U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
--- OF 1934
For the quarterly period ending December 31, 2001
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
--- OF 1934
For the transition period from to
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Commission file number 33-58972
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WASTE CONVERSION SYSTEMS, INC.
--------------------------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
NEVADA 22-2800078
------------------------------- -----------------------------------
(State of Incorporation) (IRS Employer Identification No.)
18505 Highway 377 South, Fort Worth, TX 76126
-------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number,( 817 ) 512 - 3033
----------- ------------- ----------------------
4871 Mesa Drive, Castle Rock, CO 80104
Former Name, former address and former fiscal year if changed
since last report
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
--- ---
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No --- ---
Applicable on to corporate issuers
State the number of shares outstanding of each of the issuer's class of
common equity, as of the latest practicable date:
Transitional Small Business Disclosure Format
(Check One)
Yes No X
--- ---
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.................................
Independent Accountants Review Letter................
Balance Sheet (unaudited)............................
Statements of Operations (unaudited).................
Statements of Cash Flows (unaudited).................
Notes to Financial Statements........................
Item 2. Management's Discussion and Analysis of Plan
of Operation........................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................
Item 2. Changes in Securities and Use of Proceeds............
Item 3. Defaults upon Senior Securities......................
Item 4. Submission of Matters to a Vote
of Security Holders.................................
Item 5. Other Information.....................................
Item 6. Exhibits and Reports on Form 8-K......................
Signatures......................................................
WASTE CONVERSION SYSTEMS, INC.
FORM 10-QSB
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited)
As prescribed by Item 310 of Regulation S-B, the independent auditor has
reviewed these unaudited interim financial statements of the registrant for the
three months ended December 31, 2001. The financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. The unaudited
financial statements of registrant for the three months ended December 31, 2001,
follow.
PART I - FINANCIAL STATEMENTS
WASTE CONVERSION SYSTEMS, INC.
and Subsidiaries
Consolidated Balance Sheet
December 31, September 30,
2001 2001
(Unaudited) (Audited)
------------- -------------
ASSETS
$ -- $ --
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 5,000 $ 72,428
Notes payable 210,348
Accrued payroll taxes 2,355
Accrued interest payable payroll taxes 218,261
------------- -------------
Total current liabilities 7,355 503,392
------------- -------------
Stockholders' equity (deficit):
Preferred stock, $1 par value, 500,000 shares authorized, none issued -- --
Common stock, $0.01 par value, 50,000,000 shares authorized,
6,231,667 shares outstanding 62,316 62,072
Additional paid-in capital 4,947,562 4,879,134
Accumulated deficit (5,017,233) (5,444,598)
------------- -------------
Total stockholders' equity (deficit) (7,355) (503,392)
------------- -------------
$ -- $ --
============= =============
See notes to financial statements.
F-1
WASTE CONVERSION SYSTEMS, INC.
and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended December 31, 2001 and 2000
(UNAUDITED)
2001 2000
----------- -----------
General and administrative expenses $ (2,700) $ --
----------- -----------
Income from operations 2,700 --
Other income (expense) - interest expense -- (9,713)
----------- -----------
Income (loss) before extraordinary item 2,700 (9,713)
Extraordinary item - gain on extinguishment of debt 424,665 --
----------- -----------
Net income (loss) $ 427,365 $ (9,713)
=========== ===========
Earnings per share:
Income(loss)before extraordinary item $ 0.00 $ (0.00)
Net income (loss) $ 0.07 $ (0.00)
Weighted average number of common shares outstanding 6,231,667 6,207,236
See notes to financial statements.
F-2
WASTE CONVERSION SYSTEMS, INC.
and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 2001 and 2000
(UNAUDITED)
2001 2000
--------- ---------
Operating activities:
Net income (loss) $ 427,365 $ (9,713)
Adjustments to reconcile net income (loss) to cash provided
(used) by operating activities:
Net change in assets and liabilities:
Accounts payable (67,428) --
Accounts interest (218,261) --
Accrued expenses -- 9,713
Notes payable (210,348) --
--------- ---------
Net cash provided (used) by operating activities (68,672) --
--------- ---------
Financing activities:
Issuance of stock for debt extinquishment 2,944 --
Contributed capital 68,428 --
Cancellation of shares (2,700) --
--------- ---------
68,672 --
--------- ---------
Net increase in cash -- --
Cash, beginning of period -- --
--------- ---------
Cash, end of period $ -- $ --
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ -- $ --
Income taxes $ -- $ --
Non-cash transactions:
Extraordinary item - extinguishment of debt $ 424,665 $ --
Cancellation of shares 2,700
See notes to financial statements.
F-3
WASTE CONVERSION SYSTEMS, INC.
and Subsidiaries
Notes to Financial Statements
December 31, 2001
(UNAUDITED)
1. BASIS OF PRESENTATION:
The unaudited financial statements have been prepared by the Company,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such SEC rules and
regulations; nevertheless, the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements and the notes hereto should be read in conjunction with the
financial statements and notes thereto included in the Company's Form
10-KSB for the year ended September 30, 2001, which was filed November 30,
2001. In the opinion of the Company, all adjustments, including normal
recurring adjustments necessary to present fairly the financial position of
Waste Conversion Systems, Inc. as of December 31, 2001 and the results of
its operations and cash flows for the quarter then ended, have been
included. The results of operations for the interim period are not
necessarily indicative of the results for the full year.
ACCOUNTING POLICIES:
There have been no changes in accounting policies used by the Company
during the quarter ended December 31, 2001.
2. Significant Accounting Policies
Organization and Business
Waste Conversion Systems, Inc.was incorporated under the laws of the state
of Nevada on October 21, 1986. Waste Conversion Systems, Inc.("WCSI") and
its subsidiaries, (together, the "Company") are engaged in the marketing of
thermal burner systems that utilize industrial and agricultural waste
products as fuel to produce steam, which generates electricity,
air-conditioning or heat. The Company also sells the thermal burner
distributorship rights. In addition, the Company markets fuel supply
contracts called "B.T.U. Programs" whereby the Company will retrofit an
existing boiler with a thermal burner at the Company's expense, and supply
an alternative source of fuel over a specified term. The Company will
receive revenues from fuel supply contracts determined by energy savings
achieved by the customer. Historically, a substantial portion of the
Company's revenues has been from sales to a major stockholder.
In June 1987, the Company acquired from its officers, a 75% interest in
three United States patents and a patent application pertaining to the
thermal burner. The remaining interest in the patents is held by a
nonaffiliated individual who is not entitled to any royalty or other
compensation as a result of the sale and conveyance of the 75% interest in
the United States patents to the Company. The purchase price for the 75%
interest was cash of $255,000, 1,250,000 shares of the Company's restricted
common stock, and options to purchase an aggregate of 300,000 shares of
common stock at $1.00 per share. The 300,000 options expired in June, 1992.
The Company ceased operations in August of 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of Waste
Conversion Systems, Inc. and its subsidiaries. All material intercompany
accounts and transactions are eliminated.
Intangible Assets
Patents are amortized using the straight-line method over the lesser of
their estimated economic useful lives or their legal term of existence.
F-4
WASTE CONVERSION SYSTEMS, INC.
and Subsidiaries
Notes to Financial Statements, Continued
December 31, 2001
UNAUDITED)
Income (Loss) Per Share
Income (loss) per common share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Stock options and
warrants are anti-dilutive, and accordingly, are not included in the
calculation of income (loss) per share.
Cash
For purposes of the statement of cash flows, the Company considers
unrestricted cash and all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash.
Advertising Costs
The Company expenses non-direct advertising costs as incurred. The Company
did not incur any direct response advertising costs for the quarter ended
December 31, 2001 and for fiscal years ended September 30, 2001 and 2000 to
be capitalized and deferred to future periods.
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 revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets of identifiable business
activities for impairment when events or changes in circumstances indicate,
in management's judgment, that the carrying value of such assets may not be
recoverable. The determination of whether an impairment has occurred is
based on management's estimate of undiscounted future cash flows
attributable to the assets as compared to the carrying value of the assets.
If an impairment has occurred, the amount of the impairment recognized is
determined by estimating the fair value for the assets and recording a
provision for loss if the carrying value is greater than fair value.
For assets identified to be disposed of in the future, the carrying value
of these assets is compared to the estimated fair value less the cost to
sell to determine if an impairment is required. Until the assets are
disposed of, an estimate of the fair value is redetermined when related
events or circumstances change.
Environmental
Substantially all of the Company's facilities are subject to federal,
state, and local provisions regulating the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the
Company expect such compliance to have, any material effect upon the
capital expenditures, net income, financial condition or competitive
position of the Company. Management believes that its current practices and
procedures for the control and disposition of such waste comply with
applicable federal and state requirements.
Recent Accounting Standards
The FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The Statement
provides guidance for determining whether a transfer of financial assets
should be accounted for as a sale or a secured borrowing and whether a
liability has been extinguished. The Statement is effective for recognition
and reclassification of collateral and for disclosures ending after
December 15, 2001. The Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The initial application of SFAS No. 140 will have no impact
to the Company's results of operations and financial position.
F-5
WASTE CONVERSION SYSTEMS, INC.
and Subsidiaries
Notes to Financial Statements, Continued
December 31, 2001
(UNAUDITED)
2. Significant Accounting Policies (continued)
In June, 2001 the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" and No. 142
"Goodwill and Other Intangible Assets." These statements prohibit
pooling-of-interest accounting for transactions initiated after June 30,
2001, require the use of the purchase method of accounting for all
combinations after June 30, 2001, and establish new standards for
accounting for goodwill and other intangibles acquired in business
combinations. The Company does not expect these pronouncements to have a
material affect on its financial statements.
Stock Options
The Company accounts for non-employee stock options under SFAS 123, whereby
option costs are recorded at the fair value of the consideration received
or the fair value of the equity instrument issued, whichever is more
reliable measurement.
3. Extraordinary Item
Extinguishment of Debt
Since the Company ceased operations in 1996, it has not paid any of its
obligations. For those trade creditors and note holders which did not
extend the statute of limitations on collection of their accounts through
legal actions, the Company has been taking the write off of the payables
into income as the statutory period for collection expires. The
extraordinary gains were $8,880 ($0.00 per share) for fiscal 2001 and
$1,562,122 ($0.25 per share) for fiscal 2000 and $428,609 for the three
months ended December 31, 2001.
4. Related Party Transactions
Transactions with Major Stockholder
Of the 1,250,000 shares of the Company's common stock which were issued in
1987 to the Company's three former officers in connection with the
Company's patent acquisition, 1,082,660 shares were transferred by the
three individuals to Nathaniel, Ltd. ("Nathaniel"), a foreign corporation,
as repayment for previous financing provided. Effective September 30, 1993,
193,108 of these shares became subject to a voting trust agreement dated
June 5, 1988. The agreement gives the Company's former President the
exclusive exercise of the stockholders' voting rights.
The former officers also serve as "President-agent" and "Secretary-agent"
of Nathaniel for the purpose of any business activities of Nathaniel in the
United States and Canada. Both have the full power and authority to
negotiate and execute agreements and other documents on behalf of
Nathaniel. Nathaniel holds all of the rights, patented or otherwise,
outside of the United States, to the thermal burner. Substantial amounts of
the Company's operating expenses have been paid through Nathaniel's bank
account and were repaid during 1996 when Nathaniel exchanged its debt of
$518,548 for the existing patents. The excess of $414,423, over the book
value of the patents, was treated as additional paid-in capital.
F-6
WASTE CONVERSION SYSTEMS, INC.
and Subsidiaries
Notes to Financial Statements, Continued
December 31, 2001
(UNAUDITED)
5. Notes Payable
Notes payable at December 31, 2001 consist of:
8.5% notes due April 1, 1994 from sale of
securities units * $ 0
10% unsecured loan for past due rent ** 0
----------
$ 0
==========
* During fiscal 1993 and 1994 the Company issued $880,000 in notes,
1,350,000 shares of common stock and warrants to purchase additional
shares of common stock in exchange for $880,000. All the warrants
expired prior to exercise. In fiscal 2000 the Company wrote off
$728,000 of the notes due to expiration of the statue of limitations.
The remaining $152,108 plus accrued interest was the subject of a
judgment filed against the Company which was settled in December of
2001 for 213,712 shares of its common stock.
** A judgment was entered by the landlord against the Company in April
1995 in the amount of $214,897, including accrued interest. The
Company settled this judgment in December 2001 for $1,000 plus 10,718
shares of its common stock.
6. Available Carryforwards
The Company has, for income tax purposes, approximately $4,654,000 in net
operating loss carryforwards at December 31, 2001, available to offset
future years' taxable income and expiring in varying amounts through the
year 2015. A deferred tax asset of approximately $2,032,000 has been offset
by a 100% valuation allowance. The annual utilization of the loss
carryforward will be limited under Internal Revenue Code Section 382
provisions due to the recent stock issuances. The Company accounts for
income taxes pursuant to the Statement of Financial Accounting Standards
No. 109. The net changes in fiscal 2001 and 2000 in total valuation
allowance were $33,000 and $(598,000), respectively.
7. Capital Stock
In February 1993, the Company adopted a stock option plan containing both
incentive stock options and nonqualified stock options. Under the plan,
1,520,000 shares are reserved forissuance. Effective April 2, 1993, 520,000
nonqualified options were granted to a stockholder (Nathaniel) expiring in
ten years. 260,000 of the options are exercisable at $1.30 and the
remaining 260,000 are exercisable at $1.80 per share.
The stock options were granted under a financing agreement with no stated
value. The Company incurred no material expense under these options.
F-7
WASTE CONVERSION SYSTEMS, INC.
and Subsidiaries
Notes to Financial Statements, Continued
December 31, 2001
(UNAUDITED)
8. Preferred Stock
The Articles of Incorporation of the Company authorize issuance of a
maximum of 500,000 shares of nonvoting preferred stock with a par value of
$1.00 per share. The Articles of Incorporation grant the Board of Directors
of WCSI authority to determine the designations, preferences, and relative
participating, optional or other special rights of any preferred stock
issued.
No preferred shares had been issued as of December 31, 2001.
9. Going Concern
The Company has suffered recurring losses from operations and ceased
operations in August, 1996. All assets have been either abandoned or
transferred to creditors. The liabilities exceed assets by $74,783 at
December 31, 2001. In order for the Company to sustain any kind of
operations, capital will need to be raised to retire outstanding
obligations and provide operating funds. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
The Company has been attempting to negotiate its liabilities, and
management believes all judgment creditors can be settled, for
consideration (primarily stock) the Company can afford. The Company may
raise additional capital through the sale of its equity securities, or debt
securities.
F-8
Item 2. Management's Discussion and Analysis or Plan of Operation.
OPERATIONS. The Company had no revenues for the three months ended December 31,
2001 and 2000. The Company is dependent upon management and/or significant
shareholders to provide sufficient working capital to preserve the integrity of
the corporate entity at this time. It is the intent of management and/or
significant shareholders to provide sufficient working capital necessary to
support and preserve the integrity of the corporate entity. There is no
assurance, however, that management and/or significant shareholders will
continue to supply such working capital.
OPERATING RESULTS. The Company had no operations for the quarter ended December
31, 2001 and 2000. During the three months ended December 31, 2001, it had
$427,365 of income derived from $424,665 gain from extinguishment of liabilities
and $2,700 of income derived from the cancellation of shares previously issued
for consulting services that were never performed. During the three months ended
December 31, 2000, the Company had a loss of $9,713 attributed to accrued
interest on notes payable.
EARNINGS PER SHARE OF COMMON STOCK. The net income or loss per common share is
based upon the weighted average of outstanding common stock. The net income per
share of common stock was $0.07 for the three months ended December 31, 2001
compared to a loss of less than $0.01 for the three months ended December 31,
2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company ceased operations in August 1996 and had no operations during the
quarter ending December 31, 2001.
During the quarter ended December 31, 2001, the Company settled lawsuits,
judgments and liabilities totaling $428,609 for $21,000 and 224,420 shares of
its common stock.
As of December 31, 2001, the Company's outstanding liabilities were $7,355,
which exceeds assets by $7,355. The Company's attorneys are continuing the
attempt to negotiate the settlement of these liabilities. There is no assurance
that these settlement negotiations will be successful.
Financing activities for the three months ended December 31, 2001 include
contributed capital of $68,428 from management and/or significant shareholders.
These funds were used to settle judgments, lawsuits and pay accounts payable of
the Company.
This Form 10-QSB contains statements that constitute "forward-looking
statements." These forward-looking statements can be identified by the use of
predictive, future-tense or forward-looking terminology, such as "believes,"
"anticipates," "expects," "estimates," "plans," "may," "will," or similar terms.
These statements appear in a number of places in this report and include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers with respect to, among other things: (i) trends
affecting the Company's financial condition or results of operations for its
limited history; (ii) the Company's business and growth strategies; (iii) the
Internet and Internet commerce; and, (iv) the Company's financing plans.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may differ materially from those
projected in the forward- looking statements as a result of various factors.
Factors that could adversely affect actual results and performance include,
among others, the Company's limited operating history, dependence on key
management, financing requirements, government regulation, technological change
and competition. Consequently, all of the forward-looking statements made in
this Form 10-QSB are qualified by these cautionary statements and there can be
no assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
expected consequence to or effects on the Company or its business or operations.
The Company assumes no obligations to update any such forward-looking
statements.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
The 1994 judgment against the Company in Sigma Prime Properties, Inc. v. Waste
Conversion Systems, Inc. (Arapahoe County Colorado Court File No. B 94C 4679)
was settled November 7, 2001 and satisfied on December 18, 2001.
On December 23, 1996, a judgment was entered against the Company in F.G.
Funding, Inc. v. Waste Conversion Systems, Inc. (Sup. Ct. N.Y. Queens County
Index File No. 95-007520) in the amount of $152,000, plus post-judgment
interest. On June 30, 2001, the Company entered into a settlement agreement with
F.G. Funding, Inc. whereby in exchange for the judgment, plus post-judgment
interest, the Company would issue 213,712 common shares to F.G. Funding, Inc. On
December 18, 2001, the Company issued and delivered 213,712 shares of its
restricted common stock to F.G. Funding, Inc. The Company has requested a
Satisfaction of Judgement, however, the Plaintiff, to date, has not delivered
one.
During the first week of October 2001, the Company was served as a defendant in
Jules Nordlicht v. Stan Abrams, individually; Waste Conversion Systems, Inc. in
the District Court for the City and County of Denver. Mr. Nordlicht alleges: (1)
that the Company breached a contract by failing market and resell certain
equipment and by failing to keep said equipment insured; and, (2) that the
Company was negligent or careless in causing some or all said equipment to be
shipped to Ireland. Mr. Nordlicht has asserted that he is owed $62,500 and
requests that he be awarded interest as provided by law, costs and any other
relief that the Court deems just and proper. The Company denies that it in any
way acted in breach of the alleged contract or that its actions were in any way
negligent. In addition, the Company believes that the action is subject to
certain valid defenses. During October 2001, the Company entered into an
Assumption of Liability, Indemnification and Hold Harmless Agreement with Stan
Abrams, the Company's former President, whereby Mr. Abrams has agreed, upon the
receipt of $20,000, to: (1) assume and promptly pay, any and all liability with
regard to this litigation, including any costs, expenses, attorney and expert
fees, and travel costs; and (2) indemnify and hold the Company harmless from
paying any and or all claims relating to this litigation. (See Exhibit 10.0
attached to this report)
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the fourth quarter of 2001, the Company offered and sold the
following securities pursuant to a securities transaction exemption from the
registration requirements of the Securities Act of 1933, as amended.
On December 13, 2001, the Company issued 213,712 common shares to F.G.
Funding, Inc. The shares were issued to F.G. Funding, Inc. pursuant to a
settlement agreement. The share consideration was $213,712. (See Legal
Proceedings) On November 7, 2001, the Company issued 10,708 common shares to
Sigma Prime Properties, Inc. in satisfaction of judgement. (See Legal
Proceedings) The total share consideration attributed to the satisfaction of
judgement was $9,078.
The shares issued above were issued in a private transactions pursuant to
Section 4(2) of the Securities Act of 1933, as amended, (the "Securities Act").
These shares are considered restricted securities and may not be publicly resold
unless registered for resale with appropriate governmental agencies or unless
exempt from any applicable registration requirements.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the first quarter of the fiscal
year covered by this report.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.0 Assumption of Liability, Indemnification and Hold Harmless Agreement
dated October 31, 2001 between Waste Conversion Systems, Inc. and Stan
Abrams.
(b) Reports on Form 8-K.
On October 18, 2001, the Company filed an 8K/A Amended Current Report
detailing Item 5, titled, "Other Events".
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.
Dated: May ___, 2001
Waste Conversion Systems, Inc.
By: /s/ Randy Moseley By: /s/ Stanley Woods
------------------ ------------------
Randy Moseley Stanley Woods
Title: President Title: Secretary