SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
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Commission file number 0-12914
WASTEMASTERS, INC.
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(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
(Name of Small Business Issuer in Its Charter)
Maryland 52-1507818
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(State of Incorporation) (IRS Employer Identification No.)
11940 Coman Road, Waldron, Michigan 49288
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (888)413-0059
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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(Title of Class)
Check whether the issuer: (1) has 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
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: 4,202,270
Aggregate market value of the voting stock held by non-affiliates
of the registrant: Approximately $5,500,000 as of March 31, 1997
Number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 27,779,112 shares of Common
Stock ($.01 par value) as of March 31, 1997.
Transitional small business disclosure format: Yes No X
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PART I
Item 1. Description of Business.
Wastemasters, Inc. (Formerly F & E Resource Systems Technology, Inc.
"FERST") "WasteMasters" is a pollution control company in the business of
owning, operating, acquiring and developing nonhazardous waste disposal
facilities and complementary businesses. The Company was incorporated in
Maryland in July, 1981, but its predecessor's operations date back to the early
1900's and the Flynn & Emrich Company and F&E Stokers, Inc., once premier
manufacturers of solid waste incinerator equipment. In December 1995, FERST,
then primarily a solid waste composting and recycling company, acquired
Wastemasters, Inc., a Nevada company in the waste brokerage and hauling
business. Wastemasters, Inc. also acquired at the same time (from the principals
of Wastemasters and their affiliates) a landfill in South Carolina and rights to
acquire three additional landfills in Georgia, Missouri and Michigan.
Wastemasters acquired the Missouri landfill in January 1996 and the Georgia
landfill in March 1996. Wastemasters and all the landfills were acquired for
Common Stock and the assumption of debt. The combination of FERST and
Wastemasters resulted in a company controlled by the previous management of
Wastemasters with business interests focused primarily on landfilling solid
wastes.
On May 17, 1996, the Company's Baltimore FERST Limited Partnership,
a recycling and compost 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.
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.
On May 10, 1996, the Company entered into an Operations Management
Agreement with Equinox Associates, Inc., which leases a newly-repermitted
construction & demolition (C&D) transfer station in Bronx, New York. The seller
granted the Company the right to operate the facility in consideration for
payment of $450,000 in cash.
On July 30, 1996 the Company entered into an Agreement to acquire
all of the outstanding common shares of Equinox Associates, Inc. for $1,020,000
in the form of cash, the assumption of certain liabilities and 510,000 shares of
the Company's common stock valued at $2.00 per share. The shares are to be
restricted pursuant to SEC rule 144.
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In July, 1996 the Company abandoned its efforts to purchase and
re-permit a landfill facility in Richmond, Michigan.
In February, 1997, the Company terminated the Operation Management
Agreement and the Agreement to acquire the Equinox Associates, Inc. common
shares. The Company no longer operates the Bronx, New York facility.
In August, 1996, the Company began operating a construction
demolition (C&D) transfer station located in Philadelphia, Pennsylvania under a
one year renewable contract. The facility is owned by Construction/Transfer
Station Ltd., a limited liability Company owned by Directors and Officers of
WasteMasters, Inc. The contract to operate the facility was terminated by both
parties in February, 1997. The Company no longer operates the facility.
In November, 1996, the Company entered into an Agreement to sell all
of the outstanding common stock of FERST for St. Mary's, Inc. (a wholly-owned
subsidiary of the Company), whose principal asset is approximately 421 acres of
undeveloped land in St. Mary's County, Maryland and Chemical Road Investments,
Inc. (a wholly-owned subsidiary of the Company), whose sole asset is
approximately 3 acres of industrial land in Baltimore, Maryland to Ronald W.
Pickett, the Company's former president, Chief Executive Officer and Director.
The combined sale price was $331,000, which was comprised of Mr. Pickett
assuming existing debt of approximately $275,000 and forgoing claims against the
company for unpaid compensation and expenses of approximately $55,000. The
Company recognized a loss of $1,295,785 which represents the excess of the book
value of the assets sold over the anticipated sales price.
On February 27, 1997, the Company has entered into an Agreement to
secure a line of credit in the amount of four million dollars ($4,000,000) from
Strategica Capital Corporation ("Lender"). The loan, which is subject to the
Lender completing its due diligence, will be for a term of two (2) years, bear
interest at 12.5% payable monthly, and will be secured by the Company's assets.
As consideration for the financing to be provided by the Lender, the
Company has agreed to issue warrants to purchase stock in the Company to the
Lender's Advisor, which when exercised, will provide the Lender's Advisor with
up to 45% of the issued and outstanding common stock of the Company as of the
date of the loan closing. The warrants shall expire seven (7) years from the
date of closing and shall have an exercise price equal to the average of the
closing price for the five (5) trading days immediately preceding the date
closing.
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As a condition of the obtaining the loan, the Company's Directors
shall cause a Proxy Statement to be prepared and mailed to all stockholders of
record recommending the Company's stockholders approve changing the Company's
name to Peerless Waste Industries, Inc. and a reverse split of the Company's
common stock in the ratio of 1:10. In addition, on the date of the loan closing,
Richard Masters, Paul Williamson, and Robert Fahey shall resign as Directors and
all Company officers shall resign. The Company, with approval of the Lender,
shall appoint new Directors to serve on the Board and such new Board of
Directors shall nominate and elect new officers.
In December, 1996 the Lender provided the Company with a $200,000
line of credit secured by the Company's accounts receivable and third-party
securities and guarantees.
The Common Stock of the Company is traded in The NASDAQ SmallCap
Market and is quoted under the symbol WAST.
The Company's principal executive offices are currently located at
11940 Coman Road, Waldron, Michigan 49288. Its telephone number at that address
is (888)413-0049.
Business of the Company. The Company's principal business objective
is to provide convenient, cost-effective and ecologically proper solid waste
processing and disposal for waste generators and waste transporters. The Company
contemplates achieving this objective by owning, operating, acquiring and
developing nonhazardous waste disposal businesses and businesses that complement
them, primarily nonhazardous waste processing and business. At present, however,
the Company's core business is solid waste disposal.
Solid waste processing is the physical handling of waste to change
it in some way. The Company engages in or has plans to engage in the following
solid waste processing activities: (1) quality control (to insure that only
permittable wastes transfer through the Company's system); (2) segregation of
wastes (to remove valuable recyclables and unwanted refuse); and (3) compression
and loading (to provide safe and economic transportation). These activities
generally take place at transfer stations. The Company's strategy is to develop
transfer station capability by allying with high volume processing centers.
Solid waste disposal is the physical elimination of waste by burying
at landfills, and is the Company's current core business. The Company owns three
landfills. The Company's landfills are located in Allendale, South Carolina,
Kirksville, Missouri, and Lafayette, Georgia. See "Item 2. Description of
Property." All of the Company's landfills are currently undergoing repermitting
under Subtitle D of the Resource Conservation and Recovery Act of 1976, with
construction of lined
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landfill cells expected during the 1996-1997 time frame. See "Government
Regulation" below. Subtitle D upgrade will greatly enlarge Company landfill
capacities and useful lives.
In general, the Company acquires landfill properties at a discount
to their intrinsic value by finding properties that are in need of
recapitalization and upgrade to Subtitle D. The Company avoids landfills with
questionable environmental liabilities. The Company intends to increase the
profit potential of its landfills by furnishing out-of-region waste revenues,
among other attainable measures.
Customers. The Company's three landfills currently serve small,
localized markets, but its business plan envisions primarily targeting
independent waste haulers and waste generators as customers. Its secondary
market consists of municipalities seeking to privatize disposal to avoid
long-term costs of landfill development and closure under Subtitle D. The
Company has a Host County Agreement in Allendale, South Carolina which expressly
preserves rights for the Company for 25 years.
The Company is concentrating its initial marketing efforts on
generating regional waste stream revenues for its own landfills. It is targeting
government MSW generators, waste haulers, and independently operated transfer
stations. It will then move to generate revenues from waste streams with
capability to haul to the Company's landfills, such as independently operated
MSW transfer stations in major markets and industrial waste generators with rail
access. Once the company has developed greater transfer station capability, it
will target independent haulers of MSW and construction and demolition (C&D)
waste; MSW, C&D and industrial waste generators with self-haul capability; and
independent transfer station operators with barge or truck capability.
Competition. The solid waste pollution control industry in the
Company's target markets is highly competitive and fragmented. The Company's
competitors in the processing segment of the industry are independent transfer
stations and material recovery facilities (MRFs) as well as transfer stations
and MRFs operated by the large, vertically integrated waste companies that also
do business in the transportation and disposal segments of the industry. These
companies include Browning-Ferris Industries, Inc., WMX Technologies, Inc.,
Laidlaw, Inc., USA Waste Services, Inc., J. P. Mascaro, Inc., and Longview
Development, Inc. Competitors in the disposal segment of the industry include
independent landfill companies and the vertically integrated waste companies.
The Company also considers waste incineration and composting companies as
competitors in the disposal segment based on their economic impact, although
technically these companies engage in waste processing rather than waste
disposal.
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Competition in the waste processing, and disposal industry is based
primarily on price and location (proximity to the waste source), but is also
affected by convenience (how quickly a vehicle can discharge its load), customer
relationships, government regulation (local rules governing transportation and
disposal of waste streams), operating hours and capacity, and credit terms. The
Company believes it can successfully compete in the industry on the basis of
price, location, and environmental compliance. It offers its customers
reasonably priced, long-term, reliable disposal capacity. The Company's landfill
acquisition policy (acquiring non-Subtitle D facilities at a discount, followed
by permit and infrastructure upgrades) produces a cost advantage. The Company
also expects to have lower operational and overhead expenses than many of its
competitors. The Company also expects to benefit from the migration of waste
streams to Subtitle D facilities and their upstream processing facilities in a
positive market price environment.
For a variety of reasons, many landfills that compete with those of
the Company are being closed rather than modified to comply with Subtitle D. See
"Government Regulation" below. In the short term, landfill airspace is plentiful
as non-Subtitle D landfills bring in wastes before mandated closure dates,
depressing market prices. Subtitle D requirements have raised the cost of
replacing landfill airspace, justifying an eventual rebound in market prices as
market share shifts to Subtitle D facilities. By 1998, airspace supply may
decrease 20%, and alternative supply (incinerators or composting) is not in
significant development. The Company expects to enter 1998 with several Subtitle
D rail-served landfills, whose per ton (fixed) costs for siting, permitting, and
cell construction are significantly below all competition.
The waste disposal business requires substantial capital resources,
however, and some of the Company's competitors are much larger and have
significantly greater resources. No assurance can be given that these companies
will not aggressively price and change their products and services to compete
better with those of the Company. In areas where the Company's competitors have
both collection and disposal operations, the Company's disposal facilities may
be at a competitive disadvantage because its competitors may dispose of waste at
their own disposal facilities.
The waste disposal industry is currently undergoing consolidation, and
the Company expects to encounter competition in its efforts to acquire customers
and landfills. Certain of the Company's competitors are likely to be larger,
better known companies with significantly greater resources than the Company.
Competition in the waste pollution control business may also be affected by the
increasing national emphasis on waste minimization, recycling, composting,
incineration and other waste reduction programs, which have reduced and are
expected to
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continue to reduce the volume of waste deposited in disposal facilities.
The increased competition to acquire disposal facilities and related businesses
may result in acquisitions on terms that prove to be less advantageous to the
Company or that may increase the price of these businesses to levels beyond the
Company's financial capability.
Government Regulation. The Company's disposal operations are subject
to various federal, state and local laws and substantial regulation under these
laws by governmental agencies, including the U.S. Environmental Protection
Agency (EPA), disposal various state agencies and county and local authorities.
These regulatory bodies impose restrictions to control air, soil and water
pollution and may in some cases require the Company to provide financial
assurances covering monitoring, potential corrective action and final closure
and post-closure for certain disposal facilities. The penalties for violation of
these laws and regulations are, in many instances, substantial. The Company may
in the future be required under these regulatory requirements to increase
capital and operating expenditures in order to maintain current operations or
initiate new operations. Governmental authorities may seek to impose fines on
the Company or to revoke or deny renewal of an operating permit for failure to
comply with applicable requirements. Under certain circumstances, the Company
might be required to curtail operations until a particular problem is remedied.
Amendments to current laws and regulations governing the Company's operations or
more stringent implementation thereof could have a material adverse effect on
the Company's operations or require substantial capital expenditures.
The Resource Conversation and Recovery Act of 1976 ("RCRA"). RCRA
regulates the handling, treatment, storage, transportation and disposal of
hazardous and nonhazardous wastes. The EPA's regulations under Subtitle D of
RCRA generally became effective on October 9, 1993, and affect both existing and
new MSW facilities. Subtitle D codifies minimum criteria for the location,
operations and design of MSW facilities. It also establishes standards for
groundwater monitoring, landfill gas monitoring, corrective actions, closure and
post-closure monitoring and financial assurance to ensure funding necessary to
complete closure, post-closure monitoring and, if necessary, corrective actions
at these facilities. Subtitle D requires that landfills have complying liner
systems in 1998. Subtitle D allows states, with EPA approval, to implement and
enforce the regulations; otherwise the EPA will be responsible for issuing
permits and providing enforcement. See "Item 6. Management's Discussion and
Analysis or Plan of Operation" for a discussion of the Company's financial
assurance obligations. The Company currently has Subtitle D permit applications
pending covering design, construction and operation of its South Carolina,
Georgia and Missouri landfills.
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The Federal Water Pollution Control Act of 1972 (the "Clean Water
Act"). The Clean Water Act established rules regulating the discharge of
pollutants from a variety of sources, including waste disposal sites, into
streams, groundwater or other surface or subsurface waters. Whenever leachate or
stormwater run-off from the Company's disposal facilities may be discharged into
surface waters, the Clean Water Act may require the Company to obtain discharge
permits, conduct periodic sampling and monitoring and, under certain
circumstances, reduce the quantity of pollutants in those discharges. The
Company has obtained stormwater discharge permits or is making application for
all of its landfill facilities for which such permits are required.
Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("Superfund" or "CERCLA"). CERCLA address problems created by the
release of hazardous substances into the environment. CERCLA imposes
retroactive, strict, joint and several liability on the present or former owners
or operators of facilities that release hazardous substances into the
environment. Waste generators and transporters are also strictly liable. These
persons may be liable for site investigation costs, site cleanup costs and
natural resource damage, even if conduct giving rise to liability was in
compliance with all laws and regulations. The costs of a CERCLA cleanup can be
substantial. Liability under CERCLA is not dependent upon the existence or
disposal of "hazardous wastes" and more than 20% of the sites on the EPA
National Priority List of Hazardous Waste Sites are municipal solid waste
disposal facilities that ostensibly never received "hazardous wastes." There can
be no assurance that the Company will not face claims resulting in liability
under CERCLA. The Company expects to continue to grow in part by acquiring
existing disposal businesses. As a result, the Company may have acquired, or may
in the future acquire, disposal facilities or related businesses that contain or
have handled hazardous substances or that have other unknown environmental
problems and related liabilities. The Company will be subject to similar risks
and uncertainties in connection with the acquisition of closed disposal
facilities or discontinued lines of business that had been operated by
businesses acquired by the Company. In addition, asbestos is a "hazardous
substance" under federal law. To the best of management's knowledge, however,
neither the Company, nor any of its subsidiaries are listed as potentially
responsible parties at any Superfund site. Virtually all of the states have
Superfund programs similar to CERCLA that give rise to many of the obligations
and liability concerns discussed above.
The Clean Air Act. The Clear Air Act provides for federal, state and
local regulation of emissions of air pollutants into the atmosphere. On March
12, 1996, the EPA promulgated new source performance standards and emission
guidelines for MSW disposal facilities. These regulations impose limits on air
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emissions from such facilities, as well as other related requirements. The new
source performance standards apply to all MSW disposal facilities for which
construction, modification or reconstruction commenced after May 30, 1991 or
that began accepting waste on or after that date. The emission guidelines are a
set of standards that must be adopted by the states and will apply to all MSW
disposal facilities that commenced construction before May 30, 1991 and that
accept waste after November 8, 1997. The new source performance standards and
emission guidelines, combined with new programs established under the Clean Air
Act Amendments, will subject MSW disposal facilities to new reporting and
operational requirements and, in some instances, require installation of gas
recovery systems.
Other State and Local Regulation. Each state in which the Company
operates has laws and regulations governing waste disposal and water and air
pollution and, in most cases, regulations governing the design, operation,
maintenance and closure of disposal facilities. The Company operates under solid
waste permits in Missouri and South Carolina. A consent order is under
negotiation for the Company's Georgia landfill. Successful negotiation of the
consent order would permit the facility to reopen while the Subtitle D permit is
processed.
In addition to costly and restrictive regulation, there are a number
of other factors, the long-term effects of which are unpredictable, that could
result in higher disposal facility operating costs and possible decreased demand
for disposal facilities. These factors include the increasing public opposition
to the siting and operation of disposal facilities, increased efforts (including
legislation) to reduce the volume of waste and dependence on landfilling for
disposal by promoting waste minimization, incineration, composting and
recycling.
Environmental Monitoring. The Company has implemented the
environmental safeguards required by each applicable regulatory agency. Such
safeguards include monitoring of groundwater and surface water quality and,
where required, for possible landfill gas emissions or migration. In addition,
the Company has established its own technical standards for environmental
monitoring devices, sampling equipment and testing procedures. Monitoring
programs are active during the operational life of the landfill facility and
during the required post-closure period. Test results and reports are evaluated
by the Company and transmitted to the appropriate regulatory agencies.
Indications of possible environmental impact to groundwater or surface water may
justify the implementation of remedial actions to correct the condition. The
Company is reviewing the new source performance standards under the Clean Air
Act and the corresponding impact on gas monitoring and management at landfill
sites. A landfill gas management system may be required if established gas
levels are exceeded near site boundaries. The Company believes it is satisfying
its environmental monitoring responsibilities.
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The Company's processing and disposal facilities are subject to
periodic unannounced inspection by state and local authorities. The Company
works with the authorities to remedy deficiencies found during inspections. If
serious violations are found or if deficiencies are not remedied, the Company
may incur fines or be required to close a site. The Company believes that its
processing and disposal facilities currently are in substantial compliance with
applicable regulations.
The Company intends to perform an annual technical audit of each
operating site to evaluate compliance with applicable laws and regulations,
adherence to design documents, environmental safety, knowledge and practice of
Company policies and programs, worker health and safety, and site appearance and
organization.
Legislative Initiatives. The continuing public awareness and interest
in solid waste disposal, the siting of waste facilities, and the protection of
the environment frequently lead to federal, state and local legislative
initiatives that could affect the Company's operations. The prospects for any
legislative proposal are inherently uncertain, and the Company cannot accurately
predict how its business may be affected by the adoption of new laws.
In recent years, some states and many localities have instituted waste
"flow control" requirements, under which all solid waste collected in a
jurisdiction are required to be delivered to a governmentally-designated
facility. In May 1994, the United States Supreme Court ruled that a flow control
ordinance violated the Interstate Commerce Clause of the U.S. Constitution.
Since that decision, several lower federal courts have struck down other flow
control laws. The U.S. Constitution grants the U.S. Congress power to authorize
otherwise unconstitutional state and local actions affecting interstate
commerce, and several bills are currently under consideration in Congress that
would exempt some or all flow control designations from constitutional
invalidity.
Many states also have adopted or considered legislation to ban,
restrict or impose special taxes on imported waste. The U.S. Supreme Court has
struck down such measures as unconstitutional discrimination against interstate
commerce, as have several lower federal courts. In response to these court
decisions, bills have been introduced in Congress in the past several years to
enable states to ban, restrict or differentially tax out-of-state waste. These
efforts have thus far been unsuccessful.
The Company currently cannot predict whether Congress will pass
legislation permitting flow control or restrictions on the interstate movement
of waste, or the content of any such bills that may ultimately become law.
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Employees. At December 31, 1995 the Company had approximately 16
full-time and no part-time employees at its Baltimore facility. At December 31,
1996, the Company had approximately 10 full-time employees and 7 part-time
employees. As of March 29, 1997, the Company has one employee, utilizing
subcontract labor and equipment when practical and cost effective.
Item 2. Description of Property.
The principal fixed assets of the Company consist of land, land
improvements and machinery and equipment used at its landfills.
The Company's principal real estate assets are its landfills. The
following table sets forth information on these properties:
<TABLE>
<CAPTION>
Type of Permit Permit
Identity Landfill Acreage Limitations Status
- -------- -------- ------- ----------- ------
<S><C>
Rye Creek Landfill MSW C&D 46.7 permitted None Active
Adair County, Missouri MSW acres;
5.0 permitted C&D
acres (850 add'l
acres under option)
Appleton Sanitary Landfill MSW 23.8 permitted acres 600,000 Active
Allendale, South Carolina (250 add'l acres tons of MSW and
under option) C&D per year; no
limit on yard
waste
Steele Brothers Landfill Industrial waste 11.09 permitted 700 tons per Pending
Walker County, Georgia acres (add'l 138 day
non-permitted acres
for expansion)
</TABLE>
The Company's South Carolina landfill is subject to a $4.9 million
mortgage secured by the landfill's assets, on which the wholly owned subsidiary
of the Company that holds title to the landfill is liable.
The Company's Missouri landfill is subject to a $162,000 mortgage
secured by the landfill's assets, on which the wholly-owned subsidiary of the
Company that holds the title to the landfill is liable.
Item 3. 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.
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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
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 action 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, 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 seeds 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 it
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.
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.
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Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in the fourth
quarter of fiscal year 1995.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded in The NASDAQ SmallCap Market.
The following table summarizes the low and high bid prices for the Company's
Common Stock for each of the calendar quarters of 1995 and 1996.
WASTEMASTERS,INC. COMMON STOCK
1995 1996
- ------------------------------------- -------------------------------------
Low Bid High Bid Low Bid High Bid
------- -------- ------- --------
First Quarter $0.875 $3.250 First Quarter $1.500 $3.625
Second Quarter 0.69 1.50 Second Quarter 1.625 3.063
Third Quarter 0.56 1.56 Third Quarter 0.563 2.375
Fourth Quarter 0.969 3.00 Fourth Quarter 0.188 0.750
Holders. As of March 31, 1997, there were 756 registered holders of
the Company's Common Stock.
Dividends. The Company has never paid cash dividends on its Common
Stock and has no present intention to do so. The Company intends to retain any
earnings to finance expansion and development of its business.
Item 6. Management's Discussion and Analysis or Plan of Operation.
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.
Management plans to hire additional employees as it implements the
Company's plan of operation.
The plan of operation involves a number of initiatives relating to
landfill and processing center development. The
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Company is working to expand its South Carolina landfill to include construction
and demolition (C&D) waste, achieve a Subtitle D expansion, develop rail
capability to send C&D waste to the facility, and generate out-of-region waste
streams. In Georgia, the Company has applied for a Subtitle D permit and expects
to realize revenues when the permit is in place and expansion completed. In
Missouri, the Company's immediate objective is to increase waste streams so
that its landfill processes waste from the Midwest and the Northeast. The
Company also plans to obtain a Subtitle D expansion of the Missouri facility in
1997.
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. It also is uncertain whether the Company will be able to
secure permits for disposal sites and processing facilities despite the
commitment of money and management effort.
The ability to maintain insurance for facility operation and landfill
closures is a material risk for the Company. The Company currently holds all
necessary insurance to properly operate and close its facilities. The Company
must maintain these policies.
Liquidity and Capital Resources. Cash from operations and from
borrowing will be used to fund management's plan of operation. As facilities
come on line, the Company's revenues will grow. As landfills are upgraded to
Subtitle D status, their capacities will be enlarged, allowing volume-based
revenue growth and extending their useful lives. Company assets expected to
contribute revenue are the Company's South Carolina and Missouri landfills.
The Company has met a portion of its working capital needs through the
sale of common stock. 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 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 $1,410,000 net,
convertible into the Company's common stock at
14
<PAGE>
any time during the period beginning after 40 days and ending two year 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 average of five (5) trading days closing bid price prior to the date of
conversion. As of December 31, 1996, the holders of the debentures had
converted $1,375,000 of debt into 1,628,470 shares of the Company's common
stock.
While the company has 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 improvement and provide working
capital. There are no assurances the Company will be successful in raising the
funds required.
Management expects the Company to have material financial obligations
relating to the closure of the filled areas of landfill sites during their
operating lives and the final closure and post-closure care of facilities at the
end of their operating lives. These obligations apply to each disposal facility
the Company operates or for which it is otherwise responsible. Landfills are
typically developed in a series of cells, each of which is constructed, filled,
and capped in sequence over the operating life of the landfill. When the final
cell is filled and the operating life of the landfill is over, the final cell
must be capped, the entire site must be closed and the post-closure care and
monitoring activities begin. The Company expects to be required to estimate and
establish a remediation reserve for the total costs for final closure of its
landfills and post-closure activities, including cap maintenance, groundwater
monitoring, methane gas monitoring and leachate treatment/disposal for up to 30
years after closure in certain cases. The Company expects to accrue a portion of
the difference between the closure and post-closure component of the reserve
balance at the end of each fiscal year and the total estimated closure and
post-closure cost of its facilities based on engineering estimates over the
useful lives of those facilities. In addition, the Company expects to be
required to estimate as of the end of each year the capping costs expected to
occur during the operating lives of its disposal facilities and to expense these
costs over the facilities' useful lives.
15
<PAGE>
Results of Operations. The following table sets forth, for the periods
indicated, certain items from the Company's Statements of Operations.
Fiscal Year
-----------
1996 1995
---- ----
Revenues $ 4,202,270 $ 525,524
Expenses $ 15,549,222 $ 6,062,967
Income (Loss) Before Taxes $(11,346,952) $(5,537,443)
Income Taxes $ 0 $ 0
Net Income (Loss) $(15,207,732) $(5,257,255)
The Company's revenues increased 800% or $3,676,746 in 1996 from
1995. The increase in revenue is due primarily to bringing new facilities on
line. In addition, the company briefly reopened the Baltimore recycling facility
in early January, 1996 and recognized revenues from its operation until shortly
prior to the sale of the facility at foreclosure on May 17, 1996. The plant
was closed and did not receive waste during most of the year ended December 31,
1995.
The Company's expenses increased by 256% or $9,486,255 in 1996
from $6,062,967 in 1995. Expenses as a percentage of revenues were 370%
in 1996 as compared to 1,153% in 1995. Cost of sales increased by $9,522 in
1996 from 1995. Selling, general and administrative expenses increased
$8,631,222 or 335.4% in 1996 from 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 decreased
64.8%, or $845,834 to $459,578 in 1996 compared to 1995. The decrease
reflects the extinguishment of the debt related to the disposal of the Baltimore
facility.
16
<PAGE>
Item 7. Financial Statements.
WASTEMASTERS,INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
Index
Page
FINANCIAL STATEMENTS
Report of Independent Certified Public
Accountants . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of
December 31,1996 . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for
the years ended December 31, 1996 and 1995 . . . F-5
Consolidated Statements of Stockholders'
Equity for the years ended December 31,1996
and 1995 . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows as of
December 31, 1996 and 1995 . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements for
the years ended December 31, 1996 and 1995 . . . F-10
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Wastemasters, Inc.
We have audited the accompanying consolidated balance sheets of
Wastemasters, Inc. and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 consolidated financial position of
Wastemasters, Inc. as of December 31, 1996 and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the
F-2
<PAGE>
Company incurred a net losses of $16,529,369 and $5,257,255 in 1996 and 1995,
respectively. As discussed in Notes I and F, the Company was in default of
terms and conditions on all long term debt agreements. As a result of the
defaults holders of such debts may declare the entire indebtedness due and
payable immediately. Management of the Company has met with the representatives
of the debt holders in an attempt to restructure various loan agreements. It is
not possible at this time, however, to predict the success of management's
efforts. These conditions raise substantial doubts about the Company's ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of assets and liabilities that might result should the Company be
unable to continue as a going concern.
/s/
________________________________
Turner, Jones & Associates, p.c.
Certified Public Accountants
Vienna, Virginia
April 14, 1997
F-3
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996
Assets
Current assets:
Cash $ 0
Accounts receivable, net of
allowance for doubtful accounts 108,733
-------------
Total current assets 108,733
Property, plant and equipment:
at cost
Machinery and equipment 73,643
Less accumulated depreciation (11,112)
-------------
62,531
Land 1,029,500
Land development costs (Net of amount) 1,511,865
-------------
Total property, plant and
equipment 2,603,896
-------------
Other assets:
Excess of cost over net assets
of businesses acquired, net (Note A) 13,047,493
Deferred loan costs, net of
accumulated amortization 1,262,127
Deposits and other assets 1,387
-------------
Total other assets 14,311,007
-------------
$ 17,023,636
=============
See accompanying notes to consolidated financial statements
F-4
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996
Liabilities and Stockholders Equity
Current liabilities:
Cash drawn in excess of
available balances $ 24,329
Accounts payable, accrued
interest, and other
liabilities (Note E) 3,604,815
Current maturities of
long-term debt and
convertible debentures(Note F) 9,190,149
Due to officers and directors 304,904
Due to Atlantic Coastal 271,090
-------------
Total current liabilities 13,395,287
-------------
Deferred items:
Accrued environmental and landfill costs 313,002
-------------
Total deferred items 313,022
-------------
Long-term debt , less current portion (Note F) 0
Commitments and contingencies (Note K) 0
-------------
Total liabilities 13,708,289
-------------
Stockholders' equity: (Note J)
Preferred stock, $.01 par value;
5,000,000 share authorized:
none issued. 0
Common stock, $.01 par value;
35,000,000 shares authorized;
21,437,363 shares issued. 213,374
Additional capital 27,658,640
Accumulated (24,556,667)
-------------
Total stockholders' equity 3,315,347
-------------
Total liabilities & stockholders' equity $ 17,023,636
=============
See accompanying notes to consolidated financial statements
F-5
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ -------------
Revenues
Sales $ 4,202,270 $ 523,790
Development income (Note F) 0 1,734
------------ ------------
4,202,270 525,524
Expenses
Cost of sales 2,198,369 2,207,891
Selling, general and
administrative 11,204,473 2,573,251
Interest expense 459,578 1,305,412
Interest (income) (3,642) (23,587)
Loss on operating contracts 1,690,444 0
------------ ------------
15,549,222 6,062,967
------------ ------------
Earnings (loss) before income
taxes and limited partners
interest (11,346,952) (5,537,443)
Limited partners' interest in
consolidated partnership loss 0 280,188
------------ ------------
Earning (loss) before income tax (11,346,952) (5,257,255)
------------ ------------
Income tax expense (Note H) 0 0
Net loss from operations (11,346,952) (5,257,255)
------------ ------------
Other income (loss)
Income from debt forgiveness 1,667,728 0
Disposal of assets, net of tax (1,295,785) 0
Loss on valuation of long lived
assets (4,232,723) 0
------------ ------------
Total other income (loss) (3,860,780) 0
------------ ------------
Net Loss $(15,207,732) $ (5,257,255)
============ ============
Loss per share:
(Primary and fully diluted) $ (.97) $ (1.37)
============ ============
Weighted average number of shares
outstanding (Note H) 15,606,617 3,836,006
See accompanying notes to consolidated financial statements
F-6
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
------------
TOTAL
SHARES ADDITIONAL ACCUMULATED TREASURY STOCKHOLDERS'
OUTSTANDING AMOUNT CAPITAL DEFICIT SHARES EQUITY
----------- ------ ------- ------- ------ ------
<S> <C>
Balance at December 31, 1994 3,098,947 $ 30,990 $ 5,335,586 $ (4,091,680) 0 $ 1,274,896
Net loss 0 0 0 (5,257,255) 0 (5,257,255)
Shares issued in payment of
service 76,000 760 119,165 0 0 119,925
Exercise of stock options 425,000 4,250 305,750 0 0 310,000
Shares issued in connection
with acquisition 4,565,217 45,652 6,909,130 0 0 6,954,782
Stock options vesting 0 0 258,750 0 0 258,750
Issuance of stock options 0 0 530,000 0 0 530,000
Shares canceled (565,217) (5,652) (859,130) 0 0 (864,782)
---------- --------- ----------- ------------- ----- ------------
Balance at December 31, 1995 7,599,947 $ 76,000 $12,599,251 $ (9,348,935) 0 $ 3,326,316
(Restated)
Net loss 0 0 0 (15,207,732) 0 (15,207,732)
Shares sold 1,300,000 13,000 1,223,000 0 0 1,236,000
Exercise of stock option 320,000 3,200 200,800 0 0 204,000
Shares issued in payment
of services/advances 4,941,092 49,411 5,475,751 0 0 5,525,162
Shares issued in payment
of loans 200,000 2,000 198,000 0 0 200,000
Shares issued in connection
with acquisition 4,347,826 43,478 6,567,218 0 0 6,610,696
Shares escrowed for acquisition 1,000,000 10,000 0 0 0 10,000
Issuance of stock options 0 0 35,905 0 0 35,905
Shares issued in connection
with Debenture conversion 1,628,470 16,285 1,358,715 0 0 1,375,000
----------- --------- ----------- ------------ ------ -----------
Balance at December 31, 1996 21,337,335 $ 213,374 $27,658,640 $(24,556,667) 0 $ 3,315,347
=========== ========= =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ ---------------
Increase (decrease) in cash
Cash flows from operating
activities:
Net earnings (loss) $(15,207,732) $ (5,257,255)
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 1,340,667 1,217,139
Issuance and vesting of stock
options to employees 0 269,300
Changes in assets and liabilities:
Accounts receivable & prepaid
expenses (108,733) 432,453
Accounts payable, accrued
interest and other liabilities (2,680,558) 2,175,204
Deferred income (46,540) (868)
Inventory and prepaid expenses 0 92,368
Other assets (34,215) 739,011
------------ ------------
Net cash provided by (used in)
operating expenses (16,737,111) (332,648)
Cash flow from investing activities:
Purchase of Land (612,000)
(Additions)/disposals of property,
plant and equipment 35,638,269 65,824
Business acquisitions) (7,108,605) (10,477,000)
------------ ------------
Net cash provided by (used in)
investing activities 28,529,664 (11,023,176)
See accompanying notes to consolidated financial statements
F-8
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ -------------
Increase (decrease) in cash
Cash flows from financing
activities:
Limited partners investment $ 0 $ 0
Repayments of long-term debts (36,490,626) (901,427)
Limited partners'
interest in partnership
losses 0 (280,188)
Stock issued and
options exercised
in lieu of cash
payment 13,960,763 774,375
Proceeds from issuance of
common stock and paid in
capital 1,236,000 6,265,000
Proceeds from long term debts 6,264,654 4,999,000
Proceeds from convertible
debentures (Net) 3,165,000 0
------------ ------------
Net cash provided by (used in)
financing activities: (11,864,209) 10,586,760
Net increase (decrease) in cash
and short-term investments (71,656) (499,064)
Cash and short-term investments
at beginning of period 47,327 546,391
------------ ------------
Cash and short-term investments
at end of period $ (24,329) $ 47,327
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
interest $ 277,616 $ 1,305,412
SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS
Common stock issued in business $ 6,610,706 $ 6,080,000
acquisition
Interest accrued on limited
partners' investment $ 0 $ 190,719
Common stock and options issued
and options exercised in
exchange for services $ 5,775,067 $ 774,375
Issuance of common stock and
options to employees and
vesting $ 0 $ 269,300
Issuance of common stock is
payment of debt $ 200,000 $ 0
Conversion of debentures $ 1,375,000 $ 0
See accompanying notes to consolidated financial statements
F-9
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies
The Company engages in solid waste processing, transportation and
disposal.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial statements
follows:
1. Principles of Consolidation
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.,
Chemical Road Investments, Inc., Wastemasters, 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 for Baltimore, Inc., is the general partner (collectively, the "Company").
Significant intercompany transactions have been eliminated in consolidation.
2. Cash, Short-term Investments and Marketable Securities
Short term investments and marketable securities are stated at cost,
which approximates market value. Cash and cash equivalents include only highly
liquid, short-term investments with a maturity of three months or less, when
acquired by the Company, to be cash equivalents.
3. Revenue Recognition
Revenues are recognized when waste is received and when services are
rendered (See Note J).
4. Property and Equipment
Depreciation is provided on the straight-line method as follows:
Machinery - 7 to 10 years
Vehicles - 5 years
Furniture & Fixtures - 5 years
F-10
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note A - Summary of Significant Accounting Policies - Continued
4. Property and Equipment - continued
Projects in process include costs related to development stage projects
on which construction has not begun. Future development of these projects depend
on many factors including permitting and financing arrangements. If a project is
determined to be no longer feasible, accumulated costs are written off in the
year of abandonment.
5. Income Taxes
The Company files a consolidated federal income tax return with its
wholly-owned subsidiaries and separate state income tax returns. The Company
includes its proportionate share of the profits or losses of the partnership in
its calculation of taxable income (loss).
6. Excess of Cost Over Net Assets of Businesses Acquired
The excess of cost over fair value of net assets of businesses acquired
is amortized on a straight-line basis over periods not exceeding forty years.
The Company assesses recoverability of its goodwill whenever adverse events or
changes in circumstances or business climate indicate the expected future cash
flows (undiscounted and without interest charges) for individual business units
may not be sufficient to support recorded goodwill. If undiscounted cash flows
are not sufficient to support the recorded asset an impairment is recognized to
reduce the carrying value of the goodwill based on the expected discounted cash
flows of the business unit. Expected cash flows are discounted at a rate
commensurate with the risk involved. Based upon its most recent analysis, the
Company believes there has been some impairment of tangible and intangible
assets at December 31, 1996. Pursuant to FASB 121 the Company has recognized
evaluation losses of 4,232,723 (See Note 8).
Due to the lack of objective methods of individually valuing permits,
goodwill and other intangibles, all intangibles are presented as excess cost
over fair value of net assets of businesses acquired. Amortization expense of
$334,551 and $ 0 was recognized in 1996 and 1995, respectively.
F-11
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. Concentrations of Credit Risk
Concentrations of credit risks with respect to accounts receivable are
limited to certain customers preapproved for credit by Company management. The
Company's customers are located primarily in North America.
8. Long-Lived Assets
In March, 1995, Statement of Financial Accounting Standards SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" was issued. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used or disposed of
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. During 1996, the Company adopted this statement and determined
impairment losses needed to be recognized for applicable assets of continuing
operations.
During 1996, the Company recognized losses on valuation on its
acquisitions at Steel Brothers Landfill and Wastemasters, Inc. of 3,264,123 and
968,600, respectively.
9. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumption that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
10. Accrued environmental and landfill costs
Accrued environmental and landfill costs includes the non-current
portion of accrual for closure and post-closure of the Company's landfills. The
Company estimates its future cost requirements for closure and post-closure for
solid waste operating
F-12
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. Accrued environmental and landfill costs - continued
landfills based on its interpretation of the technical standards of the U.S.
Environmental Protection Agency's Subtitle D regulations and the air missions
standards of the Clean Air Act applied on a state by state basis. Closure and
post-closure costs represent costs related to expenditures yet to be incurred
when the facility ceases to accept waste and closes. The Company provides
accruals for these estimated costs as the remaining permitted airspace is
consumed.
12. Deferred loan costs
The Company issued 2 debentures in 1996, for $2,000,000 and $3,000,000.
As a part of the issues, the Company incurred deferred loan costs. These costs
are being amortized over the life of the debentures.
Note B - Liquidity
As shown in the accompanying financial statements, the Company incurred
a net loss of $15,207,732 during the year ended December 31, 1996, and
$5,257,255 during the year ended December 31, 1995. As of December 31, 1996, the
Company's current liabilities exceeded its current assets by $13,286,654.
Although the Company's assets exceed its liabilities by $3,315,347 at December
31, 1996, substantially all of the net assets are either in the form of illiquid
land and related improvements or cost in excess of fair market value of net
assets of businesses acquired.
Note C - Acquisitions
In December 1995, the Company acquired all the outstanding shares of
common stock of Wastemasters of South Carolina, Inc., a South Carolina
corporation and Wastemasters, Inc., a Nevada corporation and forty percent (40%)
of Coastal Group Limited Partnership, a Maryland partnership (collectively
"Wastemasters").
F-13
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Acquisitions - continued
The agreement called for a total acquisition price of $15,499,000 consisting of
4,565,217 shares of the Company's common stock, valued at $10,500,000, or $2.30
per share, plus the assumption of $4,999,000 in debt secured by Wastemasters
assets. 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 $3,560,869. The acquisition did not have a material pro
forma impact on operations.
Wastemasters of South Carolina, Inc. owns and operates an approximately
331 acre sanitary landfill in Allendale, South Carolina which recently acquired
permits, pending final hearing, to process 500,000 tons of municipal solid waste
per year and 100,000 tons of construction demolition debris per year.
Wastemasters, Inc. operates a waste brokerage and hauling business,
whereby it contracts with trash pickup and hauling firms to broker the hauling
of waste from certain locales by truck, barge and rail.
The acquisition of the interest in Coastal Group Limited Partnership
was subsequently rescinded due to the failure of the acquired entity to
meet material contract contingencies. The 565,217 shares issued in the
transaction valued at $859,130 were recalled and canceled and the related
purchase removed from the financial statements.
F-14
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Acquisitions - continued
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 and the assumption of debts totaling $539,000.
Prior to the acquisition, Trantex, Inc. was an entity controlled by members of
the Company's Board of Directors an Officers. The acquisition price of
$5,000,000 was significantly in excess of the $5,000 cost to the related
shareholders. 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., for 2,173,913 shares of the Company's
common stock, valued at $5,000,000, $2.30 per share. Prior to the acquisition,
Wastemasters of Georgia, Inc. was an entity controlled by members of the
Company's Board of Directors and officers. The acquisition price of $5,000,000
was significantly in excess of the $5,000 cost to the related shareholders. 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-form impact on
operations.
In July, 1996, the Company entered into an agreement to acquire all of
the outstanding common shares of Equinox Associates, Inc., which owns a newly
permitted construction and demolition 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 Company had
previously entered into an Operating Management Agreement in May, 1996, with
the seller providing to the Company the right to operate the Bronx transfer
station in consideration of the payment of $490,000 in cash. In January, 1997
the Agreement to purchase Equinox Associates, Inc. and the related Operating
Management Agreement was terminated.
F-15
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note C - Acquisitions - continued
Pursuant to APB #16 the acquisitions were accounted for using the
purchase method. Accordingly, the purchase price was allocated to assets
acquired based on their fair values. The total cost in excess of identifiable
net assets acquired of $17,908,285 is being amortized on a straight-line basis
over 20 years. No separate independent values were assigned to permits, goodwill
and other intangibles due to the lack of objective sources of valuation.
Note D - 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 US 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.
The Company recognized a gain of $1,667,728 from the above sales and
bankruptcy petitions.
In July, 1996 the Company abandoned efforts to purchase and re-permit a
landfill facility in Richmond, Michigan. The development and acquisition costs
of $ 301,298 have been expensed.
In November, 1996, the Company sold all of the outstanding common stock
of FERST for St. Mary's, Inc., whose principal asset is 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 County to
Ronald W. Pickett a former Company President and member of the Company's Board
of Directors. The sales price was $331,000, which is comprised of the Purchaser
assuming existing Company debt secured by the assets sold of approximately
$275,000 and forgiving claims against the Company for unpaid compensation and
expenses of approximately $55,000. The Company recognized a loss of $1,295,785,
which represents the excess of the book value of the assets being sold over the
sales price.
F-16
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note E - Accounts Payable, Accrued Interest and Other Liabilities
Accounts payable, accrued interest and other liabilities at December
31, 1996 consist of the following:
Trade payables $3,334,642
Operating advances 271,090
Interest 181,961
Advance from Company officer 304,904
Accrued wages 0
Payroll taxes 88,212
----------
$4,180,809
==========
Note - F Long-Term Debt and Convertible Debentures
Long-term debt at December 31, 1996 consists of the following:
Mortgage loan payable in monthly
installments of $ 10,000, including
interest installments at 2.4% per annum; loan
secured by a first deed of trust on
Allendale, South Carolina real property. 4,900,000
Mortgage loan payable in monthly
installments of $ 4,600, including
interest; loan secured by a first
deed of trust on Kirksville,
Missouri real property. 161,615
Loan payable in quarterly
payments of principal only;
loan secured by Company's
accounts receivable third party
collateral and personally guaranteed
by company offices. 177,934
West Bank, two loans; one for $10,000
at 11% per annum past due; and one for
$15,000 at 11% per annum, also past due. 25,000
Note payable, Steel Brother's, $300,000,
no interest or payments due until
landfill in operation. 300,000
F-17
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note - F Long-Term Debt and Convertible Debentures - continued
Convertible debentures payable in
quarterly interest installments at 8%
per annum on the unpaid balance; loan
is convertible into the company's common
stock at any time beginning forty (40)
days and ending two (2) years from
April 12, 1996 at the average bid price
for ten days preceding conversion. 1,625,600
Convertible debentures payable in
quarterly interest installments at 8%
per annum on the unpaid balance due April
1998; loan is convertible into the company's
common stock at any time beginning forty (40)
days and ending two (2) years from
June, 1996 at the average bid price
for the ten preceding days. 2,000,000
---------
9,190,149
Less: Current maturities 9,190,149
---------
$ 0
=========
As of December 31, 1996, the Company is in default under the terms of
the mortgage loan secured by the Kirksville, Missouri property and both
convertible debentures.
Note G - Limited Partners' Investment in Consolidated Partnership
The Limited Partners' in Baltimore FERST Limited Partnership, which was
formed in 1990, invested $7,100,000 in the form of a loan to the Partnership,
which was to convert to equity in the Partnership provided there are no loan
defaults and upon substantial completion (as defined) of the Baltimore facility.
On May 17, 1996 the Partnership assets were sold at foreclosure (see Note D).
F-18
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note H - Income Taxes
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) NO. 109, "Accounting for Income Taxes", effective with the year
ended December 31, 1991. Temporary differences between taxable income reported
for financial reporting purposes and income tax purposes are insignificant. At
December 31, 1996, the Company had an aggregate net operating loss of
approximately $22,352,000 carry forward, which expires as follows:
Year Amount
---- ------
2007 $ 1,700,000
2008 1,360,000
2009 400,000
2010 5,257,000
2011 15,207,732
-----------
$23,924,732
===========
The deferred tax asset related to this carry forward in the amount of
$7,900,000 has been fully reserved. Effective with the changes in ownership on
December 28, 1996 and the first quarter of 1996 the use of the net operating
loss will be significantly reduced pursuant to section 382 of the Internal
Revenue Code.
Note I - Royalties
The Company is obligated to pay royalties of $1.50 and $1.00 per ton at
its Steele Brothers and Rye Creek landfills, respectively. The royalties are
based on tons of solid waste tipped. Royalties are payable as host fees to
Allendale County and the mortgage holders of both landfills. As of the date of
the financial statements the Company was in default of all royalty agreements.
Note J - Common Stock
In July, 1991 the Company entered into a letter of intent to grant
1,500,000 common stock warrants, at exercise prices ranging from $.67 to $1.20,
to Chrysler Capital Corporation in consideration for Chrysler's participation in
the Baltimore project, and other Company projects for the succeeding five years.
F-19
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - Common Stock - continued
In March, 1995, the parties revised that arrangement and the Company
agreed to issue 125,000 warrants at an exercise price of $4 per share, adjusted
for the reverse stock split, to Chrysler in full satisfaction of its
obligations. As of the date of these financial statements the warrants have not
been issued.
Effective December 1, 1994, the Company granted 300,000 common stock
warrants to three officers exercisable at $.60 per share, expiring on December
31, 1999. The options provided for vesting at a rate of 25,000 per year. An
aggregate of 75,000 options vested in 1994. Due to a change in control, the
officers' interest in the remaining 225,000 options fully vested on December 28,
1995. Accordingly, the Company recognized $258,750 in compensation expense for
1995.
On January 12, 1995, the Company issued 200,000 options to purchase
common stock at $0.60 per share to a consulting Company for the promotion of the
Company. The Company recognized $530,000 as a consulting expense. The options
expired on August 31, 1996.
On March 7, 1995, the Company's president exercised his warrants to
purchase 225,000 shares of common stock at $0.60 per share. Consideration was in
the form of unpaid salaries and forgiveness of indebtedness for cash advances
(Note K).
Effective June 22, 1995, the Company granted 80,000 common stock
warrants to eight (8) officers and key employees exercisable at $0.80 per share
(fair market value at date of grant), expiring June 22, 2000.
During 1995, the Company issued an aggregate of 6,000 shares of common
stock to six (6) employees as severance pay. Accordingly, the Company recognized
$10,550 as compensation expense.
On December 8, 1995, the Company recognized $109,375 in legal and
professional fee expense for the issuance of 70,000 shares of common stock to
various professional and contracting firms for fees and expenses outstanding.
F-20
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - Common Stock - continued
On December 20, 1995, common stock options were exercised for a total
purchase of 200,000 shares for an aggregate price of $175,000.
On December 28, 1995, the Company provided for the full vesting of
225,000 common stock options to purchase stock at $0.60 per share held by three
(3) officers and directors. The Company recognized $258,750 of compensation
expense previous to deferred pending vesting.
On December 28, 1995, the Company issued 4,565,217 shares of common
stock as partial consideration in the acquisition price of three entities. Prior
to year end the Company rescinded one acquisition and 565,217 shares were
cancelled. The fair market value, for financial statement purposes, of the net
4,000,000 shares issued was $6,080,000 (Note C).
In January, 1996, the Company issued 2,173,913 shares of common stock
as consideration in the acquisition of Trantex Inc. which owns the Rye Creek
Landfill (See Note C).
On January 19, 1996, three officers of the Company exercised warrants
to purchase 320,000 shares. Consideration was in the form of forgiveness of
$196,000 of loans due the former President of the Company.
In January, 1996 the Company sold 100,000 shares of the Company's
common stock at $1.00 per share to a Company Director. Consideration was in the
form of cash for $100,000.
In March, 1996, the Company issued 2,173,913 shares of common stock as
consideration in the acquisition of Wastemasters of Georgia, Inc. (See Note C).
In March, 1996 the Company sold 100,000 shares of the Company's common
stock at $1.00 per share to a Company Director. Consideration was in the form
of cash for $100,000. As a result the Company recognized $137,500 as
compensation expense.
In December, 1996, the Company sold 300,000 shares of the company's
Common stock at $.12 per share. Consideration was in the form of cash for
$36,000.
F-21
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - Common Stock - continued
During 1996, the holders of the Company's convertible debentures
received 1,628,470 shares of the Company's common stock in connection with their
election to convert the bonds to stock (See Note F).
On December 23, 1996 the Company issued 5,800,000 warrants, expiring in
November 1999, to certain officers and directors exercisable at $0.30 per share.
The exercise price at the date of grant equaled market. Accordingly, no
compensation expense was recognized.
During December 1996, the Company recognized $35,905 in consulting
expense from the issuance of 172,000 warrants exercisable at $0.01 per share to
an outside consultant for services rendered in obtaining financing.
During 1996, the company recognized $5,625,162 in legal and
professional fees, compensation and consulting services expense for the issuance
and or discounted sale of 5,141,092 shares of the Company's common stock to
various professionals and employees. Included in the issues are 800,688 valued
at $1,040,385, shares as compensation and advance repayments to officers,
directors and family members of the President and Chief Executive Officer.
Earnings (loss) per share were computed by dividing net income or loss
by the weighted average number of shares of common stock and common stock
equivalents outstanding during each year. Earnings (loss) per share for 1996 and
the number of shares of common stock issued and outstanding on the balance sheet
have been restated to give retroactive effect to the reverse stock split. The
difference between shares outstanding for primary and fully diluted earnings per
share was not significant in any year.
F-22
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note J - Common Stock - continued
Information relating to warrant activity during 1995 and 1996 is as
follows:
Number of
Shares Price
--------- -----
Warrants outstanding and
exercisable to purchase
stock at December 31, 1994 1,590,000 $0.60-$7.64
Warrants granted 280,000 $0.60-$4.00
Warrants exercised (425,000) $0.60-$0.80
Warrants forfeited (200,000)
Warrants expired (200,000)
----------
Warrants outstanding and
exercisable to purchase
stock at December 31, 1995 1,045,000 $0.60-$7.64
Warrants granted 5,972,000 $0.01-$0.30
Warrants exercised (320,000) $0.60-$0.80
Warrants forfeited (47,500) $0.80-$2.67
Warrants expired 0 0
--------- -----------
Warrants outstanding to
purchase stock at
December 31, 1996 6,649,500
Warrants outstanding and
exercisable to purchase
stock at December 31, 1996 6,649,500
As of December 31, 1996, outstanding options to purchase common stock,
as adjusted for the reverse stock split, were as follows:
Shares Price Expiration Date
--------- ------ -----------------
500,000 $ 1.00 March, 1999
60,000 4.68 January, 1999
30,000 4.67 January, 1999
37,500 6.33 April, 1997
200,000 0.75 September, 1998
30,000 4.67 February, 1999
1,000,000 0.30 October, 1999
172,000 0.01 October, 1999
4,600,000 0.30 November, 1999
----------
6,579,500
F-23
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note K - Employee Consultant Stock Plan
On August 5, 1996 the Company adopted a stock compensation plan
entitled 1996 Employee, Consultant and Advisor Stock Compensation Plan (the
Plan) to compensate eligible persons for certain services provided to the
Company and its subsidiaries. Participants in the Plan are required to execute a
stock payment agreement whereby the participant agrees to accept shares of
Common Stock in full satisfaction of entitled compensation.
Note L - Commitments and Contingencies
The Partnership entered into a Turnkey Agreement (Agreement) with PWT
Waste Solutions, Inc., a subsidiary of Simon Engineering Plc (Simon) to design,
equip, construct and performance test the Baltimore facility. The Agreement
provided for a fixed price of $29,950,000, plus increases for certain events.
Performance of the Agreement was guaranteed by Simon Engineering Plc. In 1994,
the Company terminated the contract with Simon after paying $28,536,565 and
assumed responsibility for completing the project within the fixed price (see
Note L). The Company and Simon dispute whether additional amounts are owed for
work on the Baltimore facility.
In June, 1994, Simon commenced litigation in state court seeking to
establish and enforce a mechanic's lien against the land and building comprising
the Baltimore facility in the amount of at least $1,500,000. The state claim has
been stayed pending the outcome of a federal claim, which is discussed
immediately below.
In July, 1995, Simon commenced litigation in federal court against the
Partnership, the Company and its affiliates as a result of its dispute with the
Company regarding completion of construction of the facility and payment
thereof. The amount of the claim is $1,605,000 plus attorney's fees and costs.
The Company has filed a counterclaim seeking damages in excess of $2,000,000
representing breach of contract, breach of warranty, breach of good faith and
fair dealing, negligence, malpractice, and breach of guarantee. Management
believes any potential claim is without merit and would not have a significant
impact on the Company's financial position, future results of operations and
cash flows.
F-24
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note L - Commitments and Contingencies - continued
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 an unspecified amount for damages based upon 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.
("Diversified") in response to a 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 Diversified and the
Company. The filing of a counter claim by Diversified is anticipated.
When the Company brings its landfills into operation it may be required
to establish a redemption reserve equivalent to the total estimated cost of
final closure and post-closure activities.
The Company will accrue the difference in the estimated closure and
post-closure costs. The final closure costs will be estimated annually and
amortized over the facilities remaining useful life.
Note M - Related Party Transactions
On March, 7, 1996, the Company's former President exercised his
warrants to purchase 225,000 shares of common stock at $.60 per share.
Consideration was in the form of forgiveness by the President of unpaid salaries
of $91,523 and conversion of cash advances made by him to the Company of
$43,477. The former president has lent the Company $274,523 in the form of a
loan. The loan, together with accrued interest at 6% per annum, was payable upon
demand. The former President had the option to secure the loan with a deed of
trust on the assets owned by FERST for St. Marys, Inc. The balance of the loans
as of March 29, 1996 was $20,838 (See Notes D and J).
F-25
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Related Party Transactions - continued
On January 19, 1996, certain officers, directors and employees
exercised options and received common stock for back salaries and loans to the
Company (Note J). During 1996, the Company issued a total of 800,688 shares
valued at $1,040,385 for services and repayment of advances to certain officers,
directors and family members of the President and Chief Executive Officer.
The Company sold two (2) of its subsidiaries to the former President
and current member of the Board of Directors at a loss of $1,295,785 (See Note
D).
The current Chief Executive Officer (CEO) and member of the Board of
Directors claims a liability at December 31,1996 of $123,128 in net advances
submitted to the Company. The CEO submitted a expense report claiming $815,302
of out of pocket expenses related to various subsidiaries. The expense report
requested the reimbursement of $468,817 for undisclosed amounts incurred prior
to the acquisition of WasteMasters, Inc. and WasteMasters of South Carolina,
Inc.
The Company owes other members of the Board of Directors $181,667
for advances made to the Company during the year to cover operating costs.
The Company borrowed $271,090 from Atlantic Coastal Demolition and
Recyclying Inc. (Atlantic) for funds advanced to maintain its operating
agreement in New York. Certain members of the Board of Directors own a
controlling interest in Atlantic.
Note M - Subsequent Events
In February 1997, The Company entered into a Memorandum of
understanding with a private lender whereby the lender will provide a
$4,000,000 loan to the Company. The net proceeds will be utilized to acquire
additional waste facilities and to meet the company's current and future working
capital needs. In consideration for advising the Company in this transaction, an
affiliate of the Lender will receive at closing, warrants which,
F-26
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note M - Subsequent Events - continued
when exercised, will provide the advisor with 45% of the issued and outstanding
common stock of the Company as of the date of closing. The warrants, which will
have an exercise price equal to the average of the closing price of he company's
common sock for the five (5) trading days immediately preceding the date of the
loan closing, which will expire seven (7) years from the date of closing. The
financing, which is subject to completion of the lender's due diligence is
expected to close on or before April 16, 1997.
F-27
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Listed below are the directors and executive officers of the Company.
Directors are elected for one year terms or until their successors are elected
and qualified Officers hold office until their successors are elected and
qualified or until their earliest resignation or removal.
Age at
Name Position with Company March 31,1996
- ---- --------------------- -------------
A Leon Blaser Chairman of the Board
of Directors 52
Richard Masters President, Chief Executive
Officer, and Director 51
Julius W. Basham II Director 48
Robert Fahey Director 64
Paul Williamson Director 40
A. Leon Blaser, Ph.D. is a principal and founder of WasteMasters,
Inc. Mr. Blaser acts as the Chairman of the Board of Directors. He is involved
in several business enterprises, and has been President of Interwest
Development, Inc. a Nevada land development Company since 1990.
Richard Masters is a principal and founder of WasteMasters, Inc.
As President and Chief Executive Officer of the Company, he supervises all
day-to-day operations. He has been President of WasteMasters, Inc. since
1992. From 1991 to 1992, he was Director of Corporate Development for
American Waste Services, Inc. in Warren, Ohio. He was an environmental
consultant from 1983 to 1987. Mr. Masters has a degree in Industrial
Engineering from Purdue University. Mr. Maters devotes full time to the Company.
Julius Basham, II has been a Director since May, 1996. Mr. Basham
is also President of Cyberhighway Internet Services in Reno, Nevada which is
in the business of providing Internet services since early 1996. Mr. Basham
was founder and from 1982 to 1995 served as President of ProData, Inc., a data
consulting and contracting Company.
44
<PAGE>
Robert Fahey has been a Director since May, 1996. He has been the
founder and President since January, 1995 of Bioactive Landfill Technologies,
Inc., a Company that holds Mr. Fahey's patent on a method for operating
landfills as bioreactors. From 1993 to 1995, he was Vice President of Advance
Reclamation, Inc., a landfill mining company. From 1979 to 1993 he was Director
of Department of Solid Waste Management of Collier County, Florida. Mr. Fahey
has over 24 years of experience in the solid waste and sanitation industries.
Paul Williamson served as the company's President from May, 1996
through November, 1996 and as Executive Vice President from September, 1995
through May 1996. Mr. Williamson has been a Director since May, 1996. From
1994 to 1995, Mr. Williams was Vice President of Garnet of Maryland, Inc., a
private landfill and transfer station company. From 1991 to 1994, he was Vice
President/General Manager of Atwoods, Inc., a public Company, where he
supervised a $95 million per year solid waste operation.
Item 10. Executive Compensation.
The following is a table which summarizes the compensation awarded to,
earned by, or paid to executive officers of he Company for services to the
Company for the years ended December 31, 1994, 1995 and 1996.
45
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Awards
------
Name and Other Securities
Principal Annual Underlying
Position Year Salary Bonus Compensation Warrants
- -------- ---- ------ ----- ------------ --------
<S> <C>
A. Leon
Blaser, Ph.D.
Chairman of
the Board 1996 $258,713(1) $ 0 $ 0 1,150,000 shares(2)
1995 $ 0 $ 0 $ 0 0 shares
1994 $ 0 $ 0 $ 0 0 shares
Richard
Masters,
President &
Chief Executive
Officer
(Nov.1996
to present) 1996 $509,931(3) $ 0 $ 0 1,000,000 shares(4)
1995 $ 0 $ 0 $ 0 0 shares
1994 $ 0 $ 0 $ 0 0 shares
Paul
Williamson
President
(January,1996
through
November,1996
to present 1996 $121,054 $ 0 $ 0 0 shares
1995 $ 0 $ 0 $ 0 0 shares
1994 $ 0 $ 0 $ 0 0 shares
Ronald W.
Pickett,
Director
(January, 1996
through
February,
1997) 1996 $285,597(5) $ 0 $ 0 300,000 shares(4)
1995 $150,000 $ 0 $3,600 325,000 shares
1994 $150,000 $ 0 $3,600 325,000 shares(6)
</TABLE>
______________
(1) Includes $206,250 of stock compensation and does not include $17,307 paid to
Mr. Blaser's wife.
(2) Includes warrants to purchase 150,000 shares of common stock priced at $.20
per share and warrants to purchase 1,000,000 shares of common stock priced
at $.60 per share.
(3) Includes $383,008 of stock compensation and expense reimbursement and does
not include $43,307 paid to Mr. Masters' wife.
(4) Includes warrants to purchase common stock priced at $.60 per share.
(5) Includes $206,250 of stock compensation and does not include $25,000 paid to
Mr. Pickett's wife.
(6) Includes warrants to purchase 225,000 shares of common stock repriced from
$2.67 per share to $.60 per share. Also includes warrants to purchase
100,000 shares of common stock.
46
<PAGE>
No person who served as and Executive officer of the company at the
end of the year ended December 31, 1996 had an annual salary and bonus in excess
of $100,000.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Beneficial Ownership As of March 31, 1997, the Company was aware that
the following persons owned beneficially more than 5% of its Common stock:
Number of Shares
Owned Percent of
Name and Address Beneficially Class
- ---------------- ----------------- ----------
A. Leon Blaser, Ph.D.
3785 Twilight Drive
Boise, Idaho 83703 1,520,743(1) 5.5%
Richard D. Masters
11940 Coman Road
Waldron, Michigan 49288 2,355,689(2) 8.5%
Julius W. Basham, II
6176 Laurelwood Drive
Reno, Nevada 89509 3,908,333(3) 14.0%
The following table sets forth the beneficial ownership of shares of
common stock of the Company as of March 31, 1997 for each Director and executive
officer and for all Directors and executive officers as a group:
Number of shares Percent of
Name Beneficially Owned Class
- ---- ------------------- ----------
A. Leon Blaser, Ph.D.
3785 Twilight Drive
Boise, Idaho 83703 1,520,743(1) 5.5%
Richard D. Masters
11940 Coman Road
Waldron, Michigan 49288 2,355,689(2) 8.5%
______________
(1) Includes immediately exercisable warrants to purchase 1,000,000 shares of
the Company's common stock at $.30 per share and warrants to purchase
150,000 shares at $.20 per share.
(2) Includes immediately exercisable warrants to purchase 1,000,000 shares of
the Company's common stock at $.30 per share
(3) Includes immediately exercisable warrants to purchase 1,000,000 shares of
the Company's common stock at $.30 per share and 200,000 shares at $.75 per
share.
47
<PAGE>
Paul Williamson
2694 East Carmel Court
Grand Junction, CO 81506 834,782 3.0%
Julius Basham II
6953 Laurelwood Drive
Reno, Nevada 89509 3,908,333(3) 14.0%
Robert Fahey
6953 Johns Road
Naples, FL 33961 100,000(4) .4%
All directors and
executive officers
as a group (five
individuals) 8,719,547 31.4%
______________
(3) Includes immediately exercisable warrants to purchase 1,000,000 shares of
the Company's common stock at $.30 per share and 200,000 shares at $.75 per
share.
(4) Includes immediately exercisable warrants to purchase 100,000 shares of the
Company's common stock at $.30 per share.
48
<PAGE>
Item 12. Certain Relationships and Related Transactions.
In November, 1996, the Company entered into an Agreement to sell all
of the outstanding common stock of FERST for St. Mary's, Inc. (a wholly-owned
subsidiary of the Company), whose principal asset is approximately 421 acres of
undeveloped land in St. Mary's County, Maryland and Chemical Road Investments,
Inc. (a wholly owned subsidiary of the Company), whose sole asset is,
approximately 3 acres of industrial land in Baltimore, Maryland to Ronald W.
Pickett, the Company's former President, Chief Executive Officer and Director.
The Combined sales price was $331,000, which was comprised of the Purchaser
assuming existing debt of approximately $275,000 and forgoing claims against the
Company for unpaid compensation and expenses of approximately $55,000. The
Company recognized a loss of $1,295,785 which represents the excess of the book
value of the assets sold over the anticipated sales price.
In August, 1996, the Company began operating a construction &
demolition (C & D) transfer station located in Philadelphia, Pennsylvania under
a one year renewable contract. The facility is owned by Construction Transfer
Station of Philadelphia, Ltd., a limited liability Company owned by Directors
and Officers of WasteMasters, Inc. The contract to operate the facility was
terminated by both parties in February, 1997. The Company no longer operates the
facility.
During 1996, Julius W. Basham, II, a Director of the Company, loaned
the Company $500,000. Mr. Basham was repaid $400,000 in cash and converted
$100,000 of this debt to equity in the Company. Mr. Basham made an additional
loan to the Company in the amount of $150,000 in the third quarter of 1996.
The loans earned no interest and were unsecured. As of March 31, 1997, the
amount of outstanding indebtedness to Mr. Basham is $150,000.
During 1996, Construction/Transfer Station of Philadelphia, Ltd. A
limited liability Company owned by various company Directors, made a number of
cash advances to the company. The advances, aggregating $480,000 were used for
working capital purposes and carried no interest and were insecured. As of March
31, 1997, the amount of outstanding indebtedness to Construction/Transfer
Station of Philadelphia, Ltd. is $271,090.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. The Exhibits to this report are listed in the Exhibit
Index, which follows the signature page.
(b) Reports on Form 8-K. During the last quarter of the period covered
by this report, the Company filed Current Reports on Form 8-K dated as follows
and covering the items indicated:
From 8-K filed November 13, 1996 announcing agreement to acquire
Morgan Excel Industries, Inc.
49
<PAGE>
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WASTEMASTERS,INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
By: /s/
_____________________________________
A. Leon Blaser, Ph.D.
Chairman of the Board, President
Date: April 15, 1997
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ /s/
__________________________________ _________________________________
Richard D. Masters, President, Julius W. Basham, II
Chief Executive Officer and Director
Director (Principal Executive Date: April 15, 1996
and Principal Accounting Officer)
Date: April 15, 1997
/s/ /s/
__________________________________ _________________________________
A. Leon Blaser Robert Fahey
Director Director
Date: April 15, 1997 Date: April 15, 1997
/s/
____________________
Paul Williamson
Director
Date: April 15, 1997
50
<PAGE>
EXHIBIT INDEX
WASTEMASTERS,INC.
(FORMERLY F & E RESOURCE SYSTEMS TECHNOLOGY, INC.)
EXHIBITS TO FORM 10-KSB
Exhibit Sequentially
Number Identification Numbered Page
------ -------------- -------------
3(i) Charter of the Company (incorporated by N.A.
reference to Exhibit 3(1) to the Registration
Statement of the Company on Form S-8 filed on
May 8, 1992, Registration No. 33-47793)
3(ii) By-Laws of the Company (incorporated by N.A.
reference to Exhibit 3(2) to the Registration
Statement of the Company on Form S-8 filed on
May 8, 1992, Registration No. 33-47793)
4(1) Article Fifth of the Charter of the Company N.A.
(incorporated by reference to Exhibit 3(1) to the
Registration Statement on Form S-8 of the Company
filed on May 8, 1992, Registration
No. 33-47793)
4(2) Article II and Section 2, Article VII of the N.A.
By-Laws of the Company (incorporated by reference
to Exhibit 3(2) to the Registration Statement on
Form S-8 of the Company filed on May 8, 1992,
Registration No. 33-47793)
4(3) Form of Common Stock Certificate of the Company N.A.
(incorporated by reference to Exhibit 4(2) to the
Registration Statement on Form SB-2 of the Company
filed on June 22, 1995, Registration No. 33-93810)
10(1) Agreement of Limited Partnership of Baltimore N.A.
Wastemasters, Inc. Limited Partnership (incorporated
by reference to Exhibit 10(b) to Annual Report on
Form 10-K of the Company for the Fiscal Year Ended
December 31, 1991, filed on or about April 7, 1992,
Commission File No. 0-12914)
10(2) Waste Supply Agreement between Baltimore N.A.
Wastemasters, Inc. Limited Partnership and Browning-
Ferris Industries, Inc. (incorporated by reference to
Exhibit 10(2) to Amendment No. 1 to Annual Report on
Form 10-KSB/A of the Company for the Fiscal Year Ended
December 31, 1994, filed on September 12, 1995,
Commission File No. 0-12914)
<PAGE>
10(3) Form of Executive Officer Warrant granted in 1994 N.A.
(incorporated by reference to Exhibit 10(3) to the
Registration Statement on Form SB-2 of the Company,
filed on June 22, 1995, Registration No. 33-93810)
10(4) Letter of Intent dated December 21, 1995 N.A.
(incorporated by reference to Exhibit 2(3) to
Current Report on Form 8-K of the Company filed
on January 26, 1996, Commission File No. 0-12914)
10(5) Acquisition Agreement dated December 28, 1995 N.A.
(incorporated by reference to Exhibit 2(1) to
Current Report on Form 8-K of the Company filed
on January 26, 1996, Commission File No. 0-12914)
10(6) Amendment to Acquisition Agreement dated N.A.
January 19, 1996 (incorporated by reference to
Exhibit 2(2) to Current Report on Form 8-K of the
Company filed on January 26, 1996, Commission File
No. 0-12914)
10(7) Second Amendment to Acquisition Agreement (undated) N.A.
(incorporated by reference to Exhibit 2(3) to Annual
Report on Form 10KSB of the Company for the fiscal
year ended December 31, 1995 filed on April 15, 1996,
Commission File No. 0-12914)
10(8) Agreement for Purchase and Sale of Richmond Landfill N.A.
dated March 27, 1996 (incorporated by reference to
Exhibit 2(4) to Annual Report on Form 10KSB of the
Company for the fiscal year ended December 31, 1995
filed on April 15, 1996)
10(9) Letter of Intent dated December 27, 1995 between N.A.
Wastemasters, Inc. and Julius William Basham II
(incorporated by reference to Exhibit A to Schedule
13D of Mr. Basham filed on February 15, 1996,
Commission File No. 5-37788)
11 Statement re: Computation of earnings per share 53
16 Letter on change in certifying accountant N.A.
(incorporated by reference to Exhibit A to Amendment
No. 2 to Current Report on Form 8-K/A of the Company
filed on May 1, 1995, Commission File No.
0-12914)
21 List of subsidiaries and affiliates of the Company 54
3(I)(1) Articles of Amendment to Corporate charter dated N.A.
May 22, 1996 (incorporated by reference to Exhibit
3(1) to Form 10-QSB of the Company filed on
August 19, 1996)
Exhibit 11
WASTEMASTERS, INC.
COMPUTATION OF EARNINGS PER COMMON
AND COMMON STOCK EQUIVALENT
For the years ended December 31, 1996 and 1995
1996 1995
---- ----
Shares outstanding at beginning of period............ 7,599,947 3,098,947
Weighted average of common shares issued
during the period.................................. 8,006,670 737,059
---------- ----------
Weighted average of common shares
outstanding during period.......................... 15,606,617 3,836,006
Shares used in computing earnings per
common share....................................... 15,606,617 3,836,006
========== ==========
Loss per common share ($15,207,732/15,606,617) $ (.97)
==========
Loss per common share ($5,257,255/3,836,006) $ (1.37)
==========
53
Exhibit 21
List of Subsidiaries and Affiliates of the Company
<TABLE>
<CAPTION>
Name State of Incorporation or Percent Owned by Other Name(s) Under Which
Organization Company Business Done
- ------------------------ ------------------------------ -------------------- ---------------------------
<S> <C>
Baltimore FERST
Limited Partnership Maryland See "Business of None
the company" in
Prospectus
F & E Resource
Systems Technology Maryland 100% FERST for
for Baltimore, Inc. Baltimore, Inc.
WasteMasters of
Georgia, Inc. Maryland 100% None
WasteMasters of
South Carolina, Inc South Carolina 100% None
Trantex, Inc. Nevada 100% None
WasteMasters of New
York, Inc. Maryland 100% None
WasteMasters of
Pennsylvania, Inc. Maryland 100% None
</TABLE>
54
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 108,733
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 108,733
<PP&E> 2,603,896
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,023,636
<CURRENT-LIABILITIES> 13,395,287
<BONDS> 0
0
0
<COMMON> 213,374
<OTHER-SE> 3,101,973
<TOTAL-LIABILITY-AND-EQUITY> 17,023,636
<SALES> 4,202,270
<TOTAL-REVENUES> 4,202,270
<CGS> 2,198,369
<TOTAL-COSTS> 2,198,369
<OTHER-EXPENSES> 12,891,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 459,578
<INCOME-PRETAX> (11,346,952)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,346,952)
<DISCONTINUED> (3,860,780)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,207,732)
<EPS-PRIMARY> (.97)
<EPS-DILUTED> (.97)
</TABLE>
