SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of 1934 Date
of Report (Date of earliest event reported): March 31, 1998
WASTEMASTERS, INC.
---------------
(Exact name of registrant as specified in its charter)
Maryland 0-12914 52-1507818
- ---------------------------- ------------------------ ------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No)
Promenade II, Suite 2545 Peachtree Street, Atlanta, Georgia 30309
- ----------------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 404-881-5775
------------
1
<PAGE>
Item 1. Changes in Control of Registrant.
Not applicable
Item 2. Acquisition or Disposition of Assets
Effective March 31, 1998, WasteMasters, Inc. ("The Company")
acquired Holsted Enterprises, Inc. ("Holsted") and its
wholly-owned subsidiary, Sales Equipment Company, Inc.
("SECO") in exchange for 7,600,000 restricted shares of the
Company's Common Stock and warrants to purchase an additional
3,000,000 restricted shares of its Common Stock until
specified time periods at an exercise price of $4.17 per
share. The consideration given for the transaction will be
valued, for accounting purposes at approximately $ 6.5
million. Holsted has 40 employees and generated revenues in
1997 of over $7.6 million through its subsidiary. SECO's main
facility is located in Oklahoma City, with locations in Tyler
and El Paso, Texas.
Item 3. Bankruptcy or Receivership.
Not applicable
Item 4. Changes in Registrant's Certifying Accountant
Not applicable
Item 5. Other Events.
Not applicable
Item 6. Resignations of Registrant's Directors
Not applicable
Item 7. Financial Statements and Exhibits
(a) Consolidated financial statements of Holsted
Enterprises, Inc. for the year ended December 31,
1997. Unaudited consolidated financial statements of
Holsted Enterprises, Inc. for the three months ended
March 31, 1998.
(b) Pro-forma statements of operations for the year ended
December 31, 1997 and the three months ended March
31, 1998.
(c) Exhibits
Not applicable
Item 8. Change in fiscal year
Not applicable
2
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WasteMasters, Inc.
Dated: June 15, 1998
By: /s/ Michael Lawshe
Name: Michael Lawshe
Title: Secretary
3
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
HOLSTED ENTERPRISES, INC. AND SUBSIDIARY
December 31, 1997
4
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Shareholder
Holsted Enterprises, Inc.
We have audited the accompanying consolidated balance sheet of Holsted
Enterprises, Inc. (an Oklahoma corporation) and Subsidiary, as of December 31,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Holsted
Enterprises, Inc. and Subsidiary, as of December 31, 1997, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,656,668 for the year ended December 31,
1997, and, as of that date, the Company's current liabilities exceeded its
current assets by $549,942. Additionally, as discussed in Note E to the
financial statements the Company's revolving note payable to bank is past due,
the Company is not in compliance with certain of the note's covenants, and on
June 8, 1998, the bank notified the Company that it was proceeding against
collateral due to default. These factors, among others, as discussed in Note K
to the financial statements, raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
June 11, 1998
5
<PAGE>
<TABLE>
<CAPTION>
Holsted Enterprises, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Cash $ 25,726
Accounts receivable - trade, less allowance for doubtful accounts of $15,000
(note E) 721,731
Advances to affiliates and employees (note J) 141,527
Current portion of notes receivable (notes C and E) 74,050
Inventories (notes B4 and E) 2,023,090
Prepaid expenses 32,962
Income taxes receivable 250,738
----------
Total current assets 3,269,824
PROPERTY AND EQUIPMENT - AT COST, net (notes B1, D, and E) 767,234
OTHER ASSETS
Notes receivable, less current portion (notes C and E) $ 134,227
Organizational and other deferred costs (net of accumulated amortization of
$65,448) (note B2) 98,173
Other 13,352 245,752
----------
$4,282,810
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,286,294
Bank overdraft 135,992
Current portion of long-term debt (note E) 2,122,400
Accrued employee compensation 75,568
Deferred revenue 35,328
Income taxes payable 2,988
Advances from affiliates (note J) 105,000
Accrued and other liabilities 56,196
----------
Total current liabilities 3,819,766
LONG-TERM DEBT, less current maturities (note E) 328,946
COMMITMENTS AND CONTINGENCIES (note G) --
STOCKHOLDERS' EQUITY
Common stock - $1 par value; authorized, 50,000 shares; issued and
outstanding, 10,000 shares $ 10,000
Additional paid-in capital 1,717,200
Accumulated deficit (1,593,102) 134,098
---------- ----------
$4,282,810
==========
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
<TABLE>
<CAPTION>
Holsted Enterprises, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1997
Net sales $ 7,748,445
<S> <C> <C>
Cost of goods sold 6,457,185
Gross profit 1,291,260
Selling, general, and administrative expenses 2,740,226
Operating loss (1,448,966)
Other expense
Interest $ (234,194)
Other, net (note I) (252,213) (486,407)
----------- --------
LOSS BEFORE INCOME TAXES (1,935,373)
Income tax benefit (note F) 278,705
---------
Net loss $(1,656,668)
==========
</TABLE>
The accompanying notes are an integral part of this statement.
7
<PAGE>
<TABLE>
<CAPTION>
Holsted Enterprises, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Year ended December 31, 1997
Retained
Additional earnings
Common paid-in (accumulated
stock capital (deficit) Total
----------- ----------- ------------ -----------
<S> <C>
Balance at January 1, 1997 $ 10,000 $ 790,000 $ 63,566 $ 863,566
Additional contributed capital -- 927,200 -- 927,200
Net loss for the year -- -- (1,656,668) (1,656,668)
----------- ----------- ----------- -----------
Balance at December 31, 1997 $ 10,000 $ 1,717,200 $(1,593,102) $ 134,098
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
8
<PAGE>
<TABLE>
<CAPTION>
Holsted Enterprises, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1997
Increase (Decrease) in Cash
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,656,668)
Adjustments to reconcile net loss to net cash used in operations
Increase in allowance for doubtful accounts 15,000
Write-off of loans and advances to small business ventures 264,231
Depreciation 73,707
Amortization of other assets 19,511
Gain on sale of assets (8,027)
Expenses incurred in exchange for note payable 42,000
Net decrease (increase) in
Accounts receivable 198,012
Trade notes receivable 119,976
Inventories 190,861
Prepaid expenses 6,432
Income taxes receivable (250,738)
Net increase (decrease) in
Accounts payable 297,521
Inventory financing line of credit (50,986)
Accrued expenses and other current liabilities 28,737
Income taxes payable 842
Deferred income taxes (28,809)
-----------
Net cash used in operations (738,398)
Cash flows from investing activities
Purchase of property and equipment (269,058)
Proceeds from the sale of assets 20,000
Advances to affiliates (75,000)
Loans and advances to small business ventures (177,636)
-----------
Net cash used in investing activities (501,694)
Cash flows from financing activities
Increase in bank overdraft 45,470
Proceeds from collection of amounts due from common stock issuance 7,500
Net borrowings under revolving note payable 308,853
Payments on amounts due to former owners (96,509)
Proceeds from long-term debt 79,142
Payments on long-term debt (113,538)
Advances from affiliates 105,000
Additional contributed capital 927,200
-----------
Net cash provided by financing activities 1,263,118
-----------
NET INCREASE IN CASH 23,026
Cash at beginning of year 2,700
-----------
Cash at end of year $ 25,726
===========
Cash paid during the year for interest $ 239,000
Cash paid during the year for income taxes -
Noncash investing and financing activities:
During 1997, the Company exchanged a note payable with a balance of $36,025 for other assets.
</TABLE>
The accompanying notes are an integral part of this statement.
9
<PAGE>
Holsted Enterprises, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE A - THE COMPANY
The accompanying consolidated financial statements of Holsted Enterprises,
Inc. and Subsidiary (the Company) include the accounts of Holsted
Enterprises, Inc. (Holsted) and its Subsidiary, Sales Equipment Company,
Inc. (SECO). All significant intercompany balances and transactions have
been eliminated.
Holsted, an Oklahoma Corporation, is a holding company which was organized
July 25, 1995 for the primary purpose of acquiring SECO. Effective January
2, 1996, Holsted acquired all the outstanding stock of SECO in a business
combination accounted for as a purchase. The total cost of the acquisition
of $2,644,000 was allocated to the net assets acquired based on fair value,
resulting in no goodwill.
SECO's principal operations consist of assembly and sale of liquid propane
delivery trucks and wholesale distribution of products to the liquid
propane gas industry. Principle products sold consist of pumps, heaters,
and carburetor equipment. SECO's main offices are located in Oklahoma City
with sales offices located in El Paso, Fort Worth, and Tyler, Texas. SECO's
trade territory includes Oklahoma and the surrounding six states.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
The summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows.
1. Property and Equipment
----------------------
Depreciation is provided principally on accelerated methods over estimated
useful lives ranging from five to twenty years.
2. Organizational and Other Deferred Costs
---------------------------------------
Organizational and other deferred costs are amortized over periods ranging
from five to thirty-one years on the straight-line method.
3. Income Taxes
------------
Deferred income tax liabilities and assets are determined based on
carryforwards and temporary differences between the financial statement and
tax bases of assets and liabilities using presently enacted tax rates and
laws. Temporary differences relate primarily to financial and tax bases
differences for property and equipment and inventory write-downs and
adjustments not currently deductible for tax purposes.
The Company provides for a valuation allowance on deferred tax assets if it
is more likely than not that some portion will not be realized.
10
<PAGE>
Holsted Enterprises, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED
4. Inventories
------------
Inventories consist of propane delivery trucks and tanks which are carried
at the lower of cost (specific identification) or market and other products
held for sale which are carried at the lower of average cost or market.
5. Revenue Recognition
-------------------
Revenue is recognized when products are delivered.
6. Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures;
accordingly, actual results could differ from those estimates.
NOTE C - NOTES RECEIVABLE
Notes receivable generally arise from the assembly and sale of liquid
propane delivery trucks. These notes receivable bear interest at rates
ranging from 9.00% to 10.50%, are generally payable in monthly installments
over terms ranging from one to five years, and are generally collateralized
by the equipment sold.
NOTE D - PROPERTY AND EQUIPMENT
At December 31, 1997 property and equipment consisted of the following:
Buildings $363,648
Office furniture and equipment 222,968
Automobiles and trucks 196,310
--------
782,926
Less accumulated depreciation 131,927
--------
650,999
Land 116,235
--------
$767,234
========
11
<PAGE>
<TABLE>
<CAPTION>
Holsted Enterprises, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE E - LONG-TERM DEBT
<S> <C>
Long-term debt consists of the following at December 31, 1997:
Revolving note payable to bank; due May 31, 1998, with interest payable
monthly at the Chase Manhattan Bank, N.A. prime rate plus .75% (effective
rate of 9.25% at December 31, 1997) $2,000,000
Note payable to former owners of SECO; payable in monthly installments of
$10,624, including interest at 10% through January 2001; collateralized by
property and equipment 337,051
Uncollateralized, non-interest bearing, note payable to affiliate of former
Holsted stockholder, due August 18, 2000 42,000
Other installment notes payable collateralized by equipment and automobiles 72,295
----------
2,451,346
Less current maturities 2,122,400
----------
$ 328,946
==========
</TABLE>
The revolving note payable to bank is collateralized by accounts and notes
receivable, inventories, SECO common stock, certain stockholder assets, and
by guaranties of certain of the Company's shareholders. The note is also
subject to a loan agreement which contains various covenants which require
certain debt and cash flow ratios, minimum net worth amounts, and
limitations on additional debt, dividends and capital expenditures, among
other things. The maximum amount available under the revolving note is
$2,000,000, subject to certain borrowing base maximums. Unfunded amounts
are subject to an annual commitment fee of .25%. As of June 11, 1998, this
note payable is past due, the Company was not in compliance with certain of
note's covenants and on June 8, 1998, the bank notified the Company that it
was proceeding against collateral due to default (see Note K).
Aggregate annual maturities of long-term debt for years ending December 31
are as follows:
1998 $2,122,400
1999 135,537
2000 176,133
2001 15,139
2002 2,137
----------
$2,451,346
=========
12
<PAGE>
<TABLE>
<CAPTION>
Holsted Enterprises, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE F - INCOME TAXES
<S> <C>
The Company's deferred tax assets and liabilities consist of the following
at December 31, 1997.
Assets $ 442,744
Liabilities (27,854)
Valuation allowance on deferred tax assets (414,890)
---------
Net $ -
=========
The change in valuation allowance for 1997 was an increase of $414,890.
The components of the Company's income tax benefit for 1997 consist of the
following:
Current $249,896
Deferred 28,809
--------
Income tax benefit $278,705
========
The Company's effective income tax rate differs from what would be expected
if the federal statutory rate were applied to loss before income taxes
primarily because of the increase in valuation allowance.
At December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $290,000 which expire in 2012.
NOTE G - COMMITMENTS AND CONTINGENCIES
Immediately prior to the Company acquiring SECO, SECO exchanged notes
receivable from customers for a portion of the former owners stock in SECO.
SECO has guaranteed the collectibility of these notes receivable as well as
certain other notes receivable sold. These notes are generally
collateralized by propane delivery trucks and related equipment sold by
SECO. The balance on such notes at December 31, 1997 is approximately
$416,000. Management does not believe these guaranteed notes will result in
any loss to the Company.
The Company has an employment agreement expiring December 31, 2000 with its
President. The agreement provides for the incurrence of a liability by the
Company, of up to $180,000, in certain events of termination of employment.
The Company leases certain automobiles and office equipment under operating
leases which expire at various dates through 2001. Additionally, certain
warehouse facilities are rented on a month-to-month basis. The minimum
rental commitments under operating leases are as follows:
Year ending December 31
1998 $ 9,000
1999 2,000
2000 2,000
2001 1,000
----------
Total minimum payments required $ 14,000
==========
</TABLE>
13
<PAGE>
Holsted Enterprises, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE G - COMMITMENTS AND CONTINGENCIES - CONTINUED
Rent expense was approximately $50,000 for the year ended December 31, 1997.
NOTE H - EMPLOYEE RETIREMENT PLAN
The Company has a retirement plan covering substantially all qualified
employees under Section 401(k) of the Internal Revenue Code. Under the plan,
participants may contribute up to 15% of their compensation to their plan
accounts. The Company contributes for each participant a matching
contribution equal to 25% of the participant's contribution to a maximum of
1% of each employee's annual compensation. The Company may also make a
discretionary contribution. The Company's matching contributions totaled
approximately $7,000 for the year ended December 31, 1997. No discretionary
contributions were made.
NOTE I - LOSSES ON INVESTMENTS
From time to time, the Company has invested in small business ventures
primarily through uncollateralized loans and advances. During 1997, such
ventures were determined to be unsuccessful and invested amounts were
written off. These write-offs totaled approximately $264,000 and are
included in other, net expenses in the statement of operations.
NOTE J - RELATED PARTY TRANSACTIONS
During 1997, the Company expensed $42,000 relating to the termination of a
consulting agreement with an affiliate of a former Holsted stockholder. Also
during 1997, the Company expensed approximately $125,000 relating to
management and other services provided by entities affiliated with
stockholders.
From time to time, the Company makes advances to or receives advances from
stockholders and entities affiliated with stockholders. Such advances are
generally to provide for short-term cash flow needs of the Company or the
affiliate and typically have no specific repayment terms.
NOTE K - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company incurred a net loss of
$1,656,668 for the year ended December 31, 1997, and, as of that date, the
Company's current liabilities exceeded its current assets by $549,942.
Additionally, the Company's $2,000,000 revolving note payable to bank is
past due, the Company is not in compliance with certain of the note's
convenants, and on June 8, 1998, the bank notified the Company that it was
proceeding against the collateral due to default (see Note E).
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its financing
requirements on a continuing basis, to maintain present financing and/or
obtain alternative financing, and to succeed in its future operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
14
<PAGE>
Holsted Enterprises, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997
NOTE K - GOING CONCERN - CONTINUED
Management is presently negotiating with the revolving note lender to
terminate proceeding against collateral and to restructure the note.
Additionally, management is seeking other sources of financing sufficient to
provide the Company with the ability to continue in existence.
NOTE L - SUBSEQUENT EVENTS
Effective March 31, 1998, the Company became a wholly-owned subsidiary of
WasteMasters, Inc. when WasteMasters, Inc. acquired 100% of the Company's
outstanding common stock.
15
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
HOLSTED ENTERPRISES, INC. AND SUBSIDIARY
March 31, 1998
16
<PAGE>
<TABLE>
<CAPTION>
Holsted Enterprises, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, 1998
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,435
Accounts receivable - trade 405,574
Advances to affiliates and employees 266,899
Current portion of notes receivable 65,000
Inventories 2,250,873
Prepaid expenses 123,742
Income taxes receivable 250,738
----------
Total current assets 3,364,261
PROPERTY AND EQUIPMENT, net - at cost 768,888
OTHER ASSETS
Notes receivable, less current portion $ 121,789
Organizational costs, net 89,992
Other 13,352 225,133
------------ ----------
$4,358,282
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $1,456,913
Bank overdraft 117,000
Current portion of long-term debt 2,293,892
Advances from affiliates 105,000
Accrued and other liabilities 161,017
----------
Total current liabilities 4,133,822
LONG-TERM DEBT, less current maturities 299,969
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $1 par value; authorized, 50,000 shares; issued and
outstanding, 10,000 shares $ 10,000
Additional paid-in capital 1,717,200
Accumulated deficit (1,802,709) (75,509)
------------ ----------
$4,358,282
==========
</TABLE>
The accompanying notes are an integral part of this statement.
17
<PAGE>
<TABLE>
<CAPTION>
Holsted Enterprises, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three months ended March 31, 1998
<S> <C> <C>
Net sales $1,681,819
Cost of goods sold 1,273,568
----------
Gross profit 408,251
Selling, general, and administrative expenses 583,004
----------
Operating loss (174,753)
Other expense
Interest $ (46,791)
Other, net 11,937 (34,854)
------------ ----------
LOSS BEFORE INCOME TAXES (209,607)
Income taxes -
Net loss $ (209,607)
==========
</TABLE>
The accompanying notes are an integral part of this statement.
18
<PAGE>
<TABLE>
<CAPTION>
Holsted Enterprises, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
Three months ended March 31, 1998
Additional
Common paid-in Accumulated
stock capital deficit Total
----------- ----------- ------------ ----------
<S> <C>
Balance at January 1, 1998 $ 10,000 $ 1,717,200 $(1,593,102) $ 134,098
Net loss for the period -- -- (209,607) (209,607)
----------- ----------- -----------
Balance at March 31, 1998 $ 10,000 $ 1,717,200 $(1,802,709) $ (75,509)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
19
<PAGE>
Holsted Enterprises, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three months ended March 31, 1998
Increase (Decrease) in Cash
Cash flows from operating activities
Net loss $(209,607)
Adjustments to reconcile net loss to net cash used in operations
Depreciation 27,652
Amortization of other assets 8,181
Net decrease (increase) in
Accounts receivable 190,785
Trade notes receivable 21,488
Inventories (227,783)
Prepaid expenses (90,780)
Net increase (decrease) in
Accounts payable 170,619
Accrued expenses and other current liabilities (9,063)
---------
Net cash used in operations (118,508)
Cash flows from investing activities
Purchase of property and equipment (29,306)
Cash flows from financing activities
Decrease in bank overdraft (18,992)
Net proceeds from long-term debt 142,515
---------
Net cash provided by financing activities 123,523
---------
NET DECREASE IN CASH (24,291)
Cash at beginning of period 25,726
Cash at end of period $ 1,435
=========
Cash paid during the period for interest $ 46,791
Cash received during the period for income taxes (net) --
The accompanying notes are an integral part of this statement.
20
<PAGE>
Holsted Enterprises, Inc. and Subsidiary
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month period ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998.
For further information, refer to the consolidated financial statements and
footnotes for the year ended December 31, 1997.
NOTE B - CONTINGENCIES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company incurred significant
net losses for the year ended December 31, 1997 and three months ended March
31, 1998, and, as of those dates, the Company's current liabilities exceeded
its current assets. Additionally, the Company's $2,000,000 revolving note
payable to bank is past due, the Company is not in compliance with certain
of the note's convenants, and on June 8, 1998, the bank notified the Company
that it was proceeding against the collateral due to default.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its financing
requirements on a continuing basis, to maintain present financing and/or
obtain alternative financing, and to succeed in its future operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management is presently negotiating with the revolving note lender to
terminate proceeding against collateral and to restructure the note.
Additionally, management is seeking other sources of financing sufficient to
provide the Company with the ability to continue in existence.
NOTE C - OTHER MATTERS
Effective March 31, 1998, the Company became a wholly-owned subsidiary of
WasteMasters, Inc. when WasteMasters, Inc. acquired 100% of the Company's
outstanding common stock.
21
<PAGE>
Pro Forma Condensed Statements of Operations
(unaudited)
The accompanying pro forma statements of operations have been derived from the
Company's operations for the year ended December 31, 1997 and the three months
ended March 31, 1998, and the statements of operations for Holsted Enterprises,
Inc. (Holsted) for the year ended December 31, 1997 and the three months ended
March 31, 1998. These statements give effect to the acquisition of Holsted as
though it had occurred on January 1, 1997.
The unaudited pro forma condensed statements of operations are presented for
informational purposes only and do not purport to be indicative of the operating
results that actually would have occurred if the acquisition had been
consummated as of January 1, 1997, nor which may result from future operations.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. The acquisition has been
accounted for using the purchase method of accounting and is included in the
historical balance sheet of the Company as of its acquisition date, March 31,
1998. These pro forma financial statements should be read in conjunction with
the historical financial statements and related notes of the Company included in
the Form 10-KSB for the year ended December 31, 1997 and Form 10-Q for the three
months ended March 31, 1998.
22
<PAGE>
<TABLE>
<CAPTION>
WasteMasters, Inc.
Pro Forma Condensed Statements of Operations
Year ended December 31, 1997
(unaudited)
Pro forma
Company Holsted adjustments Pro forma
------------ ------------ ----------- ------------
<S> <C> <C>
Revenues:
Sales $ 466,000 $ 7,748,445 $ -- $ 8,214,445
Expenses:
Cost of sales 333,351 6,457,185 -- 6,790,536
Selling, general and administrative 4,743,511 2,740,226 319,604 7,803,341
------------ ------------ ------------ ------------
5,076,862 9,197,411 319,604 14,593,877
------------ ------------ ------------ ------------
Operating loss (4,610,862) (1,448,966) (319,604) (6,379,432)
Other income (expense)
Interest expense (10,615,332) (234,194) -- (10,849,526)
Income from debt forgiveness 551,923 -- -- 551,923
Disposal of subsidiary, net of tax (1,209,379) -- -- (1,209,379)
Other, net -- (252,213) -- (252,213)
Loss on valuation of long lived
assets (4,485,645) -- -- (4,485,645)
------------ ------------ ------------ ------------
Total other income (expense) (15,758,433) (486,407) -- (16,244,840)
------------ ------------ ------------ ------------
Loss before income taxes (20,369,295) (1,935,373) (319,604) (22,624,272)
Income tax benefit -- 278,705 -- 278,705
------------ ------------ ------------ ------------
Net loss $(20,369,295) $ (1,656,668) $ (319,604) $(22,345,567)
============ ============ ============ ============
Loss per share:
Basic and diluted
Net loss $(0.67) $(0.59)
====== =====
Weighted average number of shares
outstanding 30,220,320 7,600,000 37,820,320
</TABLE>
(1) Amortization of amounts assigned to goodwill and amortized over 20 years.
(2) To reflect shares issued in the acquisition.
23
<PAGE>
<TABLE>
<CAPTION>
WasteMasters, Inc.
Pro Forma Condensed Statements of Operations
Three months ended March 31, 1998
(unaudited)
Pro forma
Company Holsted adjustments Pro forma
------------ ------------ ------------ ------------
<S> <C> <C>
Revenues:
Sales $ 6,538 $ 1,681,819 $ -- $ 1,688,357
Expenses:
Cost of sales 92,694 1,273,568 -- 1,366,262
Selling, general and
administrative 698,842 583,004 79,904 1,361,750
------------ ------------ ------------ ------------
791,536 1,856,572 79,904 2,728,012
------------ ------------ ------------ ------------
Operating loss (784,998) (174,753) (79,904) (1,039,655)
Other income (expense)
Interest expense (23,971) (46,791) -- (70,762)
Other, net -- 11,937 11,937
Write-off of capitalized loan costs (241,355) -- -- (241,355)
------------ ------------ ------------ ------------
Total other income (expense) (265,326) (34,854) -- (300,180)
------------ ------------ ------------ ------------
Loss before income taxes (1,050,324) (209,607) (79,904) (1,339,835)
Income tax expense -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (1,050,324) $ (209,607) $ (79,904) $ (1,339,835)
============ ============ ============ ============
Loss per share:
Basic and diluted $(0.01) $(0.02)
====== ======
Weighted average number of shares
outstanding 73,117,174 7,600,000 80,717,174
</TABLE>
(1) Amortization of amounts assigned to goodwill and amortized over 20 years.
(2) To reflect shares issued in the acquisition.
24
