U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 1996
Commission file number 0-12914
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
(Name of Small Business Issuer in Its Charter)
MARYLAND 52-1507818
(State of Incorporation) (IRS Employer Identification No.)
250 WEST PRATT STREET, 11TH FLOOR, BALTIMORE, MD 21201
(Address of Principal Executive Offices)
(410)659-5600
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 18,244,142 shares of Common
Stock ($.01 par value) as of October 31, 1996.
Transitional small business disclosure format: Yes No X
--- ---
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
QUARTERLY REPORT ON FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDING SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Operations: Three Months Ended September
30, 1996 and 1995; Nine Months Ended September 30, 1996 and 1995
Consolidated Balance Sheets: September 30, 1996 and December 31, 1995
Consolidated Statements of Cash Flows: Nine months ended September
30, 1996 and 1995
Notes to Consolidated Financial Statements: September 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
ii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
1996 1995 1996 1995
REVENUES:
Sales........................................................... $ 1,228,961 $ 9,218 $ 4,029,564 $ 508,648
Fees and other.................................................. -- 600,460 7,587 1,376,599
Interest income................................................. 1,660 -- 4,048 --
1,230,621 609,678 4,041,199 1,885,247
EXPENSES:
Costs of Sales.................................................. 1,810,842 517,314 4,567,628 2,681,894
Selling, General and Administrative............................. 1,954,502 76,198 5,077,069 894,432
Interest Expense................................................ 302,086 327,464 728,452 1,556,944
4,067,430 920,976 10,073,149 5,133,270
Loss Before Income Taxes, Limited Partners' Interest and
Extraordinary Item.............................................. (2,836,809) (311,297) (6,331,950) (3,248,023)
Limited Partners' Interest in Consolidated Partnership Loss....... -- 210,439 -- 2,208,687
Loss Before Income Taxes.......................................... (2,836,809) (100,859) (6,331,950) (1,039,336)
Income Tax Expense................................................ -- -- -- --
NET LOSS BEFORE EXTRAORDINARY ITEM................................ (2,836,809) (100,859) (6,331,950) (1,039,336)
Extraordinary item:
Loss from disposal of asset, net of tax......................... (1,602,503) -- (387,921) --
NET LOSS.......................................................... $(4,439,312) $ (100,859) $(6,719,871) $(1,039,336)
Loss per share:
Primary:
Loss before extraordinary item............................... $(.19) $(.03) $(.46) $(.32)
Extraordinary item........................................... (.10) -- (.03) --
Net loss................................................... $(.29) $(.03) $(.49) $(.32)
Weighted Average Number of Shares Outstanding..................... 15,347,056 3,275,697 13,869,003 3,275,697
</TABLE>
The accompanying notes are an integral part of these statements.
1
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash......................................................................................... $ 129,760 $ 47,327
Accounts receivable, net of allowance for doubtful accounts.................................. 457,409 --
Prepaid expenses............................................................................. 30,282 --
Total current assets...................................................................... 617,451 47,327
Property, machinery and equipment, net......................................................... 3,507,502 34,965,056
Other assets:
Deferred loan costs, net..................................................................... 1,434,525 3,959,775
Excess of costs over net assets acquired, net................................................ 17,615,242 10,477,000
Restricted cash.............................................................................. 220,006 --
Deposits and other assets.................................................................... 138,210 35,602
19,407,983 14,472,377
$23,532,936 $49,484,760
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED BALANCE SHEETS -- CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt......................................................... $ 451,214 $34,567,989
Accounts payable and accrued liabilities..................................................... 3,084,160 6,644,915
Total current liabilities................................................................. 3,535,374 41,212,904
Long-term debt............................................................................... 4,988,216 4,899,000
Convertible debentures....................................................................... 4,035,000 --
Deferred income.............................................................................. -- 46,560
Limited partners' investment in consolidated partnership..................................... -- 8,000,000
Limited partners' interest in losses of consolidated partnership............................. -- (8,000,000)
Total liabilities......................................................................... 12,558,590 46,158,444
Stockholders' Equity
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued.................... -- --
Common Stock, $.01 par value; 35,000,000 shares authorized; 7,599,947 shares issued and
outstanding for the year ended December 31, 1995;......................................... -- 76,000
16,601,406 shares issued and outstanding for the period ended September 30, 1996............. 166,014 --
Additional capital........................................................................... 26,877,138 12,599,251
Accumulated deficit.......................................................................... (16,068,806) (9,348,935)
Total stockholders' equity................................................................ 10,974,346 3,326,316
$ 23,532,936 $49,484,760
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
<S> <C> <C>
1996 1995
INCREASE (DECREASE) IN CASH
Cash flows from operating activities
Net loss.................................................................................. $ (6,719,871) $(1,039,336)
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization........................................................ 835,318 868,492
Limited partners' interest in losses................................................. -- (2,208,687)
Issuance of stock options............................................................ -- 530,000
Changes in assets and liabilities
Accounts receivable.................................................................. (457,409) 36,255
Inventory and prepaid expenses....................................................... (30,982) (137,083)
Bond issuance costs, net............................................................. 3,959,775 --
Other assets......................................................................... (102,608) --
Restricted cash...................................................................... (220,006) --
Accounts payable and accrued liabilities............................................. (3,560,755) (257,277)
Notes payable and other.............................................................. 133,167
Deferred income...................................................................... (46,540) (2,602)
Net cash provided by (used in) operating activities............................... (6,343,078) (2,077,071)
Cash flows from investing activities
Construction and development costs..................................................... -- 12,966
Purchase of property, plant & equipment................................................ (3,548,172) --
Disposal of property, plant & equipment, net........................................... 34,040,515 --
Business acquisitions.................................................................. (7,432,611) --
Net cash provided by (used in) investing activities............................... 23,059,732 12,966
Cash flows from financing activities
Repayment of loans..................................................................... (34,531,774) (655,679)
Proceeds from issuance of stock........................................................ 14,367,899 344,793
Proceeds from loans.................................................................... 364,654 --
Proceeds from convertible debentures, net.............................................. 3,165,000 --
Bond issuance costs.................................................................... (153,005)
Limited partners' investment........................................................... -- 2,043,843
Net cash provided by (used in) financing activities............................... (16,634,221) 1,579,952
Net increase (decrease) in cash and short-term investments........................ 82,433 (484,123)
Cash and short-term investments at beginning of period...................................... 47,327 531,730
Cash and short-term investments at end of period............................................ $ 129,760 $ 41,607
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
<S> <C> <C>
1996 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.......................................................... $ 278,830 $957,029
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Interest accrued on Limited Partners' investment.................................................. -- 533,586
Common stock issued in exchange for services...................................................... 5,277,172 --
Issuance of stock options......................................................................... -- 530,000
</TABLE>
The accompany notes are an integral part of these statements
5
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
GENERAL
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and therefore, do
not include all the information necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnoted thereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 1995.
CONSOLIDATED STATEMENTS
The consolidated financial statements include the accounts of WasteMasters,
Inc. (formerly F&E Resource Systems Technology, Inc.) and its wholly owned
subsidiaries, F&E Resource Systems Technology for Baltimore, Inc. (FERST for
Baltimore, Inc.), FERST for St. Mary's, Inc., FERST O&M, Inc., and Chemical Road
Investments, Inc., WasteMasters of South Carolina, Inc., Trantex, Inc.,
WasteMasters of Georgia, Inc. as well as the accounts of Baltimore FERST Limited
Partnership (the "Partnership") in which FERST's subsidiary, FERST for
Baltimore, Inc., is a general partner (collectively "the Company"). Significant
intercompany transactions have been eliminated in consolidation.
NOTE B -- ACQUISITIONS
In January, 1996, the Company acquired all of the outstanding common shares
of Trantex, Inc., which owns the Rye Creek Landfill in Kirksville, Missouri, for
2,173,913 shares of the Company's common stock, valued at $5,000,000, or $2.30
per share. The shares are restricted pursuant to SEC Rule 144. Prior to the
acquisition, Trantex, Inc. was an entity controlled by members of the Company's
Board of Directors and Officers. The fair market value of the common stock for
financial statement purposes was valued at $1.52 per share resulting in a
decrease in the acquisition price of $1,695,652. The acquisition did not have a
material pro forma impact on operations.
In March, 1996, the Company acquired all of the outstanding common shares
of WasteMasters of Georgia, Inc., which owns the Steele Brothers Landfill in
Walker County, Georgia, for 2,173,913 shares of common stock valued at
$5,000,000, or $2.30 per share. The shares are restricted pursuant to SEC Rule
144. Prior to the acquisition, WasteMasters of Georgia, Inc. was an entity
controlled by members of the Company's Board of Directors and Officers. The fair
market value of the common stock for financial statement purposes was valued at
$1.52 per share resulting in a decrease in the acquisition price of $1,695,652.
The acquisition did not have a material pro forma impact on the Company's
operations.
The acquisitions were accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to assets acquired
based on their fair values. The total costs in excess of identifiable net assets
acquired of $7,431,285 is being amortized on a straight line basis over 40
years. No separate independent values were assigned to permits, goodwill, and
other intangibles.
On July 30, 1996, the Company entered into an Agreement to acquire all of
the outstanding common shares of Equinox Associates, Inc., which owns a newly
re-permitted construction & demolition (C&D) transfer station in Bronx, New York
for $1,020,000 in the form of cash, the assumption of certain liabilities and
510,000 shares of common stock valued at $3.00 per share. The shares are to be
restricted pursuant to SEC Rule 144. The Company had previously entered into an
Operations Management Agreement dated May 10, 1996, with the Seller providing to
the Company the right to operate the Bronx
6
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SEPTEMBER 30, 1996
(UNAUDITED)
transfer station in consideration of the payment of $450,000 in cash. During the
quarter ended September 30, 1996, the Company operated the Bronx transfer
station pursuant to the Operations Management Agreement.
NOTE B -- DISPOSITIONS
On May 17, 1996, the Company's Baltimore recycling and composting facility
was sold at foreclosure. Assets sold include the facility, improvements, bond
issuance costs and land of the Baltimore FERST Limited Partnership. The net book
value of the assets sold was approximately $40,780,000. The Company retired
non-recourse secured and unsecured liabilities related to the facility in the
amount of $42,000,000. In addition, on April 12, 1996, FERST O & M, Inc. filed a
voluntary petition under the U. S. Bankruptcy Code.
During the quarter ended September 30, 1996, the Company abandoned its
efforts to purchase and re-permit a landfill facility in Richmond, Michigan. The
development and acquisition costs of $301,298 previously capitalized have been
expensed in the quarter ended September 30, 1996.
The Company has entered into an Agreement to sell all of the outstanding
common stock of FERST for St. Mary's, Inc., whose principal asset is
approximately 421 acres of undeveloped land in St. Mary's County, Maryland and
Chemical Road Investments, Inc., whose sole asset is approximately 3 acres of
industrial land in Baltimore, Maryland to Ronald W. Pickett, a Director of the
Company. The sales price is approximately $331,000 which is comprised of the
Purchaser assuming the existing debt of approximately $275,000 and forgiving
claims against the Company for unpaid compensation and expenses of approximately
$55,000.The Company has recognized a loss of $1,301,250, which represents excess
of the book value of the assets being sold over the anticipated sales price.
NOTE C -- CONVERTIBLE DEBENTURES
In April, 1996, the Company sold $3,000,000 of 8% debentures for $1,755,000
net, convertible into the Company's common stock at any time during the period
beginning forty (40) days and ending two years from date of issuance. In June,
1996, the Company sold $2,000,000 of 8% debentures for $1,410,000 net,
convertible into the Company's common stock at any time during the period
beginning forty (40) days and ending two years from date of issuance. The
debentures, plus accrued interest are due and payable two years from the date of
issuance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, included elsewhere within
this Report.
INTRODUCTION
The Company has significantly altered its direction since its acquisition
of WasteMasters, Inc. on December 28, 1995. The Company has embarked on raising
capital to acquire and put into operation waste related businesses, reduce
indebtedness, and fully poise the Company for upcoming growth. The Company has
transitioned to new leadership. The Company is acquiring and developing
landfills and transfer stations to provide convenient, cost-effective and
ecologically proper solid waste processing, transportation and disposal.
The core Company focus is acquiring and developing its waste processing,
transportation and disposal capacities. It has embarked on expansions and
Sub-Title D permitting of its landfills, while developing processing
capabilities upstream to supply its landfills.
7
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SEPTEMBER 30, 1996
(UNAUDITED)
The Company has shifted its revenue base from sole dependence on composting
to broader based waste processing, recycling, transportation and landfill
development. The Company has transitioned from a single customer seeking
composting to many customers seeking waste processing and disposal. Earlier in
the year, the Company discontinued operations at its Baltimore composting and
recycling center. In addition, the Company began operations at its first C&D
waste transfer station, in New York. These events mark the shift of the Company
towards the development of waste processing capabilities in large markets. This
transformation positions the Company to expand market share, establish internal
growth, and become increasingly profitable.
The Company's growth strategy is to establish a strong niche in the United
States waste disposal market. The Company plans to acquire and develop an array
of waste processing plants which receives waste, maximizes reutilization of
selected portions of the waste stream, and sends residue waste to Company
disposal sites. Financial performance will progress as facilities are brought on
line and full profit potential of the Company's landfills are achieved.
During the first nine months of 1996, the Company operated four revenue
generating facilities -- two landfills, a construction and demolition ("C & D")
waste transfer station, and the Baltimore recycling and composting facility.
Financial performance will progress as facilities are brought on line, revenues
are increased, efficiencies are created, and full potential of the Company's
landfills are achieved.
The two landfills that operated during the nine months ended September 30,
1996 were the Rye Creek Landfill in Kirksville, Missouri and the Appleton
Sanitary Landfill in Allendale, South Carolina. The Company plans to expand
their respective waste permits to allow greater volumes and extended landfill
lives.
The C&D waste transfer station which began operations during the second
quarter of 1996, is located in the Bronx, New York, and is permitted to receive
up to 3,000 yards of C&D waste plus 3,000 yards of dirt and rock per day.
As previously reported, the Company reopened the Baltimore recycling and
compost facility in January, 1996. Shortly thereafter the facility's principal
customer, Browning-Ferris Industries, Inc. ceased honoring its contractual
obligations to deliver waste, failed to make payments on account as
contractually required, and requested arbitration to attempt to break its
contract with the Company. In addition, the facility's lender sought to
foreclose on the facility and sell it to Browning-Ferris Industries, Inc. After
the Company exhausted all of its legal remedies to stay the foreclosure sale,
the Baltimore facility was sold at foreclosure on May 17, 1996 to
Browning-Ferris Industries, Inc.
During the quarter ended September 30, 1996, the Company began operating a
second C&D transfer station located in Philadelphia, Pennsylvania under a one
year renewable operating contract. The Philadelphia facility is serviced by CSX
rail which connects to the Company's South Carolina landfill. The facility is
permitted to accept up to 3,000 tons of C&D waste per day.
The Company continues to pursue opportunities to purchase waste facilities
in Hollywood, Florida, Staten Island, New York, Baltimore, Maryland and other
densely populated markets to supply its existing landfill operations.
RESULTS OF OPERATIONS
The Company's revenues increased by $620,943 to $1,230,621 for the third
quarter of 1996, from $609,678 during the same period in 1995. The increase in
revenues is a result of the receipt of disposal fees ("tipping fees") at its
South Carolina and Missouri landfills and New York City C&D transfer station.
These assets were not owned by the Company during the quarter ended September
30, 1995.
The Company's revenues increased by 214.3% to $4,041,139 for the first nine
months of 1996, from $1,885,247 during the same period in 1995. The increase in
revenues is due to bringing new facilities on line. In addition, the Company
reopened the Baltimore recycling facility in early January and recognized
revenues from its operation until shortly prior to
8
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SEPTEMBER 30, 1996
(UNAUDITED)
the sale of the facility at foreclosure. The plant was closed and did not
receive waste during most of the nine months ended September 30, 1995.
Expenses increased by 374.7% or $2,529,954 for the third quarter of 1996
compared to the same period in 1995. Expenses as a percentage of revenues were
280.4% in the current third quarter compared to 151.1% for the prior year third
quarter. Cost of sales increased by $1,173,528 for the third quarter of 1996.
This increase is the result of the Company operating the South Carolina and
Missouri landfills and the New York City transfer station. Selling, general and
administrative expenses increased by $1,381,804 for the third quarter of 1996.
The increase is due to additional management and staff compensation and
professional fees associated with the development and operation of the new
landfills and transfer station facilities. Interest expense decreased 7.8%, or
$25,378 to $302,086 for the third quarter of 1996 compared to the third quarter
of 1995. The decrease reflects the extinguishment of the debt related to the
Company's Baltimore facility.
Expenses increased by 184.2% or $4,623,379 for the first nine months of
1996 compared to the same period in 1995. Expenses as a percentage of revenues
were 241.4% in the first nine months compared to 272.3% for the first nine
months of 1995. Cost of sales increased by $1,765,734 for the first nine months
of 1996. This increase is a result of the Company reopening the Baltimore
facility after the facility was idle for most of 1995 and the costs of operating
the Company's two new landfills and transfer station. Selling, general and
administrative expenses increased $3,686,137 or 412.1% from the first nine
months of 1995. The increase is a result of additional management compensation,
clerical salaries, and professional fees incurred in connection with the
Company's new business operations. Interest expense decreased 53.2%, or $828,492
to $728,452 for the first nine months of 1996 compared to the first nine months
of 1995. The decrease reflects the extinguishment of the debt related to the
disposal of the Baltimore facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet at September 30, 1996 reflects a working
capital deficit of $2,797,924 as compared to a deficit of $41,165,667 at
December 31, 1995.
The Company's ratio of indebtedness to equity of 1.12 at September 30, 1996
improved significantly from 13.87 at December 31, 1995. This change was due to
the Company issuing common stock in exchange for cash, services, and other
assets. In addition, the Company disposed of its Baltimore facility and
extinguished the related debt.
During the first nine months of 1996, the Company's working capital
deficiency decreased $38,367,653. This was as a result of the disposal of the
Company's Baltimore facility and the extinguishment of the related debt.
Accounts receivable increased $457,409 as a result of the Company recognizing
revenues from its landfill operations.
The Company met a portion of its working capital needs through the sale of
common stock. On January 4, 1996, the Company sold 1,000,000 restricted shares
of its common stock for $1.2 million in cash. On January 12, 1996, the Company
issued 527,333 restricted shares of its common stock with registration rights to
various employees, directors, officers, consultants and advisors in exchange for
the cancellation of compensation claims of $1,582,000. Also on that date, the
Company issued 70,000 restricted shares of common stock in exchange for
cancellation of $200,000 in debt on its Rye Creek Landfill and 40,000 restricted
shares of common stock in exchange for cancellation of a $100,000 debt for
engineering consulting services. On March 15, 1996, for $500,000 in cash, the
Company issued 100,000 restricted shares of common stock and a promissory note
for $400,000 which was repaid in 30 days without interest. On April 12, 1996,
the Company sold $3,000,000 of debentures for $1,755,000 net, convertible into
the Company's commons stock at any time during the period beginning after 40
days and ending two years from issuance. On June 27, 1996 the Company sold
$2,000,000 of debentures for $1,410,000 net, convertible into the Company's
common stock at any time during the period beginning after 40 days and ending
two years from issuance. The debentures are convertible into the Company's
common stock at market prices at the
9
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SEPTEMBER 30, 1996
(UNAUDITED)
date of conversion. The debentures are convertible into the Company's common
stock at market prices at the date of conversion. As of September 30, 1996, the
holders of the debentures had converted $965,000 of debt into 495,067 shares of
the Company's common stock.
While the Company as raised capital to meet its working capital and
financing needs, additional financing is required in order to complete the
planned improvements necessary to the Company's landfills and transfer station
to make them fully operational. The Company is seeking financing in the form of
equity and debt in order to make the necessary improvements and provide working
capital. There are no assurances the Company will be successful in raising the
funds required.
INFLATION
Inflation has been considered in establishing the revenue and cost
contracts for construction and operation of the Baltimore facility. The Company
believes the assumed rates are reasonable.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously reported, on February 29, 1996, Baltimore FERST limited
Partnership (the "Partnership"), which owned the Company's Baltimore composting
and recycling facility, filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code in the U. S. Bankruptcy Court in Baltimore,
Maryland. On April 25, 1996, the Bankruptcy Court granted the motion of the
holder of the senior lien on the facility to modify the bankruptcy stay to allow
it to proceed with a foreclosure sale of the facility. The Company first
reported on the proceeding in Item 3 of its Annual Report on Form 10-KSB for the
year ended December 31, 1995.
After the Company exhausted all of its legal remedies to stay the
foreclosure sale, the Baltimore facility was sold at foreclosure sale on May 17,
1996 to Browning-Ferris Industries, Inc. The foreclosure sale was ratified by
the Circuit Court for Baltimore City, Maryland on June 27, 1996.
On April 12, 1996, FERST O & M , Inc. filed a voluntary bankruptcy petition
under Chapter 7 of the United States Bankruptcy Code. The filing stayed all
actions against FERST O & M, Inc.
The Partnership is involved in extensive litigation with PWT Waste
Solutions, Inc. ("PWT"), the facility's construction contractor. The contractor
claims to be due approximately $1.5 million from retainage claimed by the
Partnership when the contractor failed to comply with various performance tests,
timely completion, and numerous warranty claims. The Partnership is claiming
liquidated damages far in excess of the retainage. Subsequently, the contractor
expanded the lawsuit to include Credit Suisse, Chrysler, and the parent company.
Management does not believe the lawsuit will adversely affect the Company.
On June 4, 1996, Michael Reis and Lawrence Katz filed a complaint in the
United States District Court for the District of New Jersey. The Complaint seeks
unspecified damages based on a purported contract between the Plaintiffs and the
Company for a financing placement and corporate development fee. The Company
believes the complaint is completely without merit and intends to vigorously
defend its position.
On June 28, 1996, the Company instituted a Complaint for Declaratory Relief
in the United States District Court for the Southern District of New York
against Diversified Investors Services of North America, Inc. in response to a
demand by Diversified for issuance of warrants for 500,000 shares of the
Company's stock. Diversified claims it is entitled to the warrants by virtue of
having obtaining certain financing for the Company as required by a December 8,
1994 contract between Diversified and the Company. The filing of a counterclaim
by Diversified for the warrants is anticipated.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
Effective November 1, 1996, the Company relocated its corporate offices to
250 West Pratt Street, Baltimore, Maryland.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The Company filed the following reports on Form 8-K during the quarter for
which this report is filed:
Form 8-K filed August 22, 1996 announcing the opening of a 3,000 ton per
day transfer station in Philadelphia, Pennsylvania.
11
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WASTEMASTERS, INC.
Registrant
November 5, 1996 By: /s/
Date Richard C. Masters
Chief Executive Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
12
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
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0
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