<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report
Date of Report (Date of earliest event reported):
August 29, 2000 (June 30, 2000)
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-21054
SYNAGRO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0511324
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
1800 BERING, SUITE 1000 HOUSTON, TEXAS 77057
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (713) 369-1700
<PAGE> 2
This form 8-K/A is being filed to include the financial statements and pro
forma financial information omitted from the current reports on Form 8-K filed
on June 30, 2000.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a)(b) FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
Page
----
Synagro Technologies, Inc.
Introduction to Unaudited Pro Forma Financial Statements ............ 1
Pro Forma Combined Statements of Operations for the six months
ended June 30, 2000 (Unaudited) ................................... 3
Pro Forma Combined Statements of Operations for the year
ended December 31, 1999 (Unaudited) ............................... 4
Notes to Unaudited Pro Forma Combined Financial Statements .......... 5
Environmental Protection & Improvement Company, Inc.
Report of Independent Public Accountants ............................ 6
At and as of April 30, 2000
Balance Sheet ..................................................... 7
Statement of Operations ........................................... 8
Statement of Stockholders' Equity ................................. 9
Statement of Cash Flows ........................................... 10
Notes to Financial Statements ..................................... 12
Environmental Protection & Improvement Company, Inc.
Report of Independent Public Accountants ............................ 22
At and as of April 30, 1999
Balance Sheet ..................................................... 23
Statement of Operations ........................................... 24
Statement of Stockholders' Equity ................................. 25
Statement of Cash Flows ........................................... 26
Notes to Financial Statements ..................................... 27
(c) EXHIBITS
EXHIBIT 23.1 Consent of Public Accountants
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Synagro Technologies, Inc.
By: /s/ THOMAS J. BINTZ
---------------------------------
(Corporate Controller)
Date: August 29, 2000
----------
<PAGE> 4
SYNAGRO TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
In 1999, the Company purchased Anti-Pollution Associates, Inc. and D&D Pumping,
Inc., Vital Cycle, Inc. and AMSCO, Inc. (collectively, the "1999 Acquisitions").
The 1999 Acquisitions were recorded using the purchase method of accounting. The
Company also completed a business combination with National Resource Recovery,
Inc., which was accounted for using the pooling-of-interests method of
accounting. The preliminary allocation of the purchase price, which is subject
to final adjustment resulted in approximately $19,889,000 of goodwill that is
being amortized over 40 years. The assets acquired and liabilities assumed
relating to the 1999 Acquisitions were as follows:
<TABLE>
<S> <C>
Common stock shares 3,044,784
===========
Common stock issued $ 9,024,000
Cash paid including transaction costs, net
of cash acquired $13,802,000
Less: Historical net assets acquired $ 2,937,000
-----------
Goodwill $19,889,000
===========
</TABLE>
Subsequent to December 31, 1999 and through June 30, 2000, the Company purchased
Residual Technologies, Limited Partnership and its affiliates, Ecosytematics,
Inc., Davis Water Analysis, Inc., AKH Water Management, Inc., Rehbein, Inc.,
certain assets and contracts of Whiteford Construction Company, and
Environmental Protection & Improvement Company, Inc. ("EPIC") (collectively, the
"2000 Acquisitions"). The 2000 Acquisitions were accounted for using the
purchase method of accounting. The preliminary allocation of the purchase price,
which is subject to final adjustment resulted in approximately $75,263,000 of
goodwill that is being amortized over 40 years. The assets acquired and
liabilities assumed relating to the 2000 Acquisitions are summarized as follows:
<TABLE>
<S> <C>
Common stock shares 1,325,000
===========
Common stock issued $ 5,471,000
Cash paid including transaction costs, net
of cash acquired $87,480,000
Less: Historical net assets acquired $17,688,000
-----------
Goodwill $75,263,000
===========
</TABLE>
The following unaudited pro forma combined financial statements include the
unaudited consolidated financial statements of the Company for the six months
ended June 30, 2000, and the year ended December 31, 1999, combined with the
historical financial statements of the 1999 Acquisitions and the 2000
Acquisitions as follows: (i) the
1
<PAGE> 5
unaudited pro forma combined income statement for the six month period ended
June 30, 2000, includes the consolidated income statement of the Company
combined with the historical income statements of the 2000 Acquisitions as if
they had occurred on January 1, 2000, and (ii) the unaudited pro forma combined
income statement for the year ended December 31, 1999, includes the consolidated
income statement of the Company combined with the historical income statements
of the 1999 Acquisitions and the 2000 Acquisitions as if they had occurred on
January 1, 1999.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The pro forma financial statements do not purport to
represent what the Company's results of operations would actually have been if
such transactions in fact had occurred on those dates or project the Company's
results of operations for any future period. Since the Company and the
acquisitions were not under common control or management for all periods,
historical combined results may not be comparable to, or indicative of, future
performance. The unaudited pro forma combined financial statements should be
read in conjunction with the Company's periodic filings with the Securities and
Exchange Commission.
2
<PAGE> 6
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
2000 ACQUISITIONS
---------------------------- PRO FORMA PRO FORMA
COMPANY EPIC OTHERS ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 46,434,854 $ 10,385,074 $ 3,798,298 $ 60,618,226
Cost of services 34,602,960 8,237,829 3,235,489 13,753 (a) 45,115,031
(975,000) (b)
------------ ------------ ----------- ------------ ------------
Gross Profit 11,831,894 2,147,245 562,809 961,247 15,503,195
Selling, general and administrative
expenses 5,017,382 1,551,214 1,247,769 (1,406,452) (a) 6,119,115
(27,000) (c)
(263,798) (d)
Amortization of goodwill 1,438,135 905,773 7,848 (551,756) (e) 1,800,000
Special charges -- 200,000 -- (200,000) (f) --
------------ ------------ ----------- ------------ ------------
Income from operations 5,376,377 (509,742) (692,808) 3,119,455 7,584,080
Other income (expense):
Interest 5,017,530 998,288 192,407 220,756 (g) 6,428,981
Other, net 13,604 -- -- -- 13,604
------------ ------------ ----------- ------------ ------------
Net income before preferred stock
dividends and income taxes 345,243 (1,508,030) (885,215) 2,898,699 1,141,495
Provision for income taxes -- -- -- -- --
------------ ------------ ----------- ------------ ------------
Net income before preferred stock
dividends and beneficial
conversion charge 345,243 (1,508,030) (885,215) 2,898,699 1,141,495
Preferred stock dividends 951,134 -- -- 356,036 (h) 1,307,170
Non-cash beneficial conversion
charge 25,643,879 -- -- -- 25,643,879
------------ ------------ ----------- ------------ ------------
Net income (loss) applicable to
common stock $(26,249,770) $ (1,508,030) $ (885,215) $ 1,591,529 $(25,809,554)
============ ============ =========== ============ ============
Income (loss) per common share:
Basic $ (1.37) $ (1.33)
============ ============
Diluted $ (1.37) $ (1.33)
============ ============
Weighted average shares outstanding:
Basic 19,143,834 19,340,400 (i)
============ ============
Diluted 19,143,834 19,340,400 (i)
============ ============
</TABLE>
The accompanying notes are an integral part of these pro forma
combined financial statements.
3
<PAGE> 7
SYNAGRO TECHNOLOGIES, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 ACQUISITIONS
---------------------------- 1999 PRO FORMA PRO FORMA
COMPANY EPIC OTHERS ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues $ 56,462,757 $ 23,938,078 $ 33,444,531 $ 4,260,257 $ 118,105,623
Cost of services 42,470,937 18,904,211 25,016,358 2,893,875 (784,987) (a) 86,550,394
(1,950,000) (b)
------------ ------------ ------------ ----------- ----------- -------------
Gross Profit 13,991,820 5,033,867 8,428,173 1,366,382 2,734,987 31,555,229
Selling, general and
administrative expenses 6,875,928 2,289,968 4,531,262 492,586 (1,874,788) (a) 11,719,601
(75,269) (c)
(520,086) (d)
Amortization of goodwill 1,526,717 1,978,840 100,721 (6,278) (e) 3,600,000
Special charges 1,499,501 1,727,923 -- -- (1,727,923) (f) 1,499,501
------------ ------------ ------------ ----------- ----------- -------------
Income from operations 4,089,674 (962,864) 3,796,190 873,796 6,343,976 14,736,127
Other income (expense):
Interest 3,236,099 841,221 1,348,743 18,193 7,413,707 (g) 12,857,963
Other, net (294,438) -- (19,772) -- -- (314,210)
------------ ------------ ------------ ----------- ----------- -------------
Net income before preferred
stock dividends and
income taxes 1,148,013 (1,804,085) 2,467,219 855,603 (1,069,731) 2,192,374
Provision for income taxes -- -- -- -- -- --
------------ ------------ ------------ ----------- ----------- -------------
Net income before preferred
stock dividends 1,148,013 (1,804,085) 2,467,219 855,603 (1,069,731) 2,192,374
Preferred stock dividends -- -- -- -- 2,614,340 (h) 2,614,340
------------ ------------ ------------ ----------- ----------- -------------
Net income (loss) applicable
to common stock $ 1,148,013 $ (1,804,085) $ 2,467,219 $ 855,603 $(3,684,071) $ (421,966)
============ ============ ============ =========== =========== =============
Income (loss) per common share:
Basic $ 0.07 $ (0.02)
============ =============
Diluted $ 0.07 $ (0.02)
============ =============
Weighted average shares
outstanding:
Basic 16,481,399 18,817,577(i)
============ =============
Diluted 17,479,376 18,817,577(i)
============ =============
</TABLE>
The accompanying notes are an integral part of these pro forma
combined financial statements.
4
<PAGE> 8
SYNAGRO TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
The unaudited pro forma combined statement of operations adjustments
consist of the following:
(a) To adjust expenses related to prior owners based on employment
agreements entered and salary costs attributed to staff reductions.
(b) To adjust depreciation expense related to purchase price adjustments,
re-evaluation of useful lives and conformity with the Company's
depreciation methods of property and equipment.
(c) To adjust rental charge for facility closures.
(d) To eliminate certain nonrecurring expenses related to the acquisition,
including legal fees and certain accounting costs.
(e) To reflect the amortization of goodwill to be recorded in connection
with the acquisitions over a 40-year estimated life.
(f) To eliminate write-offs of EPIC's inter-company receivables, which
were forgiven in connection with the acquisition of EPIC by the
Company.
(g) To record additional interest expense on the debt incurred in
connection with the 1999 Acquisitions and the 2000 Acquisitions, as
applicable.
(h) To record amortization of Preferred Stock issuance costs and the
non-cash dividends associated with the Preferred Stock.
(i) Includes shares issued in connection with the 1999 Acquisitions and
the 2000 Acquisitions assuming these shares were issued at the
beginning of the respective periods presented. Basic earnings per
share (EPS) excludes dilution and is computed by dividing net income
applicable to common stock by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. For
purposes of the calculation, these outstanding stock options, warrants
and convertible preferred stock are considered common stock
equivalents. The common stock equivalents for the six months ended
June 30, 2000 and the year ended December 31, 1999 were approximately
14,274,960 and 14,551,154 respectively. These common stock equivalents
were excluded from the diluted per share amounts because diluted
earnings per share was antidilutive.
5
<PAGE> 9
INDEPENDENT AUDITORS' REPORT
Board of Directors
Environmental Protection & Improvement Company, Inc.
We have audited the accompanying balance sheet of Environmental Protection &
Improvement Company, Inc. as of April 30, 2000, and the related statements of
operations, stockholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Environmental Protection &
Improvement Company, Inc. as of April 30, 2000, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
July 19, 2000
6
<PAGE> 10
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY INC.
BALANCE SHEET
APRIL 30, 2000
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 264,179
Accounts receivable, net of allowance for doubtful
accounts of $117,422 4,620,304
Prepaid expenses and other current assets 569,592
------------
Total current assets 5,454,075
------------
PROPERTY, PLANT AND EQUIPMENT, NET 9,116,477
------------
OTHER LONG-TERM ASSETS
Customer contract rights, net 24,581,813
Deferred financing costs 257,377
Other assets 50,899
------------
24,890,089
------------
$ 39,460,641
============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term debt $ 578,123
Long-term debt, current portion 3,932,524
Due to related party 784,403
Accounts payable 1,985,982
Accrued expenses 561,992
------------
Total current liabilities 7,843,024
------------
LONG-TERM DEBT, LESS CURRENT PORTION 5,015,285
------------
DEFERRED INCOME TAXES 11,941,000
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, no par value,
1,000 shares authorized; 200 shares
issued and outstanding 19,553,083
Additional paid in capital 1,898,500
Accumulated deficit (6,790,251)
------------
Total stockholder's equity 14,661,332
------------
$ 39,460,641
============
</TABLE>
7
<PAGE> 11
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
REVENUES $ 23,952,073
------------
COSTS AND EXPENSES:
Operating 16,569,336
Selling, general and administrative 2,282,352
Depreciation and amortization 4,154,398
Impairment of assets 200,000
Compensation for stock options 595,000
------------
Total costs and expenses 23,801,086
------------
OPERATING INCOME 150,987
INTEREST EXPENSE 1,014,586
------------
LOSS BEFORE INCOME TAXES (863,599)
INCOME TAXES (52,168)
------------
NET LOSS $ (915,767)
============
</TABLE>
8
<PAGE> 12
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
STATEMENT OF STOCKHOLDERS EQUITY
YEAR ENDED APRIL 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
COMMON ADDITIONAL PAID ACCUMULATED STOCKHOLDER'S
STOCK IN CAPITAL DEFICIT EQUITY
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCES, MAY 1, 1999 $ 19,553,083 $ 4,455,500 $ (5,874,484) $ 18,134,099
Distributions to Compost America Holding
Company, Inc. (4,160,000) (4,160,000)
Federal income tax provision 1,008,000 1,008,000
Deferred compensation charge for common
stock options from Compost America
Holding Company, Inc. 595,000 595,000
Net loss (915,767) (915,767)
------------ --------------- ------------ ------------
BALANCES, APRIL 30, 2000 $ 19,553,083 $ 1,898,500 $ (6,790,251) $ 14,661,332
============ =============== ============ ============
</TABLE>
9
<PAGE> 13
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED APRIL 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (915,767)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,154,398
Noncash interest 223,804
Deferred income taxes (1,216,000)
Federal income tax provision 1,008,000
Deferred compensation 595,000
Increase (decrease) in cash and cash equivalents attributable
to changes in operating assets and liabilities:
Accounts receivable 772,038
Prepaid expenses and other current assets (319,664)
Other assets 177,410
Accounts payable 572,344
Accrued expenses (489,018)
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,562,545
------------
CASH FLOWS USED IN INVESTING ACTIVITIES,
purchases of property, plant and equipment (533,315)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,750,000
Proceeds from due to related party 730,000
Payments on long-term debt (1,904,165)
Payments on due to related party (485,492)
Cash distributions to Compost America Holding Company, Inc. (4,160,000)
------------
NET CASH USED IN FINANCING ACTIVITIES (4,069,657)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (40,427)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 304,606
------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 264,179
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
cash paid during the year for:
Interest $ 894,855
============
Income taxes $ 132,318
============
</TABLE>
10
<PAGE> 14
YEAR ENDED APRIL 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES, PROPERTY, PLANT AND EQUIPMENT
recorded pursuant to obligations
under financing agreements $ 30,790
===========
</TABLE>
11
<PAGE> 15
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. BACKGROUND AND NATURE
OF OPERATIONS Environmental Protection & Improvement
Company, Inc. (the "Company"), formerly
known as R. J. Longo Construction Co., Inc.,
was acquired by Compost America Holding
Company, Inc., (the "Parent") as part of the
acquisition of the outstanding common stock
of R. J. Longo Construction Co., Inc. on
November 3, 1997. On June 15, 2000 the
parent sold all of the outstanding common
stock of the Company to an unrelated 3rd
party pursuant to a stock purchase
agreement.
The Company is in the business of
transporting biosolids to approved land
application and disposal sites by intermodal
truck and rail hauling. The Company also
transports ash, municipal solid waste and
soils to approved landfills.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Cash and Cash Equivalents
The Company considers all highly-liquid debt
instruments purchased with an original
maturity of three months or less to be cash
equivalents.
Push-Down Accounting
The Company's financial statements reflect
acquisition adjustments of the Parent
pursuant to the push-down method of
accounting.
Impairment of Long-Lived Assets
The Company complies with Statement of
Financial Accounting Standards ("SFAS") 121,
"Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be
Disposed of," which requires impairment
losses to be recorded on long-lived assets
used in operations when indicators of
impairment are present and undiscounted cash
flows estimated to be generated by those
assets are less than the assets' carrying
amount. The Company continually evaluates
whether events and circumstances have
occurred that indicated the remaining
estimated useful life of long-lived assets
may warrant revision, or the remaining
balance may not be recoverable.
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 amount
of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
12
<PAGE> 16
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED) Property, Plant and Equipment
Property, plant and equipment is stated at
cost less accumulated depreciation and
amortization. The Company provides for
depreciation and amortization principally
using the straight-line method as follows:
Building 25 Years
Machinery and equipment 5-7 Years
Leasehold improvements Lease term
Depreciation and amortization expense for
property, plant and equipment was $2,169,210
for the year ended April 30, 2000.
Customer contract rights
Customer contract rights are being amortized
over the life of the respective contract,
which is 15 years. Amortization expense for
customer contract rights was $1,985,188 for
the year ended April 30, 2000.
Revenue Recognition and Related Costs
Transportation and disposal fees, the
Company's principal source of revenue, are
recognized upon the receipt of the biosolids
or organic waste at the Company's transfer
site. Costs to transport and dispose of the
biosolids or organic waste are accrued upon
receipt of the waste.
Income Taxes
The Company is included in the consolidated
federal tax return of the Parent and files
separate state tax returns. There is no
formal written tax sharing agreement in
effect and the income taxes for the Company
are calculated on a separate return basis.
The Company accounts for income taxes under
Statement of Financial Accounting Standards
(SFAS No. 109), "Accounting for Income
Taxes". SFAS No. 109 requires an asset and
liability approach to financial reporting of
income taxes. Deferred tax assets and
liabilities are computed for differences
between the financial statement and tax
bases of assets and liabilities that will
result in taxable or deductible amounts in
the future, based on enacted tax laws and
rates applicable to the periods in which the
differences are expected to affect taxable
income. Valuation allowances are
established, when necessary, to reduce the
deferred income tax assets to the amount
expected to be realized.
13
<PAGE> 17
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED) Concentration of Credit Risk
Financial instruments that potentially
subject the Company to concentration of
credit risk are accounts receivable. The
Company's customer base principally
comprises companies within the waste
disposal industry and municipal authorities.
3. PROPERTY, PLANT AND
EQUIPMENT At April 30, 2000, Property, Plant and
equipment consist of the following:
Land $ 179,938
Building 247,250
Machinery and equipment 13,265,274
Leasehold improvements 574,886
------------
14,267,348
Less accumulated depreciation
and amortization (5,150,871)
------------
$ 9,116,477
============
4. SHORT-TERM DEBT At April 30, 2000, short-term debt consists
of borrowings of $578,123 under a revolving
credit line agreement which provides for
borrowing up to $2,000,000. The credit line
bears interest at 2.65% plus the current
30-day commercial paper rate as defined
(6.04% at April 30, 2000) and expires June
30, 2000. Amounts due under the line of
credit are guaranteed by an officer of the
Company. During June 2000, the line of
credit was extended through June 30, 2001.
Short-term debt was transferred to the
parent and paid off entirely at the Company
sale closing on June 15, 2000.
14
<PAGE> 18
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
5. LONG-TERM DEBT At April 30, 2000, long-term debt consists
of the following:
<TABLE>
<S> <C>
Note payable in monthly installments
of $215,539 including interest
at 10% per annum, through June
2001 and monthly installments of
$95,811 including interest at 10%
from July 2001 to June 2006,
collateralized by substantially all
of the assets of the Company and
subject to certain covenants. This note
was transferred to the parent and paid
off entirely on June 15, 2000 with
proceeds from the sale of the Company $ 6,837,731
Promissory note payable, bearing
interest at 8% per annum through
March 2001, and collateralized by
the Parent. This note was transferred
to the Parent on June 15, 2000 1 ,831,672
Other, due in aggregate monthly
installments of approximately
$10,000, including interest at
4.9-8.95%, through various dates 278,406
-----------
8,947,809
Less current portion (3,932,524)
-----------
$ 5,015,285
===========
</TABLE>
Aggregate future required principal payments
of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING APRIL 30,
<S> <C>
2001 $ 3,932,524
2002 1,026,518
2003 849,533
2004 886,274
2005 968,795
Thereafter 1,284,165
-------------
$ 8,947,809
=============
</TABLE>
15
<PAGE> 19
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
6. COMMON STOCK OPTIONS The Company has no separate stock option
plan and no Common Stock options have been
granted for the Company's Common Stock. The
Parent has granted Common Stock options for
shares of the Parent's Common Stock to
certain officers of the Company. Prior to
the year ended April 30, 2000, the Parent
granted 2,100,000 Common Stock options to
employees of the Company for which the
Parent has recorded deferred compensation
based upon the difference between the deemed
value for accounting purposes of the
Parent's Common Stock and the exercise price
per share on the date of option grant. The
deferred compensation balance is being
amortized as compensation expense over the
option vesting periods which range from
immediate to five years. The deferred
compensation balance recorded on the
Parents' books on the date of grant was
$4,998,000 and the remaining balance as of
April 30, 2000 is $1,487,500.
The compensation expense associated with
these stock options has been reflected in
the Company's statement of operations for
the year ended April 30, 2000 for $595,000
and the expense associated with these
options vesting in future years will also be
recorded in the Company's statements of
operations.
On June 15, 2000 750,000 stock options under
the above plan were terminated in connection
with certain executive employment
agreements. Since these options were non
vested, no compensation expense was
recognized pursuant to their termination.
The following table summarizes Common Stock
option activity for the Parent's Common
Stock options granted to the Company's
employees:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
---------------------------------------
<S> <C> <C> <C>
Options outstanding at
May 1, 1999 and
April 30, 2000 2,100,000 $ 1.00 $ 1.00
========= ====== ======
</TABLE>
16
<PAGE> 20
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
6. COMMON STOCK OPTIONS
(CONTINUED) The following table summarizes information
regarding stock options outstanding at April 30,
2000 for the Parent's Common Stock options
granted to the Company's employees:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER WEIGHTED
OUTSTANDING REMAINING EXERCISE EXERCISABLE AVERAGE
EXERCISE AT APRIL 30, CONTRACTUAL PRICE PER AT APRIL 30, EXERCISE
PRICE 2000 LIFE IN YEARS SHARE 2000 PRICE
-------- ------------ ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.00 2,100,000 2.5 $ 1.00 1,350,000 $ 1.00
</TABLE>
Had compensation cost for the Company's
Stock option plan been determined based on
the fair value at the grant date of awards,
consistent with the provisions of SFAS 123,
the Company's net loss and loss per share
would have been reduced to the proforma
amounts indicated below:
Net loss - as reported $ 915,767
Net loss - pro forma $1,738,767
The fair value of each option grant was
estimated on the date of grant using the
Black-Scholes option pricing model with the
following assumptions:
Risk-free interest rate 5.86%
Expected dividend yield --
Expected life 4 years
Expected volatility 50%
17
<PAGE> 21
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
7. EMPLOYEE BENEFIT PLANS Certain employees are covered by
union-sponsored, collectively bargained,
multi-employer pension plans. Contributions
are determined in accordance with the
provisions of negotiated labor contracts.
Pension expense for these plans was
approximately $54,000 for the year ended
April 30, 2000. In the event that the
Company decided to withdraw from its
participation in the multi-employer pension
plans, which is not the Company's intent,
the Company would be required to contribute
its share of the plan's unfunded benefit
obligation.
8. INCOME TAXES Income tax expense for the year ended April
30, 2000 consists of the following:
<TABLE>
<S> <C>
CURRENT:
Federal $ 1,008,000
State 260,168
-----------
1,268,168
-----------
DEFERRED:
Federal (1,033,000)
State (183,000)
-----------
(1,216,000)
-----------
$ 52,168
===========
</TABLE>
18
<PAGE> 22
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
8. INCOME TAXES (CONTINUED) The current Federal provision has been
recorded as an additional capital
contribution of the Parent since there are
no specified payment terms pursuant to any
tax sharing arrangements and the liability
was forgiven by the Parent.
At April 30, 2000, the components of the
Company's deferred tax liability is as
follows:
<TABLE>
<S> <C>
Customer contract rights basis differences $ 9,833,000
Property, plant and equipment basis
differences 2,108,000
-----------
$11,941,000
===========
</TABLE>
9. CUSTOMER INFORMATION The Company's operations are conducted in
one business segment with its customers
located primarily in New York and New
Jersey. The following table summarizes those
customers whose revenues are in excess of
10% of total revenues:
<TABLE>
<CAPTION>
CUSTOMER
<S> <C>
A 36%
B 19%
C 13%
</TABLE>
In September 1997, the Company was awarded a
15-year take or pay contract from New York
City for biosolids disposal. The contract
requires a minimum volume of 225 tons per
day at an initial rate of $98 per ton,
subject to escalation as defined. The
contract became effective on June 22, 1998.
The Company was required to obtain a surety
bond as part of the terms of this contract.
19
<PAGE> 23
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
10. SUPPLIER CONCENTRATION The operations are currently dependent upon
the use of railroad facilities and rail
transportation from two sources. The
operations have historically not been
adversely impacted by this dependence,
however, this dependence involves several
risks, including a potential inability to
obtain an adequate alternative supply and
reduced control over pricing, timely
performance and quality.
11. COMMITMENTS AND
CONTINGENCIES Lease Obligations
The Company is obligated under
noncancellable operating leases for office
space, land and certain equipment expiring
through May 2003.
Future aggregate minimum annual rental
payments under these leases are
approximately as follows:
YEAR ENDING APRIL 30,
2001 $287,000
2002 166,000
2003 75,000
--------
$528,000
========
Employment Agreements
The Company has employment agreements with
certain of its key executives. The
agreements provide for minimum levels of
compensation during current and future years
and are subject to adjustment, as defined.
In addition, certain of these agreements
provide for a lump sum payment, as defined,
upon termination without cause or upon a
change in control. The agreements were
terminated June 15, 2000 in connection with
the sale of the Company. New agreements with
key executives providing for minimum level
compensation were executed in connection
with the change in ownership.
20
<PAGE> 24
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
11. COMMITMENTS AND
CONTINGENCIES (CONTINUED) Litigation
In the normal course of business, the
Company is a party to various claims and
legal proceedings. Although the ultimate
outcome of these matters is presently not
determinable, management of the Company,
after consultation with legal counsel, does
not believe that the resolution of these
matters will have a material effect upon the
Company's financial position, results of
operations or cash flows.
Collective Bargaining Agreements
A significant number of employees are
covered by different collective bargaining
agreements. The agreements provide for
defined wage rates and various benefits.
Government Regulations
In the normal course of business and, as a
result of the extensive governmental
regulations of the solid waste industry, the
Company periodically may become subject to
various judicial or administrative
proceedings involving federal, state or
local agencies. Certain federal and state
environmental laws impose strict liability
on the Company for such matters as
contamination of water supplies or the
improper disposal of hazardous waste.
13. SUBSEQUENT EVENT On June 15, 2000, the Parent sold all of the
outstanding stock of the Company pursuant to
a stock purchase agreement. Prior to the
sale, a substantial portion of the
outstanding debt was transferred to the
Parent. Upon closing of the sale, the Parent
paid off much of the debt with proceeds from
the sale.
21
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
Board of Directors
Environmental Protection & Improvement Company, Inc.
We have audited the accompanying balance sheet of Environmental Protection &
Improvement Company, Inc. as of April 30, 1999, and the related statements of
operations, stockholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Environmental Protection &
Improvement Company, Inc. as of April 30, 1999, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
July 19, 2000
22
<PAGE> 26
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
BALANCE SHEET
================================================================================
April 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 304,606
Accounts receivable, net of allowance for doubtful
accounts of $117,422 5,424,770
Prepaid expenses and other current assets 507,305
Note receivable from Compost America Holding Company, Inc.,
net of reserve for notes receivable of $1,727,923
Deferred income taxes 47,000
------------
Total current assets 6,283,681
------------
PROPERTY, PLANT AND EQUIPMENT, NET 10,721,582
------------
LONG-TERM ASSETS
Customer contract rights, net 26,567,001
Other assets 228,309
------------
26,795,310
------------
$ 43,800,573
============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term debt $ 522,816
Current portion of long-term debt 1,902,451
Due to officer 485,492
Accounts payable 1,413,638
Accrued expenses 1,051,015
------------
Total current liabilities 5,375,412
------------
LONG-TERM LIABILITIES
Long-term debt, less current portion 7,087,062
Deferred income taxes 13,204,000
------------
Total long-term liabilities 20,291,062
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, no par value,
1,000 shares authorized; 200 shares
issued and outstanding 24,008,583
Accumulated deficit (5,874,484)
------------
Total stockholder's equity 18,134,099
------------
$ 43,800,573
============
</TABLE>
See accompanying notes to financial statements.
23
<PAGE> 27
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
STATEMENT OF OPERATIONS
================================================================================
YEAR ENDED APRIL 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
REVENUES $ 22,032,853
------------
COSTS AND EXPENSES:
Operating 15,798,816
Selling, general and administrative 1,898,736
Provision for note receivable from Compost
America Holding Company, Inc. 1,727,923
Depreciation and amortization 4,246,996
Compensation for stock options 595,000
------------
Total costs and expenses 24,267,471
------------
OPERATING LOSS (2,234,618)
INTEREST EXPENSE, net of interest income of $44,877 892,805
------------
LOSS BEFORE INCOME TAX BENEFIT (3,127,423)
INCOME TAX BENEFIT 32,960
------------
NET LOSS $ (3,094,463)
============
</TABLE>
See accompanying notes to financial statements.
24
<PAGE> 28
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
================================================================================
YEAR ENDED APRIL 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDER'S
STOCK DEFICIT EQUITY
------------ ------------ ------------
<S> <C> <C> <C>
BALANCES, May 1, 1998 $ 24,445,997 $ (2,780,021) $ 21,665,976
Distributions to Compost America Holding
Company, Inc. (see Note 8) (1,746,414) (1,746,414)
Federal income tax provision (see Note 11) 714,000 714,000
Deferred compensation charge for common
stock options from Compost America
Holding Company, Inc. (see Note 9) 595,000 595,000
Net loss (3,094,463) (3,094,463)
------------ ------------ ------------
BALANCES, April 30, 1999 $ 24,008,583 $ (5,874,484) $ 18,134,099
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
25
<PAGE> 29
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
STATEMENT OF CASH FLOWS
================================================================================
YEAR ENDED APRIL 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,094,463)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,246,996
Provision for note receivable from Compost
America Holding Company, Inc. 1,727,923
Deferred income taxes (954,960)
Federal income tax provision (see Note 11) 714,000
Deferred compensation 595,000
Increase (decrease) in cash and cash equivalents attributable
to changes in operating assets and liabilities:
Accounts receivable (2,527,225)
Prepaid expenses and other current assets (64,619)
Other assets (22,559)
Due to officer 485,492
Accounts payable (83,218)
Accrued expenses 870,532
------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,892,899
------------
CASH FLOWS USED IN INVESTING ACTIVITIES,
purchases of property, plant and equipment (1,174,073)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term debt 522,816
Proceeds from long-term debt 10,000,000
Payments on long-term debt (7,899,044)
Payments on due to officer (1,676,189)
Cash distributions to Compost America Holding Company, Inc. (1,746,414)
------------
NET CASH USED IN FINANCING ACTIVITIES (798,831)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (80,005)
CASH AND CASH EQUIVALENTS, beginning of period 384,611
------------
CASH AND CASH EQUIVALENTS, end of year $ 304,606
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
cash paid during the year for:
Interest $ 892,805
============
Income taxes $ 51,000
============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES, property, plant and equipment
recorded pursuant to obligations
under financing agreements $ 377,392
============
</TABLE>
See accompanying notes to financial statements.
26
<PAGE> 30
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. BACKGROUND AND NATURE
OF OPERATIONS Environmental Protection & Improvement Company,
Inc. (the Company), formerly known as R. J. Longo
Construction Co., Inc., was acquired by Compost
America Holding Company, Inc., (the Parent) as part
of the acquisition of the outstanding common stock
of R. J. Longo Construction Co., Inc. on November
3, 1997.
The Company is in the business of transporting
biosolids to approved land application and disposal
sites by intermodal truck and rail hauling. The
Company also transports ash, municipal solid waste
and soils to approved landfills.
The purchase price paid by the Parent for the
Company was $26,120,000. The purchase price was
paid in cash of $20,000,000, the issuance of 39,000
shares of the Parent's Series A Preferred Stock
valued at $1,365,000, 21,000 shares of the Parent's
Series C Preferred Stock valued at $1,050,000 and
3,447,182 shares of the Parent's unregistered
Common stock valued at $3,705,000.
Under the terms of the Parent's Preferred Stock
Agreement, if at any time shares of both the
Parent's Series A Preferred and Series C Preferred
stock remain issued and outstanding and the Parent
is in default of any covenant under the Preferred
Stock Agreement or in the default of payments on
any debt in excess of $100,000, then at their
option, the holders of Parents' Series A Preferred
stock have the right to exchange all of their
shares of the Parent's Series A Preferred stock and
Series C Preferred stock and common stock for all
the outstanding shares of the Company's Common
stock. In addition, even if not in default, the
holders of the Parents' Series A Preferred stock
have the right to exchange their shares of the
Parent's Preferred and Common stock for all shares
of the Company's Common stock outstanding during
the period from November 1, 1999 through October
31, 2000, but only if all or part of the Parents'
Series C Preferred stock is outstanding. If such
exchange is made, all shares of the Parent's Series
C Preferred stock and the shares of the Parent's
Common Stock issued to the Series A Preferred stock
holders will be returned to the Parent. This option
shall be void upon payment in full of the Parents'
Series C Preferred stock.
As of April 30, 1999, the Parent is not in
compliance with certain of its debt obligations,
which could result in the holders of the Series A
Preferred having the right to exchange their shares
of the Parent's Series A Preferred and Series C
Preferred and Common stock for the outstanding
shares of the Company's Common stock. In December
1999, the Parent's Series A Preferred shareholders
signed an agreement stating that prior to May 1,
2000 they will not exercise their EPIC option to
the extent that such exercise would result in, or
increase, a stockholder's deficiency after giving
effect to the transaction.
27
<PAGE> 31
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. GOING CONCERN The accompanying financial statements have been
CONSIDERATION prepared assuming the Parent and the Company will
continue as going concerns. As of April 30, 1999,
the Parent had a working capital deficit and an
accumulated deficit. In addition, the Parent has
incurred losses since its inception and is subject
to those risks associated with companies in the
early stages of development. The Parent's growth
and development strategy will also require the
approval of certain permits from governmental
authorities and substantial financing will be
required to finance construction and development of
certain projects.
The Parent expects that adequate financing will be
available to fund working capital needs and to fund
the required debt payments. However, there is no
assurance that the Parent will be able to obtain
sufficient debt or equity financing on favorable
terms or at all. If the Parent is unable to secure
additional financing, its ability to implement its
growth strategy will be impaired and its financial
condition, results of operations and cash flows are
likely to be materially adversely affected. The
outcome of these factors or events could have an
impact on the Company given that the Company is
wholly-owned by the Parent. In August 1999, the
Company and Parent signed a letter of intent to
sell the Company. Management of the Parent believes
this will provide a significant source of capital.
While management believes that these factors or
events will not have an impact on the financial
condition, results of operations or cash flows of
the Company, there is no assurance in that regard.
These matters raise substantial doubt about the
Parent's and the Company's ability to continue as
going concerns.
3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES Cash and Cash Equivalents
The Company considers all highly-liquid debt
instruments purchased with an original maturity of
three months or less to be cash equivalents.
Push-Down Accounting
The Company's financial statements reflect
acquisition adjustments of the Parent pursuant to
the push-down method of accounting.
Impairment of Long-Lived Assets
The Company periodically assesses the
recoverability of the carrying amounts of
long-lived assets. A loss is recognized when
expected undiscounted future cash flows are less
than the carrying amount of the asset. An
impairment loss is the difference by which the
carrying amount of an asset exceeds its fair value.
28
<PAGE> 32
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED) Property, Plant and Equipment
Property, plant and equipment is stated at cost
less accumulated depreciation and amortization. The
Company provides for depreciation and amortization
principally using the straight-line method as
follows:
Building 25 Years
Machinery and equipment 5-7 Years
Leasehold improvements Lease term
Depreciation and amortization expense for property,
plant and equipment was $2,015,542 for the year
ended April 30, 1999.
Customer contract rights
Customer contract rights are being amortized over
the life of the respective contract, which is 15
years. Amortization expense for customer contract
rights was $2,231,454 for the year ended April 30,
1999.
Revenue Recognition and Related Costs
Transportation and disposal fees, the Company's
principal source of revenue, are recognized upon
the receipt of the biosolids or organic waste at
the Company's transfer site. Costs to transport and
dispose of the biosolids or organic waste are
accrued upon receipt of the waste.
Income Taxes
The Company is included in the consolidated federal
tax return of the Parent and files separate state
tax returns. There is no formal written tax sharing
agreement in effect and the income taxes for the
Company are calculated on a separate Company basis.
The Company accounts for income taxes under
Statement of Financial Accounting Standards (SFAS
No. 109), "Accounting for Income Taxes". SFAS No.
109 requires an asset and liability approach to
financial reporting of income taxes. Deferred tax
assets and liabilities are computed for differences
between the financial statement and tax bases of
assets and liabilities that will result in taxable
or deductible amounts in the future, based on
enacted tax laws and rates applicable to the
periods in which the differences are expected to
affect taxable income. Valuation allowances are
established, when necessary, to reduce the deferred
income tax assets to the amount expected to be
realized.
29
<PAGE> 33
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(CONTINUED) Concentration of Credit Risk
Financial instruments that potentially subject the
Company to concentration of credit risk are
accounts receivable. The Company's customer base
principally comprises companies within the waste
disposal industry and municipal authorities.
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
statement and the reported amounts of revenues and
expenses during the reporting period. Actual
results could differ from those estimates.
4. PROPERTY, PLANT AND
EQUIPMENT
At April 30, 1999, property, plant and equipment
consist of the following:
Land $ 179,938
Building 247,250
Machinery and equipment 12,701,169
Leasehold improvements 574,886
------------
13,703,243
Less accumulated depreciation
and amortization (2,981,661)
------------
$ 10,721,582
============
5. SHORT-TERM DEBT At April 30, 1999, short-term debt consists of
borrowings under a revolving credit line agreement
which allows for borrowings of up to $2,000,000.
The credit line bears interest at 2.65% plus the
current 30-day commercial paper rate as defined
(7.45% at April 30, 1999). Amounts due under the
line of credit are guaranteed by an officer of the
Company. During June 1999, the line of credit was
extended through June 30, 2000.
30
<PAGE> 34
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
6. LONG-TERM DEBT At April 30, 1999, long-term debt consists of the
following:
Note payable in monthly installments
of $215,539 including interest at
10% per annum, through June
2001 and monthly installments of
$95,811 including interest at 10%
from July 2001 to June 2006,
collateralized by substantially all
assets of the Company and subject
to certain covenants $ 8,634,567
Other, due in aggregate monthly
installments of approximately
$10,000, including interest at
4.9-8.95%, through various dates 354,946
-----------
8,989,513
Less current portion (1,902,451)
-----------
$ 7,087,062
===========
Aggregate future required principal payments of
long-term debt are as follows:
YEAR ENDING APRIL 30,
2000 $ 1,902,451
2001 2,095,515
2002 1,026,517
2003 849,533
2004 886,274
Thereafter 2,229,223
-----------
$ 8,989,513
===========
The Company is not in compliance with certain
covenants under its primary debt obligation. On
November 12, 1999, the Company received a waiver on
all current defaults of its primary debt
obligation.
31
<PAGE> 35
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
7. DUE TO OFFICER Amount due to officer is non-interest bearing and
has no specific repayment terms. The amount arose
from fees charged to the Company from the officer
for personally guaranteeing a performance bond.
8. STOCKHOLDER'S EQUITY
The Company distributed a total of $1,746,414 as a
return of capital to Compost America Holding
Company, Inc. for the year ended April 30, 1999.
These distributions were made pursuant to the terms
of the Series A Preferred and Series C Preferred
Stock Agreements (see Note 1) and a certain debt
covenant which restricts the cash distributions
from the Company to the Parent.
9. COMMON STOCK OPTIONS The Company has no separate stock option plan and
no Common Stock options have been granted for the
Company's Common stock. The Parent has granted
Common stock options for shares of the Parent's
Common stock to certain officers of the Company.
Prior to the year ended April 30, 1999, the Parent
granted 2,100,000 Common stock options to employees
of the Company for which the Parent has recorded
deferred compensation based upon the difference
between the fair market value of the Parent's
Common stock and the option exercise price at the
grant date. The deferred compensation balance is
being amortized as compensation expense over the
option vesting periods which range from upon grant
to five years. The deferred compensation balance
recorded on the Parents' books on the date of grant
was $4,998,000 and the remaining balance as of
April 30, 1999 is $2,082,500.
The compensation expense associated with these
stock options has been reflected in the Company's
statement of operations for the year ended April
30, 1999 for $595,000 and the expense associated
with these options vesting in future years will
also be recorded in the Company's statements of
operations.
32
<PAGE> 36
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
9. COMMON STOCK OPTIONS
(CONTINUED) The following table summarizes Common stock option
activity for the Parent's Common stock options
granted to the Company's employees:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
--------- --------- ---------
<S> <C> <C> <C>
Options outstanding at
May 1, 1998 and
April 30, 1999 2,100,000 $1.00 $1.00
========= ===== =====
</TABLE>
The following table summarizes information
regarding stock options outstanding at April 30,
1999 for the Parent's Common stock options granted
to the Company's employees:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER WEIGHTED
OUTSTANDING REMAINING EXERCISE EXERCISABLE AVERAGE
EXERCISE AT APRIL 30, CONTRACTUAL PRICE PER AT APRIL 30, EXERCISE
PRICE 1999 LIFE IN YEARS SHARE 1999 PRICE
----- ------------ ------------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 1.00 2,100,000 3.5 $ 1.00 1,100,000 $ 1.00
</TABLE>
Had compensation cost for the Company's stock
option plan been determined based on the fair value
at the grant date of awards, consistent with the
provisions of SFAS 123, the Company's net loss and
loss per share would have been reduced to the
proforma amounts indicated below:
<TABLE>
<S> <C>
Net loss - as reported $ (3,094,463)
Net loss - proforma $ (3,917,463)
</TABLE>
33
<PAGE> 37
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
9. COMMON STOCK OPTIONS The fair value of each option grant was estimated
(CONTINUED) on the date of grant using the Black-Scholes option
pricing model with the following weighted average
assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 5.86%
Expected dividend yield --
Expected life 4 years
Expected volatility 50%
</TABLE>
10. EMPLOYEE BENEFIT PLANS Certain employees are covered by union-sponsored,
collectively bargained, multi-employer pension
plans. Contributions are determined in accordance
with the provisions of negotiated labor contracts.
Pension expense for these plans was $47,756 for the
year ended April 30, 1999. In the event that the
Company decided to withdraw from its participation
in the multi-employer pension plans, which is not
the Company's intent, the Company would be required
to contribute its share of the plan's unfunded
benefit obligation.
11. INCOME TAXES Income tax benefit for the year ended April 30,
1999 consists of the following:
<TABLE>
<S> <C>
CURRENT:
Federal $ 714,000
State 208,000
---------
922,000
---------
DEFERRED:
Federal (811,716)
State (143,244)
---------
(954,960)
---------
$ (32,960)
=========
</TABLE>
34
<PAGE> 38
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
11. INCOME TAXES (CONTINUED) The current Federal provision has been recorded as
an additional capital contribution of the Parent
since there are no specified payment terms pursuant
to any tax sharing arrangements and the liability
was forgiven by the Parent. The provision for
income taxes is different from that which would be
obtained by applying the statutory federal income
tax rate to loss before income taxes. This is
primarily due to state income taxes, change in
valuation allowance and deferred compensation.
At April 30, 1999, the Company's net deferred tax
liability is comprised of the tax benefit (cost)
associated with the following items based on
statutory tax rates currently in effect:
<TABLE>
<S> <C>
DEFERRED TAX ASSETS,
allowance for bad debts $ 47,000
------------
DEFERRED TAX LIABILITIES:
Customer contract rights basis differences (10,626,800)
Property, plant and equipment basis
differences (2,577,200)
------------
(13,204,000)
------------
$(13,157,000)
============
</TABLE>
35
<PAGE> 39
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
12. CUSTOMER INFORMATION The Company's operations are conducted in one
business segment with its customers located
primarily in New York and New Jersey. The following
table summarizes those customers whose revenues are
in excess of 10% of total revenues:
<TABLE>
<S> <C>
CUSTOMER
A 33%
B 20%
C 16%
D 13%
</TABLE>
In September 1997, the Company was awarded a
15-year take or pay contract from New York City for
biosolids disposal. The contract requires a minimum
volume of 225 tons per day at an initial rate of
$98 per ton, subject to escalation as defined. The
contract became effective on June 22, 1998. The
Company was required to obtain a surety bond as
part of the terms of this contract.
13. SUPPLIER CONCENTRATION The operations are currently dependent upon the use
of railroad facilities and rail transportation from
two sources. The operations have historically not
been impacted by this dependence, however, this
dependence involves several risks, including a
potential inability to obtain an adequate
alternative supply and reduced control over
pricing, timely performance and quality.
14. COMMITMENTS AND
CONTINGENCIES Lease Obligations
The Company is obligated under noncancellable
operating leases for office space, land and certain
equipment expiring through May 2003.
Future aggregate minimum annual rental payments
under all of these leases are approximately as
follows:
<TABLE>
<S> <C>
YEAR ENDING APRIL 30,
2000 $ 249,000
2001 287,000
2002 166,000
2003 75,000
---------
$ 777,000
=========
</TABLE>
36
<PAGE> 40
ENVIRONMENTAL PROTECTION & IMPROVEMENT
COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
14. COMMITMENTS AND
CONTINGENCIES (CONTINUED) Rent expense under these leases for the year
ended April 30, 1999 was approximately
$190,000.
Employment Agreements
The Company has employment agreements with
certain of its key executives. The agreements
provide for minimum levels of compensation
during current and future years and are
subject to adjustment, as defined. In
addition, certain of these agreements provide
for a lump sum payment, as defined, upon
termination without cause or upon a change in
control.
Litigation
In the normal course of business, the Company
is a party to various claims and legal
proceedings. One such claim arose subsequent
to April 30, 1999 due to the Company being
named as a defendant in a claim against the
Parent for approximately $3,00,000 in which a
third party is seeking action for alleged
amounts due under a consulting agreement,
interest, attorneys' fees and other legal
costs. This claim has since been settled by
the Parent based upon the sale of the Company
from the Parent. If this event does not occur
the claim will be litigated. Although the
ultimate outcome of these matters is presently
not determinable, management of the Company,
after consultation with legal counsel, does
not believe that the resolution of these
matters will have a material effect upon the
Company's financial position or results of
operations.
Collective Bargaining Agreements
A significant number of employees are covered
by different collective bargaining agreements.
The agreements provide for defined wage rates
and various benefits.
Government Regulations
In the normal course of business and, as a
result of the extensive governmental
regulations of the solid waste industry, the
Company periodically may be become subject to
various judicial or administrative proceedings
involving federal, state or local agencies.
Certain federal and state environmental laws
impose strict liability on the Company for
such matters as contamination of water
supplies or the improper disposal of hazardous
waste.
15. SUBSEQUENT EVENT In August 1999, the Company and the Parent
signed a letter of intent to sell the Company.
37
<PAGE> 41
EXHIBIT INDEX
Exhibits
--------
23.1 Consent of Public Accountants
