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 March 31, 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 May 20, 1998, the registrant had outstanding 114,471,472 shares of
its Common Stock, $.01 par value.
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WasteMasters, Inc. and Subsidiaries
FORM 10-QSB REPORT INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of March 31, 1998................................. 3
Consolidated Statements of Operations For the
periods ended March 31, 1998 and 1997........................................... 5
Consolidated Statements of Stockholders' Equity................................. 6
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997...................................... 7
Notes to Consolidated Financial Statements
March 31, 1998............................................................... 9
Item 2. Management's Discussion and Analysis................................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 20
Item 2. Changes in Securities and Use of Proceeds....................................... 22
Item 4. Submission of Matters to a Vote of Securityholders............................. 22
Item 5. Other Information............................................................... 24
Item 6. Exhibits and Reports on Form 8-K................................................ 26
Signatures...................................................................................... 26
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
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WasteMasters, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
March 31, 1998
(Unaudited)
Proforma March 31
(See Note E) 1998
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ASSETS
Current assets:
Cash $ 108,251 $ 108,251
Accounts receivable, net of allowance
for doubtful accounts 1,107,562 1,107,562
Inventories 2,450,873 2,450,873
Other current assets 172,911 172,911
------------ ------------
Total current assets 3,839,597 3,839,597
Property, plant and equipment, at cost:
Machinery and equipment 3,997,296 3,997,296
Buildings and improvements 582,889 582,889
------------ ------------
Less accumulated depreciation (2,325,967) (2,325,967)
------------ ------------
2,254,218 2,254,218
Land 116,235 116,235
Landfill facilities, net of amortization 6,048,258 6,048,258
------------ ------------
Total property, plant and equipment 8,418,711 8,418,711
Other assets:
Investment - Continental Investment Corporation 7,853,352 7,853,352
Deposits and other assets 1,064,880 1,064,880
Intangible assets relating to acquired businesses, net 11,924,523 11,924,523
------------ ------------
Total other assets 20,842,755 20,842,755
------------ ------------
Total assets $ 33,101,063 $ 33,101,063
============ ============
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The accompanying notes are an integral part of these financial statements.
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<CAPTION>
WasteMasters, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
March 31, 1998
(Unaudited)
Proforma March 31
(See Note E) 1998
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LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable, accrued interest,
and other liabilities $ 3,496,191 $ 6,221,323
Short term notes payable 2,538,950 2,538,950
Current maturities of long-term debt 5,644,414 5,644,414
Liabilities to related parties, net 453,468 453,468
------------ ------------
Total current liabilities 12,133,023 14,858,155
Long-term and deferred items:
Long-term debt, less current maturities 1,491,038 1,491,038
Accrued environmental and landfill costs 471,751 471,751
------------ ------------
Total long-term and deferred items 1,962,789 1,962,789
------------ ------------
Total liabilities 14,095,812 16,820,944
Commitments and contingencies -0- -0-
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized and outstanding 50,000 50,000
Common stock, $.01 par value; 495,000,000 shares
authorized; 114,471,472 shares issued and outstanding 1,144,715 1,144,715
Additional paid-in capital 61,061,690 61,061,690
Accumulated deficit (43,251,154) (45,976,286)
------------ ------------
Total stockholders' equity 19,005,251 16,280,119
------------ ------------
Total liabilities and stockholders' equity $ 33,101,063 $ 33,101,063
============ ============
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The accompanying notes are an integral part of these financial statements.
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WasteMasters, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31,
(Unaudited)
Proforma
1998 1998 1997
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(See Note E)
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Revenues $ 6,538 $ 3,403,790 $ 161,298
Expenses
Cost of sales 92,694 2,234,594 167,818
Selling, general and administrative 698,842 2,084,254 1,144,973
------------ ------------ ------------
791,536 4,318,848 1,312,791
Earnings (loss) from operations (784,998) (915,058) (1,151,493)
Other income (loss)
Interest expense, net (23,971) (115,912) (109,800)
Write-off of capitalized loan costs (241,355) (241,355) -0-
Other income -0- 44,329 -0-
------------ ------------ ------------
Total other loss (265,326) (312,938) (109,800)
------------ ------------ ------------
NET LOSS $ (1,050,324) $ (1,227,996) $ (1,261,293)
============ ============ ============
Loss per share ($.01) ($.02) ($.05)
Weighted average number of common
shares outstanding 73,117,174 73,117,174 25,455,158
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The accompanying notes are an integral part of these financial statements.
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WasteMasters, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common and Preferred Stock
Common Preferred Common Preferred
Shares Shares Stock Stock Paid-in Accumulated
Outstanding Outstanding At par At par Capital Deficit Total
------------ ----------- ---------- --------- ---------- ------------- -------------
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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- (1,050,324) (1,050,324)
Shares issued upon
exercise of warrants 1,000,000 -0- 10,000 -0- 420,000 -0- 430,000
Shares issued in connection
with acquisitions 15,504,346 -0- 155,044 -0- 12,111,886 -0- 12,266,930
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 March 31, 1998 114,471,472 5,000,000 $1,144,715 $ 50,000 $ 61,061,690 $ (45,976,286) $ 16,280,119
============ ========= ========== ======== ============ ============= ============
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The accompanying notes are an integral part of these financial statements.
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WasteMasters, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
(Unaudited)
1998 1997
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INCREASE (DECREASE) IN CASH
Cash flows from operating activities
Net earnings (loss) $(1,050,324) $(1,261,293)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 191,535 394,676
Stock issued in lieu of cash payment -0- 1,144,973
Loss on write-off of capitalized loan costs 241,355 -0-
Accrual for landfill closure costs 128,250 -0-
Changes in assets and liabilities:
Accounts receivable & prepaid expenses 7,774 47,844
Accounts payable, accrued interest and other liabilities 190,482 314,718
Due to related parties (56,989) -0-
----------- -----------
Net cash provided by (used in) operating activities (347,917) 640,918
Cash flow from investing activities:
Deposits on acquisitions (50,034) -0-
Business acquisitions 75,294 -0-
----------- -----------
Net cash provided by (used in) investing activities $ 25,260 -0-
</TABLE>
See accompanying notes to consolidated financial statements.
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WasteMasters, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
Three Months Ended March 31,
(Unaudited)
1998 1997
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Cash flows from financing activities:
Repayments of loans $ -0- $(638,800)
Proceeds from exercise of warrants for common stock 430,000 -0-
----------- -----------
Net cash provided by (used in) financing activities: 430,000 (638,800)
----------- -----------
Net increase (decrease) in cash 107,343 $ 2,118
Cash and cash equivalents at beginning of period 908 -0-
----------- -----------
Cash and cash equivalents at end of period $108,251 $ 2,118
======== ===========
SUPPLEMENTARY DISCLOSURE OF NONCASH TRANSACTIONS
- ------------------------------------------------
Common stock issued in business acquisitions $12,266,930 -0-
Common stock issued for services -0- $1,144,973
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-
</TABLE>
The accompanying notes are an integral part of these statements.
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WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the full
year.
2. 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.; F&E
Resource Systems Technology for Baltimore, Inc., Sales Equipment Company,
Inc., C.A.T. Recycling, Inc., Wood Management, Inc., Mini-Max, Inc., and
Southeastern Research & Recovery, 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.
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. From February 18, 1998 through
May 20, 1998, Wastemasters 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, as WasteMasters
subsidiaries, are currently generating aggregate annual revenues in excess
of $40 million. 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 further believes that the impending merger of USA
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WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
Waste Services, Inc. and Waste Management, Inc. will result in the forced
divestiture (for antitrust reasons) of numerous potentially attractive
acquisition candidates.
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
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.
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WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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
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 its
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
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WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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
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. From February 18, 1998 through May 20, 1998, Wastemasters 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, as WasteMasters subsidiaries, are currently
generating aggregate annual revenues in excess of $40 million. 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 further believes that the impending merger of USA Waste Services,
Inc. and Waste Management, Inc. will result in the forced divestiture (for
antitrust reasons) of numerous potentially attractive acquisition
candidates.
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.
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WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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,
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.
(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
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WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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) History of Losses
The Company has incurred substantial net losses in the 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.
(3) 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.
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.
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<PAGE>
WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(4) 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.
(5) 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.
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.
(6) 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
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WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
(7) 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
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.
(8) 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
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WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
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WasteMasters, Inc. and Subsidiaries
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(13)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.
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.
NOTE E - ACQUISITIONS
PROFORMA BLANCE SHEET AND STATEMENT OF OPERATIONS (unaudited)
The proforma Statement of Operations for the quarter ended March 31, 1998
and Consolidated Balance Sheet as of March 31, 1998, reflect five (5)
acquisitions which took place during the quarter ended March 31, 1998 and
the elimination of $2,725,132 of current liabilities as a result of the
Chapter 7 Bankruptcy filings of five (5) Company subsidiaries on February
16, 1998.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Results of Operations
Revenues for the quarter ended March 31, 1998 were $6,538 as compared to
$161,298 for the previous year's quarter ended March 31, 1997. This drastic
reduction in revenues was primarily the result of the discontinuance of
operations of the New York City C&D transfer station in February, 1997 and the
lower revenues at the landfill in Allendale, South Carolina. Cost of revenues
also decreased due to the drastically reduced level of operations. Selling,
general and administrative expenses ("SG&A") decreased from $1,144,973 in the
quarter ended March 31, 1997 to $698,842 in the quarter ended March 31, 1998.
This decrease is explained primarily by the disposal of various Company assets,
and the resulting reduction in management and staff compensation. The SG&A
amount for both quarters included significant costs incurred for legal and
professional fees associated with the financial and operational restructuring
and the search for working capital. Interest expense decreased from $109,800 in
the quarter ended March 31, 1997 to $23,971 in the quarter ended March 31, 1998.
This decrease was due to the absence in 1998 of the interest costs that were
incurred in 1997 due to the outstanding debentures. In the quarter ended March
31, 1998, the debentures had been converted into equity and therefore had no
interest accruals.
Acquisitions
During the first quarter of 1998, the Company made five 5
significant acquistions. These acquisitions were completed primarily in
exchange for restricted Common Stock of the Company. Subsequently, the Company
has comsummated six additional significant acquisitions.
Based upon unaudited proforma financial statements for these
acquisitions for the quarter ended March 31, 1998 revenues were approximately
$3,403,790.
Liquidity and Capital Resources
The Company's balance sheet for the quarter ended March 31, 1998 reflects
a working capital deficit of $11,018,558. Accounts receivable and inventory were
the principal components of the current assets at the end of the quarter, and
were $1,107,562 and $2,450,873, respectively.
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.
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
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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 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.
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 relief 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.
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.
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.
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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.
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.
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.
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.
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.
Potential Discharge of Indebtedness in Bankruptcy Proceedings
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.,
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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's wholly-owned subsidiary,
WasteMasters of South Carolina, Inc., filed a voluntary petition under Chapter
11 of the U. S. Bankruptcy Code with the Bankruptcy Court for The Northern
District of Georgia.
Item 2. Changes in Securities and Use of Proceeds.
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, 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 also received
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 in exchange for 63,000,000 shares of
the Company's restricted common stock. 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.
Item 4. Submission of Matters to a Vote of Securityholders.
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.
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
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
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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 nominees 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 also received 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 were 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
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
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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).
Item 5. Other Information.
Significant Acquisitions During First Quarter 1998:
Sales Equipment Company, Inc. ("SECO") in exchange for 7,600,000
restricted shares of the Company's 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. 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.
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 restricted shares of its Common Stock at specified amounts and time
periods at an average price of $1.56. 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.
Mini-Max Enterprises, Inc. in exchange for 464,286 restricted shares of
the Company's Common Stock. Mini-Max, founded in 1968, is an interstate trucking
company licensed by the Interstate Commerce Commission to conduct business in
the contiguous 48 states
Wood Management, Inc. in exchange for 1,500,000 restricted shares of the
Company's Common Stock. 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 topsoil. Rail access between
Wood Management's 16-acre facility and another of the Company's recent
acquisitions, Mini-Max Enterprises, Inc., is expected to provide certain
synergies of operations.
Southeastern Research and Recovery, Inc. ("SRR") in exchange for
2,400,000 restricted shares of the Company's 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.
Subsequent Events
Potential Discharge of Indebtedness in Bankruptcy Proceedings
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.,
-24-
<PAGE>
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's wholly-owned subsidiary, WasteMasters
of South Carolina, Inc., filed a voluntary petition for reorganization Chapter
11 of the U. S. Bankruptcy Code with the Bankruptcy Court for The Northern
District of Georgia.
Significant Acquisitions Subsequent to March 31, 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. 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 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) The assets of 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 immediately 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. The acquisition is projected to add an additional $250,000 in gross
annual revenues to the Company.
(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. Effective June 1, this facility will be expanded to a
9.5-acre site with increased permitted capacity to 2,500 yards per day. The
acquisition is projected to add an additional $3.5 to $4.5 million in gross
annual revenues to the Company.
-25-
<PAGE>
(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 WasteMasters common stock. 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.
The United acquisition is expected to add approximately $3,000,000 in annual
revenues to WasteMasters, bringing the annual "run rate" of the WasteMasters
family of companies to a figure in excess of $40 million.
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.
None
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/ G. Michael Lawshe
---------------------------------
G. Michael Lawshe
Corporate Secretary and Treasurer
DATE: May 20, 1998
-26-
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