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 March 31, 1997
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Commission file number 0-12914
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WASTEMASTERS, INC.
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(Name of Small Business Issuer in Its Charter)
Maryland 52-1507818
- ------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
11940 Coman Road, Waldron, MI 49288
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(Address of Principal Executive Offices)
(800)408-7274
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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: 28,479,112 shares of Common
Stock ($.01 par value) as of April 30, 1997.
Transitional small business disclosure format: Yes No x
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WASTEMASTERS, INC.
Quarterly Report on Form 10-QSB for the
Quarterly Period Ending March 31, 1997
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Operations: Three months
ended March 31, 1997 and 1996
Consolidated Balance Sheets: March 31, 1997 and
December 31, 1996
Consolidated Statements of Cash Flows: Three months
ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements:
March 31, 1997
Item 2. Management's Discussion and Analysis.
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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
WASTEMASTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1997 1996
----------- -----------
REVENUES
Sales $ 161,298 $ 1,851,817
Development Income - 867
----------- -----------
161,298 1,852,684
EXPENSES
Cost of sales 167,818 2,016,674
Selling, General and
Administrative 1,144,973 1,465,887
Interest Expense 109,800 4,970
----------- -----------
1,422,591 3,487,531
----------- -----------
Loss Before Income Taxes (1,261,293) (1,634,847)
Income Tax Expense - -
----------- -----------
NET LOSS $(1,261,293) $(1,634,847)
=========== ===========
Loss per
Share (Primary and
Fully Diluted): $ (.05) $ (.14)
Weighted Average
Number of
Shares Outstanding 25,455,158 11,694,932
The accompanying notes are an integral part of these statements.
1
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WASTEMASTERS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS March 31, December 31,
1997 1996
----------- ------------
Current Assets
Cash $ 2,118 $ 0
Accounts Receivable, net of
allowance for doubtful accounts 60,889 108,733
----------- -----------
Total Current Assets 63,007 108,733
Property and Equipment, at cost,
net of accumulated depreciation 57,320 62,531
Construction in Process 1,511,865 1,511,865
Land 1,029,500 1,029,500
----------- -----------
2,598,685 2,603,896
Other Assets
Deferred Loan Costs, net 956,294 1,262,127
Excess of costs over net assets
acquired 12,963,860 13,047,493
Advances and other 1,387 1,387
----------- -----------
13,921,541 14,311,007
----------- -----------
$16,583,233 $17,023,636
=========== ===========
The accompanying notes are an integral part of these statements.
2
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WASTEMASTERS, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1997 1996
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Current liabilities:
Cash drawn in excess of available
balances $ - $ 24,329
Current maturities of long-term debt
and convertible debentures 8,551,349 9,190,149
Accounts payable and accrued
liabilities 3,943,861 3,604,815
Due to officers and directors 304,904 304,904
Due to Atlantic Coast & Demolition 271,090 271,090
------------- ------------
Total current liabilities 13,071,204 13,395,287
Long-term debt - -
Deferred expenses:
Accrued environmental and landfill
costs 313,002 313,002
Stockholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized;
none issued - -
Common Stock, $.01 par value; 35,000,000 shares
authorized; 21,437,363 shares
issued and outstanding for the year ended
December 31, 1996 and 35,000,000
shares authorized; 27,779,112 shares
issued and outstanding for the
period ended March 31, 1997 277,791 213,374
Additional capital 28,739,196 27,658,640
Accumulated deficit (25,817,960) (24,556,667)
------------- ------------
Total stockholders' equity 3,199,027 3,315,347
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$ 16,583,233 $ 17,023,636
============ ============
The accompanying notes are an integral part of these statements.
3
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WASTEMASTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1997 1996
----------- -----------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $(1,261,293) $(1,634,847)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and Amortization 394,676 304,783
Limited Partners' Interest
in Losses - (1,693,891)
Issuance of stock options - 530,000
Stock issued in lieu of cash
payment 1,144,973 3,942,752
Changes in assets and liabilities
Accounts receivable 47,844 (397,591)
Inventory and prepaid expenses - (76,287)
Accounts payable and accrued
liabilities, net 314,718 (2,997,536)
Other assets - (290,189)
Deferred income - (217)
----------- -----------
Net cash provided by (used in)
operating activities 640,918 (1,072,845)
----------- -----------
Cash flows from investing activities
Construction and Development Costs - -
Purchase of land and improvements - (1,540,676)
Additions to property, plant and
equipment - (5,205)
Business acquisitions - (5,541,696)
----------- -----------
Net cash provided by (used in)
investing activities - ( 7,087,577)
The accompanying notes are an integral part of these statements.
4
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WASTEMASTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Three Months Ended March 31,
1997 1996
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Cash flows from financing activities
Repayment of loans (638,800) (203,817)
Proceeds from issuance of stock - 7,932,696
Proceeds from debt - -
-------- ---------
Net cash provided by (used in)
financing activities (638,800) 2,362,445
--------- ---------
Net Increase (Decrease) in cash 2,118 (14,661)
Cash and Short-Term Investments
at beginning of period - 546,391
----------- ---------
Cash and Short-Term Investments
at end of period $ 2,118 $ 531,730
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period
for interest $ - $ 305,954
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS
Common stock issued in
exchange for services $1,144,973 -
Issuance of stock options $ - -
Common stock issued in business
acquisition - $6,608,696
Conversion of debentures $ 638,800 -
The accompanying notes are an integral part of these statements
5
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WASTEMASTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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 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 only normal recurring accruals)
considered necessary for a fair presentation have been
included. Operating results for the three month period
ended March 31, 1997 are not necessarily indicative of
the results that may be expected for the year ended
December 31, 1997. The unaudited condensed consolidated
financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for
the year ended December 31, 1996.
Consolidated Statements
The consolidated financial statements include the accounts of
Wastemasters, 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., Chemical Road Investments, Inc. , WasteMasters of South
Carolina, Inc., Trantex, Inc., and WasteMasters of Georgia,
Inc., WasteMasters of New York, Inc., WasteMasters of
Pennsylvania, Inc. as well as the accounts of Baltimore FERST
Limited Partnership (the "Partnership") in which FERST for
Baltimore, Inc. is the general partner (collectively "the
Company"). Significant intercompany transactions have been
eliminated in consolidation.
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WASTEMASTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
NOTE B- DISPOSITIONS
On May 17, 1996, the Partnership's Baltimore recycling and compost
facility was sold at foreclosure. Assets disposed of include the facility,
improvements, bond issuance costs and land. The net book value of the assets
sold was approximately $40,780,800. The Partnership filed a voluntary petition
under Chapter 11 of the U. S. Bankruptcy Code to retire any remaining
non-recourse secured and unsecured liabilities related to the facility in the
approximate amount of $42,000,000.
On April 12, 1996, FERST O & M, Inc. filed a voluntary petition under
Chapter 7 of the U. S. Bankruptcy Code.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended March 31, 1997 and 1996
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, included
elsewhere within this Report.
INTRODUCTION
Management's immediate objective is to secure sufficient working
capital in order to continue as a going concern. Once financing has been secured
and the Company's operations stabilized, management plans to develop
Company-owned processing facilities and to arrange alliances or management
contracts with independent waste processors, waste transporters, and waste
generators to produce waste revenues for the Company's landfills.
The core Company focus is developing its existing landfills. Subject to
adequate financing, the Company plans to embarked on expansions and Sub-title D
permitting of the landfills, while developing processing capability upstream to
supply the facilities.
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There can be no assurance that management will be successful in
obtaining, financing and implementing its plan of operation for the Company.
Subtitle D permits are necessary to achieve full potential of all the Company's
landfill sites, and it is uncertain whether the Company will be successful in
obtaining the permits.
On May 2, 1997, the Company was notified by its insurance carrier that
insurance coverage for the operation of Company's facilities and landfill
closure have lapsed effective April 21, 1997 due to nonpayment of the
contracted premiums. The ability to reinstate and maintain insurance coverage
for facility coverage and landfill closures is a material risk for the Company.
If the Company does not reinstate and maintain the insurance coverage, the
Company will loose its permits to operate its landfills which will materially
impair the value of these assets. The Company has been notified by the State of
Missouri that the State plans close the Kirksville, Missouri landfill
pending the reinstatement of adequate insurance and closure bond coverage.
The Company has not received a similar notification from the State of South
Carolina.
GENERAL
During the first quarter of 1997, the Company operated and received
revenues principally from two facilities- Rye Creek Landfill in Kirksville,
Missouri and the Appleton Sanitary Landfill in Allendale, South Carolina.
On May 17, 1996, the Company's Baltimore FERST Limited Partnership, a
recycling and composting facility, was sold at foreclosure. Assets sold include
the facility, improvements, bond issuance costs and the 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.
On April 12, 1996, FERST O & M, Inc. (a wholly-owned subsidiary
of the Company) and the entity responsible for managing the Baltimore
recycling and compost facility, filed a voluntary petition under Chapter 7 of
the U. S. Bankruptcy Code.
RESULTS OF OPERATIONS
The Company's revenues decreased by 91.2% to $161,298 for the first
quarter of 1997, from $1,852,684 during the same period in 1996. This decrease
in revenues is a result of the effects of the disposal of the Company's
Baltimore recycling and compost facility in May, 1996 and the corresponding loss
of revenues from that facility.
8
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Expenses for the period decreased by 59.2% or $2,064,940 for
the first quarter of 1997 compared to the same period in 1996. The Company's
operating loss (revenues less cost of sales) decreased from $163,990 during the
quarter ended March 31, 1996 to $6,520 during the quarter ended March 31, 1997.
This was a result of the effects of the disposal of the Baltimore recycling and
compost facility and its associated revenues and costs. Cost of sales decreased
by $1,848,856, or 91.7%, for the first quarter of 1997 as compared to the first
quarter of 1996. This decrease is the result of the disposal of the Baltimore
recycling and compost facility in May, 1996. Selling , general and
administrative expenses decreased $320,914 or 21.9% from the first quarter of
1996. This decrease is the result of the reduction in the Company's operations.
Interest expense increased 95.5%, or $104,830 to $ 109,800 for the first quarter
of 1997 compared to the first quarter of 1996. The increase is a result of the
additional debt the Company incurred in 1997 and the Company's decision not to
accrue interest on the debt associated with the financing of the Baltimore
facility during the quarter ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet at March 31, 1997 reflects a working
capital deficit of $13,008,197. As a result of the Company not complying with
certain debt covenants all the Company's long term debt is classified as
current.
The Company's ratio of indebtedness to equity of 4.18 remained
unchanged from 4.13 at December 31, 1996.
During the first three months of 1997, the Company's working capital
deficiency decreased $277,357. This was due to the conversion of $638,800 of
convertible debt to common stock during the period.
The Company will require financing in order to meet its working capital
needs and complete its planned improvements necessary to the Company's landfills
to make the assets fully operational. The Company has sought and continues to
seek 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.
9
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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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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. The
Company first reported on the proceeding in Item 3 of its Annual Report on Form
10-KSB for the fiscal 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.
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 as specified in the construction contract as well as other
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 outcome of the lawsuit will adversely affect the
10
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Company.
On June 4, 1996, the Company's former Chief Financial Officer and
Director, 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
demand by Diversified for issuance of warrants for 500,000 shares of the
Company's common stock. Diversified claims it is entitled to the warrants by
virtue of having obtained certain financing for the Company as required by a
December 8, 1994 contract between the Diversified and the Company. The filing of
counterclaim by Diversified is anticipated.
As of March 31, 1997 , the Company is and continues to be in default
under the terms of the mortgage loans secured by the Company's Kirksville,
Missouri and Allendale, South Carolina landfills. In addition, the Company is
and continues to be in default under the terms of the convertible debentures due
in 1998.
The Company is not a party to any other pending litigation or
administrative proceedings which are expected to have a material adverse impact
on its financial position or results of operations.
Item 2. Changes in Securities.
Not applicable
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
11
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The Company filed the following reports on Form 8-K during the quarter
for which this report is filed:
Form 8-K filed dated March 21, 1997, announcing the Company's
entering into a Memorandum of Understanding with Strategica
Capital Corporation to provide a $4,000,000 line of credit to
the Company.
Form 8-K filed dated March 25, 1997, announcing the Company's
new management that will be installed commensurate with the
funding of the Strategica Capital Corporation financing.
Form 8-K filed dated May 14, 1997, announcing the arranging of
new financing and terminating the agreement with Strategica
Capital Corporation.
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.
Date: May 19, 1997 By: /s/
__________________
Richard D. Masters
President and Chief Executive Officer
(Duly Authorized Officer and Principal
Accounting and Financial Officer)
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,118
<SECURITIES> 0
<RECEIVABLES> 60,889
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63,007
<PP&E> 2,598,685
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,583,233
<CURRENT-LIABILITIES> 13,071,204
<BONDS> 0
0
0
<COMMON> 277,791
<OTHER-SE> 2,921,236
<TOTAL-LIABILITY-AND-EQUITY> 16,583,233
<SALES> 161,298
<TOTAL-REVENUES> 161,298
<CGS> 167,818
<TOTAL-COSTS> 167,818
<OTHER-EXPENSES> 1,144,793
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,800
<INCOME-PRETAX> (1,261,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,261,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (1,261,293)
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