U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_____________________________________________
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 0-12914
_________________________________________________
WASTEMASTERS, INC.
(Exact name of small business issuer as specified in its charter)
Maryland 52-1507818
(State of (IRS Employer
Incorporation) Identification No.)
1230 Peachtree Street, Suite 2545, Atlanta, Georgia 30309
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (404) 888-0158
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
As of August 19, 1998, the registrant had outstanding 125,542,430
shares of its Common Stock, $.01 par value.
<PAGE>
WasteMasters, Inc. and Subsidiaries
FORM 10-QSB REPORT INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of June 30, 1998 ........... 3
Consolidated Statements of Operations
for the three months and six months ended
June 30, 1998 and 1997 .................................. 5
Consolidated Statements of Stockholders' Equity
Six months ended June 30, 1998 ....................... 6
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 ................. 7
Notes to Consolidated Financial Statements
June 30, 1998 ........................................... 9
Item 2. Management's Discussion and Analysis................. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................... 26
Item 5. Other Information ................................... 29
Item 6. Exhibits and Reports on Form 8-K .................... 31
Signatures....................................................... 31
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<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements (Unaudited)
- -----------------------------------------
WasteMasters, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
June 30,
1998
-----------
(Unaudited)
ASSETS
Current assets:
Cash $ 1,390,301
Accounts and notes receivable,
net of $40,950 allowance for
doubtful accounts 3,520,085
Other receivables 527,964
Inventories 2,134,778
Other current assets 348,801
-----------
Total current assets 7,921,928
Property, plant and equipment, at cost:
Machinery and equipment 18,001,390
Buildings and improvements 9,909,142
-----------
Less accumulated depreciation (855,366)
-----------
27,055,166
Land 728,235
Landfill facilities, net of amortization 20,644,907
-----------
Total property, plant and equipment 48,428,308
Other assets:
Investment - Continental Investment Corporation 7,853,352
Deposits and other assets 3,381,969
Intangible assets relating to acquired
businesses, net 24,685,563
-----------
Total other assets 35,920,884
-----------
Total assets $92,271,120
===========
The accompanying notes are an integral part of these financial statements.
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<PAGE>
WasteMasters, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET - Continued
June 30,
1998
-----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable, accrued interest,
and other liabilities $18,441,884
Short term notes payable 7,028,654
Current maturities of long-term debt 23,575,175
Liabilities to related parties, net 668,027
-----------
Total current liabilities 49,713,740
Long-term and deferred items:
Long-term debt, less current maturities 15,322,491
Deferred income taxes 16,400
Accrued environmental and landfill costs 599,851
-----------
Total long-term and deferred items 15,938,742
-----------
Total liabilities 65,652,482
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized and outstanding 50,000
Common stock, $.01 par value; 495,000,000
shares authorized; 121,823,313 shares
issued and outstanding 1,218,233
Additional paid-in capital 74,290,082
Accumulated deficit (44,925,962)
-----------
Total stockholders' equity 26,618,638
-----------
Total liabilities and stockholders' equity $92,271,120
===========
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
WasteMasters, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues $ 6,570,531 $ 62,558 $ 6,577,069 $ 223,856
Expenses
Cost of sales 6,297,654 60,995 6,390,348 228,813
Selling, general and
administrative 1,407,727 1,159,783 2,106,569 2,304,756
Depreciation and
amortization 1,599,484 -0- 1,599,483 -0-
----------- ----------- ----------- -----------
Earnings (loss) from
operations 2,734,334 (1,158,220) (3,519,332) (2,309,713)
Other income (loss)
Interest expense, net (187,185) (102,750) (211,156) (212,550)
Write-off of
capitalized
loan costs -0- -0- (241,355) -0-
Other income (50,775) -0- (50,775) -0-
Income tax benefit 8,903 -0- 8,903 -0-
----------- ----------- ----------- -----------
Total other loss (229,057) (102,750) (494,383) (212,550)
NET LOSS $(2,963,391) $(1,260,970) $(4,013,715) $(2,522,263)
=========== =========== =========== ===========
Loss per share (.03) (.04) (.04) (.09)
Weighted average number
of common shares
outstanding 109,895,220 28,678,734 89,172,348 26,830,916
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
<TABLE>
WasteMasters, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1998
Common and Preferred Stock
(Unaudited)
<CAPTION>
Common Preferred Common Preferred
Shares Shares Stock Stock Paid-in Accumulated
Outstanding Outstanding At par At par Capital Deficit Total
----------- ----------- --------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 34,967,126 5,000,000 $349,671 $50,000 $35,645,461 $(44,925,962) $(8,880,830)
Net loss for period -0- -0- -0- -0- -0- (4,013,715) (4,013,715)
Shares issued upon
exercise of warrants 3,800,000 -0- 38,000 -0- 1,596,000 -0- 1,634,000
Shares issued in
connection with
acquisitions 19,901,187 -0- 199,012 -0- 23,956,578 -0- 24,155,590
Settlement of debt 155,000 -0- 1,550 -0- 207,700 -0- 209,250
Shares issued in
cancellation of
liabilities for
debentures, accrued
interest, and
penalties 63,000,000 -0- 630,000 -0- 12,884,343 -0- 13,514,343
----------- --------- ---------- ------- ----------- ------------ -----------
Balance at
June 30, 1998 121,823,313 5,000,000 $1,218,233 $50,000 $74,290,082 $(48,939,677) $26,618,638
=========== ========= ========== ======= =========== ============ ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
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<PAGE>
WasteMasters, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)
1998 1997
------------ ------------
INCREASE (DECREASE) IN CASH
Cash flows from operating activities
Net earnings (loss) $(4,013,715) $(2,522,263)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,599,484 789,352
Stock issued in lieu of cash payment -0- 1,539,224
Stock issued in lieu of cash payment
for litigation settlement 209,250 -0-
Loss on write-off of capitalized
loan costs 241,355 -0-
Accrual for landfill closure costs 256,500
Changes in assets and liabilities:
Accounts receivable & prepaid expenses (464,429) 43,921
Accounts payable, accrued interest and
other liabilities 1,867,605 -0-
Deferred income (156,000) 748,566
Due to related parties (352,687) -0-
----------- -----------
Net cash provided by (used in)
operating activities (812,638) (598,800)
Cash flow from investing activities:
Deposits on acquisitions 110,000 -0-
Business acquisitions 822,824 -0-
Purchase of property, plant
and equipment (162,525) -0-
----------- -----------
Net cash provided by (used in)
investing activities 770,299 -0-
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
WasteMasters, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Six Months Ended June 30,
(Unaudited)
1998 1997
------------ ------------
Cash flows from financing activities:
Repayments of loans $ (376,778) $ (638,800)
Proceeds from exercise of warrants
for common stock 1,634,000 -0-
Proceeds from loans 170,510 40,000
---------- ----------
Net cash provided by (used in)
financing activities: 1,427,732 (598,800)
---------- ----------
Net increase in cash 1,389,393 -0-
Cash and cash equivalents at beginning
of period 908 -0-
Cash and cash equivalents at end of period $1,390,301 $ -0-
=========== ===========
SUPPLEMENTARY DISCLOSURE OF NON-CASH TRANSACTIONS
- -------------------------------------------------
Common stock issued in business acquisitions $17,182,084 $ -0-
Common stock issued for services $ -0- $1,539,224
Conversion of debentures for common stock $ -0- $ 638,800
Common stock issued in cancellation of
liabilities for debentures, accrued
interest and penalties $13,514,343 $ -0-
During the six months ended June 30, 1998, the Company completed
acquisitions of companies and/or assets in exchange for common stock of the
Company. The assets acquired and liabilities assumed in connection with those
acquisitions were non-cash transactions and are therefore not included in the
cash flow statement above.
The accompanying notes are an integral part of these statements.
-8-
<PAGE>
WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
NOTE A
- ------
1. Basis of Presentation
------------------------
The accompanying unaudited financial statements have been prepared by
WasteMasters, Inc. (the "Company" or "WasteMasters") pursuant to the rules
and regulations of the U. S. Securities and Exchange Commission. 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 and disclosures
necessary to a fair presentation of these financial statements have been
included. Such adjustments consist of normal recurring adjustments. This
Form 10-QSB Report should be read in conjunction with the Form 10-KSB
Report of WasteMasters, Inc. for the fiscal year ended December 31, 1997,
as filed with the U. S. Securities and Exchange Commission.
The results of operations for the periods ended June 30, 1998 are not
indicative of the results that may be expected for the full year. (See
results of operations on pages 21 and 22.
2. Consolidated Statements
---------------------------
The consolidated financial statements include the accounts of WasteMasters,
Inc. and its wholly owned subsidiaries: WasteMasters of Pennsylvania, Inc.;
WasteMasters of New York, Inc.; WasteMasters of Michigan, Inc.; WasteMasters
of Louisiana, Inc.; F&E Resource Systems Technology for Baltimore, Inc.;
WasteMasters of South Carolina, Inc.; Sales Equipment Company, Inc., C.A.T.
Recycling, Inc., Wood Management, Inc.; Mini-Max Enterprises, Inc.;
Southeastern Research & Recovery, Inc.; C&D Recycling Corporation; American
Recycling and Management Corporation and Tri-State Waste Disposal Company,
Inc. and its partially-owned subsidiary, Atlas Environmental, Inc.
Significant intercompany transactions have been eliminated in consolidation.
3. 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.
-9-
<PAGE>
NOTE B - BUSINESS
- -----------------
1. The Company
---------------
WasteMasters, Inc. is a non-hazardous solid waste services company that
provides collection, transfer, disposal and recycling services. The Company
was incorporated in Maryland in July 1981. In 1998, the Company initiated
an aggressive acquisition program in order to take advantage of the
consolidation of the solid waste industry. Thus far, WasteMasters has added
5 landfills, 4 hauling companies, 10 recycling facilities, and a state-of-
the-art industrial sludge processing facility as a result of the takeover
of companies that are now WasteMasters subsidiaries. The Company believes
that additional acquisition candidates meeting the Company's acquisition
criteria, including "tuck-in" opportunities, exist within its current and
adjacent market areas and in other prospective markets.
2. Industry Overview
--------------------
The Company believes that the United States non-hazardous solid waste
services industry generated estimated revenues of approximately $37 billion
in calendar 1997, of which approximately $26 billion was generated by
publicly-traded or privately-owned waste companies with the remaining
revenues generated by municipal, county and district operators.
Currently, the solid waste services industry is experiencing significant
consolidation and integration. The Company believes that this consolidation
and integration has been driven primarily by four factors: (i) stringent
environmental regulations resulting in increased capital requirements;
(ii) the inability of many smaller operators to achieve the economies of
scale necessary to compete effectively with large integrated solid waste
service providers; (iii) the competitive advantages of integrated companies
generated by providing integrated collection, transfer and disposal
capabilities; and (iv) privatization of solid waste services by
municipalities. Despite the considerable consolidation and integration that
has occurred in the solid waste industry in recent years, the Company
believes the industry remains highly fragmented both within its target
markets and nationally.
Stringent environmental regulations, such as the Subtitle D Regulations,
have resulted in rising costs for owners of landfills. Subtitle D specifies
design, siting, operating, monitoring, closure and financial security
requirements for landfill operations. The permits required for landfill
development, expansion or construction have also become increasingly
difficult to obtain. In addition, Subtitle D requires more stringent
engineering of solid waste landfills including the installation of liners
-10-
<PAGE>
NOTE B - BUSINESS - Continued
- -----------------------------
and leachate and gas collection and monitoring. These ongoing costs are
coupled with increased financial reserve requirements for closure and post-
closure monitoring. Certain of the smaller industry participants have found
these costs and regulations burdensome and have decided either to close
their operations or to sell them to larger operators. As a result, the
number of operating landfills has decreased while the size of landfills
has increased.
Economies of scale, driven by the high fixed costs of landfill assets and
the associated profitability of each incremental ton of waste, have led to
the development of higher volume, regional landfills. Larger integrated
operators achieve economies of scale in the solid waste collection and
disposal industry through vertical integration of their operations that may
generate a significant waste stream for these high-volume landfills.
Integrated companies gain further competitive advantage over non-integrated
operators by being able to control the waste stream. The ability of these
companies to internalize the collected solid waste (i.e., collecting the
waste at the source, transferring it through their own transfer stations
and disposing of it at their own disposal facility), coupled with access
to significant capital resources to make acquisitions, has created an
environment in which large integrated companies can operate more cost
effectively and competitively than non-integrated operators.
The trend toward consolidation in the solid waste services industry is
further supported by the increasing tendency of a number of municipalities
to privatize their waste disposal operations. Privatization is often an
attractive alternative for municipalities due, among other reasons, to the
ability of integrated operators to leverage their economies of scale to
provide the community with a broader range of services while enabling the
municipality to reduce its own capital asset requirements. The Company
believes that the financial condition of municipal landfills in the United
States was adversely affected by the 1994 United States Supreme Court
decision which declared "flow control" laws unconstitutional. These laws
had required waste generated in counties or districts to be disposed of at
the respective county or district-owned landfills or incinerators. The
reduction in the captive waste stream to these facilities, resulting from
the invalidation of such laws, forced the counties that owned them to
increase their per ton tipping fees to meet municipal bond payments. The
Company believes that these market dynamics are factors causing
municipalities to consider the privatization of public facilities.
3. Strategy
-----------
The Company's objective is to continue to grow by expanding its services in
markets where it can be one of the largest and most profitable solid waste
services companies. The Company is currently operating in certain regions
of Florida, South Carolina, New Jersey and Ohio, and believes that these
markets and other markets with similar characteristics present significant
opportunities for achieving its objectives. The Company focuses its efforts
on markets which are characterized by: (i) a geographically dispersed
-11-
<PAGE>
NOTE B - BUSINESS - Continued
- -----------------------------
population; (ii) disposal capacity which the Company anticipates may be
available for acquisition by the Company; (iii) significant environmental
regulation which has resulted in a decrease in the total number of
operating landfills; and (iv) a lack of significant competition from other
well-capitalized and established waste management companies. The Company
believes that these characteristics result in significant market
opportunities for the first well-managed market entrant, and create
economic and regulatory barriers to entry by additional competitors in
these markets.
The Company's strategy for achieving its objective is: (i) to acquire solid
waste collection businesses and disposal capacity in new markets, and to
make "tuck-in" acquisitions in existing markets; (ii) to generate internal
growth through increased sales penetration and the marketing of additional
services to existing customers; and (iii) to implement operating
enhancements and efficiencies. The Company intends to implement this
strategy as follows:
Expansion through Acquisitions. The Company intends to continue to expand
by acquiring solid waste collection companies and disposal capacity in new
markets, and increasing its revenues and operational efficiencies in it
existing markets through "tuck-in" and other acquisitions of solid waste
collection operations. In considering new markets, the Company evaluates
the opportunities to acquire or otherwise control sufficient collection
operations and disposal facilities which would enable it to generate a
captive waste stream and achieve the disposal economies of scale necessary
to meet its market share and financial objectives. The Company has
established criteria which enable it to evaluate the prospective
acquisition opportunity and the target market. In the near future, the
Company intends to enter new markets which are adjacent to its existing
markets; however, the Company may consider new markets in non-contiguous
geographic areas which meet its criteria. The Company is also targeting
additional "tuck-in" acquisitions within its current markets to allow the
Company to further improve its market penetration and density and to
further increase the internalization rate of its waste streams.
Internal Growth. In order to generate continued internal growth, the
Company intends to focus on increasing sales penetration in its current and
adjacent markets, soliciting new commercial, industrial, and residential
customers, marketing upgraded services to existing customers and, where
appropriate, raising prices. As customers are added in existing markets,
the Company's revenue per routed truck is improved, which generally
increases the Company's collection efficiencies and profitability. The
Company uses transfer stations, which serve to link disparate collection
operations with Company-operated landfills, as an important part of its
internal growth strategy.
Operating Enhancements for Acquired and Existing Businesses. The Company
intends to implement a system that establishes standards for each of its
-12-
<PAGE>
NOTE B - BUSINESS - Continued
- -----------------------------
markets and tracks operating criteria for its collection, transfer,
disposal and other operations to facilitate improved profitability in
existing and acquired operations. These measurement criteria include
collection and disposal routing efficiency, equipment utilization, cost
controls, commercial weight tracking and employee training and safety
procedures. The Company believes that by establishing standards and closely
monitoring compliance, it will be able to improve existing and acquired
operations. Moreover, where the Company is able to internalize the waste
stream of acquired operations, it is further able to increase operating
efficiencies and improve capacity utilization.
4. Acquisition Program
-----------------------
The Company's acquisition program is founded on strong management
capabilities, strict acquisition criteria, and defined integration
procedures. During 1998, WasteMasters has added 5 landfills, 4 hauling
companies, 10 recycling facilities, and a state-of-the-art industrial
sludge processing facility as a result of the takeover of companies that
are now WasteMasters subsidiaries. The Company believes that additional
acquisition candidates meeting the Company's acquisition criteria,
including "tuck-in" opportunities, exist within its current and adjacent
market areas and in other prospective markets.
The Company has developed a set of financial, geographic and management
criteria designed to assist management in the evaluation of acquisition
candidates engaged in solid waste collection and disposal. These criteria
consist of a variety of factors, including, but not limited to:
(i) historical and projected financial performance; (ii) internal rate of
return, return on assets and earnings accretion; (iii) experience and
reputation of the acquisition candidate's management and customer service
reputation and relationships with the local communities; (iv) composition
and size of the acquisition candidate's customer base; (v) opportunity to
enhance and/or expand the Company's market area and/or ability to
attract other acquisition candidates; (vi) whether the acquisition will
augment or increase the Company's market share and/or help protect the
Company's existing customer base; and (vii) internalization opportunities
to be gained by combining the acquisition candidate with the Company's
existing operations.
The Company intends to establish integration procedure for newly acquired
businesses designed to effect a prompt and efficient integration of the
acquired business and minimize disruption to the ongoing business of both
the Company and the acquired business. Once a solid waste collection
operation is acquired, the Company intends to implement programs designed
to reduce disposal costs and improve collection and disposal routing,
-13-
<PAGE>
NOTE B - BUSINESS - Continued
- -----------------------------
equipment utilization, employee productivity, operating efficiencies and
overall profitability. The Company will typically seek to retain the
acquired company's qualified managers, key employees and selected local
operations, while consolidating purchasing and other administrative
functions through the Company's corporate offices.
NOTE C - DISCLOSURE REGARDING RISK FACTORS AND FORWARD LOOKING STATEMENTS
- -------------------------------------------------------------------------
This Quarterly Report on Form 10-QSB 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), acquisitions and
projected or anticipated benefits from acquisitions made by or to be made
by the Company, or projections involving anticipated revenues, earnings,
level of capital expenditures or other aspects of operating results.
Forward-looking statements by the Company and its management are based on
estimates, projections, beliefs and assumptions of management and are not
guarantees of future performance. The Company disclaims any obligation to
update or revise any forward-looking statement based on the occurrence of
future events, the receipt of new information, or otherwise. All phases of
the Company's 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 risk factors ("Important Risk Factors") and other factors could
cause actual results to differ materially from the Company's expectations.
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 Risk 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.
-14-
<PAGE>
NOTE C - DISCLOSURE REGARDING RISK FACTORS AND FORWARD LOOKING STATEMENTS
- Continued
- -------------------------------------------------------------------------
(1) Ability to Manage Growth
----------------------------
The Company's objective is to continue to grow by expanding its services in
markets where it can be one of the largest and most profitable solid waste
services companies. Consequently, the Company may experience periods of
rapid growth. Such growth, if it were to occur, could place a significant
strain on the Company's management and on its operational, financial and
other resources. Any failure to expand its operational and financial
systems and controls or to recruit appropriate personnel in an efficient
manner at a pace consistent with such growth would have a material adverse
effect on the Company's business, financial condition and results of
operations.
(2) Ability to Identify, Acquire and Integrate Acquisition Targets
------------------------------------------------------------------
The Company's strategy envisions that a substantial part of the Company's
future growth will come from acquiring and integrating independent solid
waste collection, transfer and disposal operations. There can be no
assurance that the Company will be able to identify suitable acquisition
candidates and, once identified, to negotiate successfully their
acquisition at a price or on terms and conditions favorable to the Company,
or to integrate the operations of such acquired businesses with the Company.
In addition, the Company competes for acquisition candidates with other
entities, many of which have greater financial resources than the Company.
Failure by the Company to implement successfully its acquisition strategy
would limit the Company's growth potential.
The consolidation and integration activity in the solid waste industry in
recent years, as well as the difficulties, uncertainties and expenses
relating to the development and permitting of solid waste landfills and
transfer stations, has increased competition for the acquisition of
existing solid waste collection, transfer and disposal operations.
Increased competition for acquisition candidates may result in fewer
acquisition opportunities being made available to the Company as well as
less advantageous acquisition terms, including increased purchase prices.
The Company also believes that a significant factor in its ability to
consummate acquisitions will be the relative attractiveness of shares of
the Company's Common Stock as consideration for potential acquisition
candidates. This attractiveness may, in large part, be dependent upon the
relative market price and capital appreciation prospects of the Company's
Common Stock compared to the equity securities of the Company's competitors.
If the market price of the Company's Common Stock were to decline, the
Company's acquisition program could be materially adversely affected.
-15-
<PAGE>
NOTE C - DISCLOSURE REGARDING RISK FACTORS AND FORWARD LOOKING STATEMENTS
- Continued
- -------------------------------------------------------------------------
The successful integration of acquired businesses is important to the
Company's future financial performance. The anticipated benefits from any
acquisition may not be achieved unless the operations of the acquired
businesses are successfully combined with those of the Company in a timely
manner. The integration of any of the Company's acquisitions requires
substantial attention from management. The diversion of the attention of
management and any difficulties encountered in the transition process,
could have an adverse impact on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will
be able to successfully identify and close acquisitions and integrate them
into its organization and operations.
(3) Dependence on Management
----------------------------
The Company is highly dependent upon the services of the members of its
senior management team, the loss of any of whom may have a material adverse
effect on the Company's business, financial condition and results of
operations.
In addition, the Company's future success depends on its continuing ability
to identify, hire, train, motivate and retain highly qualified personnel.
Competition for such personnel is intense, and there can be no assurance
that the Company will be able to attract, assimilate or retain highly
qualified personnel in the future. The inability to attract and retain the
necessary personnel could have a material adverse effect upon the Company's
business, financial condition and results of operations.
(4) Uncertain Ability to Finance the Company's Growth
-----------------------------------------------------
The Company anticipates that any future business acquisitions will be
financed through cash from operations, borrowings, the issuance of shares
of the Company's Common Stock and/or seller financing. If acquisition
candidates are unwilling to accept, or the Company is unwilling to issue,
shares of the Company's Common Stock as part of the consideration for such
acquisitions, the Company would be required to utilize more of its
available cash resources or potential borrowings in order to effect such
acquisitions. To the extent that cash from operations or borrowings is
insufficient to fund such requirements, the Company will require additional
equity and/or debt financing in order to provide the cash to effect such
acquisitions. Additionally, growth through the development or acquisition
of new landfills, transfer stations or other facilities, as well as the
ongoing maintenance of such landfills, transfer stations or other
facilities, will require substantial capital expenditures. There can be no
assurance that the Company will have sufficient existing capital resources
or will be able to raise sufficient additional capital resources on terms
satisfactory to the Company, if at all, in order to meet any or all of the
foregoing capital requirements.
-16-
<PAGE>
NOTE C - DISCLOSURE REGARDING RISK FACTORS AND FORWARD LOOKING STATEMENTS
- Continued
- -------------------------------------------------------------------------
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. Because of potential
political, legal, bureaucratic, and other factors, there can be no
assurance that the Company will be able to accomplish any of its goals
within a reasonable period of time.
(5) Geographic Concentration Risks
----------------------------------
The Company's operations and customers are primarily located in Florida,
South Carolina, New Jersey and Ohio. Therefore, the Company's business,
financial condition and results of operations are susceptible to downturns
in the general economy in these states and other factors such as state
regulations and potential severe weather conditions. In addition, as the
Company expands in its existing markets, opportunities for growth within
these regions will become more limited. The costs and time involved in
permitting and the scarcity of available landfills may make it difficult
for the Company to expand vertically in these markets. There can be no
assurance that the Company will be able to complete a sufficient number of
acquisitions in other markets to lessen its geographic concentration.
(6) Fluctuations in Quarterly Results; Potential Stock Price Volatility
-----------------------------------------------------------------------
The market price of the Company's Common Stock has increased significantly
since current management began operating the Company in September 1997,
and has experienced significant fluctuations during this period. The market
price of the Company's Common Stock has been volatile and may continue to
be volatile in the future. The trading price of the Company's Common Stock
could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, changes in revenue and earnings estimates
by securities analysts, announcements by the Company or its competitors,
developments in the Company's acquisition program, government regulatory
action, challenges associated with integration of businesses and other
events or factors. Also, the market price of the Common Stock may be
affected by factors affecting the waste management industry in which the
Company competes. Due in part to the high level of public awareness of the
business in which the Company is engaged, regulatory enforcement
proceedings or other potentially unfavorable developments involving the
Company's operations or facilities, including those in the ordinary course
of business, may be expected to engender publicity which could, from time
to time, have an adverse impact upon the market price for the Company's
Common Stock. In addition, the stock market has from time to time
experienced significant price and volume.
-17-
<PAGE>
NOTE C - DISCLOSURE REGARDING RISK FACTORS AND FORWARD LOOKING STATEMENTS
- Continued
- -------------------------------------------------------------------------
The Company believes that period-to-period comparisons of its operating
results should not be relied upon as an indication of future performance.
Due to a variety of factors including general economic conditions,
governmental regulatory action, acquisitions, capital expenditures and
other costs related to the expansion of operations and services and pricing
changes (including the market prices of commodities such as recycled
materials), it is possible that in some future quarter the Company's
operating results will be below the expectations of securities analysts and
investors. In such event, the Company's Common Stock price could be
materially adversely affected.
(7) Highly Competitive Industry
-------------------------------
The solid waste services industry is highly competitive and fragmented, and
requires substantial labor and capital resources. Certain of the markets in
which the Company competes or will likely compete are served by one or more
of the large national solid waste companies, as well as numerous regional
and local solid waste companies of varying sizes and resources. The Company
also competes with operators of alternative disposal facilities, including
incinerators, and with counties, municipalities, and solid waste districts
that maintain their own waste collection and disposal operations. These
counties, municipalities, and solid waste districts may have financial
advantages due to the availability to them of user fees, similar charges or
tax revenues and the greater availability to them of tax-exempt financing.
Intense competition exists not only to provide services to customers but
also to acquire other businesses within each market. Many of the Company's
competitors have significantly greater financial and other resources than
the Company. From time to time, these or other competitors may reduce the
price of their services in an effort to expand market share or to win a
competitively bid municipal contract. These practices may either require
the Company to reduce the pricing of its services or result in the
Company's loss of business. Municipal contacts are subject to periodic
competitive bidding. There can be no assurance that the Company will be the
successful bidder to obtain or retain such contracts. The Company's
inability to compete with larger and better capitalized companies, or to
replace municipal contracts lost through the competitive bidding process
with comparable contracts or other revenue sources within a reasonable time
period, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Intense competition exist within the industry not only for collection,
transportation and disposal volume, but also for acquisition candidates.
The Company competes for acquisition candidates with numerous solid waste
management companies, many of which are significantly larger and have
greater access to capital and greater financial, marketing or technical
resources than the Company.
-18-
<PAGE>
NOTE C - DISCLOSURE REGARDING RISK FACTORS AND FORWARD LOOKING STATEMENTS
- Continued
- -------------------------------------------------------------------------
(8) Economic Conditions
-----------------------
The Company's businesses may be affected by general economic conditions.
There can be no assurance that an economic downturn would not result in a
reduction in the volume of waste that might be disposed of at the Company's
facilities and/or the price that the Company would charge for its services.
(9) Weather Conditions
-----------------------
Protracted periods of inclement weather may adversely affect the Company's
existing and 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 existing and
potential customers. In addition, particularly harsh weather conditions may
result in the temporary suspension of certain of the Company's existing and
potential operations. The Forward Looking Statements do not assume that such
weather conditions will occur.
(10) Influence of Government Regulation
---------------------------------------
The Company's existing and potential operations are and 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.
(11) Potential Environmental Liability
--------------------------------------
The Company may incur liabilities for the deterioration of the environment
as a result of its existing and potential operations. 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.
-19-
<PAGE>
NOTE C - DISCLOSURE REGARDING RISK FACTORS AND FORWARD LOOKING STATEMENTS
- Continued
- -------------------------------------------------------------------------
(12) Year 2000 Compliance
--------------------------
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st Century
dates from 20th Century dates. As a result, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. The Company is currently in the process of
evaluating its information technology infrastructure for Year 2000
compliance. The Company does not expect that the cost to modify its
information technology infrastructure to be Year 2000 compliant will be
material to its financial condition or results of operations. The Company
does not anticipate any material disruption in its operations as a result
of any failure by the Company to be in compliance. The Company's Year 2000
issues relate not only to its own systems but also to those of its
customers and suppliers. The Company does not currently have any
information concerning Year 2000 compliance status of its customers and
suppliers. In the event that any of the Company's significant customers or
suppliers does not successfully and timely achieve Year 2000 compliance,
the Company's business or operations could be adversely affected.
(13) History of Losses
----------------------
The Company has incurred substantial net losses inthe past and may continue
to lose money as a result of the adverse effects of one or more of the risk
factors discussed in this Note C.
NOTE D - NEW ACCOUNTING PRONOUNCEMENT
- -------------------------------------
In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
(SFAS 128). In accordance with SFAS 128, the Company computes basic
earnings per share based on the weighted-average number of common shares
outstanding during each period presented. Diluted earnings per share is
computed based on the weighted average number of common shares plus the
dilutive effect of all potential dilutive securities, principally stock
options and warrants, outstanding during each period presented. In all
periods presented, all potential common shares were anti-dilutive.
Accordingly, the adoption of SFAS 128 had no effect on loss per share
amounts.
-20-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- -------------------------------------------------------------------------
Six Months Ended June 30, 1998
Compared to Six Months Ended June 30, 1997
------------------------------------------
Results of Operations
- ---------------------
Revenues for the six months ended June 30, 1998 were $6,577,069 as
compared to $223,856 for the six months ended June 30, 1997. This increase
in revenues was the result of the acquisitions that have occurred during
1998. As of June 30, 1998, the Company has added 5 landfills, 4 hauling
companies, 10 recycling facilities, and a state-of-the-art industrial sludge
processing facility as a result of the takeover of companies that are now
WasteMasters subsidiaries. (The Company believes that additional acquisition
candidates meeting the Company's acquisition criteria, including "tuck-in"
opportunities, exist within its current and adjacent market areas and in other
prospective markets.)
Significantly, however, as the purchase method of accounting has been
used for all acquisitions as a result of the requirements of generally
accepted accounting principles, operating results for each acquisition did not
begin to be reflected on the Company's financial statements until their
respective dates of acquisition. Therefore, as many of the acquisitions were
consummated during the latter portion of the reporting period, the Company's
statements of operations do not reflect the potential annualized "run rate"
of such acquisitions. Nor do the statements of operations reflect the
anticipated efficiencies and cost savings that the Company expects to
ultimately realize as a result of the economies of scale and synergies that
are expected to occur.
On August 10, 1998, the Company announced the appointment of Mr. Ron
Antevy as Executive Vice President and Chief Operating Officer. Immediately
prior to joining the Company, Mr. Antevy was employed for over seven years by
Waste Management, Inc., the largest waste company in the world, in positions
of ever-increasing responsibility. He most recently served as Region Director
of Operations, in which capacity he was responsible for the management of
multiple operations, including 5 landfills, 5 transfer stations, 3 C&D
recycling facilities, 2 material recovery facilities, 2 wood grinding
operations, a power plant, and a wastewater treatment plant. Mr. Antevy, a
Registered Professional Engineer in the State of Florida, holds a degree in
civil engineering from the University of Florida.
Cost of revenues increased as a result of a significantly higher level
of operations due to the aforementioned acquisitions. Selling, general and
administrative expenses ("SG&A") decreased from $2,304,756 in the six months
ended June 30, 1997 to $2,106,569 in the six months ended June 30, 1998
despite the additional overhead incurred in connection with the acquisitions.
Interest expense decreased from $212,150 in the six months ended June 30,
1997 to $211,156 in the six months ended June 30, 1998. Depreciation and
-21-
<PAGE>
amortization for the six months ended June 30, 1998 was $1,599,483. Other
non-cash expenses included an accrual for landfill closure costs of $256,500
and a write-off of capitalized loan costs of $241,355. Net loss for the six
months ended June 30, 1998 was $4,013,715 as compared to a net loss of
$2,522,263 during the six months ended June 30, 1997.
Three Months Ended June 30, 1998
Compared to Three Months Ended June 30, 1997
--------------------------------------------
Results of Operations
- ---------------------
Revenues for the quarter ended June 30, 1998 were $6,570,531 as compared
to $62,558 for the quarter ended June 30, 1997. This increase in revenues was
the result of the acquisitions that have occurred during 1998. As of June 30,
1998, the Company has added 5 landfills, 4 hauling companies, 10 recycling
facilities, and a state-of-the-art industrial sludge processing facility as a
result of the takeover of companies that are now WasteMasters subsidiaries.
(The Company believes that additional acquisition candidates meeting the
Company's acquisition criteria, including "tuck-in" opportunities, exist
within its current and adjacent market areas and in other prospective
markets.)
Significantly, however, as the purchase method of accounting has been
used for all acquisitions, as a result of the requirements of generally
accepted accounting principles, operating results for each acquisition did not
begin to be reflected on the Company's financial statements until their
respective dates of acquisition. Therefore, as most of the acquisitions were
consummated during the latter portion of the reporting period, the Company's
statements of operations do not reflect the potential annualized "run rate"
of such acquisitions. Nor do the statements of operations reflect the
anticipated efficiencies and cost savings that the Company ultimately expects
to realize as a result of the economies of scale and synergies that are
expected to occur.
On August 10, 1998, the Company announced the appointment of Mr. Ron
Antevy as Executive Vice President and Chief Operating Officer. Immediately
prior to joining the Company, Mr. Antevy was employed for over seven years by
Waste Management, Inc., the largest waste company in the world, in positions
of ever-increasing responsibility. He most recently served as Region Director
of Operations, in which capacity he was responsible for the management of
multiple operations, including 5 landfills, 5 transfer stations, 3 C&D
recycling facilities, 2 material recovery facilities, 2 wood grinding
operations, a power plant, and a wastewater treatment plant. Mr. Antevy, a
Registered Professional Engineer in the State of Florida, holds a degree in
civil engineering from the University of Florida.
-22-
<PAGE>
Cost of revenues increased as a result of a significantly higher level
of operations due to the aforementioned acquisitions. Selling, general and
administrative expenses ("SG&A") increased from $1,159,783 in the quarter
ended June 30, 1997 to $1,407,727 in the quarter ended June 30, 1998. This
increase was caused by the additional overhead incurred in connection with
the acquisitions. Interest expense increased from $102,750 in the quarter
ended June 30, 1997 to $187,185 in the quarter ended June 30, 1998 as a result
of the indebtedness of the acquired entities. Depreciation and amortization
expense for the three months ended June 30, 1998 was $1,599,484. Other non-
cash expenses included an accrual for landfill closure costs of $128,250 and
a write-off of capitalized loan costs of $241,355. Net loss during the three
months ended June 30, 1998 was $2,963,391 as compared with a net loss of
$1,260,970 during the three months ended June 30, 1997.
Acquisitions
- ------------
During the second quarter of 1998, the Company made eight significant
acquisitions. These acquisitions were completed primarily in exchange for
restricted Common Stock of the Company.
Liquidity and Capital Resources
- -------------------------------
The Company's balance sheet as of June 30, 1998 showed cash of
$1,390,301, total current assets of $7,921,928 and total current liabilities
of $49,713,740. However, $40,163,124 of total current liabilities consisted
of debts of Company subsidiaries which are currently in bankruptcy. Another
$4,020,751 of current liabilities are owed by a subsidiary of the Company
which is not involved in the waste disposal industry and which, therefore,
will likely ultimately be disposed of. And, finally, $668,027 of current
liabilities consist of debts to "related parties" which, by their very nature,
are not of immediate concern. As per a management contract between the Company
and Continental Investment Corporation, Continental is paid a monthly fee of
$50,000 to manage the affairs and operations of the Company.
Significantly, even though the Company owns only 51% of the outstanding
common stock of Atlas Environmental, Inc., generally accepted accounting
principles require that 100% of the $31,465,897 of Atlas current liabilities
be included on the Company's balance sheet. (An additional $11,791,400 of
Atlas long-term debt is also included on the Company's June 30, 1998 balance
sheet.) Obviously, should Atlas be successful in its Chapter 11 reorganization
efforts, all or part of that $31,465,897 may be eliminated as a current
liability. Similarly, another $5,972,095 of current liabilities consisted of
debts owed by two other subsidiaries of the Company which are currently
reorganizing under Chapter 11 of the U. S. Bankruptcy Code. An additional
$2,725,132 of current liabilities consisted of the indebtedness of five
subsidiaries of the Company which, on February 16, 1998, filed petitions for
protection under Chapter 7 of the U. S. Bankruptcy Code. Active business for
each of these subsidiaries had ceased during 1996 and their assets had been
liquidated as the result of various voluntary dispositions, foreclosure
proceedings or other creditor actions. No assets exist in these five
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;
-23-
<PAGE>
however, the Company believes that the debts of these subsidiaries will be
discharged in their entirety upon the completion of the bankruptcy
proceedings. Accordingly, the Company has determined that current
liabilities of these five subsidiaries which appear on the Company's June 30,
1998 balance sheet in the aggregate amount of $2,725,132 will likely be
extinguished during 1998, which would result in a gain to be recorded by the
Company.
Additional financing will be required in order to complete planned
improvements 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.
The Company anticipates that any future business acquisitions will be
financed through cash from operations, borrowings, the issuance of shares of
the Company's Common Stock and/or seller financing. If acquisition candidates
are unwilling to accept, or the Company is unwilling to issue, shares of the
Company's Common Stock as part of the consideration for such acquisitions,
the Company would be required to utilize more of its available cash resources
or potential borrowings in order to effect such acquisitions. To the extent
that cash from operations or borrowings is insufficient to fund such
requirements, the Company will require additional equity and/or debt financing
in order to provide the cash to effect such acquisitions. Additionally, growth
through the development or acquisition of new landfills, transfer stations or
other facilities, as well as the ongoing maintenance of such landfills,
transfer stations or other facilities, will require substantial capital
expenditures. There can be no assurance that the Company will have sufficient
existing capital resources or will be able to raise sufficient additional
capital resources on terms satisfactory to the Company, if at all, in order
to meet any or all of the foregoing 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 capital stock and cash flow from the operations of
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
-24-
<PAGE>
to postpone any additional acquisitions and to continue to consolidate the
operations of the acquisitions already completed and use cash flow for
internal growth. Because of potential political, legal, bureaucratic, and
other factors, there can be no assurance that the Company will be able to
accomplish any of its goals within a reasonable period of time.
Potential Discharge of Indebtedness in Bankruptcy Proceedings
- -------------------------------------------------------------
On February 11, 1998, the Company's wholly-owned subsidiary,
WasteMasters of South Carolina, Inc., filed a voluntary petition for
reorganization under Chapter 11 of the U S Bankruptcy Code with the Bankruptcy
Court for the Northern District of Georgia.
On February 16, 1998 five (5) wholly-owned subsidiaries of the Company
filed petitions for protection under Chapter 7 of the United States Bankruptcy
Code with the Bankruptcy Court for the Northern District of Georgia. 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.
On July 9, 1998, C&D Recycling, Inc., a wholly-owned subsidiary of the
Company, filed a voluntary petition for reorganization under Chapter 11 of
the U. S. Bankruptcy Code with the Bankruptcy Court for the Northern District
of Texas.
Active business for each of the five (5) subsidiaries who filed petitions
for protection under Chapter 7 of the U. S. Bankruptcy Code 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.
Prior to the Company's involvement with it, Atlas Environmental, Inc.,
a partially-owned subsidiary of the Company, filed a voluntary petition for
reorganization under Chapter 11 of the U. S. Bankruptcy Code with the
Bankruptcy Court for the Southern District of Florida on January 14, 1997.
-25-
<PAGE>
PART II. OTHER INFORMATION.
- ----------------------------
Item 1. Legal Proceedings.
- --------------------------
Beginning in September 1997, new management has aggressively sought to
identify, evaluate, and resolve many of the claims against the Company which
arose 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.
In the normal course of its business and as a result of the extensive
governmental regulation of the waste industry, the Company may periodically
become subject to various judicial and administrative proceedings involving
Federal, state or local agencies. In these proceedings, an agency may seek to
impose fines on the Company or to revoke, or to deny renewal of, an operating
permit held by the Company. In addition, the Company may become party to
various claims and suits pending for alleged damages to persons and property,
alleged violation of certain laws and for alleged liabilities arising out of
matters occurring during the normal operations of the waste management
business. However, there is no current proceeding or litigation involving the
Company that it believes will have a material adverse effect upon the
Company's business, financial condition and results of operations.
The Company is currently involved in certain routine litigation. The
Company believes that all such litigation arose in the ordinary course of
business and that costs of settlements or judgments arising from such suits
will not have a materially adverse effect on the Company's consolidated
liquidity, financial position or results of operations.
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. The Company has negotiated a settlement of this matter.
Peerless Group, Inc. In RE: George Cadle v. WasteMasters, 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.
-26-
<PAGE>
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.
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. The Company is currently
negotiating a settlement of this matter.
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.
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 v.
Renee Colbert, Richard Masters, Bruce 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. The Company is negotiating
a settlement of this matter.
-27-
<PAGE>
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 a purchase agreement and
sub-lease situation on property in Baltimore, Maryland. Plaintiff claims
damages of $3.2 million. The Company has negotiated and is attempting to
implement a settlement of this action.
WMI Investors v. WasteMasters et al.
------------------------------------
U. S. District Court for Eastern District of Pennsylvania Civil Action
98-CU-3187. Filed in State court in Pennsylvania and thereafter removed to
Federal Court by the Company. This suit was filed seeking enforcement of an
alleged loan agreement by and between the Company and WMI Investors which was
allegedly authorized by the former Board of Directors prior to the
transactions by and between the Company and Continental Investment
Corporation. The suit seeks damages of approximately $72 million dollars.
The Company believes that the claim is without merit as it seeks enforcement
of an alleged agreement which was void and/or voidable under the Bylaws of
the Company and under Maryland Law. The Company is vigorously defending this
action.
Potential Discharge of Indebtedness in Bankruptcy Proceedings
- -------------------------------------------------------------
On February 11, 1998, the Company's wholly-owned subsidiary, WasteMasters
of South Carolina, Inc., filed a voluntary petition for reorganization under
Chapter 11 of the U S Bankruptcy Code with the Bankruptcy Court for the
Northern District of Georgia.
On February 16, 1998 five (5) wholly-owned subsidiaries of the Company
filed petitions for protection under Chapter 7 of the United States Bankruptcy
Code with the Bankruptcy Court for the Northern District of Georgia. 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.
On July 9, 1998, C&D Recycling, Inc., a wholly-owned subsidiary of the
Company, filed a voluntary petition for reorganization under Chapter 11 of
the U. S. Bankruptcy Code with the Bankruptcy Court for the Northern District
of Texas.
Prior to the Company's involvement with it, Atlas Environmental, Inc.,
a partially-owned subsidiary of the Company, filed a voluntary petition for
reorganization under Chapter 11 of the U. S. Bankruptcy Code with the
Bankruptcy Court for the Southern District of Florida on January 14, 1997.
-28-
<PAGE>
General
- -------
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
affect consolidated results of operations in a given period.
Item 5. Other Information.
- --------------------------
Significant Executive Appointment
- ---------------------------------
On August 10, 1998, the Company announced the appointment of Mr. Ron
Antevy as Executive Vice President and Chief Operating Officer. Immediately
prior to joining the Company, Mr. Antevy wa employed for over seven years by
Waste Management, Inc., the largest waste company in the world, in positions
of ever-increasing responsibility. He most recently served as Region Director
of Operations, in which capacity he was responsible for the management of
multiple operations, including 5 landfills, 5 transfer stations, 3 C&D
recycling facilities, 2 material recovery facilities, 2 wood grinding
operations, a power plant, and a wastewater treatment plant. Mr. Antevy, a
Registered Professional Engineer in the State of Florida, holds a degree in
civil engineering from the University of Florida.
Significant Acquisitions During Second Quarter 1998:
- ----------------------------------------------------
(1) The controlling interest in Atlas Environmental, Inc. (Over-the-
Counter Trading Symbol: ATEV) ("Atlas") voting common stock was acquired from
a group of Atlas shareholders in exchange for 342,591 restricted shares of
the Company's Common Stock. Prior to the acquisition by the Company, Atlas
filed a voluntary petition for relief under Chapter 11 of the U. S.
Bankruptcy Code with the Bankruptcy Court for the Southern District of
Florida on January 14, 1997. In connection with the transaction, four (4)
additional members designated by the Company were added to the Atlas board of
directors giving the Company control of the board. Atlas is believed to be
the largest construction and demolition debris recycler and the largest
remediator of petroleum-contaminated soils in the State of Florida. Atlas,
which, among other holdings owns four recycling facilities and a construction
and demolition debris landfill, generated revenues in 1997 in excess of
$16 million.
(2) C & D Recycling Corp. ("C&D") in exchange for 304,000 restricted
shares of the Company's Common Stock. Additional consideration will be paid
to the seller conditioned upon the granting of a permit for a vertical
expansion. C&D owns a 64 acre construction and demolition debris landfill in
Homestead, Florida serving Miami and the Florida Keys. This landfill had
-29-
<PAGE>
ceased operations in early 1998. The Company intends to reopen this landfill
which has a potential remaining capacity of 3,227,500 gate yards.
(3) American Recycling And Management Corporation ("American Recycling")
located in Perrine (Homestead area), Florida (including equipment, a 40-acre
tract of real property newly permitted for a construction and demolition
debris landfill, and associated permits) in exchange for 837,000 restricted
shares of the Company's Common Stock. The Company intends to open this
landfill which has a potential capacity of approximately 4 million gate yards.
(4) The assets of Palm Coast Carting And Recycling, Inc. ("Palm Coast")
of Pompano Beach, Florida, including trucks, containers, and customer
contracts in exchange for 110,000 restricted shares of the Company's Common
Stock. Palm Coast is a commercial hauler heavily engaged in the recycling
sector of the waste industry.
(5) The assets of Palm Beach Transfer And Recycling ("Palm Beach")
located in West Palm Beach, Florida, (including equipment, a 10-acre tract of
real property, and associated permits) in exchange for 943,334 restricted
shares of the Company's Common Stock. Palm Beach is currently a five (5) acre
transfer and recycling facility permitted for 560 yards per day. The facility
handles roofing material, construction and demolition debris, vegetation,
clean concrete, clean wood, and mulch and grass.
(6) The assets of United Waste Associates, Inc. (including a fleet of
collection vehicles and approximately 450 "containers") in exchange for
707,334 shares of restricted Common Stock of the Company. United, based in
Pompano Beach, Florida, is a commercial hauler servicing Monroe, Dade,
Broward, Palm Beach, Martin and St. Lucie Counties, which currently offers
commercial garbage service, construction and demolition debris hauling and
comprehensive recycling services.
(7) Tri-State Waste Disposal Co., Inc. ("Tri-State") in exchange for
289,916 restricted shares of the Company's Common Stock. Tri-State, founded
in 1979, is licensed to engage in the waste collection business throughout
the State of New Jersey.
(8) Atlantic Coast Demolition & Recycling, Inc. ("Atlantic") in exchange
for 500,000 restricted shars of the Company's Common Stock and options to
purchase an additional 1,200,000 restricted shares of the Company's Common
Stock at an exercise price of $1.75 per share. Atlantic owns a 7-acre transfer
station in the heart of Philadelphia, Pennsylvania, which is permitted to
process 3,000 tons of waste per day. It is anticipated that approximately 70%
of the throughput of Atlantic will consist of wood product which will be
processed by the New Jersey based Wood Management, Inc. subsidiary of the
Company, with the balance to be disposed of at the Company's "Lisbon Landfill"
in Lisbon, Ohio. The trucking material between the aforementioned subsidiaries
of the Company will be performed by two other Company subsidiaries, Mini-Max
Enterprises, Inc. and Tri-State Waste Disposal Co., Inc.
-30-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
(a) Furnish the exhibits required by Item 601 of Regulation S-B.
None
(b) Reports on Form 8-K.
1. Report plus two amendments dated May 12, 1998 and a third
amendment dated May 13, 1998. These reports contained an Item 5
event (acquisition of controlling interest in Atlas
Environmental, Inc.).
2. Report dated June 15, 1998. This report contained an Item 2 event
(acquisition of Holsted Enterprises, Inc. and its wholly-owned
subsidiary, Sales Equipment Company, Inc.) and an Item 7 event
(consolidated financial statements of Holsted Enterprises, Inc.).
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
WASTEMASTERS, INC.
By: /S/ R. Dale Sterritt, Jr.
-----------------------------
R. Dale Sterritt, Jr.
Chairman, President and CEO
Date: August 19, 1998
-31-
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