**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

| **ý****Quarterly Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                       |   |
| **For the quarterly period ended September 30, 2003**                                                                                                                                 |
|                                                                                                                                                                                       |   |
| **or**                                                                                                                                                                                     |
|                                                                                                                                                                                       |   |
| **o****Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                    |
|                                                                                                                                                                                       |   |
| **For the transaction period from               to              ** |
|                                                                                                                                                                                       |   |
| **Commission File Number: 333-98657**                                                                                                                                                      |

 

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**IESICORPORATION**

(Exact Name of Registrant asSpecified in its Charter)

 

| **Delaware**                                                                        |   | **75-2712191**                           |
|-------------------------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                     |   | (I.R.S. Employer  Identification Number) |
|                                                                                |   |                                     |
| **2301 Eagle Parkway  Suite 200  Fort Worth, Texas**                                |   | **76177**                                |
| (Address of principal executive offices)                                            |   | (Zip Code)                               |
|                                                                                |   |                                     |
| **(817) 632-4000**                                                                  |
| (Registrant’s telephone number, including  area code)                          |
|                                                                                |   |                                     |
| **6125 Airport Freeway  Suite 202  Haltom City, Texas 76117**                       |
| (Former name, former address and former  fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  o    No ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No   ý

 

 

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**IESI CORPORATION**

 

**TABLE OF CONTENTS**

 
| Part I.  Financial Information                                                                               |                                                                                                       |
|-------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|
|                                                                                                              |                                                                                                       |   |
|                                                                                                              | Item 1.Financial Statements                                                                                |   |
|                                                                                                              |                                                                                                       |   |
| Consolidated Balance Sheets as of September 30, 2003 and  December 31, 2002                             |                                                                                                       |
|                                                                                                              |                                                                                                       |   |
| Consolidated Statements of Operations for  the Nine and Three Months Ended September 30, 2003 and 2002       |                                                                                                       |
|                                                                                                              |                                                                                                       |   |
| Consolidated Statements of Stockholders’  Equity (Deficit) for the Nine Months Ended September 30, 2003 |                                                                                                       |
|                                                                                                              |                                                                                                       |   |
| Consolidated Statements of Cash Flows for  the Nine Months Ended September 30, 2003 and 2002                 |                                                                                                       |
|                                                                                                              |                                                                                                       |   |
| Notes to Consolidated Financial Statements                                                                        |                                                                                                       |
|                                                                                                              |                                                                                                       |   |
|                                                                                                              | Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations |   |
|                                                                                                              |                                                                                                       |   |
|                                                                                                              | Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                  |   |
|                                                                                                              |                                                                                                       |   |
|                                                                                                              | Item  4.  Controls and Procedures                                                                     |   |
|                                                                                                              |                                                                                                       |   |
| 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                                                                                                        |                                                                                                       |

 

i

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# **Part I. Financial Information**

## ***Item 1.Financial Statement***s

**IESICORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

** **
|                                                                                                                                                                                                                                                                                                                              |   | **September 30,  2003** |        | **December 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-------------|-----------------------------|------------|
|                                                                                                                                                                                                                                                                                                                              |   | **(unaudited)**              | ** **  |
| Current assets:                                                                                                                                                                                                                                                                                                                   |   |                         |        |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                         |   | $                            | 3,174,863   |                        | $          | 2,589,726 |   |
| Accounts receivable-trade, less allowance  of $1,153,000 and $941,000 at September 30, 2003 and December 31,  2002, respectively                                                                                                                                                                                        |   | 33,320,825                   |        | 27,516,534                  |       |
| Deferred income taxes                                                                                                                                                                                                                                                                                                             |   | 849,163                      |        | 849,649                     |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                         |   | 5,601,758                    |        | 3,949,590                   |       |
| Total current assets                                                                                                                                                                                                                                                                                                              |   | 42,946,609                   |        | 34,905,499                  |       |
| Property and equipment, net of accumulated  depreciation of $95,969,000 and $73,475,000 at September 30, 2003 and  December 31, 2002, respectively                                                                                                                                                                      |   | 272,276,665                  |        | 241,869,538                 |       |
| Goodwill                                                                                                                                                                                                                                                                                                                          |   | 137,707,911                  |        | 128,409,308                 |       |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                      |   | 23,627,979                   |        | 22,666,277                  |       |
| Other assets                                                                                                                                                                                                                                                                                                                      |   | 5,269,776                    |        | 3,001,394                   |       |
| Total assets                                                                                                                                                                                                                                                                                                                      |   | $                            | 481,828,940 |                        | $          | 430,852,016 |   |
| Liabilities and Stockholders’ Equity  (Deficit)                                                                                                                                                                                                                                                                              |   |                         | ** **  |                        | ** ** |
| Current liabilities:                                                                                                                                                                                                                                                                                                              |   |                         |        |                        |       |
| Accounts payable—trade                                                                                                                                                                                                                                                                                                       |   | $                            | 21,351,052  |                        | $          | 17,086,458 |   |
| Accrued expenses and other current  liabilities                                                                                                                                                                                                                                                                                   |   | 20,333,980                   |        | 13,387,878                  |       |
| Deferred revenue                                                                                                                                                                                                                                                                                                                  |   | 5,554,992                    |        | 3,777,101                   |       |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                 |   | 87,055                       |        | 184,825                     |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                         |   | 47,327,079                   |        | 34,436,262                  |       |
| Long-term debt                                                                                                                                                                                                                                                                                                                    |   | 239,415,599                  |        | 198,386,401                 |       |
| Accrued environmental and landfill costs                                                                                                                                                                                                                                                                                          |   | 12,580,136                   |        | 12,539,318                  |       |
| Deferred income taxes                                                                                                                                                                                                                                                                                                             |   | 8,472,303                    |        | 6,770,058                   |       |
| Other liabilities                                                                                                                                                                                                                                                                                                                 |   | 1,326,123                    |        | 1,593,534                   |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                 |   | 309,121,240                  |        | 253,725,573                 |       |
| Commitments and contingencies                                                                                                                                                                                                                                                                                                     |   |                         |        |                        |       |
| Redeemable preferred stock:                                                                                                                                                                                                                                                                                                       |   |                         |        |                        |       |
| Redeemable Series A Convertible Preferred  Stock, 32,000 shares authorized, issued and outstanding, liquidation  preference of $40,000,000 at September 30, 2003 and December 31,  2002                                                                                                                                 |   | 39,683,637                   |        | 39,683,637                  |       |
| Redeemable Series B Convertible Preferred  Stock, 20,100 shares authorized, issued and outstanding, liquidation  preference of $25,125,000 at September 30, 2003 and December 31,  2002                                                                                                                                 |   | 24,808,636                   |        | 24,808,636                  |       |
| Redeemable Series C Convertible Preferred  Stock, 55,000 shares authorized, issued and outstanding, liquidation  preference of $101,769,703 and $91,247,703 at September 30, 2003 and  December 31, 2002, respectively                                                                                                  |   | 99,727,242                   |        | 89,205,242                  |       |
| Redeemable Series D Convertible Preferred  Stock, 145,000 shares authorized, 55,000 shares issued and outstanding,  liquidation preference of $67,020,688 and $62,272,416 at September 30,  2003 and December 31, 2002, respectively                                                                                    |   | 64,400,811                   |        | 59,652,539                  |       |
| Total redeemable preferred stock                                                                                                                                                                                                                                                                                                  |   | 228,620,326                  |        | 213,350,054                 |       |
| Stockholders’ equity (deficit):                                                                                                                                                                                                                                                                                              |   |                         |        |                        |       |
| Common stock, par value $.01: Authorized  shares: Class A—3,600,000, Class B Convertible—450,000, at September 30,  2003 and December 31, 2002; issued and outstanding  shares: Class A—142,000, Class B Convertible—112,980, at  September 30, 2003 and December 31, 2002 |   | 2,550                        |        | 2,550                       |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                        |   | —                       |        | —                      |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                               |   | (55,915,176                  | )           | (36,226,161                 | )          |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                         |   | (55,912,626                  | )           | (36,223,611                 | )          |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                                                                                                                                                                        |   | $                            | 481,828,940 |                        | $          | 430,852,016 |   |

 

See accompanying notes.

 

1

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**IESICORPORATION AND SUBSIDIARIES**

**STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

 
|                                                                                                                                                                        |   | **Nine  Months EndedSeptember 30,** |        | **Three Months Ended****September 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|-------------|----------------------------------------------|--------|
|                                                                                                                                                                        |   | **2003**                                 |        | **2002**                                     |   | **2003** |   | **2002** |   |
|                                                                                                                                                                        |   |                                     |        |                                         |   |   |   |   |   |
| Services revenue                                                                                                                                                            |   | $                                        | 180,488,860 |                                         | $      | 156,248,844 |   | $ | 64,175,475 |   | $ | 57,220,618 |   |
| Costs and expenses:                                                                                                                                                         |   |                                     |        |                                         |   |   |   |   |   |
| Operating                                                                                                                                                                   |   | 117,926,153                              |        | 100,715,715                                  |   | 41,542,717 |   | 37,721,114 |   |
| General and administrative                                                                                                                                                  |   | 23,004,009                               |        | 19,377,201                                   |   | 8,207,212 |   | 7,267,867 |   |
| Depreciation, depletion and amortization                                                                                                                                    |   | 26,148,547                               |        | 20,095,208                                   |   | 9,562,973 |   | 7,306,915 |   |
|                                                                                                                                                                        |   | 167,078,709                              |        | 140,188,124                                  |   | 59,312,902 |   | 52,295,896 |   |
| Income from operations                                                                                                                                                      |   | 13,410,151                               |        | 16,060,720                                   |   | 4,862,573 |   | 4,924,722 |   |
| Interest expense, net                                                                                                                                                       |   | (13,778,137                              | )           | (9,834,068                                   | )      | (4,820,285 | ) | (4,169,637 | ) |
| Loss on termination of interest rate swaps                                                                                                                                  |   | —                                   |        | (825,665                                     | )      | — |   | — |   |
| Loss on extinguishment of debt                                                                                                                                              |   | —                                   |        | (585,591                                     | )      | — |   | — |   |
| Other income (expense), net                                                                                                                                                 |   | (260,227                                 | )           | (131,164                                     | )      | (146,772 | ) | (77,915 | ) |
| Income (loss) before income taxes                                                                                                                                           |   | (628,213                                 | )           | 4,684,232                                    |   | (104,484 | ) | 677,170 |   |
| Income tax expense                                                                                                                                                          |   | (2,314,080                               | )           | (3,903,969                                   | )      | (2,562,975 | ) | (940,704 | ) |
| Income (loss) before cumulative effect of  change in accounting principle                                                                                                   |   | (2,942,293                               | )           | 780,263                                      |   | (2,667,459 | ) | (263,534 | ) |
|                                                                                                                                                                        |   |                                     |        |                                         |   |   |   |   |   |
| Cumulative effect of change in accounting  principle net of income tax benefit of $0                                                                                        |   | (1,476,450                               | )           | —                                       |   | — |   | — |   |
| Net income (loss)                                                                                                                                                           |   | $                                        | (4,418,743  | )                                            | $      | 780,263 |   | $ | (2,667,459 | ) | $ | (263,534 | ) |
| Pro forma income (loss) before cumulative  effect of change in accounting principle, assuming change in accounting  principle described in Note 2 was applied retroactively |   | $                                        | (2,942,293  | )                                            | $      | 475,906 |   | $ | (2,667,459 | ) | $ | (379,042 | ) |

 

See accompanying notes.

 

2

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**IESICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDER****S’ EQUITY (DEFICIT)**

**(UNAUDITED)**

 
|                                                      |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Accumulated  Deficit** |   | **Total**   |   |
|-----------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|--------------------------|--------|-------------|--------|
|                                                      |   | **Shares**        |   | **Par  Amount**                  |   |                     |   |        |
| Balance at December 31, 2002                         |   | 254,980           |   | 2,550                            |   | —                   |   | (36,226,161 | )      | (36,223,611 | ) |
|                                                      |   |              |   |                             |   |                     |   |        |   |   |   |
| Net loss                                                  |   | —            |   | —                           |   | —                   |   | (4,418,743  | )      | (4,418,743 | ) |
| Accretion of dividends on Series C and D  Preferred Stock |   | —            |   | —                           |   | —                   |   | (15,270,272 | )      | (15,270,272 | ) |
|                                                      |   |              |   |                             |   |                     |   |        |   |   |   |
| Balance at September 30, 2003                        |   | 254,980           |   | $                                | 2,550  |                     | $      | —      |   | $ | (55,915,176 | ) | $ | (55,912,626 | ) |
|                                                           |        |                   |        |                                  |        |                          |        |             |        |  |  |  |  |  |  |

 

See accompanying notes.

 

3

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**IESICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
|                                                                                                                         |   | **For the  Nine Months Ended September 30,** |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|------------|
|                                                                                                                         |   | **2003**                                          |       | **2002** |   |
| **Operating Activities:**                                                                                                    |   |                                              |       |   |   |
| Net income (loss)                                                                                                            |   | $                                                 | (4,418,743 | ) | $ | 780,263 |   |
| Cumulative effect of change in accounting  principle                                                                         |   | 1,476,450                                         |       | — |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities:                                    |   |                                              |       |   |   |
| Depreciation, depletion and amortization                                                                                     |   | 26,148,547                                        |       | 20,095,208 |   |
| Amortization of deferred financing costs                                                                                     |   | 1,947,633                                         |       | 1,724,437 |   |
| Capping, closure and post-closure accretion                                                                                  |   | 912,869                                           |       | — |   |
| Provision for doubtful accounts                                                                                              |   | 1,207,195                                         |       | 774,600 |   |
| Write-off costs associated with transactions  in process                                                                     |   | —                                            |       | 980,000 |   |
| Loss on extinguishment of debt                                                                                               |   | —                                            |       | 585,591 |   |
| Deferred income tax expense                                                                                                  |   | 1,702,245                                         |       | 3,481,889 |   |
| Changes in operating assets and  liabilities, net of effects of acquired waste management operating assets and  liabilities: |   |                                              |       |   |   |
| Accounts receivable                                                                                                          |   | (5,491,814                                        | )          | 1,490,128 |   |
| Prepaid expenses and other current assets                                                                                    |   | (1,645,484                                        | )          | 267,822 |   |
| Accounts payable                                                                                                             |   | 4,264,594                                         |       | (2,072,527 | ) |
| Accrued expenses and other liabilities                                                                                       |   | 4,170,583                                         |       | 812,082 |   |
| Capping, closure and post closure  expenditures                                                                              |   | (641,725                                          | )          | (544,898 | ) |
| Net cash provided by operating activities                                                                                    |   | 29,632,350                                        |       | 28,374,595 |   |
| **Investing Activities:**                                                                                                    |   |                                              |       |   |   |
| Purchases of property and equipment                                                                                          |   | (34,502,731                                       | )          | (20,500,196 | ) |
| Acquisitions of waste management operations                                                                                  |   | (25,385,508                                       | )          | (39,063,274 | ) |
| Initial development costs for newly  acquired permitted landfills                                                            |   | (6,018,195                                        | )          | — |   |
| Capitalized interest                                                                                                         |   | (1,368,009                                        | )          | (1,263,697 | ) |
| Deferred costs associated with transactions  in process                                                                      |   | (1,776,663                                        | )          | (1,598,487 | ) |
| Net cash used in investing activities                                                                                        |   | (69,051,106                                       | )          | (62,425,654 | ) |
| **Financing Activities:**                                                                                                    |   |                                              |       |   |   |
| Borrowings under long-term debt                                                                                              |   | 50,500,000                                        |       | 193,300,000 |   |
| Payments on long-term debt                                                                                                   |   | (10,044,741                                       | )          | (151,013,676 | ) |
| Debt issue costs                                                                                                             |   | (451,366                                          | )          | (6,976,388 | ) |
| Payments on interest rate swap termination                                                                                   |   | —                                            |       | (825,665 | ) |
| Net cash provided by financing activities                                                                                    |   | 40,003,893                                        |       | 34,484,271 |   |
| Net increase in cash and cash equivalents                                                                                    |   | 585,137                                           |       | 433,212 |   |
| Cash and cash equivalents at beginning of  period                                                                            |   | 2,589,726                                         |       | 2,171,384 |   |
| Cash and cash equivalents at end of period                                                                                   |   | $                                                 | 3,174,863  |   | $ | 2,604,596 |   |

 

See accompanying notes.

 

4

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**IESICORPORATION AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMEN****TS**

**(UNAUDITED)**

 

**1.****                                      Businessand Organization**

 

IESI Corporation (IESI) is a Delaware holding company founded in1995.  IESI, together with itssubsidiaries (collectively, the “Company”), is a regional, integratednon-hazardous solid waste management company that provides collection,transfer, disposal, and recycling services to commercial, industrial andresidential customers. The Company was formed in order to participate in theconsolidation of the fragmented solid waste industry. The Company is executingthis strategy through an acquisition program, which targets businesses in twoprincipal geographic regions, the Northeast and the South United States. TheCompany is currently operating in nine states: Arkansas, Louisiana, Maryland,Missouri, New Jersey, New York, Oklahoma, Pennsylvania, and Texas.

 

The accompanying unaudited consolidated financial statements includethe accounts of IESI and its subsidiaries. All significant inter-companyaccounts and transactions have been eliminated. Certain information related tothe Company’s organization, significant accounting policies and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles have been condensed oromitted.  In the opinion of management,these unaudited condensed consolidated financial statements reflect allmaterial adjustments (which include only normal recurring adjustments)necessary to fairly state the financial position and the results of operationsfor the periods presented, and the disclosures herein are adequate to make theinformation presented not misleading. Operating results for interim periods are not necessarily indicative ofthe results for full years.  Theseinterim unaudited consolidated financial statements should be read in conjunctionwith the Company’s audited consolidated financial statements for the year endedDecember 31, 2002 and the related notes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2002.

 

The unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles andnecessarily include amounts based on estimates and assumptions made bymanagement.  Actual results could differfrom these amounts.  Significant itemssubject to such estimates and assumptions include the depletion andamortization of landfill development costs, accruals for final closure andpost-closure costs, valuation allowances for accounts receivable, liabilitiesfor potential litigation, claims and assessments, and liabilities forenvironmental remediation, deferred taxes and self-insurance.

 

Additionally, certain reclassifications have been made in the priorperiod consolidated statement of cash flows in order to conform to the currentperiod presentation.

 

**2.****                                      NewAccounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accountingfor Asset Retirement Obligations.”  SFASNo. 143 applies to all legally enforceable obligations associated with theretirement of tangible long-lived assets and provides the accounting andreporting requirements for such obligations. SFAS No. 143 requires amounts initially recognized as an assetretirement obligation to be measured at fair value.  The recognized asset retirement cost is capitalized as part ofthe cost of the asset and is depreciated over the useful life of theasset.  The Company adopted SFAS No. 143effective January 1, 2003.

 

The following table summarizes the pro forma impact to net income forthe nine months and three months ended September 30, 2002 of theaccounting change implemented beginning January 1, 2003:

 
|                                 |   | **Nine Months  Ended  September 30,** |    | **Three Months  Ended  September 30,** |   |
|--------------------------------------|--------|--------------------------------------------|---------|---------------------------------------------|--------|
| Reported net income (loss)           |   | $                                          | 780,263 |                                        | $      | (263,534 | ) |
| Adoption of SFAS No. 143, net of tax |   | (304,357                                   | )       | (115,508                                    | )      |
| Pro forma net income (loss)          |   | $                                          | 475,906 |                                        | $      | (379,042 | ) |

 

5

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The application of SFAS No. 143 increased loss beforecumulative effect of changes in accounting principle for the nine months endedSeptember 30, 2003 by approximately $175,000, net of tax, and decreasedincome before cumulative effect of changes in accounting principle for thethree months ended September 30, 2003 by approximately $35,000, net oftax.

 

The following table summarizes the impact on income from operations ofapplying the provisions of SFAS No. 143 on income before cumulative effect ofchange in accounting principle for the nine months and three months endedSeptember 30, 2003.  The adoptionof SFAS No. 143 had no impact on the Company’s cash flow.

 
|                               |   | **Nine Months  Ended  September 30,** |    | **Three Months  Ended  September 30** |   |
|------------------------------------|--------|--------------------------------------------|---------|--------------------------------------------|--------|
| Increase to operating expense      |   | $                                          | 365,000 |                                       | $      | 99,000 |   |
| Decrease to depletion expense      |   | (190,000                                   | )       | (64,000                                    | )      |
| Decrease to income from operations |   | $                                          | 175,000 |                                       | $      | 35,000 |   |

 

While SFAS No. 143 impacts the accounting for the Company’s landfilloperations, it does not change the basic landfill accounting principles thatthe Company and others in the waste industry have historically followed.  In general, the waste industry hasrecognized expenses associated with both amortization of capitalized costs andfuture closure and post-closure obligations on a units-of-consumption basis asairspace is consumed over the life of the related landfill.

 

Under SFAS No. 143, costs associated with future final cappingactivities that occur during the operating life of a landfill, as well asclosure and post closure activities are accounted for as asset retirementobligations on a discounted basis.  TheCompany recognizes landfill retirement obligations that relate to closure andpost-closure activities over the operating life of a landfill as landfill airspaceis consumed and the obligation is incurred. The Company recognizes its final capping obligations on a discrete basisfor each expected future final capping event over the number of tons of wastethat each final capping event is expected to cover.  The landfill retirement obligations are initially measured atestimated fair value.  Fair value ismeasured on a present value basis, using a credit-adjusted, risk-free rate(currently at 10.25%).  Accretion isrecorded on all landfill retirement obligations using the effective interestmethod.  The Company amortizes landfillretirement costs arising from closure and post-closure obligations, which arecapitalized as part of the landfill asset, on a units of consumption basis asairspace is consumed over the life of the related landfill.

 

The Company amortizes landfill retirement costs arising from finalcapping obligations, which are also capitalized as part of the landfill asset,on a units-of-consumption basis over the number of units (tons or cubic yards)of waste that each final capping event covers.

 

6

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The tables below set forth the significant changes between theCompany’s historical and current (effective January 1, 2003 upon theCompany’s adoption of SFAS No. 143) landfill accounting practices and certaindefinitions related thereto:

 
| **Term**      |   | **Historical  Definition**                                                                                                                                                                                                               |   | **Current  Definition  (Effective January 1, 2003)** |
|---------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------|
| Final Capping |   | Includes installation of flexible membrane and geosynthethic clay  liners, drainage, compacted soil layers and topsoil over areas of a landfill  where total airspace capacity has been consumed.                                        |   | No change.                                                |
|          |   |                                                                                                                                                                                                                                     |   |                                                      |
| Closure       |   | Includes last final capping event, construction of final portion of  methane gas collection system, demobilization, and the routine maintenance  costs incurred after site ceases to accept waste, but prior to being  certified closed. |   | No change.                                                |
|          |   |                                                                                                                                                                                                                                     |   |                                                      |
| Post-closure  |   | Includes routine monitoring and maintenance of a landfill after it  has closed, ceased to accept waste and been certified as closed by the  applicable state regulatory agency.                                                          |   | No change.                                                |

 
| **Description**                           |   | **Historical  Practice**                                                                                                                                     |   | **Current  Practice (Effective January 1, 2003)**                                                                                                                                                                                                                                                                                                                                                                           |
|-------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      |   |                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Discount Rate**:                        |   | None.                                                                                                                                                        |   | Credit-adjusted, risk-free rate (currently at 10.25%).                                                                                                                                                                                                                                                                                                                                                                           |
|                                      |   |                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Cost Estimates:**                       |   | Cost was estimated based on performance, principally by third  parties, with a small portion performed by us.                                                |   | No change, except that the cost of any activities performed  internally must be increased to represent an estimate of what a third party  would charge to perform such activity.                                                                                                                                                                                                                                                 |
|                                      |   |                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Inflation:**                            |   | Not applicable.                                                                                                                                              |   | 2.5% annually, effective January 1, 2003, based on the prior 10  year average.                                                                                                                                                                                                                                                                                                                                              |
|                                      |   |                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Recognition of  Assets and Liability**: |   |                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                      |   |                                                                                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Final Capping                             |   | Costs were capitalized as spent, except for the last final capping  event that occurs after the landfill closes, which is accounted for as part  of closure. |   | All final capping will be recorded as a liability and asset when  incurred; the discounted cash flow associated with each final capping event  is recorded to the accrued liability with a corresponding increase to  landfill assets as airspace is consumed related to the specific final capping  event.  Spending is reflected as a  change in liabilities within operating activities in the statement of cash  flows. |

 

7

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| **Description**                       |   | **Historical  Practice**                                                                                                                                                                                            |   | **Current  Practice (Effective January 1, 2003)**                                                                                                                                                           |
|---------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Closure and post-closure              |   | Accrued over the life of the landfill, the undiscounted cash flow  associated with such liabilities is recorded to accrued liabilities, with a  corresponding charge to cost of operations as airspace is consumed. |   | Accrued over the life of the landfill; the discounted cash flow  associated with such liabilities is recorded to accrued liabilities, with a  corresponding increase in landfill assets as airspace is consumed. |
|                                  |   |                                                                                                                                                                                                                |   |                                                                                                                                                                                                             |
| **Statement of  Operations Expense:** |   |                                                                                                                                                                                                                |   |                                                                                                                                                                                                             |
|                                  |   |                                                                                                                                                                                                                |   |                                                                                                                                                                                                             |
| Liability accrual                     |   | Expense charged to cost of operations at same amount accrued to  liability.                                                                                                                                         |   | Not applicable.                                                                                                                                                                                                  |
|                                  |   |                                                                                                                                                                                                                |   |                                                                                                                                                                                                             |
| Landfill asset amortization           |   | Not applicable.                                                                                                                                                                                                     |   | The landfill asset is amortized to depreciation, depletion and  amortization expense as airspace is consumed over life of specific final  capping event or life of landfill for closure and post-closure.        |
|                                  |   |                                                                                                                                                                                                                |   |                                                                                                                                                                                                             |
| Accretion                             |   | Not applicable.                                                                                                                                                                                                     |   | Expense, charged to cost of operations, is accreted at  credit-adjusted, risk-free rate (currently at 10.25%) under the effective  interest method.                                                              |

 

In April 2002, the FASB issued SFAS No. 145, Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.  SFAS No. 145 requires thatgains and losses from extinguishment of debt be classified as extraordinaryitems only if they meet the criteria in Accounting Principles Board Opinion No.30 (“Opinion No. 30”).  Applying theprovision of Opinion No. 30 will distinguish transactions that are part of anentity’s recurring operations from those that are unusual and infrequent thatmeet criteria for classification as an extraordinary item.  As allowed under the provisions of SFAS No.145, the Company has adopted the provisions of SFAS No. 145 as of April 1,2002.

 

**3.****                                      Summaryof Significant Accounting Policies**

 

**Property and Equipment**

 

Property and equipment are stated at cost. Improvements or betterments,which significantly extend the life, or add to the utility, of an asset, arecapitalized. Expenditures for maintenance and repair costs are charged tooperations as incurred. The cost of assets retired or otherwise disposed of andthe related accumulated depreciation is eliminated from the accounts in theyear of disposal and any resulting gain or loss is reflected in theConsolidated Statements of Operations.

 

The Company revises the estimated useful lives of property andequipment acquired through business acquisitions to conform with its’ policiesregarding property and equipment. Depreciation is calculated on thestraight-line method over the estimated useful lives of the related assetswhich generally range from three to five years for furniture and fixtures andcomputer equipment, five to 10 years for containers, compactors, trucksand collection equipment, and 10 to 40 years for buildings andimprovements. The Company assumes no salvage value for its depreciable propertyand equipment. Depreciation expense on property and equipment was approximately$15,537,000 and $11,802,000 for the nine months ended September 30, 2003and 2002, respectively, and approximately $5,450,000 and $4,289,000 for thethree months ending September 30, 2003 and 2002, respectively.

 

Landfills and landfill improvements are stated at cost and are depletedbased on consumed airspace. Landfill improvements include direct costs incurredto obtain landfill permits and direct costs incurred to construct and develop

 

8

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the site.  All indirect landfilldevelopment costs are expensed as incurred. Depletion expense was approximately $7,939,000 and $5,996,000 for thenine months ended September 30, 2003 and 2002, respectively, andapproximately $3,178,000 and $2,122,000 for the three months endingSeptember 30, 2003 and 2002, respectively.

 

Interest is capitalized on certain projects under development includinglandfill projects and probable landfill expansion projects, and on certainassets under construction, including operating landfills.  The capitalization of interest for operatinglandfills is based on the costs incurred on discrete cell constructionprojects.  Interest capitalized wasapproximately $1,368,000 and $1,264,000 for the nine months endedSeptember 30, 2003 and 2002, respectively, and $347,000 and $611,000 forthe three months ended September 30, 2003 and 2002, respectively.

 

Property and equipment consisted of the following at September 30,2003 and December 31, 2002:

 
|                                        |   | **September 30,  2003** |        | **December 31,  2002** |   |
|---------------------------------------------|--------|------------------------------|-------------|-----------------------------|--------|
| Land and landfills                          |   | $                            | 180,572,754 |                        | $      | 157,495,877 |   |
| Vehicles                                    |   | 86,774,649                   |        | 72,693,739                  |   |
| Containers and compactors                   |   | 51,599,670                   |        | 45,021,821                  |   |
| Machinery and equipment                     |   | 26,169,003                   |        | 20,199,485                  |   |
| Buildings and improvements                  |   | 17,810,281                   |        | 15,535,880                  |   |
| Furniture and office equipment              |   | 5,319,005                    |        | 4,397,468                   |   |
|                                        |   | 368,245,362                  |        | 315,344,270                 |   |
| Less accumulated depreciation and depletion |   | 95,968,697                   |        | 73,474,732                  |   |
|                                        |   | $                            | 272,276,665 |                        | $      | 241,869,538 |   |

 

**Goodwill and Other Intangible Assets**

 

Intangible assets consist primarily of the cost of acquired businessesin excess of the fair value of net assets acquired (goodwill). Otherintangibles consist of values assigned to customer lists and covenantsnot-to-compete, costs incurred to obtain debt financing and other separatelyidentifiable intangible assets.  Otherintangibles are recorded at cost and, except for debt issue costs, amortizedover periods generally ranging from five to seven years, computed on thestraight-line method. Amortization expense was approximately $2,672,000 and$2,297,000 for the nine months ended September 30, 2003 and 2002,respectively, and $935,000 and $896,000 for the three months endedSeptember 30, 2003 and 2002, respectively.  The Company defers costs related to incurring debt and amortizes,as additional interest expense, these costs over the term of the related debtusing the effective interest method.

 

Other intangible assets consisted of the following atSeptember 30, 2003 and December 31, 2002:

 
|                          |   | **September 30,  2003** |       | **December 31,  2002** |   |
|-------------------------------|--------|------------------------------|------------|-----------------------------|--------|
| Customer lists                |   | $                            | 18,494,755 |                        | $      | 14,033,330 |   |
| Noncompetition agreements     |   | 8,106,803                    |       | 7,195,483                   |   |
| Debt issue costs              |   | 16,123,400                   |       | 15,900,865                  |   |
| Other                         |   | 970,682                      |       | 1,033,983                   |   |
|                          |   | 43,695,640                   |       | 38,163,661                  |   |
| Less accumulated amortization |   | 20,067,661                   |       | 15,497,384                  |   |
|                          |   | $                            | 23,627,979 |                        | $      | 22,666,277 |   |

 

The Company assesses whether goodwill is impaired on an annualbasis.  Upon determining the existenceof goodwill impairment, the Company measures that impairment based on theamount by which the book value of goodwill exceeds its implied fair value.  The implied fair value of goodwill isdetermined by deducting the fair value of a reporting unit’s identifiableassets and liabilities from the fair value of the reporting unit as a whole, asif that reporting unit had just been acquired and the purchase price were beinginitially allocated.  Additionalimpairment assessments may be performed on an interim basis if the Companyencounters events or changes in circumstances that would indicate, more likelythan not, the book value of goodwill has been impaired.

 

9

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On an ongoing basis, management reviews the valuation and amortizationof other intangible assets with consideration toward recovery through futureoperating results.  The Companyperiodically evaluates the value and future benefits of its other intangibleassets.  The Company assessesrecoverability from future operations using cash flows and income fromoperations of the related asset as measures. In accordance with SFAS No. 144, Accounting for the Impairment orDisposal of Long-Lived Assets, the carrying value would be reduced to estimatedfair value if it becomes probable that the Company’s estimate for expectedfuture cash flows of the related asset would be less than the carrying amountof the related intangible assets.  Therehave been no adjustments to the carrying amount of intangible assets resultingfrom these evaluations as of September 30, 2003 and December 31,2002.

 

Scheduled estimated amortization of other intangible assets is asfollows:

 
| 2003       |   | $         | 1,641,294  |   |
|------------|--------|-----------|------------|--------|
| 2004       |   | 5,598,948 |       |
| 2005       |   | 3,807,911 |       |
| 2006       |   | 3,044,163 |       |
| 2007       |   | 2,718,872 |       |
| Thereafter |   | 6,816,791 |       |
|       |   | $         | 23,627,979 |   |

 

**Accrued Expenses and Other CurrentLiabilities**

 

The following is a summary of accrued expenses and other currentliabilities at September 30, 2003 and December 31, 2002:

 
|                                                    |   | **September 30,  2003** |       | **December 31,  2002** |   |
|---------------------------------------------------------|--------|------------------------------|------------|-----------------------------|--------|
| Acquisition related accrued liabilities                 |   | $                            | 2,857,740  |                        | $      | 2,740,190 |   |
| Interest                                                |   | 4,941,076                    |       | 1,169,589                   |   |
| Accrued payroll and other employee related  liabilities |   | 3,780,336                    |       | 2,663,757                   |   |
| Accrued insurance liabilities                           |   | 3,764,566                    |       | 2,874,036                   |   |
| Other                                                   |   | 4,990,262                    |       | 3,940,306                   |   |
|                                                    |   | $                            | 20,333,980 |                        | $      | 13,387,878 |   |

 

**Income Taxes**

 

Deferred income taxes are determined based on the difference betweenthe financial reporting and tax bases of assets and liabilities.  Deferred income tax provision represents thechange during the reporting period in the deferred tax assets and deferred taxliabilities, net of the effect, if any, of acquisitions and dispositions.  Deferred tax assets include tax loss carryforwards and are reduced by a valuation allowance if, based on availableevidence, it is more likely than not that some portion or all of the deferredtax assets will not be realized.

 

The Company has determined that due to its estimated annual operatingresults for 2003, the Company’s estimated income tax provision will not varysignificantly based on the estimated income (loss) before income taxes for2003.  As such, as of September 30,2003, the Company has recognized in its consolidated statement of operations anamount equaling approximately 75% of the estimated 2003 income tax provision.

 

The difference in income taxes computed at the statutory rate andreported income taxes for the three and nine months ended September 30,2003 is due primarily to state and local income taxes and an increase in thevaluation allowance.  The difference inincome taxes computed at the statutory rate and reported income taxes for thethree months ended September 30, 2003, is also due to the situationdiscussed in the preceding paragraph. The difference in income taxes computed at the statutory rate andreported income taxes for the nine months ended September 30, 2002 is dueprimarily to state and local income taxes and an increase in the valuationallowance related to a change in the estimated reversal of temporarydifferences related to tax deductible goodwill.

 

10

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**4.****                                      Acquisitions**

 

All acquisitions were accounted for as purchases and, accordingly, onlythe operations of the acquired companies since the acquisition dates areincluded in the accompanying unaudited consolidated financial statements.

 

During the nine months ended September 30, 2003, the Company acquiredthe hauling and disposal assets of 12 solid waste management companies and realestate associated with an operating landfill for an aggregate purchase price ofapproximately $30,373,000 consisting of cash and liabilities assumed.  In connection with the acquisitions, theCompany recorded approximately $7,895,000 of goodwill, all of which is expectedto be deductible for tax purposes, and approximately $6,776,000 of amortizingintangible assets.  The amortizing intangibleassets consist of $4,519,000 related to customer lists with generally two toseven year amortization periods and $2,257,000 related to non-competitionagreements with generally two to five year amortization periods.  The pro forma effects of the acquisitionsare not significant to the Company’s operating results.  See footnote 11, Subsequent Events, for adiscussion of the acquisition of Seneca Meadows, Inc. in October 2003.

 

In addition, during the nine months ended September 30, 2003, theCompany incurred $6,018,000 of development costs in connection with two“greenfield” landfills, which the Company purchased in 2002.  Both landfills included the land and thepermit to operate.  However, unlike thepurchase of an operating landfill, neither greenfield landfill had incurred thecosts of development, which include the infrastructure of an operating landfilland initial cell.  Both landfills openedduring the three months ended September 30, 2003. Prior to commencement ofthe operating activities of the landfill, development costs are classified asacquisition costs.

 

**5.****                                      Landfilland Accrued Environmental Costs**

 

On April 18, 2003, the Pennsylvania Department of EnvironmentalProtection granted the Company a permit to expand its Bethlehem, PAlandfill.  The expansion permit alsoincreased the average daily capacity of the landfill from 750 tons to 1,375tons.  As a result of the expansionpermit, the current estimated remaining operating life of the landfill has beenincreased to 14 years.

 

**Final Capping, Closure and Post-ClosureObligations**

 

The Company has material financial commitments for final capping,closure and post-closure obligations with respect to its landfills.  The Company develops its estimates of finalcapping, closure and post-closure obligations using input from its engineersand accountants.  The Company’sestimates are based on its interpretation of current requirements and areintended to approximate fair value. Absent quoted market prices, the estimate of fair value should be basedon the best available information, including the results of present valuetechniques.  In general, the Companycontracts with third parties to fulfill most of its obligations for finalcapping, closure and post-closure. Accordingly, the fair market value of these obligations is based uponquoted and actual prices paid for similar work.  The Company intends to perform some of these capping, closure andpost-closure activities using internal resources.  Where internal resources are expected to be used to fulfill anasset retirement obligation, the Company has added a profit margin to theestimated cost of such services to better reflect their fair market value.  When the Company then performs theseservices internally, the added profit margin is recognized as a component ofoperating income in the period earned. An estimate of fair value should include the price that marketplaceparticipants are able to receive for bearing the uncertainties in cashflows.  However, when utilizingdiscounted cash flow techniques, reliable estimates of market premiums may notbe obtainable.  In the waste industry,there is no market that exists for selling the responsibility for finalcapping, closure and post-closure independent of selling the landfill in itsentirety.  Accordingly, the Companybelieves that it is not possible to develop a methodology to reliably estimatea market risk premium and have excluded a market risk premium from itsdetermination of expected cash flows for landfill asset retirement obligations.

 

Once the Company has determined the final capping, closure andpost-closure costs, the Company then inflates those costs to the expected timeof payment and discounts those expected future costs back to presentvalue.  The Company inflates these costsin current dollars until the expected time of payment using an inflation rateof 2.5% annually and discounts these costs to present value using acredit-adjusted, risk-free discount rate of 10.25%.  The Company reviewed the inflation rate to be used for 2003 anddetermined that a rate of 2.5%, which is the rate used by most waste industryparticipants, was appropriate.  Thecredit-adjusted, risk-free rate is based on the risk-free

 

11

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interest rate on obligations of similar maturity adjusted for theCompany’s credit rating.  Changes in theCompany’s credit-adjusted, risk-free rate do not change recorded liabilities,but subsequently recognized obligations are measured using the revisedcredit-adjusted risk-free rate.

 

Management reviews the estimates of the Company’s obligations at leastannually.  Significant changes ininflation rates and the amount and timing of future final capping, closure andpost-closure cost estimates typically result in both (i) a current adjustmentto the recorded liability (and corresponding adjustment to the landfill asset),based on the landfill’s capacity consumed, and (ii) a change in liability andasset amounts to be recorded prospectively over the remaining capacity of thelandfill.

 

The Company records the estimated fair value of final capping, closureand post-closure liabilities for its landfills based on the respective finalcapping or landfill capacities consumed through the current period.  The liability and corresponding asset are recordedon a per-ton basis.  The estimated fairvalue of each final capping event will be fully accrued when the tonsassociated with such capping event have been disposed in the landfill.  Additionally, the estimated fair value oftotal final capping, closure and post-closure costs will be fully accrued foreach landfill at the time the site discontinues accepting waste and isclosed.  Closure and post-closureaccruals include estimates for methane gas control, leachate management andground-water monitoring and other operational and maintenance costs to beincurred after the site discontinues accepting waste, which is generallyexpected to be for a period of up to thirty years after final siteclosure.  Daily maintenance activities,which include many of these costs, are incurred during the operating life ofthe landfill and are expensed as incurred. Daily maintenance activities include leachate disposal; surface water,groundwater, and methane gas monitoring and maintenance; other pollutioncontrol activities; mowing and fertilizing the landfill cap; fence and roadmaintenance; and third party inspection and reporting costs.  For purchased disposal sites, the Companyassesses and records final capping, closure and post-closure costs and thepercentage of airspace consumed related to such obligations as of the date itassumed the responsibility.  Thereafter,the Company accounts for the landfill and related final capping, closure andpost-closure obligations consistent with the policy described above.

 

Accretion on final capping, closure and post-closure liabilities isrecorded using the effective interest method and is recorded as final capping,closure and post-closure expense, which is included in operating costs on theincome statement.

 

In the United States, the closure and post-closure requirements areestablished by the Environmental Protection Agency’s (“EPA”) Subtitle C and Dregulations, as implemented and applied on a state-by-state basis.  The costs to comply with these requirementscould increase in the future as a result of legislation or regulation.

 

The changes to landfill liabilities related to final capping, closure,post-closure and other obligations are as follows:

 
|                                                 |   | **Nine  Months Ended September 30,** |       |
|------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                 |   | **2003**                                  |       | **2002** |   |
|                                                 |   |                                      |       |   |   |
| Beginning balance                                    |   | $                                         | 12,539,318 |   | $ | 12,600,157 |   |
| Cumulative effect of change in accounting  principle |   | (1,553,432                                | )          | — |   |
| Obligations incurred                                 |   | 731,767                                   |       | 259,038 |   |
| Obligations acquired through acquisition             |   | 421,056                                   |       | 179,534 |   |
| Obligations settled                                  |   | (641,725                                  | )          | (544,898 | ) |
| Revisions in estimates                               |   | 170,283                                   |       | — |   |
| Accretion                                            |   | 912,869                                   |       | — |   |
| Ending balance (a)                                   |   | $                                         | 12,580,136 |   | $ | 12,493,831 |   |

 

----

(a)                                  As ofSeptember 30, 2003, landfill liabilities include the Company’s finalcapping, closure and post-closure obligations under the provisions of SFAS No.143.  Final capping obligations to bedischarged during the operating lives of the landfills were not included inlandfill liabilities during the year ended December 31, 2002.

 

12

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The Company pays annual premiums to obtain performance bondsunderwritten by a large insurance carrier, which support the Company’sfinancial assurance obligations for its facilities’ closure and post-closurecosts.  These premiums are expensed asincurred.

 

**6.****                                      Long-TermDebt**

 

Long-term debt consisted of the following at September 30, 2003and December 31, 2002 (amounts due under the revolving credit loan havebeen classified based on the terms of the amended credit facility as describedin footnote 11):

 
|                                              |   | **September 30,  2003** |        | **December 31,  2002** |   |
|---------------------------------------------------|--------|------------------------------|-------------|-----------------------------|--------|
| Revolving credit loan                             |   | $                            | 86,975,000  |                        | $      | 46,400,000 |   |
| Senior subordinated notes due June 15,  2012 |   | 152,440,599                  |        | 151,964,430                 |   |
| Other                                             |   | 87,055                       |        | 206,796                     |   |
| Total long-term debt                              |   | 239,502,654                  |        | 198,571,226                 |   |
| Less current portion                              |   | 87,055                       |        | 184,825                     |   |
|                                              |   | $                            | 239,415,599 |                        | $      | 198,386,401 |   |

 

Scheduled maturities of long-term debt are as follows (amounts dueunder the revolving credit loan have been classified based on the terms of theamended credit facility as described in footnote 11):

 
| 2003       |   | $           | 68,561      |   |
|------------|--------|-------------|-------------|--------|
| 2004       |   | 18,494      |        |
| 2005       |   | —      |        |
| 2006       |   | —      |        |
| 2007       |   | —      |        |
| Thereafter |   | 239,415,599 |        |
|       |   | $           | 239,502,654 |   |

 

On June 12, 2002, the Company issued $150,000,000 of 10.25% SeniorSubordinated Notes due 2012 (“Original Notes”) in a private placement.  Interest is payable semi-annually on June 15thand December 15th.  OnJanuary 15, 2003, the Company exchanged the Original Notes for a likeamount of notes (“Notes”) with substantially the same terms, which wereregistered under the Securities Act of 1933, as amended.  The net proceeds from the offering of theOriginal Notes were approximately $144,000,000, after deducting the initialpurchasers’ fees and other expenses of the offering.  The Company used $142,800,000 of these proceeds to repay amountsoutstanding under the term loan and revolving credit loan portions of itssenior credit facility.

 

The Notes are guaranteed by all of IESI’s current subsidiaries, all ofwhich are 100% owned by IESI.  Condensedconsolidating financial information is not provided as IESI has no independentassets or operations, the subsidiary guarantees are full and unconditional andjoint and several and there are no significant restrictions on the ability ofthe Company or any subsidiary guarantor to obtain funds from its subsidiariesby dividend or loan.

 

The Company’s senior credit facility was provided by a syndicate oflenders led by Fleet National Bank, as administrative agent (“Fleet”) andCredit Suisse First Boston and Citicorp North America, Inc., jointly assyndication agents. As of September 30, 2003, there was $86,975,000(excluding $15,500,000 underlying letters of credit) outstanding under therevolving loan portion of the senior credit facility and additional borrowingsof $17,400,000 were available under the revolving loan portion, plus a maximumof an additional $14,500,000 underlying letters of credit.

 

The senior credit facility permitted borrowings at floating interestrates based, at the Company’s option, on the designated eurodollar interestrate, which generally approximates LIBOR, or the Fleet prime rate, in eachcase, plus an applicable margin, and required payment of an annual commitmentfee based on the unused portion of the revolving loan.  As of September 30, 2003, the interestrate applicable to $51,450,000 outstanding under the revolving loan portion ofthe Company’s senior credit facility was LIBOR plus 325 basis points, or4.37%.  The interest rate applicable tothe remaining $35,525,000 outstanding under the revolving loan portion of theCompany’s

 

13

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senior credit facility was the Fleet prime rate, or 5.25%.  The senior credit facility expires onAugust 31, 2004.  DuringOctober 2003, the Company refinanced the senior credit facility.  See footnote 11, Subsequent Events, for adiscussion of the amended senior credit facility.

 

In August 2002, the Company entered into two interest rate swapagreements, which are effective through June 15, 2012, with two financialinstitutions.  Under each swapagreement, the fixed interest rate on $25,000,000 of the Company’s seniorsubordinated notes effectively was converted to an interest rate of 5.275% and5.305%, respectively, plus an applicable floating rate margin that is based onsix month LIBOR which is readjusted semiannually on June 15 and December 15of each year.  As of September 30,2003 and December 31, 2002, the fair value of the two interest rate swapswas $2,440,599 and $1,964,430, respectively. The fair value of the hedged senior subordinated notes has been adjustedfor the effects of the change in fair value of the interest rate swaps.

 

**7.****                                      Commitmentsand Contingencies**

 

The Company’s business activities are conducted in the context of adeveloping and changing statutory and regulatory framework.  Governmental regulation of the waste managementindustry requires the Company to obtain and retain numerous governmentalpermits to conduct various aspects of its operations.  These permits are subject to revocation, modification or denial.  The costs and other capital expenditures,which may be required to obtain or retain the applicable permits or comply withapplicable regulations, could be significant. Any revocation, modification or denial of permits could have a materialadverse effect on the Company.

 

The Company is subject to liability for any environmental damage thatits solid waste disposal facilities may cause to neighboring landowners orresidents, particularly as a result of the contamination of soil, groundwateror surface water, including, in some cases, damage resulting from conditionsexisting prior to the acquisition of such facilities by the Company.  The Company may also be subject to liabilityfor any off-site environmental contamination caused by pollutants or hazardoussubstances whose transportation, treatment or disposal was arranged by theCompany or its predecessors.

 

Any substantial liability for environmental damage incurred by theCompany could have a material adverse effect on the Company’s financialcondition, results of operations or cash flows.  As of September 30, 2003, the Company was not aware of anysuch environmental liabilities.

 

In the normal course of its business and as a result of the extensivegovernmental regulation of the solid waste industry, the Company is subject tovarious judicial and administrative proceedings involving federal, state orlocal agencies. In these proceedings, an agency may seek to impose fines on theCompany or to revoke or deny renewal of an operating permit held by theCompany.  From time to time, the Companymay also be subject to actions brought by citizens’ groups or adjacentlandowners or residents in connection with the permitting and licensing oflandfills and transfer stations, or alleging environmental damage or violationsof the permits and licenses pursuant to which the Company operates.

 

In addition, the Company may become party to various claims and suitspending for alleged damages to persons and property, alleged violations ofcertain laws and alleged liabilities arising out of matters occurring duringthe normal operation of the waste management business. However, as ofSeptember 30, 2003, there were no proceedings or litigation involving theCompany that the Company believed would have a material adverse impact on itsbusiness, financial condition, results of operations or cash flows.  See footnote 11, Subsequent Events, for adiscussion of litigation matters.

 

**8.****                                      RedeemablePreferred Stock**

 

The Company had redeemable preferred stock on its balance sheet of$228,620,000 as of September 30, 2003 and $213,350,000 as of December 31,2002, representing the carrying value of its preferred stock as of suchdates.  In accordance with EmergingIssues Task Force (“EITF”) Topic No. D-98, *Classification and Measurement of RedeemableSecurities*, the Company has classified its preferred stock outsideof permanent equity because, pursuant to the terms of such preferred stock,such preferred stock is redeemable upon the occurrence of certain transactionsdeemed to be liquidation events.  Suchredemption is not deemed to be solely within the Company’s

 

14

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control because holders of the Company’s preferred stock currentlycontrol a majority of the votes of the Company’s board of directors.  See footnote 11, Subsequent Events, for adiscussion of the Series E Convertible Preferred Stock issued inOctober 2003.

 

**9.****                                      SegmentReporting**

 

The Company’s two geographic regions are the Company’s reportablesegments. The segments provide integrated waste management services consistingof collection, transfer, disposal, and recycling services to commercial,industrial, municipal, and residential customers. Summarized financialinformation concerning the Company’s reportable segments for the respectivenine-month and three-month periods ended September 30 is shown in thefollowing table:

 
|                                                                                                   |   | **South  Region** |        | **Northeast  Region** |   | **Corporate  Functions** |   | **Total**   |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|-----------------------|--------|--------------------------|--------|-------------|--------|
| **Nine Months Ended  September 30, 2003**                                                         |   |              |        |                  |   |                     |   |        |   |
| Outside revenues                                                                                       |   |              |        |                  |   |                     |   |        |   |
| Collection                                                                                             |   | $                 | 102,620,766 |                  | $      | 25,095,442               |   | $           | — |   | $ | 127,716,208 |   |
| Transfer                                                                                               |   | 3,541,630         |        | 30,903,613            |   | —                   |   | 34,445,243  |   |
| Disposal                                                                                               |   | 6,883,534         |        | 6,019,247             |   | —                   |   | 12,902,781  |   |
| Recycling                                                                                              |   | 2,018,283         |        | 2,748,531             |   | —                   |   | 4,766,814   |   |
| Other                                                                                                  |   | 524,446           |        | 133,368               |   | —                   |   | 657,814     |   |
| Total outside revenues                                                                                 |   | 115,588,659       |        | 64,900,201            |   | —                   |   | 180,488,860 |   |
| Income (loss) from operations                                                                          |   | 11,288,793        |        | 8,450,352             |   | (6,328,994               | )      | 13,410,151  |   |
| Depreciation, depletion and amortization                                                               |   | 19,209,860        |        | 6,409,253             |   | 529,434                  |   | 26,148,547  |   |
| Purchases of property and equipment                                                                    |   | 26,691,069        |        | 9,007,519             |   | 172,152                  |   | 35,870,740  |   |
| Acquisitions of waste operations and  initial development costs for newly acquired permitted landfills |   | 31,403,703        |        | —                |   | —                   |   | 31,403,703  |   |
| Goodwill acquired                                                                                      |   | 7,895,077         |        | —                |   | —                   |   | 7,895,077   |   |
| Goodwill                                                                                               |   | 90,079,715        |        | 47,628,196            |   | —                   |   | 137,707,911 |   |
| Total assets                                                                                           |   | 306,929,082       |        | 157,952,997           |   | 16,946,861               |   | 481,828,940 |   |
|                                                                                                   |   |              |        |                  |   |                     |   |        |   |
| **Nine Months Ended September 30,  2002**                                                    |   |              |        |                  |   |                     |   |        |   |
| Outside revenues                                                                                       |   |              |        |                  |   |                     |   |        |   |
| Collection                                                                                             |   | $                 | 80,996,502  |                  | $      | 22,911,224               |   | $           | — |   | $ | 103,907,726 |   |
| Transfer                                                                                               |   | 3,342,256         |        | 32,613,215            |   | —                   |   | 35,955,471  |   |
| Disposal                                                                                               |   | 5,772,144         |        | 4,876,404             |   | —                   |   | 10,648,548  |   |
| Recycling                                                                                              |   | 1,945,005         |        | 2,717,886             |   | —                   |   | 4,662,891   |   |
| Other                                                                                                  |   | 1,055,184         |        | 19,024                |   | —                   |   | 1,074,208   |   |
| Total outside revenues                                                                                 |   | 93,111,091        |        | 63,137,753            |   | —                   |   | 156,248,844 |   |
| Income (loss) from operations                                                                          |   | 12,921,845        |        | 9,213,474             |   | (6,074,599               | )      | 16,060,720  |   |
| Depreciation, depletion and amortization                                                               |   | 14,291,596        |        | 5,346,766             |   | 456,846                  |   | 20,095,208  |   |
| Purchases of property and equipment                                                                    |   | 14,777,587        |        | 5,096,448             |   | 626,161                  |   | 20,500,196  |   |
| Acquisitions of waste operations and  initial development costs for newly acquired permitted landfills |   | 38,364,761        |        | 698,513               |   | —                   |   | 39,063,274  |   |
| Goodwill acquired                                                                                      |   | 21,564,753        |        | —                |   | —                   |   | 21,564,753  |   |
| Goodwill                                                                                               |   | 81,602,740        |        | 47,628,196            |   | —                   |   | 129,230,936 |   |
| Total assets                                                                                           |   | 247,095,829       |        | 145,780,409           |   | 17,902,698               |   | 410,778,936 |   |
|                                                                                                   |   |              |        |                  |   |                     |   |        |   |
| **Three Months Ended September 30, 2003**                                                         |   |              |        |                  |   |                     |   |        |   |
| Outside revenues                                                                                       |   |              |        |                  |   |                     |   |        |   |
| Collection                                                                                             |   | $                 | 36,682,503  |                  | $      | 8,558,112                |   | $           | — |   | $ | 45,240,615 |   |
| Transfer                                                                                               |   | 1,144,682         |        | 10,869,123            |   | —                   |   | 12,013,805  |   |
| Disposal                                                                                               |   | 2,828,644         |        | 2,345,555             |   | —                   |   | 5,174,199   |   |
| Recycling                                                                                              |   | 683,597           |        | 840,586               |   | —                   |   | 1,524,183   |   |
| Other                                                                                                  |   | 180,742           |        | 41,931                |   | —                   |   | 222,673     |   |
| Total outside revenues                                                                                 |   | 41,520,168        |        | 22,655,307            |   | —                   |   | 64,175,475  |   |
| Income (loss) from operations                                                                          |   | 3,743,325         |        | 3,333,248             |   | (2,214,000               | )      | 4,862,573   |   |
| Depreciation, depletion and amortization                                                               |   | 6,995,263         |        | 2,394,619             |   | 172,991                  |   | 9,562,873   |   |
| Purchases of property and equipment                                                                    |   | 11,211,912        |        | 4,749,199             |   | —                   |   | 15,961,111  |   |
| Acquisitions of waste operations and initial  development costs for newly acquired permitted landfills |   | 19,115,085        |        | —                |   | —                   |   | 19,115,085  |   |
| Goodwill acquired                                                                                      |   | 1,429,524         |        | —                |   | —                   |   | 1,429,524   |   |
|                                                                                                   |   |              |        |                  |   |                     |   |        |   |
| **Three Months Ended September 30,  2002**                                                   |   |              |        |                  |   |                     |   |        |   |
| Outside revenues                                                                                       |   |              |        |                  |   |                     |   |        |   |
| Collection                                                                                             |   | $                 | 30,444,498  |                  | $      | 8,044,519                |   | $           | — |   | $ | 38,489,017 |   |
| Transfer                                                                                               |   | 1,133,418         |        | 11,648,759            |   | —                   |   | 12,782,177  |   |
| Disposal                                                                                               |   | 2,164,665         |        | 1,709,549             |   | —                   |   | 3,874,214   |   |
| Recycling                                                                                              |   | 889,753           |        | 916,930               |   | —                   |   | 1,806,683   |   |
| Other                                                                                                  |   | 258,631           |        | 9,896                 |   | —                   |   | 268,527     |   |
| Total outside revenues                                                                                 |   | 34,890,965        |        | 22,329,653            |   | —                   |   | 57,220,618  |   |
| Income (loss) from operations                                                                          |   | 4,405,470         |        | 3,463,596             |   | (2,944,344               | )      | 4,924,722   |   |
| Depreciation, depletion and amortization                                                               |   | 5,371,508         |        | 1,793,696             |   | 141,711                  |   | 7,306,915   |   |
| Purchases of property and equipment                                                                    |   | 7,550,635         |        | 1,986,315             |   | 219,202                  |   | 9,756,152   |   |
| Acquisitions of waste operations and  initial development costs for newly acquired permitted landfills |   | 11,585,034        |        | —                |   | —                   |   | 11,585,034  |   |
| Goodwill acquired                                                                                      |   | 7,208,464         |        | —                |   | —                   |   | 7,208,464   |   |

 

15

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Seasonality and weather can temporarily affect some of the Company’srevenue and expenses.  The Companygenerally experiences lower construction and demolition waste volumes duringthe winter months when the construction industry slows down.  Frequent and/or heavy snow and ice stormscan affect the productivity of the Company’s operations.  In the Company’s South Region, higher thannormal rainfall and more frequent rain and ice storms over a 30 - 90 day periodcan put additional stress on the construction industry, lowering the volumes ofwaste the Company handles.  For example,inclement weather in the Company’s South Region during the fourth quarter of2002 and the first two months of 2003 resulted in a reduction in the volumes ofwaste the Company handled during such periods. Significantly below normal rainfall can lead to higher levels ofconstruction activity, increasing the Company’s volumes.

 

**10.****                               StockOptions**

 

On July 1, 2003, the Board of Directors of the Company authorizedthe issuance of 21,900 options under the Company’s existing 1999 Stock OptionPlan (the “Plan”).  Options grantedunder the Plan are nonqualified stock options to certain employees anddirectors.  The options were issued atan exercise price of $95 per share which was considered to be equal to orgreater than the estimated fair value of the underlying shares.  Options issued under the Plan expire 10years from the date of grant and become fully vested over periods ranging from5 to 8 years.

 

The following schedule reflects the pro forma impact for therespective nine-month and three-month periods ended September 30, 2003 and2002 on net income of accounting for the Company’s stock option grants usingSFAS No. 123, “Accounting for Stock-Based Compensation,” which would result inthe recognition of compensation expense for the fair value of stock optiongrants as computed using the Black-Scholes option-pricing model.

 

16

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|                                                           |   | **2003** |       | **2002** |       |
|----------------------------------------------------------------|--------|----------|------------|----------|------------|
| **For the nine months  ended September 30,**              |   |     | ** ** |     | ** ** |
| Reported net income (loss)                                     |   | $        | (4,418,743 | )        | $          | 780,263 |   |
| Less: compensation expense per SFAS No.  123,  net of tax |   | 112,646  |       | 23,588   |       |
| Pro forma net income (loss)                                    |   | $        | (4,531,389 | )        | $          | 756,675 |   |
|                                                           |   |     |       |     |       |
| **For the three months  ended September 30,**             |   |     |       |     |       |
| Reported net income (loss)                                     |   | $        | (2,667,459 | )        | $          | (263,534 | ) |
| Less: compensation expense per SFAS No.  123,  net of tax |   | 41,882   |       | 23,588   |       |
| Pro forma net loss                                             |   | $        | (2,709,341 | )        | $          | (287,122 | ) |

 

**11.          SubsequentEvents**

 

OnOctober 9, 2003, the Company acquired all of the outstanding stock ofSeneca Meadows, Inc., the owner and operator of the Seneca Meadows Landfill,for approximately $185,000,000. The Seneca Meadows Landfill is a fullypermitted municipal solid waste landfill located in the Finger Lakes Region ofupstate New York, approximately 45 miles southeast of the City of Rochester,New York. The Seneca Meadows Landfill is permitted to accept an average of6,000 tons of municipal solid waste per day.

 

Alsoduring October, the Company issued $47,500,000 of Series E ConvertiblePreferred Stock (“Series E Stock”) and finalized an amendment of its seniorsecured credit facility. The Series E Stock is the most senior class of IESI’sequity and has substantially the same terms and conditions as the Company’soutstanding Series D Convertible Preferred Stock. The proceeds from theissuance of the Series E Stock were used to finance the acquisition of SenecaMeadows.  The amended senior securedcredit facility totals $400,000,000 and consists of a $200,000,000 revolver anda $200,000,000 term loan. The revolver matures in October 2008 and theterm loan matures in October 2010. The $200,000,000 term loan andborrowings of $33,700,000 under the revolver were used to refinance IESI’sexisting credit facility, and to finance the acquisition of SenecaMeadows.  Future borrowings under therevolver will be available to finance acquisitions, capital expenditures,working capital and other general corporate purposes.  The amount outstanding under the revolving loan portion of theCompany’s credit facility at September 30, 2003 has been classified as along-term obligation in the consolidated balance sheet at September 30,2003 based on the terms of the amended credit facility.

 

OnOctober 30, 2003, a Company vehicle was involved in an accident in whichthe Company estimates the costs of the accident will exceed the Company’smaximum stop loss deductible of $500,000 per accident.  The Company will record an expense of$500,000 in the fourth quarter of 2003 to record its’ portion of the estimatedcosts related to the accident.

 

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**Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*You should read the following discussion in conjunction with ourunaudited consolidated financial statements and the related notes includedelsewhere in this Quarterly Report on Form 10-Q.*

 

**General**

 

We are one of the leading regional, non-hazardous solid wastemanagement companies in the United States. We provide collection, transfer, disposal and recycling services in twogeographic regions: our South Region, consisting of Texas, Louisiana, Oklahoma,Arkansas and Missouri; and our Northeast Region, consisting of New York, NewJersey, Pennsylvania and Maryland.  Weare the tenth largest, and the third largest privately-held, service providerin the approximately $43 billion non-hazardous solid waste management industryin the United States.

 

***Applicationof Critical Accounting Policies***

 

Our consolidated financial statements are based on the selection ofaccounting policies and application of significant accounting estimates, whichrequire management to make significant estimates and assumptions.  For a detailed discussion of our critical accountingestimates, please refer to Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of our Annual Report on Form10-K for the fiscal year ended December 31, 2002. In addition, pleaserefer to Note 2 to our unaudited consolidated financial statements included inPart I, Item 1. “Financial Statements” of this Quarterly Report on Form 10-Qfor a discussion of our adoption of Financial Accounting Standards Board, orFASB, Statement of Financial Accounting Standards, or SFAS, No. 143,“Accounting for Asset Retirement Obligations.” There were no material changesrelating to our critical accounting estimates during the three months endedSeptember 30, 2003.

 

***Sourcesof Revenue***

 

Our revenue consists primarily of fees we charge customers for solidwaste collection, transfer and disposal and recycling services.  We frequently perform these services underservice agreements with businesses, contracts with municipalities, landlords orhomeowners’ associations, or subscription arrangements with homeowners.  We estimate that more than 30% of our SouthRegion’s revenue was generated from 256 municipal contracts during 2002 and 275municipal contracts during the first nine months of 2003.  Our contracts with the City of New Yorkrepresented in the aggregate approximately 34% of our Northeast Region’s, andapproximately 14% of our overall, revenue during 2002 and approximately 33% ofour Northeast Region’s, and approximately 12% of our overall, revenue duringthe first nine months of 2003. Contracts with municipalities provide relatively consistent cash flowduring the terms of the contracts.  Ourmunicipal contracts generally last from three to five years and usually haverenewal options.  Many of our municipalcontracts are franchise agreements that give us the exclusive right to providespecified waste services within a specified territory during the contractterm.  These exclusive arrangements aretypically awarded, at least initially, on a competitive bid basis or through aformalized proposal and subsequently on a bid or negotiated renewal basis.  Collection fees are paid either by themunicipalities from their tax revenue or directly by the residents receivingthe services.  Our collection businessalso generates revenue from the sale of recyclable commodities.  After recyclables are collected, they aredelivered to other sorting facilities operated by third parties.

 

We typically determine the prices for our collection services by thecollection frequency and level of service, route density, volume, weight andtype of waste collected, type of equipment and containers furnished, thedistance to the disposal or processing facility, the cost of disposing orprocessing, and prices charged by competitors for similar services.  The terms of our contracts sometimes limitour ability to pass on cost increases. Long-term solid waste collection contracts typically contain a formula,normally based on the consumer price index, which automatically adjusts fees tocover increases in some, but not all, of our operating costs.

 

We charge transfer station and landfill customers a “tipping fee”either on a per-ton or per-yard basis for disposing of their municipal solidwaste, or MSW, construction and demolition, or C&D, waste, or both at the transferstations and landfills we operate.  Wegenerally base our transfer station “tipping fees” on market factors and thecost of processing the waste deposited at the transfer station, the cost oftransporting the waste to a disposal

 

18

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facility and the cost of disposal. We generally base our landfill “tipping fees” on market factors and thetype and weight or volume of the waste deposited and the type and size of thevehicles used in the transportation of the waste.

 

Many of our landfills are assessed state, county or local communityfees based on the volume of tons or yards disposed of during a defined period,usually either monthly or quarterly. The types and amounts of fees charged can vary widely but typically astate fee is uniformly charged to all landfills within a state.  We report our landfill revenue net of allthese fees.  Since July 2002, theCommonwealth of Pennsylvania has imposed an additional disposal fee of $4.00per ton on all solid waste disposed of at MSW landfills in Pennsylvania,raising the total disposal fees assessed on MSW landfill operators underPennsylvania state law to $7.25 per ton. Since its effectiveness, we have passed through the additional fee toour customers by increasing the fees we charge at our Pennsylvania landfills,New York City transfer stations and New York City and Pennsylvania collectionoperations.

 

The City of New York currently places a maximum limitation of $12.20per loose yard or $160.00 per ton on the fees a hauler can charge to acommercial customer for waste collection services.  The disposal facilities in and around New York City charge by theton.  Prior to September 15, 2003,the restriction applied only on a per loose yard basis.  Accordingly, based on the weight of certaincustomers’ loose yardage, prior to September 15, 2003 it was noteconomical for us to service customers with “heavy waste.”  Accordingly, our New York City collectionbusiness had focused on customers that had loose garbage that was lighter andon those customers that have a large paper recycling component, which enabledus to reduce our cost of disposal.

 

During 2002, New York City announced changes to update its Solid WasteManagement Plan, pursuant to which it plans to utilize and upgrade its existingmarine transfer station system instead of private transfer stations to processand transfer its residential waste stream of approximately 12,000 tons of MSWper day.  New York City has announcedits intention to implement these changes by retrofitting and repermitting thesemarine transfer stations by 2008 so that the stations can containerize theCity’s residential MSW on site and then transport the loaded containers toultimate disposal sites by alternative transportation methods, such as barge,rail and truck.

 

In February 2003, the New York City Department of Sanitationcompleted a solicitation of bids for the disposal of up to 4,000 tons of MSWper day that the City collects in Brooklyn. The waste covered by the solicitation of bids included the waste coveredby our contracts with the City as well as a larger, contract between the Cityand Waste Management.  We submitted bidsto transfer and dispose up to an aggregate of 1,500 tons of the waste coveredby the solicitation of bids.  The City,in October awarded us a new three-year contract for up to 1,500 tons perday commencing in November 1, 2003.

 

The tablebelow shows, for the periods indicated, the percentage of our total reportedrevenue attributable to each of our services: 

 

|       |   | **Nine  Months Ended  September 30,** |   | **Three  Months Ended  September 30,** |   |
|------------|--------|--------------------------------------------|--------|---------------------------------------------|--------|
|       |   | **2003**                                   |   | **2002**                                    |   | **2003** |   | **2002** |   |
|       |   |                                       |   |                                        |   |   |   |   |   |
| Collection |   | 70.8                                       | %      | 66.5                                        | %      | 70.5 | % | 67.3 | % |
| Transfer   |   | 19.1                                       | %      | 23.0                                        | %      | 18.7 | % | 22.3 | % |
| Disposal   |   | 7.1                                        | %      | 6.8                                         | %      | 8.1 | % | 6.8 | % |
| Recycling  |   | 2.6                                        | %      | 3.0                                         | %      | 2.4 | % | 3.1 | % |
| Other      |   | 0.4                                        | %      | 0.7                                         | %      | 0.3 | % | 0.5 | % |
| Total      |   | 100.0                                      | %      | 100.0                                       | %      | 100.0 | % | 100.0 | % |

 

***CostStructure***

 

Our operating expenses include labor, fuel, equipment maintenance,“tipping fees” paid to third-party transfer stations and disposal facilities,workers’ compensation and vehicle insurance, third-party transportationexpenses, and accretion expense.  Wemonitor the fluctuation in fuel prices and, from time to time, if this costincreases at a higher rate than inflation, we generally pass the additional coston to our customers.  Our businessstrategy is to develop vertically integrated operations to internalize —transfer and dispose of at our own landfills — the waste that we handle andthus realize higher margins from our operations.  By disposing of waste at our own landfills, we

 

19

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retain the margin generated through disposal operations that wouldotherwise be earned by third-party landfills. We currently internalize approximately 48% of the solid waste that wehandle and deliver the rest to third-party disposal facilities.  If the operators of third-party landfillsincrease their “tipping fees,” we would seek to pass along these increases toour customers, but if we were unable to do so, our profitability would beadversely affected.  If these operatorsdiscontinue their arrangements with us and we cannot find alternative disposalsites with favorable arrangements, our costs of disposal may rise.  Also, our failure to obtain the requiredpermits to establish new landfills and transfer stations or expand our existinglandfills and transfer stations could hinder our business strategy to developvertically integrated operations. Failure to expand capacity could lead to decreased profitability as aresult of the increased “tipping fees” we would have to pay to third-partylandfills.

 

We operate 23 transfer stations, which reduce our costs by allowing usto use collection personnel and equipment more efficiently and by consolidatingwaste to gain volume discounts on disposal rates.  We have a limited number of municipal contractual obligationsthat require us to deliver waste collected under the contracts to a designateddisposal facility.

 

General and administrative expenses include management, clerical and administrativecompensation and overhead costs associated with our marketing and sales force,professional services and community relations expenses.

 

Depreciation, depletion and amortization expense includes depreciationof fixed assets over their estimated useful lives using the straight-linemethod, depletion of landfill costs using life cycle accounting and theunits-of-consumption method and amortization of intangible assets other thangoodwill using the straight-line method. In allocating the purchase price of an acquired company among itsassets, we first assign value to the tangible assets, followed by intangibleassets, including non-competition covenants and certain contracts that aredeterminable both in terms of size and life. We determine the value of the intangible assets other than goodwill byconsidering, among other things, the present value of the cash flows associatedwith those assets.

 

We capitalize some third-party expenditures related to pendingacquisitions and development projects, such as legal and engineeringexpenses.  We expense indirectacquisition costs, such as executive and corporate overhead, public relationsand other corporate services, as we incur them.  We charge against net income any unamortized capitalizedexpenditures and advances, net of any portion that we believe we may recoverthrough sale or otherwise, that relate to any operation that is permanentlyshut down and any pending acquisition or landfill development project that isnot expected to be completed.  We routinelyevaluate all capitalized costs and expense those related to projects that webelieve are not likely to be completed.

 

Effective January 1, 2003, we adopted SFAS No. 143, “Accountingfor Asset Retirement Obligations.”  SeeNote 2 to our unaudited consolidated financial statements included in Part I,Item 1. “Financial Statements” of this Quarterly Report on Form 10-Q.  Under SFAS No. 143, costs associated withfinal capping activities that occur during the operating life of a landfill, aswell as closure and post closure activities, are accounted for as assetretirement obligations on a discounted basis. We recognize landfill retirement obligations that relate to closure andpost-closure activities over the operating life of a landfill as landfill airspaceis consumed and the obligation is incurred. We recognize our final capping obligations on a discrete basis for eachexpected future final capping event over the number of tons of waste that eachfinal capping event is expected to cover. The landfill retirement obligations are initially measured at estimatedfair value.  Fair value is measured on apresent value basis, using a credit-adjusted, risk-free rate (currently at10.25%).  Accretion is recorded on alllandfill retirement obligations using the effective interest method.  We amortize landfill retirement costsarising from closure and post-closure obligations, which are capitalized aspart of the landfill asset, using our historical landfill accounting practices.  We amortize landfill retirement costsarising from final capping obligations, which are also capitalized as part ofthe landfill asset, on a units-of-consumption basis over the number of tons ofwaste that each final capping event covers.

 

We periodically evaluate the value and future benefits of our goodwilland other intangible assets. For intangible assets other than goodwill, weassess the recoverability from future operations using cash flows and incomefrom operations of the related assets as measures.  Under this approach, the carrying value is reduced if it becomesprobable that our best estimate of expected future cash flows from the relatedintangible assets would be less than the carrying amount of the intangibleassets.  As of December 31, 2002,there were no adjustments to the carrying amounts of intangibles other thangoodwill resulting from these evaluations. We test goodwill for

 

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impairment using the two-step process prescribed in SFASNo. 142.  The first step is ascreen for potential impairment and the second step measures the amount of theimpairment, if any.  We performed thefirst of the required impairment tests of goodwill and indefinite-livedintangible assets based on the carrying values as of January 1, 2002 and incurredno impairment of goodwill upon the initial adoption of SFAS No. 142.  We also performed our annual impairment testduring 2002 and incurred no impairment. As of September 30, 2003, goodwill and other intangible assetsrepresented approximately 33.5% of total assets, 70.6% of redeemable preferredstock and 92.0% of the sum of our redeemable preferred stock and stockholders’equity (deficit).

* *

***Seasonality***

 

Seasonality and weather can temporarily affect some of our revenue andexpenses.  We generally experience lowerC&D waste volumes during the winter months when the construction industryslows down.  Frequent and/or heavy snowand ice storms can affect our revenue and the productivity of our operations.  In our South Region, higher than normalrainfall and more frequent rain and ice storms over a 30 - 90 day period canput additional stress on the construction industry, lowering the volumes ofwaste we handle.  For example, inclementweather in the our South Region during the fourth quarter of 2002 and the firsttwo months of 2003 resulted in a reduction in the volumes of waste we handledduring such periods. Significantly below normal rainfall can lead to higherlevels of construction activity, increasing our volumes.

* *

***Impactof Inflation***

 

To date, inflation has not significantly affected our operations.  Consistent with industry practice, many ofour contracts allow us to pass through certain costs to our customers,including increases in landfill “tipping fees” and, in some cases, fuelcosts.  Therefore, we believe that wewould be able to increase prices to offset many cost increases that result frominflation.  However, competitivepressures and the terms of certain of our long-term contracts may require us toabsorb at least part of these cost increases, particularly during periods ofhigh inflation.  For example, during thefirst nine months of 2003, diesel fuel costs have been significantly higherthan during the comparable six-month period of 2002.

* *

***Acquisitions***

 

Our integration plan for acquisitions contemplates certain costsavings, including through the elimination of duplicative personnel andfacilities.  Unforeseen factors mayoffset the estimated cost savings or other components of our integration plan,in whole or in part, and, as a result, we may not realize any cost savings orother benefits from future acquisitions, and we may experience a net increasein costs.

 

In accordance with generally accepted accounting principles, or GAAP,we capitalize some expenditures and advances relating to pendingacquisitions.  For any pendingacquisition that is not consummated, we charge any such expenditures andadvances against earnings.  Therefore,we may incur charges against earnings in future periods, which could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

All of our acquisitions have been accounted for as purchases and,accordingly, only the operations of acquired companies since the acquisitiondates are included in our unaudited consolidated financial statements.  These acquisitions were financed through acombination of funds borrowed under our senior credit facility and proceedsfrom private offerings of our equity securities.  We expect to be able to finance any future acquisitions with cashprovided from operations, borrowings under our senior credit facility, debt orequity offerings, or some combination of the foregoing.

* *

*2003.* During the first nine months of 2003, we acquired the assets of 12 solidwaste management companies, for an aggregate purchase price of $30.4 million,consisting of cash and liabilities assumed.

* *

*2002*. During 2002, we acquired the assets of 17 solid waste managementcompanies as well as real estate associated with landfill expansions, for anaggregate purchase price of $47.3 million, consisting of cash and liabilitiesassumed.

 

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***Resultsof Operations***

 

The followingtable sets forth, for the periods indicated, selected consolidated statement ofoperations data (in thousands) and the percentage relationship that such databear to our revenue:

 
|                                                 |   | **Nine  Months Ended September 30,** |   | **Three  Months Ended September 30,** |   |
|------------------------------------------------------|--------|-------------------------------------------|--------|--------------------------------------------|--------|
|                                                 |   | **2003**                                  |   | **2002**                                   |   | **2003** |   | **2002** |   |
|                                                 |   | **$**                                     |   | **%**                                      |   | **$** |   | **%** |   | **$** |   | **%** |   | **$** |   | **%** |   |
|                                                 |   |                                      |   |                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| South Region                                         |   | 115,589                                   |   | 64.0                                       |   | 93,111 |   | 59.6 |   | 41,520 |   | 64.7 |   | 34,891 |   | 61.0 |   |
| Northeast Region                                     |   | 64,900                                    |   | 36.0                                       |   | 63,138 |   | 40.4 |   | 22,655 |   | 35.3 |   | 22,330 |   | 39.0 |   |
| Services revenue                                     |   | 180,489                                   |   | 100.0                                      |   | 156,249 |   | 100.0 |   | 64,175 |   | 100.0 |   | 57,221 |   | 100.0 |   |
| Operating expense                                    |   | 117,926                                   |   | 65.3                                       |   | 100,716 |   | 64.5 |   | 41,542 |   | 64.7 |   | 37,721 |   | 65.9 |   |
| General and administrative                           |   | 23,004                                    |   | 12.7                                       |   | 19,377 |   | 12.4 |   | 8,207 |   | 12.8 |   | 7,268 |   | 12.7 |   |
| Depreciation, depletion and amortization             |   | 26,149                                    |   | 14.5                                       |   | 20,095 |   | 12.9 |   | 9,563 |   | 14.9 |   | 7,307 |   | 12.8 |   |
| Income from operations                               |   | 13,410                                    |   | 7.5                                        |   | 16,061 |   | 10.3 |   | 4,863 |   | 7.6 |   | 4,925 |   | 8.6 |   |
| Interest expense, net                                |   | (13,778                                   | )      | (7.7                                       | )      | (9,834 | ) | (6.3 | ) | (4,820 | ) | (7.6 | ) | (4,170 | ) | (7.3 | ) |
| Loss on termination of interest rate swaps           |   | —                                    |   | —                                     |   | (825 | ) | (0.5 | ) | — |   | — |   | — |   | — |   |
| Loss on extinguishment of debt                       |   | —                                    |   | —                                     |   | (586 | ) | (0.4 | ) | — |   | — |   | — |   | — |   |
| Other income (expense), net                          |   | (261                                      | )      | (0.1                                       | )      | (132 | ) | (0.1 | ) | (147 | ) | (0.2 | ) | (78 | ) | (0.2 | ) |
| Income tax benefit (expense)                         |   | (2,314                                    | )      | (1.3                                       | )      | (3,904 | ) | (2.5 | ) | (2,563 | ) | (4.0 | ) | (941 | ) | (1.6 | ) |
| Cumulative effect of change in accounting  principle |   | (1,476                                    | )      | (0.8                                       | )      | — |   | — |   | — |   | — |   | — |   | — |   |
| Net income (loss)                                    |   | (4,419                                    | )      | (2.4                                       | )      | 780 |   | 0.5 |   | (2,667 | ) | (4.2 | ) | (264 | ) | (0.5 | ) |

 

**Three Months Ended September 30, 2003Compared With Three Months Ended September 30, 2002**

 

*Revenue. *Ourrevenue increased by $7.0 million, or 12.2%, to $64.2 million duringthe three months ended September 30, 2003 from $57.2 million duringthe three months ended September 30, 2002.  During the three months ended September 30, 2003,acquisitions completed since July 2002 contributed $4.3 million, or7.5%, to the increase in our revenue from the three months endedSeptember 30, 2002.  Excludingincremental revenue from acquisitions, our revenue increased by$2.7 million, or 4.7%.  During thethree months ended September 30, 2003, our new business, from both newmunicipal contracts and increased sales from existing operations, contributed2.9% of such increase, while selective price increases contributed 1.8%.  In our South Region, our revenue increasedby $6.6 million, or 19.0%, to $41.5 million during the three monthsended September 30, 2003 from $34.9 million during the three monthsended September 30, 2002.  In ourNortheast Region, our revenue increased by $0.4 million, or 1.5%, to$22.7 million during the three months ended September 30, 2003 from$22.3 million during the three months ended September 30, 2002.

* *

*Operating Expenses.*  Our operating expenses increased by $3.8 million, or 10.1%,to $41.5 million during the three months ended September 30, 2003from $37.7 million during the three months ended September 30,2002.  Operating expenses as apercentage of our revenue decreased by 1.2% to 64.7% during the three monthsended September 30, 2003 from 65.9% during the comparable period in2002.  The increase in our operatingexpenses was substantially due to the increase in our revenue during the sameperiod, including as a result of expenses from acquired operations.   Fuel costs increased by $75,000 during thethree months ended September 30, 2003 as compared to the correspondingperiod in 2002. While down significantly since its peak in the first quarter of2003, fuel cost per gallon was still up approximately $0.05 per gallon duringthe three months ended September 30, 2003 as compared to the correspondingperiod in 2002.

* *

*General and Administrative. *Ourgeneral and administrative expenses increased by $939,000, or 12.9%, to$8.2 million during the three months ended September 30, 2003 from$7.3 million during the three months ended September 30, 2002.  Our general and administrative expensesincreased as a result of our employment of additional personnel from companiesacquired and additional corporate and regional overhead to accommodate ourinternal growth from our collection operations.  Also during the quarter, we increased our bad debt reserve by anadditional $250,000 to cover expected write-offs at a single hauling operationin our South Region.  General andadministrative

 

22

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expenses as a percentage of our revenue increased to 12.8% during thethree months ended September 30, 2003 from 12.7% during the comparableperiod in 2002.

* *

*Depreciation, Depletion and Amortization. *Our depreciation, depletion andamortization expenses increased by $2.3 million, or 30.9%, to $9.6 millionduring the three months ended September 30, 2003 from $7.3 millionduring the three months ended September 30, 2002.  This increase resulted primarily from theinclusion of depreciation, depletion, and amortization of businesses acquiredin 2003, a full three months of depreciation, depletion, and amortization frombusinesses acquired since July 2002 and depreciation of capital assetspurchased for internal growth.  In addition,during the three months ended September 30, 2003, we added three newoperating landfills, including two greenfield sites acquired in 2002 thatopened in August 2003 and an operating landfill purchased inJuly 2003. Landfills generally have a higher component of depreciation,depletion and amortization expenses than a typical hauling operation.  Our Bethlehem landfill permit expansion,which was granted in April 2003 and included an increase in dailypermitted volume from 750 tons to 1,375 tons, resulted in an increase indepletion expense for the three months ended September 30, 2003 of$500,000.  Depreciation, depletion andamortization as a percentage of our revenue increased to 14.9% during the threemonths ended September 30, 2003 from 12.8% during the comparable period in2002.

* *

*Income from Operations. *Ourincome from operations decreased $62,000, or 1.3%, to $4.9 million duringthe three months ended September 30, 2003 from $4.9 million during thethree months ended September 30, 2002. Income from operations as a percentage of our revenue decreased to 7.6%in the three months ended September 30, 2003 from 8.6% during thecomparable period in 2002.  The decreasein income from operations during the three-month period endedSeptember 30, 2003 was caused by higher fuel costs, an increase in our baddebt reserve, and higher depletion expenses related to our Bethlehem landfilland new landfills, partially offset by an increase in our revenue during thesame period, net of an increase in expenses from acquired operations and newbusiness.

* *

*Interest Expense, Net. *Ourinterest expense, net, increased $651,000, or 15.6%, to $4.8 millionduring the three months ended September 30, 2003 from $4.2 millionduring the three months ended September 30, 2002.  This increase was attributable to higherdebt levels during the three months ended September 30, 2003 as comparedto the three months ended September 30, 2002, primarily due toacquisitions, and capital needs related to new business.  Interest expense, net, as a percentage ofour revenue, increased to 7.6% in the three months ended September 30,2003 from 7.3% during the comparable period in 2002.

* *

*Other Expenses. *Ourother expenses increased by $69,000 to $147,000 in the three months endedSeptember 30, 2003 from $78,000 in the three months ended September 30,2002.  The increase was the result ofadditional state franchise taxes.

* *

*Income Tax Expense. *Ourincome tax expense increased to $2.6 million during the three months endedSeptember 30, 2003 from $941,000 during the three months endedSeptember 30, 2002.  Income taxexpense as a percentage of revenue was 4.0% for the three months endedSeptember 30, 2003.  We havedetermined that due to our estimated annual operating results for 2003, ourestimated income tax provision will not vary significantly based on theestimated income (loss) before income taxes for 2003.  As such, as of September 30, 2003, we have recognized in ourconsolidated statement of operations an amount equaling approximately 75% ofthe estimated 2003 income tax provision. The difference in income taxes computed at the statutory rate andreported income taxes for the three months ended September 30, 2003 isalso due primarily to state and local income taxes and an increase in thevaluation allowance related to deferred tax assets.

* *

*Net Income (Loss). *Ournet loss increased $2.4 million to a loss of $2.7 million during the threemonths ended September 30, 2003 from a loss of $264,000 during the threemonths ended September 30, 2002. The increase in net loss was substantially attributable to the increasein income tax expense, partially offset by an increase in our revenue duringthe same period, net of an increase in expenses from acquired operations andnew business.  Additionally, net lossincreased due to higher fuel costs, an increase in our bad debt reserve,additional depletion expense, increased interest expense, net, from a higherdebt level and additional state franchise taxes.  Net income as a percentage of our revenue decreased to a loss of(4.2)% in the three months ended September 30, 2003 from a loss of (0.5)%in the three months ended September 30, 2002.

 

23

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**Nine Months Ended September 30, 2003Compared With Nine Months Ended September 30, 2002**

* *

*Revenue. *Ourrevenue increased by $24.3 million, or 15.5%, to $180.5 millionduring the nine months ended September 30, 2003 from $156.2 millionduring the nine months ended September 30, 2002.  During the nine months ended September 30, 2003,acquisitions completed since January 2002 contributed $15.5 million,or 9.9%, to the increase in our revenue from the nine months endedSeptember 30, 2002.  Excludingincremental revenue from acquisitions, our revenue increased by $8.8 million,or 5.6%.  During the nine months endedSeptember 30, 2003, our new business, from both new municipal contractsand increased sales from existing operations, contributed 2.7% of suchincrease, while selective price increases contributed 2.9%.  In our South Region, our revenue increasedby $22.5 million, or 24.1%, to $115.6 million during the nine monthsended September 30, 2003 from $93.1 million during the nine monthsended September 30, 2002.  In ourNortheast Region, our revenue increased by $1.8 million, or 2.8%, to$64.9 million during the nine months ended September 30, 2003 from$63.1 million during the nine months ended September 30, 2002.  During the winter months of January,February and March, 2003, severe weather in our Northeast Region and, to alesser extent, in our South Region, temporarily reduced our roll-offcollection, transfer station and landfill revenue by $1.6 million to $1.8million, as compared to the comparable three month period in 2002.

* *

*Operating Expenses.*  Our operating expenses increased by $17.2 million, or 17.1%,to $117.9 million during the nine months ended September 30, 2003from $100.7 million during the nine months ended September 30,2002.  Operating expenses as apercentage of our revenue increased by 0.8% to 65.3% during the nine monthsended September 30, 2003 from 64.7% during the comparable period in2002.  The increase in our operatingexpenses was substantially due to the increase in our revenue during the sameperiod, including as a result of expenses from acquired operations and newbusiness.  Additionally, our operatingexpenses increased during the nine months ended September 30, 2003 due toan additional $4.00 per ton disposal fee enacted by Pennsylvania inJuly 2002.  While we were able topass this additional fee on to our customers, the additional disposal costincreased operating expenses as a percentage of our revenue by approximately0.7%.  Between January andSeptember 2003, the price for a gallon of diesel fuel increased at itspeak by approximately $0.30 per gallon, resulting in additional fuel costs of $825,000during the period, as compared to the corresponding period in 2002.  As discussed above, the severe winterweather during January, February, and March 2003 negatively impacted ourlandfill and transfer station revenue, without a corresponding reduction inexpenses.  Excluding transportation anddisposal costs related to transfer stations, the other costs at thesefacilities are mostly fixed, causing margin deterioration during the ninemonths ended September 30, 2003 of 0.1%.

* *

*General and Administrative. *Ourgeneral and administrative expenses increased by $3.6 million, or 18.7%,to $23.0 million during the nine months ended September 30, 2003 from$19.4 million during the nine months ended September 30, 2002.  Our general and administrative expensesincreased as a result of our employment of additional personnel from companiesacquired and additional corporate and regional overhead to accommodate ourinternal growth from our collection operations.  General and administrative expenses as a percentage of ourrevenue increased to 12.7% during the nine months ended September 30, 2003from 12.4% during the comparable period in 2002.  During the nine months ended September 30, 2003 we wrote off$170,000 from an aborted debt transaction, primarily related to legal andaccounting fees and we increased our bad debt reserve by an additional $250,000to cover expected write-offs at a hauling operation in our South Region.

* *

*Depreciation, Depletion and Amortization. *Our depreciation, depletion andamortization expenses increased by $6.0 million, or 30.1%, to $26.1million during the nine months ended September 30, 2003 from$20.1 million during the nine months ended September 30, 2002.  This increase resulted primarily from theinclusion of depreciation, depletion, and amortization of businesses acquiredin 2003, a full nine months of depreciation, depletion, and amortization frombusinesses acquired since January 2002, and depreciation of capital assetspurchased for internal growth.  Duringthe nine-month period in 2003, we added three new operating landfills,including two greenfield sites acquired in 2002 that opened in August 2003and an operating landfill purchased in July 2003, which have a highercomponent of depreciation, depletion and amortization expenses than a typicalhauling operation.  Additional depletionexpense related to the Bethlehem landfill permit expansion granted inApril 2003, that included an increase in daily permitted volume from 750tons to 1,375 tons, resulted in an increase to expense for the nine monthsended September 30, 2003 of $810,000. Depreciation, depletion and amortization as a percentage of our revenueincreased to 14.5% during the nine months ended September 30, 2003 from 12.9%during the comparable period in 2002. Our depreciation, depletion and amortization expenses are substantiallyfixed costs.

 

24

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The severe winter weather during the three months ended March 31,2003 negatively impacted our revenue, without a corresponding reduction inexpenses during the period, which caused 0.1% - 0.2% of the margindeterioration.

* *

*Income from Operations. *Ourincome from operations decreased $2.7 million, or 16.5%, to$13.4 million during the nine months ended September 30, 2003 from $16.1 millionduring the nine months ended September 30, 2002.  Income from operations as a percentage of our revenue decreasedto 7.5% in the nine months ended September 30, 2003 from 10.3% during thecomparable period in 2002.  Increases inoperating expense from higher fuel cost, an increase in our bad debt reserve,the write off of $170,000 from an aborted debt transaction and higher depletionexpenses related to our Bethlehem landfill and new landfills, reduced ourincome from operations during the nine months ended September 30,2003.  Also, the decrease in income fromoperations (and the related margin decrease) during the nine-month period wasattributable to the severe winter weather, higher fuel costs, an increase inour bad debt reserve and higher depletion expenses related to our Bethlehemlandfill and new landfills, partially offset by an increase in our revenueduring the same period, net of an increase in expenses from acquired operationsand new business.  The Pennsylvaniadisposal tax additionally reduced the margin during the nine-month period.

* *

*Interest Expense, Net. *Ourinterest expense, net, increased $3.9 million, or 40.1%, to $13.8 millionduring the nine months ended September 30, 2003 from $9.8 millionduring the nine months ended September 30, 2002.  This increase was attributable to higher debt levels during thenine months ended September 30, 2003 as compared to the nine months endedSeptember 30, 2002, primarily due to acquisitions and by the relativelyhigher interest rate we paid since June 12, 2002, on $150.0 millionof our Notes (which was partially offset by interest rate swaps on $50.0million of this debt) which constituted a significant portion of ouroutstanding debt as of September 30, 2003.  Interest expense, net, as a percentage of our revenue, increasedto 7.7% in the nine months ended September 30, 2003 from 6.3% during thecomparable period in 2002.

* *

*Loss on Termination of Interest Rate Swaps.*  There was no such expense in the nine monthsended September 30, 2003.  We incurreda loss on the termination of interest rate swaps of $826,000 in the nine monthsended September 30, 2002.  Inconjunction with the payoff of the then outstanding balance under our seniorcredit facility with the proceeds from the offering of our Notes, we terminatedinterest rate swaps that were in place with respect to a portion of the thenoutstanding debt under our senior credit facility.

* *

*Loss on Extinguishment of Debt.*  There was no such expense in the nine monthsended September 30, 2003.  We incurreda non-cash loss on the extinguishment of debt of $586,000 in the nine monthsended September 30, 2002.  Inconjunction with the payoff of the $39.2 million term loan under oursenior credit facility with the proceeds from the offering of our Notes, wewrote off loan transaction costs incurred in previous years related to the termloan.

* *

*Other Expenses. *Ourother expenses increased by $129,000 to $261,000 in the nine months endedSeptember 30, 2003 from $132,000 in the nine months ended September 30,2002.  The increase was primarily theresult of additional state franchise taxes.

 

*Income Tax Expense. *Ourincome tax expense decreased to $2.3 million during the nine months endedSeptember 30, 2003 from $3.9 million during the nine months ended September 30,2002.  Income tax expense as apercentage of revenue was 1.3% for the nine months ended September 30,2003.  We have determined that due toour estimated annual operating results for 2003, our estimated income taxprovision will not vary significantly based on the estimated income (loss)before income taxes for 2003.  As such,as of September 30, 2003, we have recognized in our consolidated statementof operations an amount equaling approximately 75% of the estimated 2003 incometax provision.  The difference in incometaxes computed at the statutory rate and reported income taxes for the ninemonths ended September 30, 2003 is due primarily to state and local incometaxes and an increase in the valuation allowance related to deferred tax assets.

* *

*Cumulative Effect of Change in Accounting Principle. *We recorded anafter-tax expense of $1.5 million from a cumulative effect of a change inaccounting principle related to our adoption of SFAS No. 143 on January 1,2003.  For more information on SFAS No.143, please refer to Note 2 to our unaudited consolidated financial statementsincluded in Part I, Item 1. “Financial Statements” of this Quarterly Report onForm 10-Q.

* *

*Net Income (Loss). *Ournet loss increased $5.2 million to a loss of $4.4 million during the ninemonths ended September 30, 2003 from net income of $780,000 during thenine months ended September 30, 2002. The increase

 

25

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in net loss was attributable to an after-tax charge of a cumulativeeffect of a change in accounting principle, higher diesel fuel costs, anincrease in our bad debt reserve, higher expense related to our Bethlehemlandfill and new landfills, the write-off of an aborted debt transaction, thesevere winter weather and increased interest expense, net, from a higher debtlevel and a higher effective interest rate, offset by a reduction in income taxexpense.  Net income as a percentage ofour revenue decreased to a loss of (2.4)% in the nine months endedSeptember 30, 2003 from 0.5% in the nine months ended September 30,2002.

 

**Liquidity and Capital Resources**

** **

***CashFlow***

 

The following is a summary of our cash flows for the nine months endedSeptember 30, 2003 and 2002 (in thousands):

 

|                                      |   | **Nine  Months Ended  September 30,** |    |
|-------------------------------------------|--------|--------------------------------------------|---------|
|                                      |   | **2003**                                   |    | **2002** |   |
| Net cash provided by operating activities |   | $                                          | 29,632  |   | $ | 28,375 |   |
| Net cash used in investing activities     |   | $                                          | (69,051 | ) | $ | (62,426 | ) |
| Net cash provided by financing activities |   | $                                          | 40,003  |   | $ | 34,484 |   |

 

Net cash provided by operating activities increased by $1.2 millionfrom $28.4 million during the nine months ended September 30, 2002 to$29.6 million during the nine months ended September 30, 2003.  During the nine months ended September 30,2003, net cash used in investing activities was $69.1 million.  Of this amount, $25.4 million was used forthe acquisition of businesses and $6.0 million was used for the initialdevelopment costs for two permitted landfills acquired in 2002.  Cash used for capital expenditures duringthe nine months ended September 30, 2003 was $34.5 million, which wasprincipally for investments in fixed assets, consisting primarily of trucks,containers, landfill and transfer station equipment, and landfill constructionprojects.  Net cash provided byfinancing activities during the nine months ended September 30, 2003 was$40.0 million, which consisted primarily of a net borrowing increase underour senior credit facility of $40.5 million.

 

During the nine months ended September 30, 2002, net cash used ininvesting activities was $62.4 million. Of this amount, $39.1 million was used for the acquisition ofbusinesses.  Cash used for capitalexpenditures during the nine months ended September 30, 2002 was $20.5million, which was principally for investments in fixed assets, consistingprimarily of trucks, containers, landfill and transfer station equipment, andlandfill construction projects.  Netcash provided by financing activities during the nine months endedSeptember 30, 2002 was $34.5 million, which consisted primarily of a netborrowing increase under our senior credit facility of $42.3 million.

 

26

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The following table summarizes the components of the reconciliation ofour debt balances from December 31, 2002 and 2001 to September 30,2003 and 2002, respectively:

 

|                                                                                                  |   | **Nine  Months Ended  September 30,** |    |
|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
|                                                                                                  |   | **2003**                                   |    | **2002** |   |
|                                                                                                  |   | **(in  thousands)**                        |    |
| Roll-forward of debt balance:                                                                         |   |                                       |    |   |   |
| Debt balance at beginning of period                                                                   |   | $                                          | 198,571 |   | $ | 130,351 |   |
| Free cash flow deficit (surplus) before  acquisitions(1)                                              |   | 6,239                                      |    | (6,612 | ) |
| Acquisitions, divestitures and initial  development costs for newly acquired permitted landfills, net |   | 31,404                                     |    | 39,064 |   |
| Acquisition-related and non-recurring  expenditures                                                   |   | 1,777                                      |    | 1,598 |   |
| Debt issue costs                                                                                      |   | 451                                        |    | 6,976 |   |
| Debt increase due to interest rate swap  termination payment                                          |   | —                                     |    | 825 |   |
| Addition related to change in fair value of  the hedged long-term debt                                |   | 476                                        |    | 1,741 |   |
| Increase in cash                                                                                      |   | 585                                        |    | 433 |   |
|                                                                                                  |   |                                       |    |   |   |
| Debt balance at end of period                                                                         |   | $                                          | 239,503 |   | $ | 174,377 |   |

 

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(1)                                  Free cash flowsurplus/deficit before acquisitions is not a measure of liquidity, operatingperformance or cash flow from operating activities under GAAP.  Free cash flow surplus/deficit beforeacquisitions is defined as net cash provided by operating activities, lesscapital expenditures (other than for acquisitions) and capitalizedinterest.  We believe that thepresentation of free cash flow surplus/deficit before acquisitions is useful toinvestors regarding our ability to meet debt service requirements and to betterassess and understand recurring cash generated from operations afterexpenditures for fixed assets.  Freecash flow surplus/deficit before acquisitions does not represent our residualcash flow available for discretionary expenditures since we have mandatory debtservice requirements and other required expenditures that are not deducted fromfree cash flow surplus/deficit before acquisitions.  Free cash flow surplus/deficit before acquisitions does notcapture debt repayment and/or the receipt of proceeds from the issuance ofdebt.  We use free cash flowsurplus/deficit before acquisitions as a measure of recurring operating cashflow.  The most directly comparable GAAPmeasure to free cash flow surplus/deficit before acquisitions is net cash providedby operating activities.  Following is areconciliation of free cash flow surplus/deficit before acquisitions to netcash provided by operating activities:

 

|                                                  |   | **Nine  Months Ended  September 30,** |   |
|-------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                  |   | **2003**                                   |   | **2002** |   |
|                                                  |   | **(in  thousands)**                        |   |
| Free cash flow (deficit) surplus before  acquisitions |   | $                                          | (6,239 | ) | $ | 6,612 |   |
| Capital expenditures, excluding  acquisitions         |   | 34,503                                     |   | 20,500 |   |
| Capitalized interest                                  |   | 1,368                                      |   | 1,264 |   |
| Other                                                 |   | —                                     |   | (1 | ) |
| Net cash provided by operating activities             |   | $                                          | 29,632 |   | $ | 28,375 |   |

 

***Liquidity***

 

Our business is capital intensive. Our capital requirements include business acquisitions, new franchiseagreements, and fixed asset purchases for internal growth, primarily fortrucks, containers and equipment, and for landfill cell construction, landfilldevelopment and landfill closure activities. We have historically financed, and plan to continue to finance, ourcapital needs with cash provided from operations, borrowings under our seniorcredit facility (or an amended senior credit facility with increased capacity),debt or equity offerings, or some combination of the foregoing.

 

27

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Our Notes mature on June 15, 2012 and interest on our Notes is dueon June 15 and December 15 of each year.  Our Notes are guaranteed by all of our current, and will beguaranteed by certain of our future, subsidiaries and are unsecured seniorsubordinated obligations that rank junior in right of payment to all of ourexisting and future senior debt and secured debt.  Our Notes are redeemable at a premium on or after June 15,2007 and we may redeem up to 35.0% of the aggregate principal amount of ourNotes on or before June 15, 2005 with the proceeds from qualified publicofferings of our equity securities.  Theindenture governing our Notes contains covenants which, among other things,limit our ability to incur additional debt, create liens, engage insale-leaseback transactions, pay dividends or make other equity distributions,purchase or redeem capital stock, make investments, sell assets, engage intransactions with affiliates and effect a consolidation or merger.  These limitations are subject to certainqualifications and exceptions.  As of September 30,2003, we were in compliance with all covenants contained in the indenturegoverning our Notes.

 

Our senior credit facility, which is provided by a syndicate of lendersled by Fleet National Bank, as administrative agent (“Fleet”), and CreditSuisse First Boston and Citicorp North America, Inc., jointly as syndicationagents, includes a $222.5 million senior secured revolving loan, includinga maximum of $30.0 million underlying letters of credit, and previouslyincluded a $39.2 million senior secured term loan, which has been fullyrepaid.  We are not permitted to reborrowany amounts under the term loan. Subject to certain conditions, we may request an increase in therevolving loan portion of our senior credit facility of up to$13.3 million such that the total revolving loan portion would equal$235.8 million.  As of September 30,2003, there was $87.0 million (excluding $15.5 million underlyingletters of credit) outstanding under the revolving loan portion of our seniorcredit facility and additional borrowings of $17.4 million, plus a maximumof $14.5 million underlying letters of credit, were availablethereunder.  In order to borrow underthe revolving loan portion of our senior credit facility, we must satisfycustomary conditions including maintaining certain financial ratios.  Our senior credit facility is secured by apledge of the stock of our direct and indirect subsidiaries and a lien onsubstantially all of our direct and indirect subsidiaries’ assets.

 

Oursenior credit facility permits borrowings at floating interest rates based on,at our option, the designated eurodollar interest rate, which generallyapproximates LIBOR, or the Fleet prime rate, in each case, plus an applicablemargin, and requires payment of an annual commitment fee based on the unusedportion of the revolving loan portion. As of September 30, 2003, the interest rate applicable to $51.5million outstanding under the revolving loan portion of our senior creditfacility was LIBOR plus 325 basis points, or 4.37%, and the interest rateapplicable to the remaining $35.5 million outstanding under the revolving loanportion was base, or 5.25%.  Our seniorcredit facility expires on August 31, 2004.  During October, the Company finalized an amendment of its seniorsecured credit facility. See “ — Obligations and Commitments.”  The amended senior secured credit facilitytotals $400 million and consists of a $200 million revolver and a $200 millionterm loan. The revolver matures in October 2008 and the term loan maturesin October 2010. The $200 million term loan and borrowings of $33.7 millionunder the revolver were used to refinance the Company’s existing creditfacility, and to finance the acquisition of Seneca Meadows, Inc. The amountoutstanding under the revolving loan portion of the Company’s credit facilityat September 30, 2003 has been classified as a long-term obligation in theconsolidated balance sheet at September 30, 2003 based on the terms of theamended credit facility.

 

The proceeds of the loans under our senior credit facility may be usedsolely to refinance certain debt and for certain acquisitions, capitalexpenditures, working capital and general corporate purposes.  The letters of credit under our seniorcredit facility may be used solely for working capital and general corporatepurposes.

 

Our senior credit facility contains affirmative and negative covenantsand other terms customary to such financings, including requirements that wemaintain specified financial ratios, including the following:

 

•                                          **MaximumLeverage Ratio**—Our consolidated debt to consolidated EBITDA(1) ratiofor any period of four consecutive fiscal quarters may not be greater than 4.5to 1.0.

 

•                                          **MaximumSenior Leverage Ratio**—Our consolidated senior debt (generally,consolidated debt other than certain debt, including, without limitation, ourNotes, subordinated to our senior credit facility) to consolidated EBITDA(1)ratio for any period of four consecutive fiscal quarters may not be greaterthan 3.0 to 1.0.

 

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•                                          **MinimumInterest Coverage Ratio**—Our consolidated EBITDA(1) to consolidatedinterest expense ratio for any period of four consecutive fiscal quartersending on the last day of any fiscal quarter specified below may not be lessthan the applicable ratio indicated below: 

 

| **Quarters Ending**                        |   | **Consolidated  EBITDA(1) to  Consolidated Interest Expense Ratio** |       |
|--------------------------------------------|--------|---------------------------------------------------------------------|------------|
|                                       |   |                                                                | ** ** |
| March 31, 2003                        |   | 2.75 to 1.0                                                         |       |
| June 30, 2003-September 30, 2003 |   | 2.40 to 1.0                                                         |       |
| December 31, 2003                     |   | 2.50 to 1.0                                                         |       |
| March 31, 2004 and thereafter         |   | 2.75 to 1.0                                                         |       |

 

•**                                          MinimumConsolidated Net Worth**—Our consolidated net worth (generally, excess of ourassets over our liabilities excluding redeemable preferred stock) at any timemay not be less than approximately $172.1 million, plus (a) theproceeds of any new equity offerings and (b) 50% of our positive consolidatednet income for each fiscal quarter beginning with the third quarter of 2003.

 

•**                                          MaximumCapital Expenditures**—Our annual capital expenditures less property andequipment purchased for new municipal contracts may not be greater than theproduct of our annual depreciation expense for any fiscal year and theapplicable multiple specified below: 

 

| **Year Ending December 31,** |   | **Multiple  of Depreciation  Expense for Such Year** |   |
|-----------------------------------|--------|------------------------------------------------------|--------|
| 2002                              |   | 1.6 x                                                |   |
| Thereafter                        |   | 1.4 x                                                |   |

 

As of September 30, 2003, our consolidated debt to consolidatedEBITDA(1) ratio was 4.20:1, our consolidated senior debt to consolidatedEBITDA(1) ratio was 1.54:1, our consolidated EBITDA(1) to consolidated interestexpense ratio was 2.96:1 and our consolidated net worth was $172.7 million($0.6 million in excess of the minimum required under our senior creditfacility).  In addition, our 2002 annualcapital expenditures of $31.5 million (net of $9.8 million representingproperty and equipment purchased for new municipal contracts) did not exceed1.6 times our 2002 annual depreciation expense.  Our ability to comply in future periods with the financialcovenants in our senior credit facility will depend on our ongoing financialand operating performance, which, in turn, will be subject to economic conditionsand to financial, business and other factors, many of which are beyond ourcontrol, and will be substantially dependent on our ability to successfullyimplement our overall business strategies.

 

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(1)                                  EBITDA is calculatedin accordance with the definition in our senior credit facility and is usedsolely in this context to provide information on the extent to which we are incompliance with our senior credit facility covenants.

 

In August 2002, we entered into two interest rate swap agreements,which are effective through June 15, 2012, with two financialinstitutions.  Under each swapagreement, the fixed interest rate on $25.0 million of our Noteseffectively was converted to an interest rate of 5.275% and 5.305%,respectively, plus an applicable floating rate margin that is based on sixmonth LIBOR which is readjusted semiannually on June 15 andDecember 15 of each year.

 

Environmental laws and regulation, including Subtitle D, thatapply to the non-hazardous solid waste management industry have required us, aswell as others in the industry, to alter the way we conduct our operations andto modify or replace pre-Subtitle D landfills.  These expenditures have been, and will continue to be,substantial; however, we do not anticipate that these expenditures relating toour ongoing operations will be substantially different than what we haveexperienced to date.  Legislative orregulatory changes could increase the costs of operating our business,accelerate required expenditures for closure activities and post-closuremonitoring and obligate us to spend sums in addition to those presentlyreserved for such purposes.  Thesefactors could substantially increase our operating costs and adversely affectour results of operations, financial condition and cash flow.

 

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We believe that cash flow from operations and borrowings under therevolving loan portion of our senior credit facility will provide adequate cashto fund our working capital, capital expenditure, debt service and other cashrequirements for the foreseeable future. Our ability to meet future working capital, capital expenditure and debtservice requirements, to provide financial assurance, as requested or required,and to fund capital amounts required for the expansion of our existing businesswill depend on our future financial performance, which will be affected by arange of economic, competitive and business factors, many of which are outsideof our control.  See “—DisclosureRegarding Forward Looking Statements.” We cannot assure you that our business will generate sufficient cashflow from operations, that future financings will be available to us in amountssufficient to enable us to service our debt or to make necessary capitalexpenditures, or that any refinancing would be available on commerciallyreasonable terms, if at all.  Further,depending on the timing, amount and structure of any possible futureacquisitions and the availability of funds under, and compliance with certainother covenants in, our senior credit facility, we may need to raise additionalcapital.  We may raise such fundsthrough public or private offerings of our debt or equity securities.  We cannot assure you that we will be able tosecure such funding, if necessary, on favorable terms, if at all.

* *

***Off-BalanceSheet Financing***

 

We have no off-balance sheet debt or similar obligations, other thanthe financial assurance instruments, which are issued in the ordinary course ofbusiness and are not debt (and, therefore, are not reflected in ourconsolidated balance sheet) which are discussed under “Significant CommercialCommitments” in Item 7.  “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” of ourAnnual Report on Form 10-K for the fiscal year ended December 31,2002.  We have no transactions orobligations with related parties that are not disclosed, consolidated into orreflected in our reported results of operations or financial position.  We do not guarantee any third party debt.

 

***Obligationsand Commitments***

 

For a discussion of our obligations and commitments, please refer toItem 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations” of our Annual Report on Form 10-K for the fiscal yearended December 31, 2002.  Inaddition to those disclosures, the transactions discussed below occurredsubsequent to the nine and three months ended September 30, 2003.

 

On October 9, 2003, we acquired all of the outstanding stock ofSeneca Meadows, Inc., the owner and operator of the Seneca Meadows Landfill,for approximately $185,000,000. The Seneca Meadows Landfill is a fullypermitted municipal solid waste landfill located in the Finger Lakes Region ofupstate New York, approximately 45 miles southeast of the City of Rochester,New York. The Seneca Meadows Landfill is permitted to accept an average of6,000 tons of municipal solid waste per day.

 

Also during October, we issued $47,500,000 of Series E ConvertiblePreferred Stock (“Series E Stock”) and finalized an amendment of our seniorsecured credit facility. The Series E Stock is the most senior class of ourequity and has substantially the same terms and conditions as our outstandingSeries D Convertible Preferred Stock. The proceeds from the issuance of the SeriesE Stock were used to finance the acquisition of Seneca Meadows. The amendedsenior secured credit facility totals $400,000,000 and consists of a$200,000,000 revolver and a $200,000,000 term loan. The revolver matures inOctober 2008 and the term loan matures in October 2010. The$200,000,000 term loan and borrowings of $33,700,000 under the revolver wereused to refinance our existing credit facility, and to finance the acquisitionof Seneca Meadows. Future borrowings under the revolver will be available tofinance acquisitions, capital expenditures, working capital and other generalcorporate purposes.  The amountoutstanding under the revolving loan portion of our credit facility atSeptember 30, 2003 has been classified as a long-term obligation in theconsolidated balance sheet at September 30, 2003 based on the terms of theamended credit facility.

 

On October 30, 2003, one of our vehicles was involved in anaccident for which we estimate the costs of the accident will exceed ourmaximum stop loss deductible of $500,000 per accident.  We will record an expense of $500,000 in thefourth quarter of 2003 to record our portion of the estimated costs related tothe accident.

 

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***CapitalExpenditures***

 

We made capital expenditures of $34.5 million during the nine monthsended September 30, 2003, $30.6 million for our existing business and $3.9million for new municipal contracts.  Inaddition, during the nine months ended September 30, 2003, we incurred$6.0 million of development costs in connection with two “greenfield” landfillspurchased in 2002.  Both landfillsincluded the land and the permit to operate. However, unlike the purchase of an operating landfill, neithergreenfield landfill had incurred the costs of development, which include theinfrastructure of an operating landfill and initial cell.  Both landfills opened inAugust 2003.  We currently expectto make additional capital expenditures of approximately $6.0 million to$8.0 million during the remainder of 2003****in connection with ourexisting business.  We intend to fundour remaining planned 2003 capital expenditures principally through existingcash, internally generated funds and borrowings under our senior credit facility.

 

In addition, we may make substantial additional capital expenditures inacquiring solid waste management businesses. If we acquire additional landfill disposal facilities, we may also haveto make significant expenditures to bring them into compliance with applicableregulatory requirements, obtain permits or expand our available disposalcapacity.  In addition we may need tomake additional capital expenditures if we bid and are awarded new municipalcontracts.  We cannot currentlydetermine the amount of these expenditures because they will depend on thenumber, nature, condition and permitted status of any acquired landfilldisposal facilities or new municipal contracts.

 

From time to time we evaluate our existing operations and theirstrategic importance to us.  If we determinethat a given operating unit does not have future strategic importance, we maysell or otherwise dispose of those operations. Although we believe our operations would not be impaired by suchdispositions, we could incur losses on them.

 

**Recent Accounting Pronouncements**

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations.”  SFAS No. 143applies to all legally enforceable obligations associated with the retirementof tangible long-lived assets and provides the accounting and reportingrequirements for such obligations.  SFASNo. 143 requires amounts initially recognized as an asset retirement obligationto be measured at fair value.  Therecognized asset retirement cost is capitalized as part of the cost of the assetand is depreciated over the useful life of the asset.  We adopted SFAS No. 143 effective January 1, 2003.

 

The following table summarizes the pro forma impact to our net incomefor the nine and three months ended September 30, 2002 of the accountingchange we implemented beginning January 1, 2003:

 

|                                 |   | **Nine  Months  Ended September 30,  2002** |    | **Three  Months  Ended September 30,  2002** |   |
|--------------------------------------|--------|--------------------------------------------------|---------|---------------------------------------------------|--------|
|                                 |   |                                             |    |                                              |   |
| Reported net income                  |   | $                                                | 780,263 |                                              | $      | (263,534 | ) |
| Adoption of SFAS No. 143, net of tax |   | (304,357                                         | )       | (115,508                                          | )      |
| Pro forma net income                 |   | $                                                | 475,906 |                                              | $      | (379,042 | ) |

 

The application of SFAS No. 143 increased loss before cumulative effectof change in accounting principle for the nine months ended September 30,2003 by approximately $175,000, net of tax and decreased income before cumulativeeffect of changes in accounting principle for the three months endedSeptember 30, 2003 by approximately $35,000, net of tax.

 

 

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The following tablesummarizes the impact on income from operations of applying theprovisions of SFAS No. 143 for the nine and three months endedSeptember 30, 2003.  The adoptionof SFAS No. 143 had no impact on our cash flow.

 

|                               |   | **Nine  Months  Ended September 30,  2003** |    | **Three  Months  Ended September 30,  2003** |   |
|------------------------------------|--------|--------------------------------------------------|---------|---------------------------------------------------|--------|
|                               |   |                                             |    |                                              |   |
| Increase to operating expense      |   | $                                                | 365,000 |                                              | $      | 99,000 |   |
| Decrease to depletion expense      |   | (190,000                                         | )       | (64,000                                           | )      |
| Decrease to income from operations |   | $                                                | 175,000 |                                              | $      | 35,000 |   |

 

For a more detailed description of SFAS No. 143, please refer to Note 2to our unaudited consolidated financial statements included in Part I, Item 1.“Financial Statements” of this Quarterly Report in Form 10-Q.

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  SFAS No. 145 requiresthat gains and losses from extinguishment of debt be classified asextraordinary items only if they meet the criteria in Accounting PrinciplesBoard Opinion No. 30 (“Opinion No. 30”). Applying the provision of Opinion No. 30 will distinguish transactionsthat are part of an entity’s recurring operations from those that are unusualand infrequent that meet criteria for classification as an extraordinaryitem.  As allowed under the provisionsof SFAS No. 145, we have adopted the provisions of SFAS No. 145 as ofApril 1, 2002.

 

**Disclosure Regarding Forward-LookingStatements**

 

This Quarterly Report on Form 10-Q contains forward-lookingstatements.  These forward-lookingstatements are not historical facts, but only predictions and generally can beidentified by use of statements that include phrases such as “believe,”“expect,” “anticipate,” “intend,” “plan,” “foresee” or other words or phrasesof similar import.  Similarly,statements that describe our objectives, plans or goals are alsoforward-looking statements.

 

These forward-looking statements are subject to risks anduncertainties, which could cause actual results to differ materially from thosecurrently anticipated.  These risks anduncertainties include:  our business iscapital intensive and may consume cash in excess of cash flow from ouroperations and borrowings; our growth strategy depends, in part, on ouracquiring other solid waste management or related businesses and expanding ourexisting landfills and other operations, which we may be unable to do; we maynot be able to successfully manage our growth; competition could reduce ourprofitability or limit our ability to grow; state and municipal requirements toreduce landfill disposal by encouraging various alternatives may adverselyaffect our ability to operate our landfills at full capacity; we may losecontracts through competitive bidding or early termination, which would causeour revenue to decline; we are geographically concentrated in the northeasternand southern United States and susceptible to those regions’ local economiesand regulations; the loss of the City of New York as a customer could have asignificant adverse effect on our business and operations; our substantial debtcould adversely affect our financial condition and make it more difficult forus to make payments with respect to our debt; despite our current indebtedness,we and our subsidiaries may be able to incur substantially more debt,exacerbating the risks described above; we require a significant amount of cashto service our debt, and our ability to generate cash depends on many factors,some of which are beyond our control; our failure to comply with the covenantscontained in our senior credit facility or the indenture governing our Notes,including as a result of events beyond our control, could result in an event ofdefault, which could materially and adversely affect our operating results andfinancial condition; covenant restrictions in our senior credit facility andthe indenture governing our  Notes  may limit our ability to operate ourbusiness; the interests of our controlling stockholders could conflict withthose of other holders of our securities; we depend heavily on our seniormanagement; if we are unable to obtain performance or surety bonds, letters ofcredit or insurance, we may not be able to enter into additional MSW collectioncontracts or retain necessary landfill operating permits; we are subject toextensive legislation and governmental regulation that may restrict ouroperations or increase our costs of operations; we may not be able to obtainpermits we require to operate our business; we may be subject to legal actionrelating to compliance with environmental laws; we may have liability forenvironmental contamination; and we will always face the risk of liability, andinsurance may not always be available or sufficient.

 

For a further list and description of such risks and uncertainties,please refer to Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” of our Annual Report on Form 10-K for

 

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the fiscal year ended December 31, 2002.  All subsequent written and oral forward-looking statementsattributable to us or persons acting on our behalf are also expressly qualifiedin their entirety by such factors.  Weurge you to carefully consider such factors in evaluating the forward-lookingstatements and caution you not to place undue reliance on such forward-lookingstatements.  There may also beadditional risks that we do not presently know of or that we currently believeare immaterial which could also impair our business.  In light of these risks, uncertainties and assumptions, theforward-looking events may or may not occur. The forward-looking statements included herein are made only as of thedate of this Quarterly Report on Form 10-Q and we undertake no obligation topublicly update these forward-looking statements to reflect new information,future events or otherwise.

 

**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk*.***

 

See Part II, Item 7A. “Quantitative and Qualitative Disclosures AboutMarket Risks” of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2002 for a discussion of our exposure to market risks.  There was no significant change in thoserisks during the three months ended September 30, 2003.

 

**Item 4. Controls and Procedures.**

 

Our Chief Executive Officer and Chief Financial Officer have concluded,based on their evaluation as of the end of the period covered by this QuarterlyReport on Form 10-Q, that our “disclosure controls and procedures” (as isdefined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e))are effective to ensure that information required to be disclosed in thereports we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  There were no changes in the Company’sinternal control over financial reporting during the quarter endedSeptember 30, 2003 that have materially affected, or are reasonably likelyto materially affect, the Company’s internal controls over financial reporting.

 

**Part II.  Other Information**

**Item 1. Legal Proceedings*.***

 

Please see Part I, Item 1. “Financial Statements,” Note 7, captioned“Commitments and Contingencies.”

 

**Item 2. Changes in Securities and Useof Proceeds.**

 

None.

 

**Item 3. Defaults Upon Senior Securities.**

 

None.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders.**

 

None.

 

**Item 5. Other Information.**

 

None.

 

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**Item 6. Exhibits and Reports on Form 8-K.**

 

(a)  Exhibits: 

 
| **Exhibit  Number** |   | **Description**                                                                                           |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                      |
| 31.1                |   | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
| 31.2                |   | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
| 32.1                |   | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |
| 32.2                |   | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

(b)  Reports on Form 8-K:

 

On August 11, 2003, we furnished (but not filed) a Current Reporton Form 8-K reporting our financial results for the first quarter endedJune 30, 2003.

 

On October 14, 2003, we furnished a Press Release on Form 8-Kannouncing the completion of the Seneca Meadows, Inc, acquisition, a new amendedcredit facility and the raising of new equity.

 

On October 23, 2003, we furnished on Form 8-K the Stock PurchaseAgreement from the Seneca Meadows, Inc acquisition, the Fifth Amended andRestated Certificate of Incorporation of the Company, Fourth Amended andRestated By-laws of the Company, Supplemental Indenture No. 3, the Fifth andRestated Revolving Credit and Term Loan Agreement, the Stock PurchaseAgreement, the Second Amended and Restated Stockholders’ Agreement, and theAmended and Restated Subordinate Registration Rights Agreements.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                   | **IESI CORPORATION** |
|------------------------|----------------------|
|                   |                 |
|                   |                 |   |
| November 13, 2003 | By:                  | /s/ THOMAS J. COWEE |
|                   |                 | Thomas J. Cowee |
|                   |                 | Vice President, Chief Financial Officer, |
|                   |                 | Treasurer and Assistant Secretary |
|                   |                 | (Principal Financial Officer and |
|                   |                 | Principal Accounting Officer) |

 

35

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**ExhibitIndex**

** **
| **Exhibit  Number** |   | **Document  Name**                                                                                        |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                      |
| 31.1                |   | Certification of Chief Executive Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
| 31.2                |   | Certification of Chief Financial Officer Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
| 32.1                |   | Certification of Chief Executive Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |
| 32.2                |   | Certification of Chief Financial Officer Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

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