** **

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**ý****   Quarterly Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended September 30, 2004**

 

**or**

 

**o****   Transition Report Pursuant to Section13 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 ofRegistrant as Specified in its Charter)

 

| **Delaware**                                                      | ** ** | **75-2712191**                             |
|-------------------------------------------------------------------|------------|--------------------------------------------|
| (State or other  jurisdiction of   incorporation or organization) |       | (I.R.S. Employer    Identification Number) |
|                                                              |       |                                       |
| **2301  Eagle Parkway   Suite 200   Fort Worth, Texas**           | ** ** | **76177**                                  |
| (Address of  principal executive offices)                         |       | (Zip Code)                                 |

 

**(817)632-4000**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes oNo ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes oNo ý

 

The number of shares of the Registrant’s Class Avoting common stock, par value $.01 per share, and Class B non-voting commonstock, par value $.01 per share, outstanding as of November 1, 2004 were142,000 and 112,980.2, respectively. There is no trading market for any class of equity securities of theRegistrant.

 

 

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**IESI CORPORATION**

** **

**TABLE OF CONTENTS**

 
| Part  I. Financial Information                                                                      |                                                                                                         |
|-----------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
|                                                                                                |                                                                                                         |
| Item 1. Financial Statements                                                                        |                                                                                                         |
|                                                                                                |                                                                                                         |
|                                                                                                | Consolidated Balance Sheets as of  September 30, 2004 and December 31, 2003                                  |   |
|                                                                                                |                                                                                                         |   |
|                                                                                                | Consolidated Statements of  Operations for the Nine and Three Months Ended September 30, 2004 and 2003       |   |
|                                                                                                |                                                                                                         |   |
|                                                                                                | Consolidated  Statement of Stockholders’ Equity (Deficit) for the Nine Months Ended  September 30, 2004 |   |
|                                                                                                |                                                                                                         |   |
|                                                                                                | Consolidated Statements of  Cash Flows for the Nine Months Ended September 30, 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. Unregistered Sales of Equity  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                                                                                    |                                                                                                         |
|                                                                                                |                                                                                                         |
| Signatures                                                                                          |                                                                                                         |

 

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**Part I**.  Financial Information

 

**Item1.  FinancialStatements**

 

**IESI CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **September 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                         | ** ** | **(unaudited)**         | ** **  | ** **             | ** ** |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                    |        |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                                                                                                                                         |       | $                       | 4,091,964   |                   | $          | 4,197,157 |   |
| Accounts  receivable-trade, less allowance of $1,638,000 and $2,397,000 at September  30, 2004 and December 31, 2003, respectively                                                                                                                                                                                                                                                                                                 |       | 37,035,056              |        | 30,585,797             |       |
| Deferred income  taxes                                                                                                                                                                                                                                                                                                                                                                                                             |       | 1,356,471               |        | 1,356,471              |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                                                                                                                                                                         |       | 6,245,237               |        | 4,782,446              |       |
| Total current  assets                                                                                                                                                                                                                                                                                                                                                                                                              |       | 48,728,728              |        | 40,921,871             |       |
| Property and  equipment, net of accumulated depreciation of $154,547,000 and $110,218,000  at September 30, 2004 and December 31, 2003, respectively                                                                                                                                                                                                                                                                               |       | 495,241,121             |        | 488,659,850            |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 138,903,734             |        | 138,335,715            |       |
| Other intangible  assets, net                                                                                                                                                                                                                                                                                                                                                                                                      |       | 28,342,060              |        | 32,986,163             |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 4,113,667               |        | 2,143,616              |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                                       |       | $                       | 715,329,310 |                   | $          | 703,047,215 |   |
| Liabilities and  Stockholders’ Equity (Deficit)                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **              | ** **  | ** **             | ** ** |
| Current  liabilities:                                                                                                                                                                                                                                                                                                                                                                                                              |       |                    |        |                   |       |
| Accounts  payable—trade                                                                                                                                                                                                                                                                                                                                                                                                       |       | $                       | 20,085,857  |                   | $          | 27,448,950 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                                                                                                                                                                                                    |       | 35,623,789              |        | 17,512,525             |       |
| Deferred revenue                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 1,711,409               |        | 1,231,758              |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                 |       | 2,061,274               |        | 2,731,595              |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                                                                                         |       | 59,482,329              |        | 48,924,828             |       |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 372,628,495             |        | 378,129,393            |       |
| Accrued  environmental and landfill costs                                                                                                                                                                                                                                                                                                                                                                                          |       | 50,382,304              |        | 47,456,769             |       |
| Deferred income  taxes                                                                                                                                                                                                                                                                                                                                                                                                             |       | 11,614,566              |        | 9,949,611              |       |
| Other  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                 |       | 1,362,353               |        | 1,282,992              |       |
| Total  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                 |       | 495,470,047             |        | 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 September 30, 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 September 30, 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 $117,607,613 and $105,448,126 at  September 30, 2004 and December 31, 2003, respectively                                                                                                                                                                                                       |       | 115,565,152             |        | 103,405,665            |       |
| Redeemable  Series D Convertible Preferred Stock, 55,000 shares authorized, shares issued  and outstanding, liquidation preference of $73,890,308 and $68,655,338 at  September 30, 2004 and December 31, 2003, respectively                                                                                                                                                                                                  |       | 71,270,431              |        | 66,035,461             |       |
| Redeemable  Series E Convertible Preferred Stock, 55,000 shares authorized, 49,660 shares  issued and outstanding, liquidation preference of $54,633,207 and $50,762,561  at September 30, 2004 and December 31, 2003, respectively                                                                                                                                                                                           |       | 52,991,535              |        | 49,120,889             |       |
| Total redeemable  preferred stock                                                                                                                                                                                                                                                                                                                                                                                                  |       | 304,319,391             |        | 283,054,288            |       |
| Stockholders’  equity (deficit):                                                                                                                                                                                                                                                                                                                                                                                              |       |                    |        |                   |       |
| Common stock,  par value $.01 at September 30, 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 September 30, 2004 and December 31, 2003 respectively; issued and  outstanding shares:  Class A—142,000, Class B  Convertible—112,980, at September 30, 2004 and December 31, 2003 |       | 2,550                   |        | 2,550                  |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                        |       | —                  |        | —                 |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                                                                               |       | (84,892,400             | )           | (65,753,216            | )          |
| Cumulative other  comprehensive income                                                                                                                                                                                                                                                                                                                                                                                             |       | 429,722                 |        | —                 |       |
| Total  stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                                                                                                         |       | (84,460,128             | )           | (65,750,666            | )          |
| Total  liabilities and stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                                                                                         |       | $                       | 715,329,310 |                   | $          | 703,047,215 |   |

 

See accompanying notes.

 

1

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

** **
| ** **                                                                           | ** ** | **Nine Months Ended****September 30,** | ** **  | **Three Months Ended   September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|----------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                               | ** **  | **2003**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                 |       |                                   |        |                                   |       |   |   |   |   |
| Services revenue                                                                     |       | $                                      | 241,982,271 |                                   | $          | 180,488,860 |   | $ | 85,087,575 |   | $ | 64,175,475 |   |
| Costs and  expenses:                                                                 |       |                                   |        |                                   |       |   |   |   |   |
| Operating                                                                            |       | 138,901,832                            |        | 118,344,703                            |       | 48,651,860 |   | 41,711,267 |   |
| General and  administrative                                                          |       | 29,523,584                             |        | 23,004,009                             |       | 10,513,403 |   | 8,207,212 |   |
| Depreciation,  depletion and amortization                                            |       | 47,390,298                             |        | 26,148,547                             |       | 16,934,212 |   | 9,562,973 |   |
|                                                                                 |       | 215,815,714                            |        | 167,497,259                            |       | 76,099,475 |   | 59,481,452 |   |
| Income from  operations                                                              |       | 26,166,557                             |        | 12,991,601                             |       | 8,988,100 |   | 4,694,023 |   |
| Interest  expense, net                                                               |       | (20,651,130                            | )           | (13,778,137                            | )          | (6,882,375 | ) | (4,820,285 | ) |
| Other income  (expense), net                                                         |       | (611,669                               | )           | (260,227                               | )          | 83,470 |   | (146,772 | ) |
| Income (loss)  before income taxes                                                   |       | 4,903,758                              |        | (1,046,763                             | )          | 2,189,195 |   | (273,034 | ) |
| Income tax  expense                                                                  |       | (2,777,839                             | )           | (2,314,080                             | )          | (1,707,747 | ) | (2,562,975 | ) |
| Income (loss)  before cumulative effect of change in accounting principle            |       | 2,125,919                              |        | (3,360,843                             | )          | 481,448 |   | (2,836,009 | ) |
|                                                                                 |       |                                   |        |                                   |       |   |   |   |   |
| Cumulative  effect of change in accounting principle net of income tax benefit of $0 |       | —                                 |        | (1,530,708                             | )          | — |   | — |   |
| Net income  (loss)                                                                   |       | $                                      | 2,125,919   |                                   | $          | (4,891,551 | ) | $ | 481,448 |   | $ | (2,836,009 | ) |

 

Seeaccompanying notes.

 

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

** **
| ** **                                                                              | ** ** | **Common  Stock** | ** ** | **Additional**   | ** ** | ** **            | ** ** | **Cumulative    Other**    | ** ** | ** **                  | ** **  |
|-----------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------------|------------|-----------------------------|-------------|
| ** **                                                                              | ** ** | **Shares**        | ** ** | **Par   Amount** | ** ** | **Paid-In   Capital** | ** ** | **Accumulated    Deficit** | ** ** | **Comprehensive    Income** | ** **  | **Total** | ** ** |
|                                                                                    |       |              |       |             |       |                  |       |                       |       |                        |        |   |   |
| Balance at  December 31, 2003                                                           |       | 254,980           |       | $                | 2,550      |                  | —     |                       | $          | (65,753,216                 | )           | — |   | $ | (65,750,666 | ) |
| Comprehensive  income:                                                                  |       |              |       |             |       |                  |       |                       |       |                        |        |   |   |
| Net income                                                                              |       | —            |       | —           |       | —                |       | 2,125,919                  |       | —                      |        | 2,125,919 |   |
| Other  comprehensive income:                                                            |       |              |       |             |       |                  |       |                       |       |                        |        |   |   |
| Unrealized gain  on market value of interest rate swaps, net of tax expense of $221,338 |       | —            |       | —           |       | —                |       | —                     |       | 429,722                     |        | 429,722 |   |
| Comprehensive  income                                                                   |       | —            |       | —           |       | —                |       | —                     |       | —                      |        | 2,555,641 |   |
| Accretion of  dividends on Series C, D and E Redeemable Preferred Stock                 |       | —            |       | —           |       | —                |       | (21,265,103                | )          | —                      |        | (21,265,103 | ) |
| Balance at  September 30, 2004                                                          |       | 254,980           |       | $                | 2,550      |                  | $          | —                     |       | $                           | (84,892,400 | ) | $ | 429,722 |   | $ | (84,460,128 | ) |
|                                                                                         |            |                   |            |                  |            |                       |            |                            |            |                             |             |  |  |  |  |  |  |  |

 

Seeaccompanying notes.

 

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

** **
| ** **                                                                                                                   | ** ** | **For the Nine Months Ended   September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2004**                                      | ** ** | **2003** | ** ** |
| **Operating  Activities:**                                                                                                   |       |                                          |       |   |   |
| Net income  (loss)                                                                                                           |       | $                                             | 2,125,919  |   | $ | (4,891,551 | ) |
| Cumulative  effect of change in accounting principle                                                                         |       | —                                        |       | 1,530,708 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:                                    |       |                                          |       |   |   |
| Depreciation,  depletion and amortization                                                                                    |       | 47,390,298                                    |       | 26,148,547 |   |
| Amortization of  deferred financing costs                                                                                    |       | 1,766,378                                     |       | 1,947,633 |   |
| Capping, closure  and post-closure accretion                                                                                 |       | 1,518,705                                     |       | 912,869 |   |
| Provision for  doubtful accounts                                                                                             |       | 1,931,797                                     |       | 1,207,195 |   |
| Write off of  costs associated with transactions in process                                                                  |       | 877,020                                       |       | — |   |
| Unrealized loss  on commodity swap                                                                                           |       | 320,000                                       |       | — |   |
| Deferred income  tax expense                                                                                                 |       | 1,450,725                                     |       | 1,702,245 |   |
| Changes in  operating assets and liabilities, net of effects of acquired waste management  operating assets and liabilities: |       |                                          |       |   |   |
| Accounts  receivable                                                                                                         |       | (8,417,132                                    | )          | (5,491,814 | ) |
| Prepaid expenses  and other current assets                                                                                   |       | (2,571,409                                    | )          | (1,601,934 | ) |
| Accounts payable                                                                                                             |       | (7,363,093                                    | )          | 4,264,594 |   |
| Accrued expenses  and other liabilities                                                                                      |       | 10,693,731                                    |       | 4,545,583 |   |
| Capping, closure  and post closure expenditures                                                                              |       | (2,549,536                                    | )          | (641,725 | ) |
| Net cash  provided by operating activities                                                                                   |       | 47,173,403                                    |       | 29,632,350 |   |
| **Investing  Activities:**                                                                                                   |       |                                          |       |   |   |
| Purchases of  property and equipment                                                                                         |       | (36,456,944                                   | )          | (34,502,731 | ) |
| Acquisitions of  waste management operations                                                                                 |       | (1,609,692                                    | )          | (25,385,508 | ) |
| Initial  development costs for newly acquired permitted landfills                                                            |       | —                                        |       | (6,018,195 | ) |
| Capitalized  interest                                                                                                        |       | (1,908,740                                    | )          | (1,368,009 | ) |
| Deferred costs  associated with transactions in process                                                                      |       | (602,105                                      | )          | (1,776,663 | ) |
| Net cash used in  investing activities                                                                                       |       | (40,577,481                                   | )          | (69,051,106 | ) |
| **Financing  Activities:**                                                                                                   |       |                                          |       |   |   |
| Borrowings under  long-term debt                                                                                             |       | 26,500,000                                    |       | 50,500,000 |   |
| Payments on  long-term debt                                                                                                  |       | (33,201,115                                   | )          | (10,044,741 | ) |
| Debt issue costs                                                                                                             |       | —                                        |       | (451,366 | ) |
| Net cash (used  in) provided by financing activities                                                                         |       | (6,701,115                                    | )          | 40,003,893 |   |
| Net (decrease)  increase in cash and cash equivalents                                                                        |       | (105,193                                      | )          | 585,137 |   |
| Cash and cash  equivalents at beginning of period                                                                            |       | 4,197,157                                     |       | 2,589,726 |   |
| Cash and cash  equivalents at end of period                                                                                  |       | $                                             | 4,091,964  |   | $ | 3,174,863 |   |

 

Seeaccompanying notes.

 

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**IESI CORPORATION AND SUBSIDIARIESNOTES TOCONSOLIDATED FINANCIAL STATEMENTS**(UNAUDITED)

** **

**Notes** to Consolidated Financial Statements

 

**1.**                                      Business andOrganization

 

IESI Corporation (IESI) is a Delaware holding companyfounded in 1995.  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 financialstatements include the accounts of IESI and its subsidiaries. All significantinter-company accounts and transactions have been eliminated. Certaininformation related to the Company’s organization, significant accountingpolicies and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted.  In the opinion ofmanagement, these unaudited condensed consolidated financial statements reflectall adjustments necessary to fairly state the financial position and theresults of operations for the periods presented, and the disclosures herein areadequate to make the information presented not misleading.  Operating results for interim periods are notnecessarily indicative of the results for full years.  These interim unaudited consolidatedfinancial statements should be read in conjunction with the Company’s auditedconsolidated financial statements for the year ended December 31, 2003 andthe related notes thereto included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2003.

 

The unaudited condensed consolidated financialstatements have been prepared in accordance with generally accepted accountingprinciples and necessarily include amounts based on estimates and assumptionsmade by management.  Actual results coulddiffer from these amounts.  Significantitems subject to such estimates and assumptions include the depletion andamortization of landfill development costs, accruals for final closure andpost-closure costs, valuation allowances for accounts receivable, liabilitiesfor potential litigation, claims and assessments, and liabilities forenvironmental remediation, deferred taxes and self-insurance.

 

Additionally, certain adjustments have been made inthe prior period consolidated financial statements in order to reflect changesrecorded by the Company in the fourth quarter of 2003 as follows:

 

1.               Thefirst nine months of 2003 results include a net of tax charge of approximately$1,531,000 related to the cumulative effect of a change in accounting principlefor the initial adoption of SFAS No. 143. Included in this amount is $54,000 recorded by the Company in the fourthquarter of 2003 due to a revision in the cumulative effect adjustment recordedin the first quarter.  For purposes ofquarterly reporting, the Company has revised its net loss amount previouslyreported in the Company’s September 30, 2003 quarterly report for the ninemonths then ended.

 

2.               In thefourth quarter of 2003 the Company recorded approximately $2,168,000 ofexpenses related to misconduct of a manager in the Company’s South Region.  For purposes of quarterly reporting theCompany has revised its net loss amount previously 

 

5

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reported in the Company’sSeptember 30, 2003 quarterly report to reflect the allocation of $168,550 and $418,550of such expenses to the third quarter and first nine months of 2003,respectively.

 

**2.**                                      NewAccounting Pronouncements

 

For a description of new accounting pronouncementsthat affect the Company, please see Note 1 to the Company’s consolidatedfinancial statements included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2003.  Therewere no new accounting pronouncements during the nine months ended September 30,2004 which the Company expects to have a material effect on the Company’sconsolidated financial statements.

 

**3.**                                      Summary ofSignificant Accounting Policies

 

**Accounts Receivable**

 

The Company’s accounts receivable are recorded whenbilled or accrued, and represent claims against third parties that will besettled in cash.  The carrying value ofthe trade receivables, net of the allowance for doubtful accounts, representstheir estimated net realizable value. The Company estimates the allowance for doubtful accounts based onhistorical collection trends, type of customer, such as municipal ornon-municipal, the age of outstanding trade receivables, and existing economicconditions.  If circumstances indicatethat specific accounts receivable balances may be impaired, furtherconsideration is given to the collectibility of those balances and theallowance is adjusted accordingly.  Past duetrade receivable balances are written off when the Company’s internalcollection efforts have been unsuccessful in collecting the amount due. Creditlosses have been within management’s expectations.

 

**Property and Equipment**

 

Property and equipment are stated at cost.Improvements or betterments, which significantly extend the life, or add to theutility, of an asset, are capitalized. Expenditures for maintenance and repaircosts are charged to operations as incurred. The cost of assets retired orotherwise disposed of, and the related accumulated depreciation is eliminated,from the accounts in the period of disposal, and any resulting gain or loss isreflected in the Consolidated Statements of Operations.

 

The Company revises the estimated useful lives ofproperty and equipment acquired through business acquisitions to conform withits policies regarding property and equipment. Depreciation is calculated onthe straight-line method over the estimated useful lives of the related assets,which generally range from three to five years for furniture and fixtures andcomputer equipment, five to 10 years for containers, compactors, trucksand collection equipment, and 10 to 40 years for buildings andimprovements. The Company assumes no salvage value for its depreciable propertyand equipment. Depreciation expense on property and equipment was approximately$18,591,000 and $15,537,000 for the nine months ended September 30, 2004 and2003, respectively, and approximately $6,298,000 and $5,450,000 for the threemonths ended September 30, 2004 and 2003, respectively.

 

Landfills and landfill improvements are stated at cost,and are depleted based on consumed airspace. Landfill improvements includedirect costs incurred to obtain landfill permits, and direct costs incurred toconstruct and develop the site.  Allindirect landfill development costs are expensed as incurred.  Depletion expense was approximately $25,456,000and $7,939,000 for the nine months ended September 30, 2004 and 2003,respectively, and approximately $9,547,000 and $3,178,000 for the three monthsended September 30, 2004 and 2003, respectively. Interest is capitalized oncertain projects under 

 

6

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development including landfill projects and probable landfill expansionprojects and on certain assets under construction, including operatinglandfills.  The capitalization ofinterest for operating landfills is based on the costs incurred on discretecell construction projects.  Interestcapitalized was approximately $1,909,000 and $1,368,000 for the nine monthsended September 30, 2004 and 2003, respectively, and $734,000 and $347,000 forthe three months ended September 30, 2004 and 2003, respectively.  The Company assesses whether property andequipment are impaired on an annual basis.

 

Property and equipment consisted of the following at September30, 2004 and December 31, 2003:

 
| ** **                                   | ** ** | **September 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|----------------------------------------------|------------|-------------------------|-------------|------------------------|------------|
| Land                                         |       | $                       | 9,573,407   |                   | $          | 9,189,881 |   |
| Landfills                                    |       | 423,936,829             |        | 389,028,075            |       |
| Vehicles                                     |       | 94,809,031              |        | 90,346,853             |       |
| Containers and  compactors                   |       | 57,283,775              |        | 52,677,979             |       |
| Machinery and  equipment                     |       | 37,373,604              |        | 33,085,294             |       |
| Buildings and  improvements                  |       | 19,992,632              |        | 18,722,952             |       |
| Furniture and  office equipment              |       | 6,819,254               |        | 5,826,441              |       |
|                                         |       | 649,788,532             |        | 598,877,475            |       |
| Less accumulated  depreciation and depletion |       | 154,547,411             |        | 110,217,625            |       |
|                                         |       | $                       | 495,241,121 |                   | $          | 488,659,850 |   |

 

**Landfill Accounting**

 

The Company uses life cycle accounting and theunits-of-consumption method to recognize certain landfill costs. In life cycleaccounting, all costs to acquire, construct, close and maintain a site duringthe post-closure period are capitalized or accrued and charged to expense basedupon the consumption of cubic yards or tons of available airspace. Costs andairspace estimates are developed annually by independent engineers togetherwith the Company’s engineers. These estimates are used by the Company’soperating and accounting personnel to annually adjust the Company’s rates usedto expense capitalized costs and accrue closure and post-closure costs. Changesin these estimates primarily relate to changes in available airspace, futureclosure and post-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**

 

Intangible assets consist primarily of the cost ofacquired businesses in excess of the fair value of net assets acquired(goodwill). Other intangibles consist of values assigned to customer lists andcovenants not-to-compete, costs incurred to obtain debt financing and otherseparately identifiable intangible assets. Other intangibles are recorded at cost and, except for debt issue costs,amortized over periods generally ranging from five to seven years, computed onthe straight-line method. Amortization expense was approximately $3,343,000 and$2,672,000 for the nine months ended September 30, 2004 and 2003, respectively,and $1,089,000 and $935,000 for the three months ended September 30, 2004 and2003, respectively.  The Company deferscosts related to incurring debt and amortizes, as additional interest expense,these costs over the term of the related debt using the effective interestmethod.  Other intangible assetsconsisted of the following at September 30, 2004 and December 31, 2003:

 

7

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| ** **                     | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------|------------|-------------------------|------------|------------------------|------------|
| Customer lists                 |       | $                       | 24,070,149 |                   | $          | 23,707,139 |   |
| Noncompetition  agreements     |       | 7,367,604               |       | 7,277,689              |       |
| Debt issue costs               |       | 22,011,381              |       | 22,007,533             |       |
| Other                          |       | 935,577                 |       | 951,088                |       |
|                           |       | 54,384,711              |       | 53,943,449             |       |
| Less accumulated  amortization |       | 26,042,651              |       | 20,957,286             |       |
|                           |       | $                       | 28,342,060 |                   | $          | 32,986,163 |   |

 

The Company assesses whether goodwill is impaired onan annual basis.  Upon determining theexistence of goodwill impairment, the Company measures that impairment based onthe amount by which the book value of goodwill exceeds its implied fairvalue.  The implied fair value ofgoodwill is determined by deducting the fair value of a reporting unit’sidentifiable assets and liabilities from the fair value of the reporting unitas a whole, as if that reporting unit had just been acquired and the purchaseprice 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 an ongoing basis, management reviews the valuationand amortization of other intangible assets with consideration toward recoverythrough future operating results.  TheCompany periodically evaluates the value and future benefits of its otherintangible assets.  The Company assessesrecoverability from future operations using cash flows of the related asset asmeasures.  In accordance with SFASNo. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,the carrying value would be reduced to estimated fair value if it becomesprobable that the Company’s estimate for expected future cash flows of therelated asset would be less than the carrying amount of the related intangibleassets.  There have been no adjustmentsto the carrying amount of intangible assets resulting from these evaluations asof September 30, 2004 and December 31, 2003.

 

Remaining scheduled estimated amortization of other intangibleassets is as follows: 

 
| 2004       |   | $         | 2,488,385  |   |
|------------|--------|-----------|------------|--------|
| 2005       |   | 6,530,231 |       |
| 2006       |   | 5,358,296 |       |
| 2007       |   | 4,941,146 |       |
| 2008       |   | 3,843,844 |       |
| Thereafter |   | 5,180,158 |       |
|       |   | $         | 28,342,060 |   |

 

**Accrued Expenses and Other CurrentLiabilities**

 

The following is a summary of accrued expenses andother current liabilities at September 30, 2004 and December 31, 2003:

 
| ** **                               | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Acquisition  related accrued liabilities |       | $                       | 8,993,766  |                   | $          | 1,489,429 |   |
| Interest                                 |       | 6,920,383               |       | 2,104,923              |       |
|                                          |            |                         |            |                        |            |  |  |

 

8

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| ** **                                              | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Accrued  insurance liabilities                          |       | 6,465,682               |       | 5,062,902              |       |
| Accrued payroll  and other employee related liabilities |       | 4,713,147               |       | 3,613,059              |       |
| Accrued  franchise fee and royalties                    |       | 2,766,386               |       | 1,154,276              |       |
| Other                                                   |       | 5,764,425               |       | 4,087,936              |       |
|                                                    |       | $                       | 35,623,789 |                   | $          | 17,512,525 |   |
|                                                         |            |                         |            |                        |            |  |  |

 

**Income Taxes**

 

Deferred income taxes are determined based on thedifference between the financial reporting and tax bases of assets andliabilities.  Deferred income tax provisionrepresents the change during the reporting period in the deferred tax assetsand deferred tax liabilities, net of the effect, if any, of acquisitions anddispositions.  Deferred tax assetsinclude tax loss carry forwards, and are reduced by a valuation allowance if,based on available evidence, it is more likely than not that some portion orall of the deferred tax assets will not be realized.

 

The difference in income taxes computed at thestatutory rate and reported income taxes for the three and nine months ended September30, 2004 and 2003 is due primarily to state and local income taxes andadjustments to the valuation allowance related to deferred tax assets and arevision of the estimated pre-tax income for the fiscal year ending December31, 2004.

 

**4.**                                      Acquisitions

 

All acquisitions are accounted for as purchases and,accordingly, only the operations of the acquired companies since theacquisition dates are included in the accompanying unaudited consolidatedfinancial statements.

 

During the nine months ended September 30, 2004, theCompany acquired the hauling assets of five solid waste management companiesfor an aggregate purchase price of approximately $1,790,000 consisting of cashand liabilities assumed.  In connectionwith the acquisitions, the Company recorded approximately $568,000 of goodwill,all of which is expected to be deductible for tax purposes, and approximately $454,000of definite-lived intangible assets.  Thedefinite-lived intangible assets consist of $364,000 related to customer listswith generally a seven year amortization period and $90,000 related tonon-competition agreements with generally two to five year amortizationperiods.  The pro forma effects of theacquisitions are not significant to the Company’s operating results.

 

The allocation of the purchase price for the SenecaMeadows, Inc. (SMI) acquisition, which was consummated in October 2003, was preliminaryand has been finalized upon completion of valuation analyses of certain assetsand liabilities associated with the landfill owned by SMI.  During the three months ended September 30,2004, the Company recorded an estimated liability and capitalized additionallandfill costs of approximately $7.7 million related primarily to a contractualobligation of the Company to reimburse the selling shareholder of SMI for anyadditional federal and state taxes incurred by the selling shareholder as aresult of the election by the Company to treat the stock acquisition of SMI asan asset acquisition for tax reporting purposes in accordance with the InternalRevenue Code Section 338(h)(10), and also includes a payment relating to acontractual liability to pay New York state real estate transfer taxes onbehalf of the selling shareholder of SMI.

 

9

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**5.**                                      Landfill andAccrued Environmental Costs

 

The Company has material financial commitments forfinal capping, closure and post-closure obligations with respect to itslandfills.  The Company develops itsestimates of final capping, closure and post-closure obligations using inputfrom its engineers and accountants.  TheCompany’s estimates are based on its interpretation of current requirements andare intended to approximate fair value. Absent quoted market prices, the estimate of fair value is based on thebest 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 value of these obligations is based upon quotedand 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 usedto fulfill an asset retirement obligation, the Company has added a profitmargin to the estimated cost of such services to better reflect their fairvalue.  When the Company then performsthese services internally, the added profit margin is recognized as a componentof operating income in the period earned. An estimate of fair value includes the price that marketplaceparticipants are able to receive for bearing the uncertainties in cashflows.  However, when utilizingdiscounted cash flow techniques, reliable estimates of market premiums may notbe obtainable.  In the waste industry,there is no market that exists for selling the responsibility for finalcapping, closure and post-closure independent of selling the landfill in itsentirety.  Accordingly, the Companybelieves that it is not possible to develop a methodology to reliably estimatea market risk premium and has excluded a market risk premium from itsdetermination of expected cash flows for landfill asset retirement obligations.

 

Once the Company has determined the final capping,closure and post-closure costs, the Company then inflates those costs to theexpected time of payment and discounts those expected future costs back topresent value.  The Company inflatesthese costs in current dollars until the expected time of payment using anannual inflation rate and discounts these costs to present value using acredit-adjusted, risk-free discount rate. The Company reviewed the inflation rate to be used for 2004 anddetermined that a rate of 2.5%, which is the rate used by most waste industryparticipants, was appropriate.  Thecredit-adjusted, risk-free rate is based on the risk-free interest rate onobligations of similar maturity adjusted for the Company’s credit rating.  Changes in the Company’s credit-adjusted,risk-free rate do not change recorded liabilities, but subsequently recognizedobligations are measured using the revised credit-adjusted risk-free rate.  During the three months and nine months endedSeptember 30, 2004, the Company used a credit-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.

 

The Company records the estimated fair value of finalcapping, closure and post-closure liabilities for its landfills based on therespective final capping or landfill capacities consumed through the currentperiod.  The liability and correspondingasset are recorded on a per-ton basis. The estimated fair value of each final capping event will be fullyaccrued when the tons associated with such capping event have been disposed inthe landfill.  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 

 

10

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maintenance; other pollution control activities; mowing and fertilizingthe landfill cap; fence and road maintenance; and third party inspection andreporting costs.  For purchased disposalsites, the Company assesses and records final capping, closure and post-closurecosts and the percentage of airspace consumed related to such obligations as ofthe date it assumed the responsibility. Thereafter, the Company accounts for the landfill and related finalcapping, closure and post-closure obligations consistent with the policydescribed above.

 

Accretion on final capping, closure and post-closureliabilities is recorded using the effective interest method and is recorded asfinal capping, closure and post-closure expense, which is included in operatingcosts on the income statement.

 

In the United States, the closure and post-closurerequirements are established by the Environmental Protection Agency’s (EPA)Subtitle C and D regulations, as implemented and applied on a state-by-statebasis.  The costs to comply with theserequirements could increase in the future as a result of legislation orregulation.

 

The following is a roll-forward of amounts accrued forfinal closure and post-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              |       | 2,712,849                                |       | 303,396                   |       | 3,016,245  |       |
| Acquisition  related adjustments   |       | 679,953                                  |       | —                    |       | 679,953    |       |
| Obligations  settled               |       | (336,876                                 | )          | (2,212,660                | )          | (2,549,536 | )          |
| Revisions in  estimates            |       | 261,354                                  |       | (1,186                    | )          | 260,168    |       |
| Accretion                          |       | 1,430,325                                |       | 88,380                    |       | 1,518,705  |       |
|                               |       |                                     |       |                      |       |       |       |
| Balance at  September 30, 2004     |       | $                                        | 24,676,514 |                      | $          | 25,705,790 |       | $ | 50,382,304 |   |

 

**6.**                                      Long-TermDebt

 

Long-term debt consisted of the following at September30, 2004 and December 31, 2003:

 
| ** **                                   | ** ** | **September 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|----------------------------------------------|------------|-------------------------|-------------|------------------------|------------|
| Revolving credit  loan                       |       | $                       | 25,100,000  |                   | $          | 29,600,000 |   |
| Term loan                                    |       | 198,000,000             |        | 200,000,000            |       |
| Senior  subordinated notes due June 15, 2012 |       | 151,528,495             |        | 150,998,599            |       |
| Other                                        |       | 61,274                  |        | 262,389                |       |
| Total long-term  debt                        |       | 374,689,769             |        | 380,860,988            |       |
| Less current  portion                        |       | 2,061,274               |        | 2,731,595              |       |
|                                         |       | $                       | 372,628,495 |                   | $          | 378,129,393 |   |

 

Scheduled maturities of long-term debt are as follows:

 
| 2004       |   | $           | 530,480     |   |
|------------|--------|-------------|-------------|--------|
| 2005       |   | 2,030,794   |        |
| 2006       |   | 2,000,000   |        |
| 2007       |   | 2,000,000   |        |
| 2008       |   | 27,100,000  |        |
| Thereafter |   | 339,500,000 |        |
|       |   | $           | 373,161,274 |   |

 

11

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On October 10, 2003, the Company entered into theFifth Amended and Restated Revolving Credit and Term Loan Agreement (the CreditFacility).  The Credit Facility isprovided by a syndicate of lenders led by Bank of America Corporation (f/k/aFleet National Bank), as administrative agent (Bank of America), and LaSalleNational Bank Association, as syndication agent, and includes a$200,000,000 senior secured term loan, a $200,000,000 senior securedrevolving loan, and has a maximum of $80,000,000 letters of credit sub-limit.  Subject to certain conditions, the Companymay request an increase in the revolving loan portion or the term loan portionof the Credit Facility of up to $50,000,000, such that the total of therevolving loan and term loan portions would equal $450,000,000.  As of September 30, 2004, there was $25,100,000(excluding $49,118,000 underlying letters of credit) outstanding under therevolving loan portion of the Credit Facility and $125,782,000 of remainingcapacity (of which $49,788,000 was immediately available for borrowing) underthe revolving loan portion, plus a maximum of $30,882,000 underlying letters ofcredit.  In order to borrow under therevolving loan portion of the Credit Facility, the Company must satisfycustomary conditions including maintaining certain financial ratios.  If a default under the indenture governingthe 10.25% Senior Subordinated Notes due 2012 (Notes) or Credit Facility shouldoccur, the holders of the Notes or the lenders under the Credit Facility couldelect to declare all amounts borrowed to be immediately due and payable.  Furthermore, this could result in all amountsborrowed under other instruments, including the indenture governing our Notesor the Credit Facility, that contain cross-acceleration or cross-default provisionsbeing declared immediately due and payable and the lenders could terminate allcommitments thereunder.  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, repay subordinatedindebtedness and enter into certain franchise agreements.  These limitations are subject to certainqualifications and exceptions.

 

Pursuant to the terms of the Credit Facility, duringeach 12-month period commencing on October 1 and ending on September 30, theCompany is required to repay 1.0% (except for the 12-month period prior tomaturity when it is required to repay 94.0%) of the principal amount of theterm loan portion of its senior credit facility in quarterly installmentspayable on the last business day of each calendar quarter.  In addition, the Company’s senior creditfacility requires it to prepay the term loan with, subject to certainconditions and exceptions, 100.0% of the net cash proceeds it receives from anydisposition of assets in excess of $5.0 million in the aggregate per year,100.0% of the net cash proceeds it receives from the incurrence of anypermitted indebtedness (other than up to $100.0 million of additionalsubordinated indebtedness) and 50.0% of the net cash proceeds it receives inconnection with any issuance of the Company’s equity (other than equity theCompany issues (i) in an aggregate amount not to exceed $100.0 million,(ii) as payment in a permitted acquisition or (iii) to employees, consultantsor directors in connection with the exercise of options under bona fide optionplans).  The Company is also required toprepay the term loan with the percentage of excess consolidated operating cashflow (to be calculated for each fiscal year, and which includes, generally,consolidated Earning Before Interest, Taxes, Depreciation and Amortization (EBITDA),plus or minus net working capital changes and extraordinary cash items, lessthe sum of (a) capital expenditures, (b)  the cash purchase price ofany permitted acquisitions, (c)  cash payments for taxes, (d) cashpayments of interest and (e)  the scheduled principal repayments of indebtedness,in each case of clauses (a) through (e), paid during such period) correspondingto the applicable leverage ratio set forth below:

 

12

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| **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%                                                                                                          |       |

 

The Credit Facility permits borrowings at floatinginterest rates based, at the Company’s option, on the designated Eurodollarinterest rate, which generally approximates LIBOR, or the Bank of America primerate, in each case, plus an applicable margin, and requires payment of anannual commitment fee based on the unused portion of the revolving loanportion.  As of September 30, 2004, theinterest rate applicable to $17.1 million outstanding under the revolvingloan portion of our senior credit facility was LIBOR plus 325 basis points, or4.83% and the interest rate applicable to $8.0 million then outstanding underthe revolving loan portion was base, or 6.0%. As of September 30, 2004, the interest rate applicable to$196.5 million outstanding under the term loan portion of our seniorcredit facility was LIBOR plus 300 basis points, or 4.61% and the interest rateapplicable to $1.5 million then outstanding under the term loan portion wasbase, or 5.75%.  The revolving loanportion of the Credit Facility expires on September 30, 2008 and the termloan portion of the Credit Facility expires on September 30, 2010.

 

In June 2002, the Company issued $150,000,000 of the Notesin a private placement and registered the Notes under the Securities Act of1933 in December 2002.  Interest ispayable semi-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 financial informationis not provided because IESI has no independent assets or operations, thesubsidiary guarantees are full and unconditional and joint and several, andthere are no significant restrictions on the ability of the Company or anysubsidiary guarantor to obtain funds from its subsidiaries by dividend or loan.

 

In August 2002, the Company entered into twointerest rate swap agreements, which are effective through June 15, 2012, withtwo financial institutions.  Under eachswap agreement, the fixed interest rate on $25,000,000 of the Notes effectivelywas converted 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.  On September 30, 2004, the six month LIBORrate was 1.86%.

 

In January 2004, the Company entered into fourinterest rate swap agreements, which are effective through January 2007, withfour financial institutions.  Under eachswap agreement, 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.  On September 30, 2004, the three month LIBORrate was 1.59%.

 

**7.**                                      Commitmentsand Contingencies

 

The Company’s business activities are conducted in thecontext of a developing and changing statutory and regulatory framework.  Governmental regulation of the wastemanagement industry requires the Company to obtain and retain numerousgovernmental permits to conduct various aspects of its operations.  These permits are subject to revocation,modification or denial.  The costs andother capital expenditures, which may be required to obtain or retain theapplicable permits or comply with applicable regulations, could besignificant.  Any revocation,modification or denial of permits could have a material adverse effect on theCompany.

 

13

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The Company is subject to liability for anyenvironmental damage that its solid waste disposal facilities may cause toneighboring landowners or residents, particularly as a result of thecontamination of soil, groundwater or surface water, including, in some cases,damage resulting from conditions existing prior to the acquisition of suchfacilities by the Company.  The Companymay also be subject to liability for any off-site environmental contaminationcaused by pollutants or hazardous substances whose transportation, treatment ordisposal was arranged by the Company or its predecessors.

 

Any substantial liability for environmental damageincurred by the Company could have a material adverse effect on the Company’sfinancial condition, results of operations or cash flows.  As of September 30, 2004, the Company was notaware of any such environmental liabilities (other than those recorded in theCompany’s consolidated financial statements).

 

In the normal course of its business, and as a resultof the extensive governmental regulation of the solid waste industry, theCompany is subject to various judicial and administrative proceedings involvingfederal, state or local agencies. In these proceedings, an agency may seek toimpose fines on the Company or to revoke or deny renewal of an operating permitheld by the Company.  From time to time,the Company may also be subject to actions brought by citizens’ groups oradjacent landowners or residents in connection with the permitting andlicensing of landfills and transfer stations, or alleging environmental damageor violations of the permits and licenses pursuant to which the Companyoperates.

 

In addition, the Company may become party to variousclaims and suits pending for alleged damages to persons and property, allegedviolations of certain laws and alleged liabilities arising out of mattersoccurring during the normal operation of the waste management business.However, as of September 30, 2004, there were no proceedings or litigationinvolving the Company that the Company believed would have a material adverseimpact on its business, financial condition, results of operations or cashflows.

 

**8.**                                      RedeemablePreferred Stock

 

The Company had redeemable preferred stock on itsbalance sheet of approximately $304,319,000 as of September 30, 2004 and $283,054,000as of December 31, 2003, representing the carrying value of its preferred stockas of such dates.  In accordance withEmerging Issues Task Force (EITF) Topic No. D-98, *Classificationand Measurement of Redeemable Securities*, the Company has classifiedits preferred stock outside of permanent equity because, pursuant to the termsof such preferred stock, such preferred stock is redeemable upon the occurrenceof certain transactions deemed to be liquidation events.  Such redemption is not deemed to be solelywithin the Company’s control because holders of the Company’s preferred stockcurrently control a majority of the votes of the Company’s board of directors.

 

**9.**                                      ComprehensiveIncome

 

The Company had comprehensive income includingunrealized gains on the market value of interest rate swaps of approximately $88,000and $2,556,000 for the three and nine months ended September 30, 2004, respectively.

 

**10.**                               Segment Reporting

 

The Company’s two geographic regions are the Company’sreportable segments. The segments provide integrated waste management servicesconsisting of collection, transfer, disposal, and recycling services tocommercial, industrial, municipal, and residential customers. Summarizedfinancial 

 

14

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information concerning the Company’s reportable segments for the threeand nine-month periods ended September 30 is shown in the following table:

 
| ** **                                                                                              | ** ** | **South   Region** | ** **  | **Northeast   Region** | ** ** | **Corporate   Functions** | ** ** | **Total**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|------------------------|------------|---------------------------|------------|-------------|------------|
| **Nine  Months Ended September 30, 2004**                                                               |       |               |        |                   |       |                      |       |        |       |
| Outside revenues                                                                                        |       |               |        |                   |       |                      |       |        |       |
| Collection                                                                                              |       | $                  | 118,146,063 |                   | $          | 26,715,861                |       | $           | —     |   | $ | 144,861,924 |   |
| Transfer                                                                                                |       | 3,338,393          |        | 32,207,055             |       | —                    |       | 35,545,448  |       |
| Disposal                                                                                                |       | 9,041,775          |        | 44,491,876             |       | —                    |       | 53,533,651  |       |
| Recycling                                                                                               |       | 2,577,217          |        | 3,489,106              |       | —                    |       | 6,066,323   |       |
| Other                                                                                                   |       | 613,230            |        | 1,361,695              |       | —                    |       | 1,974,925   |       |
| Total outside  revenues                                                                                 |       | 133,716,678        |        | 108,265,593            |       | —                    |       | 241,982,271 |       |
| Income (loss)  from operations                                                                          |       | 7,036,718          |        | 26,731,491             |       | (7,601,652                | )          | 26,166,557  |       |
| Depreciation,  depletion and amortization                                                               |       | 22,769,122         |        | 24,111,670             |       | 509,506                   |       | 47,390,298  |       |
| Purchases of  property and equipment including capitalized interest                                     |       | 17,548,966         |        | 20,158,856             |       | 657,862                   |       | 38,365,684  |       |
| Acquisitions of  waste operations and initial development costs for newly acquired permitted  landfills |       | 1,609,692          |        | —                 |       | —                    |       | 1,609,692   |       |
| Goodwill  acquired                                                                                      |       | 568,019            |        | —                 |       | —                    |       | 568,019     |       |
| Goodwill                                                                                                |       | 91,275,538         |        | 47,628,196             |       | —                    |       | 138,903,734 |       |
| Total assets                                                                                            |       | 305,869,686        |        | 391,371,019            |       | 18,088,605                |       | 715,329,310 |       |
|                                                                                                    |       |               |        |                   |       |                      |       |        |       |
| **Nine  Months Ended September 30, 2003**                                                          |       |               |        |                   |       |                      |       |        |       |
| Outside revenues                                                                                        |       |               |        |                   |       |                      |       |        |       |
| Collection                                                                                              |       | $                  | 102,620,766 |                   | $          | 25,095,442                |       | $           | —     |   | $ | 127,716,208 |   |
| Transfer                                                                                                |       | 3,541,630          |        | 30,903,613             |       | —                    |       | 34,445,243  |       |
| Disposal                                                                                                |       | 6,883,534          |        | 6,019,247              |       | —                    |       | 12,902,781  |       |
| Recycling                                                                                               |       | 2,018,283          |        | 2,748,531              |       | —                    |       | 4,766,814   |       |
| Other                                                                                                   |       | 524,446            |        | 133,368                |       | —                    |       | 657,814     |       |
| Total outside  revenues                                                                                 |       | 115,588,659        |        | 64,900,201             |       | —                    |       | 180,488,860 |       |
| Income (loss)  from operations                                                                          |       | 10,870,243         |        | 8,450,352              |       | (6,328,994                | )          | 12,991,601  |       |
| Depreciation,  depletion and amortization                                                               |       | 19,209,860         |        | 6,409,253              |       | 529,434                   |       | 26,148,547  |       |
| Purchases of  property and equipment including capitalized interest                                     |       | 26,691,069         |        | 9,007,519              |       | 172,152                   |       | 35,870,740  |       |
| Acquisitions of  waste operations and initial development costs for newly acquired permitted  landfills |       | 31,403,703         |        | —                 |       | —                    |       | 31,403,703  |       |
| Goodwill  acquired                                                                                      |       | 7,895,077          |        | —                 |       | —                    |       | 7,895,077   |       |
| Goodwill                                                                                                |       | 90,079,715         |        | 47,628,196             |       | —                    |       | 137,707,911 |       |
| Total assets                                                                                            |       | 306,929,082        |        | 157,952,997            |       | 16,946,861                |       | 481,828,940 |       |

 

15

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| ** **                                                                                              | ** ** | **South   Region** | ** ** | **Northeast   Region** | ** ** | **Corporate   Functions** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|---------------------------|------------|------------|------------|
| **Three  Months Ended September 30, 2004**                                                              |       |               |       |                   |       |                      |       |       |       |
| **Outside  revenues**                                                                                   |       |               |       |                   |       |                      |       |       |       |
| Collection                                                                                              |       | $                  | 40,241,189 |                   | $          | 9,029,940                 |       | $          | —     |   | $ | 49,271,129 |   |
| Transfer                                                                                                |       | 1,123,474          |       | 11,395,810             |       | —                    |       | 12,519,284 |       |
| Disposal                                                                                                |       | 3,721,895          |       | 16,934,029             |       | —                    |       | 20,655,924 |       |
| Recycling                                                                                               |       | 998,278            |       | 1,147,358              |       | —                    |       | 2,145,636  |       |
| Other                                                                                                   |       | 188,358            |       | 307,244                |       | —                    |       | 495,602    |       |
| Total outside  revenues                                                                                 |       | 46,273,194         |       | 38,814,381             |       | —                    |       | 85,087,575 |       |
| Income (loss)  from operations                                                                          |       | 1,911,550          |       | 10,057,924             |       | (2,981,374                | )          | 8,988,100  |       |
| Depreciation,  depletion and amortization                                                               |       | 7,871,667          |       | 8,890,965              |       | 171,580                   |       | 16,934,212 |       |
| Purchases of  property and equipment including capitalized interest                                     |       | 5,550,708          |       | 8,314,350              |       | 105,283                   |       | 13,970,341 |       |
| Acquisitions of  waste operations and initial development costs for newly acquired permitted  landfills |       | 421,939            |       | —                 |       | —                    |       | 421,939    |       |
| Goodwill  acquired                                                                                      |       | 51,535             |       | —                 |       | —                    |       | 51,535     |       |
|                                                                                                    |       |               |       |                   |       |                      |       |       |       |
| **Three  Months Ended September 30, 2003**                                                         |       |               |       |                   |       |                      |       |       |       |
| Outside revenues                                                                                        |       |               |       |                   |       |                      |       |       |       |
| Collection                                                                                              |       | $                  | 36,682,503 |                   | $          | 8,558,112                 |       | $          | —     |   | $ | 45,240,615 |   |
| Transfer                                                                                                |       | 1,144,682          |       | 10,869,123             |       | —                    |       | 12,013,805 |       |
| Disposal                                                                                                |       | 2,828,644          |       | 2,345,555              |       | —                    |       | 5,174,199  |       |
| Recycling                                                                                               |       | 683,597            |       | 840,586                |       | —                    |       | 1,524,183  |       |
| Other                                                                                                   |       | 180,742            |       | 41,931                 |       | —                    |       | 222,673    |       |
| Total outside  revenues                                                                                 |       | 41,520,168         |       | 22,655,307             |       | —                    |       | 64,175,475 |       |
| Income (loss)  from operations                                                                          |       | 3,574,775          |       | 3,333,248              |       | (2,214,000                | )          | 4,694,023  |       |
| Depreciation,  depletion and amortization                                                               |       | 6,995,263          |       | 2,394,619              |       | 172,991                   |       | 9,562,873  |       |
| Purchases of  property and equipment including capitalized interest                                     |       | 11,211,912         |       | 4,749,199              |       | —                    |       | 15,961,111 |       |
| Acquisitions of  waste operations and initial development costs for newly acquired permitted  landfills |       | 19,115,085         |       | —                 |       | —                    |       | 19,115,085 |       |
| Goodwill  acquired                                                                                      |       | 1,429,524          |       | —                 |       | —                    |       | 1,429,524  |       |

 

Seasonality and weather can temporarily affect some ofthe Company’s revenue and expenses.  TheCompany generally experiences lower construction and demolition waste volumesduring the winter months when the construction industry slows down.  Frequent and/or heavy snow and ice storms canaffect the productivity of the Company’s operations in both its South andNortheast Regions.  Additionally, in theCompany’s South Region, higher than normal rainfall or more frequent rainstorms over a 30 to 90 day period can put additional stress on the constructionindustry, lowering the volumes of waste the Company handles.  Significantly below normal rainfall can leadto higher levels of construction activity, increasing the Company’s volumes.

 

**11.**                               StockOptions

 

On January 28, 2004, the Compensation Committee of theBoard of Directors of the Company granted non-qualified stock options topurchase an aggregate of 103,300 shares of the Company’s Class A voting commonstock to certain employees and directors of the Company pursuant to the Company’s1999 Stock Option Plan, as amended (the Plan). The options were granted at an exercise price of $100.00 per share,which was equal to or greater than the estimated fair value of the underlyingshares.  On the same date, the Board ofDirectors also approved an amendment to the Plan increasing the number ofoptions authorized 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.

 

16

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The following schedule reflects the pro forma impact onnet income (loss) of accounting for the Company’s stock option grants usingSFAS No. 123, “Accounting for Stock-Based Compensation,” which would result inthe recognition of compensation expense for the fair value of stock optiongrants as computed using the Black-Scholes option-pricing model.

 
| ** **                                    | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| **For the  nine months ended September 30,**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reported net  income (loss)                   |       | $          | 2,125,919  |       | $          | (4,891,551 | ) |
| Less:  compensation expense per SFAS No. 123  |       | 170,363    |       | 112,646    |       |
| Pro forma net  income (loss)                  |       | $          | 1,955,556  |       | $          | (5,004,197 | ) |
|                                          |       |       |       |       |       |
| **For the  three months ended September 30,** |       |       |       |       |       |
| Reported net  income (loss)                   |       | $          | 481,448    |       | $          | (2,836,009 | ) |
| Less:  compensation expense per SFAS No. 123, |       | 64,360     |       | 41,882     |       |
| Pro forma net  income (loss)                  |       | $          | 417,088    |       | $          | (2,877,891 | ) |

 

17

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of 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 are one of the leading regional, non-hazardoussolid waste management companies in the United States.  We provide collection, transfer, disposal andrecycling services in two geographic regions: our South Region, consisting ofTexas, Louisiana, Oklahoma, Arkansas and Missouri; and our Northeast Region,consisting of New York, New Jersey, Pennsylvania and Maryland.  In 2003, we were the tenth largest serviceprovider based on revenue in the approximately $42.0 billion non-hazardoussolid waste management industry in the United States, and would have been theeighth largest provider after giving the full-year effect to our 2003acquisitions.

 

**Critical Accounting Policies**

** **

Our consolidated financial statements are based on theselection of accounting policies and application of significant accountingestimates, which require management to make significant estimates andassumptions.  For a detailed discussionof our critical accounting estimates, please refer to Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofour Annual Report on Form 10-K for the fiscal year ended December 31, 2003.There were no material changes relating to our critical accounting estimatesduring the three months ended September 30, 2004.

 

**Sources of Revenue**

** **

Our revenue consists primarily of fees we chargecustomers for solid waste collection, transfer and disposal and recyclingservices.  We frequently perform theseservices under service agreements with businesses, contracts withmunicipalities, landlords or homeowners’ associations, or subscriptionarrangements with homeowners.

 

The table below shows, for the periods indicated, thepercentage of our total reported revenue attributable to each of our services:

 
| ** ** | ** ** | **Nine Months Ended   September 30,** | ** ** | **Three Months Ended   September 30,** | ** ** |
|------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| ** ** | ** ** | **2004(1)**                           | ** ** | **2003**                               | ** ** | **2004(2)** | ** ** | **2003** | ** ** |
|       |       |                                  |       |                                   |       |   |   |   |   |
| Collection |       | 59.9                                  | %          | 70.8                                   | %          | 57.9 | % | 70.5 | % |
| Transfer   |       | 14.7                                  | %          | 19.1                                   | %          | 14.7 | % | 18.7 | % |
| Disposal   |       | 22.1                                  | %          | 7.1                                    | %          | 24.3 | % | 8.1 | % |
| Recycling  |       | 2.5                                   | %          | 2.6                                    | %          | 2.5 | % | 2.4 | % |
| Other      |       | 0.8                                   | %          | 0.4                                    | %          | 0.6 | % | 0.3 | % |
| Total      |       | 100.0                                 | %          | 100.0                                  | %          | 100.0 | % | 100.0 | % |

 

----

(1)          Theincrease in the percentage of our total reported revenue attributable to ourdisposal services during the nine months ended September 30, 2004 primarilyresulted from our acquisition on October 9, 2003 of the Seneca Falls, New Yorklandfill in our Northeast Region, and the addition in our South Region of threeoperating landfills, including two greenfield sites acquired in 2002, which weopened in August 2003, and an operating landfill which we purchased in July2003.  Excluding the effects of thesefour landfills, the disposal percentage 

 

18

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for the nine months ended September 30, 2004 would havebeen substantially the same as the disposal percentage for the nine monthsended September 30, 2003.  During the ninemonths ended September 30, 2004, our total revenue increased by an aggregate of$61.5 million from the corresponding nine-month period in 2003.  This increase resulted from increases in ourrevenue from collection services ($17.2 million increase from the correspondingnine-month period in 2003), transfer services ($1.1 million increase from thecorresponding nine-month period in 2003), disposal services ($40.6 millionincrease from the corresponding nine-month period in 2003), recycling services($1.3 million increase from the corresponding nine-month period in 2003) andother services ($1.3 million increase from the corresponding nine-month periodin 2003).

 

(2)          Theincrease in the percentage of our total reported revenue attributable to ourdisposal services during the three months ended September 30, 2004 primarilyresulted from our acquisition on October 9, 2003 of the Seneca Falls, New Yorklandfill in our Northeast Region, and the addition in our South Region of twogreenfield sites acquired in 2002, which we opened in August 2003.  Excluding the effects of these threelandfills, the disposal percentage for the three months ended September 30,2004 would have been substantially the same as the disposal percentage for thethree months ended September 30, 2003. During the three months ended September 30, 2004, our total revenueincreased by an aggregate of $20.9 million from the corresponding three-monthperiod in 2003.  This increase resultedfrom increases in our revenue from collection services ($4.0 million increasefrom the corresponding three-month period in 2003), transfer services ($0.5million increase from the corresponding three-month period in 2003), disposalservices ($15.5 million increase from the corresponding three-month period in2003), recycling services ($0.6 million increase from the correspondingthree-month period in 2003) and other services ($0.3 million increase from thecorresponding three-month period in 2003).

 

We estimate that more than 40% of our South Region’srevenue was generated from 273 municipal contracts during 2003 and during thefirst nine months of 2004.  Our contractswith New York City represented, in the aggregate, approximately 30% of ourNortheast Region’s, and approximately 11% of our overall, revenue in 2003 andapproximately 20% of our Northeast Region’s, and approximately 9% of ouroverall, revenue in the first nine months of 2004.  Contracts with municipalities providerelatively consistent cash flow during their terms.  Our municipal contracts generally last fromthree to five years and usually have renewal options.  Many of our municipal contracts are franchiseagreements that give us the exclusive right to provide specified waste serviceswithin a specified territory during the contract term.  These exclusive arrangements are typicallyawarded, at least initially, on a competitive bid basis or through a formalizedproposal and subsequently on a bid or negotiated renewal basis.  Collection fees are paid either by themunicipalities from their tax revenue or directly by the residents receivingthe services.  Depending on fluctuatingcommodity prices, we sometimes also generate revenue from the sale ofrecyclable commodities; however, such revenue does not represent a significantpart of our total recycling revenue. After recyclables are collected, they are delivered to other sortingfacilities operated by third parties.

 

We typically determine the prices for our collectionservices by the collection frequency and level of service, route density,volume, weight and type of waste or recyclable material collected, type ofequipment and containers that we furnish, the distance to the disposal or processingfacility, the cost of disposing or processing, and prices charged bycompetitors for similar services.  Theterms of our contracts sometimes limit our ability to pass on cost increases.  Long-term solid waste collection contractstypically contain a formula, usually based on the consumer price index, whichautomatically adjusts fees, usually on an annual basis, to cover increases insome, but not all of our operating costs.

 

We charge transfer station and landfill customers a “tippingfee” either on a per-ton or per-yard basis for disposal of their municipalsolid waste, or MSW, construction and demolition, or C&D, waste or both atthe transfer stations and landfills we operate. We generally base our transfer station “tipping fees” on market factorsand the cost of processing the waste deposited at the transfer station, thecost of transporting the waste to a disposal facility and the cost ofdisposal.  We generally base our landfill“tipping fees” on market factors and the type and weight or volume of the wastedeposited and the type and size of the vehicles used in the transportation ofthe waste.

 

19

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Many of our landfills are assessed state, county orlocal community fees based on the volume of tons or yards disposed of during adefined period, usually either monthly or quarterly.  The types and amounts of fees charged canvary widely, but typically a state fee is uniformly charged to all landfillswithin a state.  We report our landfillrevenue net of all these fees.  SinceJuly 2002, the Commonwealth of Pennsylvania has imposed an additional disposalfee of $4.00 per ton on all solid waste disposed of at MSW landfills inPennsylvania, raising the total disposal fees assessed on MSW landfilloperators under Pennsylvania state law to a minimum of $7.25 per ton.  In addition, Pennsylvania and Virginia areboth currently considering new legislation that would impose a new fee of up toan additional $5.00 on each ton of waste disposed of at landfills in theirrespective states.  Other states couldfollow this trend as well.

 

Effective September 2003, New York City revised itswaste collection services maximum rate to permit haulers to charge commercialcustomers either the pre-existing $12.20 per loose yard or a new rate of$160.00 per ton.  The disposal facilitiesin and around New York City charge by the ton. However, prior to September 2003, the maximum rate was imposed on a perloose yard basis only.  Accordingly, itwas not economical for us to service customers whose waste was particularlydense.  As a result, until recently, ourNew York City collection operations focused on customers with light loosegarbage and customers with a large paper recycling component, which enabled usto reduce our cost of disposal.  The newtonnage rate will enable our New York City collection operations to service allcustomers in all areas in which we operate.

 

New York City awarded us two new three-year contracts,effective November 2003, each with two optional one-year renewals, at theoption of the City, which collectively provide for us to transfer and disposeof up to an aggregate of 1,500 tons of MSW per day collected by the City.  The new contracts replaced our priorcontracts with New York City which expired in 2003.  New York City’s trucks collect primarilyresidential waste in Brooklyn and deliver it to two of our Brooklyn transferstations.  In 2003, New York Citydelivered average daily volumes of waste of approximately 1,330 tons pursuantto these contracts.

 

During 2002, New York City announced changes to itsSolid Waste Management Plan, pursuant to which it planned to utilize andupgrade its existing marine transfer station system instead of private transferstations to process and transfer its residential waste stream of between 11,000and 12,000 tons of MSW per day.  New YorkCity initially intended to implement these changes by retrofitting andrepermitting its marine transfer stations by 2008 so that the stations couldcontainerize the City’s residential MSW on site and then transport the loadedcontainers to ultimate disposal sites by alternative transportation methods,such as barge, rail and truck.  However,during 2003, New York City determined that this plan was not feasible based onestimates of costs necessary to complete the plan, and decided to seekproposals from private industry with respect to the transfer and disposal ofNew York City’s residential waste stream. In early 2004, New York City requested proposals to receive, transfer,transport and dispose the City’s residential waste stream.  New York City also requested expressions ofinterest to provide waste disposal capacity in New York State.  We submitted our proposals in late March 2004,and the City is currently evaluating all proposals and expressions ofinterest.  New York City has not providedtimelines for award or implementation dates.

 

**Cost Structure**

** **

Our operating expenses include labor, fuel, equipmentmaintenance, “tipping fees” paid to third-party transfer stations and disposalfacilities, workers’ compensation, vehicle insurance, third-partytransportation expenses and accretion expense.

 

We monitor the fluctuation in fuel prices and, fromtime to time, if this cost increases at a higher rate than inflation, wegenerally pass the additional cost on to our customers.

 

20

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Our business strategy is to develop verticallyintegrated operations to internalize the waste that we handle and thus realizehigher margins from our operations.  By disposingof waste at our landfills, we retain the margin generated through disposaloperations that would otherwise be earned by third-party landfills.  As of September 30, 2004, we internalizedapproximately 61% of the solid waste that we handled and delivered the rest tothird-party disposal facilities.  Some ofour municipal contracts require us to provide only collection services and todispose of the collected waste at a designated third-party disposal facility(at no cost to us) with whom the municipality has contracted directly.

 

If the operators of third-party landfills increasetheir “tipping fees,” we would seek to pass along these increases to ourcustomers, but if we were unable to do so, our profitability would be adverselyaffected.  If these operators discontinuetheir arrangements with us and we cannot find alternative disposal sites withfavorable arrangements, our costs of disposal may rise.  Also, our failure to obtain the requiredpermits to establish new landfills and transfer stations or expand our existinglandfills and transfer stations could hinder our business strategy to developvertically integrated operations. Failure to expand capacity could lead to decreased profitability as aresult of the increased “tipping fees” we would have to pay to third-partylandfills.

 

We operate 23 transfer stations, which reduce ourcosts by allowing us to use collection personnel and equipment more efficientlyand to consolidate waste to gain volume discounts on disposal rates.

 

General and administrative expenses includemanagement, clerical and administrative compensation and overhead costsassociated with our marketing and sales force, professional services andcommunity relations expenses.

 

Depreciation, depletion and amortization expensesinclude depreciation of fixed assets over their estimated useful lives usingthe straight-line method, depletion of landfill costs using life cycleaccounting and the units-of-consumption method, and amortization of intangibleassets other than goodwill using the straight-line method.  In allocating the purchase price of anacquired company among its assets, we first assign value to the tangibleassets, followed by intangible assets, including non-competition covenants andcertain contracts that are determinable both in terms of size and life.  We determine the value of the intangibleassets other than goodwill by considering, among other things, the presentvalue of the cash flows associated with those assets.

 

We capitalize some third-party expenditures related topending acquisitions and development projects, such as legal and engineeringexpenses.  We expense indirectacquisition costs, such as executive and corporate overhead, public relationsand other corporate services, as we incur them. We charge against net income any unamortized capitalized expendituresand advances, net of any portion that we believe we may recover through sale orotherwise, that relate to any operation that is permanently shut down and anypending acquisition 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.

 

Effective January 1, 2003, we adopted SFAS No. 143, “Accountingfor Asset Retirement Obligations.”  UnderSFAS No. 143, costs associated with final capping activities that occur duringthe operating life of a landfill, as well as closure and post-closureactivities, are accounted for as asset retirement obligations on a discountedbasis.  We recognize landfill retirementobligations that relate to closure and post-closure activities over theoperating life of a landfill as landfill airspace is consumed and theobligation is incurred.  We recognize ourfinal capping obligations on a discrete basis for each expected future finalcapping event over the number of tons of waste that each final capping event isexpected to cover.  The landfillretirement obligations are initially measured at estimated fair value.  Fair value is measured on a present valuebasis, using a credit-adjusted, risk-free rate of 7.86% during 2004.  

 

21

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Accretion is recorded onall landfill retirement obligations using the effective interest method.  We amortize landfill retirement costs arisingfrom closure and post-closure obligations, which are capitalized as part of thelandfill asset, using our historical landfill accounting practices.  We amortize landfill retirement costs arisingfrom final capping obligations, which are also capitalized as part of thelandfill asset, on a units-of-consumption basis over the number of tons ofwaste that each final capping event covers.

 

We periodically evaluate the value and future benefitsof our property and equipment, goodwill and other intangible assets.  For property and equipment and intangibleassets other than goodwill, we assess the recoverability from future operationsusing cash flows of the related assets as measures.  Under this approach, the carrying value isreduced if it becomes probable that our best estimate of expected future cashflows from the related assets would be less than the carrying amount of theassets.  As of September 30, 2004, therewere no adjustments to the carrying amounts of property and equipment and intangiblesother than goodwill resulting from these evaluations.

 

We test goodwill for impairment using the two-stepprocess prescribed in SFAS No. 142. The first step is a screen for potential impairment and the second stepmeasures the amount of the impairment, if any. We performed our annual impairment test during the fourth quarter of2003 and incurred no impairment.  As of September30, 2004, goodwill and other intangible assets represented approximately 23.4%of total assets, 55.0% of redeemable preferred stock and 76.1% of the sum ofour redeemable preferred stock and stockholders’ equity (deficit).

 

**Seasonality**

** **

Seasonality and weather can temporarily affect ourrevenue and expenses.  We generallyexperience lower C&D waste volumes during the winter months when theconstruction industry is less active. Frequent and/or heavy snow and ice storms can adversely affect ourrevenue in both our South and Northeast Regions, primarily by interfering withour transfer station and landfill operations which are volume based, and theproductivity of our collection operations. Additionally, in our South Region, higher than normal rainfall and morefrequent rain storms over a 30 to 90 day period can put additional stress onthe construction industry, lowering the volumes of waste we handle.  Significantly below normal rainfall can leadto higher levels of construction activity, increasing our volumes.

 

**Impact of Inflation**

** **

To date, inflation has not significantly affected ouroperations.  Consistent with industrypractice, many of our contracts allow us to pass through certain costs to ourcustomers, including increases in landfill “tipping fees” and, in some cases,fuel costs.  Accordingly, we believe thatwe would be able to increase prices to offset many cost increases that resultfrom inflation.  However, competitivepressures and the terms of certain of our long-term contracts may require us toabsorb at least part of these cost increases, particularly during periods ofhigh inflation.

 

**Acquisitions**

** **

Our integration plan for acquisitions contemplatescertain cost savings, including through the elimination of duplicativepersonnel and facilities.  Unforeseenfactors may offset the estimated cost savings or other components of ourintegration plan, in whole or in part, and, as a result, we may not realize anycost savings or other benefits from future acquisitions, and we may experiencea net increase in costs.

 

In accordance with GAAP, we capitalize someexpenditures and advances relating to pending acquisitions.  For any pending acquisition that is notconsummated, we charge any such expenditures and 

 

22

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advances against earnings. Therefore, we may incur charges against earnings in future periods,which could have a material adverse effect on our business, financial conditionand results of operations.

 

All of our acquisitions have been accounted for aspurchases and, accordingly, only the operations of acquired companies since theirrespective acquisition dates are included in our consolidated financialstatements.  These acquisitions werefinanced through a combination of funds borrowed under our senior creditfacility and proceeds from 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.

 

*2004.*  During the nine months ended September 30,2004, the Company acquired the hauling assets of five solid waste managementcompanies for an aggregate purchase price of approximately $1.8 millionconsisting of cash paid and liabilities assumed.

 

**Results of Operations**

** **

The following table sets forth, for the periodsindicated, selected consolidated statement of operations data (in thousands)and the percentage relationship that such data bear to our revenue: 

 
| ** **                                           | ** ** | **Nine Months Ended September 30,** | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2004**                            | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **$**                               | ** ** | **%**                                | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
|                                                 |       |                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| South Region  revenue                                |       | 133,717                             |       | 55.3                                 |       | 115,589 |   | 64.0 |   | 46,273 |   | 54.4 |   | 41,520 |   | 64.7 |   |
| Northeast Region  revenue                            |       | 108,265                             |       | 44.7                                 |       | 64,900 |   | 36.0 |   | 38,815 |   | 45.6 |   | 22,655 |   | 35.3 |   |
| Services revenue                                     |       | 241,982                             |       | 100.0                                |       | 180,489 |   | 100.0 |   | 85,088 |   | 100.0 |   | 64,175 |   | 100.0 |   |
| Operating  expense                                   |       | 138,902                             |       | 57.4                                 |       | 118,345 |   | 65.6 |   | 48,652 |   | 57.2 |   | 41,711 |   | 65.0 |   |
| General and  administrative                          |       | 29,523                              |       | 12.2                                 |       | 23,004 |   | 12.7 |   | 10,514 |   | 12.3 |   | 8,207 |   | 12.8 |   |
| Depreciation,  depletion and amortization            |       | 47,390                              |       | 19.6                                 |       | 26,148 |   | 14.5 |   | 16,934 |   | 19.9 |   | 9,563 |   | 14.9 |   |
| Income from  operations                              |       | 26,167                              |       | 10.8                                 |       | 12,992 |   | 7.2 |   | 8,988 |   | 10.6 |   | 4,694 |   | 7.3 |   |
| Interest  expense, net                               |       | (20,651                             | )          | (8.5                                 | )          | (13,778 | ) | (7.7 | ) | (6,882 | ) | (8.1 | ) | (4,820 | ) | (7.5 | ) |
| Other income  (expense), net                         |       | (612                                | )          | (0.3                                 | )          | (261 | ) | (0.1 | ) | 83 |   | 0.1 |   | (147 | ) | (0.2 | ) |
| Income tax  expense                                  |       | (2,778                              | )          | (1.1                                 | )          | (2,314 | ) | (1.3 | ) | (1,708 | ) | (2.0 | ) | (2,563 | ) | (4.0 | ) |
| Cumulative  effect of change in accounting principle |       | —                              |       | —                               |       | (1,531 | ) | (0.8 | ) | — |   | — |   | — |   | — |   |
| Net income  (loss)                                   |       | 2,126                               |       | 0.9                                  |       | (4,892 | ) | (2.7 | ) | 481 |   | 0.6 |   | (2,836 | ) | (4.4 | ) |

 

**Three Months Ended September 30, 2004Compared With Three Months Ended September 30, 2003**

** **

*Revenue. *Our revenue increased by $20.9 million,or 32.6%, to $85.1 million during the three months ended September 30,2004 from $64.2 million during the three months ended September 30, 2003.  Acquisitions completed since July 2003contributed $13.5 million, or 21.0%, to the increase in our revenue duringthe three months ended September 30, 2004. Excluding incremental revenue from acquisitions, our revenue increasedby $7.4 million, or 11.6%.  Our newbusiness, from both new municipal contracts and increased sales from existingoperations, contributed 6.5% of such increase, while price increasescontributed 5.1%.  In our South Region,our revenue increased by $4.8 million, or 

 

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11.4%, to $46.3 million during the three months ended September 30,2004 from $41.5 million during the corresponding three-month period in2003.  In our Northeast Region, ourrevenue increased by $16.1 million, or 71.3%, to $38.8 million duringthe three months ended September 30, 2004 from $22.7 million during the correspondingthree-month period in 2003.

 

*Operating Expenses.*  Our operating expenses increased by $7.0 million,or 16.6%, to $48.7 million during the three months ended September 30,2004 from $41.7 million during the three months ended September 30, 2003.  Operating expenses as a percentage of ourrevenue decreased by 7.8% to 57.2% during the three months ended September 30,2004 from 65.0% during the three months ended September 30, 2003.  The increase in our operating expenses wassubstantially due to additional expenses associated with the increase in ourrevenue from acquired operations and new business during the same period.  Integration of newly-acquired businesses intoour organizational structure typically takes three to six months.  The labor, maintenance, fuel and disposalcosts related to newly-acquired businesses are generally higher during theintegration period.  Start-up andintegration costs related to a municipal contract typically are incurred in theone-to two-month period prior to, and the one to two-month period following,the commencement of the contract. During this period, labor costs are generallyhigher due to delivery of containers, residential carts and recycling bins tothe new municipality and training of newly-hired employees.  The margin improvement in operating expensesduring the three months ended September 30, 2004 was primarily attributable toour Seneca Falls, New York landfill acquisition consummated in October 2003,which resulted in a substantial increase in our revenue and a less significantincrease in our operating expenses.

 

*General and Administrative. *Our general andadministrative expenses increased by $2.3 million, or 28.1%, to $10.5 millionduring the three months ended September 30, 2004 from $8.2 million during thethree months ended September 30, 2003.  Generaland administrative expenses as a percentage of our revenue decreased by 0.5% to12.3% during the three months ended September 30, 2004 from 12.8% during thethree months ended September 30, 2003.  Duringthe three months ended September 30, 2004, we recorded a $0.8 million write-offrelated to an aborted equity transaction. In addition our general and administrative expenses increased as aresult of our employment of additional personnel from companies acquired andadditional corporate and regional overhead which was necessary to accommodateour internal growth from our collection operations.

 

*Depreciation, Depletion andAmortization. *Ourdepreciation, depletion and amortization expenses increased by $7.3 million,or 77.1%, to $16.9 million during the three months ended September 30,2004 from $9.6 million during the three months ended September 30, 2003.  Depreciation, depletion and amortization as apercentage of our revenue increased by 5.0% to 19.9% during the three monthsended September 30, 2004 from 14.9% during the three months ended September 30,2003.  This increase resulted primarilyfrom the inclusion of depreciation, depletion and amortization expenses relatedto businesses acquired in 2003 and depreciation of capital assets purchased forinternal growth.  The Seneca Falls, NewYork landfill we acquired in October 2003 increased our depreciation, depletionand amortization expenses by $5.9 million during the three months ended September30, 2004.  During 2003, we also added twogreenfield sites acquired in 2002 which we opened in August 2003, which have ahigher component of depreciation, depletion and amortization expenses than atypical hauling operation.

 

*Income from Operations. *Our income from operations increasedby $4.3 million, or 91.5%, to $9.0 million during the three months ended September30, 2004 from $4.7 million during the three months ended September 30,2003.  Income from operations as apercentage of our revenue increased by 3.3% to 10.6% during the three monthsended September 30, 2004 from 7.3% during the three months ended September 30,2003.  The increase in income from operations was attributable toacquisitions closed in 2003, particularly our Seneca Falls, New York landfillacquisition, price increases, increased internalization of collection volumesinto the landfills we operate and internal growth, partially offset by 

 

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the write off of an aborted financingtransaction, additional depreciation, depletion and amortization expenses relatedto such acquisitions and internal growth.

 

*Interest Expense, Net. *Our interest expense, net,increased $2.1 million, or 42.8%, to $6.9 million during the threemonths ended September 30, 2004 from $4.8 million during the three monthsended September 30, 2003.  Interestexpense, net, as a percentage of our revenue, increased to 8.1% during thethree months ended September 30, 2004 from 7.5% during the three months ended September30, 2003.  This increase was attributableto higher debt levels during the three months ended September 30, 2004 ascompared to the same period in 2003, primarily due to our acquisition of the SenecaFalls, New York landfill in October 2003 and other smaller acquisitions closed during2003.

 

*Other Income (Expense), Net. *Our other income (expense),net, increased by $0.2 million to income of $0.1 million during the threemonths ended September 30, 2004 from an expense of $0.1 million during thethree months ended September 30, 2003. The increase was primarily the result of an unrealized gain related to a$0.2 million increase in the fair value of an old corrugated cardboard futurescontract.

 

*Income Tax Expense. *Our income tax expense decreasedby $0.9 million to $1.7 million during the three months ended September 30,2004 from $2.6 million during the three months ended September 30, 2003.  During the three-month period ended September30, 2004, we recognized in our consolidated statement of operations an amount suchthat the effective income tax rate for the nine months ended September 30, 2004approximates our estimated 2004 effective tax rate.  The difference in income taxes computed atthe statutory rate and reported income taxes for the three months ended September30, 2004 is due primarily to state and local income taxes, adjustment to the valuationallowance related to deferred tax assets and a revision of the estimatedpre-tax income for the fiscal year ending December 31, 2004.

 

**Nine Months Ended September 30, 2004Compared With Nine Months Ended September 30, 2003**

** **

*Revenue. *Our revenue increased by $61.5 million,or 34.1%, to $242.0 million during the nine months ended September 30,2004 from $180.5 million during the nine months ended September 30,2003.  Acquisitions completed since January 2003contributed $45.5 million, or 25.2%, to the increase in our revenue duringthe nine months ended September 30, 2004. Excluding incremental revenue from acquisitions, our revenue increasedby $16.0 million, or 8.9%.  Our newbusiness, from both new municipal contracts and increased sales from existingoperations, contributed 4.2% of such increase, while price increasescontributed 4.7%.  In our South Region,our revenue increased by $18.1 million, or 15.7%, to $133.7 million duringthe nine months ended September 30, 2004 from $115.6 million during thecorresponding nine-month period in 2003. In our Northeast Region, our revenue increased by $43.4 million, or66.8%, to $108.3 million during the nine months ended September 30, 2004from $64.9 million during the corresponding nine-month period in 2003.

 

*Operating Expenses.*  Our operating expenses increased by $20.6 million,or 17.4%, to $138.9 million during the nine months ended September 30,2004 from $118.3 million during the nine months ended September 30, 2003.  Operating expenses as a percentage of ourrevenue decreased by 8.2% to 57.4% during the nine months ended September 30,2004 from 65.6% during the nine months ended September 30, 2003.  The increase in our operating expenses wassubstantially due to additional expenses associated with the increase in ourrevenue from acquired operations and new business during the same period.  The margin improvement in operating expensesduring the nine months ended September 30, 2004 was primarily attributable toour Seneca Falls, New York landfill acquisition consummated in October 2003,which resulted in a substantial increase in our revenue and a less significantincrease in our operating expenses.

 

25

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*General and Administrative. *Our general andadministrative expenses increased by $6.5 million, or 28.3%, to $29.5million during the nine months ended September 30, 2004 from $23.0 millionduring the nine months ended September 30, 2003.  General and administrative expenses as apercentage of our revenue decreased by 0.5% to 12.2% during the nine monthsended September 30, 2004 from 12.7% during the nine months ended September 30,2003.  Our general and administrativeexpenses increased as a result of our employment of additional personnel fromcompanies acquired and additional corporate and regional overhead which wasnecessary to accommodate our internal growth from our collectionoperations.  In addition, during the ninemonths ended September 30, 2004, we recorded a $0.8 million write-off relatedto an aborted equity transaction and we recorded a $0.1 million write-offrelated to certain costs incurred in connection with aborted acquisitiontransactions. We also incurred $0.1 million of accounting and legal costsrelated to the investigation at one of our collection divisions in our SouthRegion, as described in more detail in Part II. Item 9A. “Controls andProcedures” of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003.

 

*Depreciation, Depletion andAmortization. *Ourdepreciation, depletion and amortization expenses increased by $21.3 million,or 81.2%, to $47.4 million during the nine months ended September 30, 2004from $26.1 million during the nine months ended September 30, 2003.  Depreciation, depletion and amortization as apercentage of our revenue increased by 5.1% to 19.6% during the nine monthsended September 30, 2004 from 14.5% during the nine months ended September 30,2003.  This increase resulted primarilyfrom the inclusion of depreciation, depletion and amortization expenses relatedto businesses acquired in 2003 and depreciation of capital assets purchased forinternal growth.  The Seneca Falls, NewYork landfill we acquired in October 2003 increased our depreciation, depletionand amortization expenses by $15.2 million during the nine months ended September30, 2004.  During 2003, we also addedthree operating landfills, including two greenfield sites acquired in 2002which we opened in August 2003 and an operating landfill which we purchased inJuly 2003, which have a higher component of depreciation, depletion andamortization expenses than a typical hauling operation.  Additionally, depletion expense related tothe Bethlehem landfill expansion permit we obtained in April 2003, whichincreased our daily permitted volume at the landfill from 750 tons to 1,375tons, resulted in an increase to depletion expense for the nine months ended September30, 2004 of $0.5 million.

 

*Income from Operations. *Our income from operationsincreased by $13.2 million, or 101.4%, to $26.2 million during the ninemonths ended September 30, 2004 from $13.0 million during the nine monthsended September 30, 2003.  Income fromoperations as a percentage of our revenue increased by 3.6% to 10.8% during thenine months ended September 30, 2004 from 7.2% during the nine months ended September30, 2003.  The increase in income from operations was attributable toacquisitions closed in 2003, particularly our Seneca Falls, New York landfillacquisition, price increases, increased internalization of collection volumesinto the landfills we operate and internal growth, partially offset byadditional depreciation, depletion and amortization expenses related to suchacquisitions, the Bethlehem landfill expansion permit and the write-off ofaborted equity and acquisition transactions.

 

*Interest Expense, Net. *Our interest expense, net,increased $6.9 million, or 49.9%, to $20.7 million during the ninemonths ended September 30, 2004 from $13.8 million during the nine monthsended September 30, 2003.  Interestexpense, net, as a percentage of our revenue, increased to 8.5% during the ninemonths ended September 30, 2004 from 7.7% during the nine months ended September30, 2003.  This increase was attributableto higher debt levels during the nine months ended September 30, 2004 ascompared to the same period in 2003, primarily due to our acquisition of theSeneca Falls, New York landfill in October 2003 and other smaller acquisitionsclosed during 2003.

 

*Other Income (Expense), Net. *Our other expense increasedby $0.3 million to $0.6 million during the nine months ended September 30, 2004from $0.3 million during the nine months ended September 30, 2003.

 

26

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The increase was primarily the result of an unrealized loss related toa $0.3 million decrease in the fair value of an old corrugated cardboard futurescontract and additional state franchise taxes.

 

*Income Tax Expense. *Our income tax expense increasedby $0.5 million to an expense of $2.8 million during the nine months ended September30, 2004 from an expense of $2.3 million during the nine months ended September30, 2003.  For the nine month periodended September 30, 2004, we recognized in our consolidated statement ofoperations an amount such that the effective income tax rate for the ninemonths ended September 30, 2004 approximates our estimated 2004 effective taxrate.  The difference in income taxescomputed at the statutory rate and reported income taxes for the nine monthsended September 30, 2004 is also due primarily to state and local income taxesand a revision of the estimated pre-tax income for the fiscal year endingDecember 31, 2004.

 

*Cumulative Effect of Change inAccounting Principle. *Duringthe nine months ended September 30, 2003, we recorded an after-tax expense of$1.5 million from a cumulative effect of a change in accounting principlerelated to our adoption of SFAS No. 143 on January 1, 2003.  For more information on SFAS No. 143, pleaserefer to Note 2 in our audited consolidated financial statements included inour Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

 

**Liquidity and Capital Resources**

** **

***CashFlow***

*** ***

The following is a summary, for the periods indicated,of our cash flows (in thousands):

 
| ** **                                           | ** ** | **Nine Months Ended   September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| Net cash  provided by operating activities           |       | $                                     | 47,173     |   | $ | 29,632 |   |
|                                                 |       |                                  |       |   |   |   |   |
| Net cash (used  in) investing activities             |       | $                                     | (40,577    | ) | $ | (69,051 | ) |
| Net cash  provided by (used in) financing activities |       | $                                     | (6,701     | ) | $ | 40,004 |   |

 

During the nine months ended September 30, 2004, netcash used in investing activities was $40.6 million.  Of this amount, $1.6 million was used for theacquisition of businesses.  Cash used forcapital expenditures during the nine months ended September 30, 2004 was $36.5 million,which was principally for investments in fixed assets, consisting primarily oftrucks, containers, landfill and transfer station equipment, and landfillconstruction projects.  Net cash used infinancing activities during the nine months ended September 30, 2004 was $6.7million, which consisted of a net borrowing decrease under our senior creditfacility.

 

During the nine months ended September 30, 2003, netcash used in investing activities was $69.1 million.  Of this amount, $25.4 million was used forthe acquisition of businesses and $6.0 million was used for the initialdevelopment costs for two permitted landfills acquired in 2002.  Cash used for capital expenditures during thenine months ended September 30, 2003 was $34.5 million, which wasprincipally for investments in fixed assets, consisting primarily of trucks,containers, landfill and transfer station equipment, and landfill constructionprojects.  Net cash provided by financingactivities during the nine months ended September 30, 2003 was $40.0 million,which consisted of a net borrowing increase under our senior credit facility of$40.5 million, offset by debt issuance costs of $0.5 million.

 

The following table, for the periods indicated,summarizes the components of the reconciliation of our debt balances:

 

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| ** **                                                                              | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                              | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                                                              | ** ** | **(in thousands)**                    | ** ** |
| Roll-forward of  debt balance:                                                          |       |                                  |       |   |   |
| Debt balance at  beginning of period                                                    |       | $                                     | 380,861    |   | $ | 198,571 |   |
| Free cash flow  (surplus) deficit before acquisitions(1)                                |       | (8,807                                | )          | 6,239 |   |
| Acquisitions and  divestitures                                                          |       | 1,609                                 |       | 31,404 |   |
| Acquisition-related  and other expenditures                                             |       | 602                                   |       | 1,777 |   |
| Debt issue costs                                                                        |       | —                                |       | 451 |   |
| Increase  (decrease) in cash                                                            |       | (105                                  | )          | 585 |   |
| Increase related  to the change in fair value of interest rate swap from long-term debt |       | 530                                   |       | 476 |   |
|                                                                                    |       |                                  |       |   |   |
| Debt balance at  end of period                                                          |       | $                                     | 374,690    |   | $ | 239,503 |   |

 

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(1)               Freecash flow (surplus or deficit) before acquisitions is not a measure ofliquidity, operating performance or cash flow from operating activities underGAAP.  Free cash flow before acquisitionsis defined as net cash provided by operating activities, less capitalexpenditures (other than for acquisitions) and capitalized interest.  We believe that the presentation of free cashflow before acquisitions is useful to investors because it allows them to assessand understand our ability to meet debt service requirements and the amount of recurringcash generated from operations after expenditures for fixed assets.  Free cash flow before acquisitions does notrepresent our residual cash flow available for discretionary expenditures becausewe have mandatory debt service requirements and other required expendituresthat are not deducted from free cash flow deficit before acquisitions.  Free cash flow before acquisitions does notcapture debt repayment and/or the receipt of proceeds from the issuance ofdebt.  We use free cash flow beforeacquisitions as a measure of recurring operating cash flow.  We do not intend for free cash flow beforeacquisitions to be considered in isolation or as a substitute for GAAP measures. Other companies may define this financialmeasure differently.  The most directlycomparable GAAP measure to free cash flow before acquisitions is net cashprovided by operating activities. Following is a reconciliation of free cash flow before acquisitions tonet cash provided by operating activities:

 
| ** **                                            | ** **                                    | **Nine Months Ended   September 30,** | ** ** |
|-------------------------------------------------------|-----------------------------------------------|---------------------------------------|------------|
| ** **                                            | ** **                                    | **2004**                              | ** ** | **2003** | ** ** |
| ** **                                            | ** **                                    | **(in thousands)**                    | ** ** |
| Free cash flow  surplus (deficit) before acquisitions |                                          | $                                     | 8,807      |   | $ | (6,239 | ) |
| Add:                                                  | Capital  expenditures, excluding acquisitions |                                  | 36,457     |   | 34,503 |   |
|                                                  | Capitalized  interest                         |                                  | 1,909      |   | 1,368 |   |
|                                                  | Other                                         |                                  | —     |   | — |   |
| Net cash provided  by operating activities            |                                          | $                                     | 47,173     |   | $ | 29,632 |   |

 

***Liquidity***

*** ***

Our business is capital intensive.  Our capital requirements includeacquisitions, new municipal contracts and fixed asset purchases for internalgrowth, primarily for trucks, containers and equipment, and for landfill cellconstruction, landfill development and landfill closure activities.  We have historically financed, and plan tocontinue to finance, our capital needs with cash provided from operations,borrowings under our senior credit facility, debt or equity offerings, or somecombination of the foregoing.

 

On October 10, November 20, and December 30, 2003, we issuedan aggregate of 49,660 shares of our Series E convertible preferred stock foran aggregate purchase price of $49.7 million.  Net proceeds 

 

28

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from such sales of $48.0 million were used to partially fund theacquisition of the Seneca Falls, New York landfill and the expenses relatedthereto.

 

On June 12, 2002, we completed a private offering ofour 10.25% senior subordinated notes due 2012 (our Notes) at a price of100.0%.  These Notes mature on June 15,2012.  Interest on our Notes is due onJune 15 and December 15 of each year. Our Notes are guaranteed by all of our current, and will be guaranteedby certain of our future, subsidiaries and are unsecured senior subordinatedobligations that rank junior in right of payment to all of our existing andfuture senior debt and secured debt.  OurNotes are redeemable on or after June 15, 2007 and we may redeem up to 35.0% ofthe aggregate principal amount of our Notes on or before June 15, 2005 with theproceeds 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 September 30, 2004, we were incompliance with all covenants contained in the indenture governing our Notes.

 

In connection with our acquisition of the SenecaFalls, New York landfill, on October 10, 2003, we and our subsidiaries entered intothe Fifth Amended and Restated Revolving Credit and Term Loan Agreement with a syndicateof lenders led by Bank of America Corporation (f/k/a Fleet National Bank), asadministrative agent (BOA) and LaSalle Bank National Association, assyndication agent, and Fleet Securities, Inc., as arranger, which amended our thenexisting senior credit facility, dated as of September 14, 2001.  Our senior credit facility, as so amended, includesa $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.  Subjectto certain conditions, we may request an increase in the revolving loan or termloan portions of our senior credit facility of up to $50.0 million suchthat the total amount of indebtedness under our senior credit facility wouldequal $450.0 million.  As of September30, 2004, there was $198.0 million outstanding under the term loan portionand $25.1 million (excluding $49.1 million underlying letters ofcredit) outstanding under the revolving loan portion of our senior creditfacility.  As of such date, we had anadditional $125.8 million available under the revolving loan portion (ofwhich $49.8 million represented immediate borrowing capacity), including amaximum of $30.9 million underlying letters of credit.  In order to borrow under the revolving loanportion of our senior credit facility, we must satisfy customary conditionsincluding maintaining certain financial ratios. Our senior credit facility is secured by a pledge of the stock of ourdirect and indirect subsidiaries and a lien on substantially all of our directand indirect subsidiaries’ assets.

 

Our senior credit facility permits borrowings atfloating interest rates based on, at our option, the designated Eurodollarinterest rate, which generally approximates LIBOR, or the BOA prime rate, ineach case, plus an applicable margin, and requires payment of an annualcommitment fee based on the unused portion of the revolving loan portion.  As of September 30, 2004, the interest rateapplicable to the $17.1 million outstanding under the revolving loanportion of our senior credit facility was LIBOR plus 325 basis points, or 4.83%and the interest rate applicable to $8.0 million then outstanding under therevolving loan portion was base, or 6.0%. As of September 30, 2004, the interest rate applicable to the $196.5 millionoutstanding under the term loan portion of our senior credit facility was LIBORplus 300 basis points, or 4.61% and the interest rate applicable to $1.5million then outstanding under the term loan portion was base, or 5.75%.  The revolving loan and term loan portions ofour senior credit facility mature on September 30, 2008 and September 30,2010, respectively.

 

29

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Pursuant to the terms of our senior credit facility, duringeach 12-month period commencing on October 1 and ending on September 30, we arerequired to repay 1.0% (except for the 12-month period prior to maturity whenwe are required to repay 94.0%) of the principal amount of the term loanportion of our senior credit facility in quarterly installments payable on thelast business day of each calendar quarter.  In addition, our senior credit facilityrequires us to prepay the term loan with, subject to certain conditions andexceptions, 100.0% of the net cash proceeds we receive from any disposition ofassets in excess of $5.0 million in the aggregate per year, 100.0% of the netcash proceeds we receive from the incurrence of any permitted indebtedness(other than up to $100.0 million of additional subordinated indebtedness) and50.0% of the net cash proceeds we receive in connection with any issuance ofour equity (other than equity we issue (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).  We arealso required to prepay the term loan with the percentage of excessconsolidated operating cash flow (generally, for any fiscal year, consolidated EBITDA(1),plus or minus net working capital changes and extraordinary cash items, less thesum of (a) capital expenditures, (b)  the cash purchase price of any permittedacquisitions, (c)  cash payments for taxes, (d) cash payments ofinterest and (e)  the scheduled principal repayments of indebtedness, ineach case of clauses (a) through (e), paid during such period) corresponding tothe applicable 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%                                                                                                          |       |

 

The proceeds of the loans under our senior creditfacility may be used solely to refinance certain debt, fund certainacquisitions, capital expenditures, working capital and general corporatepurposes.  The letters of credit underour senior credit facility may be used solely for working capital and generalcorporate purposes.

 

Our senior credit facility contains affirmative andnegative covenants and other terms customary to such financings, includingrequirements that we maintain specified financial ratios, including thefollowing:

 

•                                          **Maximum Leverage Ratio**—Our ratio of consolidated debt toconsolidated EBITDA for any period of four consecutive fiscal quarters may notbe greater than 4.5 to 1.0.

 

•                                          **Maximum Senior Leverage Ratio**—Our ratio of consolidatedsenior debt (generally, consolidated debt other than certain debt, including,without limitation, our Notes, subordinated to our senior credit facility) toconsolidated EBITDA for any period of four consecutive fiscal quarters may notbe greater than 3.0 to 1.0.

 

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(1)                                  Oursenior credit facility defines EBITDA, a non-GAAP measure, to be consolidatednet income, subject to certain adjustments, plus interest expense, incometaxes, depreciation and amortization. For certain purposes, and with the consent of Bank of America, we mayinclude in EBITDA the 

 

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projected EBITDA fromcertain new municipal contracts and the EBITDA for the prior 12 months ofcertain newly-acquired businesses.  Wediscuss EBITDA in this context solely to provide information regarding therequirements of, and the extent to which we are in compliance with, our seniorcredit facility covenants.

•                                          **Minimum Interest Coverage Ratio**—Our ratio of consolidatedEBITDA to consolidated interest expense ratio for any period of fourconsecutive fiscal quarters ending on the last day of any fiscal quarterspecified below may not be less than the applicable ratio indicated below: 

 
| **Quarters Ending**               | ** ** | **Consolidated EBITDA to   Consolidated Interest Expense Ratio** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------|------------|
|                              |       |                                                             |       |
| 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 our assets over our liabilities excluding redeemablepreferred stock) at any time may not be less than approximately $215.1 million,plus (a) the proceeds of any new equity offerings and (b) 50% of ourpositive consolidated net income for each fiscal quarter beginning with the fourthquarter of 2004.

 

•                                          **Maximum Capital Expenditures**—Our annual capital expendituresless capital expenditures for new municipal contracts may not be greater thanthe product of our annual depreciation and depletion expense for any fiscalyear and the applicable 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 of September 30, 2004, we were in compliance withour senior credit facility financial covenants: our ratio of consolidated debt to consolidated EBITDA was 3.97:1, our ratioof consolidated senior debt to consolidated EBITDA was 2.37:1, our ratio of consolidatedEBITDA to consolidated interest expense ratio was 3.40:1 and our consolidatednet worth was $219.7 million ($4.6 million in excess of the minimumrequired under our senior credit facility). In addition, our fiscal 2003 annual capital expenditures of $54.9million less capital purchased for new municipal contracts of $3.9 million didnot exceed 1.6 times our fiscal 2003 annual depreciation and depletionexpense.  Our ability to comply in futureperiods with the financial covenants in our senior credit facility will dependon our ongoing financial and operating performance, which, in turn, will besubject to economic conditions and to financial, business and other factors,many of which are beyond our control, and will be substantially dependent onour ability to successfully implement our overall business strategies.

 

Our senior credit facility also contains covenantswhich, among other things, restrict our ability to, incur additional debt,create liens, dispose of assets, make investments, engage in transactions withaffiliates, enter into a merger or consolidation, make specified payments,including dividends, repay subordinated 

 

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indebtedness and enter into certain franchise agreements.  These limitations are subject to certainqualifications and exceptions.

 

In August 2002, we entered into two interest rate swapagreements, which are effective through June 15, 2012, with two financialinstitutions.  Under each swap agreement,the fixed interest rate on $25.0 million of our 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.  On September 30, 2004, the six month LIBORrate was 1.86%.

 

In January 2004, we entered into four interestrate swap agreements, which are effective through January 2007, with fourfinancial institutions.  Under each swapagreement, the variable interest rate on $25.0 million outstanding under our seniorcredit 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.  On September 30, 2004, the three month LIBORrate was 1.59%.

 

Environmental laws and regulation, includingSubtitle D, that apply to the non-hazardous solid waste managementindustry have required us, as well as others in the industry, to alter the waywe conduct our operations and to modify or replace pre-Subtitle D landfills.  These expenditures have been, and willcontinue to be, substantial; however, we do not anticipate that theseexpenditures relating to our ongoing operations will be substantially differentthan what we have experienced to date. Legislative or regulatory changes could increase the costs of operatingour business, accelerate required expenditures for closure activities and post-closuremonitoring, and obligate us to spend sums in addition to those presentlyreserved for such purposes.  Thesefactors could substantially increase our operating costs and adversely affectour results of operations, financial condition and cash flow.

 

We believe that cash flow from operations andborrowings under the revolving loan portion of our senior credit facility willprovide adequate cash to fund our working capital, capital expenditure, debtservice, and other cash requirements for the foreseeable future.  Our ability to meet future working capital,capital expenditure and debt service requirements, to provide financialassurance, as requested or required, and to fund capital amounts required forthe expansion of our existing business will depend on our future financialperformance, which will be affected by a range of economic, competitive andbusiness factors, many of which are outside of our control.  See “—Disclosure Regarding Forward LookingStatements.” We cannot assure you that our business will generate sufficientcash flow from operations, that future financings will be available to us inamounts sufficient to enable us to service our debt or to make necessarycapital expenditures, or that any refinancing would be available oncommercially 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 withcertain other covenants in, our senior credit facility, we may need to raiseadditional capital.  We may raise suchfunds through public or private offerings of our debt or equitysecurities.  We cannot assure you that wewill be able to secure such funding, if necessary, on favorable terms, if atall.

 

We had a working capital deficit at September 30, 2004of $10.8 million as compared to a working capital deficit of $8.0 millionat December 31, 2003.  The $2.8 millionincrease in the working capital deficit during the nine months ended September30, 2004 was primarily attributable to the recording of approximately $7.7 millionof estimated liabilities related to a contractual obligation from the SenecaMeadows, Inc. acquisition from October 2003, a $4.8 million increase in accruedinterest payable primarily related to the 10.25% senior subordinated notes, a$1.4 million increase in accrued insurance related costs, offset by a $3.6million increase in the account receivable balance with New York City and a$7.4 million decrease in accrued accounts payable.  There is no covenant in our senior credit 

 

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facility directly tied to working capital.  At September 30, 2004, our immediatelyavailable borrowing capacity was sufficient to cover the working capitaldeficit.

 

***CapitalExpenditures***

*** ***

We made capital expenditures of $14 millionduring the three months ended September 30, 2004, including $0.3 million relatedto equipment for new municipal contracts and $0.7 million of capitalizedinterest primarily related to landfill construction and permitting projects.

 

We made capital expenditures of $38.4 millionduring the nine months ended September 30, 2004, including $3.0 millionfor new municipal contracts and $1.9 million of capitalized interest primarilyrelated to landfill construction and permitting projects.  We expect our capital expenditures withrespect to our existing business to range from approximately $10.0 million to $14.0million during the remainder of 2004, including approximately $2.0 million to$2.5 million for new municipal contracts, $0.7 million of capitalized interestprimarily related to landfill construction and permitting projects and $1.0million to $1.5 million for new transfer station and greenfield landfillprojects.  We intend to fund ourremaining 2004 capital expenditures principally through existing cash,internally generated funds and borrowings under our senior credit facility.

 

In addition, we may make substantial additionalcapital expenditures in acquiring solid waste management businesses.  If we acquire additional landfill disposalfacilities, we may also have to make significant expenditures to bring theminto compliance with applicable regulatory requirements, obtain permits orexpand our available disposal capacity. In addition we may need to make additional capital expenditures if webid and are awarded new municipal contracts. We cannot currently determine the amount of these expenditures becausethey will depend on the number, nature, condition and permitted status of anyacquired landfill disposal facilities or new municipal contracts.

 

From time to time we evaluate our existing operationsand their strategic importance to us.  Ifwe determine that a given operating unit does not have future strategicimportance, we may sell or otherwise dispose of those operations.  Although we believe our operations would notbe impaired by such dispositions, we could incur losses on such disposals.

 

**Off-Balance Sheet Arrangements**

** **

We have no off-balance sheet debt or similarobligations, other than the financial assurance instruments, which are issuedin our ordinary course of business and are not debt (and, therefore, are notreflected in our consolidated balance sheet) which are discussed under “SignificantCommercial Commitments” in Item 7.  “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” ofour Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

 

**Related Party Transactions**

** **

We have no transactions or obligations with relatedparties that are not disclosed, consolidated into or reflected in our reportedresults of operations or financial position. We do not guarantee any third party debt.

 

**Obligations and Commitments**

** **

For a discussion of our obligations and commitments,please refer to Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” of our Annual Report on Form 10-K for thefiscal year ended December 31, 2003. There were no significant changes in our 

 

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business during the three months ended September 30, 2004 that wouldrequire an update to those disclosures.

 

**Recent Accounting Pronouncements**

** **

For a description of new accounting pronouncements thataffect us, please see Note 1 to our audited consolidated financial statementsincluded in our Annual Report on Form 10-K for the fiscal year ended December31, 2003.  There were no new accountingpronouncements during the three months ended September 30, 2004 which we expectto have a material effect on our consolidated financial statements.

 

**Disclosure Regarding Forward-LookingStatements**

** **

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

 

These forward-looking statements are subject to risksand uncertainties, which could cause actual results to differ materially fromthose currently anticipated.  These risksand uncertainties include:  our businessis capital intensive and may consume cash in excess of cash flow from our operationsand borrowings; our growth strategy depends, in part, on our acquiring othersolid waste management or related businesses and expanding our existinglandfills and other operations, which we may be unable to do; we may not beable to successfully manage our growth; we face risks related to certaindeficiencies in the operation of our internal control over financial reportingand disclosure controls and procedures; competition could reduce ourprofitability or limit our ability to grow; state and municipal requirements toreduce landfill disposal by encouraging various alternatives may adverselyaffect our ability to operate our landfills at full capacity; we may losecontracts through competitive bidding or early termination, which would causeour revenue to decline; we are geographically concentrated in the northeasternand southern United States and susceptible to those regions’ local economiesand regulations; the loss of the City of New York as a customer could have asignificant adverse effect on our business and operations; our substantial debtcould adversely affect our financial condition and make it more difficult forus to make payments with respect to our debt; despite our current indebtedness,we and our subsidiaries may be able to incur substantially more debt,exacerbating such risks; we require a significant amount of cash to service ourdebt, and our ability to generate cash depends on many factors, some of whichare beyond our control; our failure to comply with the covenants contained inour senior credit facility or the indenture governing our Notes, including as aresult of events beyond our control, could result in an event of default, whichcould materially and adversely affect our operating results and financialcondition; covenant restrictions in our senior credit facility and theindenture governing our Notes may limit our ability to operate our business;the interests of our controlling stockholders could conflict with those ofother holders of our securities; we depend heavily on our senior management; ifwe are unable to obtain performance or surety bonds, letters of credit orinsurance, we may not be able to enter into additional MSW collection contractsor retain necessary landfill operating permits; we are subject to extensivelegislation and governmental regulation that may restrict our operations or increaseour costs of operations; we may not be able to obtain permits we require tooperate our business; we may be subject to legal action relating to compliancewith environmental laws; we may have liability for environmental contamination;and we will always face the risk of liability, and insurance may not always beavailable or sufficient.

 

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For a further list and description of such risks anduncertainties, please refer to Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of our Annual Report on Form10-K for the fiscal year ended December 31, 2003.  All subsequent written and oralforward-looking statements attributable to us or persons acting on our behalfare also expressly qualified in their entirety by such factors.  We urge you to carefully consider suchfactors in evaluating the forward-looking statements and caution you not toplace undue reliance on such forward-looking statements.  There may also be additional risks that we donot presently know of or that we currently believe are immaterial which couldalso impair our business.  In light ofthese risks, uncertainties and assumptions, the forward-looking events may ormay 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.  Quantitativeand Qualitative Disclosures About Market Risk**

 

For a discussion of our exposure to market risks, seePart II. Item 7A. “Quantitative and Qualitative Disclosures About Market Risk”of our Annual Report on Form 10-K for the fiscal year ended December 31, 2003and Part I. Item 3.  “Quantitative andQualitative Disclosures About Market Risk” of our Quarterly Reports on Form10-Q for the quarterly periods ending March 31, 2004 and June 30, 2004.  There was no significant change in thoserisks during the three months ended September 30, 2004.

 

**Item 4.  Controls andProcedures**

 

Our Chief Executive Officer and Chief FinancialOfficer have concluded, based on their evaluation as of the end of the periodcovered by this Quarterly Report on Form 10-Q, that our disclosure controls andprocedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)and 15(d)-15(e)) are effective to ensure that information required to bedisclosed in the reports we file or submit under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.  There were no changes in our internal controlover financial reporting during our third quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

** **

As discussed in Part II. Item 9A. “Controls andProcedures” of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003, in March 2004, we discovered that the manager of a divisionin our South Region had engaged in misconduct that violated our internal policiesand resulted in an overstatement of our South Region’s accounts receivable asof December 31, 2003 by approximately $1.6 million and an understatement of itsexpenses during 2003 by approximately $0.8 million.  This division accounted for approximately 4.5%of our consolidated revenues during 2003. We adjusted our financial statements for 2003 to account for thesediscrepancies.

 

As part of our ongoing internal investigation, inconsultation with the audit committee of our board of directors, into thismisconduct, we have identified certain deficiencies in the operation of ourinternal control over financial reporting and disclosure controls andprocedures.  These deficiencies includeda lack of proper segregation of management and accounting responsibilities atthis division and insufficient regional and corporate oversight of accountingfunctions performed at this division.  Inconnection with their audit of our financial statements for the year endedDecember 31, 2003, our independent auditors determined that these deficienciesconstituted a material weakness in our internal control over financialreporting.

 

We have taken steps to address these deficiencies andimprove our internal control over financial reporting and disclosure controlsand procedures.  In particular, we havehired a new manager and a new 

 

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controller with responsibility for the division in question andconfirmed that management and accounting responsibilities are segregated at allof our other divisions.  Our board ofdirectors, in coordination with our audit committee, will continually assessthe progress and sufficiency of these initiatives and make adjustments as necessary.

 

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**Part II.  Other Information**

 

**Item 1.  Legal Proceedings**

 

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

 

**Item 2. **UnregisteredSales of Equity Securities and Use of Proceeds

 

None.

 

**Item 3.  Defaults UponSenior Securities**

 

None.

 

**Item 4.  Submission ofMatters to a Vote of Security Holders**

 

None.

 

**Item 5.  Other Information**

 

None.

 

**Item 6.  Exhibits**

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

 

 

**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

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| ** **        | **IESI CORPORATION** |
|-------------------|----------------------|
| ** **        | ** **           | ** ** |
| November 10, 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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**Exhibit Index**

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

 

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