WASTEMASTERS INC, 10QSB/A, 1999-11-10

WASTEMASTERS INC
10QSB/A, 1999-11-10
MISC DURABLE GOODS

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U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

_____________________________________________

FORM 10-QSB/A

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 1998

[ ] 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

(State or other jurisdiction of incorporation or organization)

52-1507818

(IRS Employer Identification No.)

205 S. Bickford Avenue, Oklahoma City, OK 73036

(Address of Principal Executive Offices)

(405) 262-0800

(Issuer's telephone number)

Not Applicable

(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 No X

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 153,329,250 shares of its Common Stock, $.01 par value, as of October 10, 1999.

WasteMasters, Inc. and Subsidiaries

FORM 10-QSB/A REPORT INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
	Consolidated Balance Sheet as of June 30, 1998	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997	5
	Consolidated Statements of Stockholders Equity for the Six Months Ended June 30, 1998	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997	7
	Supplementary Disclosure of Noncash Transactions	9
	Notes to Unaudited Consolidated Financial Statements for the Three Months Ended June 30, 1998	10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation		20
Signatures		24

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

WasteMasters, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEET

(Unaudited)

ASSETS	JUNE 30,1998 (Restated)
(Unaudited)
Current Assets:
Cash	$300,268
Accounts receivable, net of $40,950 allowance for doubtful accounts	1,817,329
Other receivables	371,381
Inventories	2,099,108
Other current assets	141,597
Total current assets	4,729,683

Property, plant and equipment-net of depreciation	14,601,252
Landfill facilities, net of amortization	127,341
Net property, plant and equipment	14,728,593

Other Assets:
Investments	7,853,352
Excess of cost over net assets of businesses acquired, net	4,517,309
Deposits and other assets	3,034,385
Intangible assets relating to acquired businesses, net	17,236,765
Total other assets	32,641,811

Total assets	$52,100,087

LIABILITIES AND STOCKHOLDERS EQUITY

Current liabilities:
Accounts payable, accrued interest, and other liabilities	$8,637,118
Short term notes payable	2,048,286
Current maturities of long-term debt	6,894,412
Liabilities to related parties, net	668,027
Total current liabilities	18,247,843

Long-term and deferred items:
Long-term debt, less current maturities	3,547,491
Accrued environmental and landfill costs	599,851
Total long-term and deferred items	4,147,342

Total liabilities	22,395,185

Stockholders' Equity:
Convertible preferred stock, 5,000,000 shares authorized and outstanding	50,000
Common stock, $.01 par value; 495,000,000 shares
Authorized; 143,134,568 shares issued and outstanding	1,218,233
Additional paid-in capital	75,767,062
Accumulated deficit	(47,330,393)
Total stockholders' equity	29,704,902

Total liabilities and stockholders' equity	$52,100,087

The accompanying notes are an integral part of these statements.

WasteMasters, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30		Six Months Ended June 30
	1998 (Restated)	1997	1998 (Restated	1997

Revenues	$3,960,635	$62,558	$3,967,173	$223,856

Expenses
Cost of sales	4,125,998	60,995	4,218,692	228,813
Selling, general and administrative	1,119,002	1,159,783	1,817,844	2,304,756
Depreciation and amortization	943,214	0	943,213	0

Loss from operations	(2,227,579)	(1,158,220)	(3,012,576)	(2,309,713)

Other income (expense)
Interest expense, net	(185,730)	(102,750)	(209,701)	(212,550)
Write-off capitalized loan costs	0	0	(241,355)	0
Other income, net	(25)	0	(25)	0
Income tax benefit	8,903	0	8,903	0

Total other expense	(176,852)	(102,750)	(442,178)	(212,500)

Net loss	$(2,404,431)	$(1,260,970)	$(3,454,754)	$(2,522,263)

Net loss per share	$ (.02)	$ (.04)	$ (.04)	$ (.09)


Weighted average number of common shares outstanding	109,895,220	28,678,734	89,172,348	26,830,916

The accompanying notes are an integral part of these statements.

WasteMasters, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Six Months Ended June 30, 1998

(Unaudited)

Common and Preferred Stock

	Common Shares Outstanding	Preferred Shares Outstanding	Common Stock At par	Preferred Stock At par	Additional Paid-in Capital	Total Accumulated Deficit	Stockholder Equity

Balance at 12/ 31/97	34,967		$349,671	$50,000	$35,645,461	$(44,925,962)	$(8,880,830)

Net loss for period	-0-	-0-	-0-	-0-	-0-	(2,404,431)	(2,404,431)

Shares issued upon exercise of warrants	3,800,000	-0-	38,800	-0-	1,596,000	-0-	1,634,000

Shares issued in connection with acquisitions	19,901,187	-0-	199,012	-0-	25,433,558	-0-	25,632,570

Settlement of debt	155,000	-0-	1,550	-0-	207,700	-0-	209,250

Shares issued in cancellation of liabilities for debentures, accrued interest, and penalties	63,000,000	-0-	630,000	-0-	12,884,343	-0-	13,514,343

Balance at 6/30/98	$121,823,313	$5,000,000	$1,218,233	$50,000	$75,767,062	$(47,330,393)	$29,704,902

The accompanying notes are an integral part of these statements.

WasteMasters, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30

(Unaudited)

INCREASE (DECREASE) IN CASH	1998 (Restated)	1997
Cash flows:
Net loss	$(2,404,431)	$(2,522,263)
Adjustments to reconcile net earnings (loss) to net cash
Provided by (used in) operating activities:
Depreciation and amortization	943,214	0
Stock issued in lieu of cash payment	0	789,352
Stock issued in lieu of cash payment for litigation settlement	209,250	0
Loss on write-off of capitalized loan costs	241,355	0
Accrual for landfill closure costs	256,500	0
Changes in assets and liabilities:
Accounts receivable & prepaid expenses	(595,366)	43,921
Accounts payable, accrued interest and other liabilities	(101,822)	0
Deferred income	(125,649)	748,566
Due to related parties	(352,687)	0

Net cash provided by (used in) operating activities	(1,929,636)	(598,800)

Cash flow from investing activities:
Deposits on acquisitions	110,000	0
Business acquisitions	822,824	0
Purchase of plant property and equipment	(131,560)	0

Net cash provided by (used in) investing activities	801,264	0

Cash flows from financing activities:
Repayment of loans	(376,778)	(638,800)
Proceeds from exercise of warrants for common stock	1,634,000	0
Proceeds from loans	170,510	40,000

Net cash provided by financing activities:	1,427,732	(598,800)

Net increase (decrease) in cash	299,360	0

Cash and cash equivalents at beginning of period	908	0

Cash and cash equivalents at end of period	$ 300,268	0

The accompanying notes are an integral part of these statements.

WasteMasters, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

Six Months Ended June 30

(Unaudited)

	1998 (Restated)	1997
SUPPLEMENTARY DISCLOSURE OF NON-CASH TRANSACTIONS

Common stock issued in business acquisitions	$17,182,084	$0

Common stock issued for services	$0	$1,539,224

Conversion of debentures for common stock	$0	$638,800

Common stock issued in cancellation of liabilities for debentures, accrued interest and penalties	$13,514,343	$0

During the six months ended June 30, 1998, the Company completed acquisitions of companies and/or assets in exchange for common stock of the Company. The assets acquired and liabilities assumed in connection with those acquisitions were non-cash transactions and are therefore not included in the cash flow statement above.

The accompanying notes are an integral part of these statements.

WasteMasters, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 1998 (Unaudited)

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 for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments. This Form 10-QSB Report should be read in conjunction with the Form 10-KSB Report of WasteMasters, Inc. for the fiscal year ended December 31, 1997, as filed with the U. S. Securities and Exchange Commission.

The results of operations for the periods ended June 30, 1998 are not indicative of the results that may be expected for the full year. (See Results of Operations on pages 20 and 23).

2. Consolidated Statements

The consolidated financial statements include the accounts of WasteMasters, Inc. and its wholly owned subsidiaries: WasteMasters of Pennsylvania, Inc.; WasteMasters of New York, Inc.; WasteMasters of Michigan, Inc.; WasteMasters of Louisiana, Inc.; F&E Resource Systems Technology for Baltimore, Inc.; WasteMasters of South Carolina, Inc.; Sales Equipment Company, Inc., C.A.T. Recycling, Inc., Wood Management, Inc.; Mini-Max Enterprises, Inc.; Southeastern Research & Recovery, Inc.; C&D Recycling Corporation; American Recycling and Management Corporation; Tri-State Waste Disposal Company, Inc.; Atlantic Coast Demolition and Recycling, Inc.; and WasteMasters of Palm Beach, Inc. Significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements do not include the accounts of Atlas Environmental, Inc. ("Atlas") and its subsidiaries.

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.

4. Business

(a) The Company

WasteMasters, Inc. is a non-hazardous solid waste services company that provides collection, transfer, disposal and recycling services. The Company was incorporated in Maryland in July 1981. In 1998, the Company initiated an aggressive acquisition program in order to take advantage of the consolidation of the solid waste industry. Thus far, WasteMasters has added 1 landfill, 2 hauling companies, 4 recycling facilities, and a industrial sludge processing facility as a result of the acquisition of companies that are now WasteMasters subsidiaries. The Company believes that additional acquisition candidates meeting the Company's acquisition criteria, including "tuck-in" opportunities, exist within its current and adjacent market areas and in other prospective markets.

(b) 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.

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.

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, Pennsylvania, Texas, Oklahoma 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 it existing markets through "tuck-in" and other acquisitions of solid waste collection operations. In considering new markets, the Company evaluates the opportunities to acquire or otherwise control sufficient collection operations and disposal facilities which would enable it to generate a captive waste stream and achieve the disposal economies of scale necessary to meet its market share and financial objectives. The Company has established criteria which enable it to evaluate the prospective acquisition opportunity and the target market. In the near future, the Company intends to enter new markets which are adjacent to its existing markets; however, the Company may consider new markets in non-contiguous geographic areas which meet its criteria. The Company is also targeting additional "tuck-in" acquisitions within its current markets to allow the Company to further improve its market penetration and density and to further increase the internalization rate of its waste streams.

Internal Growth. In order to generate continued internal growth, the Company intends to focus on increasing sales penetration in its current and adjacent markets, soliciting new commercial, industrial, and residential customers, marketing upgraded services to existing customers and, where appropriate, raising prices. As customers are added in existing markets, the Company's revenue per routed truck is improved, which generally increases the Company's collection efficiencies and profitability. The Company uses transfer stations, which serve to link disparate collection operations with Company-operated landfills, as an important part of its internal growth strategy.

Operating Enhancements for Acquired and Existing Businesses. The Company intends to implement a system that establishes standards for each of it markets and tracks operating criteria for its collection, transfer, disposal and other operations to facilitate improved profitability to 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.

(d) Acquisition Program

The Company's acquisition program is founded on strong management capabilities, strict acquisition criteria, and defined integration procedures. During 1998, WasteMasters has added 1 landfill, 2 hauling companies, 4 recycling facilities, and a state-of-the-art industrial sludge processing facility as a result of the takeover of companies that are now WasteMasters' subsidiaries. The Company believes that additional acquisition candidates meeting the Company's acquisition criteria, including "tuck-in" opportunities, exist within its current and adjacent market areas and in other prospective markets.

The Company has developed a set of financial, geographic and management criteria designed to assist management in the evaluation of acquisition candidates engaged in solid waste collection and disposal. These criteria consist of a variety of factors, including, but not limited to: (i) historical and projected financial performance; (ii) internal rate of return, return on assets and earnings accretion; (iii) experience and reputation of the acquisition candidate's management and customer service reputation and relationships with the local communities; (iv) composition and size of the acquisition candidate's customer base; (v) opportunity to enhance and/or expand the Company's market areas and/or ability to attract other acquisition candidates; (vi) whether the acquisition will augment or increase the Company's market share and/or help protect the Company's existing customer base; and (vii) internalization opportunities to be gained by combining the acquisition candidate with the Company's existing operations.

The Company intends to establish integration procedure for newly acquired businesses designed to effect a prompt and efficient integration of the acquired business and minimize disruption to the ongoing business of both the Company and the acquired business. Once a solid waste collection operation is acquired, the Company intends to implement programs designed to reduce disposal costs and improve collection and disposal routing, 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.

5. 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.

(a) Ability to Manage Growth

The Company's objective is to grow by expanding its services in markets where it can operate profitably as a solid waste services company. Consequently, the Company may experience periods of rapid growth. Such growth, if it were to occur, could place a significant strain on the Company's management and on its operational, financial and other resources. Any failure to expand its operational and financial systems and controls or to recruit appropriate personnel in an efficient manner at a pace consistent with such growth would have a material adverse effect on the Company's business, financial condition and results of operations. The Company, under prior management, historically was not able to manage properly the companies it acquired, resulting in significant losses from operations.

(b) 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 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 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. 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.

(d) Fluctuations in Quarterly Results; Potential Stock Price Volatility

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 fluctuations.

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.

(e) Highly Competitive Industry

The solid waste services industry is highly competitive and fragmented, and requires substantial labor and capital resources. Certain of the markets in which the Company competes or will likely compete are served by one or more of the large national solid waste companies, as well as numerous regional and local solid waste companies of varying sizes and resources. The Company also competes with operators of alternative disposal facilities, including incinerators, and with counties, municipalities, and solid waste districts that maintain their own waste collection and disposal operations. These counties, municipalities, and solid waste districts may have financial advantages due to the availability to them of user fees, similar charges or tax revenues and the greater availability to them of tax-exempt financing. Intense competition exists not only to provide services to customers but also to acquire other businesses within each market. Many of the Company's competitors have significantly greater financial and other resources than the Company. From time to time, these or other competitors may reduce the price of their services in an effort to expand market share or to win a competitively bid municipal contract. These practices may either require the Company to reduce the pricing of its services or result in the Company's loss of business. Municipal contacts are subject to periodic competitive bidding. There can be no assurance that the Company will be the successful bidder to obtain or retain such contracts. The Company's inability to compete with larger and better capitalized companies, or to replace municipal contracts lost through the competitive bidding process with comparable contracts or other revenue sources within a reasonable time period, could have a material adverse effect on the Company's business, financial condition and results of operations.

Intense competition exists 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.

(f) 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.

(g) 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.

(h) 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.

(i) 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.

(j) Year 2000 (Y2K) 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 Y2K 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 Y2K compliant will be material to its financial condition or results of operations.

(k) 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.

(l) Litigation Involving Company

The Company is a defendant in a considerable number of litigation matters, many of which have already resulted in judgments against the Company for material amounts. Substantially all of the judgments remain unsatisfied. The existence of the judgments substantially impairs the Company's ability to continue as a going concern and to raise capital to resume normal operations. Unless the Company is able to raise funds to satisfy the judgments and/or negotitate settlements of the judgments for amounts substantially less than the face amount of the judgments, the Company will not be able to continue in existence.

6. 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.

7. Acquisition of Interest in Atlas Environmental, Inc.

During the quarter ended June 30, 1998, the Company acquired a 51% interest in Atlas Environmental, Inc. ("Atlas") in exchange for 342,591 shares of common stock of the Company. Prior to the Company's acquisition of an interest in Atlas, Atlas and its subsidiaries had filed voluntary petitions for relief on January 14, 1997 under Chapter 11 of the U.S. Bankruptcy Code with the Bankruptcy Court for the Southern District of Florida. In November 1998, the Bankruptcy Court overseeing the Chapter 11 proceedings of Atlas and its subsidiaries appointed a Chapter 11 trustee, which eliminated any ability of the Company to control the management or affairs of Atlas and its subsidiaries. Prior to the appointment of the trustee for Atlas, the Company's ability to control the management and affairs of Atlas and its subsidiaries was limited severely by the provisions of the Bankruptcy Code and various orders of the bankruptcy court which prevented Atlas from taking many actions without approval of the bankruptcy court after notice to creditors and a hearing. Because of the Company's limited control over Atlas prior to the appointment of a trustee and its total loss of control over Atlas upon the appointment of the trustee, the Company has determined that it lacked the necessary control over Atlas to consolidated the assets, liabilities and operating results of Atlas and its subsidiaries with those of the Company. In addition, audited financial statements for Atlas and its subsidiaries are not available, both for the years prior to the time that the Company acquired an interest in Atlas as well as for fiscal 1998; therefore, it would be impossible for the Company to comply with its reporting obligations under the Securities Exchange Act of 1934 if it had to consolidate the assets, liabilities and operation results of Atlas and its subsidiaries with those of the Company. Accordingly, the Company has changed the method of accounting for its investment in Atlas on its 1998 financial statements. All items in the financial statements for 1998 have been restated to report the Company's interest in Atlas and its subsidiaries as an investment, rather than as consolidated subsidiaries.

Nikko Settlement.

On February 5, 1999, the Company entered into a Consent Judgment in that litigation styled Nikko Trading of America Corporation, et al. v. Wastemasters, Inc., pending in the United States District Court for the Northern District of Texas, Dallas Division, Civil Action No. 3-98CV0048-D (the "Nikko Litigation"), pursuant to which the Company settled its obligation under approximately $3.2 in convertible debentures by the issuance of 63,000,000 shares of common stock. Even though the Company only owed principal and interest of approximately $3.2 million on the debentures, the Company recorded a liability of $13,514,343 in 1997 as a result the plaintiffs' claims that the Company owed significant penalties on the debentures for failure to honor prior conversion requests.

On December 16, 1998, Stewart Rahr, a shareholder of the Company, filed a motion to intervene in the Nikko Litigation. Mr. Rahr requested that the Consent Judgment entered in that action on February 5, 1998 be vacated, and that Mr. Rahr be granted leave to defend the action derivatively on behalf of the Company. Mr. Rahr alleges that the Consent Judgment was obtained as a result of collusion between the plaintiffs in the action and the Company, and that the Chairman of the Company at the time, R. Dale Sterritt, Jr., failed to disclose to the Company's board that he beneficially owned an interest in the plaintiffs and/or controlled the plaintiffs through nominees. Mr. Rahr further contends that, because of that collusion, the Company ignored certain legal defenses in the action and agreed to a judgment which was not in the best interests of the Company. Specifically, Mr. Rahr contends that the penalty clause in the debentures, which was the legal basis for most of the shares issued in the settlement, is unenforceable as a matter of law. The Court granted Mr. Rahr's request for a preliminary injunction barring any transfer of the shares which were issued under the Consent Judgment until the Court rules on Mr. Rahr's claims.

Based on the Company's understanding of the evidence elicited to date in the discovery process by Mr. Rahr, the Company believes that there may be valid grounds to vacate the Consent Judgment. Therefore, the Company supports Mr. Rahr's position in the litigation. If the Consent Judgment is vacated, the Company estimates that from 40-49 million of its outstanding shares could be cancelled. The actual number of shares which could be cancelled may vary depending on subsequent Court rulings as to the rights of subsequent transferees of the shares, the actual number of shares which are held by subsequent transferees, and the circumstances under which subsequent transferees acquired their shares. If the Court declines to vacate the Consent Judgment, then the litigation will have no effect on the number of shares which are outstanding. If shares issued in the settlement are cancelled, the Company may need to restate certain items in its financial statements relating to the initial settlement of the Nikko Litigation.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Results of Operations

Revenues for the six months ended June 30, 1998 were $3,967,173 as compared to $223,856 for the six months ended June 30, 1997. This increase in revenues was the result of the acquisitions that have occurred during 1998. As of June 30, 1998, the Company has added 1 landfills, 2 hauling companies, 4 recycling facilities, and a state-of-the-art industrial sludge processing facility as a result of the takeover of companies that are now WasteMasters subsidiaries. (The Company believes that additional acquisition candidates meeting the Company's acquisition criteria, including "tuck-in" opportunities, exist within its current and adjacent market areas and in other prospective markets.)

Since the Company accounted for its acquisitions as purchases, rather than a pooling of interests, the operating results for each of the acquisitions are not reflected on the Company's financial statements until their respective dates of acquisition. Therefore, as most of the acquisitions were consummated near the end of the reporting period, the Company's statements of operations do not reflect the potential annualized "run rate" of such acquisitions. Nor do the statements of operations reflect the anticipated efficiencies and cost savings that the Company expects to ultimately achieve as a result of the economies of scale and synergies that are expected to occur. The acquisition of 51% of the outstanding common stock of Atlas and its subsidiaries has been reflected at cost. (See footnote 7 to the Financial Statements).

Cost of revenues increased as a result of a significantly higher level of operations due to the aforementioned acquisitions. Selling, general and administrative expenses ("SG&A") decreased from $2,304,756 in the six months ended June 30, 1997 to $1,817,844 in the six months ended June 30, 1998, despite the additional overhead incurred in connection with the acquisitions. Interest expense decreased from $212,500 in the six months ended June 30, 1997 to $209,701 in the six months ended June 30, 1998 as a result of the satisfaction of the Company's convertible debentures in the first quarter of 1998, offset by interest incurred on indebtedness of the acquired entities. Depreciation and amortization for the six months ended June 30, 1998 was $943,213. Net loss for the six months ended June 30, 1998 was $3,454,754 as compared to a net loss of $2,522,263 during the six months ended June 30, 1997.

Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Results of Operations

Revenues for the quarter ended June 30, 1998 were $3,960,635 as compared to $62,558 for the quarter ended June 30, 1997. This increase in revenues was the result of the acquisitions that have occurred during 1998. As of June 30, 1998, the Company added 1 landfill, 2 hauling companies, 4 recycling facilities, and a industrial sludge processing facility as a result of the acquisition of companies in the first six months of fiscal 1998.

Cost of revenues increased as a result of a significantly higher level of operations due to the aforementioned acquisitions. Selling, general and administrative expenses ("SG&A") decreased from $1,159,783 in the quarter ended June 30, 1997 to $1,119,002 in the quarter ended June 30, 1998 despite the increase in general and administrative expenses resulting from the acquisitions. Interest expense increased from $102,750 in the quarter ended June 30, 1997 to $185,730 in the quarter ended June 30, 1998 as a result of indebtedness of the acquired entities, offset by reduced interest expense resulting from the conversion of the Company's convertible debentures into common stock pursuant to the Nikko Litigation. Depreciation and amortization expense for the three months ended June 30, 1998 was $943,214. Net loss during the three months ended June 30, 1998 was $2,404,431 as compared with a net loss of $1,260,970 during the three months ended June 30, 1997.

Liquidity and Capital Resources

The Company's balance sheet as of June 30, 1998 showed cash of $300,268, total current assets of $4,729,683 and total current liabilities of $18,247,843. However, $4,020,751 of current liabilities are owed by a subsidiary of the Company which is not involved in the waste disposal industry and which, therefore, will likely ultimately be disposed of. Also, $668,027 of current liabilities consist of debts to "related parties." Pursuant to a management contract between the Company and Continental Investment Corporation, Continental was paid a monthly fee of $50,000 per month up to June 1, 1998 to manage the affairs and operations of the Company.

Additional financing will be required in order to complete planned improvements to the Company's acquisitions. The Company is seeking financing in the form of equity and debt in order to make the necessary improvements and provide working capital. There are no assurances the Company will be successful in raising the funds required.

The Company has issued shares of its Common Stock from time to time in the past to satisfy certain obligations, and expects in the future to also acquire certain services, satisfy indebtedness and/or make acquisitions utilizing authorized shares of the capital stock of the Company.

The Company anticipates that any future business acquisitions will be financed through cash from operations, borrowings, the issuance of shares of the Company's Common Stock and/or seller financing. If acquisition candidates are unwilling to accept, or the Company is unwilling to issue shares of the Company's Common Stock as part of the consideration for such acquisitions, the Company would be required to utilize more of its available cash resources or potential borrowings in order to effect such acquisitions. Additionally, growth through the development or acquisition of new landfills, transfer stations or other facilities, as well as the ongoing maintenance of such landfills, transfer stations or other facilities, will require substantial capital expenditures. There can be no assurance that the Company will have sufficient existing capital resources or will be able to raise sufficient additional capital resources on terms satisfactory to the Company, if at all, in order to meet any or all of the foregoing capital requirements.

In order to satisfy the liquidity needs of the Company for the following twelve months, the Company will be primarily dependent upon proceeds from the sale of the Company's capital stock and cash flow from the operations of companies which have been acquired or may be acquired as part of the Company's expansion plans. Historically, revenues from the existing operations have not been adequate to fund the operations of the Company. If the Company is unable to obtain adequate funds from the sale of its stock in public offerings, private placements or alternative financing arrangements, it may be necessary to postpone any additional acquisitions and to continue to consolidate the operations of the acquisitions already completed and use cash flow for internal growth. Because of potential political, legal, bureaucratic, and other factors, there can be no assurance that the Company will be able to accomplish any of its goals within a reasonable period of time.

Prior to the Company's involvement with it, Atlas Environmental, Inc., a partially-owned subsidiary of the Company, filed a voluntary petition for reorganization under Chapter 11 of the U. S. Bankruptcy Code with the Bankruptcy Court for the Southern District of Florida on January 14, 1997.

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.
Date: November 2, 1999	/s/ Douglas Holsted
	By: Douglas Holsted, President and Chief Financial Officer