**SECURITIES AND 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  March 31, 2004**                                                                                    |
|                                                                                                                                       |
| **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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**IESI CORPORATION**

(Exact Name of Registrant as Specified in itsCharter)

 
| **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)      |

 

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes o   No ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 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 March 31, 2004 and  December 31, 2003 |   |
|                                |    |   |   |
|                                |    | Consolidated Statements of Operations for  the Three Months Ended March 31, 2004 and 2003 |   |
|                                |    |   |   |
|                                |    | Consolidated Statement of Stockholders’ Equity (Deficit) for the  Three Months Ended March 31, 2004 |   |
|                                |    |   |   |
|                                |    | Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2004 and 2003 |   |
|                                |    |   |   |
|                                |    | 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.  FinancialInformation**

 

**Item 1. Financial Statements**

 

**IESICORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **March 31,  2004** |        | **December 31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-------------|-----------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **(unaudited)**          |        |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                     |        |                        |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $                        | 3,235,948   |                        | $      | 4,197,157 |   |
| Accounts receivable-trade, less allowance  of $1,642,000 and $2,397,000 at March 31, 2004 and December 31,  2003, respectively                                                                                                                                                                                                                                                                                                       |   | 31,282,805               |        | 30,585,797                  |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 1,356,471                |        | 1,356,471                   |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                                                      |   | 7,650,809                |        | 4,782,446                   |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 43,526,033               |        | 40,921,871                  |   |
| Property and equipment, net of accumulated  depreciation of $123,739,000 and $110,218,000 at March 31, 2004 and December 31,  2003, respectively                                                                                                                                                                                                                                                                                     |   | 486,194,400              |        | 488,659,850                 |   |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 138,372,772              |        | 138,335,715                 |   |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 31,260,200               |        | 32,986,163                  |   |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 4,208,499                |        | 2,143,616                   |   |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | $                        | 703,561,904 |                        | $      | 703,047,215 |   |
| Liabilities and Stockholders’ Equity  (Deficit)                                                                                                                                                                                                                                                                                                                                                                                           |   |                     |        |                        |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                     |        |                        |   |
| Accounts payable—trade                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $                        | 21,321,814  |                        | $      | 27,448,950 |   |
| Accrued expenses and other current  liabilities                                                                                                                                                                                                                                                                                                                                                                                                |   | 21,656,124               |        | 17,512,525                  |   |
| Deferred revenue                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 1,357,006                |        | 1,231,758                   |   |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                              |   | 2,173,693                |        | 2,731,595                   |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 46,508,637               |        | 48,924,828                  |   |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 380,953,662              |        | 378,129,393                 |   |
| Accrued environmental and landfill costs                                                                                                                                                                                                                                                                                                                                                                                                       |   | 48,154,897               |        | 47,456,769                  |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 9,949,611                |        | 9,949,611                   |   |
| Other liabilities                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 3,313,452                |        | 1,282,992                   |   |
| Total liabilities                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 488,880,259              |        | 485,743,593                 |   |
| 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 March 31, 2004 and December 31, 2003                                                                                                                                                                                                                                                   |   | 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 March 31, 2004 and December 31, 2003                                                                                                                                                                                                                                                   |   | 24,808,636               |        | 24,808,636                  |   |
| Redeemable Series C Convertible Preferred  Stock, 55,000 shares authorized, issued and outstanding, liquidation  preference of $109,402,431 and $105,448,126 at March 31, 2004 and  December 31, 2003, respectively                                                                                                                                                                                                                  |   | 107,359,970              |        | 103,405,665                 |   |
| Redeemable Series D Convertible Preferred  Stock, 55,000 and 145,000 shares authorized, 55,000 and 55,000 shares issued  and outstanding, liquidation preference of $70,371,722 and $68,655,338 at  March 31, 2004 and December 31, 2003, respectively                                                                                                                                                                               |   | 67,751,845               |        | 66,035,461                  |   |
| Redeemable Series E Convertible Preferred  Stock, 55,000 shares authorized, 49,660 shares issued and outstanding,  liquidation preference of $52,031,625 and $50,762,561 at March 31, 2004 and  December 31, 2003, respectively                                                                                                                                                                                                      |   | 50,389,953               |        | 49,120,889                  |   |
| Total redeemable preferred stock                                                                                                                                                                                                                                                                                                                                                                                                               |   | 289,994,041              |        | 283,054,288                 |   |
| Stockholders’ equity (deficit):                                                                                                                                                                                                                                                                                                                                                                                                           |   |                     |        |                        |   |
| Common stock, par value $.01 at  March 31, 2004 and December 31, 2003, respectively:  Authorized shares:  Class A—4,200,000  and 4,200,000, Class B Convertible—450,000 and 450,000, at March 31,  2004 and December 31, 2003 respectively; issued and outstanding  shares:  Class A—142,000, Class B Convertible—112,980, at  March 31, 2004 and December 31, 2003 |   | 2,550                    |        | 2,550                       |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                                     |   | —                   |        | —                      |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (73,913,553              | )           | (65,753,216                 | )      |
| Cumulative other comprehensive loss                                                                                                                                                                                                                                                                                                                                                                                                            |   | (1,401,393               | )           | —                      |   |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                                                                                                                      |   | (75,312,396              | )           | (65,750,666                 | )      |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                                                                                                                                                                                                                                                                                     |   | $                        | 703,561,904 |                        | $      | 703,047,215 |   |

 

See accompanying notes.

 

1

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**IESI CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)**

 
|                                                                                 |   | **Three  Months Ended  March 31,** |       |
|--------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                                 |   | **2004**                                |       | **2003** |   |
|                                                                                 |   |                                    |       |   |   |
| Services revenue                                                                     |   | $                                       | 74,062,831 |   | $ | 55,413,871 |   |
| Costs and expenses:                                                                  |   |                                    |       |   |   |
| Operating                                                                            |   | 43,733,985                              |       | 37,042,790 |   |
| General and administrative                                                           |   | 9,448,876                               |       | 7,059,954 |   |
| Depreciation, depletion and amortization                                             |   | 14,434,221                              |       | 7,874,457 |   |
|                                                                                 |   | 67,617,082                              |       | 51,977,201 |   |
| Income from operations                                                               |   | 6,445,749                               |       | 3,436,670 |   |
| Interest expense, net                                                                |   | (6,887,455                              | )          | (4,329,958 | ) |
| Other income (expense), net                                                          |   | (778,878                                | )          | 2,375 |   |
| Loss before income taxes                                                             |   | (1,220,584                              | )          | (890,913 | ) |
|                                                                                 |   |                                    |       |   |   |
| Income tax benefit                                                                   |   | —                                  |       | 390,000 |   |
|                                                                                 |   |                                    |       |   |   |
| Loss before cumulative effect of change in  accounting principle                     |   | (1,220,584                              | )          | (500,913 | ) |
|                                                                                 |   |                                    |       |   |   |
| Cumulative effect of change in accounting  principle net of income tax benefit of $0 |   | —                                  |       | (1,530,708 | ) |
| Net loss                                                                             |   | $                                       | (1,220,584 | ) | $ | (2,031,621 | ) |

 

See accompanying notes.

 

2

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**IESI CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY (DEFICIT)(UNAUDITED)**

 
|                                                                              |   |            | ** ** | **Additional  Paid-In  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Cumulative  Other  Comprehensive  Income** | ** ** | **Total**  | ** **  |
|-----------------------------------------------------------------------------------|--------|-----------------|------------|----------------------------------|------------|--------------------------|------------|----------------------------------------------|------------|------------|-------------|
| **Common  Stock**                                                                 |
| **Shares**                                                                        |   | **Par  Amount** |
| Balance at December 31, 2003                                                 |   | 254,980         |       | 2,550                            |       | —                   |       | (65,753,216                                  | )          | —     |        | (65,750,666 | ) |
| Comprehensive income:                                                             |   |            |       |                             |       |                     |       |                                         |       |       |        |   |   |
| Net loss                                                                          |   | —          |       | —                           |       | —                   |       | (1,220,584                                   | )          | —     |        | (1,220,584 | ) |
| Other comprehensive income:                                                       |   |            |       |                             |       |                     |       |                                         |       |       |        |   |   |
| Unrealized loss on market value of interest  rate swaps, net of tax benefit of $0 |   | —          |       | —                           |       | —                   |       | —                                       |       | (1,401,393 | )           | (1,401,393 | ) |
| Comprehensive income                                                              |   | —          |       | —                           |       | —                   |       | —                                       |       | —     |        | (2,621,977 | ) |
| Accretion of dividends on Series C, D and E  Preferred Stock                      |   | —          |       | —                           |       | —                   |       | (6,939,753                                   | )          | —     |        | (6,939,753 | ) |
|                                                                              |   |            |       |                             |       |                     |       |                                         |       |       |        |   |   |
| Balance at March 31, 2004                                                    |   | 254,980         |       | $                                | 2,550      |                     | $          | —                                       |       | $          | (73,913,553 | ) | $ | (1,401,393 | ) | $ | (75,312,396 | ) |
|                                                                                   |        |                 |            |                                  |            |                          |            |                                              |            |            |             |  |  |  |  |  |  |  |

 

See accompanying notes.

 

3

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**IESI CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

 
|                                                                                                                         |   | **For the  Three Months Ended   March 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|------------|
|                                                                                                                         |   | **2004**                                         |       | **2003** |   |
| **Operating  Activities:**                                                                                                   |   |                                             |       |   |   |
| Net loss                                                                                                                     |   | $                                                | (1,220,584 | ) | $ | (2,031,621 | ) |
| Cumulative effect of change in accounting  principle                                                                         |   | —                                           |       | 1,530,708 |   |
| Adjustments to reconcile net loss to net  cash provided by operating activities:                                             |   |                                             |       |   |   |
| Depreciation, depletion and amortization                                                                                     |   | 14,434,221                                       |       | 7,874,457 |   |
| Amortization of deferred financing costs                                                                                     |   | 588,693                                          |       | 653,751 |   |
| Capping, closure and post-closure accretion                                                                                  |   | 491,208                                          |       | 286,260 |   |
| Provision for doubtful accounts                                                                                              |   | 296,588                                          |       | 180,991 |   |
| Unrealized loss on commodity swap                                                                                            |   | 660,000                                          |       | — |   |
| Write off of costs associated with  transactions in process                                                                  |   | 102,164                                          |       | — |   |
| Deferred income tax benefit                                                                                                  |   | —                                           |       | (620,000 | ) |
| Changes in operating assets and  liabilities, net of effects of acquired waste management operating assets and  liabilities: |   |                                             |       |   |   |
| Accounts receivable                                                                                                          |   | (1,029,672                                       | )          | (995,751 | ) |
| Prepaid expenses and other current assets                                                                                    |   | (3,076,890                                       | )          | (1,653,314 | ) |
| Accounts payable                                                                                                             |   | (6,127,136                                       | )          | (1,631,979 | ) |
| Accrued expenses and other liabilities                                                                                       |   | 4,350,422                                        |       | 3,676,569 |   |
| Capping, closure and post closure  expenditures                                                                              |   | (356,669                                         | )          | (67,077 | ) |
| Net cash provided by operating activities                                                                                    |   | 9,112,345                                        |       | 7,202,994 |   |
| **Investing  Activities:**                                                                                                   |   |                                             |       |   |   |
| Purchases of property and equipment                                                                                          |   | (9,788,671                                       | )          | (8,853,410 | ) |
| Acquisitions of waste management operations                                                                                  |   | —                                           |       | (133,640 | ) |
| Initial development costs for newly  acquired permitted landfills                                                            |   | —                                           |       | (1,247,245 | ) |
| Capitalized interest                                                                                                         |   | (580,230                                         | )          | (617,762 | ) |
| Deferred costs associated with transactions  in process                                                                      |   | (115,957                                         | )          | (505,823 | ) |
| Net cash used in investing activities                                                                                        |   | (10,484,858                                      | )          | (11,357,880 | ) |
| **Financing  Activities:**                                                                                                   |   |                                             |       |   |   |
| Borrowings under long-term debt                                                                                              |   | 13,000,000                                       |       | 7,600,000 |   |
| Payments on long-term debt                                                                                                   |   | (12,588,696                                      | )          | (3,056,030 | ) |
| Debt issue costs                                                                                                             |   | —                                           |       | (435,877 | ) |
| Net cash provided by financing activities                                                                                    |   | 411,304                                          |       | 4,108,093 |   |
| Net decrease in cash and cash equivalents                                                                                    |   | (961,209                                         | )          | (46,793 | ) |
| Cash and cash equivalents at beginning of  period                                                                            |   | 4,197,157                                        |       | 2,589,726 |   |
| Cash and cash equivalents at end of period                                                                                   |   | $                                                | 3,235,948  |   | $ | 2,542,933 |   |

 

See accompanying notes.

 

4

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**IESI CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS(UNAUDITED)**

 

**1.**              Business and 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-company accountsand transactions have been eliminated. Certain information related to theCompany’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 inconjunction with the Company’s audited consolidated financial statements forthe year ended December 31, 2003 and the related notes thereto included inthe Company’s Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003.

 

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 and amortizationof landfill development costs, accruals for final closure and post-closure costs,valuation allowances for accounts receivable, liabilities for potentiallitigation, claims and assessments, and liabilities for environmentalremediation, deferred taxes and self-insurance.

 

Additionally, certain adjustments have been made in the prior periodconsolidated financial statements in order to reflect changes recorded by theCompany in the fourth quarter of 2003 as follows:

 

1.               The first quarter of 2003 results includea net of tax charge of $1,530,708 related to the cumulative effect of a changein accounting principle for the initial adoption of SFAS No. 143.  Included in this amount is $54,000 recordedby the Company in the fourth quarter of 2003 due to a revision in thecumulative effect adjustment recorded in the first quarter.  For purposes of quarterly reporting, theCompany has revised its net loss amount previously reported in the Company’sMarch 31, 2003 quarterly report.

 

2.               In the fourth quarter of 2003 the Companyrecorded approximately $2,168,000 of expenses related to misconduct of amanager in the Company’s South Region. For purposes of quarterly reporting the Company has revised its net lossamount previously reported in the Company’s March 31, 2003 quarterlyreport to reflect the allocation of $125,000 of such expenses to the firstquarter of 2003.

 

5

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**2.**              New Accounting Pronouncements

 

For a description of new accounting pronouncements that affect theCompany, please see Note 1 to the Company’s consolidated financial statementsincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.  There were nonew accounting pronouncements during the three months ended March 31, 2004which the Company expects to have a material effect on the Company’s consolidatedfinancial statements.

 

**3.**              Summary of Significant AccountingPolicies

 

**Accounts Receivable**

 

TheCompany’s accounts receivable are recorded when billed or accrued, andrepresent claims against third parties that will be settled in cash.  The carrying value of the trade receivables,net of the allowance for doubtful accounts, represents their estimated netrealizable value.  The Company estimatesthe allowance for doubtful accounts based on historical collection trends, typeof customer, such as municipal or non-municipal, the age of outstanding tradereceivables, and existing economic conditions. If circumstances indicate that specific accounts receivable balances maybe impaired, further consideration is given to the collectibility of thosebalances and the allowance is adjusted accordingly.  Past due trade receivable balances are written off when theCompany’s internal collection efforts have been unsuccessful in collecting theamount due. Credit losses have been within management’s expectations.

 

**Property and Equipment**

 

Propertyand equipment are stated at cost. Improvements or betterments, whichsignificantly 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,and the related accumulated depreciation is eliminated, from the accounts inthe year of disposal, and any resulting gain or loss is reflected in theConsolidated Statements of Operations.

 

TheCompany revises the estimated useful lives of property and equipment acquiredthrough business acquisitions to conform with its policies regarding propertyand equipment. Depreciation is calculated on the straight-line method over theestimated useful lives of the related assets, which generally range from threeto five years for furniture and fixtures and computer equipment, five to10 years for containers, compactors, trucks and collection equipment, and10 to 40 years for buildings and improvements. The Company assumes nosalvage value for its depreciable property and equipment. Depreciation expensefor property and equipment was approximately $6,165,000 and $4,983,000 for thethree months ending March 31, 2004 and 2003, respectively.

 

Landfillsand landfill improvements are stated at cost, and are depleted based onconsumed airspace. Landfill improvements include direct costs incurred toobtain landfill permits, and direct costs incurred to construct and develop thesite.  All indirect landfill developmentcosts are expensed as incurred. Depletion expense was approximately $7,136,000 and $1,969,000 for thethree months ending March 31, 2004 and 2003, respectively.

 

Interestis capitalized on certain projects under development including landfill projectsand probable landfill expansion projects and on certain assets underconstruction, including operating landfills. The capitalization of interest for operating landfills is based on thecosts incurred on discrete cell construction projects.  Interest capitalized was approximately$580,000 and $618,000 for the three months ended March 31, 2004 and 2003,respectively.

 

6

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Property and equipment consisted of the following at March 31,2004 and December 31, 2003:

 
|                                        |   | **March 31,  2004** |        | **December 31,  2003** |   |
|---------------------------------------------|--------|--------------------------|-------------|-----------------------------|--------|
| Land                                        |   | $                        | 9,928,498   |                        | $      | 9,189,881 |   |
| Landfills                                   |   | 393,691,660              |        | 389,028,075                 |   |
| Vehicles                                    |   | 92,617,539               |        | 90,346,853                  |   |
| Containers and compactors                   |   | 53,808,279               |        | 52,677,979                  |   |
| Machinery and equipment                     |   | 34,833,683               |        | 33,085,294                  |   |
| Buildings and improvements                  |   | 18,892,880               |        | 18,722,952                  |   |
| Furniture and office equipment              |   | 6,160,494                |        | 5,826,441                   |   |
|                                        |   | 609,933,033              |        | 598,877,475                 |   |
| Less accumulated depreciation and depletion |   | 123,738,633              |        | 110,217,625                 |   |
|                                        |   | $                        | 486,194,400 |                        | $      | 488,659,850 |   |

 

**LandfillAccounting**

 

TheCompany uses life cycle accounting and the units-of-consumption method torecognize certain landfill costs. In life cycle accounting, all costs toacquire, construct, close and maintain a site during the post-closure periodare capitalized or accrued and charged to expense based upon the consumption ofcubic yards or tons of available airspace. Costs and airspace estimates aredeveloped annually by independent engineers together with the Company’sengineers. These estimates are used by the Company’s operating and accountingpersonnel to annually adjust the Company’s rates used to expense capitalizedcosts and accrue closure and post-closure costs. Changes in these estimatesprimarily relate to changes in available airspace, future closure andpost-closure costs, the Company’s credit adjusted risk free rate, inflationrates and applicable regulations. Changes in available airspace primarilyinclude changes due to the addition of airspace lying in expansion areas deemedprobable to be permitted.

 

**Goodwill and Other Intangible Assets**

 

Intangibleassets consist primarily of the cost of acquired businesses in excess of thefair value of net assets acquired (goodwill). Other intangibles consist ofvalues assigned to customer lists and covenants not-to-compete, costs incurredto obtain debt financing and other separately identifiable intangibleassets.  Other intangibles are recordedat cost and, except for debt issue costs, amortized over periods generallyranging from five to seven years, computed on the straight-line method.Amortization expense was approximately $1,133,000 and $922,000 for the threemonths ended March 31, 2004 and 2003. The Company defers costs related to incurring debt and amortizes, asadditional interest expense, these costs over the term of the related debtusing the effective interest method. Other intangible assets consisted of the following at March 31,2004 and December 31, 2003:

 
|                          |   | **March 31,  2004** |       | **December 31,  2003** |   |
|-------------------------------|--------|--------------------------|------------|-----------------------------|--------|
| Customer lists                |   | $                        | 23,707,139 |                        | $      | 23,707,139 |   |
| Noncompetition agreements     |   | 7,277,689                |       | 7,277,689                   |   |
| Debt issue costs              |   | 22,008,520               |       | 22,007,533                  |   |
| Other                         |   | 944,434                  |       | 951,088                     |   |
|                          |   | 53,937,782               |       | 53,943,449                  |   |
| Less accumulated amortization |   | 22,677,582               |       | 20,957,286                  |   |
|                          |   | $                        | 31,260,200 |                        | $      | 32,986,163 |   |

 

TheCompany assesses whether goodwill is impaired on an annual basis.  Upon determining the existence of goodwillimpairment, the Company measures that impairment based on the amount by whichthe book value of goodwill exceeds its implied fair value.  The implied fair value of goodwill is

 

7

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determined by deducting the fair value of a reportingunit’s identifiable assets and liabilities from the fair value of the reportingunit as a whole, as if that reporting unit had just been acquired and thepurchase price were being initially allocated. Additional impairment assessments may be performed on an interim basisif the Company encounters events or changes in circumstances that wouldindicate, more likely than not, the book value of goodwill has been impaired.

 

On anongoing basis, management reviews the valuation and amortization of otherintangible assets with consideration toward recovery through future operatingresults.  The Company periodicallyevaluates the value and future benefits of its other intangible assets.  The Company assesses recoverability fromfuture operations using cash flows of the related asset as measures.  In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the carryingvalue would be reduced to estimated fair value if it becomes probable that theCompany’s estimate for expected future cash flows of the related asset would beless than the carrying amount of the related intangible assets.  There have been no adjustments to thecarrying amount of intangible assets resulting from these evaluations as ofMarch 31, 2004 and December 31, 2003.

 

Scheduledestimated amortization of other intangible assets is as follows: 

 
| 2004       |   | $         | 5,801,000  |   |
|------------|--------|-----------|------------|--------|
| 2005       |   | 6,455,000 |       |
| 2006       |   | 5,303,000 |       |
| 2007       |   | 4,903,000 |       |
| 2008       |   | 3,783,000 |       |
| Thereafter |   | 5,015,000 |       |
|       |   | $         | 31,260,000 |   |

 

**Accrued Expenses and Other Current Liabilities**

 

Thefollowing is a summary of accrued expenses and other current liabilities atMarch 31, 2004 and December 31, 2003:

 
|                                                    |   | **March 31,  2004** |       | **December 31,  2003** |   |
|---------------------------------------------------------|--------|--------------------------|------------|-----------------------------|--------|
| Acquisition related accrued liabilities                 |   | $                        | 834,154    |                        | $      | 1,489,429 |   |
| Interest                                                |   | 6,835,558                |       | 2,104,923                   |   |
| Accrued payroll and other employee related  liabilities |   | 2,268,910                |       | 3,613,059                   |   |
| Accrued insurance liabilities                           |   | 5,532,453                |       | 5,062,902                   |   |
| Other                                                   |   | 6,185,049                |       | 5,242,212                   |   |
|                                                    |   | $                        | 21,656,124 |                        | $      | 17,512,525 |   |

 

**Income Taxes**

 

Deferredincome taxes are determined based on the difference between the financialreporting and tax bases of assets and liabilities.  Deferred income tax provision represents the change during thereporting period in the deferred tax assets and deferred tax liabilities, netof 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.

 

Thedifference in income taxes computed at the statutory rate and reported incometaxes for the three months ended March 31, 2004 is due primarily to anincrease in the valuation allowance. The difference in income taxes computed at the statutory rate andreported income taxes for the three months ended March 31, 2003 is dueprimarily to state and local income taxes.

 

8

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**4.**                                      Acquisitions

 

Allacquisitions are accounted for as purchases and, accordingly, only theoperations of the acquired companies since the acquisition dates are includedin the accompanying unaudited consolidated financial statements.  During the three months ended March 31,2004, the Company did not make any acquisitions.  The allocation of the purchase price for the Seneca Meadows, Inc.(SMI) acquisition, which was consummated in October 2003, is preliminaryand will be finalized upon completion of valuation analyses of certain assetsand liabilities associated with the landfill owned by SMI, which the Companyexpects to occur by June 30, 2004. Upon completion of such valuation analyses, the Company may be requiredto reallocate a portion of such purchase price among the Company’s assets andliabilities.  The Company does notbelieve any such reallocation will have a material effect on its consolidatedfinancial statements.

 

**5.**                                      Landfill andAccrued Environmental Costs

 

TheCompany has material financial commitments for final capping, closure andpost-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 cash flows.  However, when utilizing discounted cash flowtechniques, reliable estimates of market premiums may not be obtainable.  In the waste industry, there is no marketthat exists for selling the responsibility for final capping, closure andpost-closure independent of selling the landfill in its entirety.  Accordingly, the Company believes that it isnot possible to develop a methodology to reliably estimate a market riskpremium and have excluded a market risk premium from its determination ofexpected cash flows for landfill asset retirement obligations.

 

Oncethe Company has determined the final capping, closure and post-closure costs,the Company then inflates those costs to the expected time of payment anddiscounts those expected future costs back to present value.  The Company inflates these costs in currentdollars until the expected time of payment using an annual inflation rate anddiscounts these costs to present value using a credit-adjusted, risk-freediscount rate.  The Company reviewed theinflation rate to be used for 2004 and determined that a rate of 2.5%, which isthe rate used by most waste industry participants, was appropriate.  The credit-adjusted, risk-free rate is basedon the risk-free interest rate on obligations of similar maturity adjusted forthe Company’s credit rating.  Changes inthe Company’s credit-adjusted, risk-free rate do not change recordedliabilities, but subsequently recognized obligations are measured using therevised credit-adjusted risk-free rate. During the three months ended March 31, 2004, the Company used acredit-adjusted risk free rate of 7.86%.

 

Managementreviews the estimates of the Company’s obligations at least annually.  Significant changes in inflation rates andthe amount and timing of future final capping, closure and post-closure costestimates typically result in both (i) a current adjustment to the recordedliability (and corresponding adjustment to the landfill asset), based on thelandfill’s capacity consumed, and (ii) a change in liability and asset amountsto be recorded prospectively over the remaining capacity of the landfill.

 

9

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TheCompany records the estimated fair value of final capping, closure andpost-closure liabilities for its landfills based on the respective finalcapping or landfill capacities consumed through the current period.  The liability and corresponding asset arerecorded on a per-ton basis.  Theestimated fair value of each final capping event will be fully accrued when thetons associated with such capping event have been disposed in thelandfill.  Additionally, the estimatedfair value of total final capping, closure and post-closure costs will be fullyaccrued for each landfill at the time the site discontinues accepting waste andis closed.  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.

 

Accretionon final capping, closure and post-closure liabilities is recorded using theeffective interest method and is recorded as final capping, closure andpost-closure expense, which is included in operating costs on the incomestatement.

 

In theUnited States, the closure and post-closure requirements are established by theEnvironmental Protection Agency’s (“EPA”) Subtitle C and D regulations, asimplemented and applied on a state-by-state basis.  The costs to comply with these requirements could increase in thefuture as a result of legislation or regulation.

 

Thefollowing is a roll-forward of amounts accrued for final closure andpost-closure costs and environmental costs: 

 
|                              |   | **Final  Closure/  Post-Closure  Costs** |       | **Environmental  Costs** |   | **Total**  |   |
|-----------------------------------|--------|------------------------------------------|------------|--------------------------|--------|------------|--------|
| Balance at December 31, 2003 |   | $                                        | 19,928,909 |                     | $      | 27,527,860 |   | $ | 47,456,769 |   |
| Obligations incurred              |   | 697,313                                  |       | 100,677                  |   | 797,990    |   |
| Acquisition related adjustments   |   | (42,135                                  | )          | —                   |   | (42,135    | )      |
| Obligations settled               |   | (7,856                                   | )          | (348,813                 | )      | (356,669   | )      |
| Revisions in estimates            |   | (191,072                                 | )          | (1,194                   | )      | (192,266   | )      |
| Accretion                         |   | 461,748                                  |       | 29,460                   |   | 491,208    |   |
|                              |   |                                     |       |                     |   |       |   |
| Balance at March 31, 2004    |   | $                                        | 20,846,907 |                     | $      | 27,307,990 |   | $ | 48,154,897 |   |

 

**6.**              Long-Term Debt

 

Long-termdebt consisted of the following at March 31, 2004 and December 31,2003:

 
|                                              |   | **March 31,  2004** |        | **December 31,  2003** |   |
|---------------------------------------------------|--------|--------------------------|-------------|-----------------------------|--------|
| Revolving credit loan                             |   | $                        | 31,100,000  |                        | $      | 29,600,000 |   |
| Term loan                                         |   | 199,000,000              |        | 200,000,000                 |   |
| Senior subordinated notes due June 15,  2012 |   | 152,853,662              |        | 150,998,599                 |   |
| Other                                             |   | 173,693                  |        | 262,389                     |   |
| Total long-term debt                              |   | 383,127,355              |        | 380,860,988                 |   |
| Less current portion                              |   | 2,173,693                |        | 2,731,595                   |   |
|                                              |   | $                        | 380,953,662 |                        | $      | 378,129,393 |   |

 

10

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Scheduledmaturities of long-term debt are as follows:

 
| 2004       |   | $           | 2,142,899   |   |
|------------|--------|-------------|-------------|--------|
| 2005       |   | 2,030,794   |        |
| 2006       |   | 2,000,000   |        |
| 2007       |   | 2,000,000   |        |
| 2008       |   | 33,100,000  |        |
| Thereafter |   | 339,000,000 |        |
|       |   | $           | 380,273,693 |   |

 

OnOctober 10, 2003, the Company entered into the Fifth Amended and RestatedRevolving Credit and Term Loan Agreement (the Credit Facility).  The Credit Facility is provided by asyndicate of lenders led by Fleet National Bank, as administrative agent(Fleet), and LaSalle National Bank Association, as syndication agent, andincludes a $200,000,000 senior secured term loan, a$200,000,000 senior secured revolving loan, and has a maximum of$80,000,000 letters of credit sub-limit. Subject to certain conditions, the Company may request an increase inthe revolving loan portion or the term loan portion of the Credit Facility ofup to $50,000,000, such that the total of the revolving loan and term loanportions would equal $450,000,000.  Asof March 31, 2004, there was $31,100,000 (excluding $49,727,000 underlyingletters of credit) outstanding under the revolving loan portion of the CreditFacility and $119,173,000 of remaining capacity (of which $15,314,000 wasimmediately available for borrowing) under the revolving loan portion, plus amaximum of $30,273,000 underlying letters of credit.  In order to borrow under the revolving loan portion of the CreditFacility, the Company must satisfy customary conditions including maintainingcertain financial ratios.  If a defaultunder the indenture governing the 10.25% Senior Subordinated Notes due 2012(Notes) or Credit Facility should occur, the holders of the Notes or thelenders under the Credit Facility could elect to declare all amounts borrowedto be immediately due and payable. Furthermore, this could result in all amounts borrowed under otherinstruments, including the indenture governing our Notes or the CreditFacility, that contain cross-acceleration or cross-default provisions beingdeclared immediately due and payable and the lenders could terminate allcommitments there under.  The CreditFacility is secured by a pledge of the stock of the Company’s direct andindirect subsidiaries and a lien on substantially all of the Company’s directand indirect subsidiaries’ assets.  TheCredit Facility also contains covenants which restrict the Company’s abilityto, among other things, incur additional debt, create liens, dispose of assets,make investments, engage in transactions with affiliates, enter into a mergeror consolidation, make specified payments, including dividends, and enter intocertain franchise agreements.  Theselimitations are subject to certain qualifications and exceptions.

 

Pursuantto the terms of the Credit Facility, during the 12 months that commences onOctober 1 and ends on September 30, the Company is required to repay1.0% (except for the 12-month period prior to maturity when it is required torepay 94.0%) of the principal amount of the term loan portion of its seniorcredit facility in quarterly installments payable on the last business day ofeach calendar quarter.  In addition, theCompany’s senior credit facility requires it to prepay the term loan with,subject to certain conditions and exceptions, 100.0% of the net cash proceedsit receives from any disposition of assets in excess of $5.0 million in theaggregate per year, 100.0% of the net cash proceeds it receives from theincurrence of any permitted indebtedness (other than up to $100.0 millionof additional subordinated indebtedness) and 50.0% of the net cash proceeds itreceives in connection with any issuance of the Company’s equity (other thanequity the Company issues (i) in an aggregate amount not to exceed$100.0 million, (ii) as payment in a permitted acquisition or (iii) toemployees, consultants or directors in connection with the exercise of optionsunder bona fide option plans).  TheCompany is also required to prepay the term loan with the percentage of excessconsolidated operating cash flow (to be calculated for each fiscal year, andwhich includes, generally, consolidated EBITDA, plus or minus net workingcapital changes and extraordinary cash items, less the sum of (a) capitalexpenditures, (b)  the cash purchase

 

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price of any permitted acquisitions, (c)  cashpayments for taxes, (d) cash payments of interest and (e)  thescheduled principal repayments of indebtedness, in each case of clauses (a)through (e), paid during such period) corresponding to the applicable leverageratio set forth below:

 

| **Leverage Ratio**               |   | **Percentage  of Excess Consolidated  Operating Cash Flow Required as  Mandatory Prepayment of Term Loan** |
|----------------------------------|--------|------------------------------------------------------------------------------------------------------------|
| > 3.50:1.00                   |   | 50%                                                                                                        |
| > 3.00:1.00 and <3.50:1.00 |   | 25%                                                                                                        |
| <3.00:1.00                    |   | 0%                                                                                                         |

 

TheCredit Facility permits borrowings at floating interest rates based, at theCompany’s option, on 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 March 31, 2004, the interest rate applicable to $23,600,000outstanding under the revolving loan portion of the Company’s senior creditfacility was LIBOR plus 325 basis points, or 4.37%, and the interest rateapplicable to the remaining balance of $7,500,000 outstanding there under wasFleet’s prime rate plus 100 basis points, or 5.25%.  As of March 31, 2004, the interest rateapplicable to $100,000,000 outstanding under the term loan portion of itssenior credit facility was LIBOR plus 300 basis points, or 4.25%, and theinterest rate applicable to the remaining balance of $99,000,000 outstandingthere under was Fleet’s prime rate plus 75 basis points, or 5.00%.  The revolving loan portion of the CreditFacility expires on September 30, 2008 and the term loan portion of theCredit Facility expires on September 30, 2010.

 

InJune 2002, the Company issued $150,000,000 of the Notes in a privateplacement and registered the Notes under the Securities Act of 1933 inDecember 2002.  Interest is payablesemi-annually on June 15th and December 15th.  The Notes are guaranteed by all of IESI’scurrent subsidiaries, all of which are 100% owned by IESI.  Condensed consolidating financialinformation is not provided because IESI has no independent assets oroperations, the subsidiary guarantees are full and unconditional and joint andseveral, and there are no significant restrictions on the ability of theCompany or any subsidiary guarantor to obtain funds from its subsidiaries bydividend or loan.

 

InAugust 2002, the Company 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 $25,000,000 of the Notes effectively wasconverted to an interest rate of 5.275% and 5.305%, respectively, plus anapplicable floating rate margin that is based on six month LIBOR which isreadjusted semiannually on June 15 and December 15 of each year.

 

InJanuary 2004, the Company entered into four interest rate swap agreements,which are effective through January 2007, with four financialinstitutions.  Under each swapagreement, the variable interest rate on $25,000,000 outstanding under theCredit Facility effectively was converted to a fixed interest rate of 2.58%,2.61%, 2.71% and 2.75%, respectively, plus an applicable LIBOR margin.

 

**7.**              Commitments and Contingencies

 

TheCompany’s business activities are conducted in the context of a developing andchanging statutory and regulatory framework. Governmental regulation of the waste management industry requires theCompany to obtain and retain numerous governmental permits to conduct variousaspects of its operations.  Thesepermits are subject to revocation, modification or denial.  The costs and other capital expenditures, whichmay be required to obtain or retain the applicable permits or comply withapplicable

 

12

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regulations, could be significant.  Any revocation, modification or denial ofpermits could have a material adverse effect on the Company.

 

TheCompany is subject to liability for any environmental damage that its solidwaste disposal facilities may cause to neighboring landowners or residents,particularly as a result of the contamination of soil, groundwater or surfacewater, including, in some cases, damage resulting from conditions existingprior 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.

 

Anysubstantial liability for environmental damage incurred by the Company couldhave a material adverse effect on the Company’s financial condition, results ofoperations or cash flows.  As ofMarch 31, 2004, the Company was not aware of any such environmentalliabilities (other than those recorded in the Company’s consolidated financialstatements).

 

In thenormal course of its business, and as a result of the extensive governmentalregulation of the solid waste industry, the Company is subject to variousjudicial and administrative proceedings involving federal, state or localagencies. 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.

 

Inaddition, the Company may become party to various claims and suits pending foralleged damages to persons and property, alleged violations of certain laws andalleged liabilities arising out of matters occurring during the normaloperation of the waste management business. However, as of March 31, 2004,there were no proceedings or litigation involving the Company that the Companybelieved would have a material adverse impact on its business, financialcondition, results of operations or cash flows.  See footnote 11, Subsequent Events, for a discussion of litigationmatters.

 

**8.**              Redeemable Preferred Stock

 

TheCompany had redeemable preferred stock on its balance sheet of approximately$289,994,000 as of March 31, 2004 and $283,054,000 as of December 31,2003, representing the carrying value of its preferred stock as of such dates.  In accordance with Emerging Issues TaskForce (“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 control becauseholders of the Company’s preferred stock currently control a majority of thevotes of the Company’s board of directors.

 

**9.**              Segment Reporting

** **

TheCompany’s two geographic regions are the Company’s reportable segments. Thesegments provide integrated waste management services consisting of collection,transfer, disposal, and recycling services to commercial, industrial,municipal, and residential customers. Summarized financial informationconcerning the Company’s reportable segments for the three-month periods endedMarch 31 is shown in the following table:

 

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|                                                                                                   |   | **South  Region** |       | **Northeast  Region** |   | **Corporate  Functions** |   | **Total**   |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------------|------------|-----------------------|--------|--------------------------|--------|-------------|--------|
| **Three Months Ended  March 31, 2004**                                                            |   |              |       |                  |   |                     |   |        |   |
| Outside revenues                                                                                       |   |              |       |                  |   |                     |   |        |   |
| Collection                                                                                             |   | $                 | 37,872,178 |                  | $      | 8,623,863                |   | $           | — |   | $ | 46,496,041 |   |
| Transfer                                                                                               |   | 1,060,679         |       | 9,683,940             |   | —                   |   | 10,744,619  |   |
| Disposal                                                                                               |   | 2,637,809         |       | 12,045,341            |   | —                   |   | 14,683,150  |   |
| Recycling                                                                                              |   | 708,737           |       | 1,119,364             |   | —                   |   | 1,828,101   |   |
| Other                                                                                                  |   | 115,707           |       | 195,213               |   | —                   |   | 310,920     |   |
| Total outside revenues                                                                                 |   | 42,395,110        |       | 31,667,721            |   | —                   |   | 74,062,831  |   |
| Income (loss) from operations                                                                          |   | 2,258,238         |       | 6,606,928             |   | (2,419,417               | )      | 6,445,749   |   |
| Depreciation, depletion and amortization                                                               |   | 7,335,916         |       | 6,926,827             |   | 171,478                  |   | 14,434,221  |   |
| Purchases of property and equipment                                                                    |   | 4,912,863         |       | 5,331,540             |   | 124,498                  |   | 10,368,901  |   |
| Goodwill                                                                                               |   | 90,744,576        |       | 47,628,196            |   | —                   |   | 138,372,772 |   |
| Total assets                                                                                           |   | 304,312,435       |       | 380,248,369           |   | 19,001,100               |   | 703,561,904 |   |
|                                                                                                   |   |              |       |                  |   |                     |   |        |   |
| **Three Months  Ended March 31, 2003**                                                       |   |              |       |                  |   |                     |   |        |   |
| Outside revenues                                                                                       |   |              |       |                  |   |                     |   |        |   |
| Collection                                                                                             |   | $                 | 31,691,112 |                  | $      | 8,103,292                |   | $           | — |   | $ | 39,794,404 |   |
| Transfer                                                                                               |   | 1,166,308         |       | 9,327,280             |   | —                   |   | 10,493,588  |   |
| Disposal                                                                                               |   | 1,634,698         |       | 1,542,225             |   | —                   |   | 3,176,923   |   |
| Recycling                                                                                              |   | 672,479           |       | 1,011,350             |   | —                   |   | 1,683,829   |   |
| Other                                                                                                  |   | 191,597           |       | 73,530                |   | —                   |   | 265,127     |   |
| Total outside revenues                                                                                 |   | 35,356,194        |       | 20,057,677            |   | —                   |   | 55,413,871  |   |
| Income (loss) from operations                                                                          |   | 3,525,653         |       | 1,939,256             |   | (2,028,239               | )      | 3,436,670   |   |
| Depreciation, depletion and amortization                                                               |   | 5,945,982         |       | 1,746,984             |   | 181,491                  |   | 7,874,457   |   |
| Purchases of property and equipment                                                                    |   | 7,272,802         |       | 2,075,997             |   | 122,373                  |   | 9,471,172   |   |
| Acquisitions of waste operations and  initial development costs for newly acquired permitted landfills |   | 1,380,885         |       | —                |   | —                   |   | 1,380,885   |   |
| Goodwill acquired                                                                                      |   | 109,506           |       | —                |   | —                   |   | 109,506     |   |
| Goodwill                                                                                               |   | 80,890,618        |       | 47,628,196            |   | —                   |   | 128,518,814 |   |
| Total assets                                                                                           |   | 265,049,848       |       | 154,460,135           |   | 14,536,463               |   | 434,046,446 |   |

 

Seasonalityand weather can temporarily affect some of the Company’s revenue andexpenses.  The Company generallyexperiences lower construction and demolition waste volumes during the wintermonths when the construction industry slows down.  Frequent and/or heavy snow and ice storms can affect theproductivity of the Company’s operations. In the Company’s South Region, higher than normal rainfall and morefrequent rain and ice storms over a 30 to 90 day period can put additionalstress on the construction industry, lowering the volumes of waste the Companyhandles.  Significantly below normalrainfall can lead to higher levels of construction activity, increasing theCompany’s volumes.

 

**10.  StockOptions**

 

OnJanuary 28, 2004, the Compensation Committee of the Board of Directors ofthe Company granted non-qualified stock options to purchase an aggregate of79,794 shares of the Company’s Class A voting common stock to certain employeesand directors of the Company pursuant to the Company’s 1999 Stock Option Plan,as amended (the Plan).  The options weregranted at an exercise price of $100.00 per share, which was equal to orgreater than the estimated fair value of the underlying shares.  On the same date, the Board of Directorsalso approved an amendment to the Plan increasing the number of optionsauthorized to be granted thereunder from 250,000 to 400,000.  Options granted under the Plan expire 10years from the date of grant and generally become fully vested over periodsranging from 5 to 8 years.

 

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Thefollowing schedule reflects the pro forma impact on net loss of accountingfor the Company’s stock option grants using SFAS No. 123, “Accounting forStock-Based Compensation,” which would result in the recognition ofcompensation expense for the fair value of stock option grants as computedusing the Black-Scholes option-pricing model.

 
|                                          |   | **2004** |       | **2003** |   |
|-----------------------------------------------|--------|----------|------------|----------|--------|
| **For the three months ended March 31,** |   |     |       |     |   |
| Reported net loss                             |   | $        | (1,220,584 | )        | $      | (2,031,621 | ) |
| Less: compensation expense per SFAS No. 123   |   | 50,337   |       | 35,382   |   |
| Pro forma net income loss                     |   | $        | (1,270,921 | )        | $      | (2,067,003 | ) |

 

15

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**Item 2**. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.

 

*You should read the followingdiscussion in conjunction with our unaudited consolidated financial statementsand the related notes included elsewhere in this Quarterly Report on Form 10-Q.*

 

**General**

 

We areone of the leading regional, non-hazardous solid waste management companies inthe United States.  We providecollection, transfer, disposal and recycling services in two geographicregions: our South Region, consisting of Texas, Louisiana, Oklahoma, Arkansasand Missouri; and our Northeast Region, consisting of New York, New Jersey,Pennsylvania and Maryland.  We are thetenth largest, and the third largest privately-held, service provider in theapproximately $43 billion non-hazardous solid waste management industry in theUnited States.

 

**Critical Accounting Policies**

 

Ourconsolidated financial statements are based on the selection of accountingpolicies and application of significant accounting estimates, which requiremanagement to make significant estimates and assumptions.  For a detailed discussion of our criticalaccounting estimates, please refer to Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” of our Annual Reporton Form 10-K for the fiscal year ended December 31, 2003. There were nomaterial changes relating to our critical accounting estimates during the threemonths ended March 31, 2004.

 

**Sources of Revenue**

 

Ourrevenue consists primarily of fees we charge customers for solid wastecollection, 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 40% of our SouthRegion’s revenue was generated from 273 municipal contracts during 2003 and 280municipal contracts during the three months ended March 31, 2004.  Our contracts with the City of New Yorkrepresented in the aggregate approximately 30% of our Northeast Region’s, andapproximately 11% of our overall, revenue in 2003 and approximately 22% of ourNortheast Region’s, and approximately 9% of our overall, revenue during thethree months ended March 31, 2004. Contracts with municipalities provide relatively consistent cash flowduring their terms.  Our municipalcontracts generally last from three to five years and usually have renewaloptions.  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 renewalbasis.  Collection fees are paid eitherby the municipalities from their tax revenue or directly by the residentsreceiving the services.  Depending onfluctuating commodity prices, we sometimes also generate revenue from the saleof recyclable commodities; however, such revenue does not represent asignificant part of our total recycling revenue.  After recyclables are collected, they are delivered to othersorting facilities operated by third parties.

 

Wetypically determine the prices for our collection services by the collectionfrequency and level of service, route density, volume, weight and type of wasteor recyclable material collected, type of equipment and containers furnished,the distance 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,usually based on the consumer price index, which automatically adjusts fees,usually on an annual basis, to cover increases in some, but not all of ouroperating costs.

 

16

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Wecharge transfer station and landfill customers a “tipping fee” either on aper-ton or per-yard basis for disposing of their municipal solid waste, or MSW,construction and demolition, or C&D, waste or both at the transfer stationsand landfills we operate.  We generally baseour transfer station “tipping fees” on market factors and the cost ofprocessing the waste deposited at the transfer station, the cost oftransporting the waste to a disposal facility and the cost of disposal.  We generally base our landfill “tipping fees”on market factors and the type and weight or volume of the waste deposited andthe type and size of the vehicles used in the transportation of the waste.

 

Manyof our landfills are assessed state, county or local community fees based onthe volume of tons or yards disposed of during a defined period, usually eithermonthly or quarterly.  The types andamounts of fees charged can vary widely, but typically a state fee is uniformlycharged to all landfills within a state. We report our landfill revenue net of all these fees.  Pennsylvania and Virginia are both currentlyconsidering legislation that would impose a fee of an additional $5.00 on eachton of waste disposed of at landfills in their respective states.  Other states could follow this trend as well.

 

EffectiveSeptember 2003, the City of New York revised its waste collection servicesmaximum rate to permit haulers to charge commercial customers either thepre-existing $12.20 per loose yard rate or a new rate of $160.00 per ton.  The disposal facilities in and around NewYork City charge by the ton.  However,prior to September 2003, the maximum rate was imposed on a per loose yardbasis only.  Accordingly, based on theweight of certain customers’ loose yardage, it was not economical for us to servicecustomers with heavy waste.  As aresult, until recently, our New York City collection operations focused oncustomers with light loose garbage and customers with a large paper recyclingcomponent, which enabled us to reduce our cost of disposal.  The new tonnage rate will enable our NewYork City collection operations to service all customers in all areas in whichwe operate.

 

In2002, New York City announced changes to its Solid Waste Management Plan,pursuant to which it planned to utilize and upgrade its existing marinetransfer station system instead of private transfer stations to process andtransfer its residential waste stream of approximately 12,000 tons of MSW perday.  New York City initially intendedto implement these changes by retrofitting and repermitting its marine transferstations by 2008 so that the stations could containerize the City’s residentialMSW on site and then transport the loaded containers to ultimate disposal sitesby alternative transportation methods, such as barge, rail and truck.  However, during 2003, New York Citydetermined that this plan was not feasible, based on estimates of the costsnecessary to complete the plan, and decided to seek proposals from privateindustry with respect to the transfer and disposal of New York City’sresidential waste stream.  In early2004, the City requested proposals to receive, transfer, transport and disposethe City’s residential waste stream. The City also requested expressions of interest to provide wastedisposal capacity in New York State.  Wesubmitted our proposals in late March 2004, and the City is currentlyevaluating all proposals and expressions of interest.  The City has not provided timelines for award or implementationdates.

 

17

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Thetable below shows, for the periods indicated, the percentage of our totalreported revenue attributable to each of our services: 

 
|       |   | **Three  Months Ended  March 31,** |   |
|------------|--------|-----------------------------------------|--------|
|       |   | **2003**                                |   | **2004(1)** |   |
|       |   |                                    |   |   |   |
| Collection |   | 71.8                                    | %      | 62.8 | % |
| Transfer   |   | 18.9                                    | %      | 14.5 | % |
| Disposal   |   | 5.8                                     | %      | 19.8 | % |
| Recycling  |   | 3.0                                     | %      | 2.5 | % |
| Other      |   | 0.5                                     | %      | 0.4 | % |
| Total      |   | 100.0                                   | %      | 100.0 | % |

 

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(1)  The increase in thepercentage of our total reported revenue attributable to our disposal servicesduring the three months ended March 31, 2004 primarily resulted from ouracquisition on October 9, 2003 of the Seneca Falls, New York landfill inour Northeast Region, and the addition in our South Region of three operatinglandfills, including two greenfield sites acquired in 2002, which we opened inAugust 2003, and an operating landfill which we purchased inJuly 2003.  Excluding the effectsof these four landfills, the disposal percentage for the three months endedMarch 31, 2004 would have been substantially the same as the disposalpercentage for the three months ended March 31, 2003.  During the three months ended March 31,2004, our total revenue increased by an aggregate of $18.7 million from thecorresponding three-month period in 2003. This increase primarily resulted from increases in our revenue fromcollection services ($6.7 million increase from the corresponding three-monthperiod in 2003), disposal services ($11.5 million increase from thecorresponding three-month period in 2003) and transfer services ($251,000increase from the corresponding three-month period in 2003).

 

**CostStructure**

 

Ouroperating expenses include labor, fuel, equipment maintenance, “tipping fees”paid to third-party transfer stations and disposal facilities, workers’compensation, vehicle insurance, third-party transportation expenses andaccretion expense.  We monitor thefluctuation in fuel prices and, from time to time, if this cost increases at ahigher rate than inflation, we generally pass the additional cost on to ourcustomers.  Our business strategy is todevelop vertically integrated operations to internalize — transfer to anddispose of at our own landfills — the waste that we handle and thus realizehigher margins from our operations.  Bydisposing of waste at our landfills, we retain the margin generated throughdisposal operations that would otherwise be earned by third-partylandfills.  We currently internalizeapproximately 59% of the solid waste that we handle and deliver the rest tothird-party disposal facilities.  Someof our municipal contracts require us to provide only collection services andto dispose of the collected waste at a designated third-party disposal facility(at no cost to us) with whom the municipality has contracted with directly.

 

If theoperators of third-party landfills increase their “tipping fees,” we would seekto pass along these increases to our customers, but if we were unable to do so,our profitability would be adversely affected. If these operators discontinue their arrangements with us and we cannotfind alternative disposal sites with favorable arrangements, our costs ofdisposal may rise.  Also, our failure toobtain the required permits to establish new landfills and transfer stations orexpand our existing landfills and transfer stations could hinder our businessstrategy to develop vertically integrated operations.  Failure to expand capacity could lead to decreased profitabilityas a result of the increased “tipping fees” we would have to pay to third-partylandfills.

 

Weoperate 23 transfer stations, which reduce our costs by allowing us to usecollection personnel and equipment more efficiently, and by consolidating wasteto gain volume discounts on disposal rates.

 

18

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Generaland 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 depreciation of fixed assets overtheir estimated useful lives using the straight-line method, depletion oflandfill costs using life cycle accounting and the units-of-consumption method,and amortization of intangible assets other than goodwill using thestraight-line method.  In allocating thepurchase price of an acquired company among its assets, we first assign valueto the tangible assets, followed by intangible assets, includingnon-competition covenants and certain contracts that are determinable both interms of size and life.  We determinethe value of the intangible assets other than goodwill by considering, amongother things, the present value of the cash flows associated with those assets.

 

Wecapitalize some third-party expenditures related to pending acquisitions anddevelopment projects, such as legal and engineering expenses.  We expense indirect acquisition costs, suchas executive and corporate overhead, public relations and other corporateservices, as we incur them.  We chargeagainst net income any unamortized capitalized expenditures and advances, netof any portion that we believe we may recover through sale or otherwise, thatrelate to any operation that is permanently shut down and any pendingacquisition or landfill development project that is not expected to becompleted.  We routinely evaluate allcapitalized costs and expense those related to projects that we believe are notlikely to be completed.

 

EffectiveJanuary 1, 2003, we adopted SFAS No. 143, “Accounting for Asset RetirementObligations.”  See Note 2 to our auditedconsolidated financial statements included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2003.  Under SFAS No. 143, costs associated with 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.  Werecognize landfill retirement obligations that relate to closure andpost-closure activities over the operating life of a landfill as landfillairspace is consumed and the obligation is incurred.  We recognize our 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 of7.86% during 2004.  Accretion isrecorded on all landfill retirement obligations using the effective interestmethod.  We amortize landfill retirementcosts arising from closure and post-closure obligations, which are capitalizedas part of the landfill asset, using our historical landfill accountingpractices.  We amortize landfillretirement costs arising from final capping obligations, which are alsocapitalized as part of the landfill asset, on a units-of-consumption basis overthe number of tons of waste that each final capping event covers.

 

Weperiodically evaluate the value and future benefits of our goodwill and otherintangible assets. For intangible assets other than goodwill, we assess therecoverability from future operations using cash flows of the related assets asmeasures.  Under this approach, thecarrying value is reduced if it becomes probable that our best estimate ofexpected future cash flows from the related intangible assets would be lessthan the carrying amount of the intangible assets.  As of March 31, 2004, there were no adjustments to thecarrying amounts of intangibles other than goodwill resulting from theseevaluations.

 

Wetest goodwill for 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 ourannual impairment test during the fourth quarter of 2003 and incurred noimpairment.  As of March 31, 2004,goodwill and other intangible assets represented approximately 24.1% of totalassets, 58.5% of redeemable preferred stock and 79.0% of the sum of ourredeemable preferred stock and stockholders’ equity (deficit).

 

19

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**Seasonality**

 

Seasonalityand weather can temporarily affect our revenue and expenses.  We generally experience lower C&D wastevolumes during the winter months when the construction industry slowsdown.  Frequent and/or heavy snow, icestorms and very cold weather can affect our revenue, primarily from ourtransfer station and landfill operations which are volume based, and theproductivity of our collection operations. In our South Region, higher than normal rainfall and more frequent rainand ice storms over a 30 to 90 day period can put additional stress on theconstruction industry, lowering the volumes of waste we handle.  Significantly below normal rainfall can leadto higher levels of construction activity, increasing our volumes.

 

**Impactof Inflation**

 

Todate, 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.  Accordingly, 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 of highinflation.

 

**Acquisitions**

 

Ourintegration plan for acquisitions contemplates certain cost savings, includingthrough the elimination of duplicative personnel and facilities.  Unforeseen factors may offset the estimatedcost savings or other components of our integration plan, in whole or in part,and, as a result, we may not realize any cost savings or other benefits fromfuture acquisitions, and we may experience a net increase in costs.

 

Inaccordance with GAAP, we capitalize some expenditures and advances relating topending acquisitions.  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 ofour acquisitions have been accounted for as purchases and, accordingly, onlythe operations of acquired companies since their respective acquisition datesare included in our consolidated financial statements.  These acquisitions were financed through acombination of funds borrowed under our senior credit facility and proceedsfrom private offerings of shares of our preferred stock.  We expect to be able to finance any futureacquisitions with cash provided from operations, borrowings under our seniorcredit facility, debt or equity offerings, or some combination of theforegoing.

 

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**Resultsof Operations**

 

Thefollowing table sets forth, for the periods indicated, selected consolidatedstatement of operations data (in thousands) and the percentage relationshipthat such data bear to our revenue:

 
|                                                 |   | **Three  Months Ended March 31,** |   |
|------------------------------------------------------|--------|----------------------------------------|--------|
|                                                 |   | **2003**                               |   | **2004** |   |
|                                                 |   | **$**                                  |   | **%** |   | **$** |   | **%** |   |
|                                                 |   |                                   |   |   |   |   |   |   |   |
| South Region                                         |   | 35,356                                 |   | 63.8 |   | 42,395 |   | 57.2 |   |
| Northeast Region                                     |   | 20,058                                 |   | 36.2 |   | 31,668 |   | 42.8 |   |
| Services revenue                                     |   | 55,414                                 |   | 100.0 |   | 74,063 |   | 100.0 |   |
| Operating expense                                    |   | 37,043                                 |   | 66.9 |   | 43,734 |   | 59.0 |   |
| General and administrative                           |   | 7,060                                  |   | 12.7 |   | 9,449 |   | 12.8 |   |
| Depreciation, depletion and amortization             |   | 7,874                                  |   | 14.2 |   | 14,434 |   | 19.5 |   |
| Income from operations                               |   | 3,437                                  |   | 6.2 |   | 6,446 |   | 8.7 |   |
| Interest expense, net                                |   | (4,330                                 | )      | (7.8 | ) | (6,888 | ) | (9.3 | ) |
| Other income (expense), net                          |   | 2                                      |   | — |   | (779 | ) | (1.1 | ) |
| Income tax benefit (expense)                         |   | 390                                    |   | 0.7 |   | — |   | — |   |
| Cumulative effect of change in accounting  principle |   | (1,531                                 | )      | (2.8 | ) | — |   | — |   |
| Net loss                                             |   | (2,032                                 | )      | (3.7 | ) | (1,221 | ) | (1.7 | ) |

 

**ThreeMonths Ended March 31, 2004 Compared With Three Months EndedMarch 31, 2003**

 

*Revenue. *Ourrevenue increased by $18.7 million, or 33.7%, to $74.1 million duringthe three months ended March 31, 2004 from $55.4 million during thethree months ended March 31, 2003. Acquisitions completed since January 2003 contributed $15.1 million,or 27.1%, to the increase in our revenue during the three months endedMarch 31, 2004.  Excludingincremental revenue from acquisitions, our revenue increased by$3.6 million, or 6.6%.  Our newbusiness, from both new municipal contracts and increased sales from existingoperations, contributed 2.1% of such increase, while price increasescontributed 4.5%.  In our South Region,our revenue increased by $7.0 million, or 19.9%, to $42.4 millionduring the three months ended March 31, 2004 from $35.4 millionduring the corresponding three-month period in 2003.  In our Northeast Region, our revenue increased by$11.6 million, or 57.9%, to $31.7 million during the three monthsended March 31, 2004 from $20.1 million during the correspondingthree-month period in 2003.

 

*Operating Expenses.* Our operating expenses increased by $6.7 million, or 18.1%, to$43.7 million during the three months ended March 31, 2004 from$37.0 million during the three months ended March 31, 2003.  Operating expenses as a percentage of ourrevenue decreased by 7.9% to 59.0% during the three months ended March 31,2004 from 66.9% during the three months ended March 31, 2003.  The increase in our operating expenses wassubstantially due to additional expenses associated with the increase in our revenuefrom acquired operations and new business during the same period.  Integration of newly-acquired businessesinto our organizational structure typically takes three to six months.  The labor, maintenance, fuel and disposalcosts related to newly-acquired businesses are generally higher during the integrationperiod.  Start-up and integration costsrelated to a municipal contract typically are incurred in the one-to two-monthperiod prior to, and the one-to two-month period after, the commencement of thecontract. During this period, labor costs are generally higher due to deliveryof containers, residential carts and recycling bins to the new municipality andtraining of newly-hired employees.  Themargin improvement in operating expenses during the three months endedMarch 31, 2004 was primarily attributable to our Seneca Falls, New Yorklandfill acquisition consummated in October 2003, which resulted in asubstantial increase in our revenue and only an incremental increase in ouroperating expenses.

 

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*General and Administrative. *Our general and administrative expenses increased by$2.4 million, or 33.8%, to $9.4 million during the three months endedMarch, 31 2004 from $7.0 million during the three months ended March 31,2003.  General and administrativeexpenses as a percentage of our revenue increased by 0.1% to 12.8% during thethree months ended March 31, 2004 from 12.7% during the three months endedMarch 31, 2003.  Our general andadministrative expenses increased as a result of our employment of additionalpersonnel from companies acquired and additional corporate and regionaloverhead which was necessary to accommodate our internal growth from ourcollection operations.  In addition,during the three months ended March 31, 2004, we recorded a $102,000write-off  related to certain costsincurred in connection with aborted acquisition transactions. We also incurred$100,000 of accounting and legal costs related to the ongoing investigation atone of our collection divisions in our South Region, as described in moredetail in Part I. Item 4. “Controls and Procedures” of this Quarterly Report onForm 10-Q.

 

*Depreciation, Depletion andAmortization. *Our depreciation, depletion andamortization expenses increased by $6.5 million, or 83.3%, to $14.4 millionduring the three months ended March 31, 2004 from $7.9 million duringthe three months ended March 31, 2003. Depreciation, depletion and amortization as a percentage of our revenueincreased by 5.3% to 19.5% during the three months ended March 31, 2004from 14.2% during the three months ended March 31, 2003.  This increase resulted primarily from theinclusion of depreciation, depletion and amortization expenses related tobusinesses acquired in 2003 and depreciation of capital assets purchased forinternal growth.  The Seneca Falls, NewYork landfill we acquired in October 2003 increased our depreciation,depletion and amortization expenses by $4.5 million during the threemonths ended March 31, 2004. During 2003, we also added three operating landfills, including twogreenfield sites acquired in 2002 which we opened in August 2003 and anoperating landfill which we purchased in July 2003, which have a highercomponent of depreciation, depletion and amortization expenses than a typical haulingoperation.  Additionally, depletionexpense related to the Bethlehem landfill expansion permit we obtained inApril 2003, which increased our daily permitted volume at the landfillfrom 750 tons to 1,375 tons, resulted in an increase to depletion expense for thethree months ended March 31, 2004 of $530,000.

 

*Income from Operations. *Our income from operations increased by $3.0 million,or 87.5%, to $6.4 million during the three months ended March 31,2004 from $3.4 million during the three months ended March 31,2003.  Income from operations as apercentage of our revenue increased by 2.5% to 8.7% during the three monthsended March 31, 2004 from 6.2% during the three months endedMarch 31, 2003.  Theincrease in income from operations was attributable to acquisitions closed in2003, primarily the Seneca Falls, New York landfill acquisition, priceincreases, increased internalization of collection volumes into the landfillswe operate and internal growth, partially offset by additional depreciation,depletion and amortization expenses related to such acquisitions, the Bethlehemlandfill expansion permit and internal growth.

 

*Interest Expense, Net. *Our interest expense, net, increased$2.6 million, or 59.1%, to $6.9 million during the three months endedMarch 31, 2004 from $4.3 million during the three months endedMarch 31, 2003.  Interest expense,net, as a percentage of our revenue, increased to 9.3% during the three monthsended March 31, 2004 from 7.8% during the three months endedMarch 31, 2003.  This increase wasattributable to higher debt levels during the three months ended March 31,2004 as compared to the same period in 2003, primarily due to our acquisitionof the Seneca Falls, New York landfill in October 2003 and other smalleracquisitions closed during 2003.

 

*Other Expenses. *Our other expenses increased by $781,000 to $779,000during the three months ended March 31, 2004 from other income of $2,000during the three months ended March 31, 2003.  The increase was primarily the result of an unrealized lossrelated to a $660,000 decrease in the fair value of an old corrugated cardboardhedge and additional state franchise taxes.

 

*Income Tax Expense. *Our income tax expense increased by $390,000 to $0during the three months ended March 31, 2004 from a benefit of $390,000during the three months ended March 31, 2003.  The difference in income taxes computed at the statutory rate andreported income taxes for the three

 

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months ended March 31, 2004 is due primarily toan increase in the valuation allowance related to deferred tax assets.

 

*Cumulative Effect of Change inAccounting Principle. *We incurred no such expense during thethree months ended March 31, 2004. During the three months ended March 31, 2003, 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 in our audited consolidated financial statementsincluded in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003.

 

**Liquidityand Capital Resources**

 

***CashFlow***

 

Thefollowing is a summary, for the periods indicated, of our cash flows (inthousands):

 
|                                      |   | **Three  Months Ended  March 31,** |    |
|-------------------------------------------|--------|-----------------------------------------|---------|
|                                      |   | **2003**                                |    | **2004** |   |
| Net cash provided by operating activities |   | $                                       | 7,203   |   | $ | 9,112 |   |
| Net cash used in investing activities     |   | $                                       | (11,358 | ) | $ | (10,485 | ) |
| Net cash provided by financing activities |   | $                                       | 4,108   |   | $ | 411 |   |

 

Duringthe three months ended March 31, 2004, net cash used in investingactivities was $10.5 million.  Ofthis amount, $9.8 million was used for capital expenditures, principallyfor investments in fixed assets, consisting primarily of trucks, containers,landfill and transfer station equipment, and landfill constructionprojects.  Net cash provided byfinancing activities during the three months ended March 31, 2004 was$411,000, which consisted of a net borrowing increase under our senior creditfacility.

 

Duringthe three months ended March 31, 2003, net cash used in investingactivities was $11.4 million.  Ofthis amount, $134,000 was used for the acquisition of a business and $1.2million was used for the initial development costs for two permitted landfillsacquired in 2002.  Cash used for capitalexpenditures during the three months ended March 31, 2003 was$8.9 million, which was principally for investments in fixed assets,consisting primarily of trucks, containers, landfill and transfer stationequipment, and landfill construction projects. Net cash provided by financing activities during the three months endedMarch 31, 2003 was $4.1 million, which consisted of a net borrowingincrease under our senior credit facility of $4.6 million.

 

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The following table, for the periodsindicated, summarizes the components of the reconciliation of our debtbalances:

 
|                                                                                    |   | **Three  Months Ended  March 31,** |       |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                                                    |   | **2003**                                |       | **2004** |   |
|                                                                                    |   | **(in  thousands)**                     | ** ** |
| Roll-forward of debt balance:                                                           |   |                                    |       |   |   |
| Debt balance at beginning of period                                                     |   | $                                       | 198,571    |   | $ | 380,861 |   |
| Free cash flow deficit before acquisitions(1)                                           |   | 2,269                                   |       | 1,256 |   |
| Acquisitions and divestitures                                                           |   | 1,381                                   |       | — |   |
| Acquisition-related and other expenditures                                              |   | 506                                     |       | 116 |   |
| Debt issue costs                                                                        |   | 436                                     |       | — |   |
| Increase in cash                                                                        |   | (47                                     | )          | (961 | ) |
| Addition related to the change in fair  value of interest rate swap from long-term debt |   | 538                                     |       | 1,855 |   |
|                                                                                    |   |                                    |       |   |   |
| Debt balance at end of period                                                           |   | $                                       | 203,654    |   | $ | 383,127 |   |

 

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(1)          Free cash flow (surplusor deficit) before acquisitions is not a measure of liquidity, operatingperformance or cash flow from operating activities under GAAP.  Free cash flow before acquisitions isdefined as net cash provided by operating activities, less capital expenditures(other than for acquisitions) and capitalized interest.  We believe that the presentation of freecash flow before acquisitions is useful to investors because it allows them toassess and understand our ability to meet debt service requirements and theamount of recurring cash generated from operations after expenditures for fixedassets.  Free cash flow beforeacquisitions does not represent our residual cash flow available fordiscretionary expenditures because we have mandatory debt service requirementsand other required expenditures that are not deducted from free cash flowdeficit before acquisitions.  Free cashflow before acquisitions does not capture debt repayment and/or the receipt ofproceeds from the issuance of debt.  Weuse free cash flow before acquisitions as a measure of recurring operating cashflow.  We do not intend for free cashflow before acquisitions to be considered in isolation or as a substitute forGAAP measures.  Other companies may definethis financial measure differently.  Themost directly comparable GAAP measure to free cash flow before acquisitions isnet cash provided by operating activities. Following is a reconciliation of free cash flow before acquisitions tonet cash provided by operating activities:

 

|                                          |                                          | **Three  Months Ended  March 31,** |       |
|-----------------------------------------------|-----------------------------------------------|-----------------------------------------|------------|
|                                          |                                          | **2003**                                |       | **2004** |   |
|                                          |                                          | **(in  thousands)**                     | ** ** |
| Free cash flow (deficit) before  acquisitions |                                          | $                                       | (2,269     | ) | $ | (1,256 | ) |
| Add:                                          | Capital expenditures, excluding  acquisitions |                                    | 8,853      |   | 9,789 |   |
|                                          | Capitalized interest                          |                                    | 618        |   | 580 |   |
|                                          | Other                                         |                                    | 1          |   | (1 | ) |
| Net cash provided by operating activities     |                                          | $                                       | 7,203      |   | $ | 9,112 |   |

 

***Liquidity***

 

Ourbusiness is capital intensive.  Ourcapital requirements include acquisitions, new municipal contracts and fixedasset purchases for internal growth, primarily for trucks, containers andequipment, and for landfill cell construction, landfill development andlandfill closure activities.  We havehistorically financed, and plan to continue to finance, our capital needs withcash provided from operations, borrowings under our senior credit facility,debt or equity offerings, or some combination of the foregoing.

 

OnOctober 10, November 20, and December 30, 2003, we issued anaggregate of 49,660 shares of our Series E convertible preferred stock for anaggregate purchase price of $49.7 million.  Net proceeds

 

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from such sales of $48.0 million were used topartially fund the acquisition of the Seneca Falls, New York landfill and theexpenses related thereto.

 

OnJune 12, 2002, we completed a private offering of our 10.25% senior subordinatednotes due 2012, or our Notes, at a price of 100.0%.  These Notes mature on June 15, 2012.  Interest on our Notes is due on June 15and December 15 of each year.  OurNotes are guaranteed by all of our current, and will be guaranteed by certain ofour future, subsidiaries and are unsecured senior subordinated obligations thatrank junior in right of payment to all of our existing and future senior debtand secured debt.  Our Notes areredeemable on or after June 15, 2007 and we may redeem up to 35.0% of theaggregate principal amount of our Notes on or before June 15, 2005 withthe proceeds from qualified public offerings of our equity securities.  The indenture governing our Notes containscovenants which, among other things, limit our ability to incur additionaldebt, create liens, engage in sale-leaseback transactions, pay dividends ormake other equity distributions, purchase or redeem capital stock, makeinvestments, sell assets, engage in transactions with affiliates and effect aconsolidation or merger.  Theselimitations are subject to certain qualifications and exceptions.  As of March 31, 2004, we were incompliance with all covenants contained in the indenture governing our Notes.

 

Inconnection with our acquisition of the Seneca Falls, New York landfill, onOctober 10, 2003, we and our subsidiaries entered into the Fifth Amendedand Restated Revolving Credit and Term Loan Agreement with a syndicate oflenders led by Fleet National Bank, as administrative agent (“Fleet”), andLaSalle Bank National Association, as syndication agent, and Fleet Securities,Inc., as arranger, which amended our then existing senior credit facility,dated as of September 14, 2004. Our senior credit facility, as so amended, includes a$200.0 million senior secured term loan and a $200.0 million seniorsecured revolving loan, including an $80.0 million letter of creditsublimit.  We used the borrowing of the$200.0 million term loan and borrowings of $33.7 million in revolvingloans to pay a portion of the purchase price for our acquisition of the SenecaFalls, New York landfill, refinance our then existing senior credit facilityand pay related fees and expenses. Subject to certain conditions, we may request an increase in therevolving loan or term loan portions of our senior credit facility of up to$50.0 million such that the total amount of indebtedness under our seniorcredit facility would equal $450.0 million.  As of March 31, 2004, there was $199.0 millionoutstanding under the term loan portion and $31.1 million (excluding$49.7 million underlying letters of credit) outstanding under therevolving loan portion of our senior credit facility.  As of such date, we had an additional $119.2 millionavailable under the revolving loan portion (of which $15.3 millionrepresented immediate borrowing capacity), including a maximum of$30.3 million underlying letters of credit.  In order to borrow under the revolving loan portion of our seniorcredit facility, we must satisfy customary conditions including maintaining certainfinancial ratios.  Our senior creditfacility is secured by a pledge of the stock of our direct and indirectsubsidiaries and a lien on substantially all of our direct and indirectsubsidiaries’ 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 March 31, 2004, the interest rate applicable to$23.6 million outstanding under the revolving loan portion of our seniorcredit facility was LIBOR plus 325 basis points, or 4.37%, and the interest rateapplicable to the balance of $7.5 million outstanding thereunder wasFleet’s prime rate plus 125 basis points, or 5.25%.  As of March 31, 2004, the interest rateapplicable to $100.0 million outstanding under the term loan portion ofour senior credit facility was LIBOR plus 300 basis points, or 4.25%, and theinterest rate applicable to the balance of $99.0 million outstandingthereunder was Fleet’s prime rate plus 100 basis points, or 5.0%.  The revolving loan and term loan portions ofour senior credit facility mature on September 30, 2008 andSeptember 30, 2010, respectively.

 

Pursuantto the terms of our senior credit facility, during 12 months that commences onOctober 1 and ends on September 30, we are required to repay 1.0%(except for the 12-month period prior to maturity when we are required to repay94.0%) of the principal amount of the term loan portion of our senior creditfacility in quarterly installments payable on the last business day of eachcalendar quarter.  In addition, oursenior credit facility requires us to prepay the term loan with, subject tocertain conditions

 

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and exceptions, 100.0% of the net cash proceeds wereceive from any disposition of assets in excess of $5.0 million in theaggregate per year, 100.0% of the net cash proceeds we receive from theincurrence of any permitted indebtedness (other than up to $100.0 millionof additional subordinated indebtedness) and 50.0% of the net cash proceeds wereceive in connection with any issuance of our equity (other than equity weissue (i) in an aggregate amount not to exceed $100.0 million, (ii) aspayment in a permitted acquisition or (iii) to employees, consultants ordirectors in connection with the exercise of options under bona fide optionplans).  We are also required to prepaythe term loan with the percentage of excess consolidated operating cash flow(generally, for any fiscal year, consolidated EBITDA, plus or minus net workingcapital changes and extraordinary cash items, less the sum of (a) capitalexpenditures, (b)  the cash purchase price of any permitted acquisitions,(c)  cash payments for taxes, (d) cash payments of interest and(e)  the scheduled principal repayments of indebtedness, in each case ofclauses (a) through (e), paid during such period) corresponding to theapplicable leverage ratio set forth below:

 

| **Leverage Ratio**              |   | **Percentage  of Excess Consolidated  Operating Cash Flow Required as  Mandatory Prepayment of Term Loan** |
|---------------------------------|--------|------------------------------------------------------------------------------------------------------------|
|                            |   |                                                                                                       |
| > 3.50:1.00                  |   | 50%                                                                                                        |
| >3.00:1.00 and <3.50:1.00 |   | 25%                                                                                                        |
| <3.00:1.00                   |   | 0%                                                                                                         |

 

Theproceeds of the loans under our senior credit facility may be used solely torefinance certain debt, fund certain acquisitions, capital expenditures,working capital and general corporate purposes.  The letters of credit under our senior credit facility may beused solely for working capital and general corporate purposes.

 

Oursenior credit facility contains affirmative and negative covenants and otherterms customary to such financings, including requirements that we maintainspecified financial ratios, including the following:

 

•                                          **Maximum Leverage Ratio**—Our consolidated debt to consolidated EBITDA(1) ratio for any period of four consecutivefiscal quarters may not be greater than 4.5 to 1.0.

 

•                                          **Maximum Senior Leverage Ratio**—Our consolidated senior debt (generally, consolidateddebt other than certain debt, including, without limitation, our Notes,subordinated to our senior credit facility) to consolidated EBITDA(1) ratio for any period of four consecutivefiscal quarters may not be greater than 3.0 to 1.0.

 

•                                          **Minimum Interest Coverage Ratio**—Our consolidated EBITDA(1) to consolidated interest expense ratiofor any period of four consecutive fiscal quarters ending on the last day ofany fiscal quarter specified below may not be less than the applicable ratioindicated below: 

 
| **Quarters Ending**                            |   | **Consolidated  EBITDA****(1)****to  Consolidated Interest Expense Ratio** |
|------------------------------------------------|--------|----------------------------------------------------------------------------|
|                                           |   |                                                                       |
| March 31, 2004 through June 30, 2004 |   | 3.00 to 1.0                                                                |
| September 30, 2004                        |   | 3.25 to 1.0                                                                |
| December 31, 2004 and thereafter          |   | 3.50 to 1.0                                                                |

 

•                                          **Minimum Consolidated 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 $213.4 million, plus (a) theproceeds of any new equity

 

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offerings and (b) 50% of our positive consolidated net income foreach fiscal quarter beginning with the second quarter of 2004.

 

•                                          **Maximum Capital Expenditures**—Our annual capital expenditures less capitalexpenditures for new municipal contracts may not be greater than the product ofour annual depreciation and depletion expense for any fiscal year and theapplicable multiple specified below:

 
| **Year Ending December 31,** |   | **Multiple  of Depreciation  and Depletion  Expense for Such Year** |
|-----------------------------------|--------|---------------------------------------------------------------------|
| 2003                              |   | 1.6x                                                                |
| 2004                              |   | 1.3x                                                                |
| 2005 and 2006                     |   | 1.2x                                                                |
| Thereafter                        |   | 1.1x                                                                |

 

As ofMarch 31, 2004, we were in compliance with our senior credit facilityfinancial covenants:  our consolidateddebt to consolidated EBITDA(1) ratio was 4.33:1, our consolidated senior debtto consolidated EBITDA(1) ratio was 2.61:1, our consolidated EBITDA(1) toconsolidated interest expense ratio was 3.03:1 and our consolidated net worthwas $214.7 million ($1.3 million in excess of the minimum required underour senior credit facility).  Inaddition, our fiscal 2003 annual capital expenditures of $54.9 million lesscapital purchased for new municipal contracts of $3.9 million did not exceed1.6 times our fiscal 2003 annual depreciation and depletion expense.  Our ability to comply in future periods withthe financial covenants in our senior credit facility will depend on ourongoing financial and operating performance, which, in turn, will be subject toeconomic conditions and to financial, business and other factors, many of whichare beyond our control, and will be substantially dependent on our ability tosuccessfully implement our overall business strategies.

 

Oursenior credit facility also contains covenants which, among other things,restrict our ability to, incur additional debt, create liens, dispose ofassets, make investments, engage in transactions with affiliates, enter into amerger or consolidation, make specified payments, including dividends, andenter into certain franchise agreements. These limitations are subject to certain qualifications and exceptions.

 

InAugust 2002, we entered into two interest rate swap agreements, which areeffective through June 15, 2012, with two financial institutions.  Under each swap agreement, the fixedinterest rate on $25.0 million of our Notes effectively was converted toan interest rate of 5.275% and 5.305%, respectively, plus an applicablefloating rate margin that is based on six month LIBOR which is readjustedsemiannually on June 15 and December 15 of each year.

 

InJanuary 2004, we entered into four interest rate swap agreements, whichare effective through January 2007, with four financial institutions.  Under each swap agreement, the variableinterest rate on $25.0 million outstanding under our senior credit facilityeffectively was converted to a fixed interest rate of 2.58%, 2.61%, 2.71% and2.75%, respectively, plus an applicable LIBOR margin.

 

Environmentallaws and regulation, including Subtitle D, that apply to the non-hazardoussolid waste management industry have required us, as well as others in theindustry, to alter the way we conduct our operations and to modify or replacepre-Subtitle D landfills.  Theseexpenditures have been, and will continue to be, substantial; however, we do notanticipate that these expenditures relating to our ongoing operations will besubstantially different than what we have experienced to date.  Legislative or

 

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(1)                                  EBITDAis calculated in accordance with the definition in our senior credit facilityand is used solely in this context to provide information on the extent towhich we are in compliance with our senior credit facility covenants.

 

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regulatory changes could increase the costs ofoperating our business, accelerate required expenditures for closure activitiesand post-closure monitoring, and obligate us to spend sums in addition to thosepresently reserved for such purposes. These factors could substantially increase our operating costs and adverselyaffect our results of operations, financial condition and cash flow.

 

Webelieve that cash flow from operations and borrowings under the revolving loanportion of our senior credit facility will provide adequate cash to fund ourworking capital, capital expenditure, debt service, and other cash requirementsfor the foreseeable future.  Our abilityto meet future working capital, capital expenditure and debt servicerequirements, to provide financial assurance, as requested or required, and tofund capital amounts required for the expansion of our existing business willdepend on our future financial performance, which will be affected by a rangeof economic, competitive and business factors, many of which are outside of ourcontrol.  See “—Disclosure RegardingForward Looking Statements.” We cannot assure you that our business willgenerate sufficient cash flow from operations, that future financings will beavailable to us in amounts sufficient to enable us to service our debt or tomake necessary capital expenditures, or that any refinancing would be availableon commercially reasonable terms, if at all. Further, depending on the timing, amount and structure of any possiblefuture acquisitions 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.

 

Workingcapital at March 31, 2004 was a deficit of $3.0 million as comparedto a working capital deficit of $8.0 million at December 31, 2003.  The $5.0 million reduction in workingcapital deficit during the three months ended March 31, 2004 was partiallyattributable to a $2.0 million decrease in capital expenditures accrued inaccounts payable as of March 31, 2004, primarily related to landfillconstruction projects and new municipal contracts, and a $1.6 million increasein 2004 insurance premiums prepaid during the three months ended March 31,2004. There is no covenant in our senior credit facility directly tied toworking capital.  At March 31,2004, our immediately available borrowing capacity was sufficient to cover theworking capital deficit.

 

***CapitalExpenditures***

 

Wemade capital expenditures of $10.4 million during the three months endedMarch 31, 2004, including $1.9 million for new municipal contractsand $580,000 of capitalized interest primarily related to landfill constructionand permitting projects.  We expect ourcapital expenditures with respect to our existing business to range fromapproximately $37.0 million to $42.0 million during the remainder of 2004,including approximately $2.0 million to $3.0 million for new municipalcontracts, $1.9 million to $2.4 million of capitalized interest primarilyrelated to landfill construction and permitting projects and $2.5 million to$3.0 million for new transfer station and greenfield landfill projects.  We intend to fund our remaining 2004 capitalexpenditures principally through existing cash, internally generated funds andborrowings under our senior credit facility.

 

Inaddition, we may make substantial additional capital expenditures in acquiring solidwaste management businesses.  If weacquire additional landfill disposal facilities, we may also have to makesignificant 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.

 

Fromtime to time we evaluate our existing operations and their strategic importanceto us.  If we determine that a givenoperating unit does not have future strategic importance, we may sell orotherwise dispose of those operations. Although we believe our operations would not be impaired by suchdispositions, we could incur losses on such disposals.

 

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**Off-BalanceSheet Arrangements**

 

Wehave no off-balance sheet debt or similar obligations, other than the financialassurance instruments, which are issued in our ordinary course of business andare not debt (and, therefore, are not reflected in our consolidated balancesheet) which are discussed under “Significant Commercial Commitments” in Item7.  “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” of our Annual Reporton Form 10-K for the fiscal year ended December 31, 2003.

 

**RelatedParty Transactions**

** **

Wehave no transactions or obligations with related parties that are notdisclosed, consolidated into or reflected in our reported results of operationsor financial position.  We do notguarantee any third party debt.

 

**Obligationsand Commitments**

 

For adiscussion of our obligations and commitments, please refer to Item 7.“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003.  There were nosignificant changes in our business during the three months endedMarch 31, 2004 that would require an update to those disclosures.

 

**RecentAccounting Pronouncements**

 

For adescription of new accounting pronouncements that affect us, please see Note 1to our audited consolidated financial statements included in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2003.  There were no new accounting pronouncementsduring the three months ended March 31, 2004 which we expect to have amaterial effect on our consolidated financial statements.

 

**DisclosureRegarding Forward-Looking Statements**

 

ThisQuarterly Report on Form 10-Q contains forward-looking statements.  These forward-looking statements are nothistorical facts, but only predictions and generally can be identified by useof statements that include phrases such as “believe,” “expect,” “anticipate,”“intend,” “plan,” “foresee” or other words or phrases of similar import.  Similarly, statements that describe ourobjectives, plans or goals are also forward-looking statements.

 

Theseforward-looking statements are subject to risks and uncertainties, which couldcause actual results to differ materially from those currentlyanticipated.  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; we face risks related to anongoing internal investigation at one of our operating divisions; competitioncould reduce our profitability or limit our ability to grow; state andmunicipal requirements to reduce landfill disposal by encouraging variousalternatives may adversely affect our ability to operate our landfills at fullcapacity; we may lose contracts through competitive bidding or early termination,which would cause our revenue to decline; we are geographically concentrated inthe northeastern and southern United States and susceptible to those regions’local economies and regulations; the loss of the City of New York as a customercould have a significant adverse effect on our business and operations; oursubstantial debt could adversely affect our financial condition and make itmore difficult for us to make payments with respect to our debt; despite ourcurrent indebtedness, we and our subsidiaries may be able to incursubstantially more debt, exacerbating such risks; we require a significantamount of cash to service our debt, and our ability to generate cash depends onmany factors, some of which are beyond our control; our failure to comply withthe covenants contained in our senior credit facility or the indenturegoverning our Notes, including as a result of events beyond our control, couldresult in an event of default, which could materially and adversely affect ouroperating results and financial condition; covenant restrictions in our seniorcredit

 

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facility and the indenture governing our Notes maylimit our ability to operate our business; the interests of our controllingstockholders could conflict with those of other holders of our securities; wedepend heavily on our senior management; if we are unable to obtain performanceor surety bonds, letters of credit or insurance, we may not be able to enterinto additional MSW collection contracts or retain necessary landfill operatingpermits; we are subject to extensive legislation and governmental regulationthat may restrict our operations or increase our costs of operations; we maynot be able to obtain permits we require to operate our business; we may besubject to legal action relating to compliance with environmental laws; we mayhave liability for environmental contamination; and we will always face therisk of liability, and insurance may not always be available or sufficient.

 

For afurther list and description of such risks and uncertainties, 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, 2003.  Allsubsequent written and oral forward-looking statements attributable to us orpersons acting on our behalf are also expressly qualified in their entirety bysuch factors.  We urge you to carefullyconsider such factors in evaluating the forward-looking statements and cautionyou not to place undue reliance on such forward-looking statements.  There may also be additional risks that wedo not presently know of or that we currently believe are immaterial whichcould also impair our business.  In lightof these risks, uncertainties and assumptions, the forward-looking events mayor may not occur.  The forward-lookingstatements included herein are made only as of the date of this QuarterlyReport on Form 10-Q and we undertake no obligation to publicly update theseforward-looking statements to reflect new information, future events orotherwise.

 

**Item 3**. Quantitative and Qualitative Disclosures About Market Risk.

 

InJanuary 2004, we entered into four interest rate swap agreements, whichare effective through January 2007, with four financial institutions.  Under each swap agreement, the variableinterest rate on $25.0 million outstanding under our senior credit facilityeffectively was converted to a fixed interest rate of 2.58%, 2.61%, 2.71% and2.75%, respectively, plus an applicable LIBOR margin.  For a discussion of our exposure to market risks, see Part II.Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” of ourAnnual Report on Form 10-K for the fiscal year ended December 31,2003.  Other than our entering into thefour interest rate swap agreements described above, there was no significantchange in those risks during the three months ended March 31, 2004.

 

**Item 4**. Controls and Procedures.

 

OurChief Executive Officer and Chief Financial Officer have concluded, based ontheir evaluation as of the end of the period covered by this Quarterly Reporton Form 10-Q, that, with the exceptions described below, our disclosurecontrols and procedures (as defined in the Securities Exchange Act of 1934Rules 13a-15(e) and 15(d)-15(e)) are effective to ensure that informationrequired to be disclosed in the reports we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.  With the exceptions describedbelow, there were no changes in our internal control over financial reportingduring our first quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

As discussed in Part II. Item 9A. “Controls and Procedures” of ourAnnual Report on Form 10-K for the fiscal year ended December 31, 2003, inMarch 2004, we discovered that the manager of a division in our SouthRegion had engaged in misconduct that violated our internal policies resultingin an overstatement of our South Region’s accounts receivable as ofDecember 31, 2003 and an understatement of its expenses during 2003.  This division accounted for approximately4.5% of our consolidated revenues during 2003. Based on our internal investigation conducted to date, we believe thatsuch division’s accounts receivable were overstated by approximately $1.6million and expenses were understated by approximately $833,000 for 2003.  Our investigation is still ongoing and wehave yet to determine our exact course of action with respect to the manager ofthis division.  We expect that our

 

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corporate and region management will remain in direct supervision ofthis division until our investigation is concluded.

 

We believe that, based upon our investigation conducted to date, wehave identified substantially all of the potential liabilities and expensesrelated to this incident.  We do notbelieve that this incident had any significant effect on prior periods.  While we believe that this was an isolatedincident, during the first quarter of 2004, we took steps to improve ourdisclosure controls and procedures and internal control over financialreporting, including segregation of the accounting and financial reportingduties from the management duties at this division.

 

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**Part II.  OtherInformation**

 

**Item1.  LegalProceedings.**

 

Please see Part I. Item 1. “Financial Statements,”Note 7, captioned “Commitments and Contingencies” of this Quarterly Report onForm 10-Q.

 

**Item2.  Changesin Securities and Use of Proceeds.**

 

None.

 

**Item3.  DefaultsUpon Senior Securities.**

 

None.

 

**Item4.  Submissionof Matters to a Vote of Security Holders.**

 

None.

 

**Item5.  OtherInformation.**

 

None.

 

## **Item6.  Exhibitsand Reports on Form 8-K.**

 

(a)  Exhibits: 

 
| **Exhibit  Number** |   | **Description**                                                                                           |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                      |
| 10.1                |   | 1999 Stock Option Plan, as amended.                                                                       |
| 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:

 

We did not file any reports on Form 8-K during thethree months ended March 31, 2004.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|         | **IESI CORPORATION** |
|--------------|----------------------|
|         |                 |
|         |                 |
| May 12, 2004 | By:                  | /s/ THOMAS J. COWEE |   |
|         |                 | Thomas J. Cowee |
|         |                 | Vice President, Chief Financial Officer,  Treasurer and Assistant Secretary  (Principal Financial Officer and  Principal Accounting Officer) |

 

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