UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------------------
FORM 10-KSB
(Mark One)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1997
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission File Number 0-12914
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WASTEMASTERS, INC.
(Name of small business issuer in its charter)
Maryland 52-1507818
- - ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Promenade II, Suite 2545, 1230 Peachtree Street, Atlanta, Georgia 30309
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (404) 888-0158
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
___
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. [|X|]
The issuer's revenues for its most recent fiscal year. $466.000.00
The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, as of April 9, 1998 was $213,120,184.00, based
upon the closing bid price of $ 2.09 per share as reported by the trading and
market services of the Nasdaq Stock Market, Inc.
As of April 9, 1998 the registrant had outstanding 114,471,472 shares of
its Common Stock, $0.01 par value.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Background
WasteMasters, Inc. (Formerly F & E Resource Systems Technology, Inc.
"FERST") is a waste management 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.
Recent Developments
Acquisitions
During the first quarter of 1998, the Company acquired five (5) companies
engaged in the waste and environmental industries. These acquisitions were
completed primarily in exchange for restricted common stock of the Company. The
recipients of the WasteMasters stock have various restrictions upon the transfer
of the shares.
The stockholders of the Company approved an increase in the authorized
capital stock of the Company, as described in Item 4. This increase in the
capital stock afforded new management the opportunity to pursue the negotiation
and acquisition of certain strategic assets using a portion of its authorized
but unissued stock as part of the consideration for the acquisitions. See Item
7, Note B regarding the presentation of Proforma Balance Sheet information that
includes the recent acquisitions summarized below. Any audited financial
statements that may be required pursuant to SEC regulations will be reported on
subsequent 8-K reports.
On February 18, 1998, the Company entered into an agreement with 20th
Century Holdings, Inc. for the acquisition of all of the shares owned by 20th
Century of Holsted Enterprises, Inc. (and its subsidiary, Sales Equipment
Company, Inc.) in exchange for 7,600,000 shares of the Company's restricted
Common Stock and options to purchase an additional 3,000,000 restricted shares
of its Common Stock until specified time periods at an exercise price of $4.17
per share. The transaction was closed effective March 31, 1998. Sales Equipment
Company, Inc. ("SECO"), founded in 1949, is a manufacturer and distributor of
equipment in the pressurized gas equipment industry. SECO has 40 employees and
generated revenues in 1997 of over $7.6 million. SECO's main facility is located
in Oklahoma City, with locations in Tyler and El Paso, Texas.
On February 10, 1998, the Company entered into an agreement for the
acquisition of all of the shares of C.A.T. Recycling, Inc. ("CAT") in exchange
for 3,250,000 shares of the Company's restricted Common Stock and options to
purchase an additional 3,000,000 shares of its restricted Common Stock at
specified amounts and time periods at an average price of $1.56. The transaction
was closed effective March 31, 1998. CAT, which owns and operates recycling
facilities in Pompano, St. Lucie, Dania, and West Palm Beach Florida and a
construction and demolition ("C&D") landfill in Sebring, Florida, generated
revenues in 1997 in excess of $3 million.
On February 26, 1998, the Company entered into an agreement for the
acquisition of all of the shares of Wood Management, Inc. in exchange for
1,500,000 shares of the Company's restricted common stock. The transaction was
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closed effective March 31, 1998. Wood Management, founded in 1993, holds a
permit to process 1,200 tons per day of tree stumps, mixed wood, pallets and
yard waste. Processing of these recyclables results in the production of end
products ranging from wood chips to mulch to high quality top soil. Rail access
between Wood Management's 16-acre facility and another of the Company's recent
acquisitions, Mini-Max Enterprises, Inc., provides certain synergies of
operations.
On February 26, 1998, the Company entered into an agreement for the
acquisition of all of the shares of Mini-Max Enterprises, Inc. in exchange for
464,286 shares of the restricted common stock of WasteMasters, Inc.. The
transaction was closed effective March 31, 1998. Mini-Max, founded in 1968, is
an interstate trucking company licensed by the Interstate Commerce Commission to
conduct business in the lower 48 states. Mini-Max's fleet of tractors and
trailers are used to haul waste to a nationwide network of disposal sites and to
transport other cargo.
On February 6, 1998, the Company entered into an agreement for the
acquisition of all of the shares of Southeastern Research and Recovery, Inc.
("SRR") in exchange for 2,400,000 restricted shares of WasteMasters, Inc. common
stock. The transaction was closed effective March 31, 1998. SRR owns and
operates a non-hazardous waste facility located in South Carolina that processes
industrial sludge prior to its disposal in Subtitle D landfills.
Potential Discharge of Indebtedness in Bankruptcy Proceedings
On February 16, 1998, the Company filed petitions for protection under
Chapter 7 of the United States Bankruptcy laws with the Bankruptcy Court for the
Northern District of Georgia for five (5) wholly-owned subsidiaries of the
Company. The subsidiaries are: F&E Resource Systems Technology for Baltimore,
Inc., WasteMasters of Louisiana, Inc., WasteMasters of Michigan, Inc.,
WasteMasters of New York, Inc. and WasteMasters of Pennsylvania, Inc.
Active business for each of these subsidiaries had ceased during 1996 and
the assets had been liquidated as the result of various voluntary dispositions,
foreclosure proceedings, or other creditor actions. No assets exist in the
respective subsidiaries to satisfy the creditors claims, and the parent company,
WasteMasters, Inc. is believed to have no obligation in connection with the
indebtedness of these subsidiaries. The bankruptcy proceedings are pending;
however, the Company believes the debt of these subsidiaries will be discharged
upon the completion of the bankruptcy proceedings. Accordingly, the Company has
determined that debt in the aggregate amount of approximately $2,725,132 will be
extinguished during 1998, which will result in a gain to be recorded by the
Company.
On February 11, 1998, the Company filed a voluntary petition under
Chapter 11 of the U. S. Bankruptcy Laws with the bankruptcy court for The
Northern District of Georgia for its wholly-owned subsidiary, WasteMasters of
South Carolina, Inc.
Transaction with Continental Investment Corporation
On September 6, 1997, pursuant to the terms of a Stock Issuance and Stock
Purchase Agreement (the "Stock Purchase Agreement") between the Company,
Continental Investment Corporation, a Georgia corporation ("Continental"), and
Continental Technologies Corporation of Georgia (a wholly-owned subsidiary of
Continental), a Georgia corporation ("Continental Technologies"), the Company
acquired 400,000 shares of the common stock, par value $0.50 per share, of
Continental (the "Continental Common") and an option to purchase up to 100,000
additional shares of Continental Common for a period of five years at an
exercise price of $23.00 per share (the "Continental Option"). In consideration
for the Continental Common and the Continental Option, the Company (i) issued to
Continental 4,500,000 shares of its authorized but previously unissued Common
Stock and 5,000,000 shares of its authorized but previously unissued Preferred
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Stock, being all of the Company's authorized preferred stock, and (ii) conveyed
to Continental Technologies 100% of the issued and outstanding shares of the
capital stock of Rye Creek/Trantex and WasteMasters of Georgia, Inc., both of
which were subsidiaries of the Company. The Stock Purchase Agreement also
provided for the delivery of voting proxies, irrevocable for a period of five to
twelve months from September 6, 1997, in favor of Continental from five
stockholders of the Company, from which Continental can exercise proxies for
8,182,727 shares of the Company's Common Stock, and the issuance to Continental
of a Warrant, pursuant to which Continental may acquire up to 100,000,000 shares
of the Company's Common Stock in exchange for up to 1,000,000 shares of
Continental Common, for a period of two years. Further, as stipulated in the
Stock Purchase Agreement, of the 400,000 shares of the Continental Common
received in the exchange, 100,000 shares were received for the sale of the
capital stock of Rye Creek/Trantex and WasteMasters of Georgia, Inc., and the
remaining 300,000 shares of Continental Common, valued at $23.50 per share, were
received for the issuance of WasteMasters Common Stock and Preferred Stock. The
Preferred Stock is convertible into Common Stock, at the option of Continental,
at the rate of 5.1 shares of Common for each share of Preferred.
Previous Years Events
In November, 1996, the Company entered into an Agreement with Ronald W.
Pickett, the Company's former President, Chief Executive Officer and Director,
to sell all of the outstanding common stock of FERST for St. Mary's, Inc. (a
wholly-owned subsidiary of the Company).
On May 17, 1996, the Company's Baltimore FERST Limited Partnership, a
recycling and compost facility, was sold at foreclosure.
On April 12, 1996, the Company filed a voluntary petition under Chapter 7
of the U. S. Bankruptcy Code for FERST O&M, Inc. (a wholly owned subsidiary of
the Company) and the entity responsible for managing the Baltimore recycling and
compost facility.
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.
Solid Waste Processing
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
Solid waste disposal is the physical elimination of waste by burying at
landfills.
An inert waste landfill is a disposal facility that may accept only
wastes that will not or are not likely to generate contamination to surrounding
soils or groundwater. Such wastes are limited to earth and earth-like products,
concrete, cured asphalt, rock, bricks, yard trimmings, stumps, limbs, and
leaves. A landfill permitted for construction and demolition debris may accept
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building materials and rubble resulting from construction, remodeling, repair,
and demolition operations on pavements, houses, commercial buildings and other
structures. Such wastes include, but are not necessarily limited to, asbestos
containing wastes, wood, bricks, metal, concrete, wallboard, paper, cardboard,
all inert waste landfill material, and other "non-putrescible" wastes, as these
wastes have a low potential for groundwater contamination upon decomposition.
A municipal solid waste landfill can accept any waste derived from
households, including garbage, trash and sanitary waste in septic tanks.
Household waste includes solid waste from single-family and multi-family
residences, hotels and motels, bunkhouses, campgrounds, picnic grounds, and
day-use recreation areas. The term also includes commercial solid waste, but
does not include solid waste from mining, agricultural or silvicultural
operations or industrial processes or operations.
A transfer station is a waste management facility where solid waste is
received from collection vehicles and then transferred to and compacted in
large, specially designed and constructed trailers for transportation to distant
disposal facilities. Transportation can be by road or rail. A transfer station
operation can effectively reduce costs by positively impacting the utilization
of personnel and equipment and by reducing fuel costs. The greatest benefit of
transfer stations is the quick turnaround obtained for route collection
vehicles.
Industry Background
According to the National Solid Waste Management Association, the North
American solid waste industry was estimated to have had revenues of more than
$32 billion in 1995. The industry is highly fragmented, with the four largest
companies accounting, in 1995, for approximately 30% of revenues, seven
mid-sized public companies, accounting for approximately 4% of revenues, and
several thousand municipalities and independent collection firms accounting for
approximately 66% of revenues. The industry has been consolidating in recent
years as a result of increased capital requirements arising primarily from
stringent environmental and other governmental regulations. The Company expects
the trend toward consolidation to continue as many independent landfill and
collection operators, including municipalities, lack the capital resources,
management skills and technical expertise necessary to operate in compliance
with such regulations.
The Company believes that approximately 80% of solid waste landfills are
owned by municipalities, 15% by private companies and 5% by the federal and
state governments. These landfills vary greatly in size and capacity. The
Company believes that the estimated 800 privately-owned landfills represent
approximately 50% of the remaining disposal capacity in the United States.
Subtitle D regulations ("Subtitle D") of the Resource Conservation and Recovery
Act ("RCRA") require landfill operators to upgrade existing disposal facilities
by imposing requirements in the areas of facility design and operating criteria,
closure and post-closure requirements, financial assurance standards and
groundwater monitoring as well as corrective action standards. Trade group data
indicate that the number of municipal solid waste landfills decreased by 62%
from 1988 to 1995 and that the remaining number of such landfills in 1995 was
under 3,000.
As a result of these regulatory changes, a number of independent landfill
operators and municipalities are discontinuing or privatizing landfill and
collection operations. In some instances, industrial companies that had
previously operated landfills have decided to close such landfills rather than
bring them into compliance with the new, more demanding regulations. The
increasing requirements for capital, skilled management and technical expertise
are, for small operators who cannot achieve economics of scale and integration,
reducing margins and causing them to sell or close existing landfills. As a
result, the Company expects continued availability of opportunities to acquire
solid waste collection and disposal businesses. However, there can be no
assurance of such continued availability or of the Company's ability to
consummate any such potential acquisitions.
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5
Pricing in the waste management industry has become increasingly complex
as wastes have been sub-divided/categorized by regulation changes, and charges
or "tipping fees" are being calculated as to specific transport and disposal
requirements. Revenues are generated through charges or tipping fees to the
collection and hauling companies and are calculated by volume or weight.
Transfer stations consolidate and compact the waste for transport to distant
sites where tipping fees may be lower, while collecting a fee per ton for
consolidation, compaction, transportation, and disposal. The prices that are
charged for disposal or transfer of waste are determined by the volume or
weight, the type of waste disposed of and prices charged for similar disposal
services by competitors. Long term disposal and collection contracts typically
contain a formula, generally based on published price indices, for automatic
adjustment of fees to cover increases in some, but not all, operating costs.
In general, the Company intends to acquire 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.
Competition
The solid waste industry is highly competitive and requires substantial
amounts of capital. The waste industry is currently dominated by several large,
national waste management companies -- WMX Technologies, Inc. (formerly Waste
Management, Inc.), Browning-Ferris Industries, Inc. ("BFI"), U.S.A. Waste
Services, Inc., Allied Waste Industries, Inc. and Republic Industries, Inc.
Additionally, there are a number of regional companies and numerous local
companies. All of these companies have significantly larger operations and
greater financial resources than WAST. The Company may also compete with those
counties and municipalities that maintain their own waste collection and/or
disposal operations.
WAST would compete for landfill and transfer business on the basis of
tipping fees, geographical location and quality of operations. The Company's
ability to obtain landfill and transfer business may be limited by the fact that
some major collection companies also own or operate landfills to which they send
waste that they collect.
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 Solid Waste Disposal Act ("SWDA"), as amended by the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA")
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The SWDA and its implementing regulations establish a framework for
regulating the handling, transportation, treatment, and disposal of hazardous
and non-hazardous wastes. They also require states to develop programs to ensure
the safe disposal of solid wastes in landfills.
Subtitle D of RCRA establishes a framework for federal, state, and local
government cooperation in controlling the management of non-hazardous solid
wastes. While the role of the EPA is to provide overall regulatory direction,
the actual planning and implementation of solid waste programs under Subtitle D
are largely state and local functions. In October 1993, the EPA adopted
regulations under Subtitle D with respect to solid waste disposal facility
criteria, which include location standards, hydrogeological investigations,
facility design requirements (including liners and leachate collection systems),
enhanced operating and control criteria, groundwater and methane gas monitoring,
corrective action standards, closure and extended post-closure requirements, and
financial assurance standards, many of which have not commonly been in place or
enforced at landfills. All Subtitle D regulations are in effect, except for
financial responsibility requirements, which were to take effect in April 1997
although many states have already implemented financial assurance programs.
These federal regulations must be implemented by the states, although states may
impose requirements for landfill sites that are more stringent than the federal
Subtitle D standards. Once a state has an approved program, it will review all
existing landfill permits to ensure that they comply with the new regulations.
Although the states were required to submit proposed permitting programs
designed to implement the Subtitle D regulations to the EPA by April 1993, some
states have not submitted their programs to the EPA and others have not fully
completed their implementation. Because the new regulations did not take effect
until late 1993 and have not been fully implemented by the states, their full
impact may not be apparent for several years. The Company could incur
significant costs in complying with such regulations; however, the Company does
not believe that such enhanced standards will have a material adverse effect on
its potential operations because all of the Company's potential landfills would
be engineered to meet or exceed these requirements.
The Federal Water Pollution Control Act of 1972 ("The Clean Water Act")
This Act establishes rules regulating the discharge of pollutants from a
variety of sources, including solid waste disposal sites, into streams,
groundwater or other surface or subsurface waters. If runoff from the Company's
potential landfill or transfer station is discharged into surface waters, the
Act would require the Company to apply for and obtain a discharge permit,
conduct sampling and monitoring and, under certain circumstances, reduce the
quantity of pollutants in such discharge. Also, virtually all landfills are
required to comply with the new federal storm water regulations, which are
designed to prevent possibly contaminated storm water from flowing into surface
waters. The Company will work with the appropriate regulatory agencies to ensure
that its facilities are in compliance with Clean Water Act requirements,
particularly as they apply to treatment and discharge of leachate and storm
water. In addition, where development may alter or affect "wetlands," a permit
must be obtained before such development may be commenced. This requirement is
likely to affect the construction or expansion of many solid waste disposal
sites. The Act provides for civil, criminal and administrative penalties for
violations of specified sections of the Act.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("Superfund" or "CERCLA")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities from which there has been, or is
threatened, a release of any hazardous substance into the environment. CERCLA's
primary mechanism for remedying such programs is to impose strict joint and
several liability for cleanup of facilities on current owners and operators of
the land, former owners and operators of the land at the time of the disposal of
the hazardous substances, as well as the generators of the hazardous substances
and the transporters who arranged for disposal or transportation of the
hazardous substances. The costs of CERCLA investigation and cleanup can be very
substantial. Liability under CERCLA does not depend upon the existence or
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disposal of "hazardous waste" but can also be founded upon the existence of even
very small amounts of the more than 700 "hazardous substances" listed by the
EPA, many of which can be found in household waste. If the Company were found to
be a responsible party for a CERCLA cleanup, the enforcing agency could hold the
Company completely responsible for all investigative and remedial costs even if
others may also be liable. CERCLA also authorized the imposition of a lien in
favor of the United States upon all real property subject to or affected by a
remedial action for all costs for which a party is liable. The Company's ability
to obtain reimbursement from others for their allocable share of such costs
would be limited by the Company's ability to find other responsible parties and
prove the extent of their responsibility and by the financial resources of such
other parties. In the past, legislation has been introduced in Congress to limit
the liability of municipalities and others under CERCLA as generators and
transporters of municipal solid waste. Although such legislation has not been
enacted, if it were to pass it would limit the Company's ability to seek full
contribution from municipalities for CERCLA cleanup costs even if hazardous
substances that were released and caused the need for cleanup at the Company's
potential landfill were generated by or transported to the landfill by a
municipality. Depending upon whether and how Congress acts, it is possible that
each of these laws may be changed in ways that may significantly affect the
Company's potential waste disposal business.
The Occupational Safety and Health Act of 1970 (the "OSHA Act")
The OSHA Act authorizes the Occupational Safety and Health Administration
to promulgate occupational safety and health standards. Various of these
standards, including standards for notices of hazards, safety in excavation and
demolition work, and the handling of asbestos, may apply to the Company's
operations.
The Clean Air Act
The Clean Air Act provides for regulation, through state implementation
of federal requirements, of the emission of air pollutants from certain
landfills based upon the date of the landfill construction and volume per year
of emissions of regulated pollutants. The EPA proposed a New Source Performance
Standard and Emission Guidelines for municipal solid waste landfills. Current
regulations impose limits on air emissions from municipal solid waste landfills.
The New Source Performance Standard will apply to all municipal solid waste
landfills that commence construction after the date of the proposal. The
Emission Guidelines are a set of standards that must be adopted by the states
and will apply to all municipal solid waste landfills that received waste after
November 8, 1987. The EPA may also issue regulations controlling the emissions
of particular regulated air pollutants from municipal solid waste landfills.
Landfills located in areas with air pollution problems may be subject to even
more extensive air pollution controls and emission limitations.
Proposed Federal Legislation
In the future, the Company's potential collection, transfer and landfill
operations may also be affected by legislation currently pending before Congress
that would authorize the states to enact discriminatory legislation governing
waste shipments. The Company believes that if any such federal legislation is
enacted, it may have a material adverse effect on the Company's potential
operations.
State and Local Regulation
Each state in which the Company may operate in the future has laws and
regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, water and air pollution and, in most
cases, siting, design, operation, maintenance, closure and post-closure of
landfills and transfer stations. There has also been an increasing trend in
various states seeking to regulate the disposal of out-of-state waste in their
landfills. Legislative and regulatory measures to mandate or encourage waste
reduction at the source and waste recycling have been adopted by many states and
are also under consideration by Congress and the EPA.
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The Company's potential collection and landfill operations may be affected
by the trend toward laws requiring the development of waste reduction and
recycling programs. For example, California, Georgia, Florida, Illinois,
Indiana, Kentucky, Pennsylvania, Ohio, South Carolina and West Virginia have
enacted laws that will require counties to adopt comprehensive plans to reduce
the volume of solid waste deposited in landfills, through waste planning,
composting and recycling or other programs, within the next few years. A number
of states have taken, or are considering, steps to ban the landfilling of
certain wastes, such as yard wastes, beverage containers, newspapers, unshredded
tires, lead-acid batteries and "white goods", such as refrigerators. The
enactment of regulations reducing the volume and types of wastes available for
transport to and disposal in landfills could affect adversely the Company's
ability to operate its potential facilities at their full capacity.
Many municipalities also have ordinances, local laws and regulations
affecting the waste disposal industry. These include zoning and health measures
that limit solid waste management activities to specified sites or activities,
flow control provisions that direct the delivery of solid wastes to specified
facilities, and bans or other restrictions on the movement of solid wastes into
a municipality.
The permits or other land use approvals with respect to a landfill, as well
as state or local regulations, may (i) limit a landfill to accepting waste that
originates from a specified geographic area and/or (ii) specify the quantity of
waste that may be accepted at a landfill during a given time period and/or (iii)
specify the types of waste that may be accepted at the landfill.
Disclosure Regarding Forward Looking Statements
This Annual Report on Form 10-KSB includes forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended ("Forward Looking
Statements"). All statements other than statements of historical fact included
in this report are Forward Looking Statements. In the normal course of its
business, the Company, in an effort to help keep its shareholders and the public
informed about the Company's operations, may from time-to-time issue certain
statements, either in writing or orally, that contain or may contain
Forward-Looking Statements. Although the Company believes that the expectations
reflected in such Forward Looking Statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, past and
possible future, of acquisitions and projected or anticipated benefits from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings, levels of capital expenditures or other aspects
of operating results. All phases of the Company operations are subject to a
number of uncertainties, risks and other influences, many of which are outside
the control of the Company and any one of which, or a combination of which,
could materially affect the results of the Company's proposed operations and
whether Forward Looking Statements made by the Company ultimately prove to be
accurate. Such important factors ("Important Factors") and other factors could
cause actual results to differ materially from the Company's expectations are
disclosed in this report. All prior and subsequent written and oral Forward
Looking Statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the Important Factors described
below that could cause actual results to differ materially from the Company's
expectations as set forth in any Forward Looking Statement made by or on behalf
of the Company.
Competition: The waste collection/disposal business is both highly
competitive and require substantial amounts of capital. If permitted and
operational, the Company's facilities would compete with numerous enterprises,
many of which have significantly larger operations and greater resources than
the Company. The Company would also compete with those counties and
municipalities that maintain their own waste collection and disposal operations.
Forward Looking Statements assume that the Company will be able to effectively
compete with these other entities.
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Availability of Acquisition Targets: The Company's planned acquisition
program is a key element of its expansion strategy. In addition, obtaining
landfill permits has become increasingly difficult, time consuming and
expensive. There can be no assurance, however, that the Company will succeed in
obtaining landfill permits or locating appropriate acquisition candidates that
can be acquired at price levels that the Company considers appropriate.
Ongoing Capital Requirements: In order to satisfy the liquidity needs of
the Company for the following twelve months, the Company will be primarily
dependent upon proceeds from the sale of the Company's stock and cash flow from
the acquisition of other waste companies. Historically, revenues from the
existing operations have not been adequate to fund the operations of the
Company. If the Company is unable to obtain adequate funds from the sale of its
stock in public offerings, private placements or alternative financing
arrangements, it may be necessary to postpone any additional acquisitions and
continue to consolidate the operations of the new acquisitions and use cash flow
for internal growth.
Economic Conditions: The Company's potential waste collection/disposal
business would be affected by general economic conditions. There can be no
assurance that an economic downturn would not result in a reduction in the
potential volume of waste that might be disposed of at the Company's potential
facilities and/or the price that the Company would charge for its services.
Weather Conditions: Protracted periods of inclement weather may adversely
affect the Company's potential operations by interfering with collection and
landfill operations, delaying the development of landfill capacity and/or
reducing the volume of waste generated by the Company's potential customers. In
addition, particularly harsh weather conditions may result in the temporary
suspension of certain of the Company's potential operations. The Forward Looking
Statements do not assume that such weather conditions will occur.
Dependence on Senior Management: The Company is highly dependent upon its
senior management team. In addition, as the Company continues to grow, its
requirements for operations management with franchising and waste industry
experience will also increase. The future availability of such experienced
management cannot be predicted. The Forward Looking Statements assume that
experienced management will be available when needed by the Company at
compensation levels that are within industry norms. The loss of the services of
any member of senior management or the inability to hire experienced operations
management could have a material adverse effect on the Company.
Influence of Government Regulation: The Company's potential operations
would be subject to and substantially affected by extensive federal, state and
local laws, regulations, orders and permits, which govern environmental
protection, health and safety, zoning and other matters. These regulations may
impose restrictions on operations that could adversely affect the Company's
results, such as limitations on the expansion of disposal facilities,
limitations on or the banning of disposal of out-of-state waste or certain
categories of waste or mandates regarding the disposal of solid waste. Because
of heightened public concern, companies in the waste management business may
become subject to judicial and administrative proceedings involving federal,
state or local agencies. These governmental agencies may seek to impose fines or
to revoke or deny renewal of operating permits or licenses for violations of
environmental laws or regulations or to require remediation of environmental
problems at sites or nearby properties, or resulting from transportation or
predecessors' transportation and collection operations, all of which could have
a material adverse effect on the Company. Liability may also arise from actions
brought by individuals or community groups in connection with the permitting or
licensing of operations, any alleged violations of such permits and licenses or
other matters. The Forward Looking Statements assume that there will be no
materially negative impact on its operations due to governmental regulation.
Potential Environmental Liability: The Company may incur liabilities for
the deterioration of the environment as a result of its potential operations.
10
<PAGE>
Any substantial liability for environmental damage could materially adversely
affect the operating results and financial condition of the Company. Due to the
limited nature of insurance coverage of environmental liability, if the Company
were to incur liability for environmental damage, its business and financial
condition could be materially adversely affected.
Inflation and Prevailing Economic Conditions
To date, inflation has not had a significant impact on the Company's
operations. Consistent with industry practice, most of the Company's contracts
will provide for a pass through of certain costs, including increases in
landfill tipping fees and, in some cases, fuel costs. The Company therefore
believes it should be able to implement price increases sufficient to offset
most cost increases resulting from inflation. However, competitive factors may
require the Company to absorb cost increases, resulting from inflation. The
Company is unable to determine the future impact of a sustained economic
slowdown.
Employees
At March 31, 1998, the Company had the following employees including
its new acquisitions.
<TABLE>
<S> <C> <C> <C> <C> <C>
WasteMasters Sales
WasteMasters of Equipment C.A.T. Wood Mini
Corporate South Carolina Company Recycling S.R.R. Mgmt. Max Total
----------------- ----------------- ----------------- --------------- ------------ ------------ ----------- -------
Full-Time
Employee 0 1 34 28 12 8 6 89
Part-Time
Employee 0 - 2 - - 1 - 3
Contract Management
Management Agreement with
Services Continental - - - - -
</TABLE>
The Company currently has an ongoing management services contract with
Continental Investment Corporation to advise, consult with, and assist the
Company in various matters including, management structure, operating
procedures, analysis of potential acquisitions and the development of expansion
by providing management personnel and corporate office facilities.
ITEM 2. DESCRIPTION OF PROPERTY.
As of December 31, 1997 the principal fixed assets of the Company consist
of land, land improvements, machinery and equipment used at its landfill and
waste operation.
The Company's principal real estate asset is a landfill. The following
table sets forth information on this property:
<TABLE>
<S> <C> <C>
Type of Permit Permit
Identity Landfill Acreage Limitations Status
- - -------- -------- ------- ----------- ------
Appleton Sanitary Landfill MSW 23.8 permitted 600,000 tons of MSW and Active
Allendale, South Carolina acres C&D per year; no limit
on yard waste
</TABLE>
11
<PAGE>
The Company's South Carolina landfill is subject to a $4.9 million mortgage
secured by the landfill's assets, on which WasteMasters of South Carolina (a
wholly owned subsidiary) holds title to the landfill. WasteMasters of South
Carolina, Inc. has recently filed Chapter 11 Bankruptcy on February 16, 1998 in
U.S. Bankruptcy for the Northern District Court of Georgia, Atlanta Division.
ITEM 3. LEGAL PROCEEDINGS.
Reis v. WasteMasters, Inc. On June 4, 1996, Michael Reis and Lawrence Katz
filed a complaint in the United States District Court for the District of New
Jersey. The Complaint seeks unspecified damages based on a purported contract
between the Plaintiffs and the Company for a financing placement and corporate
development fee. The Company believes the complaint is without merit and intends
to vigorously defend its position.
WasteMasters, Inc. v. Diversified Investor Services of North America, Inc.
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 warrents 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. On September 24, 1997 a Civil Judgement was
entered in the Company's favor dismissing with Prejudice the Defendant's
counterclaims and declaring that the Defendant is not entitled to the issuance
of any additional warrants for the Plaintiff's stock. The matter is currently on
appeal.
Peerless Group, Inc. In RE: George Cadle v. WastMasters, Inc. et al On May
8, 1997, the Company was advised by the seller of the land contract purchase
agreement for the landfill in Allendale County, South Carolina that the Company
was in default under the terms of the contract. In July, 1997, the seller sued
in the Court of Common Pleas Allendale County, South Carolina to terminate the
land contract. This matter has been stayed by Chapter 11 Bankruptcy proceedings
on February 11, 1998 for WasteMasters of South Carolina.
Harold Solomon and Mary Ann Solomon v. WasteMasters, Inc. In July, 1997,
Harold Solomon, former employee and consultant to the Company and Mary Solomon,
filed a complaint in the Circuit Court for Broward County Florida. The Complaint
seeks damages based on a breach of contract between the Plaintiff and the
Company for services rendered. The Company believes the complaint is completely
without merit and intends to vigorously defend its position.
Waste Management of Cambridge, Inc. d/b/a Hunting Ridge Landfill v.
WasteMasters, Inc. On July 14, 1997, Waste Management of Cambridge, Inc. filed a
complaint in the United States District Court for the Eastern District of
Pennsylvania. The complaint seeks payment for access to its landfill for
disposal of various products. The amount of the unpaid invoices for services
total $69,800. The Company has negotiated a settlement of this matter.
WasteMasters, Inc. v. Old Solomons Isl. Road On July 30, 1997, 157 Old
Solomon's Isl. Road Corp. filed a complaint in the District Court of Maryland
for Anne Arundel County of $20,000 plus costs. The complaint seeks damages
resulting from a breach of contract.
Herzog v. WasteMasters, Inc. In June, 1997, Herzog Contracting Corp. filed
a complaint in Buchannon County, Missouri. The complaint seeks payment for
car-topper services in the amount of $31,000.
CSX Transportation, Inc. v. WasteMasters, Inc. Suit was filed September 25,
1997. Plaintiff's claim is based on a contract for the transportation of
non-hazardous construction debris. Plaintiff demands a judgment for $258,215.60.
12
<PAGE>
Raritan Properties, Inc. v. WasteMasters, Inc. Superior court of New Jersey
Law division, Middlesex County. Complaint filed May 23, 1997. The Plaintiff's
claim is based upon a lease agreement for the Abarry Complex in Perth Amboy, New
Jersey in which the Defendant allegedly agreed to pay all real estate taxes for
the subject property quarterly for the first 6 months of the lease. Defendant
has allegedly not made such payments and the Plaintiff claims damages for taxes
and for lease defaults.
Steffen Robertson and Kirsten (U.S., Inc. ("SRK") Court of Common Pleas for
the 14th Judicial Circuit, South Carolina. Notice and Certificate of Mechanics
lien in the amount of $88,933.36 was filed against WasteMasters of South
Carolina, Inc. by SRK. This matter has been stayed by Chapter 11 Bankruptcy
proceedings on February 11, 1998 for WasteMasters of South Carolina.
Steffen Robertson and Kirsten, Inc. ("SRK") v. WasteMasters of South
Carolina, Inc., George Cadle, E&J Landscaping, Inc. Court of Common Pleas,
Allendale County, South Carolina. This is an action to foreclose a mechanic's
lien on property in Allendale County due to lack of payment for engineering
services. Damages sought are $135,822.07 plus interest. Also, as part of this
litigation, E&J landscaping also holds an Order of Judgment by Default against
WasteMasters of South Carolina for $458,206.80 plus post-judgment interest. This
matter has been stayed by Chapter 11 Bankruptcy proceedings on February 11, 1998
for WasteMasters of South Carolina.
E&J Landscaping, Inc. v. WasteMasters, Inc., Rye Creek Corporation, Olive
A. Tharp, Bank Midwest, Red Earth Environmental, Inc., SRK, Inc. and Continental
Technologies Corp. Circuit Court of Adair County, Kirksville, Missouri. The
Plaintiff's claim is a petition to enforce and foreclose upon a mechanic's lien
and for damages. Plaintiff claims damages of $157,379.38 for landscaping
services provided on the Rye Creek Landfill, which was sold on September 2,
1997. The petition was filed on September 19, 1997. The Company has filed its
answer and is vigorously defending this action.
Mudge Rose Guthrie Alexander & Ferdon v. Ronald W. Pickett, F&E Resource
Systems Technology, Inc. and WasteMasters, Inc. United States District Court for
the District of New York. The Plaintiff's claim is based upon legal services
rendered to F&E Resource Systems Technology and other subsidiaries. The
Plaintiff has demanded the outstanding amount of $885,466.80 plus interest at
the maximum rate provided, plus the cost of the lawsuit and other and further
relief. The complaint was filed on September 24, 1997. The Company has filed its
answers and is vigorously defending its position.
Michael Paul Bahor and Engineering Contract Personnel, Inc. v. Renee
Colbert, Richard Masters, Burce Blazer, Leon Blazer, George Cadle, Red Earth
Environmental, Inc., Appleton Landfill, WasteMasters and WasteMasters/FERST
Court of Common Pleas of Allegheny County, Pennsylvania. Plaintiff's claim is
based on a settlement agreement whereby the Defendants were to convey stock in
Wastemasters to Bahor in October and/or November 1995. Also, Defendants
allegedly entered into a settlement agreement with Renee Colbert and Red Earth
Environmental and failed to comply with that as well. Plaintiff demands judgment
against Defendants for $100,000.
Coastal, Ltd. V. WasteMasters, Inc. et al Filed in the Court of Common
Pleas, Franklin County, Ohio. This suit was brought in relation to an alleged
default on s sub-lease situation on property in Baltimore, Maryland. Plaintiff
claims damages in excess of $25,000.
Mayor and City Council of Baltimore v. F&E Resource Systems Technology,
Inc. Filed in District Court of Maryland for Baltimore City. This suit was
brought in relation to alleged indebtedness to Plaintiff for Tangible Person
Property taxes. Plaintiff claims amount due is $7,361.65 plus interest of
$4,063.77 plus PPS fees.
13
<PAGE>
Rickel & Associates, Inc. v. WasteMasters, Inc. Filed in the United States
District Court for the Southern District of New York. This is a breach of
contract Plaintiff is claiming to be entitled to fees in excess of $2,00,000.00
Sheppard Detective System, Inc. v. WasteMasters of Pennsylvania, Inc. v et
al Filed in the Philadelphia Municipal Court. Judgment entered against
Defendants in the Amount of $8,049.80.
Young's Environmental Cleanup, Inc. v. F&E Resources, Inc. and WasteMasters
of Michigan, Inc. Filed in the Circuit Court for the County of Osceola, State of
Michigan. This suit is in relation to Defendants' alleged breach of contract and
unjust enrichment in regards to a written contract executed by the parties on
February 16, 1996. The contract generally provided that Plaintiff would provide
materials and/or services to transport quantities of waste water from Richmond
Sanitary Landfill located in Reed City, Michigan. The Plaintiff claims damages
in the amount of $41,210.00 together with interest, attorney fees, and court
costs.
F&E Resource Systems Technology for Baltimore, Inc. Chapter 7 bankruptcy
filed on February 11, 1998 in U.S. Bankruptcy Court for theNorthern District
of Georgia, Atlanta Division.
WasteMasters of Louisiana, Inc. Chapter 7 bankruptcy filed on February 11,
1998 in U.S. Bankruptcy Court for the Northern District of Georgia, Atlanta
Division.
WasteMasters of Michigan, Inc. Chapter 7 bankruptcy filed on February 11,
1998 in U.S. Bankruptcy Court for the Northern District of Georgia, Atlanta
Division.
WasteMasters of New York, Inc. Chapter 7 bankruptcy filed on February 11,
1998 in U.S. Bankruptcy Court for the Northern District of Georgia, Atlanta
Division.
WasteMasters of Pennsylvania, Inc. Chapter 7 bankruptcy filed on February 11,
1998 in U.S. Bankruptcy Court for the Northern District of Georgia, Atlanta
Division.
WasteMasters of South Carolina, Inc. Chapter 11 bankruptcy filed on February 11,
1998 in U.S. Bankruptcy Court for the Northern District of Georgia, Atlanta
Division.
There are numerous other claims and pending legal proceedings involving
creditors claims. Beginning in September 1997, with the installation of new
management, the Company has aggressively sought to identify, evaluate, and
resolve many of the claims against the Company, created under prior management.
Although the ultimate disposition of legal proceedings cannot be predicted with
certainty, it is the present opinion of the Company's management that the
outcome of any of these claims which is pending or threatened, either
individually or on a combined basis, will not have a material adverse effect on
the consolidated financial condition of the Company, but could materially effect
consolidated results of operations in a given period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon by the stockholders during the fourth quarter of
the fiscal year, as required to be reported upon by the Company in response to
this Item 4. However, the events discussed below occurred in the subsequent
period.
Meeting of Stockholders on February 6, 1998.
An annual meeting of stockholders was held on February 6, 1998. At this
meeting, the stockholders approved an amendment to its charter to establish a
classified board of directors and to establish terms for directors in each of
14
<PAGE>
three classes. Class A was designated for directors who are to serve terms of
three years; Class B was designated for directors who are to serve terms of two
years; and Class C was designated for directors who are to serve terms of one
year. For the proposal to establish a classified board of directors, 79,840,258
affirmative votes and 183,469 negative votes were cast, with 82,045 abstentions
and 13,775,594 broker non-votes.
Persons elected at this meeting of stockholders to serve as Class A
directors were Mr. Douglas C. Holsted and Mr. R. Dale Sterritt, Jr.; elected to
serve as Class B directors were Mr. S. Theis Rice and Mr. A. Leon Blaser; and
elected to serve as Class C directors were Mr. William L. Hutchinson, Mr. Noel
F. Khalil, and Mr. Brian Galligan. The results of voting for the nomines for
director were:
Nominee Votes For Votes Withheld
------- --------- --------------
Douglas C. Holsted 93,767,004 114,362
A. Leon Blaser, Ph.D 93,558,308 323,058
Brian Galligan 93,767,379 113,987
R. Dale Sterritt, Jr. 93,585,104 296,262
S. Theis Rice 93,767,379 113,987
William L. Hutchinson 93,767,379 113,987
Noel F. Khalil 93,767,379 113,987
At this meeting, the stockholders also voted upon proposals to effect a
reverse split of the Company's capital stock and to further approve an increase
in the amount of its authorized Common Stock and Preferred Stock. For the
proposal to effect a one for ten reverse split of the Company's capital stock,
92,409,396 affirmative votes and 937,936 negative votes were cast, with 47,488
abstentions and 486,546 broker non-votes. For the proposal to increase the
authorized Common and Preferred Stock, 79,639,495 affirmative votes and 399,384
negative votes were cast, with 66,893 abstentions and 13,775,594 broker
non-votes.
On February 5, 1998, the Company and the holders of the Series A and Series
B Convertible Debentures (the "Debentures") entered into a Compromise Settlement
Agreement which was entered as a Consent Judgment and filed February 5, 1998 in
the U.S. District Court for the Northern District of Texas, Dallas Division.
This Consent Judgment provided for the settlement of all claims in a civil
action brought against the Company by the holders of the Debentures for unpaid
principal, accrued interest and penalties. Pursuant to the Settlement Agreement
the Company was to issue 63 million shares of restricted Common Stock in
exchange for cancellation of the Debentures, accrued interest and penalties. The
Debenture holders would also receive warrants for the purchase of up to 100
million restricted shares of the Company's Common Stock exercisable in specified
quantities and time periods over the next two to five years at an average price
in excess of $1.50 per share. The Consent Judgment stipulated the holders of the
Debentures would be entitled to vote the 63,000,000 shares at the meeting of
shareholders on February 6, 1998. Therefore, these shares are included in the
votes counts indicated above.
Consent of Stockholders on February 16, 1998.
The intent of the Board of Directors in recommending the reverse stock
split to the stockholders meeting on February 6, 1998 was to comply with the
minimum bid price requirements of The Nasdaq Stock Market, Inc. ("Nasdaq") as a
condition for continued listing on the Nasdaq SmallCap Market. However, because
the trading price of the Company's Common Stock during the period of time
following the stockholders' meeting was sufficiently above the minimum bid price
requirement of Nasdaq, the Board of Directors determined it was not necessary at
this time to effectuate the reverse stock split as approved by the stockholders
at its February 6th meeting.
Accordingly, effective on February 16, 1998, a consent was executed by
shareholders representing 81.9% of the outstanding shares of the Common Stock of
15
<PAGE>
the Company to authorize an increase in the authorized capital stock from
40,000,000 shares to 500,000,000 shares in order to satisfy the Consent Judgment
dated February 5, 1998 and have sufficient shares to satisfy all other
outstanding obligations and ongoing business demands. This increase in the
number of authorized shares was in an amount to correspond with the increase in
the capital stock approved by stockholders at the February 6th meeting, if
calculated on a pre-split basis. On February 25, 1998, Articles of Amendment to
the Articles of Incorporation of WasteMasters, Inc. were filed in the state of
Maryland providing for an increase in the capital stock of the Company from
40,000,000 shares (5,000,000 shares of Preferred Stock and 35,000,000 shares of
Common Stock) to 500,000,000 shares of capital stock, (5,000,000 shares of
Preferred Stock and 495,000,000 shares of Common Stock).
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is registered with the United States
Securities and Exchange Commission under 12 (g) of the Securities Exchange Act
of 1934 and is traded on 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 1996 and 1997.
<TABLE>
<S> <C> <C> <C>
WASTEMASTERS, INC., COMMON STOCK
1997 1996
-------------------------------- -------------------------------
Low Bid High Bid Low Bid High Bid
--------------- ---------------- --------------- ---------------
First Quarter First Quarter $1.50 $3.63
Second Quarter Second Quarter $1.63 $3.06
Third Quarter $0.03 $0.97 Third Quarter $0.56 $2.38
Fourth Quarter $0.25 $0.47 Fourth Quarter $0.19 $0.75
</TABLE>
There were 1129 holders of record of the Common Stock as of April 10,
1998. This number does not include an indeterminate number of shareholders whose
shares are held by brokers in "street name". The Company has not declared any
cash dividends on its Common Stock during its fiscal years ended on December 31,
1997 or 1996. The Board of Directors of the Company has made no determination to
date to declare cash dividends during the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Overview
The last two years have been highlighted by financial distress and
restructuring efforts for both the financial and operational aspects of the
Company. The initial outlook for 1997 was very unfavorable as the Company was in
desperate need of capital for operating expenses and for development of its
three landfill sites. Two of the sites were operating marginally but were
heavily burdened with debt and in need of capital for expansion and development.
Continuous changes in previous management further diluted the turnaround efforts
and apparently thwarted efforts to raise capital. The year of 1996 had been a
catastrophic year, which saw the Company's principal assets disposed of in
foreclosure or bankruptcy proceedings. Although the Company received
approximately $3.2 million from the sale of convertible debentures in mid-1996,
it was not sufficient for the financing needs of the Company.
16
<PAGE>
In September 1997, new management and a reconstituted Board of Directors
began a significant effort to restructure the Company and arrange for capital
for operations and expansion through acquisitions. As operations are stabilized,
management plans to continue to develop Company-owned waste 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. The Company is now executing its plan to expand its
base of operating assets, and during the first quarter of 1998, the Company has
completed the acquisition of five (5) companies principally using the Common
Stock of the Company to acquire the companies.
Results of Operations
Revenues for the year 1997 were $466,000 as compared to $4,202,270 for
the previous year. This drastic reduction in revenues was primarily the result
of the disposal of the Company's principal asset, the Baltimore Recycling and
compost facility, in May 1996, and the discontinuance of operations of the New
York City C&D transfer station in February, 1997. Cost of revenues also
decreased due to the loss of these operating assets. Selling, general and
administrative expenses ("SG&A") decreased from $11,204,473 in 1996 to
$7,089,922 in 1997. This decrease is explained primarily by the disposal of the
Company's assets in 1996 and 1997, and the resulting reduction in management and
staff compensation. The SG&A amount for both years included significant costs
incurred for legal and professional fees associated with the financial and
operational restructuring and the search for working capital that continued
throughout most of 1996 and 1997. SG&A expense for 1997 and 1996 includes
approximately $1,353,405 and $5,712,456, respectively, for compensation paid in
stock of the Company to officers, other employees and consultants in lieu of
cash compensation, as the Company did not have adequate cash to compensate these
persons. Interest expense increased from $ 459,578 in 1996 to $10,615,332 in
1997. This large increase in interest expense is due almost exclusively to the
$10,441,636 penalty cost included in the settlement with the holders of the
convertible debentures which were in default. (See discussion regarding the
Debentures in Part I, Item 4, and in Note F to the Financial Statements at
December 31, 1997.)
Acquisitions
During the first quarter of 1998, the Company acquired five (5) companies
engaged in the waste and environmental industries. These acquisitions were
completed primarily in exchange for restricted Common Stock of the Company.
Based upon unaudited proforma financial statements for these
acquisitions, the 1997 revenues were approximately $14,287,123 and the
annualized revenues for 1998 are expected to increase by approximately 10%
overall. The Company expects the net operating cash flow from these acquisitions
will be positive, which will reduce the amount of capital required from outside
sources.
Liquidity and Sources of Capital
The Company's balance sheet at December 31, 1997 reflects a working
capital deficit of $22,628,713, as compared to a deficit of $13,286,554 at
December 31, 1996. During the fiscal year ended December 31, 1997, the company's
working capital deficiency increased $9,342,159. Accounts receivable was the
principal component of current assets at the end of 1997 and 1996, and was
$212,953 and $108,733, respectively.
The increase in the working capital deficit resulted primarily from the
settlement with the holders of the Debentures, as part of which $10,441,636 was
recorded as an additional short-term obligation for the penalty portion of the
settlement. However, during the first quarter of 1998, the total obligation due
to the Debenture holders of $13,751,102 was canceled in exchange for 63 million
shares of the company's Common Stock. The working capital deficit at December
31, 1997 without the $13,751,102 due to the Debenture holders was $8,877,611, as
compared to the prior year deficit of $13,286,554.
17
<PAGE>
The Company is in default under the terms of the Land Purchase Contract
for the purchase of the Company's Allendale, South Carolina landfill, for
failing to make the required principal and interest payments. However, in
February, 1998, the Company filed a petition for relief under Chapter 11 of the
U.S. Bankruptcy laws for the subsidiary that holds title to the landfill. If the
Company is successful in its efforts at restructuring the debt on this landfill,
a substantial portion of the indebtedness will be reclassified to long-term
liabilities.
The Company believes the subsidiaries that filed for voluntary bankruptcy
on February 16, 1998 will be totally discharged and that the current debt of
$2.7 million will be extinguished.
The Company believes the previous debenture holders will continue to
invest in the Company by exercising warrants they received in the settlement
agreement.
The Company maintains an investment in the common stock of Continental
Investment Corporation, which was valued at $7,840,000 at December 31, 1997.
However, the shares are subject to various trading restrictions pursuant to the
rules of the SEC and to the contract under which the shares were acquired. These
restrictions limit the ability of the Company to convert the shares to cash for
twenty-four months from the date of issuance. Also, these is no assurance that
the present value can be maintained until the shares may be sold for cash.
In order to satisfy the liquidity needs of the Company for the following
twelve months, the Company will be primarily dependent upon proceeds from the
sale of the Company's capital stock and cash flow from the operations of other
companies which have been acquired or may be acquired as part of the company's
expansion plans. Historically, revenues from the existing operations have not
been adequate to fund the operations of the Company. If the Company is unable to
obtain adequate funds from the sale of its stock in public offerings private
placements or alternative financing arrangements, it may be necessary to
postpone any additional acquisitions and continue to consolidate the operations
of the acquisitions already completed and use cash flow for internal growth.
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 acquisitions. The Company is
seeking financing in the form of equity and debt in order to make the necessary
improvements and provide working capital. There are no assurances the Company
will be successful in raising the funds required.
The Company has issued shares of its Common Stock from time to time in
the past to satisfy certain obligations, and expects in the future to also
acquire certain services, satisfy indebtedness and/or make acquisitions
utilizing authorized shares of the capital stock of the Company.
18
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
WASTEMASTERS, INC.
Index to Financial Statements
Page
----
Report of Independent Certified Public
Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
. . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet as of
December 31,1997. . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
. . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for
the years ended December 31, 1997 and 1996 . . . . . . . . . . . . F-6
. . . . . . . . .
Consolidated Statements of Stockholders'
Equity for the years ended December 31,1997 F-7
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows as of
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . F-9
. . . . . . . . . . . . . .
Notes to Consolidated Financial Statements for
the years ended December 31, 1997 and 1996 . . . . . . . . . . . . F-10
. . . . . . . . .
19
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH AUDIT REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
TABLE OF CONTENTS
PAGE
-----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31,
1997 F-4
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996 F-6
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997 and
1996 F-7
Consolidated Statements of Cash Flows as of
December 31, 1997 and 1996 F-9
Notes to Consolidated Financial Statements
for the years ended December 31, 1997 and
1996 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, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1997 and 1996. 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, 1997 and the consolidated results of its
operations changes in stockholders equity and its cash flows for the years ended
December 31, 1997 and 1996, 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 net losses of $20,369,295 and $15,207,326 in 1997 and 1996,
respectively. The audited December 31, 1997 financial statements raised
substantial doubts, about the Company's ability to continue as a going concern.
Subsequent to that time, current new management has taken significant steps
towards turning around and improving the Company's financial position and
results of operations including, but not limited to: (1) the acquisition of five
corporations, (2) bandruptcy filings on five debt ridden subsideries and (3) the
creation of significant stockholders' equity through the conversion of
substantial corporate indebtednes into equity securities.
Turner, Jones & Associates, p.c.
Certified Public Accountants
Vienna, Virginia
April 8, 1998
F-3
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997
Assets
------
Proforma
(Note B)
----------
Unaudited
Current assets:
Cash (Note A) $ 908 $ 159,232
Accounts receivable, net of
allowance for doubtful accounts 212,953 1,906,098
Receivable from related parties (Note L) 0 187,763
Inventories 0 2,123,090
Other current assets 0 283,471
----------- -----------
Total current assets 213,861 4,659,654
----------- -----------
Property, plant and equipment (Note A):
at cost
Machinery and equipment 18,222 3,799,189
Buildings 0 633,306
Less accumulated depreciation (4,998) (1,954,284)
----------- -----------
13,224 2,478,211
Landfill faciliate (Note A) 6,239,636 6,737,247
----------- -----------
Total property, plant and
equipment 6,252,860 9,215,458
----------- -----------
Other assets:
Deferred loan costs, net of
accumulated amortization 241,355 241,355
Investment - Continental
Corporation (Note E) 7,840,000 8,084,223
Deposits and other assets 1,327 475,693
----------- -----------
Total other assets 8,082,682 8,801,271
----------- -----------
$14,549,403 $22,676,383
=========== ===========
See accompanying notes to consolidated financial statements
F-4
<PAGE>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997
Liabilities and Stockholders Equity
-----------------------------------
Proforma
(Note B)
---------
Unaudited
Current liabilities:
Accounts payable, accrued
interest, and other
liabilities (Note F) $14,735,233 $ 3,610,748
Short term notes payable 0 2,913,035
Current maturities of
long-term debt and
convertible debentures(Note G) 8,351,499 5,366,930
Commitments and contingencies (Note K) 0 0
----------- -----------
Total current liabilities 23,086,732 11,890,713
----------- -----------
Deferred items:
Accrued environmental and
landfill costs 343,501 343,501
----------- -----------
Total deferred items 343,501 343,501
----------- -----------
Long-term debt, less current
portion (Note G) 0 1,698,484
----------- ----------
Total liabilities 23,430,233 13,932,698
----------- -----------
Stockholders' equity: (Note I)
Preferred stock, $.01 par value;
5,000,000 share authorized
and outstanding 50,000 50,000
Common stock, $.01 par value;
35,000,000 shares authorized;
34,967,126 shares issued. 349,671 991,471
Additional capital 35,645,461 50,601,954
Accumulated deficit (44,925,962) (42,899,740)
----------- -----------
Total stockholders' equity (8,880,830) 8,743,685
----------- -----------
Total liabilities and
stockholders' equity $14,549,403 $22,676,383
=========== ===========
See accompanying notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<S> <C>
Proforma
1997 (Note B) 1996
------------- ------------- --------
(Unaudited)
Revenues:
Sales $ 466,000 $14,287,123 $ 4,202,270
Development income 0 0 0
------------ ----------- -----------
466,000 14,287,123 4,202,270
Expenses:
Cost of sales 333,351 8,991,521 2,198,369
Selling, general and
administrative 4,743,511 9,753,760 11,204,473
Loss on operating contracts 0 0 1,690,444
------------ ----------- ------------
5,076,862 18,745,281 15,093,286
------------ ----------- ------------
Earnings (loss) before income
taxes (4,610,862) (4,458,158) (10,891,016)
Income tax expense (Note H) 0 (325,129) 0
------------ ----------- ------------
Net loss before extraordinary item (4,610,862) (4,133,029) (10,891,016)
------------ ----------- ------------
Other income (loss)
Interest expense (10,615,332) (10,946,898) (459,578
Income from debt forgiveness 551,923 (139,339) 1,667,728
Disposal of subsidiary, net of tax (1,209,379) 0 0
Interest (income) 0 0 3,642
Disposal of assets, net of tax 0 (1,158,174) (1,295,785)
Loss on valuation of long lived
assets (4,485,645) (4,744,844) (4,232,723)
------------ ----------- ------------
Total other income (15,758,433) (16,989,255) (4,316,716)
------------ ----------- ------------
Net Loss $(20,369,295) $(21,122,284) $(15,207,732)
============ ============ ============
Loss per share:
Primary:
Loss before extraordinary item (0.67) (0.67) (0.97)
Extraordinary item 0.00 0.00 0.00
------------ ------------ ------------
Net Loss $ (0.67) $ (0.67) $ (0.97)
============ ============ ============
Weighted average number of shares
outstanding (Note H) 30,220,320 31,208,924 15,606,617
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
WASTEMASTERS, INC.
(FORMERLY F&E RESOURCE SYSTEMS TECHNOLOGY, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
COMMON STOCK & PREFERRED STOCK
------------------------------
COMMON COMMON PREFERRED TOTAL
SHARES PREFERRED STOCK STOCK ADDITIONAL ACCUMULATED TREASURY STOCKHOLDERS'
OUTSTANDING SHARES BASIS BASIS CAPITAL DEFICIT SHARES EQUITY
----------- -------- ------ --------- ---------- ---------- -------- -------------
<S> <C> <C> <C>
Balance at
December 31,
1995 7,599,947 0 $76,000 $ 0 $12,599,251 $(9,348,935) $ 0 $3,326,316
Net loss 0 0 0 0 0 (15,207,732) 0
Shares sold 1,300,000 0 13,000 0 1,223,000 0 0 1,236,000
Exercise of
stock option 320,000 0 3,200 0 200,800 0 0 204,000
Shares issued
in payment
of services/
advances 4,941,092 0 49,411 0 5,475,751 0 0 5,525,162
Shares issued
in payment
of loans 200,000 0 2,000 0 198,000 0 0 200,000
Shares issued
in connection
with
acquisition 4,347,826 0 43,478 0 6,567,218 0 0 6,610,696
Shares
escrowed for
acquisition 1,000,000 0 10,000 0 0 0 0 10,000
Issuance of
stock options 0 0 0 0 35,905 0 35,905
Shares issued in connection
with Debenture conversion 1,628,470 0 16,285 0 1,358,715
</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, 1997 AND 1996
1997 1996
------------ ---------
Increase (decrease) in cash Cash
flows from operating activities:
Net earnings (loss) $(20,369,295) $(15,207,732)
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 1,603,647 1,340,667
Changes in assets and liabilities:
Accounts receivable & prepaid
expenses (104,160) (108,733)
Accounts payable, accrued
interest and other liabilities 10,979,485 (2,680,558)
Deferred income 0 (46,540)
Other assets 0 (34,215)
------------ ------------
Net cash provided by (used in)
operating expenses (7,890,323) (16,737,111)
------------ ------------
Cash flow from investing activities:
Purchase of land 0 0
(additions)/disposals of property,
plant and equipment) 8,351,711 35,638,269
Business acquisitions 0 (7,108,605)
------------ ------------
Net cash provided by (used in)
investing activities 8,351,711 28,529,664
------------ ------------
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, 1997 AND 1996
1997 1996
------------ -------------
Increase (decrease) in cash Cash
flows from financing activities:
Limited partners investment $ 0 $ 0
Repayments of long-term debts 0 (36,490,626)
Limited partners' interest in
partnership losses 0 0
Stock issued and options exercised
in lieu of cash payment 0 13,960,763
Proceeds from issuance of
common stock and paid in
capital 333,118 1,236,000
Proceeds from long term debts (130,469) 6,264,654
Proceeds from convertible
debentures (Net) (638,800) 3,165,000
------------ ------------
Net cash provided by (used in)
financing activities: (436,151) (11,864,209)
Net increase (decrease) in cash
and short-term investments 25,237 (71,656)
Cash and short-term investments
at beginning of period (24,329) 47,327
------------ ------------
Cash and short-term investments
at end of period $ 908 $ (24.329)
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for stock
interest $ 150,040 $ 277,616
SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS
Common stock issued in business $ 1,170,0000 $ 6,567,218
acquisition/disposition
Preferred stock issued in business
disposition $ 4,710,000 $ 1,358,715
Interest accrued on limited
partners' investment $ 0 $ 0
Common stock and options issued
and options exercised in
exchange for services $ 1,353,405 $ 5,712,456
Issuance of common stock and
options to employees and
vesting $ 0 $ 0
Issuance of common stock as
payment of debt $ 0 $ 198,000
Conversion of debentures $ 489,673 $ 1,378,715
See accompanying notes to consolidated financial statements
F-9
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Nature of Operations
1. The Company engages in solid waste processing, transportation and
disposal.
2. General
The accompanying financial statements have been prepared by the Company
pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission ("SEC"). Certain information and disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of these
financial statements have been included. These financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's annual Report on Form 10-KSB for the year
ended December 31, 1997 and December 31, 1996.
3. Consolidated Statements
The consolidated financial statements include the accounts of
WasteMasters, Inc. and its wholly owned subsidiaries; WasteMasters of South
Carolina, Inc.; WasteMasters of Pennsylvania, Inc.;WasteMasters of New York,
Inc.; WasteMasters of Michigan, Inc.; WasteMasters of Louisiana, Inc; and F&E
Resource Systems Technology for Baltimore, Inc. Significant intercompany
transactions have been eliminated in consolidation.
4. Cash and Cash Equivalents
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.
F-10
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
5. Revenue Recognition
Revenues are recognized when waste is received and when services are
rendered.
6. Property and Equipment
Depreciation is provided on the straight-line method as follows: Machinery
- 7 to 10 years Vehicles - 5 years Furniture and fixtures - 5
years
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.
7. 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 or loss. Due to significant changes in
ownership, the Company's use of its existing net operating losses may be
limited.
8. 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
F-11
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
8. Excess of Cost Over Net Assets of Businesses Acquired (continued)
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, 1997 and 1996. Pursuant to FASB
121 the Company has recognized evaluation losses for December 31, 1997 and 1996
of $4,485,645 and $4,232,723, respectively. The write off totaling $8,718,368
represents all excess of costs over net assets of business acquired.
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 for the years ending December 31, 1997 and 1996 are
$559,920 and $334,551, respectively.
Reclassification The Company has reclassed, land, landfill facilities and
costs in excess of acquisited to landfill facilities in the amount of $4,900,000
representing remaining air space to Landfill facilities.
9. 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 the southeastern United States.
F-12
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
10. 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 1997, the Company recognized losses on valuation on its acquisition
of WasteMasters of South Carolina, Inc. landfill of $4,485,645.
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.
11. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period.
Actual results could differ from those estimates.
12. 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 landfills based on its interpretation of the technical standards
of the U.S. Environmental Protection Agency's Subtitle D regulations and the air
emissions 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.
F-13
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
13. Deferred Loan Costs
The Company issued two (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.
14. Landfill Development Cost
Landfill development include land, landfill development costs, and air
space as follows:
Land $ 612,000
Land development (net of amortization) 727,636
Landfill airspace (net of amortization) 4,900,000
-----------
Total Landfill Facilities $ 6,239,636
===========
The Company has temporary ceased operation of the landfill for repairs and
additional permitting to meet subtitle D. Should the Company be unsuccessful in
obtaining permits under Subtitle D by September 30, 1998 the landfill will not
reopen and the remaining value of $4,900,000 will be written off. See Note
A(14).
15. Liquidity
As shown in the accompanying financial statements, the Company incurred a
net loss of $20,369,295 during the year ended December 31, 1997, and $5,257,255
during the year ended December 31, 1996. As of December 31, 1997, the Company's
current liabilities exceeded its current assets by $22,872,871. The Company's
liabilities exceed its assets by $8,880,830 at December 31, 1997, and
substantially all of the assets are either in the form of illiquid land and
related improvements or intangibles.
F-14
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE B - ACQUISITIONS: PROFORMA BALANCE SHEET (unaudited)
The proforma balance sheet at December 31, 1997, reflects certain
transactions which are significant to the financial and operational
restructuring of the Company that have occurred, or are reasonably expected to
occur, subsequent to the financial statements dated December 31, 1997. These
transactions are (i) the acquisition by the Company of five (5) companies
primarily in exchange for restricted common stock of WasteMasters, Inc., (ii)
the issuance of shares of common stock in discharge of debt and in settlement of
claims for damages due to holders of the convertible debentures, and (iii) the
extinguishment of certain liabilities expected to occur in connection with
petitions filed in U.S. Bankruptcy court for certain subsidiaries of the Company
whose operations have ceased during prior years.
The acquisitions included in the proforma balance sheet include the
following companies:
Sales Equipment Company, Inc.
Wood Management, Inc.
Mini-Max Enterprises, Inc.
C.A.T. Recycling, Inc.
Southeastern Research and Recovery, Inc.
For purposes of this proforma balance sheet, the acquisitions have been
recorded as a pooling of interests.
The transactions included in the proforma balance sheet have been
discussed in more detail in Note M below.
NOTE C - TRANSACTIONS WITH CONTINENTAL AND DISPOSITIONS
In September, 1997, Continental Investment Corporation ("Continental"), a
publicly-traded corporation engaged in the waste disposal business, purchased
4,500,00 shares of newly-issued Common Stock and 5,000,000 shares of
newly-issued Series A Preferred Stock, par value $.01 per share, of
WasteMasters, Inc. ("Preferred Stock") directly from WasteMasters, Inc. Each
share of Preferred Stock has a preference over holders of Common Stock upon any
liquidation or dissolution of the Company equal to $1.25 per share, is entitled
to one vote on any matter on which shareholders will
F-15
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE C - TRANSACTIONS WITH CONTINENTAL AND DISPOSITIONS (continued)
vote, and is convertible 5 for 1 into shares of WasteMasters Common Stock. The
consideration paid to WasteMasters, Inc. for the WasteMasters Common Stock and
Preferred Stock was the issuance by Continental to WasteMasters of 300,000
shares of Continental Investment Corporation Common Stock, par value $0.50 per
share ("Continental Common"), valued for the purposes of this transaction at
$19.60 per share.
Continental also purchased from WasteMasters, Inc. 100% of the issued and
outstanding shares of two corporations which had been wholly-owned subsidiaries
of WasteMasters, Inc. These corporations, Trantex, Inc. (which owns a landfill
site in Kirksville, Missouri) and WasteMasters of Georgia, Inc. (which owns an
undeveloped landfill site in Walker County, Georgia) are now wholly-owned
subsidiaries of Continental Technologies Corporation of Georgia, which is itself
a wholly-owned subsidiary of Continental. The consideration paid to
WasteMasters, Inc. for the Trantex, Inc. stock and the WasteMasters of Georgia,
Inc. stock was the issuance by Continental to WasteMasters of 100,000 shares of
Continental Common and an option to purchase up to 100,000 additional shares of
Continental Common Stock for a period of five (5) years at an exercise price of
$23.00 per share (the "Continental Option").
In addition, a warrant for the purchase of shares of WasteMasters Common
Stock was issued by WasteMasters, Inc. to Continental giving Continental the
option, exercisable until August 29, 1999, to acquire up to 100 million shares
of WasteMasters Common Stock in exchange for up to 1 million shares of
Continental Common Stock. The Company value of the Common Stock received at
$7,840,000 no value was assigned to the options as ther were at market and
restricted.
The Company entered into a management agreement beginning on September 9,
1997, whereby Continental Investment Corporation will provide management
services, as well as an infusion of operating capital, over the next one (1)
year. In exchange, WasteMasters, Inc. will pay Continental a management fee of
$50,000 per month, to be paid on a quarterly basis, plus any out-of-pocket costs
made by Continental.
In November, 1996, the Company sold all of the outstanding common stock
of FERST for St. Mary's, Inc. to a former Company President.
F-16
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE C - TRANSACTIONS WITH CONTINENTAL AND DISPOSITIONS (continued)
On May 17, 1996, the Partnership's Baltimore recycling and compost
facility was sold at foreclosure. Assets disposed of include the facility,
improvements, bond issuance costs and land. The net book value of the assets
sold was approximately $40,780,800. The Partnership filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code to retire any remaining
non-recourse secured and unsecured liabilities related to the facility in the
approximate amount of $42,000,000.
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.
On April 12, 1996, FERST 0 & M, Inc. (a wholly-owned subsidiary of the
Company)filed a voluntary petition under Chapter 7 of the U.S. Bankruptcy Code.
NOTE D - INVESTMENT IN CONTINENTAL
The Company's long term investments consist of Common Stock of Continental
Investment Corporation. Although the stock is regularly traded and has a readily
determinable market value, due to the trading restrictions placed on the stock,
the investment has been recorded at a discount of 20% from the closing price on
the date of the transaction in which the stock was acquired. The trading
restrictions are for a two (2) year period, from the September 9, 1997 purchase
date.
NOTE E - ACCOUNTS PAYABLE, ACCRUED INTEREST AND OTHER LIABILITIES
Accounts payable, accrued interest and other liabilities at December 31,
1997, consist of the following:
Trade payables $ 3,617,223
Interest 387,942
Accrued penalties
on Debentures 10,441,636
Accrued management fee 200,000
Payroll taxes 88,432
-----------
$14,735,233
F-17
<PAGE>
<TABLE>
<CAPTION>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<S> <C>
NOTE F - LONG-TERM DEBT AND CONVERTIBLE DEBENTURES
Long-term debt at December 31, 1997 consists of the following:
Mortgage loan payment 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
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 a conversion price,
as amended, of $0.255 per share 986,800
Unsecured loan in the original amount
of $49,000 on June 30, 1997, plus interest
at 9% per annum 18,741
Loans and other shareholder advances
with interest at 8% per annum 445,958
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 27, 1996 at conversion price, as amended, of
$0.255 per share. 2,000,000
---------
8,351,499
Less: Current maturities 8,351,499
---------
Net long-term debt $ 0
==========
</TABLE>
F-18
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE F - LONG-TERM DEBT AND CONVERTIBLE DEBENTURES - continued
The outstanding principal amount of the Series A and Series B Convertible
Debentures (the Debentures) was $2,986,000 at December 31, 1997, plus accrued
interest of approximately $402,326. Prior to September, 1997, the Company had
defaulted upon several key provisions of the Debentures, thereby triggering
substantial penalties. The principal, interest and penalties were subject to
conversion into shares of the Company's Common Stock. Following a declaration of
default and demand for payment of the unpaid principal and accrued interest and
penalties, the Debenture holders filed a civil action for collection of amounts
due. Following negotiations, the Company and the debenture holders entered into
a Compromise Settlement Agreement (the Settlement Agreement), which was entered
as a Consent Judgment and filed February 5, 1998 in the U.S. District Court for
the Northern District of Texas. Pursuant to the Settlement Agreement, the
Company was to issue sixty three million (63,000,000) shares of restricted
Common Stock in exchange for cancellation of the Debentures, accrued interest
and penalties. The Debenture holders would also receive warrants for the
purchase of up to one hundred million (100,000,000) restricted shares of the
Company's Common Stock exercisable in specified quantities and time periods over
the next two (2) to five (5) years at an average price in excess of $1.50 per
share. The Settlement Agreement also stipulated the outstanding principal amount
of the Debentures would be modified effective December 31, 1997, to reflect the
total amount due under the Settlement Agreement of $13,751,102. Accordingly, an
additional obligation of $10,441,636 was recorded at December 31, 1997, with a
corresponding charge to earnings. The entire amount of $13,751,102 was converted
to equity in the first quarter, 1998 (see Note M - Subsequent Events).
F-19
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE G - 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, 1997, the Company had an aggregate net operating loss carry forward
of approximately $42,721,195, which expires as follows:
Year Amount
2007 $ 1,700,000
2008 1,360,000
2009 400,000
2010 5,257,000
2011 13,635,000
2012 20,369,295
-----------
$42,721,295
===========
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 H - CAPITAL STOCK
At December 31, 1997, The Company's authorized capital stock was
35,000,000 shares of Common Stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share. On that date, the Company
had outstanding 34,967,126 shares of Common Stock and 5,000,000 shares of
preferred stock.
F-20
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE H - CAPITAL STOCK (continued)
The Preferred Stock was issued in September, 1997, pursuant to an
agreement with Continental Investment Corporation ("Continental") (see Note C -
Transaction with Continental and Dispositions), The Board of Directors is
authorized to designate series of Preferred Stock and fix the powers,
preferences and rights of the shares of such series and the qualifications,
limitations or restrictions thereon. The Preferred Stock issued to Continental
was designated as Series A, and is convertible into twenty-five million five
hundred thousand (25,500,000) shares of the Company's Common Stock, is entitled
to receive the same dividends per Share as the Common Stock, has a preference as
to distributions in liquidation over holders of Common Stock or any other class
or series of capital stock of $1.25 per share, and is entitled to one vote for
each share of Preferred on any matters as to which holders of Common Stock are
entitled to vote.
The Company issued a Warrant to Continental in September, 1997, giving
Continental the right to purchase up to one hundred million (100,000,000) shares
of the Company's Common Stock until September 5, 1995, in exchange for up to one
million (1,000,000) shares of Continental's $0.50 par value Common Stock. At
December 31, 1997, the Company had other warrants outstanding for the purchase
of an aggregate of 6,090,000 shares of its Common Stock, which are summarized in
the table below. The Company had outstanding eight percent (8%) Convertible
Debentures in the principal amount of $2,986,000 (the "Debentures") which,
together with accrued interest and penalties, were convertible into shares of
the Company's Common Stock. However, prior to September, 1997, the Company had
defaulted upon several key provisions of the Debentures thereby triggering
substantial penalties. Pursuant to a Compromise Settlement Agreement between the
Debenture Holders and the Company entered into on February 5, 1998, the Company
was to issue the debenture holders sixty-three million (63,000,000) shares of
restricted Common Stock of the Company in exchange for cancellation
F-21
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE H - CAPITAL STOCK (continued)
of the Debentures, accrued interest and penalties. The debenture holders would
also receive warrants for the purchase of up to one hundred million restricted
shares of the Company's Common Stock exercisable in specified quantities and
time periods over the next two (2) to five (5) years at an average price in
excess of $1.50 (see Note F & M - Subsequent Events for discussion related to
conversion of debentures and related indebtedness to equity). At December 31,
1997, the Company did not have sufficient authorized shares to provide for the
issuance of any of these additional shares. In February, 1998, the stockholders
approved an increase in its capital stock to five hundred million (500,000,000)
shares, divided into five million (5,000,000) shares of Preferred Stock and four
hundred ninety five million (495,000,000) shares of Common Stock.
Information about stock warrants at December 31, 1997 is summarized as
follows:
Range of exercise prices number outstanding date of expiration
$0.75 200,000 9/19/98
4.67 90,000 1/01/99
4.67 30,000 2/02/99
0.20 - 0.30 5,750,000 11/25/99
0.80 20,000 6/22/00
---------
6,090,000
F-22
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE I - 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.
No issuance of stock under this plan has been made since the transaction
with Continental and the installation of new management.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company may be required, at the option of Continental, to exchange
100,000,000 shares of its common stock for 1,000,000 shares of common stock from
Continental investment corporation pursuant to terms of the agreement dated
September 6, 1997.
The Company will accrue the estimated closure and post-closure costs.
The final closure costs will be estimated annually and amortized over the
facilities remaining useful life.
NOTE K - 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 Note's B and H).
F-23
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE K - RELATED PARTY TRANSACTIONS (continued)
On January 19, 1996, former officers, directors and employees exercised
options and received common stock for back salaries and loans to the Company.
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 (FERST for St. Marys,
Inc. and Chemical Road Investments, Inc.) to Ronald Pickett, a former President
and former member of the Board of Directors, at a loss of $1,295,785 (see Note
C).
The Company's former 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.
A former member of the Board of Directors has claims against the
Company for $201,000 for advances made to the Company to cover operating needs.
As of December 31, 1997, amounts due to former officers/directors have
been written off as not being valid. The Corporation has recognized income in
the amount of $174,079.
NOTE L - SUBSEQUENT EVENTS
As part of management's overall plan for the financial and operational
restructuring of the Company, numerous events have occurred subsequent to
year-end that impact the financial condition of the Company as reported on its
historical balance sheet as of December 31, 1997. These events are regarded by
management as significant improvements to the financial condition and future
viability of the Company. (Also, see Note B, "Acquisition; Proforma Balance
Sheet (unaudited)," above.)
F-24
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE M - SUBSEQUENT EVENTS (continued)
Conversion of Debentures and Related Indebtedness to Equity
Pursuant to a Compromise Settlement Agreement between the holders of
the Convertible Debentures and the Company, obligations due to the debenture
holders in the aggregate amount of $13,751,102 has been canceled in exchange for
63,000,000 shares of the Company's restricted Common Stock. The Compromise
Settlement Agreement was filed as a Consent Judgment on February 5, 1998 in the
U.S. District Court for the Northern District of Texas, Dallas Division. As part
of the settlement agreement, the Company was to issue stock purchase warrants to
the former debenture holders for the purchase of up to one hundred million
(100,000,000) restricted shares of the Company's Common Stock exercisable in
specified quantities and time periods over the next two (2) to five (5) years at
an average price in excess of $1.50 per share. As a result of the settlement
agreement, the Company reflected a reduction of liabilities in the first quarter
of 1998 of $13,751,102, with a corresponding increase in stockholders equity
(See Note F).
Acquisitions
During the first quarter of 1998, the Company acquired five (5)
companies in the waste and environmental industries. These acquisitions were
completed primarily in exchange for restricted common stock of the Company, and
are summarized in the paragraphs that follow. The recipients of the WasteMasters
stock have various restrictions upon the transfer of shares.
On February 18, 1998, the Company entered into an agreement with 20th
Century Holdings, Inc. for the acquisition of all of its shares owned by 20th
Century for Holsted Enterprises, Inc. (and its subsidiary, Sales Equipment
Company, Inc.) In exchange for 7,600,000 shares of the Company's restricted
common stock and options to purchase an additional three million (3,000,000)
shares of its common stock at an exercise price of $4.17 per share. Sales
Equipment Company, Inc. ("SECO") is a manufacturer and distributor of equipment
in pressurized gas equipment industry. SECO's main facility is located in
Oklahoma City, with locations in Tyler and El Paso, Texas.
F-25
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE M - SUBSEQUENT EVENTS (continued)
On February 10, 1998, the Company entered into an agreement for the
acquisition of all of the shares of C.A.T. Recycling, Inc. ("CAT") in exchange
for three million two hundred fifty thousand (3,250,000) shares of the Company's
restricted common stock. CAT owns and operations recycling facilities in four
Florida cities and a construction and demolition ("C&D") landfill in Sebring,
Florida.
As of February 26, 1998, the Company entered into an agreement for the
acquisition of all of the shares of Wood Management, Inc. in exchange for one
million five hundred thousand (1,500,000) shares of the Company's restricted
common stock. Wood Management, founded in 1993, holds a permit to process twelve
hundred (1,200) tons per day of tree stumps, mixed wood, pallets and yard waste.
Processing of these recyclables results in the production of end products
ranging from wood chips to mulch to high quality top soil. Rail access between
Wood Management's sixteen acre facility and another of the Company's recent
acquisitions, Mini-Max Enterprises, Inc., provides certain synergies of
operations.
As of February 26, 1998, the Company entered into an agreement for the
acquisition of all of the shares of Mini-Max Enterprises, Inc., in exchange for
four hundred sixty four thousand two hundred eight six (464,286) shares of
restricted common stock of WasteMasters, Inc. Mini-Max, founded in 1968, is an
interstate trucking company licensed by the Interstate Commerce Commission to
conduct business in the lower forty eight states. Mini-Max's fleet of tractors
and trailers are used to haul waste to a nationwide network of disposal sites
and to transport other cargo.
As of February 6, 1998, the Company entered into an agreement for the
acquisition of all of the shares of Southeastern Research and Recovery, Inc.
("SRR") in exchange for two million four hundred thousand (2,400,000) restricted
shares of WasteMasters, Inc. Common Stock. SRR owns and operates a non-hazardous
waste facility located in South Carolina that processes industrial sludge prior
to its disposal in Subtitle D landfills.
F-26
<PAGE>
WASTEMASTERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE M - SUBSEQUENT EVENTS (continued)
Potential Discharge of Indebtedness in Bankruptcy Proceedings
In February, 1998, the Company filed petitions for protection Under
Chapter 7 of the United States Bankruptcy laws with the Bankruptcy Court for the
Northern District of Georgia for five (5) subsidiaries of the Company. The
subsidiaries are:
F&E Resource Systems Technology for Baltimore, Inc.
WasteMasters of Louisiana, Inc.
WasteMasters of Michigan, Inc.
WasteMasters of New York, Inc.
WasteMasters of Pennsylvania, Inc.
Active business for each of these subsidiaries had ceased during 1996 and
the assets had been liquidated as the results of various voluntary dispositions,
foreclosure proceedings, or to the creditor actions. No assets exit in the
respective subsidiaries to satisfy the creditors claims, and the parent company,
WasteMasters, Inc. is believed to have no obligation in connection with the
indebtedness of these subsidiaries. The bankruptcy proceedings are pending;
however, the Company believes the debt of these subsidiaries will be discharged
upon the completion of the bankruptcy proceedings. Accordingly, the Company has
determined that debt in the aggregate amount of approximately $2,725,132 will be
extinguished during 1998, which will result in a gain to be recorded by the
Company.
F-27
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the two fiscal years ended December 31, 1997, the Company has not
filed any Current Report on Form 8-K reporting any change in accountants in
which there was a reported disagreement on any matter of accounting principles
or practices, financial statement disclosures or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
<TABLE>
<S> <C>
Listed below are the directors and executive officers of the Company.
Name Age Present Position with Company
R. Dale Sterritt, Jr 41 Chairman of the Board, Chief Executive Officer
Douglas C. Holsted 37 Acting Chief Financial Officer, Director (1)(2)
S. Theis Rice 46 Director (1)(2)
A. Leon Blaser, Ph.D. 54 Director
William L. Hutchinson 39 Director (1)(2)
Noel F. Khalil 46 Director
Brian Galligan 39 Director
G. Michael Lawshe 37 Corporate Secretary & Treasurer
</TABLE>
(1) Executive Committee member.
(2) Audit Committee member
At the annual meeting of stockholders on February 6, 1998, the stockholders
approved an amendment to its charter to establish a classified board of
directors and to establish terms for directors in each of three classes. Class A
was designated for directors who are to serve terms of 3 years; Class B was
designated for directors who are to serve terms of 2 years; and Class C was
designated for directors who are to serve terms of 1 year. Persons elected at
this meeting of stockholders to serve as Class A directors were Mr. Douglas C.
Holsted and Mr. R. Dale Sterritt, Jr.; elected to serve as Class B directors
were Mr. S. Theis Rice and Mr. A. Leon Blaser; and elected to serve as Class C
directors were Mr. William L. Hutchinson, Mr. Noel F. Khalil, and Mr. Brian
Galligan.
The following information sets forth the backgrounds and business
experience of the directors and executive officers.
R. Dale Sterritt, Jr. was elected as Chairman of the Board of Directors on
September 2, 1997, and was appointed as the Company's Chief Executive Officer on
20
<PAGE>
November 7, 1997. Since July 1, 1991, Mr. Sterritt has served as the Chief
Executive Officer and Chairman of the Board of Directors of Continental
Investment Corporation of Dallas, Texas, a publicly owned company engaged in
waste management and other businesses. Mr. Sterritt has also served as the
President and Treasurer of Continental since July 14, 1997. Since 1980, he has
served as Chairman of the Board of Directors of Sterritt Energy, Inc., a company
involved in oil and gas production and as President of Sterritt Investments,
Inc., an investment company.
Douglas C. Holsted has served as a member of the Company's Board since
September 2, 1997 and, on November 7, 1997, was appointed as Acting Chief
Financial Officer. From January, 1996 to the present, Mr. Holsted has been the
Chief Executive Officer of Sales Equipment Company in Oklahoma City, Oklahoma,
which is in the business of distributing equipment in the pressurized gas
industry. From 1991 through 1995, he was the Chief Financial Officer of The
Dwyer Group, Inc. of Waco, Texas, a publicly owned company in the franchise
industry. Mr. Holsted is a certified public accountant licensed in the State of
Oklahoma.
S. Theis Rice has served as a member of the Company's Board since
September 2, 1997. Mr. Rice has served in various capacities with Trinity
Industries, Inc., of Dallas, Texas, since 1989. Since 1994, he has been Senior
Corporate Counsel and Corporate Environmental Director, responsible for all
aspects of Trinity's environmental compliance. Trinity Industries, Inc., is a
diversified industrial corporation listed on the New York Stock Exchange.
A. Leon Blaser, Ph.D. has served as a member of the Company's Board since
January 4, 1996. He was a founder of WasteMasters, Inc., the private predecessor
company formed in 1995 and, from May 22, 1996 until September 2, 1997, was
Chairman of the Board of the Company. Mr. Blaser is involved in several private
business enterprises and, since 1990, has served principally as the President of
Interwest Development, Inc., an Idaho land development company.
William L. Hutchinson has served as a member of the Company's Board since
September 2, 1997. Since 1983, he has been President of Dunhill Partners, Inc.,
an investment and brokerage firm in Dallas, Texas, specializing in the
acquisition, syndication and management of investments in commercial real
estate.
Noel F. Khalil is a principal in Affordable Housing Partnership, Inc.,
located in Atlanta, Georgia, and through that company has been engaged in the
development of real estate in the Atlanta area since 1991, including joint
ventures in the construction industry with Browning Ferris Industries and H. J.
Russell Construction Company, Inc.
Brian Galligan, President of Millennium Hospitality Group, Inc., has
since 1984 served in executive positions of ever-increasing responsibility with
corporations engaged in the hotel and restaurant industry.
G. Michael Lawshe has served as Corporate Secretary since September 2,
1997 and Treasurer since April 10, 1998. Mr. Lawshe, has served since May 1996
as the Director of Corporate Finance for Continental Investment Corporation, a
publicly held company. Since 1984, Mr. Lawshe served as Vice President and
Director for Master Video Systems, Inc. and Vice President and Director for Omni
Systems of Texas, Inc. two privately - held firms in the private cable industry.
There are no family relationships among any of the officers or directors of the
Company
21
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation earned by the Company's
Chief Executive Officers during the last three fiscal years and other officers
who received compensation in excess of $100,000 during any of the last three
fiscal years.
<TABLE>
<S> <C> <C> <C> <C>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
---------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Name Annual Restricted Under- All Other
and Compen- Stock lying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary ($) Bonus ($) ($) ($) SARs (#) ($) ($)
- - ------------------------- --------- ----------- ------------ ---------- ------------- ----------- ------- ---------
(1)
Richard D. Masters 1997 - - $125,544 - - - -
CEO (2) 1996 - - $509,931 - 1,000,000 - -
1995 - - - - - - -
Peter Stefanou 1997 - - $342,896 - - - -
CFO and Interim 1996 - - - - 500,000 - -
CEO (3) 1995 - - - - - - -
J. B. Morris 1997 - - - - - - -
Interim 1996 - - - - - - -
President (4) 1995 - - - - - - -
R. Dale Sterritt, Jr. 1997 - - - - - - -
CEO and 1996 - - - - - - -
Chairman (5) 1995 - - - - - - -
Robert P. Crabb 1997 - - $122,475 - - - -
Corporate 1996 $80,000 - - - 500,000 - -
Secretary (6) 1995 $90,000 - - - - - -
Douglas C. Holsted 1997 - - - - - - -
Acting CFO (7) 1996 - - - - - - -
1995 - - - - - - -
-
G. Michael Lawshe 1997 - - - - - - -
Corporate Secretary 1996 - - - - - - -
and Treasurer (8) 1995 - - - - - -
</TABLE>
(1) The securities underlying these options are the shares of the Company's
Common Stock, $0.01 par value.
(2) Mr. Masters served as CEO from January, 1996 until July 14, 1997. The
amount for 1997 represents compensation and expenses paid with shares of
Common Stock of the Company. The compensation for 1996 includes expense
reimbursements. $383,008 of 1996 compensation was paid with Common Stock
of the Company. Compensation amounts for Mr. Masters exclude amounts paid
to his wife of $7,575 and $43,307 in 1997 and 1996, respectively.
(3) Mr. Stefanou served as CFO from January, 1997 until September 2, 1997;
additionally, he served as Interim CEO from July 14 to September 2, 1997.
All compensation reported in the table to Mr. Stefanou was paid in shares
of Common Stock of the Company, and includes expense reimbursements and
payments to Stefanou & Company, Certified Public Accountants, for
accounting services provided to the Company. Stefanou & Company was also
paid for accounting services provided to the Company during 1996.
22
<PAGE>
(4) Mr. Morris was appointed as Interim President on September 2, 1997. He
was not compensated by the Company during this period.
(5) Mr. Sterritt was appointed as the Company's CEO on November 7, 1997
and has received no compensation from the Company since his
appointment. He is employed by Continental Investment Corporation.
(6) Mr. Crabb served as Vice President and Secretary from mid-1993 until
January, 1996, and as Secretary from January, 1996 until August 28, 1997.
All compensation for 1997 to Mr. Crabb was paid in shares of Common Stock
of the Company pursuant to a consulting agreement.
(7) Mr. Holsted was appointed as Acting CFO on November 7, 1997.
(8) Mr. Lawshe was appointed as Corporate Secretary on September 2, 1997 and
additionally as Treasurer on April 10, 1998 and has received no compensation
from the Company since his appointments. He is employed by Continental
Investment Corporation.
The Company does not have any employment agreements with any of its
executive officers.
During the year 1997, the Company made no grants of options or stock
appreciation rights (SARs) to any officer or director. Therefore, the required
table on options and SARs granted is omitted.
<TABLE>
<S> <C> <C>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
FY-End(#) at FY-End($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise(#) Value Realized ($) Unexercisable Unexercisable
Richard D. Masters - - 1,000,000 $43,750
Peter Stefanou - - 500,000 $21,875
Robert P. Crabb - - 500,000 $21,875
</TABLE>
All outstanding Warrants are exercisable by their terms; however, the
Company does not have sufficient authorized but unissued shares should the
holders of the Warrants seek to exercise their Warrants.
Compensation of Directors
Directors are entitled to reimbursement for expenses in attending
meetings but receive no other compensation for services as directors. Directors
who are employees may receive compensation for services other than as director.
No compensation was paid during 1997 to directors for services in their capacity
as director.
Management Agreement with Continental Investment Corporation
The Company currently has an ongoing management services contract with
Continental Investment Corporation to advise, consult with, and assist the
23
<PAGE>
Company in various matters including, management structure, operating
procedures, analysis of potential acquisitions and the development of expansion
by providing management personnel and corporate office facilities.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of April 10, 1998,
with respect to the beneficial ownership of the Company's voting securities by
each person known to the Company to be the beneficial owner of more than five
percent (5%) of any class of the Company's voting securities.
- - --------------------------------------------------------------------------------
(1) (2) (3) (4)
Title Name and Amount and Percent
of Address of Nature of of
Class Beneficial Beneficial Class
Owner Ownership
Common Stock
Continental Investment Corporation 138,182,727 (a) 57.6%
10254 Miller Road
Dallas, Texas 75238
Preferred Stock
Continental Investment Corporation 5,000,000 100.0%
10254 Miller Road
Dallas, Texas 75238
- - ----------------------
(a) Beneficial ownership for Continental includes 100,000,000 shares which
Continental has the right to purchase pursuant to a warrant issued to
Continental and 25,500,000 shares issuable upon the conversion of
5,000,000 shares of the Company's Preferred Stock owned by Continental.
Also includes 8,182,727 shares as to which Continental holds irrevocable
proxies to vote such shares.
The Company has been advised the 63,000,000 shares of Common Stock that
the Company was to issue pursuant to the Consent Judgement dated February 5,
1998, was distributed to various holders and that no one shareholder qualified
as a beneficial owner of 5% or more of the Company's outstanding Common Stock.
(See Note F to Financial Statements in Part II, Item 7.)
24
<PAGE>
The following table sets forth certain information, as of April 10, 1998,
with respect to the beneficial ownership of the Company's Common Stock by (i)
all directors of the Company (ii) each executive officer of the Company named in
the Summary Compensation Table and (iii) all directors and executive officers of
the Company as a group.
- - --------------------------------------------------------------------------------
(1) (2) (3)
Name and Amount and Percent of Class
Address of Nature of
Beneficial Beneficial
Owner Ownership
- - --------------------------------------------------------------------------------
A. Leon Blaser, Ph.D. 2,616,743 (a) 2.3%
3350 Americana Terrace, Suite 200
Boise, Idaho 83706-2506
Brian Galligan - -
60 Riverside Drive
New York, New York 10024
Douglas C. Holsted, CPA 1,600,000 1.4%
c/o Sales Equipment Company
2824 N.W. 43rd Street
Oklahoma City, Oklahoma
William L. Hutchinson - -
c/o Dunhill Partners
4807 W. Lovers Lane
Dallas, Texas 75209
Noel F. Khalil - -
c/o Affordable Housing Partnership
1718 Peachtree Street NW Suite 153
Atlanta, Georgia 30309
S. Theis Rice - -
c/o Trinity Industries, Inc.
2525 Stemmons Freeway
Dallas, Texas 75207
R. Dale Sterritt, Jr. (b) - -
Promenade II, Suite 2545
1230 Peachtree Street
Atlanta, Georgia 30309
G. Michael Lawshe 60,000 .1%
10254 Miller Road
Dallas, TX 75238
25
<PAGE>
- - --------------------------------------------------------------------------------
(1) (2) (3)
Name and Amount and Percent of Class
Address of Nature of
Beneficial Beneficial
Owner Ownership
(Continued)
J. B. Morris (c) - -
Promenade II, Suite 2545
1230 Peachtree Street
Atlanta, Georgia 30309
Richard C. Masters (d) 2,456,521 2.1%
11940 Coman Road
Waldron, Michigan 49288
Peter Stefanou (e) 507,950 .4%
1360 Beverly Road, Suite 305
McLean, VA 22101
Robert P. Crabb (f) - -
583 Lombard Road
Rising Sun, MD 21911
All Officers and Directors 5,741,743 4.9%
as a Group (8 persons)
(a) Includes warrants for the purchase of 1,150,000 shares of the
Company's Common Stock.
(b) Mr. Sterritt, CEO and Chairman of WasteMasters, Inc., is also CEO
and Chairman of Continental Investment Corporation. See
"Transactiion With Continental Investment Corporation in Part I,
Item 1.
(c) Mr. Morris served as the Company's Interim President from
September 2 to November 7, 1997.
(d) Includes warrants for the purchase of 1,000,000 shares of the
Company's Common Stock. Mr.
Masters was the Company's CEO from January, 1996 until July
14, 1997. He also served as a director of the Company from
January, 1996 until February, 1998, having served as its
Chairman from January, 1996 until May, 1996.
(e) Includes warrants for the purchase of 500,000 shares of the
Company's Common Stock. Mr. Stefanou is a former officer of
the company, having served as CFO from January, 1997, until
September 2, 1997 and additionally as Interim CEO from July
14, 1997 until September 2, 1997.
(f) Mr. Crabb is a former officer, having served as Vice
President and Secretary from mid-1993 until January, 1996
and as Secretary from January, 1996 until August 28, 1997.
26
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transaction With Continental Investment Corporation
Pursuant to the terms of a Stock Issuance and Stock Purchase Agreement,
dated as of September 6, 1997 (the "Stock Purchase Agreement"), between the
Company, Continental Investment Corporation, a Georgia corporation
("Continental"), and Continental Technologies Corporation of Georgia (a
wholly-owned subsidiary of Continental), a Georgia corporation ("Continental
Technologies"), the Company acquired 400,000 shares of the Common Stock, par
value $0.50 per share, of Continental (the "Continental Common") and an option
to purchase up to 100,000 additional shares of Continental Common for a period
of five years at an exercise price of $23.00 per share (the "Continental
Option"). In consideration for the Continental Common and the Continental
Option, the Company (i) issued to Continental 4,500,000 shares of its authorized
but previously unissued Common Stock and 5,000,000 shares of its authorized but
previously unissued Preferred Stock, being all of the Company's authorized
preferred stock, and (ii) conveyed to Continental Technologies 100% of the
issued and outstanding shares of the capital stock of Rye Creek/Trantex and
WasteMasters of Georgia, Inc., both of which were subsidiaries of the Company.
The Stock Purchase Agreement also provided for the delivery of voting proxies,
irrevocable for a period of five to twelve months from September 6, 1997, in
favor of Continental from five stockholders of the Company, from which
Continental can exercise proxies for 8,182,727 shares of the Company's Common
Stock, and the issuance to Continental of a Warrant, pursuant to which
Continental may acquire up to 100,000,000 shares of the Company's Common Stock
in exchange for up to 1,000,000 shares of Continental Common, for a period of
two years. Further, as stipulated in the Stock Purchase Agreement, of the
400,000 shares of the Continental Common received in the exchange, 100,000
shares were received for the sale of the capital stock of Rye Creek/Trantex and
WasteMasters of Georgia, Inc., and the remaining 300,000 shares of Continental
Common, valued at $23.50 per share, were received for the issuance of
WasteMasters Common Stock and Preferred Stock. The Preferred Stock is
convertible into Common Stock, at the option of Continental, at the rate of 5.1
shares of Common for each share of Preferred.
The 9,500,000 aggregate shares of the WasteMasters Preferred Stock and
Common Stock owned by Continental represent 7.9% of the total 119,471,472 Common
Stock and Preferred Stock issued and outstanding. When combined with the
8,182,727 shares of Common Stock on which Continental holds irrevocable proxies
that can be voted, Continental is entitled to vote 17,682,727 shares (through
September 6, 1998) of the voting securities of the Company, which represents
14.8% of the total voting securities outstanding.
The Stock Purchase Agreement was attached as an Exhibit to the Company's
Quarterly Report on Form 10-QSB for the period ended September 30, 1997. The
description in this Form 10-KSB of the Stock Purchase Agreement and its terms
and conditions is qualified in its entirety by reference to the Stock Purchase
Agreement and the respective exhibits and schedules thereto and is not, and does
not purport to be, complete.
Other Relationships And Related Transactions
On February 18, 1998 the Company entered into an agreement with 20th
Century Holdings, Inc. for the acquisition of all its shares of Holsted
Enterprises, Inc. (and its subsidary, Sales Equipment Company, Inc.) in exchange
for 7,600,000 shares of the Company's restricted Common Stock and Options to
purchase an additional 3,000,000 shares of its Common Stock at specified amounts
and time periods at an exercise price of $4.17 per share. The transaction was
closed effective March 31, 1998. 20th Century Holdings is owned by Sterritt
Properties, Inc., Sterritt Properties, Inc. is a beneficial owner of Continental
Investment Corporation. Sterritt Properties, Inc. is owned 100% by a Family
Limited Partnership. Richard D. Sterritt, Sr., the President of Sterritt
Properties, Inc., is the father of the Chairman and CEO, R. Dale Sterritt, Jr..
20th Century Holdings, Inc. obtained minority ownership of Holsted Enterprises,
Inc. in December 1995. Mr. Douglas Holsted, Director and Acting Chief Financial
27
<PAGE>
Officer of the Company also obtained minority ownership in Holsted Enterprises,
in December 1995. On August 18, 1997, 20th Century Holdings, Inc. acquired 65%
control of all outstanding stock of Holsted Enterprises with Mr. Holsted holding
35% of the remaining stock. On February 16, 1997, 20th Century acquired the
remaining 35% outstanding stock from Mr. Holsted and subsequently sold 100% of
its holdings to the Company.
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, including officers and members of management, 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. Beginning in the fourth quarter of 1996 and continuing
throughout 1997, the Company did not have adequate funds to pay its officers,
and issued shares of its Common Stock in lieu of salary and expense payments.
During 1997, two present directors and other former officers and/or directors of
the Company, received shares of the Company's Common Stock as compensation and
for reimbursement of expenses pursuant to the Plan, as indicated in the table
below. The compensation amount was based upon the value of the shares issued at
the date of such issuance.
Number of Compensation
Name Shares Amount
A. Leon Blaser, Ph.D. 206,667 $ 45,219
Robert P. Crabb 661,600 $ 122,475
Richard C. Masters 891,740 $ 125,544
Peter Stefanou 1,194,000 $ 342,896
Paul Williamson 50,000 $ 5,470
The amounts for Mr. Masters above do not include stock issued in 1997 to
Mr. Masters' wife as compensation that was valued at $7,575.
On January 16, 1997, the Company sold 1,033,333 shares of its restricted
Common Stock to Julius W. Basham, II, a then director of the Company who has
since resigned. The purchase price for the stock was $.145 per share, as
compared to the closing market price of $.28125 per share on the date of
issuance. The Company's historical accounting records reflect indebtedness
totaling $190,000 to Mr. Basham for loans to the Company. These loans were made
during the time he was serving as a director, and consisted of advances of
$150,000 in September, 1996 and $40,000 in May, 1997. Both notes bear interest
at 12%, and matured in 45 days. Mr. Basham was also issued a Warrant for the
purchase of 200,000 shares of Common Stock in connection with the loan on
September 16, 1996, which is exercisable at $.75 per share until September 16,
1998.
On December 16, 1996, Richard D. Masters pledged 840,000 shares of Common
Stock of the Company owned by him personally as security for the payment of
financial advisory services provided to the Company by an outside firm pursuant
to an agreement. The outside firm sought to seize the shares on August 29, 1997
as collateral for the loan, although the amount due under the agreement is
presently in dispute. The matter is currently pending in a court proceeding
which commenced in November, 1997.
On November 26, 1996, the Company issued Warrants to seven persons who
were, at that time, officers and/or directors of the Company for the purchase of
an aggregate of 4,800,000 shares of Common Stock. The Warrants are exercisable
until November 26, 1999, at $.30 per share and all were outstanding as of
December 22, 1997.
28
<PAGE>
In August, 1996, the Company began operating a waste transfer station for
construction and demolition materials at a site located in Philadelphia,
Pennsylvania under a one-year renewable contract. The facility is owned by
Construction Transfer Station of Philadelphia, Ltd. ("Construction Transfer"), a
limited liability company of which Messrs. Basham, Blaser and Masters are the
principal owners. The contract to operate the facility was terminated by both
parties in February, 1997. The Company no longer operates the facility. During
1996, Construction Transfer made cash advances to the Company aggregating
$480,000, and carried no interest and were unsecured. As of September 30, 1997,
the historical accounting records reflect outstanding indebtedness to
Construction Transfer of $271,090.
Certain former directors claim amounts due for advances to the Company
and for reimbursable expenses in 1997 aggregating $201,000.00.
29
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description and Incorporation by Reference
3(i) Charter of the Company (incorporated by 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 (i) 1 Articles of Amendment to Corporate charger dated May 22, 1996
(incorporated by reference to Exhibit 3.1 to Form 10-QSB of the
Company filed on August 19, 1996.
* 3 (i) 2 Articles of Amendment to The Articles of Incorporation dated
February 25, 1998.
3(ii) By-Laws of the Company (incorporated by 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 (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 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 (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 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 WasteMasters, Inc.
Limited Partnership and Browning Ferris Industries, Inc.
(incorporated by reference to Exhibit 10.2 to Amendment No.
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)
10.3 Form of Executive Officer Warrant granted in 1994
(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 (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)
30
<PAGE>
Exhibit
Number Description and Incorporation by Reference
10.5 Acquisition Agreement dated December 28, 1995 (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 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)
(incorporated by reference to Exhibit 2.3 to Annual Report on
Form 10-KSB of the Company for the fiscal year ended December
31, 1995, filed on or about April 15, 1997 Commission File
No. 0-12914)
10.8 Agreement for Purchase and Sale of Richmond Landfill dated
March 27, 1996 (incorporated by reference to Exhibit 2.4 to
Annual Report on Form 10-KSB of the Company for the fiscal
year ended December 31, 1995 filed on April I5, 1996)
10.9 Letter of Intent dated December 27, 1995 between WasteMasters,
Inc. and Julius William Basham II (incorporated by reference
to Exhibit A to Schedule 13-D of Mr. Basham filed on February
15, 1996, Commission File No. 5-37788)
10.10 Stock Issuance and Stock Purchase Agreement dated September
6, 1997, by and between Continental Investment Corporation
and WasteMasters, Inc. (incorporated by reference to the
Company's report on Form 10-KSB for the quarter ended
September 30, 1997, filed on November 19, 1997)
16 Letter on change in certifying accountant (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 Subsidiaries of the Registrant
* 27 Financial Data Schedule
* Asterisk denotes an exhibit that is attached to this form 10-KSB for the year
ended December 31, 1997.
(b) Reports on Form 8-K. During the fourth quarter of 1998, the Company did not
file any Current Reports on Form 8-K.
31
<PAGE>
Exhibit 21
As of March 31, 1997, the Company had the following subsidiaries:
(a) WasteMasters of South Carolina, Inc.
(b) WasteMasters of Pennsylvania, Inc.
(c) WasteMasters of New York, Inc.
(d) WasteMasters of Michigan, Inc.
(e) WasteMasters of Louisiana, Inc.
(f) F&E Resource Systems Technologies for Baltimore, Inc.
32
<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,
hereunto duly authorized.
WASTEMASTERS, INC.
By: /S/ R. Dale Sterritt, Jr.
-------------------------------------
R. Dale Sterritt, Jr. - Chairman and
Chief Executive Officer
(Principal Executive Officer and Director)
Dated: April 15, 1998
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.
<TABLE>
<S> <C>
Signature Title Date
/S/ R. Dale Sterritt, Jr. Chairman and Chief Executive Officer
- - --------------------------
R. Dale Sterritt, Jr. (Principal Executive Officer and Director) April 15, 1998
/S/ Douglas C. Holsted
- - --------------------------
Douglas C. Holsted Acting Chief Financial Officer and Director April 15, 1998
/S/ G. Michael Lawshe Corporate Secretary and Treasurer
- - --------------------------
G. Michael Lawshe (Principal Accounting Officer) April 15, 1998
/S/ S. Theis Rice
- - -------------------------
S. Theis Rice Director April 15, 1998
/S/ A. Leon Blaser, Ph.D.
- - -------------------------
A. Leon Blaser, Ph.D. Director April 15, 1998
/S/ William L. Hutchinson
- - -------------------------
William L. Hutchinson Director April 15, 1998
/S/ Noel F. Khalil
- - -------------------------
Noel F. Khalil Director April 15, 1998
/S/ Brian Galligan
- - -------------------------
Brian Galligan Director April 15, 1998
</TABLE>
33
<PAGE>
Articles of Amendment
to the
Articles of Incorporation
of
WasteMasters, Inc.
Wastemasters, Inc. a Maryland corporation, having its principal office in
Atlanta, Georgia (herinafter called the "Corporation"), hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended by
striking out in its entirety Paragraph (A) only of Article FIFTH of the Charter
and inserting in lieu thereof the following:
"FIFTH: (A) The total number of shares of all classes
of capital stock which the Corporation shall have the authority to
issue is 500,000,000 shares of par value of $.01 per share, and an
aggregate par value of $5,000,000, of which 5,000,000 shall be
shares of Preferred Stock of $.01 par value each, (herinafter
called "Preferred Stock") and 495,000,000 shares shall be shares
of Common Stock of $.01 par value each (herinafter called "Common
Stock")."
SECOND: The Charter of the Corporation is hereby amended by
striking out in its entirety Article SIXTH of the Charter and inserting in lieu
thereof the following:
"SIXTH: The Board of Directors shall consist of not
less than three nor more than fifteen directors. The exact number
of directors shall be determined from time to time by resolution
adopted by the affirmative vote of a majority of the Board of
Directors. The directors shall be divided into three classes,
designated Class A, Class B and Class C. Each class shall consist,
as nearly as may be possible, of one-third of the total number of
directors constituting the entire Board of Directors. The first
directors serving as members of Class A shall hold office until
the annual meeting of shareholders to be held in 2000, the first
directors serving as members of Class B shall hold office until
the annual meeting of shareholders to be held in 1999, and the
first directors serving as members of Class C shall hold office
until the second meeting of shareholders to be held in 1998. At
each annual meeting of shareholders, successors to the class of
directors whose term expires at that annual meeting shall be
elected for a three-year term. Directors shall serve until the
expiration of their terms and until their successors have been
elected and qualified, subject to the director's prior death,
resignation, disqualification, or removal from office. If the
number of directors is changed in accordance with the terms of
these Articles of Incorporation, any increase or decrease shall be
apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible. Any vacancy
on the Board of Directors that results from a newly created
directorship, and any other vacancy occurring on the Board of
Directors shall be filled by the affirmative vote of a majority of
the Board of Directors then in office, although less than a
quorum, or by a sole remaining director. A director of any class
elected by the Board of Directors to fill a vacancy shall hold
office until the next annual meeting of shareholders. A director
of any class elected by the shareholders to fill a vacancy shall
hold office for a term that shall coincide with the remaining term
of that class. In no case will a decrease in the number of
directors shorten the term of any incumbent director. The election
of directors need not be by written ballot unless the
Corporation's Bylaws so require."
34
<PAGE>
THIRD: (a) the total number of shares of all classes of capital stock of
the Corporation heretofore authorized, and the number and par value of the
shares of each class of capital stock, are as follows:
"Forty Million (40,000,000) shares of capital stock of the Corporation
divided into:
Five Million (5,000,000) shares of Preferred Stock of One Cent ($.01) par
value per share, with aggregate par value of Fifty Thousand Dollars
($50,000);
Thirty Five Million (35,000,000) shares of Common Stock of One Cent ($.01)
par value per share, with aggregate par value of Three Hundred Fifty
Thousand Dollars ($350,000);
The aggregate par value of all shares of capital stock is Four Hundred
Thousand Dollars ($400,000)."
(b) the total number of shares of all classes of
capital stock of the Corporation as increased by these amendments, and the
number and par value of the shares of each class of capital stock, are as
follows:
"Five Hundred Million (500,000,000) shares of capital stock of the
Corporation divided into:
Five Million (5,000,000) shares of Preferred Stock of One Cent
($.01) par value per share, with aggregate par value of Fifty Thousand Dollars
(50,000);
Four Hundred Ninety-Five Million (495,000,000) shares of Common
Stock of One Cent ($.01) par value pershare, with aggregate value of Four
Million Nine Hundred Fifty Thousand Dollars (4,950,000);
The aggregate par value of all shares of capital stock is Five
Million Dollars (5,000,000)."
(c) The description of each class of capital stock,
as provided in Paragraph (B) of Article FIFTH of the Charter, including
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms of redemption was not
amended by these amendments.
FOURTH: The foregoing amendments of the Corporation's Charter were
duly advised by the Board of Directors and approved by the Stockholders of the
Corporation at the Annual Meeting of the Stockholders held on February 6, 1998,
and by the written consent of 2/3 of the Stockholders of the Corporation.
IN WITNESS WHEREOF, WasteMasters, Inc. has caused these Articles
of Amendment to be signed in its name and on its behalf by the President and
attested to by its Secretary this ____ day of February 1998. Each of the
undersigned officers of WasteMasters, Inc. acknowledges, under the penalties for
perjury, that these Articles of Amendment are the corporate act of the
Corporation and that the matters and facts set forth herein are true in all
material respects, to the best of his or her knowledge, information and belief.
ATTEST: WASTEMASTERS, INC.
- - ------------------------ By: -----------------------------
G. Michael Lawshe R. Dale Sterritt, Jr.
Corporate Secretary President and Chief Executive
Officer
35
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<CIK> 0000748055
<NAME> WASTEMASTERS, INC.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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