**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the quarterly periodended June 30, 2004**

 

**or**

 

**o****   Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

 

**For the transaction period from            to         **

 

**Commission File Number:333-98657**

 

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**IESI CORPORATION**

(ExactName of Registrant 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 telephone number, including  area code)      |

 

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

 

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

 

Thenumber of shares of the Registrant’s Class A voting common stock, par value$.01 per share, and Class B non-voting common stock, par value $.01 per share,outstanding as of August 1, 2004 were 142,000 and 112,980.2, respectively.  There is no trading market for any class ofequity securities of the Registrant.

 

 

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**IESI CORPORATION**

 

**TABLE OF CONTENTS**

 
| Part I.   | Financial Information |                                                                                                        |
|-----------|-----------------------|-------------------------------------------------------------------------------------------------------------|
|      |                  |
|      | Item 1.               | Financial Statements                                                                                        |   |
|      |                  |                                                                                                        |   |
|      |                  | Consolidated Balance Sheets  as of June 30, 2004 and December 31, 2003                            |   |
|      |                  |                                                                                                        |   |
|      |                  | Consolidated  Statements of Operations for the Six and Three Months Ended June 30,  2004 and 2003      |   |
|      |                  |                                                                                                        |   |
|      |                  | Consolidated  Statement of Stockholders’ Equity (Deficit) for the Six Months Ended  June 30, 2004 |   |
|      |                  |                                                                                                        |   |
|      |                  | Consolidated  Statements of Cash Flows for the Six Months Ended June 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.              | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                           |   |
|      |                  |                                                                                                        |   |
|      | Item 3.               | Defaults Upon  Senior Securities                                                                            |   |
|      |                  |                                                                                                        |   |
|      | Item  4.              | Submission  of Matters to a Vote of Security Holders                                                        |   |
|      |                  |                                                                                                        |   |
|      | Item 5.               | Other Information                                                                                           |   |
|      |                  |                                                                                                        |   |
|      | Item 6.               | Exhibits and  Reports on Form 8-K                                                                           |   |
|      |                  |
| Part III. | Signatures            |                                                                                                        |

 

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**Part I.  Financial Information**

** **

**Item1.**  Financial Statements

 

**IESICORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **(unaudited)**         | ** **  |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                    |        |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                   |       | $                       | 3,115,627   |                        | $          | 4,197,157 |   |
| Accounts receivable-trade, less allowance  of $1,897,000 and $2,397,000 at June 30, 2004 and December 31,  2003, respectively                                                                                                                                                                                                                                                                                                     |       | 33,728,975              |        | 30,585,797                  |       |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 1,356,471               |        | 1,356,471                   |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                                                   |       | 6,115,098               |        | 4,782,446                   |       |
| Total current assets                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 44,316,171              |        | 40,921,871                  |       |
| Property and equipment, net of accumulated  depreciation of $138,567,000 and $110,218,000 at June 30, 2004 and  December 31, 2003, respectively                                                                                                                                                                                                                                                                                   |       | 486,764,797             |        | 488,659,850                 |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 138,852,199             |        | 138,335,715                 |       |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                                                                                                                                |       | 29,892,318              |        | 32,986,163                  |       |
| Other assets                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 3,630,366               |        | 2,143,616                   |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                |       | $                       | 703,455,851 |                        | $          | 703,047,215 |   |
| Liabilities and Stockholders’ Equity  (Deficit)                                                                                                                                                                                                                                                                                                                                                                                        |       |                    |        |                        |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                    |        |                        |       |
| Accounts payable—trade                                                                                                                                                                                                                                                                                                                                                                                                                 |       | $                       | 22,750,618  |                        | $          | 27,448,950 |   |
| Accrued expenses and other current  liabilities                                                                                                                                                                                                                                                                                                                                                                                             |       | 21,369,813              |        | 17,512,525                  |       |
| Deferred revenue                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 1,613,845               |        | 1,231,758                   |       |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                           |       | 2,112,870               |        | 2,731,595                   |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 47,847,146              |        | 48,924,828                  |       |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 374,315,998             |        | 378,129,393                 |       |
| Accrued environmental and landfill costs                                                                                                                                                                                                                                                                                                                                                                                                    |       | 48,500,924              |        | 47,456,769                  |       |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 11,106,967              |        | 9,949,611                   |       |
| Other liabilities                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 1,913,695               |        | 1,282,992                   |       |
| Total liabilities                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 483,684,730             |        | 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 June 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 June 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 $113,356,736 and $105,448,126 at June 30, 2004 and  December 31, 2003, respectively                                                                                                                                                                                                                |       | 111,314,275             |        | 103,405,665                 |       |
| Redeemable Series D Convertible Preferred  Stock, 55,000 shares authorized, shares issued and outstanding, liquidation  preference of $72,088,105 and $68,655,338 at June 30, 2004 and  December 31, 2003, respectively                                                                                                                                                                                                           |       | 69,468,228              |        | 66,035,461                  |       |
| Redeemable Series E Convertible Preferred  Stock, 55,000 shares authorized, 49,660 shares issued and outstanding,  liquidation preference of $53,300,689 and $50,762,561 at June 30, 2004  and December 31, 2003, respectively                                                                                                                                                                                                    |       | 51,659,017              |        | 49,120,889                  |       |
| Total redeemable preferred stock                                                                                                                                                                                                                                                                                                                                                                                                            |       | 296,933,793             |        | 283,054,288                 |       |
| Stockholders’ equity (deficit):                                                                                                                                                                                                                                                                                                                                                                                                        |       |                    |        |                        |       |
| Common stock, par value $.01 at  June 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 June 30, 2004  and December 31, 2003 respectively; issued and outstanding shares:   Class A—142,000, Class B Convertible—112,980, at June 30, 2004  and December 31, 2003 |       | 2,550                   |        | 2,550                       |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                                  |       | —                  |        | —                      |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                                         |       | (77,988,250             | )           | (65,753,216                 | )          |
| Cumulative other comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                       |       | 823,028                 |        | —                      |       |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                                                                                                                   |       | (77,162,672             | )           | (65,750,666                 | )          |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                                                                                                                                                                                                                                                                                  |       | $                       | 703,455,851 |                        | $          | 703,047,215 |   |

 

See accompanying notes.

 

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**IESICORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

 
| ** **                                                                           | ** ** | **Six Months Ended****June 30,** | ** **  | **Three Months Ended********June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|-------------|---------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                              | ** **  | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                 |       |                                  |        |                                        |       |   |   |   |   |
| Services revenue                                                                     |       | $                                     | 156,894,696 |                                        | $          | 116,313,385 |   | $ | 82,831,865 |   | $ | 60,899,514 |   |
| Costs and expenses:                                                                  |       |                                  |        |                                        |       |   |   |   |   |
| Operating                                                                            |       | 90,249,972                            |        | 76,633,436                                  |       | 46,515,987 |   | 39,590,646 |   |
| General and administrative                                                           |       | 19,010,181                            |        | 14,796,797                                  |       | 9,561,305 |   | 7,736,843 |   |
| Depreciation, depletion and amortization                                             |       | 30,456,086                            |        | 16,585,574                                  |       | 16,021,865 |   | 8,711,117 |   |
|                                                                                 |       | 139,716,239                           |        | 108,015,807                                 |       | 72,099,157 |   | 56,038,606 |   |
| Income from operations                                                               |       | 17,178,457                            |        | 8,297,578                                   |       | 10,732,708 |   | 4,860,908 |   |
| Interest expense, net                                                                |       | (13,768,755                           | )           | (8,957,852                                  | )          | (6,881,300 | ) | (4,627,894 | ) |
| Other income (expense), net                                                          |       | (695,139                              | )           | (113,455                                    | )          | 83,739 |   | (115,830 | ) |
| Income (loss) before income taxes                                                    |       | 2,714,563                             |        | (773,729                                    | )          | 3,935,147 |   | 117,184 |   |
| Income tax benefit (expense)                                                         |       | (1,070,092                            | )           | 248,895                                     |       | (1,070,092 | ) | (141,105 | ) |
| Income (loss) before cumulative effect of  change in accounting principle            |       | 1,644,471                             |        | (524,834                                    | )          | 2,865,055 |   | (23,921 | ) |
| Cumulative effect of change in accounting  principle net of income tax benefit of $0 |       | —                                |        | (1,530,708                                  | )          | — |   | — |   |
| Net income (loss)                                                                    |       | $                                     | 1,644,471   |                                        | $          | (2,055,542 | ) | $ | 2,865,055 |   | $ | (23,921 | ) |

 

See accompanying notes.

 

2

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**IESICORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENT OFSTOCKHOLDERS’ 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                                                                              |       | —           |       | —          |       | —               |       | 1,644,471                |       | —                    |        | 1,644,471 |   |
| Other comprehensive income:                                                             |       |             |       |            |       |                 |       |                     |       |                      |        |   |   |
| Unrealized gain on market value of interest  rate swaps, net of tax expense of $535,561 |       | —           |       | —          |       | —               |       | —                   |       | 823,028                   |        | 823,028 |   |
| Comprehensive income                                                                    |       | —           |       | —          |       | —               |       | —                   |       | —                    |        | 2,467,499 |   |
| Accretion of dividends on Series C, D and E  Redeemable Preferred Stock                 |       | —           |       | —          |       | —               |       | (13,879,505              | )          | —                    |        | (13,879,505 | ) |
|                                                                                    |       |             |       |            |       |                 |       |                     |       |                      |        |   |   |
| Balance at June 30, 2004                                                           |       | 254,980          |       | $               | 2,550      |                 | $          | —                   |       | $                         | (77,988,250 | ) | $ | 823,028 |   | $ | (77,162,672 | ) |
|                                                                                         |            |                  |            |                 |            |                      |            |                          |            |                           |             |  |  |  |  |  |  |  |

 

See accompanying notes.

 

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**IESICORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

 
| ** **                                                                                                                   | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
| **Operating  Activities:**                                                                                                   |       |                                        |       |   |   |
| Net income (loss)                                                                                                            |       | $                                           | 1,644,471  |   | $ | (2,055,542 | ) |
| Cumulative effect of change in accounting  principle                                                                         |       | —                                      |       | 1,530,708 |   |
| Adjustments to reconcile net loss to net  cash provided by operating activities:                                             |       |                                        |       |   |   |
| Depreciation, depletion and amortization                                                                                     |       | 30,456,086                                  |       | 16,585,574 |   |
| Amortization of deferred financing costs                                                                                     |       | 1,177,513                                   |       | 1,300,612 |   |
| Capping, closure and post-closure accretion                                                                                  |       | 982,416                                     |       | 584,377 |   |
| Provision for doubtful accounts                                                                                              |       | 946,321                                     |       | 626,411 |   |
| Unrealized loss on commodity swap                                                                                            |       | 560,000                                     |       | — |   |
| Write off of costs associated with  transactions in process                                                                  |       | 109,690                                     |       | — |   |
| Deferred income tax expense (benefit)                                                                                        |       | 621,795                                     |       | (711,367 | ) |
| Changes in operating assets and  liabilities, net of effects of acquired waste management operating assets and  liabilities: |       |                                        |       |   |   |
| Accounts receivable                                                                                                          |       | (4,125,575                                  | )          | (3,088,552 | ) |
| Prepaid expenses and other current assets                                                                                    |       | (2,088,467                                  | )          | (1,504,777 | ) |
| Accounts payable                                                                                                             |       | (4,698,332                                  | )          | 1,906,585 |   |
| Accrued expenses and other liabilities                                                                                       |       | 4,007,941                                   |       | (321,636 | ) |
| Capping, closure and post closure  expenditures                                                                              |       | (1,437,138                                  | )          | (203,061 | ) |
| Net cash provided by operating activities                                                                                    |       | 28,156,721                                  |       | 14,649,332 |   |
| **Investing  Activities:**                                                                                                   |       |                                        |       |   |   |
| Purchases of property and equipment                                                                                          |       | (23,220,495                                 | )          | (18,848,138 | ) |
| Acquisitions of waste management operations                                                                                  |       | (1,187,753                                  | )          | (8,561,627 | ) |
| Initial development costs for newly  acquired permitted landfills                                                            |       | —                                      |       | (3,726,991 | ) |
| Capitalized interest                                                                                                         |       | (1,174,848                                  | )          | (1,020,923 | ) |
| Deferred costs associated with transactions  in process                                                                      |       | (505,636                                    | )          | (764,789 | ) |
| Net cash used in investing activities                                                                                        |       | (26,088,732                                 | )          | (32,922,468 | ) |
| **Financing  Activities:**                                                                                                   |       |                                        |       |   |   |
| Borrowings under long-term debt                                                                                              |       | 16,000,000                                  |       | 26,400,000 |   |
| Payments on long-term debt                                                                                                   |       | (19,149,519                                 | )          | (7,306,030 | ) |
| Debt issue costs                                                                                                             |       | —                                      |       | (436,071 | ) |
| Net cash (used in) provided by financing  activities                                                                         |       | (3,149,519                                  | )          | 18,657,899 |   |
| Net (decrease) in cash and cash equivalents                                                                                  |       | (1,081,530                                  | )          | 384,763 |   |
| Cash and cash equivalents at beginning of  period                                                                            |       | 4,197,157                                   |       | 2,589,726 |   |
| Cash and cash equivalents at end of period                                                                                   |       | $                                           | 3,115,627  |   | $ | 2,974,489 |   |

 

See accompanying notes.

 

4

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**IESICORPORATION AND SUBSIDIARIES NOTES TOCONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)**

 

**Notes to Consolidated Financial Statements**

 

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

 

IESICorporation (IESI) is a Delaware holding company founded in 1995.  IESI, together with its subsidiaries(collectively, the Company), is a regional, integrated non-hazardous solidwaste management company that provides collection, transfer, disposal, andrecycling services to commercial, industrial and residential customers. TheCompany was formed in order to participate in the consolidation of thefragmented solid waste industry. The Company is executing this strategy throughan acquisition program, which targets businesses in two principal geographicregions, the Northeast and the South United States. The Company is currentlyoperating in nine states: Arkansas, Louisiana, Maryland, Missouri, New Jersey,New York, Oklahoma, Pennsylvania, and Texas.

 

Theaccompanying unaudited consolidated financial statements include the accountsof IESI and its subsidiaries. All significant inter-company accounts andtransactions have been eliminated. Certain information related to the Company’sorganization, significant accounting policies and footnote disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been condensed or omitted.  In the opinion of management, these unauditedcondensed consolidated financial statements reflect all adjustments (whichinclude only normal recurring adjustments) necessary to fairly state thefinancial position and the results of operations for the periods presented, andthe disclosures herein are adequate to make the information presented notmisleading.  Operating results forinterim periods are not necessarily indicative of the results for fullyears.  These interim unauditedconsolidated financial statements should be read in conjunction with theCompany’s audited consolidated financial statements for the year endedDecember 31, 2003 and the related notes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2003.

 

Theunaudited condensed consolidated financial statements have been prepared inaccordance with generally accepted accounting principles and necessarilyinclude amounts based on estimates and assumptions made by management.  Actual results could differ from theseamounts.  Significant items subject tosuch estimates and assumptions include the depletion and amortization oflandfill development costs, accruals for final closure and post-closure costs,valuation allowances for accounts receivable, liabilities for potentiallitigation, claims and assessments, and liabilities for environmentalremediation, deferred taxes and self-insurance.

 

Additionally,certain adjustments have been made in the prior period consolidated financialstatements in order to reflect changes recorded by the Company in the fourthquarter of 2003 as follows:

 

1.               The first six months of 2003 results include a net oftax charge of $1,530,708 related to the cumulative effect of a change inaccounting principle for the initial adoption of SFAS No. 143.  Included in this amount is $54,000 recordedby the Company in the fourth quarter of 2003 due to a revision in thecumulative effect adjustment recorded in the first quarter.  For purposes of quarterly reporting, theCompany has revised its net loss amount previously reported in the Company’sJune 30, 2003 quarterly report for the six months then ended.

 

2.               In the fourth quarter of 2003 the Company recordedapproximately $2,168,000 of expenses related to misconduct of a manager in theCompany’s South Region.  For

 

5

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purposes of quarterly reporting the Company has revised itsnet loss amount previously reported in the Company’s June 30, 2003quarterly report to reflect the allocation of $125,000 and $250,000 of suchexpenses to the second quarter and first six months of 2003, respectively.

 

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

 

For adescription of new accounting pronouncements that affect the Company, pleasesee Note 1 to the Company’s consolidated financial statements included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2003.  There were no new accountingpronouncements during the six months ended June 30, 2004 which the Companyexpects to have a material effect on the Company’s consolidated financialstatements.

 

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

 

**Accounts Receivable**

 

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

 

**Property and Equipment**

 

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

 

TheCompany revises the estimated useful lives of property and equipment acquiredthrough business acquisitions to conform with itspolicies regarding property and equipment. Depreciation is calculated on thestraight-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$12,293,000 and $10,087,000 for the six months ended June 30, 2004 and2003, respectively, and approximately $6,128,000 and $5,104,000 for the threemonths ending June 30, 2004 and 2003, respectively.

 

Landfillsand landfill improvements are stated at cost, and are depleted based onconsumed airspace. Landfill improvements include direct costs incurred toobtain landfill permits, and direct costs incurred to construct and develop thesite.  All indirect landfill developmentcosts are expensed as incurred. Depletion expense was approximately $15,909,000 and $4,761,000 for thesix months ended June 30, 2004 and 2003, respectively, and approximately$8,773,000 and $2,792,000 for the three months ending

 

6

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June 30, 2004 and 2003, respectively.Interest is capitalized on certain projects under development includinglandfill projects and probable landfill expansion projects and on certainassets under construction, including operating landfills.  The capitalization of interest for operatinglandfills is based on the costs incurred on discrete cell constructionprojects.  Interest capitalized wasapproximately $1,175,000 and $1,021,000 for the six months ended June 30,2004 and 2003, respectively, and $595,000 and $403,000 for the three monthsended June 30, 2004 and 2003, respectively.

 

Propertyand equipment consisted of the following at June 30, 2004 andDecember 31, 2003:

 
| ** **                                  | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|---------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| Land                                        |       | $                       | 9,502,381   |                        | $          | 9,189,881 |   |
| Landfills                                   |       | 402,981,510             |        | 389,028,075                 |       |
| Vehicles                                    |       | 94,333,957              |        | 90,346,853                  |       |
| Containers and compactors                   |       | 56,194,649              |        | 52,677,979                  |       |
| Machinery and equipment                     |       | 36,043,148              |        | 33,085,294                  |       |
| Buildings and improvements                  |       | 19,805,040              |        | 18,722,952                  |       |
| Furniture and office equipment              |       | 6,471,302               |        | 5,826,441                   |       |
|                                        |       | 625,331,987             |        | 598,877,475                 |       |
| Less accumulated depreciation and depletion |       | 138,567,190             |        | 110,217,625                 |       |
|                                        |       | $                       | 486,764,797 |                        | $          | 488,659,850 |   |

 

**Landfill Accounting**

 

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

 

**Goodwill and Other Intangible Assets**

 

Intangibleassets consist primarily of the cost of acquired businesses in excess of thefair value of net assets acquired (goodwill). Other intangibles consist ofvalues assigned to customer lists and covenants not-to-compete, costs incurredto obtain debt financing and other separately identifiable intangibleassets.  Other intangibles are recordedat cost and, except for debt issue costs, amortized over periods generallyranging from five to seven years, computed on the straight-line method.Amortization expense was approximately $2,254,000 and $1,737,000 for the sixmonths ended June 30, 2004 and 2003, respectively, and $1,121,000 and$815,000 for the three months ended June 30, 2004 and 2003, respectively.  The Company defers costs related to incurringdebt and amortizes, as additional interest expense, these costs over the termof the related debt using the effective interest method.  Other intangible assets consisted of thefollowing at June 30, 2004 and December 31, 2003:

 

7

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| ** **                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Customer lists                |       | $                       | 23,986,024 |                        | $          | 23,707,139 |   |
| Noncompetition agreements     |       | 7,336,629               |       | 7,277,689                   |       |
| Debt issue costs              |       | 22,011,381              |       | 22,007,533                  |       |
| Other                         |       | 935,577                 |       | 951,088                     |       |
|                          |       | 54,269,611              |       | 53,943,449                  |       |
| Less accumulated amortization |       | 24,377,293              |       | 20,957,286                  |       |
|                          |       | $                       | 29,892,318 |                        | $          | 32,986,163 |   |

 

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

 

On anongoing basis, management reviews the valuation and amortization of otherintangible assets with consideration toward recovery through future operatingresults.  The Company periodicallyevaluates the value and future benefits of its other intangible assets.  The Company assesses recoverability fromfuture operations using cash flows of the related asset as measures.  In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the carryingvalue would be reduced to estimated fair value if it becomes probable that theCompany’s estimate for expected future cash flows of the related asset would beless than the carrying amount of the related intangible assets.  There have been no adjustments to thecarrying amount of intangible assets resulting from these evaluations as ofJune 30, 2004 and December 31, 2003.

 

Scheduledestimated amortization of other intangible assets is as follows: 

 
| 2004       |   | $         | 4,152,000  |   |
|------------|--------|-----------|------------|--------|
| 2005       |   | 6,514,000 |       |
| 2006       |   | 5,342,000 |       |
| 2007       |   | 4,924,000 |       |
| 2008       |   | 3,827,000 |       |
| Thereafter |   | 5,133,000 |       |
|       |   | $         | 29,892,000 |   |

 

**Accrued Expenses and Other Current Liabilities**

 

Thefollowing is a summary of accrued expenses and other current liabilities atJune 30, 2004 and December 31, 2003:

 
| ** **                                              | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Acquisition related accrued liabilities                 |       | $                       | 1,172,013  |                        | $          | 1,489,429 |   |
| Interest                                                |       | 2,952,557               |       | 2,104,923                   |       |
| Accrued payroll and other employee related  liabilities |       | 3,573,018               |       | 3,613,059                   |       |
| Accrued insurance liabilities                           |       | 5,549,959               |       | 5,062,902                   |       |
| Other                                                   |       | 8,122,266               |       | 5,242,212                   |       |
|                                                    |       | $                       | 21,369,813 |                        | $          | 17,512,525 |   |

 

8

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**Income Taxes**

 

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

 

Thedifference in income taxes computed at the statutory rate and reported incometaxes for the three and six months ended June 30, 2004 and 2003 is dueprimarily to state and local income taxes and adjustments to the valuationallowance related to deferred tax assets.

 

**4.****                                      Acquisitions**

 

Allacquisitions are accounted for as purchases and, accordingly, only theoperations of the acquired companies since the acquisition dates are includedin the accompanying unaudited consolidated financial statements.

 

Duringthe six months ended June 30, 2004, the Company acquired the haulingassets of three solid waste management companies for an aggregate purchaseprice of approximately $1,291,000 consisting of cash and liabilitiesassumed.  In connection with theacquisitions, the Company recorded approximately $516,000 of goodwill, all ofwhich is expected to be deductible for tax purposes, and approximately $338,000of amortizing intangible assets.  Theamortizing intangible assets consist of $279,000 related to customer lists withgenerally a seven year amortization period and $59,000 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.

 

Theallocation of the purchase price for the Seneca Meadows, Inc. (SMI)acquisition, which was consummated in October 2003, is preliminary andwill be finalized upon completion of valuation analyses of certain assets andliabilities associated with the landfill owned by SMI, which the Companyexpects to occur by September 30, 2004. Upon completion of such valuation analyses, the Company may be requiredto reallocate a portion of such purchase price among the Company’s assets andliabilities.  The Company does notbelieve any such reallocation will have a material effect on its consolidatedfinancial statements.

 

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

 

TheCompany has material financial commitments for final capping, closure andpost-closure obligations with respect to its landfills.  The Company develops its estimates of finalcapping, closure and post-closure obligations using input from its engineersand accountants.  The Company’s estimatesare based on its interpretation of current requirements and are intended toapproximate fair value.  Absent quotedmarket prices, the estimate of fair value should be based on the best availableinformation, including the results of present value techniques.  In general, the Company contracts with thirdparties to

 

9

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fulfill most of its obligations for finalcapping, closure and post-closure. Accordingly, the fair market value of these obligations is based uponquoted and actual prices paid for similar work. The Company intends to perform some of these capping, closure andpost-closure activities using internal resources.  Where internal resources are expected to beused to fulfill an asset retirement obligation, the Company has added a profitmargin to the estimated cost of such services to better reflect their fairmarket value.  When the Company thenperforms these services internally, the added profit margin is recognized as acomponent of operating income in the period earned.  An estimate of fair value should include theprice that marketplace participants are able to receive for bearing theuncertainties in cash flows.  However,when utilizing discounted cash flow techniques, reliable estimates of marketpremiums may not be obtainable.  In thewaste industry, there is no market that exists for selling the responsibilityfor final capping, closure and post-closure independent of selling the landfillin its entirety.  Accordingly, theCompany believes that it is not possible to develop a methodology to reliablyestimate a market risk premium and have excluded a market risk premium from itsdetermination of expected cash flows for landfill asset retirement obligations.

 

Oncethe Company has determined the final capping, closure and post-closure costs,the Company then inflates those costs to the expected time of payment anddiscounts those expected future costs back to present value.  The Company inflates these costs in currentdollars until the expected time of payment using an annual inflation rate anddiscounts these costs to present value using a credit-adjusted, risk-freediscount rate.  The Company reviewed theinflation rate to be used for 2004 and determined that a rate of 2.5%, which isthe rate used by most waste industry participants, was appropriate.  The credit-adjusted, risk-free rate is basedon the risk-free interest rate on obligations of similar maturity adjusted forthe Company’s credit rating.  Changes inthe Company’s credit-adjusted, risk-free rate do not change recordedliabilities, but subsequently recognized obligations are measured using therevised credit-adjusted risk-free rate. During the three months and six months ended June 30, 2004, theCompany 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.

 

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

 

10

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

 

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

 

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

 
| ** **                        | ** ** | **Final Closure/  Post-Closure  Costs** | ** ** | **Environmental  Costs** | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|------------|------------|
|                              |       |                                    |       |                     |       |       |       |
| Balance at December 31, 2003 |       | $                                       | 19,928,909 |                     | $          | 27,527,860 |       | $ | 47,456,769 |   |
| Obligations incurred              |       | 1,532,733                               |       | 200,527                  |       | 1,733,260  |       |
| Acquisition related adjustments   |       | (42,135                                 | )          | —                   |       | (42,135    | )          |
| Obligations settled               |       | (207,941                                | )          | (1,229,197               | )          | (1,437,138 | )          |
| Revisions in estimates            |       | (191,071                                | )          | (1,177                   | )          | (192,248   | )          |
| Accretion                         |       | 923,496                                 |       | 58,920                   |       | 982,416    |       |
|                              |       |                                    |       |                     |       |       |       |
| Balance at June 30, 2004     |       | $                                       | 21,943,991 |                     | $          | 26,556,933 |       | $ | 48,500,924 |   |

 

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

 

Long-termdebt consisted of the following at June 30, 2004 and December 31,2003:

 
| ** **                                        | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|---------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| Revolving credit loan                             |       | $                       | 28,100,000  |                        | $          | 29,600,000 |   |
| Term loan                                         |       | 198,500,000             |        | 200,000,000                 |       |
| Senior subordinated notes due June 15,  2012 |       | 149,715,998             |        | 150,998,599                 |       |
| Other                                             |       | 112,870                 |        | 262,389                     |       |
| Total long-term debt                              |       | 376,428,868             |        | 380,860,988                 |       |
| Less current portion                              |       | 2,112,870               |        | 2,731,595                   |       |
|                                              |       | $                       | 374,315,998 |                        | $          | 378,129,393 |   |

 

Scheduledmaturities of long-term debt are as follows:

 
| 2004       |   | $           | 1,082,076   |   |
|------------|--------|-------------|-------------|--------|
| 2005       |   | 2,030,794   |        |
| 2006       |   | 2,000,000   |        |
| 2007       |   | 2,000,000   |        |
| 2008       |   | 30,100,000  |        |
| Thereafter |   | 339,500,000 |        |
|       |   | $           | 376,712,870 |   |

 

OnOctober 10, 2003, the Company entered into the Fifth Amended and RestatedRevolving Credit and Term Loan Agreement (the Credit Facility).  The Credit Facility is provided by asyndicate of lenders led by Bank of America Corporation (f/k/a Fleet NationalBank), as administrative agent (Bank of

 

11

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America), and LaSalle National Bank Association, as syndication agent,and includes a $200,000,000 senior secured term loan, a$200,000,000 senior secured revolving loan, and has a maximum of$80,000,000 letters of credit sub-limit. Subject to certain conditions, the Company may request an increase inthe revolving loan portion or the term loan portion of the Credit Facility ofup to $50,000,000, such that the total of the revolving loan and term loanportions would equal $450,000,000.  As ofJune 30, 2004, there was $28,100,000 (excluding $48,071,000 underlyingletters of credit) outstanding under the revolving loan portion of the CreditFacility and $123,829,000 of remaining capacity (of which $36,995,000 wasimmediately available for borrowing) under the revolving loan portion, plus amaximum of $31,929,000 underlying letters of credit.  In order to borrow under the revolving loanportion of the Credit Facility, the Company must satisfy customary conditionsincluding maintaining certain financial ratios. If a default under the indenture governing the 10.25% SeniorSubordinated Notes due 2012 (Notes) or Credit Facility should occur, theholders of the Notes or the lenders under the Credit Facility could elect todeclare 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-defaultprovisions being declared immediately due and payable and the lenders couldterminate all commitments there under. The Credit Facility is secured by a pledge of the stock of the Company’sdirect and indirect subsidiaries and a lien on substantially all of theCompany’s direct and indirect subsidiaries’ assets.  The Credit Facility also contains covenantswhich restrict the Company’s ability to, among other things, incur additionaldebt, create liens, dispose of assets, make investments, engage in transactionswith affiliates, enter into a merger or consolidation, make specified payments,including dividends, repay subordinated indebtedness and enter into certainfranchise agreements.  These limitationsare subject to certain qualifications and exceptions.

 

Pursuantto the terms of the Credit Facility, during each 12-month period commencing onOctober 1 and ending on September 30, the Company is required torepay 1.0% (except for the 12-month period prior to maturity when it isrequired to repay 94.0%) of the principal amount of the term loan portion ofits senior credit facility in quarterly installments payable on the lastbusiness day of each calendar quarter. In addition, the Company’s senior credit facility requires it to prepaythe term loan with, subject to certain conditions and exceptions, 100.0% of thenet cash proceeds it receives from any disposition of assets in excess of$5.0 million in the aggregate per year, 100.0% of the net cash proceeds itreceives from the incurrence of any permitted indebtedness (other than up to$100.0 million of additional subordinated indebtedness) and 50.0% of thenet cash proceeds it receives in connection with any issuance of the Company’sequity (other than equity the Company issues (i) in an aggregate amount not toexceed $100.0 million, (ii) as payment in a permitted acquisition or (iii)to employees, consultants or directors in connection with the exercise ofoptions under bona fide option plans). The Company is also required to prepay the term loan with the percentageof excess consolidated operating cash flow (to be calculated for each fiscalyear, and which includes, generally, consolidated EBITDA, plus or minus networking capital changes and extraordinary cash items, less the sum of(a) capital expenditures, (b)  the cash purchase price of anypermitted acquisitions, (c)  cash payments for taxes, (d) cashpayments of interest and (e)  the scheduled principal repayments ofindebtedness, in each case of clauses (a) through (e), paid during such period)corresponding to the 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%                                                                                                         |

 

12

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TheCredit Facility permits borrowings at floating interest rates based, at theCompany’s option, on the designated Eurodollar interest rate, which generallyapproximates LIBOR, or the Bank of America prime rate, in each case, plus anapplicable margin, and requires payment of an annual commitment fee based onthe unused portion of the revolving loan portion.  As of June 30, 2004, the interest rateapplicable to $28,100,000 outstanding under the revolving loan portion of theCompany’s senior credit facility was LIBOR plus 325 basis points, or4.44%.  As of June 30, 2004, theinterest rate applicable to $198,500,000 outstanding under the term loanportion of its senior credit facility was LIBOR plus 300 basis points, or4.15%.  The revolving loan portion of theCredit Facility expires on September 30, 2008 and the term loan portion ofthe Credit Facility expires on September 30, 2010.

 

InJune 2002, the Company issued $150,000,000 of the Notes in a privateplacement and registered the Notes under the Securities Act of 1933 in December 2002.  Interest is payable semi-annually onJune 15th and December 15th. The Notes are guaranteed by all of IESI’s current subsidiaries, all ofwhich are 100% owned by IESI.  Condensedconsolidating financial information is not provided because IESI has noindependent assets or operations, the subsidiary guarantees are full andunconditional and joint and several, and there are no significant restrictionson the ability of the Company or any subsidiary guarantor to obtain funds fromits subsidiaries by dividend or loan.

 

InAugust 2002, the Company entered into two interest rate swap agreements,which are effective through June 15, 2012, with two financialinstitutions.  Under each swap agreement,the fixed interest rate on $25,000,000 of the Notes effectively was convertedto an interest rate of 5.275% and 5.305%, respectively, plus an applicablefloating rate margin that is based on six month LIBOR which is readjustedsemiannually on June 15 and December 15 of each year.  On June 30, 2004, the six month LIBORrate was 1.86%.

 

InJanuary 2004, the Company entered into four interest rate swap agreements,which are effective through January 2007, with four financialinstitutions.  Under each swap agreement,the variable interest rate on $25,000,000 outstanding under the Credit Facilityeffectively was converted to a fixed interest rate of 2.58%, 2.61%, 2.71% and2.75%, respectively, plus an applicable LIBOR margin.  On June 30, 2004, the three month LIBORrate was 1.14%.

 

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

 

TheCompany’s business activities are conducted in the context of a developing andchanging statutory and regulatory framework. Governmental regulation of the waste management industry requires theCompany to obtain and retain numerous governmental permits to conduct variousaspects of its operations.  These permitsare subject to revocation, modification or denial.  The costs and other capital expenditures,which may be required to obtain or retain the applicable permits or comply withapplicable regulations, could be significant. Any revocation, modification or denial of permits could have a materialadverse effect on the Company.

 

TheCompany is subject to liability for any environmental damage that its solidwaste disposal facilities may cause to neighboring landowners or residents,particularly as a result of the contamination of soil, groundwater or surfacewater, including, in some cases, damage resulting from conditions existingprior to the acquisition of such facilities by the Company.  The Company may also be subject to liabilityfor any off-site environmental contamination caused by pollutants or hazardoussubstances whose transportation, treatment or disposal was arranged by theCompany or its predecessors.

 

Anysubstantial liability for environmental damage incurred by the Company couldhave a material adverse effect on the Company’s financial condition, results ofoperations or cash flows.  As of

 

13

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June 30, 2004, the Company was not aware of any such environmentalliabilities (other than those recorded in the Company’s consolidated financialstatements).

 

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

 

Inaddition, the Company may become party to various claims and suits pending foralleged damages to persons and property, alleged violations of certain laws andalleged liabilities arising out of matters occurring during the normaloperation of the waste management business. However, as of June 30, 2004,there were no proceedings or litigation involving the Company that the Companybelieved would have a material adverse impact on its business, financialcondition, results of operations or cash flows.

 

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

 

TheCompany had redeemable preferred stock on its balance sheet of approximately$296,934,000 as of June 30, 2004 and $283,054,000 as of December 31,2003, representing the carrying value of its preferred stock as of suchdates.  In accordancewith Emerging Issues Task Force (EITF) Topic No. D-98, *Classification and Measurement of Redeemable Securities*, theCompany has classified its preferred stock outside of permanent equity because,pursuant to the terms of such preferred stock, such preferred stock isredeemable upon the occurrence of certain transactions deemed to be liquidationevents.  Such redemption is not deemed tobe solely within the Company’s control because holders of the Company’spreferred stock currently control a majority of the votes of the Company’sboard of directors.

 

**9.****                                      ComprehensiveIncome**

 

TheCompany had comprehensive income including unrealized gains on the market valueof interest rate swaps of approximately $5,089,000 and $2,467,000 for the threeand six months ended June 30, 2004, respectively.

 

**10.****                               SegmentReporting**

 

TheCompany’s two geographic regions are the Company’s reportable segments. Thesegments provide integrated waste management services consisting of collection,transfer, disposal, and recycling services to commercial, industrial,municipal, and residential customers. Summarized financial informationconcerning the Company’s reportable segments for the three and six-month periodsended June 30 is shown in the following table:

 

14

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| ** **                                                                                             | ** ** | **South  Region** | ** ** | **Northeast  Region** | ** ** | **Corporate  Functions** | ** ** | **Total**   | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|--------------------------|------------|-------------|------------|
| **Six Months Ended  June 30, 2004**                                                               |       |              |       |                  |       |                     |       |        |       |
| Outside revenues                                                                                       |       |              |       |                  |       |                     |       |        |       |
| Collection                                                                                             |       | $                 | 77,904,874 |                  | $          | 17,685,921               |       | $           | —     |   | $ | 95,590,795 |   |
| Transfer                                                                                               |       | 2,214,919         |       | 20,811,245            |       | —                   |       | 23,026,164  |       |
| Disposal                                                                                               |       | 5,319,880         |       | 27,557,847            |       | —                   |       | 32,877,727  |       |
| Recycling                                                                                              |       | 1,578,939         |       | 2,341,748             |       | —                   |       | 3,920,687   |       |
| Other                                                                                                  |       | 424,872           |       | 1,054,451             |       | —                   |       | 1,479,323   |       |
| Total outside revenues                                                                                 |       | 87,443,484        |       | 69,451,212            |       | —                   |       | 156,894,696 |       |
| Income (loss) from operations                                                                          |       | 5,125,168         |       | 16,673,567            |       | (4,620,278               | )          | 17,178,457  |       |
| Depreciation, depletion and amortization                                                               |       | 14,897,455        |       | 15,220,706            |       | 337,925                  |       | 30,456,086  |       |
| Purchases of property and equipment                                                                    |       | 11,998,258        |       | 11,844,506            |       | 552,579                  |       | 24,395,343  |       |
| Acquisitions of waste operations and  initial development costs for newly acquired permitted landfills |       | 1,187,753         |       | —                |       | —                   |       | 1,187,753   |       |
| Goodwill acquired                                                                                      |       | 516,484           |       | —                |       | —                   |       | 516,484     |       |
| Goodwill                                                                                               |       | 91,224,003        |       | 47,628,196            |       | —                   |       | 138,852,199 |       |
| Total assets                                                                                           |       | 311,414,934       |       | 378,648,816           |       | 13,392,101               |       | 703,455,851 |       |
|                                                                                                   |       |              |       |                  |       |                     |       |        |       |
| **Six Months  Ended June 30, 2003**                                                          |       |              |       |                  |       |                     |       |        |       |
| Outside revenues                                                                                       |       |              |       |                  |       |                     |       |        |       |
| Collection                                                                                             |       | $                 | 65,938,263 |                  | $          | 16,537,330               |       | $           | —     |   | $ | 82,475,593 |   |
| Transfer                                                                                               |       | 2,396,948         |       | 20,034,490            |       | —                   |       | 22,431,438  |       |
| Disposal                                                                                               |       | 4,054,890         |       | 3,673,692             |       | —                   |       | 7,728,582   |       |
| Recycling                                                                                              |       | 1,334,686         |       | 1,907,945             |       | —                   |       | 3,242,631   |       |
| Other                                                                                                  |       | 343,704           |       | 91,437                |       | —                   |       | 435,141     |       |
| Total outside revenues                                                                                 |       | 74,068,491        |       | 42,244,894            |       | —                   |       | 116,313,385 |       |
| Income (loss) from operations                                                                          |       | 7,430,468         |       | 5,117,104             |       | (4,249,994               | )          | 8,297,578   |       |
| Depreciation, depletion and amortization                                                               |       | 12,214,597        |       | 4,014,634             |       | 356,343                  |       | 16,585,574  |       |
| Purchases of property and equipment                                                                    |       | 15,479,159        |       | 4,258,320             |       | 172,152                  |       | 19,909,631  |       |
| Acquisitions of waste operations and  initial development costs for newly acquired permitted landfills |       | 12,288,618        |       | —                |       | —                   |       | 12,288,618  |       |
| Goodwill acquired                                                                                      |       | 6,465,553         |       | —                |       | —                   |       | 6,465,553   |       |
| Goodwill                                                                                               |       | 88,634,596        |       | 47,628,196            |       | —                   |       | 136,262,792 |       |
| Total assets                                                                                           |       | 279,743,527       |       | 155,117,037           |       | 16,788,696               |       | 451,649,260 |       |
|                                                                                                   |       |              |       |                  |       |                     |       |        |       |
| **Three Months Ended  June 30, 2004**                                                             |       |              |       |                  |       |                     |       |        |       |
| Outside  revenues                                                                                      |       |              |       |                  |       |                     |       |        |       |
| Collection                                                                                             |       | $                 | 40,032,696 |                  | $          | 9,062,058                |       | $           | —     |   | $ | 49,094,754 |   |
| Transfer                                                                                               |       | 1,154,240         |       | 11,127,305            |       | —                   |       | 12,281,545  |       |
| Disposal                                                                                               |       | 2,682,071         |       | 15,512,506            |       | —                   |       | 18,194,577  |       |
| Recycling                                                                                              |       | 870,202           |       | 1,222,384             |       | —                   |       | 2,092,586   |       |
| Other                                                                                                  |       | 309,165           |       | 859,238               |       | —                   |       | 1,168,403   |       |
| Total outside revenues                                                                                 |       | 45,048,374        |       | 37,783,491            |       | —                   |       | 82,831,865  |       |
| Income (loss) from operations                                                                          |       | 2,866,930         |       | 10,066,639            |       | (2,200,861               | )          | 10,732,708  |       |
| Depreciation, depletion and amortization                                                               |       | 7,561,539         |       | 8,293,879             |       | 166,447                  |       | 16,021,865  |       |
| Purchases of property and equipment                                                                    |       | 7,085,395         |       | 6,512,966             |       | 428,081                  |       | 14,026,442  |       |
| Acquisitions of waste operations and  initial development costs for newly acquired permitted landfills |       | 1,187,753         |       | —                |       | —                   |       | 1,187,753   |       |
| Goodwill acquired                                                                                      |       | 516,484           |       | —                |       | —                   |       | 516,484     |       |
|                                                                                                   |       |              |       |                  |       |                     |       |        |       |
| **Three Months  Ended June 30, 2003**                                                        |       |              |       |                  |       |                     |       |        |       |
| Outside revenues                                                                                       |       |              |       |                  |       |                     |       |        |       |
| Collection                                                                                             |       | $                 | 34,247,151 |                  | $          | 8,434,038                |       | $           | —     |   | $ | 42,681,189 |   |
| Transfer                                                                                               |       | 1,230,640         |       | 10,707,210            |       | —                   |       | 11,937,850  |       |
| Disposal                                                                                               |       | 2,420,192         |       | 2,131,467             |       | —                   |       | 4,551,659   |       |
| Recycling                                                                                              |       | 662,207           |       | 896,595               |       | —                   |       | 1,558,802   |       |
| Other                                                                                                  |       | 152,107           |       | 17,907                |       | —                   |       | 170,014     |       |
| Total outside revenues                                                                                 |       | 38,712,297        |       | 22,187,217            |       | —                   |       | 60,899,514  |       |
| Income (loss) from operations                                                                          |       | 3,904,815         |       | 3,177,848             |       | (2,221,755               | )          | 4,860,908   |       |
| Depreciation, depletion and amortization                                                               |       | 6,268,615         |       | 2,267,650             |       | 174,852                  |       | 8,711,117   |       |
| Purchases of property and equipment                                                                    |       | 7,542,352         |       | 1,784,835             |       | 49,779                   |       | 9,376,966   |       |
| Acquisitions of waste operations and  initial development costs for newly acquired permitted landfills |       | 10,907,733        |       | —                |       | —                   |       | 10,907,733  |       |
| Goodwill acquired                                                                                      |       | 6,356,044         |       | —                |       | —                   |       | 6,356,044   |       |

 

15

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Seasonalityand weather can temporarily affect some of the Company’s revenue andexpenses.  The Company generallyexperiences lower construction and demolition waste volumes during the wintermonths when the construction industry slows down.  Frequent and/or heavy snow and ice storms 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**

 

OnJanuary 28, 2004, the Compensation Committee of the Board of Directors ofthe Company granted non-qualified stock options to purchase an aggregate of79,794 shares of the Company’s Class A voting common stock to certain employeesand directors of the Company pursuant to the Company’s 1999 Stock Option Plan,as amended (the Plan).  The options weregranted at an exercise price of $100.00 per share, which was equal to orgreater than the estimated fair value of the underlying shares.  On the same date, the Board of Directors alsoapproved an amendment to the Plan increasing the number of options authorizedto 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.

 

Thefollowing schedule reflects the pro forma impact on net income (loss) ofaccounting for the Company’s stock option grants using SFAS No. 123,“Accounting for Stock-Based Compensation,” which would result in therecognition of compensation expense for the fair value of stock option grantsas computed using the Black-Scholes option-pricing model.

 
| ** **                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| **For the  six months ended June 30,**   |       |     |       |     |       |
| Reported net income (loss)                    |       | $        | 1,644,471  |     | $          | (2,055,542 | ) |
| Less: compensation expense per SFAS No. 123   |       | 106,003  |       | 70,764   |       |
| Pro forma net income (loss)                   |       | $        | 1,538,468  |     | $          | (2,126,306 | ) |
|                                          |       |     |       |     |       |
| **For the three  months ended June 30,** |       |     |       |     |       |
| Reported net income (loss)                    |       | $        | 2,865,055  |     | $          | (23,921 | ) |
| Less: compensation expense per SFAS No.  123, |       | 55,666   |       | 35,382   |       |
| Pro forma net income (loss)                   |       | $        | 2,809,389  |     | $          | (59,303 | ) |

 

16

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

 

*Youshould read the following discussion in conjunction with our unauditedconsolidated financial statements and the related notes included elsewhere inthis Quarterly Report on Form 10-Q.*

 

**General**

 

We areone of the leading regional, non-hazardous solid waste management companies inthe United States.  We providecollection, transfer, disposal and recycling services in two geographicregions: our South Region, consisting of Texas, Louisiana, Oklahoma, Arkansasand Missouri; and our Northeast Region, consisting of New York, New Jersey,Pennsylvania and Maryland.  In 2003, wewere the tenth largest service provider based on revenue in the approximately$42.0 billion non-hazardous solid waste management industry in the UnitedStates, and would have been the eighth largest provider after giving thefull-year effect to our 2003 acquisitions.

 

**Critical Accounting Policies**

 

Ourconsolidated financial statements are based on the selection of accountingpolicies and application of significant accounting estimates, which requiremanagement to make significant estimates and assumptions.  For a detailed discussion of our criticalaccounting estimates, please refer to Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” of our Annual Reporton Form 10-K for the fiscal year ended December 31, 2003. There were no material changes relating to our critical accountingestimates during the three months ended June 30, 2004.

 

**Sources of Revenue**

 

Ourrevenue consists primarily of fees we charge customers for solid wastecollection, transfer and disposal and recycling services.  We frequently perform these services underservice agreements with businesses, contracts with municipalities, landlords orhomeowners’ associations, or subscription arrangements with homeowners.

 

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

 
| ** ** | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **2004(1)**                         | ** ** | **2003**                              | ** ** | **2004(2)** | ** ** | **2003** | ** ** |
|       |       |                                |       |                                  |       |   |   |   |   |
| Collection |       | 61.1                                | %          | 70.8                                  | %          | 59.6 | % | 70.1 | % |
| Transfer   |       | 14.7                                | %          | 19.3                                  | %          | 14.8 | % | 19.6 | % |
| Disposal   |       | 21.3                                | %          | 6.6                                   | %          | 22.6 | % | 7.5 | % |
| Recycling  |       | 2.5                                 | %          | 2.8                                   | %          | 2.5 | % | 2.5 | % |
| Other      |       | 0.4                                 | %          | 0.5                                   | %          | 0.5 | % | 0.3 | % |
| Total      |       | 100.0                               | %          | 100.0                                 | %          | 100.0 | % | 100.0 | % |

 

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(1)               The increase in thepercentage of our total reported revenue attributable to our disposal servicesduring the six months ended June 30, 2004 primarily resulted from ouracquisition on October 9, 2003 of the Seneca Falls, New York landfill inour Northeast Region, and the addition in our South Region of three operatinglandfills, including two greenfield sites acquired in 2002, which we opened inAugust 2003, and an operating landfill which we purchased inJuly 2003.  Excluding the effects ofthese four landfills, the disposal percentage for the

 

18

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six months ended June 30,2004 would have been substantially the same as the disposal percentage for thesix months ended June 30, 2003. During the six months ended June 30, 2004, our total revenueincreased by an aggregate of $40.6 million from the corresponding six-month periodin 2003.  This increase primarilyresulted from increases in our revenue from collection services ($13.4 millionincrease from the corresponding six-month period in 2003), transfer services($0.6 million increase from the corresponding six-month period in 2003),disposal services ($25.7 million increase from the corresponding six-monthperiod in 2003) and recycling services ($0.7 million increase from thecorresponding six-month period in 2003).

 

(2)               The increase in thepercentage of our total reported revenue attributable to our disposal servicesduring the three months ended June 30, 2004 primarily resulted from ouracquisition on October 9, 2003 of the Seneca Falls, New York landfill inour Northeast Region, and the addition in our South Region of three operatinglandfills, including two greenfield sites acquired in 2002, which we opened inAugust 2003, and an operating landfill which we purchased inJuly 2003.  Excluding the effects ofthese four landfills, the disposal percentage for the three months endedJune 30, 2004 would have been substantially the same as the disposalpercentage for the three months ended June 30, 2003.  During the three months ended June 30,2004, our total revenue increased by an aggregate of $21.9 million from thecorresponding three-month period in 2003. This increase primarily resulted from increases in our revenue fromcollection services ($6.7 million increase from the corresponding three-monthperiod in 2003), transfer services ($0.3 million increase from thecorresponding three-month period in 2003), disposal services ($14.2 millionincrease from the corresponding three-month period in 2003) and recyclingservices ($0.5 million increase from the corresponding three-month period in2003).

 

Weestimate that more than 40% of our South Region’s revenue was generated from 273municipal contracts during 2003 and 280 municipal contracts during the firstsix months of 2004.  Our contracts withNew York City represented in the aggregate approximately 30% of our NortheastRegion’s, and approximately 11% of our overall, revenue in 2003 andapproximately 21% of our Northeast Region’s, and approximately 9% of ouroverall, revenue in the first six 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.

 

Wetypically determine the prices for our collection services by the collectionfrequency and level of service, route density, volume, weight and type of wasteor recyclable material collected, type of equipment and containers that wefurnish, the distance to the disposal or processing facility, the cost ofdisposing or processing, and prices charged by competitors for similar services. The terms of our contracts sometimeslimit our ability to pass on cost increases. Long-term solid waste collection contracts typically contain a formula,usually based on the consumer price index, which automatically adjusts fees,usually on an annual basis, to cover increases in some, but not all of ouroperating costs.

 

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

 

19

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Manyof our landfills are assessed state, county or local community fees based onthe volume of tons or yards disposed of during a defined period, usually eithermonthly or quarterly.  The types andamounts of fees charged can vary widely, but typically a state fee is uniformlycharged to all landfills within a state. We report our landfill revenue net of all these fees.  Since July 2002, the Commonwealth ofPennsylvania has imposed an additional disposal fee of $4.00 per ton on allsolid waste disposed of at MSW landfills in Pennsylvania, raising the totaldisposal fees assessed on MSW landfill operators under Pennsylvania state lawto a minimum of $7.25 per ton.  In addition,Pennsylvania and Virginia are both currently considering new legislation thatwould impose a new fee of up to an additional $5.00 on each ton of wastedisposed of at landfills in their respective states.  Other states could follow this trend as well.

 

EffectiveSeptember 2003, New York City revised its waste collection servicesmaximum rate to permit haulers to charge commercial customers either thepre-existing $12.20 per loose yard or a new rate of $160.00 per ton.  The disposal facilities inand around New York City charge by the ton.  However, prior to September 2003, themaximum rate was imposed on a per loose yard basis only.  Accordingly, it was not economical for us toservice customers whose waste was particularly dense.  As a result, until recently, our New YorkCity collection operations focused on customers with light loose garbage andcustomers with a large paper recycling component, which enabled us to reduceour cost of disposal.  The new tonnagerate will enable our New York City collection operations to service allcustomers in all areas in which we operate.

 

NewYork City awarded us two new three-year contracts, effectiveNovember 2003, each with two optional one-year renewals, at the option ofthe City, which collectively provide for us to transfer and dispose of up to anaggregate 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.

 

During2002, New York City announced changes to its Solid Waste Management Plan,pursuant to which it planned to utilize and upgrade its existing marinetransfer station system instead of private transfer stations to process andtransfer its residential waste stream of between 11,000 and 12,000 tons of MSWper day.  New York City initiallyintended to implement these changes by retrofitting and repermitting its marinetransfer stations by 2008 so that the stations could containerize the City’sresidential MSW on site and then transport the loaded containers to ultimatedisposal sites by alternative transportation methods, such as barge, rail andtruck.  However, during 2003, New YorkCity determined that this plan was not feasible based on estimates of costsnecessary to complete the plan, and decided to seek proposals from privateindustry with respect to the transfer and disposal of New York City’sresidential waste stream.  In early 2004,New York City requested proposals to receive, transfer, transport and disposethe City’s residential waste stream.  NewYork City also requested expressions of interest to provide waste disposalcapacity in New York State.  We submittedour proposals in late March 2004, and the City is currently evaluating allproposals and expressions of interest.  NewYork City has not provided timelines for award or implementation dates.

 

**Cost Structure**

 

Ouroperating expenses include labor, fuel, equipment maintenance, “tipping fees”paid to third-party transfer stations and disposal facilities, workers’compensation, vehicle insurance, third-party transportation expenses andaccretion expense.

 

Wemonitor the fluctuation in fuel prices and, from time to time, if this costincreases at a higher rate than inflation, we generally pass the additionalcost on to our customers.

 

20

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Ourbusiness strategy is to develop vertically integrated operations to internalizethe waste that we handle and thus realize higher margins from ouroperations.  By disposing of waste at ourlandfills, we retain the margin generated through disposal operations thatwould otherwise be earned by third-party landfills.  As of June 30, 2004, we internalizedapproximately 59% 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 theoperators of third-party landfills increase their “tipping fees,” we would seekto pass along these increases to our customers, but if we were unable to do so,our profitability would be adversely affected. If these operators discontinue their arrangements with us and we cannotfind alternative disposal sites with favorable arrangements, our costs ofdisposal may rise.  Also, our failure toobtain the required permits to establish new landfills and transfer stations orexpand our existing landfills and transfer stations could hinder our businessstrategy to develop vertically integrated operations.  Failure to expand capacity could lead todecreased profitability as a result of the increased “tipping fees” we wouldhave to pay to third-party landfills.

 

Weoperate 23 transfer stations, which reduce our costs by allowing us to use collectionpersonnel and equipment more efficiently and to consolidate waste to gainvolume discounts on disposal rates.

 

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

 

Depreciation,depletion and amortization expenses include depreciation of fixed assets overtheir estimated useful lives using the straight-line method, depletion of landfillcosts using life cycle accounting and the units-of-consumption method, andamortization of intangible assets other than goodwill using the straight-linemethod.  In allocating the purchase priceof an acquired 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 intangible assetsother than goodwill by considering, among other things, the present value ofthe cash flows associated with those assets.

 

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

 

EffectiveJanuary 1, 2003, we adopted SFAS No. 143, “Accounting for Asset RetirementObligations.”  Under SFAS No. 143, costsassociated with final capping activities that occur during the operating lifeof a landfill, as well as closure and post-closure activities, are accountedfor as asset retirement obligations on a discounted basis.  We recognize landfill retirement obligationsthat relate to closure and post-closure activities over the operating life of alandfill as landfill airspace is consumed and the obligation is incurred.  We recognize our final capping obligations ona discrete basis for each expected future final capping event over the numberof tons of waste that each final capping event is expected to cover.  The landfill retirement obligations areinitially measured at estimated fair value. Fair value is measured on a present value basis, using a credit-adjusted,risk-free rate of 7.86% during 2004.

 

21

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Accretion is recorded on all landfill retirementobligations 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 of wastethat each final capping event covers.

 

Weperiodically evaluate the value and future benefits of our goodwill and otherintangible assets.  For intangible assetsother than goodwill, we assess the recoverability from future operations usingcash flows of the related assets as measures. Under this approach, the carrying value is reduced if it becomesprobable that our best estimate of expected future cash flows from the relatedintangible assets would be less than the carrying amount of the intangible assets.  As of June 30, 2004, there were noadjustments to the carrying amounts of intangibles other than goodwillresulting from these evaluations.

 

Wetest goodwill for impairment using the two-step process prescribed in SFASNo. 142.  The first step is a screenfor potential impairment and the second step measures the amount of theimpairment, if any.  We performed ourannual impairment test during the fourth quarter of 2003 and incurred noimpairment.  As of June 30, 2004,goodwill and other intangible assets represented approximately 2.0% of totalassets, 56.8% of redeemable preferred stock and 76.7% of the sum of ourredeemable preferred stock and stockholders’ equity (deficit).

 

**Seasonality**

 

Seasonalityand weather can temporarily affect our revenue and expenses.  We generally experience lower C&D wastevolumes during the winter months when the construction industry is lessactive.  Frequent and/or heavy snow andice storms can adversely affect our revenue in both our South and NortheastRegions, primarily by interfering with our transfer station and landfilloperations which are volume based, and the productivity of our collectionoperations.  Additionally, in our SouthRegion, higher than normal rainfall and more frequent rain storms over a 30 to90 day period can put additional stress on the construction industry, loweringthe volumes of waste we handle. Significantly below normal rainfall can lead to higher levels ofconstruction activity, increasing our volumes.

 

**Impact of Inflation**

 

Todate, inflation has not significantly affected our operations.  Consistent with industry practice, many ofour contracts allow us to pass through certain costs to our customers,including increases in landfill “tipping fees” and, in some cases, fuelcosts.  Accordingly, we believe that wewould be able to increase prices to offset many cost increases that result frominflation.  However, competitivepressures and the terms of certain of our long-term contracts may require us toabsorb at least part of these cost increases, particularly during periods ofhigh inflation.

 

**Acquisitions**

 

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

 

Inaccordance with GAAP, we capitalize some expenditures and advances relating topending acquisitions.  For any pendingacquisition that is not consummated, we charge any such expenditures 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 ofour acquisitions have been accounted for as purchases and, accordingly, only theoperations of acquired companies since their respective acquisition dates areincluded in our consolidated financial statements.  These acquisitions were financed through acombination of funds borrowed under our senior credit facility and proceedsfrom private offerings of shares of our preferred stock.  We expect to be able to finance any futureacquisitions with cash provided from operations, borrowings under our seniorcredit facility, debt or equity offerings, or some combination of theforegoing.

 

*2004.* During the six months ended June 30, 2004, the Company acquired thehauling assets of three solid waste management companies for an aggregatepurchase price of approximately $1.3 million consisting of cash and liabilitiesassumed.

 

**Results of Operations**

 

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

 
| ** **                                           | ** ** | **Six Months Ended June 30,** | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2004**                           | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **$**                              | ** ** | **%**                                | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
|                                                 |       |                               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| South Region                                         |       | 87,444                             |       | 55.7                                 |       | 74,068 |   | 63.7 |   | 45,048 |   | 54.4 |   | 38,713 |   | 63.6 |   |
| Northeast Region                                     |       | 69,451                             |       | 44.3                                 |       | 42,245 |   | 36.3 |   | 37,784 |   | 45.6 |   | 22,187 |   | 36.4 |   |
| Services revenue                                     |       | 156,895                            |       | 100.0                                |       | 116,313 |   | 100.0 |   | 82,832 |   | 100.0 |   | 60,900 |   | 100.0 |   |
| Operating expense                                    |       | 90,250                             |       | 57.5                                 |       | 76,633 |   | 65.9 |   | 46,516 |   | 56.2 |   | 39,591 |   | 65.0 |   |
| General and administrative                           |       | 19,011                             |       | 12.1                                 |       | 14,797 |   | 12.7 |   | 9,562 |   | 11.5 |   | 7,737 |   | 12.7 |   |
| Depreciation, depletion and amortization             |       | 30,456                             |       | 19.4                                 |       | 16,585 |   | 14.3 |   | 16,022 |   | 19.3 |   | 8,711 |   | 14.3 |   |
| Income from operations                               |       | 17,178                             |       | 11.0                                 |       | 8,298 |   | 7.1 |   | 10,732 |   | 13.0 |   | 4,861 |   | 8.0 |   |
| Interest expense, net                                |       | (13,769                            | )          | (8.8                                 | )          | (8,958 | ) | (7.7 | ) | (6,881 | ) | (8.3 | ) | (4,628 | ) | (7.6 | ) |
| Other income (expense), net                          |       | (695                               | )          | (0.4                                 | )          | (114 | ) | (0.1 | ) | 84 |   | 0.1 |   | (116 | ) | (0.2 | ) |
| Income tax benefit (expense)                         |       | (1,070                             | )          | (0.7                                 | )          | 249 |   | 0.2 |   | (1,070 | ) | (1.3 | ) | (141 | ) | (0.2 | ) |
| Cumulative effect of change in accounting  principle |       | —                             |       | —                               |       | (1,531 | ) | (1.3 | ) | — |   | — |   | — |   | — |   |
| Net income (loss)                                    |       | 1,644                              |       | 1.1                                  |       | (2,056 | ) | (1.8 | ) | 2,865 |   | 3.5 |   | (24 | ) | (0.0 | ) |

 

**Three Months Ended June 30, 2004 Compared WithThree Months Ended June 30, 2003**

 

*Revenue.** *Ourrevenue increased by $21.9 million, or 36.0%, to $82.8 million duringthe three months ended June 30, 2004 from $60.9 million during thethree months ended June 30, 2003. Acquisitions completed since April 2003 contributed$16.9 million, or 27.8%, to the increase in our revenue during the threemonths ended June 30, 2004. Excluding incremental revenue from acquisitions, our revenue increasedby $5.0 million, or 8.2%.  Our newbusiness, from both new municipal contracts and increased sales from existingoperations, contributed 3.7% of such increase, while price increasescontributed 4.5%.  In our South Region,our revenue increased by $6.3 million, or 16.4%, to $45.0 millionduring the three months ended June 30, 2004 from $38.7 million duringthe corresponding three-month

 

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period in 2003.  Inour Northeast Region, our revenue increased by $15.6 million, or 70.3%, to$37.8 million during the three months ended June 30, 2004 from$22.2 million during the corresponding three-month period in 2003.

 

*Operating Expenses.* Our operating expenses increased by $6.9 million, or 17.5%, to$46.5 million during the three months ended June 30, 2004 from$39.6 million during the three months ended June 30, 2003.  Operating expenses as a percentage of ourrevenue decreased by 8.8% to 56.2% during the three months ended June 30,2004 from 65.0% during the three months ended June 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 June 30, 2004 was primarily attributable toour Seneca Falls, New York landfill acquisition consummated inOctober 2003, which resulted in a substantial increase in our revenue anda less significant increase in our operating expenses.

 

*General and Administrative.** *Ourgeneral and administrative expenses increased by $1.8 million, or 23.6%,to $9.6 million during the three months ended June 30, 2004 from $7.7million during the three months ended June 30, 2003.  General and administrative expenses as apercentage of our revenue decreased by 1.2% to 11.5% during the three monthsended June 30, 2004 from 12.7% during the three months ended June 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 collection operations.

 

*Depreciation, Depletion and Amortization.** *Ourdepreciation, depletion and amortization expenses increased by$7.3 million, or 83.9%, to $16.0 million during the three monthsended June 30, 2004 from $8.7 million during the three months endedJune 30, 2003.  Depreciation,depletion and amortization as a percentage of our revenue increased by 5.0% to19.3% during the three months ended June 30, 2004 from 14.3% during thethree months ended June 30, 2003. This increase resulted primarily from the inclusion of depreciation,depletion and amortization expenses related to businesses acquired in 2003 anddepreciation of capital assets purchased for internal growth.  The Seneca Falls, New York landfill weacquired in October 2003 increased our depreciation, depletion andamortization expenses by $4.8 million during the three months endedJune 30, 2004.  During 2003, we alsoadded three operating landfills, including two greenfieldsites acquired in 2002 which we opened in August 2003 and an operatinglandfill which we purchased in July 2003, which have a higher component ofdepreciation, depletion and amortization expenses than a typical haulingoperation.

 

*Income from Operations.** *Our incomefrom operations increased by $5.8 million, or 120.8%, to $10.7 millionduring the three months ended June 30, 2004 from $4.9 million duringthe three months ended June 30, 2003. Income from operations as a percentage of our revenue increased by 5.0%to 13.0% during the three months ended June 30, 2004 from 8.0% during thethree months ended June 30, 2003.  Theincrease in income from operations was attributable to acquisitions closed in2003, particularly our Seneca Falls, New York landfill acquisition, priceincreases, increased internalization of collection volumes into the landfillswe operate and internal growth, partially offset by additional depreciation,depletion and amortization expenses related to such acquisitions and internalgrowth.

 

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*InterestExpense, Net. *Our interest expense, net, increased$2.3 million, or 48.7%, to $6.9 million during the three months endedJune 30, 2004 from $4.6 million during the three months endedJune 30, 2003.  Interest expense,net, as a percentage of our revenue, increased to 8.3% during the three monthsended June 30, 2004 from 7.6% during the three months ended June 30,2003.  This increase was attributable tohigher debt levels during the three months ended June 30, 2004 as comparedto the same period in 2003, primarily due to our acquisition of the SenecaFalls, New York landfill in October 2003 and other smaller acquisitionsclosed during 2003.

 

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

 

*IncomeTax Benefit (Expense). *Our income tax expense increased by $1.0million to $1.1 million during the three months ended June 30, 2004 from$0.1 million during the three months ended June 30, 2003.  During the three-month period endedJune 30, 2004, we recognized in our consolidated statement of operationsan amount such that the effective income tax rate for the six months endedJune 30, 2004 approximates our estimated 2004 effective tax rate.  The difference in income taxes computed atthe statutory rate and reported income taxes for the three months endedJune 30, 2004 is also due primarily to state and local income taxes andreduced by an additional tax benefit from a reduction in the valuationallowance related to deferred tax assets.

 

**Six Months Ended June 30, 2004 Compared WithSix Months Ended June 30, 2003**

 

*Revenue.** *Ourrevenue increased by $40.6 million, or 34.9%, to $156.9 millionduring the six months ended June 30, 2004 from $116.3 million duringthe six months ended June 30, 2003. Acquisitions completed since January 2003 contributed$32.0 million, or 27.5%, to the increase in our revenue during the sixmonths ended June 30, 2004. Excluding incremental revenue from acquisitions, our revenue increasedby $8.6 million, or 7.4%.  Our newbusiness, from both new municipal contracts and increased sales from existingoperations, contributed 2.9% of such increase, while price increasescontributed 4.5%.  In our South Region,our revenue increased by $13.3 million, or 18.1%, to $87.4 millionduring the six months ended June 30, 2004 from $74.1 million duringthe corresponding six-month period in 2003. In our Northeast Region, our revenue increased by $27.3 million, or64.4%, to $69.5 million during the six months ended June 30, 2004from $42.2 million during the corresponding six-month period in 2003.

 

*Operating Expenses.* Our operating expenses increased by $13.7 million, or 17.8%, to$90.3 million during the six months ended June 30, 2004 from$76.6 million during the six months ended June 30, 2003.  Operating expenses as a percentage of ourrevenue decreased by 8.4% to 57.5% during the six months ended June 30,2004 from 65.9% during the six months ended June 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 three months ended June 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.** *Ourgeneral and administrative expenses increased by $4.2 million, or 28.5%,to $19.0 million during the six months ended June 30, 2004 from $14.8million during the six months ended June 30, 2003.  General and administrative expenses as apercentage of our revenue decreased by 0.6% to 12.1% during the six monthsended June 30, 2004 from 12.7% during the six months ended June 30,2003.  Our general and administrativeexpenses increased as a result of our

 

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employment of additional personnel from companies acquired andadditional corporate and regional overhead which was necessary to accommodate ourinternal growth from our collection operations. In addition, during the six months ended June 30, 2004, we recordeda $0.1 million write-off related to certain costs incurred in connection withaborted acquisition transactions. We also incurred $0.1 million of accountingand legal costs related to the investigation at one of our collection divisionsin our South Region, as described in more detail in Part I. Item 4. “Controls and Procedures” of this Quarterly Report on Form 10-Q.

 

*Depreciation, Depletion and Amortization.** *Ourdepreciation, depletion and amortization expenses increased by$13.9 million, or 83.6%, to $30.5 million during the six months endedJune 30, 2004 from $16.6 million during the six months endedJune 30, 2003.  Depreciation,depletion and amortization as a percentage of our revenue increased by 5.1% to19.4% during the six months ended June 30, 2004 from 14.3% during the sixmonths ended June 30, 2003.  Thisincrease resulted primarily from the inclusion of depreciation, depletion andamortization expenses related to businesses acquired in 2003 and depreciationof capital assets purchased for internal growth.  The Seneca Falls, New York landfill weacquired in October 2003 increased our depreciation, depletion andamortization expenses by $9.3 million during the six months endedJune 30, 2004.  During 2003, we alsoadded three operating landfills, including two greenfieldsites acquired in 2002 which we opened in August 2003 and an operatinglandfill which we purchased in July 2003, which have a higher component ofdepreciation, depletion and amortization expenses than a typical haulingoperation.  Additionally, depletionexpense related to the Bethlehem landfill expansion permit we obtained in April 2003,which increased our daily permitted volume at the landfill from 750 tons to1,375 tons, resulted in an increase to depletion expense for the six monthsended June 30, 2004 of $0.5 million.

 

*Income from Operations.** *Our incomefrom operations increased by $8.9 million, or 107.0%, to $17.2 millionduring the six months ended June 30, 2004 from $8.3 million duringthe six months ended June 30, 2003. Income from operations as a percentage of our revenue increased by 3.9%to 11.0% during the six months ended June 30, 2004 from 7.1% during thesix months ended June 30, 2003.  Theincrease in income from operations was attributable to acquisitions closed in2003, particularly our Seneca Falls, New York landfill acquisition, priceincreases, increased internalization of collection volumes into the landfillswe operate and internal growth, partially offset by additional depreciation,depletion and amortization expenses related to such acquisitions, the Bethlehemlandfill expansion permit and internal growth.

 

*InterestExpense, Net. *Our interest expense, net, increased$4.8 million, or 53.7%, to $13.8 million during the six months endedJune 30, 2004 from $9.0 million during the six months endedJune 30, 2003.  Interest expense,net, as a percentage of our revenue, increased to 8.8% during the six monthsended June 30, 2004 from 7.7% during the six months ended June 30,2003.  This increase was attributable tohigher debt levels during the six months ended June 30, 2004 as comparedto the same period in 2003, primarily due to our acquisition of the SenecaFalls, New York landfill in October 2003 and other smaller acquisitionsclosed during 2003.

 

*OtherIncome (Expense), Net. *Our other expense increased by $0.6million to $0.7 million during the six months ended June 30, 2004 from$0.1 million during the six months ended June 30, 2003.  The increase was primarily the result of anunrealized loss related to a $0.6 million decrease in the fair value of an oldcorrugated cardboard futures contract and additional state franchise taxes.

 

*IncomeTax Benefit (Expense). *Our income tax benefit (expense)decreased by $1.3 million to an expense of $1.1 million during the six monthsended June 30, 2004 from a benefit of $0.2 million during the six monthsended June 30, 2003.  For the sixmonth period ended June 30, 2004, we recognized in our consolidatedstatement of operations an amount such that the effective income tax rate forthe six months

 

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ended June 30, 2004 approximates our estimated 2004effective tax rate.  The difference inincome taxes computed at the statutory rate and reported income taxes for thesix months ended June 30, 2004 is also due primarily to state and localincome taxes.

 

*Cumulative Effect of Change in AccountingPrinciple.** *During the six months ended June 30, 2003, werecorded an after-tax expense of $1.5 million from a cumulative effect ofa change in accounting principle related to our adoption of SFAS No. 143 onJanuary 1, 2003.  For moreinformation on SFAS No. 143, please refer to Note 2 in our audited consolidatedfinancial statements included in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2003.

 

**Liquidity and Capital Resources**

 

***CashFlow***

 

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

 
| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| Net cash provided by operating activities            |       | $                                   | 28,157     |   | $ | 14,649 |   |
|                                                 |       |                                |       |   |   |
| Net cash used in investing activities                |       | $                                   | (26,089    | ) | $ | (32,922 | ) |
| Net cash provided by (used in) financing  activities |       | $                                   | (3,150     | ) | $ | (18,658 | ) |

 

Duringthe six months ended June 30, 2004, net cash used in investing activitieswas $26.1 million.  Of this amount,$1.2 million was used for the acquisition of businesses.  Cash used for capital expenditures during thesix months ended June 30, 2004 was $23.2 million, which wasprincipally for investments in fixed assets, consisting primarily of trucks,containers, landfill and transfer station equipment, and landfill constructionprojects.  Net cash used in financingactivities during the six months ended June 30, 2004 was $3.2 million,which consisted of a net borrowing decrease under our senior credit facility.

 

Duringthe six months ended June 30, 2003, net cash used in investing activitieswas $32.9 million.  Of this amount,$8.6 million was used for the acquisition of businesses and $3.7 million wasused for the initial development costs for two permitted landfills acquired in2002.  Cash used for capital expendituresduring the six months ended June 30, 2003 was $18.9 million, whichwas principally for investments in fixed assets, consisting primarily oftrucks, containers, landfill and transfer station equipment, and landfillconstruction projects.  Net cash providedby financing activities during the six months ended June 30, 2003 was$18.7 million, which consisted of a net borrowing increase under oursenior credit facility of $19.1 million, offset by debt issuance costs of$0.4 million.

 

Thefollowing table, for the periods indicated, summarizes the components of thereconciliation of our debt balances:

 
| ** **                                                                                                | ** ** | **Six Months Ended  June 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)                                                  |       | (3,761                              | )          | 5,220 |   |
| Acquisitions and divestitures                                                                             |       | 1,188                               |       | 12,289 |   |
| Acquisition-related and other expenditures                                                                |       | 506                                 |       | 765 |   |
| Debt issue costs                                                                                          |       | —                              |       | 436 |   |
| Increase (decrease)  in cash                                                                         |       | (1,082                              | )          | 385 |   |
| Increase (decrease) related to the change  in fair value of interest rate swap from   long-term debt |       | (1,283                              | )          | 1,505 |   |
|                                                                                                      |       |                                |       |   |   |
| Debt balance at end of period                                                                             |       | $                                   | 376,429    |   | $ | 219,171 |   |

 

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(1)               Free cash flow(surplus or deficit) before acquisitions is not a measure of liquidity,operating performance or cash flow from operating activities under GAAP.  Free cash flow before acquisitions is definedas net cash provided by operating activities, less capital expenditures (otherthan for acquisitions) and capitalized interest.  We believe that the presentation of free cashflow before acquisitions is useful to investors because it allows them toassess and understand our ability to meet debt service requirements and the amountof recurring cash generated from operations after expenditures for fixedassets.  Free cash flow beforeacquisitions does not represent our residual cash flow available fordiscretionary expenditures because we have mandatory debt service requirements andother required expenditures that are not deducted from free cash flow deficitbefore acquisitions.  Free cash flowbefore acquisitions does not capture debt repayment and/or the receipt ofproceeds from the issuance of debt.  Weuse free cash flow before acquisitions as a measure of recurring operating cashflow.  We do not intend for free cashflow before acquisitions to be considered in isolation or as a substitute forGAAP measures.  Other companies maydefine this financial measure differently. The most directly comparable GAAP measure to free cash flow beforeacquisitions is net cash provided by operating activities.  Following is a reconciliation of free cashflow before acquisitions to net cash provided by operating activities:

 
| ** **                                            | ** **                                    | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|-----------------------------------------------|-------------------------------------|------------|
| ** **                                            | ** **                                    | **2004**                            | ** ** | **2003** | ** ** |
| ** **                                            | ** **                                    | **(in thousands)**                  | ** ** |
| Free cash flow surplus (deficit) before  acquisitions |                                          | $                                   | 3,761      |   | $ | (5,220 | ) |
| Add:                                                  | Capital expenditures, excluding  acquisitions |                                | 23,220     |   | 18,848 |   |
|                                                  | Capitalized interest                          |                                | 1,175      |   | 1,021 |   |
|                                                  | Other                                         |                                | 1          |   | — |   |
| Net cash provided by operating activities             |                                          | $                                   | 28,157     |   | $ | 14,649 |   |

 

***Liquidity***

 

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

 

OnOctober 10, November 20, and December 30, 2003, we issued anaggregate of 49,660 shares of our Series E convertible preferred stock for anaggregate purchase price of $49.7 million. Net proceeds from such sales of $48.0 million were used to partiallyfund the acquisition of the Seneca Falls, New York landfill and the expensesrelated thereto.

 

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OnJune 12, 2002, we completed a private offering of our 10.25% seniorsubordinated notes due 2012, or our Notes, at a price of 100.0%.  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 to35.0% of the aggregate principal amount of our Notes on or before June 15,2005 with the proceeds from qualified public offerings of our equitysecurities.  The indenture governing ourNotes contains covenants which, among other things, limit our ability to incuradditional debt, create liens, engage in sale-leaseback transactions, paydividends or make other equity distributions, purchase or redeem capital stock,make investments, sell assets, engage in transactions with affiliates andeffect a consolidation or merger.  Theselimitations are subject to certain qualifications and exceptions.  As of June 30, 2004, we were incompliance with all covenants contained in the indenture governing our Notes.

 

Inconnection with our acquisition of the Seneca Falls, New York landfill, onOctober 10, 2003, we and our subsidiaries entered into the Fifth Amendedand Restated Revolving Credit and Term Loan Agreement with a syndicate oflenders led by Bank of America Corporation (f/k/a Fleet National Bank), as administrativeagent, or Bank of America, and LaSalle Bank National Association, assyndication agent, and Fleet Securities, Inc., as arranger, which amended ourthen existing senior credit facility, dated as of September 14, 2001.  Our senior credit facility, as so amended,includes a $200.0 million senior secured term loan and a$200.0 million senior secured revolving loan, including an$80.0 million letter of credit sublimit. We used the borrowing of the $200.0 million term loan andborrowings of $33.7 million in revolving loans to pay a portion of thepurchase price for our acquisition of the Seneca Falls, New York landfill,refinance our then existing senior credit facility and pay related fees andexpenses.  Subject to certain conditions,we may request an increase in the revolving loan or term loan portions of oursenior credit facility of up to $50.0 million such that the total amountof indebtedness under our senior credit facility would equal$450.0 million.  As of June 30,2004, there was $198.5 million outstanding under the term loan portion and$28.1 million (excluding $48.1 million underlying letters of credit)outstanding under the revolving loan portion of our senior creditfacility.  As of such date, we had anadditional $123.8 million available under the revolving loan portion (ofwhich $37.0 million represented immediate borrowing capacity), including amaximum of $31.9 million underlying letters of credit.  In order to borrow under the revolving loan portionof our senior credit facility, we must satisfy customary conditions includingmaintaining 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.

 

Oursenior credit facility permits borrowings at floating interest rates based on,at our option, the designated eurodollar interestrate, which generally approximates LIBOR, or the Fleet prime rate, in eachcase, plus an applicable margin, and requires payment of an annual commitmentfee based on the unused portion of the revolving loan portion.  As of June 30, 2004, the interest rateapplicable to the $28.1 million outstanding under the revolving loan portionof our senior credit facility was LIBOR plus 325 basis points, or 4.44%.  As of June 30, 2004, the interest rateapplicable to the $198.5 million outstanding under the term loan portionof our senior credit facility was LIBOR plus 300 basis points, or 4.15%.  The revolving loan and term loan portions ofour senior credit facility mature on September 30, 2008 andSeptember 30, 2010, respectively.

 

Pursuantto the terms of our senior credit facility, during each 12-month periodcommencing on October 1 and ending on September 30, we are requiredto repay 1.0% (except for the 12-month period prior to maturity when we arerequired to repay 94.0%) of the principal amount of the term loan portion ofour senior credit facility in quarterly installments payable on the lastbusiness day of each calendar quarter. In addition, our senior credit facility requires us to prepay the termloan with, subject to certain conditions and exceptions, 100.0% of the net cashproceeds we receive from any disposition of assets in

 

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excess of $5.0 million in the aggregate per year,100.0% of the net cash proceeds we receive from the incurrence of any permittedindebtedness (other than up to $100.0 million of additional subordinatedindebtedness) and 50.0% of the net cash proceeds we receive in connection withany issuance of our equity (other than equity we issue (i) in an aggregateamount not to exceed $100.0 million, (ii) as payment in a permittedacquisition or (iii) to employees, consultants or directors in connection with theexercise of options under bona fide option plans).  We are also required to prepay the term loanwith the percentage of excess consolidated operating cash flow (generally, forany fiscal year, consolidated EBITDA(1), plus or minus net working capital changesand extraordinary cash items, less the sum of (a) capital expenditures,(b)  the cash purchase price of any permitted acquisitions, (c)  cashpayments for taxes, (d) cash payments of interest and (e)  thescheduled principal repayments of indebtedness, in each case of clauses (a)through (e), paid during such period) corresponding to the applicable leverageratio set forth below:

 
| **Leverage  Ratio**                | ** ** | **Percentage of Excess Consolidated  Operating Cash Flow Required as  Mandatory Prepayment of Term Loan** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| 33.50:1.00                    |       | 50                                                                                                        |  %    |
| 33.00:1.00  and <3.50:1.00 |       | 25                                                                                                        |  %    |
| <3.00:1.00                      |       | 0                                                                                                         |  %    |

 

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

 

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

 

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

 

•                                          **Maximum Senior Leverage Ratio**—Our ratio of consolidated senior debt(generally, consolidated debt other than certain debt, including, withoutlimitation, 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)                                  Our senior creditfacility defines EBITDA to be consolidated net income, subject to certainadjustments, plus interest expense, income taxes, depreciation andamortization.  For certain purposes, andwith the consent of Bank of America, we may include in EBITDA the projectedEBITDA from certain new municipal contracts and the EBITDA for the prior 12months of certain newly-acquired businesses. We discuss EBITDA in this context solely to provide informationregarding the requirements of, and the extent to which we are in compliancewith, our senior credit facility covenants.

 

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•                                          **Minimum Interest Coverage Ratio**—Our ratio of consolidated EBITDA toconsolidated interest expense ratio for any period of four consecutive fiscalquarters ending on the last day of any fiscal quarter specified below may notbe less than the applicable ratio indicated below: 

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

 

•                                          **Minimum Consolidated Net Worth**—Our consolidated net worth (generally,excess of our assets over our liabilities excluding redeemable preferred stock)at any time may not be less than approximately $214.8 million, plus(a) the proceeds of any new equity offerings and (b) 50% of ourpositive consolidated net income for each fiscal quarter beginning with thethird quarter of 2004.

 

•                                          **Maximum Capital Expenditures**—Our annual capital expenditures lesscapital expenditures for new municipal contracts may not be greater than theproduct of our annual depreciation and depletion expense for any fiscal yearand 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 ofJune 30, 2004, we were in compliance with our senior credit facilityfinancial covenants:  our ratio ofconsolidated debt to consolidated EBITDA was 4.10:1, our ratio of consolidatedsenior debt to consolidated EBITDA was 2.47:1, our ratio of consolidated EBITDAto consolidated interest expense ratio was 3.26:1 and our consolidated networth was $219.7 million ($4.9 million in excess of the minimum requiredunder our senior credit facility).  Inaddition, our fiscal 2003 annual capital expenditures of $54.9 million lesscapital purchased for new municipal contracts of $3.9 million did not exceed1.6 times our fiscal 2003 annual depreciation and depletion expense.  Our ability to comply in future periods withthe financial covenants in our senior credit facility will depend on ourongoing financial and operating performance, which, in turn, will be subject toeconomic conditions and to financial, business and other factors, many of whichare beyond our control, and will be substantially dependent on our ability tosuccessfully implement our overall business strategies.

 

Oursenior credit facility also contains covenants which, among other things,restrict our ability to, incur additional debt, create liens, dispose ofassets, make investments, engage in transactions with affiliates, enter into amerger or consolidation, make specified payments, including dividends, repaysubordinated

 

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

 

InAugust 2002, we entered into two interest rate swap agreements, which areeffective through June 15, 2012, with two financial institutions.  Under each swap agreement, the fixed interestrate on $25.0 million of our Notes effectively was converted to aninterest rate of 5.275% and 5.305%, respectively, plus an applicable floatingrate margin that is based on six month LIBOR which is readjusted semiannuallyon June 15 and December 15 of each year.  On June 30, 2004, the six month LIBORrate was 1.86%.

 

InJanuary 2004, we entered into four interest rate swap agreements, whichare effective through January 2007, with four financial institutions.  Under each swap agreement, the variableinterest rate on $25.0 million outstanding under our senior credit facilityeffectively was converted to a fixed interest rate of 2.58%, 2.61%, 2.71% and2.75%, respectively, plus an applicable LIBOR margin.  On June 30, 2004, the three month LIBORrate was 1.14%.

 

Environmentallaws and regulation, including Subtitle D, that apply to the non-hazardoussolid waste management industry have required us, as well as others in theindustry, to alter the way we conduct our operations and to modify or replacepre-Subtitle D landfills.  Theseexpenditures have been, and will continue to be, substantial; however, we donot anticipate that these expenditures relating to our ongoing operations willbe substantially different than what we have experienced to date.  Legislative or regulatory changes couldincrease the costs of operating our business, accelerate required expendituresfor closure activities and post-closure monitoring, and obligate us to spendsums in addition to those presently reserved for such purposes.  These factors could substantially increaseour operating costs and adversely affect our results of operations, financialcondition and cash flow.

 

Webelieve that cash flow from operations and borrowings under the revolving loanportion of our senior credit facility will provide adequate cash to fund ourworking capital, capital expenditure, debt service, and other cash requirementsfor the foreseeable future.  Our abilityto meet future working capital, capital expenditure and debt service requirements,to provide financial assurance, as requested or required, and to fund capitalamounts required for the expansion of our existing business will depend on ourfuture financial performance, which will be affected by a range of economic,competitive and business factors, many of which are outside of ourcontrol.  See “—Disclosure RegardingForward Looking Statements.” We cannot assure you that our business willgenerate sufficient cash flow from operations, that future financings will beavailable to us in amounts sufficient to enable us to service our debt or tomake necessary capital expenditures, or that any refinancing would be availableon commercially reasonable terms, if at all. Further, depending on the timing, amount and structure of any possiblefuture acquisitions and the availability of funds under, and compliance 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 hada working capital deficit at June 30, 2004 of $4.4 million ascompared to a working capital deficit of $8.0 million at December 31,2003.  The $3.6 million reduction inworking capital deficit during the six months ended June 30, 2004 wasprimarily attributable to a $3.2 million increase in accounts receivable whichis a normal seasonal change and consistent with the change in accountsreceivable during the six months ended June 30, 2003.  There is no covenant in our senior creditfacility directly tied to working capital. At June 30, 2004, our immediately available borrowing capacity wassufficient to cover the working capital deficit.

 

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***CapitalExpenditures***

 

Wemade capital expenditures of $14.0 million during the three months endedJune 30, 2004, including $0.7 million for new municipal contracts and $0.6million of capitalized interest primarily related to landfill construction andpermitting projects.

 

Wemade capital expenditures of $24.4 million during the six months endedJune 30, 2004, including $2.6 million for new municipal contracts and$1.2 million of capitalized interest primarily related to landfill constructionand permitting projects.  We expect ourcapital expenditures with respect to our existing business to range fromapproximately $24.0 million to $28.0 million during the remainder of 2004,including approximately $1.4 million to $2.4 million for new municipalcontracts, $1.3 million to $1.8 million of capitalized interest primarilyrelated to landfill construction and permitting projects and $2.0 million to$2.5 million for new transfer station and greenfield landfill projects.  We intend to fund our remaining 2004 capitalexpenditures principally through existing cash, internally generated funds andborrowings under our senior credit facility.

 

Inaddition, we may make substantial additional capital expenditures in acquiringsolid waste management businesses.  If weacquire additional landfill disposal facilities, we may also have to makesignificant expenditures to bring them into compliance with applicableregulatory requirements, obtain permits or expand our available disposalcapacity.  In addition we may need tomake additional capital expenditures if we bid and are awarded new municipalcontracts.  We cannot currently determinethe amount of these expenditures because they will depend on the number,nature, condition and permitted status of any acquiredlandfill disposal facilities or new municipal contracts.

 

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

 

**Off-Balance Sheet Arrangements**

 

Wehave no off-balance sheet debt or similar obligations, other than the financialassurance instruments, which are issued in our ordinary course of business andare not debt (and, therefore, are not reflected in our consolidated balancesheet) which are discussed under “Significant Commercial Commitments” in Item7.  “Management’s Discussion and Analysisof Financial Condition and Results of Operations” of our Annual Report on Form10-K for the fiscal year ended December 31, 2003.

 

**Related Party Transactions**

 

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

 

**Obligations and Commitments**

 

For adiscussion of our obligations and commitments, please refer to Item 7.“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003.  There were nosignificant changes in our business during the three months ended June 30,2004 that would require an update to those disclosures.

 

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**Recent Accounting Pronouncements**

 

For adescription of new accounting pronouncements that affect us, please see Note 1 toour audited consolidated financial statements included in our Annual Report onForm 10-K for the fiscal year ended December 31, 2003.  There were no new accounting pronouncementsduring the three months ended June 30, 2004 which we expect to have a materialeffect on our consolidated financial statements.

 

**Disclosure Regarding Forward-Looking Statements**

 

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

 

Theseforward-looking statements are subject to risks and uncertainties, which couldcause actual results to differ materially from those currentlyanticipated.  These risks anduncertainties include:  our business iscapital intensive and may consume cash in excess of cash flow from ouroperations and borrowings; our growth strategy depends, in part, on ouracquiring other solid waste management or related businesses and expanding ourexisting landfills and other operations, which we may be unable to do; we maynot be able to successfully manage our growth; we face risks related to 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 ourbusiness; the interests of our controlling stockholders could conflict withthose of other holders of our securities; we depend heavily on our seniormanagement; if we are unable to obtain performance or surety bonds, letters ofcredit or insurance, we may not be able to enter into additional MSW collectioncontracts or retain necessary landfill operating permits; we are subject toextensive legislation and governmental regulation that may restrict ouroperations or increase our costs of operations; we may not be able to obtainpermits we require to operate our business; we may be subject to legal actionrelating to compliance with environmental laws; we may have liability forenvironmental contamination; and we will always face the risk of liability, andinsurance may not always be available or sufficient.

 

For afurther list and description of such risks and uncertainties, please refer toItem 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations” of our Annual Report on Form 10-K for the fiscal yearended December 31, 2003.  Allsubsequent written and oral forward-looking statements attributable to us orpersons acting on our behalf are also expressly qualified in their entirety bysuch factors.  We urge you to carefullyconsider such factors in evaluating

 

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

 

For adiscussion of our exposure to market risks, see Part II. Item7A. “Quantitative and Qualitative Disclosures AboutMarket Risk” of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2003 and Part I. Item 3. “Quantitative and Qualitative Disclosures AboutMarket Risk” of our Quarterly Report on Form 10-Q for the quarterly periodended March 31, 2004.  There was nosignificant change in those risks during the three months ended June 30,2004.

 

**Item 4.****  Controls and Procedures.**

 

OurChief Executive Officer and Chief Financial Officer have concluded, based ontheir evaluation as of the end of the period covered by this Quarterly Reporton Form 10-Q, that our disclosure controls and procedures (as defined in theSecurities Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e)) are effectiveto ensure that information required to be disclosed in the reports we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms. There were no changes in our internal control over financial reportingduring our second quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

Asdiscussed 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 adivision in our South Region had engaged in misconduct that violated our internalpolicies and resulted in an overstatement of our South Region’s accountsreceivable as of December 31, 2003 by approximately $1.6 million and anunderstatement of its expenses during 2003 by approximately $0.8 million.  This division accounted for approximately4.5% of our consolidated revenues during 2003. We adjusted our financial statements for 2003 to account for thesediscrepancies.

 

Aspart of our ongoing internal investigation, in consultation with the auditcommittee of our board of directors, into this misconduct, we have identifiedcertain deficiencies in the operation of our internal control over financialreporting and disclosure controls and procedures.  These deficiencies included a lack of propersegregation of management and accounting responsibilities at this division andinsufficient regional and corporate oversight of accounting functions performedat this division.  In connection withtheir audit of our financial statements for the year ended December 31,2003, our independent auditors determined that these deficiencies constituted amaterial weakness in our internal control over financial reporting.

 

Wehave taken steps to address these deficiencies and improve our internal controlover financial reporting and disclosure controls and procedures.  In particular, we have hired a new managerand a new 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 asnecessary.

 

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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.**** ****Changes in Securities, Use of Proceeds and Issuer Purchases of EquitySecurities.**

 

None.

 

**Item 3.****  Defaults Upon SeniorSecurities.**

 

None.

 

**Item 4.****  Submission of Matters to aVote of Security Holders.**

 

None.

 

**Item 5.****  Other Information.**

 

None.

 

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

 

(a)  Exhibits: 

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

 

Reportson Form 8-K:

 

On May 10, 2004, we furnished (but not filed) aCurrent Report on Form 8-K reporting our financial results for the three monthsended March 31, 2004.

 

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**Signatures**

 

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

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

 

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**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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