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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the year ended December 31, 2004oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
            to
 Commission file number 000-25955 Waste Services, Inc.  Delaware(State or other jurisdiction of
incorporation or organization)
    
    01-0780204(I.R.S. Employer Identification No.)1122 International Blvd.
Suite 601, Burlington, Ontario(Address of principal executive offices)
    
    L7L 6Z8(Zip Code)
 Registrants telephone number, including area code: (905) 319-1237 Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share(Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yesþ                    Noo Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in a
definitive proxy or information statement incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act.) Yesþ                    Noo The approximate aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 30, 2004 was $345.9 million based upon the closing price of the Registrants
Common Shares as quoted on the Nasdaq National Market as of that date. The number of Common Shares of the Registrant outstanding as of March 1, 2005 was 99,593,680.
(assuming exchange of 6,569,910 exchangeable shares of Waste Services (CA) Inc. not owned by Waste
Services, Inc.)




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INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004 PagePART I.
    
    
    1Item 1. Business
    
    
    2Item 2. Properties
    
    
    15Item 3. Legal Proceedings
    
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 4A. Executive Officers of the Registrant
    
    
    17PART II.
    
    
    18Item 5. Market for Registrants Common Equity and Related
Shareholder Matters
    
    
    18Item 6. Selected Financial Data
    
    
    19Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    20Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
    
    
    37Item 8. Financial Statements and Supplementary Data
    
    
    38Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    
    38Item 9A. Controls and Procedures
    
    
    39Item 9B. Other Information
    
    
    39PART III
    
    
    39Item 10. Directors and Executive Officers of the Registrant
    
    
    39Item 11. Executive Compensation
    
    
    41Item 12. Security Ownership of Certain Beneficial Owners and
Management and
Related Stockholder Matters
    
    
    46Item 13. Certain Relationships and Related Transactions
    
    
    48Item 14. Principal Accountant Fees and Services
    
    
    49PART IV
    
    
    50Item 15. Exhibits, Financial Statement Schedules
    
    
    50Plan of ArrangementProvisions for Exchangeable SharesVoting and Exchange Trust AgreementSupport AgreementEmployment Agreement/Charles A. WilcoxList of SubsidiariesConsent of BDO Seidman LLPConsent of BDO Dunwoody LLPConsent of PricewaterhouseCoopers LLPConsent of PricewaterhouseCoopers LLPSection 302 Chief Executive Officer CertificationSection 302 Chief Financial Officer CertificationSection 906 CEO & CFO Certification




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PART I CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS This annual report on Form 10-K, or the annual report, contains certain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, or the
Exchange Act. Some of these forward-looking statements include forward-looking phrases such as
anticipates, believes, could, estimates, expects, foresees, intends, may, should
or will continue, or similar expressions or the negatives thereof or other variations on these
expressions, or similar terminology, or discussions of strategy, plans or intentions. These
statements also include descriptions in connection with, among other things:  
    our anticipated revenue, capital expenditures, future cash flows and financing
requirements, and those of companies we acquire;
    the implementation of our business strategy;
    descriptions of the expected effects of our competitive strategies; and
    the impact of actions taken by our competitors and other third parties, including courts
and other governmental authorities. Such statements reflect our current views regarding future events and are subject to certain
risks, uncertainties and assumptions. Many factors could cause the actual results, performance or
achievements to be materially different from any future results, performance or achievements that
forward-looking statements may express or imply, including, among others:  
    significant restrictive covenants in our various credit facilities;
    changes in regulations affecting our business and costs of compliance;
    revocation of existing permits and licenses or the refusal to renew or grant new permits
and licenses, which are required to enable us to operate our business or implement our
growth strategy;
    our ability to successfully implement our corporate strategy and integrate any
acquisitions we undertake;
    costs and risks associated with litigation;
    changes in general business and economic conditions, changes in exchange rates and in the
financial markets;
    changes in accounting standards or pronouncements; and
    construction, equipment delivery or permitting delays for our transfer stations or landfills. Some of these factors are discussed in more detail in this annual report, including under
Item 1. Business  Risk Factors. If one or more of these risks or uncertainties affects future
events and circumstances, or if underlying assumptions do not materialize, actual results may vary
materially from those described in this annual report as anticipated, believed, estimated or
expected, and this could have a material adverse effect on our business, financial condition and
the results of our operations. Further, any forward-looking statement speaks only as of the date on
which it is made, and except as required by law we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which it is made or
to reflect the occurrence of anticipated or unanticipated events or circumstances. 1




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Item 1.Business Overview We are a multi-regional, integrated solid waste services company, providing collection,
transfer, landfill disposal and recycling services for commercial, industrial and residential
customers in the United States and Canada. We operate on a decentralized basis while financial
controls and information systems are controlled centrally. We currently have operations in five
geographic markets  Florida, Arizona, Texas and Eastern and Western Canada. We currently service
approximately 5.5 million customers and own and operate seven landfills. Our parent company was incorporated in Delaware in 2003 under the name Omni Waste, Inc. In
2003, its name was changed to Waste Services, Inc. (Waste Services). Waste Services is the
successor to Capital Environmental Resource Inc. (Capital) now Waste Services (CA) Inc., by a
migration transaction completed effective July 31, 2004. The migration transaction occurred by way
of a plan of arrangement under the Business Corporations Act (Ontario) and was approved by the
Ontario Superior Court of Justice. Pursuant to the plan of arrangement, holders of Capital Common
Shares received shares of our common stock unless they elected to receive exchangeable shares of
Capital. The terms of the exchangeable shares of Capital are the functional and economic
equivalent of our common stock. As a
result of the migration Capital became our indirect subsidiary and we became the parent company.
Our corporate offices are located at 1122 International Blvd., Suite 601 Burlington, Ontario L7L
6Z8. Our telephone number is (905) 319-1237. We are organized along geographic locations or regions within the U.S. and Canada. Our
Canadian operations are organized between two regions, Eastern and Western Canada while the U.S. is
organized into Florida (North, Central, Gulf), Texas and Arizona. We believe that our
geographic segments within Canada and the United States meet the Aggregation Criteria set forth in SFAS 131 for the following
reasons: (i) the nature of the service, waste collection and disposal, is economically the same and
transferable across locations; (ii) the type and class of customer is consistent among
regions/districts; (iii) the methods used to deliver services are essentially the same (e.g.
containers collect waste at market locations and trucks collect and transfer waste to landfills);
and (iv) the regulatory environment within each country is
consistent. Accordingly, we have two reportable segments, United States and Canada. We re-entered the United States in May
2003 with the acquisition of the JED Landfill in Osceola County, Florida. We do not have
significant (in volume or dollars) inter-segment operation-related transactions. For more
information regarding our segments refer to Note 17 of our Consolidated Financial Statement. We file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K with the SEC. The public may read and copy any materials we file with the SEC at the SECs
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The internet address is
www.sec.gov. You may request a copy our filings, at no cost, by writing or telephoning us at: Waste
Services, Inc., 1122 International Blvd., Suite 601, Burlington, Ontario L7L 6Z8, Attention:
Corporate Secretary or call (905) 319-1237. You also may obtain them through our website. Our website address is
www.wasteservicesinc.com. Information on our website does not form a part of this annual report. Our Business Strategy Our goal is to be a highly profitable, multi-regional solid waste services company in North
America with leading market positions in each of the markets we serve. In order to achieve this
goal, we intend to: Maximize Density and Vertical Integration of Operations.We believe that achieving a high degree
of density and vertical integration of operations leads to higher profitability and returns on
invested capital. In each of our local markets, we seek to maximize the density of our collection
routes, which allows us to leverage our facilities and vehicle fleet by increasing the number of
customers served and revenue generated by each route. In addition, we seek to vertically integrate
our operations where possible, using transfer stations to link collection operations with our
landfills to increase internalization of waste volume. By securing and controlling the solid waste
stream from collection through disposal, we are able to achieve cost savings for our collection
operations, while at the same time providing our landfills with more stable and predictable waste
volume and enhancing returns on the capital invested in these facilities. In our efforts to
maximize vertical integration, we periodically evaluate markets where we are not internalized for 2




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possible divestiture or asset swap transactions to enhance density and/or internalization in
existing markets where we are vertically integrated. Provide Consistent, Superior Customer Service.Our long-term growth and profitability will be
driven, in large part, by our ability to provide consistent, superior service to our customers. We
believe that our local and regional operating focus allows us to respond effectively to customer
needs on a local basis, as well as maintain strong relationships with commercial, municipal and
residential accounts. In each of our markets, customer retention and new account generation are key
areas of focus for our local managers, and
are important components of their performance evaluation. Maintain a Decentralized Operating Management Structure with Centralized Controls and
Information Systems.The solid waste industry is a local and regional business by nature, where we
believe that asset investment, customer relationships, pricing and operational productivity are
most effectively managed on a local and regional basis. We have structured our operating management
team on a geographically decentralized basis, because we believe that talented, experienced and
incentivized local management are in the best position to make effective, profitable decisions
regarding local operations and to provide strong customer service. Our senior management team
provides significant oversight and guidance for our local management, developing operating goals
and standards tailored to each market, but does not impose corporate directives regarding local
operating decisions, such as pricing. While our operating management structure is decentralized, all of our operations adhere to
uniform corporate policies and financial controls and utilize integrated information systems. Our
information systems provide both corporate and local management with comprehensive, consistent and
timely operating and financial data, enabling them to maintain detailed, ongoing visibility of the
performance and trends in each of our local market operations. Execute a Disciplined, Disposal-Based Growth Strategy.Our growth strategy consists of both
new geographic market entries, for which we first secure disposal capacity, and tuck-in
acquisitions within an existing market, which typically consist of collection operations or
transfer stations. In either case, we focus on maximizing cash flow and return on invested capital. For new market entries, we only pursue opportunities where we can:  
    benefit from (i) above-average underlying economic or population growth, or (ii) a
changing competitive or regulatory environment that could lead to above-average growth for
solid waste services;
    establish a leading market position over time in the local markets in which we operate;
and
    become vertically integrated with the ability to secure significant waste volume that we
collect and transfer to our own landfills. We believe that each of the new markets we have entered in the United States have met these
criteria. For tuck-in acquisitions, we only pursue opportunities that:  
    are complementary to our existing infrastructure, allowing us to increase the density of
our collection routes or enhance asset utilization; or
    increase the waste volume that can be internalized into our transfer stations and
landfills. Operations We provide our services on a geographic basis in three regions in the United States, Florida,
Arizona and Texas, and in two regions in Canada, Eastern and Western Canada. For a discussion on
the seasonality of our business, see Item 7. Managements Discussion and Analysis of Financial
Condition and Operating Results  Seasonality. Collection Services We provide collection services to approximately 87,000 commercial and industrial customers and
approximately 5,445,000 residential customers. As of December 31, 2004, we had a front-line
collection fleet size of approximately 1,185 vehicles with an average fleet age of approximately
six years. 3




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Commercial and Industrial Collection.We provide collection services to a variety of
commercial and industrial customers in all of our geographic markets where we have collection
operations. We perform such services principally under one to five year service agreements, which
typically contain provisions for automatic renewal and which prohibit the customer from terminating
the agreement prior to its expiration date without incurring a penalty. We provide roll-off
containers to customers for temporary services, such as for construction projects, under short-term
purchase orders. We also provide stationary compactors to our customers, which allow them to
compact their waste at their premises prior to its collection. Commercial and industrial collection
vehicles normally require one operator. We provide two to eight cubic yard containers to commercial
customers and ten to fifty cubic yard containers to industrial customers, including our roll-off
accounts. We determine the fees we charge our customers by a variety of factors, including collection
frequency; level of service; route density; the type, volume and weight of the waste collected;
type of equipment and containers furnished; the distance to the disposal or processing facility;
the cost of disposal or processing; and prices charged by competitors for similar services. Our
contracts with commercial and industrial customers typically allow us to pass on increased costs
resulting from variable items such as disposal and
fuel costs and surcharges. Our ability to pass on price increases is sometimes limited by the
terms of our contracts. Residential Collection.We provide residential waste collection services in all of our
geographic markets where we have collection operations through a variety of contractual
arrangements, including contracts with municipalities, owners and operators of large residential
complexes and mobile home parks, and homeowners associations. We also provide such services through
residential subscription arrangements with individual homeowners in certain markets. Our contracts with municipalities are typically for a term of up to five years and contain a
formula, generally based on a predetermined published price index, for automatic adjustments to
fees to cover increases in some, but not all, of our operating costs. Certain of our contracts with
municipalities contain renewal provisions. The fees we charge for residential solid waste collection services provided on a subscription
basis are based primarily on route density, the frequency and level of service, the distance to the
disposal or transfer facility, the cost of disposal or transfer and prices we charge in the market
for similar services. Transfer Station Services We operate 15 transfer stations, including our transfer station in Houston, Texas which
commenced operations in January 2005. As further described below, two transfer stations are
currently under development in Central Florida and are scheduled to be operational in the second
quarter of 2005. These transfer stations will allow us to internalize existing collection volumes
to our JED landfill, located outside Orlando. Our transfer stations receive solid waste from our
own operations and from third parties, compact the waste and transfer it for disposal to our own or
third-party landfills. We charge third parties fees to dispose of their waste at our transfer
stations. Transfer station fees are generally based on the cost of processing, transportation and
disposal. We typically subcontract the transportation of waste from our transfer stations to the
landfill. We believe that the benefits of using our transfer stations include improved utilization of
our collection infrastructure and better relationships with municipalities and private operators
that deliver waste to our transfer stations, which can lead to additional growth opportunities. We
believe that transfer stations will become increasingly valuable as new landfills are opening
further away from metropolitan areas and waste needs to travel further for disposal. Commercial and Residential Recycling Services We offer collection and processing services to our municipal, commercial and industrial
customers for a variety of recyclable materials, including cardboard, office paper, plastic
containers, glass bottles, fiberboard, and ferrous and aluminum metals. We operate five material
recovery facilities in Florida and five in Ontario, Canada. These facilities are used to sort, bale
and ship recyclable materials to market. We also deliver recyclable materials that we collect to
third parties for processing and resale. In an effort to reduce our exposure to commodity price
fluctuations on recycled materials, where competitive pressures permit, we charge collection or
processing fees for recycling volume collected from our customers. We believe that recycling will
continue to be an important component of municipal solid waste management plans due to the publics
environmental awareness and regulations that mandate or encourage recycling. 4




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Landfill Disposal Services We charge our landfill and transfer station customers a tipping fee on a per ton basis for
disposing of their solid waste at our transfer stations and landfills. We generally base our
landfill tipping fees on market factors and the type and weight of or volume of the waste
deposited. We dispose of the solid waste we collect in one of four ways: (i) at our own landfills; (ii)
through our own transfer stations; (iii) at municipally-owned landfills; or (iv) at third-party
landfills or transfer stations. In markets where we do not have our own landfills, we seek to
secure favorable long-term disposal arrangements with municipalities or private owners of landfills
or transfer stations. In those markets, our ability to maintain competitive prices for our
collection services is generally dependent upon our ability to secure favorable disposal pricing.
In some markets we may enter into put or pay disposal arrangements with third party operators of
disposal facilities. These arrangements require us to deliver a minimum tonnage of waste for
disposal at a fixed disposal rate, or pay a penalty equal to the number of tons below the required tonnage by that
disposal rate. These types of arrangements allow us to fix our disposal costs, but also expose us
to the risk that if our tonnage declines and we are unable to deliver the minimum tonnage, we will
be required to pay the penalty. Other Specialized Services We offer other specialized services consisting primarily of sales and leasing of compactor
equipment and portable toilet services for special events or construction sites. Local/Regional Operating Structure We manage the business on a local/regional basis. Each of our operating regions also has a
number of operating districts where the business is managed on a local basis. From a management perspective, each region has a general manager who reports to our President
and Chief Operating Officer. District managers are responsible for the day-to-day operations of
their districts, including supervising their sales force, maintaining service quality, implementing
our health and safety and environmental programs and overseeing contract administration. District
managers work closely with the region managers to execute business plans and identify business
development opportunities. This structure is designed to provide decision-making authority to our
district managers who are closest to the needs of the customers they serve in the community. This
localized approach allows us to quickly identify and address customer needs, manage local operating
dynamics and take advantage of market opportunities. United States We operate in three regions in the United States; Florida, Arizona and Texas. Florida Region.Our Florida region is organized into three districts with ten collection
operations, two transfer stations, five material recovery facilities and two landfills. The Central Florida district, concentrated in the Orlando metropolitan area, has three
collection operations and our JED landfill. Our JED Landfill is located in Osceola County, Florida (approximately 20 miles south of
metropolitan Orlando) and commenced operations in January 2004. This municipal solid waste landfill
has initial permitted airspace of approximately 24.0 million cubic yards. The site has an average
daily volume limit of 4,000 tons for municipal solid waste and is currently permitted to accept
waste from Osceola County and various other counties (which include the Orlando and Tampa/St.
Petersburg metropolitan areas) as well as the right to take 2,000 tons per day from other areas of Florida. We have two transfer station and recycling facilities under development in Central Florida
which, upon completion, will enable us to internalize significant collection volumes into our JED
landfill. The Taft transfer station and recycling facility, located south of Orlando, is owned and
operated by a third party with whom we have entered into a 10-year disposal agreement. The Taft
facility has received a modified permit allowing it to accept up to 1,500 tons of Class I and Class
III solid waste combined per day subject to completion of certain building modifications expected
to be completed in the second quarter of 2005. The other transfer station and recycling facility,
located in Sanford, Florida, is fully permitted to accept up to 2,000 tons per day of Class I
municipal solid waste upon completion of construction which is also expected in the second quarter
of 2005. Ownership of the Sanford facility, also referred to as the Ice House facility, will be
transferred to us upon completion of construction pursuant to the terms of our settlement agreement
with the sellers of Florida Recycling. 5




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The North Florida district includes the Jacksonville and Daytona market areas and is comprised
of two collection operations, two material recovery facilities and the Jones Road Landfill. The
Jones Road Landfill is permitted to receive construction and demolition waste and has permitted
capacity of approximately 4.48 million cubic yards, with remaining permitted capacity of
approximately 2.3 million cubic yards. The landfill has an average daily volume limit of 1,642
tons. The Gulf district, concentrated in the Tampa/St. Petersburg, Sarasota and Ft. Myers market
areas, has five collection operations, two transfer stations and three material recovery
facilities. Arizona Region.Our Arizona regional operations are focused in the Phoenix metropolitan area
and comprise two collection operations, two transfer stations and our Cactus Regional Landfill.
The Cactus Regional Landfill is located in Pinal County (approximately half way between Phoenix and
Tucson, Arizona). The landfill began accepting waste in July 2004 and has initial permitted
capacity of approximately 224.0 million cubic yards. The site has no daily or annual volume
limits. Our transfer station in Mesa, Arizona commenced operations in July of 2004 and our Central
Phoenix transfer station began operations in June of 2004. There are no daily or annual volume
limits at these transfer stations. Texas Region.Our Texas operations include our Fort Bend Regional Landfill and a transfer
station serving the Houston market. The Fort Bend Regional Landfill is located in Fort Bend County,
which is approximately 15 miles southwest of metropolitan Houston, Texas. It began accepting waste
in August 2004 and has initial permitted capacity of 47.6 million cubic yards. The
site has no daily or annual volume limits. Additionally, we operate a solid waste transfer station
in Houston, Texas, which began operations in January 2005. The site is permitted to accept up to
850 tons per day of municipal and industrial solid waste. Canada We have operations throughout Ontario and in Saskatchewan, Alberta and British Columbia. Eastern Canada.Our Eastern Canada operations are based primarily in and around metropolitan
areas of southern Ontario. We operate in 16 districts with 14 collection operations, eight transfer
stations, five material recovery facilities and one landfill. While our southern Ontario
operations, other than Ottawa, do not have internal disposal facilities, we have disposal contracts
in place for a majority of our collected volume at rates we believe to be favorable. Our Waste Services Landfill is located in Ottawa, Canada. It has estimated remaining capacity
of 1.4 million cubic yards. The site has an annual disposal limit of 234,750 metric tons
of dry waste. Based on current and projected disposal volumes, we estimate that the site has
approximately seven years of remaining capacity. Additionally, we own property that is available
for potential future expansions. Western Canada.Our Western Canada operations are located in the three most western Canadian
provinces: Saskatchewan, Alberta and British Columbia. Our hauling companies are located in and
around metropolitan areas of Alberta and British Columbia and our two landfills are located in
proximity to the industrial waste markets that they serve. We operate in ten districts with eight
collection operations, two transfer stations and two landfills. The two landfills we own and
operate in Western Canada primarily serve industrial customers and while we do not have significant
internal disposal facilities, we have disposal contracts in place for a majority of our collected
volume. Our Gap Landfill is located in southern Saskatchewan and is permitted to accept industrial
waste. Its primary customer base is the oilfield industry. It has current permitted capacity of
approximately 2.4 million cubic yards. The site has no daily or annual volume limits. Based on
current disposal volumes, we estimate that the site has a total remaining life of 50 years. Our Paintearth Landfill is located in Coronation, Alberta and is permitted to accept
non-hazardous solid and industrial wastes, construction and demolition waste and certain special
wastes and includes a composting facility, a bio-remediation facility and a material recycling
facility. Its primary customer base is currently the oilfield industry. It has an estimated current
remaining capacity of 8.9 million cubic yards. Based on current disposal volumes, we estimate that
the site has a total remaining life of 40 years. Sales and Marketing We market our services on a decentralized basis principally through our district managers and
direct sales representatives. Our 6




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sales representatives visit customers on a regular basis and call
upon potential new customers within a specified territory or service area. These sales
representatives receive a portion of their compensation based on meeting certain incentive targets. In addition to our sales efforts directed at commercial and industrial customers, we have
municipal marketing representatives in our markets in Canada and Florida who are responsible for
interfacing with municipalities and communities to which we provide residential service to ensure
customer satisfaction. Our municipal representatives organize and handle bids for renewal and new
municipal contracts in their service areas. We have a diverse customer base, with no single contract or customer representing more than
3.0% of consolidated revenue for the year ended December 31, 2004. Competition The solid waste services industry is highly competitive and fragmented. We compete with large,
national solid waste services companies, as well as smaller regional solid waste services companies
of varying sizes and resources. Some of our competitors are better capitalized, have greater name
recognition and greater financial, operational and marketing resources than we have, and may be
able to provide services at a lower cost. We also compete with operators of alternative disposal
facilities, and with municipalities that maintain their own waste collection and disposal
operations. Public sector operators may have financial advantages over us because of their access
to user fees and similar charges as well as to tax revenue. The U.S. solid waste industry currently includes three large national waste companies: Waste
Management, Inc., Allied Waste Industries, Inc. and Republic Services, Inc.. Waste Management,
Inc. operating through its Canadian subsidiary, Waste Management of Canada Corporation and BFI
Canada are our significant competitors in Canada. We compete for collection, transfer and disposal volume based primarily on the price and
quality of services. From time to time, competitors may reduce the prices of their services in an
effort to expand their market share or service areas or to win competitively bid municipal
contracts. These practices may cause us to reduce the prices of our services or, if we elect not to
do so, to lose business. Competition exists not only for collection, transfer and disposal volume, but also for
acquisition candidates. We generally compete for acquisition candidates with publicly owned
regional and large national solid waste services companies. Governmental Regulation We are subject to significant federal, provincial, state and local environmental and land use
laws and regulations in the United States and Canada. The enforcement of both U.S. and Canadian
environmental laws has become increasingly stringent. We believe that we are currently in
substantial compliance with all material applicable environmental laws, permits, orders and
regulations, and therefore we do not currently anticipate any significant environmental costs
necessary to bring our existing operations into compliance. We anticipate that regulation,
legislation and regulatory enforcement actions related to the solid waste services industry will
continue to increase and that as they do, the administrative burden and costs of our compliance
will increase. To transport, manage and accept solid waste for disposition, we must possess and comply with
one or more permits from federal, provincial, state or local agencies and government offices. These
permits must be periodically renewed and may be modified or revoked by the issuing agency. The principal statutes and regulations that affect our operations are described below. United States Regulation The principal laws and regulations that affect our U.S. operations (including those that were
sold in 2001 and which could continue to result in liability to us), as well as waste that we
export from our Canadian operations to landfills located in the United States are described below. The Resource Conservation and Recovery Act of 1976 The Resource Conservation and Recovery Act of 1976, or RCRA, regulates the generation,
treatment, storage, handling, transportation and disposal of solid waste and requires states to
develop programs to ensure the safe disposal of solid waste. RCRA 7




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divides solid waste into two
groups, hazardous and non- hazardous. Wastes classified as hazardous under RCRA are subject to much
stricter regulation than wastes classified as non-hazardous. The Subtitle D Regulations, which govern solid waste landfills, include location restrictions,
facility design standards, operating criteria, closure and post-closure requirements, financial
assurance requirements, groundwater monitoring requirements, methane gas emission control
requirements, groundwater remediation standards and corrective action requirements. The Subtitle D
Regulations also require new landfill sites to meet more stringent liner design criteria to keep
leachate out of groundwater. Each state is required to revise its landfill regulations to meet
these requirements or these requirements will be automatically imposed by the Environmental
Protection Agency, or EPA, on landfill owners and operators in that state. Each state is also
required to adopt and implement a permit program or other appropriate system to ensure that
landfills in each state comply with the Subtitle D Regulations. Various states in which we
currently operate or in which we may operate in the future have adopted regulations or programs as
stringent as, or more stringent than, the Subtitle D Regulations. The Federal Water Pollution Control Act of 1972 The Federal Water Pollution Control Act of 1972, or Clean Water Act, regulates the discharge
of pollutants from a variety of sources into waters of the United States. If run-off from transfer
stations or run-off or collected leachate from landfills that we operate or own were discharged
into streams, rivers or other surface waters, the Clean Water Act requires us to obtain a discharge
permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of
pollutants in the discharge. Also, virtually all landfills are required to comply with the EPAs
storm water regulations issued in November 1990, which are designed to prevent contaminated
landfill storm water run-off from flowing into surface waters. Various states have adopted
regulations that are more stringent than the federal requirements. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA,
established a regulatory and remedial program intended to provide for the investigation and cleanup
of facilities where or from which a release of any hazardous substance into the environment has
occurred or is threatened. CERCLA imposes strict joint and several liability for cleanup of
facilities on current owners and operators of the site, former owners and operators of the site at
the time of the disposal of the hazardous substances, any person who arranges for the
transportation, disposal or treatment of the hazardous substances, and the transporters who select
the disposal and treatment facilities. CERCLA also imposes liability for the cost of evaluation and
remediation of any damage to natural resources. The costs of a CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA may be based on the existence of small amounts of the more than 700 hazardous substances
listed by the EPA, many of which can be found in household waste. If we were found to be a
responsible party for a CERCLA cleanup, the enforcing agency could hold us, or any other generator,
transporter or the owner or operator of the contaminated facility, responsible for all
investigative and remedial costs, even if others
were also liable. CERCLA gives a responsible party the right to bring a contribution action
against other responsible parties for their allocable shares of investigative and remedial costs.
Our ability to obtain reimbursement from others for their allocable shares of these costs would be
limited by our ability to find other responsible parties and prove the extent of their
responsibility and by the financial resources of these other parties. The Clean Air Act of 1970 The Clean Air Act of 1970, or Clean Air Act, regulates emissions of air pollutants. The EPA
has developed standards that apply to certain landfills depending on the date of the landfill
construction, the location of the landfill, the materials disposed of at the landfill and the volume
of the landfill emissions. The EPA has also issued standards regulating the disposal of asbestos
containing materials under the Clean Air Act. Air permits to construct may be required for gas
collection and flaring systems, and operating permits may be required, depending on the estimated
volume of emissions. All of the federal statutes described above contain provisions authorizing, under certain
circumstances, the institution of lawsuits by private citizens to enforce the provisions of the
statutes. In addition to a penalty award to the U.S. government, some of those statutes authorize
an award of attorneys fees to parties successfully advancing such an action. 8




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The Occupational Safety and Health Act of 1970 The Occupational Safety and Health Act of 1970 is administered by the Occupational Safety and
Health Administration, or OSHA, and in many states by state agencies whose programs have been
approved by OSHA. The OSHA Act establishes employer responsibilities for worker health and safety,
including the obligation to maintain a workplace free of recognized hazards likely to cause death
or serious injury, to comply with adopted worker protection standards, to maintain certain records,
to provide workers with required disclosures and to implement certain health and safety training
programs. Various OSHA standards may apply to our operations, including standards concerning
notices of hazards, the handling of asbestos and asbestos-containing materials and worker training
and emergency response programs. Flow Control/Interstate Waste Restrictions Certain permits and approvals, as well as certain state and local regulations, may limit a
landfill in accepting waste that originates from specified geographic areas, restrict the
importation of out-of-state waste or otherwise discriminate against out-of-state waste. These
restrictions, generally known as flow control restrictions, are controversial, and some courts have
held that some flow control schemes violate constitutional limits on state or local regulation of
interstate commerce. From time to time, federal legislation is proposed that would allow some local
flow control restrictions. Although no such federal legislation has been enacted to date, if this
federal legislation should be enacted in the future, states could act to limit or prohibit the
importation of out-of-state waste or direct that waste be handled at specified facilities. These
state actions could adversely affect landfill owners and could also result in higher disposal costs
for collection operations. Even in the absence of federal legislation, certain state and local jurisdictions may seek to
enforce flow control restrictions through local legislation or contract. These restrictions could
result in the volume of waste going to landfills being reduced in certain areas, which could affect
the landfill owners ability to operate the landfills at full capacity or reduce the prices that it
can charge for landfill disposal services. Any such restrictions may also result in higher disposal
costs for our collection operations. State and Local Regulation Each state has laws and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, occupational safety and health, water and air pollution
and, in most cases, the siting, design, operation, maintenance, closure and post-closure
maintenance of landfills and transfer stations. In addition, many states have adopted statutes
comparable to, and in some cases more stringent than, CERCLA. These statutes impose requirements
for investigation and cleanup of contaminated sites and liability for costs and damages associated
with these sites, and some provide for the imposition of liens on property owned by responsible
parties. Furthermore, many municipalities also have ordinances, local laws and regulations that
affect the operations of solid waste services companies. These include zoning and health measures
that limit solid waste management activities to specified sites or activities, flow control
provisions that direct the delivery of solid wastes to specific facilities, laws that grant the
right to establish franchises for collection services and then put these franchises out for bid,
and bans or other restrictions on the movement of solid wastes into a municipality. Permits or other land use approvals with respect to a landfill, as well as state or local laws
and regulations, may specify the quantity of waste that may be accepted at the landfill during a
given time period, specify the types of waste that may be accepted at the landfill or the areas
from which waste may be accepted at a landfill. Once an operating permit for a landfill is
obtained, it must generally be renewed periodically. There has been an increasing trend at the state and local level in the United States to
mandate and encourage waste reduction at the
source, and waste recycling, and to prohibit or restrict the disposal of certain types of
solid wastes, such as yard wastes, leaves and tires, in landfills. The enactment of regulations
reducing the volume and types of wastes available for transport to and disposal in landfills could
affect the ability of transfer station and landfill owners to operate their sites at full capacity. Some state and local authorities enforce certain federal laws in addition to state and local
laws and regulations. For example, in some states, RCRA, the Occupational Safety and Health Act,
parts of the Clean Air Act and parts of the Clean Water Act are enforced by local or state
authorities instead of by the EPA, and in some states those laws are enforced jointly by state or
local and federal authorities. Canadian Regulation Our Canadian operations are subject to environmental statutes and regulations at each of the
federal, provincial and local levels. These laws impose restrictions designed to control air, soil
and water pollution and regulate health and safety, zoning and land use and 9




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the handling of
hazardous and non-hazardous wastes, and often empower government officials to issue administrative
orders, including orders to cease carrying out a specific activity. This regulatory framework
imposes significant compliance burdens and risks. The contravention of these laws may result in
substantial fines that could equal or exceed the amount of monetary benefit acquired as a result of
the commission of the offense and which could materially affect our business, results of operations
and financial condition. In addition, our Canadian operations are subject to federal and provincial
legislation regulating the operation of our fleet of vehicles, as well as to provincial
occupational health and safety and workers compensation statutes which establish employer
responsibilities for worker health and safety. The provisions of these statutes impose compliance
burdens and costs and may result in significant penalties for failure to comply. The Canadian Environmental Protection Act, 1999 and the regulations passed under the act
regulate, among other things, the import and export of waste into and out of Canada. The
Transportation of Dangerous Goods Act regulates the transport of wastes across provincial and
federal borders. Ontario Ontarios Environmental Protection Act and the regulations passed under the Act regulate
general waste management and new or expanding landfill sites, prescribe the principal standards for
the location, maintenance and operation of waste management systems, transfer and disposal sites,
require the monitoring and reporting of airborne contamination and create offenses for spills,
unlawful contaminant discharges or failure to comply with environmental permits or approvals. The operation of a waste management system or a waste transfer or disposal site in Ontario
requires a certificate of approval or a provisional certificate of approval issued by the Ministry
of the Environment under Part V of the Ontario Environmental Protection Act. We have applied for
and obtained Certificates of Approval for the operation of all of our existing waste management
systems and waste transfer and disposal sites in Ontario. The Ontario Water Resources Act prohibits unlawful discharges into water and regulates
wastewater systems in Ontario, including leachate collection, treatment and discharges at
landfills. In 2003, amendments were passed to the Municipal Act that allow, in certain prescribed
circumstances, the formation of municipal businesses to compete directly in a public competitive
bidding process with the private sector waste services industry for the collection, transfer,
storage, disposal or recycling of residential waste. Saskatchewan The Environment Management and Protection Act of 2002 and the regulations passed under the Act
govern waste management activities carried on in Saskatchewan, including the permitting and
operation of our Gap Disposal landfill. Alberta The Environmental Protection and Enhancement Act comprehensively regulates the management and
control of waste, including hazardous waste, and creates offenses for spills and other matters of
non-compliance. The Waste Control Regulation deals in detail with the identification of wastes and
requirements for the handling, storage and disposal of waste. Waste management facilities currently
permitted under the Alberta Public Health Act, including our landfill in Coronation, Alberta, must
be permitted by Alberta Environment no later than 2006 and the permit must be renewed every 10
years thereafter. Renewal of the Coronation, Alberta landfill site permit may result in the
imposition of additional permit conditions that may increase the cell development and operating
cost above current levels, or may limit the type, quantity or quality of waste that may be
accepted. New landfill design standards are being developed by Alberta Environment that may require
us to construct or operate future landfill cells and infrastructure to a higher and potentially
more costly standard than currently permitted. British Columbia The Environmental Management Act was enacted in July 2004 and introduced a regime which
applies a risk-based approach of administrative penalties to be applied as a compliance enforcement
tool as an alternative to prosecution. The Act governs waste collection and transfer operations in
British Columbia. Various other provincial statutes, such as the Transportation of Dangerous Goods Act deal generally with environmental matters and could also impact our operations in
British Columbia. 10




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Municipal Regulation Many municipal governments have passed local by-laws, including zoning and health measures by-laws
that limit our activities to prescribed sites or activities, control the delivery of solid wastes
to prescribed sites, restrict or ban the movement of solid waste into a municipality and regulate
discharges into municipal sewers from our solid waste facilities. There has been an increasing
trend to mandate and encourage waste reduction and separation at source and waste recycling, and to
prohibit or restrict the disposal of certain solid waste, such as yard waste, leaves and tires, in
landfills. Such restrictions could affect the ability of our transfer stations and landfills to
operate at full capacity. Employees As of December 31, 2004, we employed 2,128 full-time employees, including 176 persons
categorized as professionals or managers, 1,808 employees involved in collection, transfer,
disposal and recycling operations, and 144 sales, clerical, data processing or other administrative
employees. Risk Factors Our indebtedness may make us more vulnerable to unfavorable economic conditions and competitive
pressures, limit our ability to borrow additional funds, require us to dedicate or reserve a large
portion of cash flow from operations to service debt, and limit our ability to take actions that
would increase our revenue and execute our growth strategy As of December 31, 2004, we had total debt and capital lease obligations of $278.4 million.
Our debt is comprised of our senior credit facilities, including a $60.0 million revolving credit
facility due in April 2009, ($15.0 million outstanding at December 31, 2004) and a $99.3 million
term loan maturing on April 2011, and our $160.0 million senior subordinated notes maturing in
April 2014. The Credit Facilities are secured by substantially all of the assets of our U.S.
restricted subsidiaries. Our Canadian operations guarantee and pledge all of their assets only in
support of the portion of the revolving credit facility available to them. Separately, 65% of the
Common Shares of Waste Services first tier foreign subsidiaries, including Capital, are pledged to
secure obligations under the Credit Facilities. The amount of indebtedness owed under our existing credit facilities and senior subordinated
notes may have adverse consequences for us,
including making us more vulnerable to unfavorable economic conditions and competitive pressures,
limiting our ability to borrow additional funds, requiring us to dedicate or reserve a large
portion of cash flow from operations to service debt, limiting our ability to plan for or react to
changes in our business and industry and placing us at a disadvantage compared to competitors with
less debt in relation to cash flow. The credit facilities contain covenants and restrictions that could
limit the manner in which we conduct our operations and could adversely affect our ability to raise
additional capital. Any failure by us to comply with these covenants and restrictions will, unless
waived by the lenders, result in an immediate obligation to repay indebtedness. If such events occurred, we would be required
to refinance or obtain capital from other sources, including sales of additional debt or equity or
the sale of assets, in order to meet our repayment obligations. We may not be
successful in obtaining alternative sources of funding to repay these obligations should events of
default occur. 11




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Our business is capital intensive and may consume cash in excess of cash flow from our operations
and borrowings Our ability to remain competitive, sustain our growth and maintain our operations largely
depends on our cash flow from operations and our access to capital. We intend to fund our cash
needs through our operating cash flow, borrowings and equity issuances. We may require additional
equity or debt financing to fund our growth and debt repayment obligations. During 2004, we had capital expenditures of $46.2 million. Separately, we have provided for
our liabilities related to our closure and post-closure obligations. As we undertake acquisitions,
expand our operations, and deplete our landfills, our cash expenditures will increase. As a result,
working capital levels may decrease and require financing. In addition, if we must close a landfill
sooner than we currently anticipate, or if we reduce our estimate of a landfills remaining
available air space, we may be required to incur such cash expenditures earlier than originally
anticipated. Expenditures for closure and post-closure obligations may increase as a result of any
federal, state or local government regulatory action taken to accelerate such expenditures. These
factors could substantially increase our cash expenditures and therefore impair our ability to
invest in our existing or new facilities. We may need to refinance our existing credit facilities and may need to refinance other debt
to pay the principal amounts due at maturity. In addition, we may need additional capital to fund
future acquisitions and the integration of the businesses that we acquire. Our business may not
generate sufficient cash flow, we may not be able to obtain sufficient funds to enable us to pay
our debt obligations and capital expenditures or we may not be able to refinance on commercially
reasonable terms, if at all. We may be unable to obtain or maintain the environmental permits and approvals we need to operate
our business, which could adversely affect our earnings and cash flow We are subject to significant environmental and land use laws and regulations. To own and
operate solid waste facilities, including landfills and transfer stations, we must obtain and
maintain licenses or permits, as well as zoning, environmental and other land use approvals. It has
become increasingly difficult, costly and time-consuming to obtain required permits and approvals
to build, operate and expand solid waste management facilities. The process often takes several
years, requires numerous hearings and compliance with zoning, environmental and other requirements
and is resisted by citizen, public interest and other groups. The cost of obtaining permits could
be prohibitive. We may not be able to obtain and maintain the permits and approvals needed to own,
operate or expand our solid waste facilities. Moreover, the enactment of additional laws and
regulations or the more stringent enforcement of existing laws and regulations could increase the
costs associated with our operations. Any of these occurrences could reduce our expected earnings
and cash flow. In some markets in which we operate, permitting requirements may be prohibitive and may differ
between those required of us and those required of our competitors. Our inability to obtain and
maintain permits for solid waste facilities may adversely affect our ability to service our
customers and compete in these markets, thereby resulting in reduced operating revenue. In addition, stringent controls on the design, operation, closure and post-closure care of
solid waste facilities could require us to undertake investigative or remedial activities, curtail
operations, close a facility temporarily or permanently, or modify, supplement or replace equipment
or facilities at substantial costs resulting in reduced profitability and cash flow. Any failure to maintain the required financial assurance or insurance to support existing or future
service contracts may prevent us from meeting our contractual obligations, and we might be unable
to bid on new contracts or retain existing contracts resulting in reduced operating revenue and
earnings Municipal solid waste services contracts and permits to operate transfer stations, landfills and
recycling facilities typically require us to obtain performance bonds, letters of credit or other
means of financial assurance to secure our contractual performance. Such contracts and permits also
typically require us to maintain adequate insurance coverage. We carry a broad range of insurance
coverage and retain certain insurance exposure that we believe is customary for a company of our
size. If our obligations were to exceed our estimates, there could be a material adverse effect on
our results of operations. Our ability to obtain performance bonds or letters of credit is
generally dependent on our creditworthiness. Also, the issuance of letters of credit reduces the
availability of our revolving credit facilities for other purposes. Our bonding arrangements are
generally renewed annually. If we are unable to renew our bonding arrangements on favorable terms
or at all or enter into arrangements with new surety providers, we would be unable to meet our
existing contractual obligations that require the posting of performance bonds, and we would be
unable to bid on new contracts. This would reduce our operating revenue and our earnings. 12




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Our acquisition strategy may be unsuccessful if we are unable to identify and complete future
acquisitions and integrate acquired assets or businesses and this subjects us to risks that may
have a material adverse effect on our results of operations Part of our strategy to expand our business and increase our revenue and profitability is to
pursue the acquisition of disposal-based and collection assets and businesses. We have identified a
number of acquisition candidates, both in the United States and Canada, that we believe are
suitable. However, we may not be able to acquire these candidates at prices or on terms and
conditions that are favorable to us. Furthermore, we expect to finance future acquisitions through
a combination of seller financing, cash from operations, borrowings under our financing facilities
or issuing additional equity or debt securities. Our ability to execute our acquisition strategy
also depends upon other factors, including our ability to obtain financing on favorable terms, the
successful integration of acquired businesses and our ability to effectively compete in the new
markets we enter. If we are unable to identify suitable acquisition candidates or successfully complete and
integrate the acquisitions, we may not realize the expected benefits from our acquisition growth
strategy, including any expected benefits from the proposed vertical integration of acquired
operations and disposal facilities. Our business strategy depends in part upon vertically integrating our operations. If we are unable
to permit, expand or renew permits for our existing landfill sites or enter into agreements that
provide us with access to landfill sites and acquire, lease or otherwise secure access to transfer
stations, this may reduce our profitability and cash flow. Our ability to meet our business strategy depends in part on our ability to permit, expand or
renew permits for our existing landfills, develop new landfill sites in proximity to our
operations, enter into agreements that will give us long-term access to landfill sites in our
markets and to acquire, lease or otherwise secure access to transfer stations that permit us to
internalize our collection volume to our own landfill sites. Permits to expand landfills are often
not approved until the remaining permitted disposal capacity of a landfill is very low. We may not
be able to purchase additional landfill sites, renew the permits for or expand existing landfill
sites, negotiate or renegotiate agreements to obtain a long-term advantage for landfill costs or
permit or renew permits for transfer stations that allow us to internalize the waste we collect. If
we were to exhaust our permitted capacity at our landfills, our ability to expand internally could
be limited, and we could be required to cap and close our landfills and dispose of collected waste
at more distant landfills or at landfills operated by our competitors or other third parties. In
Alberta, Canada, regulations require landfills to be re-approved every 10 years, thereby providing
the regulator an opportunity to add potentially more stringent or costly design or operating
conditions to the permit or prevent the renewal of the permit. Our landfill located in Alberta,
Canada must complete this re-approval process by October 2006. Any failure by us to secure
favorable arrangements (through ownership of landfills or otherwise) for the disposal of collected
waste would increase our disposal costs and could result in the loss of business to competitors
with more favorable disposal options thereby reducing our profitability and cash flow. Changes in legislative or regulatory requirements may cause changes in the landfill site
permitting process. These changes could make it more difficult or costly for us to obtain or renew
landfill permits. Technical design requirements, as approved, may need modification at some future
point in time, which could result in higher development and construction costs than projected. Our
current estimates of future disposal capacity may change as a result of changes in design
requirements prescribed by legislation, construction requirements and changes in the expected waste
density over the life of a landfill site. The density of waste used to convert the available
airspace at a landfill into tons may be different than estimated because of variations in operating
conditions, including waste compaction practices, site design, climate and the nature of the waste. Any exposure to environmental liabilities, to the extent not adequately covered by insurance, could
result in significant expenses, which would reduce the funds we have available for other purposes,
including debt service and reduction and acquisitions We could be held liable for environmental damage at solid waste facilities that we own or
operate, including damage to neighboring landowners and residents for contamination of the air,
soil, groundwater, surface water and drinking water. Our liability could extend to damage resulting
from pre-existing conditions and off-site contamination caused by pollutants or hazardous
substances that we or our predecessors arranged to transport, treat or dispose of at other
locations. We are also exposed to liability risks from businesses that we acquire because these
businesses may have liabilities that we fail or are unable to discover, including noncompliance
with environmental laws. Our insurance program may not cover all liabilities associated with
environmental cleanup or remediation or compensatory damages, punitive damages, fines, or penalties
imposed on us as a result of environmental damage caused by our operations or those of any
predecessor. The incurring of liabilities for environmental damages that are not fully covered by
insurance could adversely affect our liquidity and could result in significant expenses, which
would reduce the funds we have available for other purposes, including debt service and reduction
and acquisitions. 13




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We face competition from large and small solid waste services companies and may be unable to
successfully compete with other solid waste companies reducing our operating margins The markets in which we operate are highly competitive and require substantial labor and
capital resources. We compete with large, national solid waste services companies as well as
smaller regional solid waste services companies. Some of our competitors are better capitalized,
have greater name recognition and greater financial, operational and marketing resources than us,
and may be able
to provide services at a lower cost. We also compete with operators of alternative disposal facilities and municipalities that
maintain their own waste collection and disposal operations. Public sector operators may have
financial advantages over us because of their access to user fees and similar charges as well as to
tax revenue. Responding to this competition may result in reduced operating margins. Further,
competitive pressures may make our internal growth strategy of improving service and increasing
sales penetration difficult or impossible to execute. The termination or non-renewal of existing customer contracts, or the failure to obtain new
customer contracts, could result in declining revenue We derive a portion of our revenue from municipal contracts that require competitive bidding
by potential service providers. Although we intend to continue to bid on municipal contracts and to
rebid existing municipal contracts, such contracts may not be maintained or won in the future. In
the past year, we have found that some municipalities in Canada, for example, have imposed more
restrictive bonding requirements as a qualification to bid for some residential waste collection
contracts. We may be unable to meet such bonding requirements at a reasonable cost to us or at all.
These requirements may limit our ability to bid for some municipal contracts and may favor some of
our competitors. If we are unable to compete successfully for municipal contracts because of
bonding requirements, we may lose important sources of revenue. We also derive a portion of our revenue from non-municipal contracts, which generally have a
term of one to five years. Some of these contracts permit our customers to terminate them before
the end of the contractual term. Any failure by us to replace revenue from contracts lost through
competitive bidding, termination or non-renewal within a reasonable time period could result in a
decrease in our operating revenue and our earnings. We depend on third parties for disposal of solid waste and if we cannot maintain disposal
arrangements with them we could incur significant costs that would result in reduced operating
margins and revenue We currently deliver a substantial portion of the solid waste we collect to municipally owned
disposal facilities and to privately owned or operated disposal facilities. If municipalities
increase their disposal rates or if we cannot obtain and maintain disposal arrangements with
private owners or operators, we could incur significant additional costs and, if we are not able to
pass these cost increases on to our customers because of competitive pressures, this could result
in reduced operating margins and revenue. Labor unions may attempt to organize our non-unionized employees, which may result in increased
operating expenses Some of our employees in Canada have chosen to be represented by unions, and we have
negotiated collective bargaining agreements with them. Labor unions may make attempts to organize
our non-unionized employees. The negotiation of any collective bargaining agreement could divert
managements attention away from other business matters. If we are unable to negotiate acceptable
collective bargaining agreements, we may have to wait through cooling-off periods, which are
often followed by union-initiated work stoppages, including strikes. Unfavorable collective
bargaining agreements, work stoppages or other labor disputes may result in increased operating
expenses. Our operating margins and profitability may be negatively impacted by increased fuel and energy
costs Although fuel and energy costs account for a relatively small portion of our total operating
costs, sustained increases in such costs, which we are unable to pass on to our customers because
of competitive pressures, could lower our operating margins and negatively impact our
profitability. 14




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The industry in which we operate is seasonal and decreases in revenue during winter months may have
an adverse effect on our results of operations, particularly for our Canadian operations Our operating revenue tends to be somewhat lower in the fall and winter months for our
Canadian operations, reflecting the lower volume of solid waste generated during those periods. Our
first and fourth quarter results typically reflect this seasonality. In addition, particularly
harsh weather conditions may result in temporary slowdowns or suspension of certain of our
operations or higher labor and operational costs, any of which could have a material adverse effect
on our results of operations. Our Canadian operations subject us to currency translation risk, which could cause our results to
fluctuate significantly from period to period For the year ended December 31, 2004, a portion of our revenue was derived from our operations
in Canada. For each reporting period, we translate the results of our Canadian operations and
financial condition into U.S. dollars. Therefore, our reported results of operations and financial
condition are subject to changes in the exchange relationship between the two currencies. As the
relationship of the Canadian dollar strengthens against the U.S. dollar our revenue is favorably
affected and conversely expenses are unfavorably affected. The effects of translation are reported
as a component of other comprehensive income. Separately, monetary assets and liabilities
denominated in U.S. dollars held by our Canadian operations are re-measured from U.S. dollars into
Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported
currently as a component of net income (loss). We do not currently hedge our exposure to changes in
foreign exchange rates. Changes to patterns regarding disposal of waste could adversely affect our results of operations by
reducing the volume of waste available for collection and thus reducing our earnings Waste reduction programs may reduce the volume of waste available for collection in some areas
where we operate. Some areas in which we operate offer alternatives to landfill disposal, such as
recycling and composting. In addition, state, local, and provincial authorities increasingly
mandate recycling and waste reduction at the source and prohibit the disposal of certain types of
waste, such as yard waste, at landfills. Any significant adverse change in regulation or patterns
regarding disposal of waste could have a material adverse effect on our earnings by reducing the
level of demand for our services, resulting in decreased revenue and the earnings we are able to
generate. Limits on export of waste and any disruptions to the cross-border flow of waste may adversely
affect our results of operations by increasing our costs of disposal There is limited disposal capacity available in Ontario, Canada, a market in which we have
significant operations. As a result, a significant portion of the solid waste collected in Ontario
is transported to sites in the United States for disposal. Disruptions in the cross-border flow of
waste, or periodic closures of the border to solid waste would cause us to incur more costs due to
the increased time our trucks may be required to spend at border check-points or increased
processing or sorting requirements. Additionally, our trucks might be required to travel further to
dispose of their waste in other areas of Ontario. Disruptions in the cross-border flow of waste
could also result in a lack of disposal capacity available to our Ontario market at a reasonable
price or at all. These disruptions could have a material adverse effect on our operating results by
increasing our costs of disposal in the Ontario market and thereby decreasing our operating margins
and could result in the loss of business to competitors with more favorable disposal options. 
 Item 2.Properties Our principal executive offices are in leased premises in Burlington, Ontario and in
Scottsdale, Arizona. We also have administrative offices in Arizona, Florida, Alberta and Ontario.
Our principal property and equipment consist of land, buildings, vehicles and equipment,
substantially all of which are encumbered by liens in favor of our lenders under our existing
revolving and term loan credit facilities. We operate collection businesses from locations in the United States and in Canada, of which
11 are owned and 22 are leased. At 8 of these leased facilities, we also operate transfer
stations. We own 3 of the properties from which we operate transfer stations and lease or have
operating agreements for 3 other locations. 3 of our 10 material recycling facilities in Canada
and the United States are operated on properties which we own. 15




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We own and operate four landfills in the United States and three in Canada. For more
information regarding our landfills, see Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations  Critical Accounting Policies  Landfill Sites. As of December 31, 2004, we used approximately 1,185 front-line waste collection vehicles in
our operations. We believe that our vehicles, equipment and operating properties are adequate for
our current operations. However, we expect to continue to make investments in additional equipment
and property for expansion, replacement of assets and in connection with future acquisitions. 
 Item 3.Legal Proceedings In the normal course of our business and as a result of the extensive governmental regulation
of the solid waste industry, we may periodically become subject to various judicial and
administrative proceedings involving federal, provincial, state or local agencies. In these
proceedings, an agency may seek to impose fines on us or revoke or deny renewal of an operating
permit or license that is required for our operations. From time to time, we may also be subject to
actions brought by citizens groups or adjacent landowners or residents in connection with the
permitting and licensing of transfer stations and landfills or alleging environmental damage or
violations of the permits and licenses pursuant to which we operate. We may become party to various
lawsuits pending for alleged damages to persons and property, alleged violations of certain laws
and alleged liabilities arising out of matters occurring during the normal operation of a solid
waste management business. In December 2002, Canadian Waste Services Inc., or Canadian Waste, one of our competitors,
commenced an action in the Court of Queens Bench of Alberta against us and one of our employees in
Western Canada who had previously been employed by Canadian Waste. The action alleges breach of the
employment contract between the employee and Canadian Waste, and breach of fiduciary duties. The
action also alleges that we participated in those alleged breaches. The action seeks damages in the
amount of approximately C$14.5 million, and an injunction enjoining the employee from acting
contrary to his alleged employment contract and fiduciary duties. In February 2003, Canadian Waste commenced an action in the Court of Queens Bench of
Alberta against us alleging breach of a landfill tipping agreement that we had entered into with
Canadian Waste. The action alleges that we have breached the agreement by not paying certain
amounts invoiced to us by Canadian Waste relating to increased costs incurred by Canadian Waste in
its operation of the Ryley landfill and at which we deposited certain quantities of waste pursuant
to the agreement. Canadian Waste seeks damages in the amount of approximately C$1.3 million. The
agreement contains an arbitration clause that prohibits court action and requires arbitration with
respect to certain disputes. In July 2004, Waste Management, Inc. filed a suit in the District Court of Harris County,
Texas against Charles A. Wilcox, our President and Chief Operating Officer. The suit is for breach
of contract, including breach of a non-competition agreement, and for a temporary and permanent
injunction. Mr. Wilcox is subject to a temporary order restraining him from engaging in certain
activities adverse to the interests of Waste Management, Inc. Mr. Wilcox intends to vigorously
defend this action. We intend to vigorously defend these actions both with respect to liability and damages, and
no provisions have been made in these financial statements for the above matters. As of the date of this report, we do not believe that the reasonably possible losses in
respect of all or any of these matters would have a material adverse impact on our business,
financial condition, results of operations or cash flows. In March 2005, we filed a Complaint against Waste Management, Inc. in the United States
District Court in the Middle District of Florida (Orlando). The Complaint alleges that Waste
Management sought to prevent us from establishing ourselves as an effective competitor to Waste
Management in the State of Florida, by tortiously interfering with our business relationships and
committing antitrust violations under both federal and Florida law. We are seeking in excess of $25.0 million
in damages against Waste Management. If we are successful in our suit under antitrust laws, Waste
Management would be liable for treble damages or in excess of $75.0 million. 16




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Item 4.Submission of Matters to a Vote of Security Holders On December 29, 2004, we held an annual meeting of our shareholders. At the meeting, David
Sutherland-Yoest and Gary W. DeGroote were re-elected as directors to hold office until the 2007
annual meeting of shareholders. The following table sets forth the number of votes cast for or withheld for each director
nominee: Director
    
    For
    
    
    WithheldDavid Sutherland-Yoest
    
    
    75,941,016
    
    
    
    327,616Gary W. DeGroote
    
    
    76,030,928
    
    
    
    237,704
 
 Item 4A.Executive Officers of the Registrant The following table sets forth information regarding our executive officers as of March 1,
2005. Name
    
    Age
    
    Position
    
    SinceDavid Sutherland-Yoest
    
    
    48
    
    
    Chairman and Chief Executive Officer
    
    September 6, 2001Charles A. Wilcox
    
    
    52
    
    
    President and Chief Operating Officer
    
    July 1, 2004Ivan R. Cairns
    
    
    59
    
    
    Executive Vice President, General
Counsel and Secretary
    
    January 5, 2004Mark A. Pytosh
    
    
    40
    
    
    Executive Vice President
    
    February 23, 2004Ronald L. Rubin
    
    
    39
    
    
    Executive Vice President and Chief
Financial Officer
    
    September 2, 2003Brian A. Goebel
    
    
    37
    
    
    Vice President, Chief Accounting
Officer and Corporate Controller
    
    October 1, 2003
 Certain biographical information regarding each of our executive officers is set forth below. David Sutherland-Yoesthas been our Chairman and Chief Executive Officer and a director since
September 6, 2001. Mr. Sutherland-Yoest also held the position of Chairman and Chief Executive
Officer of H2O Technologies Ltd., a water purification company, from March 2000 to
October 2003 and served as a director of H2O Technologies Ltd. from March 2000 to
January 2004. Mr. Sutherland-Yoest served as the Senior Vice President  Atlantic Area of Waste
Management, Inc. from July 1998 to November 1999. From August 1996 to July 1998, he was the Vice
Chairman and Vice President  Atlantic Region of USA Waste Services, Inc., or USA Waste and the
President of Canadian Waste Services, Inc., which, during such time, was a subsidiary of USA Waste.
Prior to joining USA Waste, Mr. Sutherland-Yoest was President, Chief Executive Officer and a
director of Envirofil, Inc. Between 1981 and 1992, he served in various capacities at Laidlaw
Waste Systems, Inc. and Browning-Ferris Industries, Ltd. Charles A. Wilcoxwas appointed our President and Chief Operating Officer effective July 1,
2004. Prior to joining us, Mr. Wilcox worked for Waste Management, Inc. from December 1994 where
he held the positions of Senior Vice President, Market Planning and Development and prior to that
Senior Vice President, Eastern Group. Ivan R. Cairnswas appointed as Executive Vice President, General Counsel, and Corporate
Secretary effective January 5, 2004. Prior to joining us, Mr. Cairns served as Senior Vice
President and General Counsel at Laidlaw International Inc. and was Senior Vice President and
General Counsel at its predecessor, Laidlaw Inc., for over 20 years. In June 2001, Laidlaw Inc.,
and four of its direct and indirect subsidiaries, filed voluntary petitions for bankruptcy under
the U.S. Bankruptcy Code and also commenced Canadian insolvency proceedings. In June 2003, these
companies emerged from bankruptcy and the Canadian insolvency proceedings. Mark A. Pytoshwas appointed Executive Vice President effective February 23, 2004. Prior to
joining us, Mr. Pytosh was a Managing Director in Investment Banking at Lehman Brothers where he
focused on working with clients in the industrial sector, including leading the firms banking
efforts in the solid waste industry. Before joining Lehman Brothers in 2000, Mr. Pytosh had 15
years of investment banking experience at Donaldson, Lufkin & Jenrette and Kidder, Peabody. 17




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##### Table of Contents



Ronald L. Rubinwas appointed as our Executive Vice President and Chief Financial Officer
effective September 2, 2003. Prior to joining us, Mr. Rubin, a Certified Public Accountant, held
the position of Vice President, Chief Accounting Officer and Controller for Paxson Communications
Corporation which owns and operates a broadcast television distribution system in the United States
and the PAX TV network. Prior to joining Paxson, Mr. Rubin held the position of Vice President,
Controller for AutoNation Inc., a Fortune 100 company and the former parent of Republic Services,
Inc., a provider of solid waste collection, transfer and disposal services in the United States. Brian A. Goebelwas appointed as our Vice President, Chief Accounting Officer and Corporate
Controller effective October 1, 2003. From December 1999 until joining us, Mr. Goebel, a Certified
Public Accountant, held the position of Assistant Controller, ANC Rental Corporation, which owned
Alamo and National Car Rental. From January 1997 to December 1999, Mr. Goebel was a Director of
Corporate Accounting for AutoNation, Inc. Prior to joining AutoNation, Inc., Mr. Goebel spent eight
years in the Business Assurance practice of Coopers & Lybrand, LLP. 
 PART II 
 Item 5.Market for Registrants Common Equity and Related Shareholder Matters Market Information Since March 8, 2004, our Common Shares have been traded on the Nasdaq National Market. From
September 22, 2000 through March 7, 2004, our Common Shares were traded on the Nasdaq SmallCap
Market. The following table provides high and low common share price information for each quarter
within our last two fiscal years: High
    
    
    LowYear Ended December 31, 2003First Quarter
    
    $
    5.11
    
    
    $
    3.71Second Quarter
    
    $
    4.76
    
    
    $
    2.98Third Quarter
    
    $
    5.90
    
    
    $
    3.10Fourth Quarter
    
    $
    7.00
    
    
    $
    5.05Year Ended December 31, 2004First Quarter
    
    $
    6.06
    
    
    $
    5.11Second Quarter
    
    $
    5.37
    
    
    $
    4.51Third Quarter
    
    $
    3.00
    
    
    $
    1.95Fourth Quarter
    
    $
    3.91
    
    
    $
    2.41
 Holders As
at March 1, 2005, there were approximately 150 holders of record of our Common Shares
(including holders of exchangeable shares). Dividends We have not paid cash dividends on our Common Shares to date. The terms of our senior secured
credit facilities prohibit us from paying cash dividends without the consent of our lenders. See
Item 7  Management Discussion and Analysis of Financial Condition  Liquidity and Capital
Resources  Senior Secured Credit Facilities. We currently intend to retain our future earnings, if any, to finance the growth, development
and expansion of our business and repayment of indebtedness. Accordingly, we do not intend to declare or pay any cash dividends
on our Common Shares in the immediate future. The declaration, payment and amount of future cash
dividends, if any, will be at the discretion of our board of directors after taking into account
various factors. These factors include our financial condition, results of operations, cash flows
from operations, current and anticipated capital requirements and expansion plans, the income tax
laws then in effect and the requirements of applicable laws. Recent Sales of Unregistered Securities In February 2004, we issued warrants to purchase 200,000 shares of common stock valued at
approximately $0.4 million in a private placement transaction in connection with the acquisition of
the Fort Bend Regional Landfill site. This issuance of warrants 18




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was exempt from the registration
requirements pursuant to Section 4 (2) of the Securities Act and the rules and regulations
promulgated thereunder on the basis that it did not involve a public offering. The warrants vest
over a three year period, one-third on each of the first, second and third anniversary of the
warrant issue date and are exercisable for a period of 5 years from the warrant issue date at an
exercise price of $5.75 per share, being the closing market price of our common stock on the date
the warrant was issued. In
October 2004, we issued 40,000 shares of common stock valued at
approximately $0.2 million in a
private placement transaction as an earn-out payment in connection with an acquisition in Arizona
which was completed in March 2004. This stock issuance was exempt from the registration
requirements pursuant to Section 4 (2) of the Securities Act and the rules and regulations
promulgated thereunder on the basis that it did not involve a public offering. 
 Item 6.Selected Financial Data The following tables set forth our selected consolidated financial data for the periods
indicated and are qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and the notes thereto, which are included elsewhere in this
annual report, especially Note 3 as it relates to our business combinations, significant asset
acquisitions and dispositions and Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operation. The financial data as of December 31, 2004, 2003, 2002, 2001 and 2000 for the years then ended
have been derived from our audited Consolidated Financial Statements. The selected consolidated financial data as of December 31, 2004, 2003, 2002, 2001 and 2000
and for each of the years then ended have been prepared in accordance with accounting principles
generally accepted in the United States. All financial information presented in the
tables is in thousands of dollars except per share data or as otherwise indicated. For Each of the Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands except per share data)Statement of Operations and Cash Flow Data:Revenue
    
    $
    310,785
    
    
    $
    126,750
    
    
    $
    98,846
    
    
    $
    93,241
    
    
    $
    117,008Income (loss) from operations
    
    
    7,517
    
    
    
    (5,046
    )
    
    
    9,567
    
    
    
    (8,671
    )
    
    
    (6,622
    )Net income (loss)
    
    
    (48,154
    )
    
    
    (22,380
    )
    
    
    2,127
    
    
    
    (19,668
    )
    
    
    (18,281
    )Net income (loss) attributable to common
shareholders
    
    
    (48,154
    )
    
    
    (76,952
    )
    
    
    (12,590
    )
    
    
    (19,668
    )
    
    
    (18,281
    )Basic and
diluted net loss per share
    
    
    (0.55
    )
    
    
    (1.98
    )
    
    
    (0.39
    )
    
    
    (1.60
    )
    
    
    (2.54
    )Shares used in calculating basic and diluted
net loss per share
    
    
    88,232
    
    
    
    38,782
    
    
    
    32,414
    
    
    
    12,260
    
    
    
    7,197Cash flows from operating activities
    
    
    24,697
    
    
    
    9,446
    
    
    
    13,654
    
    
    
    6,685
    
    
    
    7,362Capital expenditures
    
    
    (46,209
    )
    
    
    (24,438
    )
    
    
    (12,157
    )
    
    
    (3,778
    )
    
    
    (14,362
    )
 As of December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    8,507
    
    
    $
    21,062
    
    
    $
    1,775
    
    
    $
    2,469
    
    
    $
    Property, equipment and landfill sites,
net
    
    
    300,083
    
    
    
    192,062
    
    
    
    58,994
    
    
    
    36,708
    
    
    
    50,899Goodwill and intangible assets
    
    
    327,756
    
    
    
    163,380
    
    
    
    66,596
    
    
    
    55,089
    
    
    
    80,609Total assets
    
    
    720,583
    
    
    
    470,998
    
    
    
    149,022
    
    
    
    110,652
    
    
    
    152,959Total debt and capital lease obligations
(excluding mandatorily redeemable
shares of preferred stock)
    
    
    278,363
    
    
    
    177,449
    
    
    
    53,645
    
    
    
    53,005
    
    
    
    100,834Mandatorily redeemable preferred shares
    
    
    64,971
    
    
    
    48,205
    
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    298,776
    
    
    
    201,117
    
    
    
    77,817
    
    
    
    45,913
    
    
    
    38,655
 19




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Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion is based on, and should be read in conjunction with Item 6. Selected
Financial Data and our Consolidated Financial Statements and Notes thereto contained in this
annual report. Overview We are a multi-regional, integrated solid waste services company, providing collection,
transfer, landfill disposal and recycling services for commercial, industrial and residential
customers in the United States and Canada. In 2003, we initiated a disposal-based growth strategy
to enter the U.S. solid waste market and establish vertically integrated market positions. Under
this strategy, we enter geographic markets with attractive growth or competitive characteristics by
acquiring and developing landfill disposal capacity, then acquiring and developing waste collection
and transfer operations. We implemented this strategy in 2003 and 2004 by acquiring large municipal
solid waste landfill developments and/or collection operations in Florida, Arizona and Texas. As
part of our business strategy to expand into the U.S., we completed a migration transaction (the
Migration Transaction) on July 31, 2004. Under the Migration Transaction, our corporate structure
was reorganized so that Waste Services, Inc. a Delaware company and former subsidiary of Capital
Environmental Resource Inc. became the ultimate parent company of our corporate group. We operate on a decentralized basis, while financial controls and information systems are
controlled centrally. Our business is managed through five operating
regions comprised of Florida (including our Central, North, and Gulf districts) Arizona, Texas, and Eastern and Western Canada. We had many accomplishments in 2004, including the completion and integration of significant
business acquisitions in the U.S. and the opening of our three new large municipal solid waste
landfill sites in Florida, Arizona and Texas. The JED landfill, located outside Orlando, opened in
January 2004, the Cactus Regional Landfill, serving the Phoenix market, opened in July 2004, and
the Fort Bend Regional Landfill, serving the Houston market, opened in August 2004. In Central
Florida, two transfer stations are in the final stages of construction. Their completion expected in the
second quarter of 2005, will allow us to internalize significant volumes into our JED landfill. In
Arizona, we opened two transfer stations in the Phoenix market, which allow us to internalize a
majority of our collected volumes into our Cactus Regional Landfill. In January 2005, we opened a
transfer station in the Houston market. We look forward to improving margins and cash flow in 2005
as we increase internal and external waste volumes at each of these disposal facilities. We have
also taken steps to improve operating performance at our newly acquired collection operations in
Florida and Arizona through pricing initiatives, cost controls, safety programs, workforce
reductions and consolidation of purchasing in areas such as fuel and parts. We expect these
initiatives will also lead to improved financial performance in 2005. Our Canadian operations continue to perform according to our expectations and provide a
consistent source of operating income and cash flow. We have introduced operating and cost control
initiatives to improve the performance of our Canadian operations. We expect to continue to
rationalize certain aspects of our operations in markets where we are not internalized for possible
divestiture or asset swap transactions to enhance density and/or internalization opportunities in
existing markets where we are vertically integrated and earn our highest returns. While we had many accomplishments in 2004, we also experienced setbacks as we failed to meet
certain of our second quarter debt covenants in part because of delays in the opening of the
Florida transfer stations and the under performance of the operations acquired from Florida
Recycling relative to the historical results represented by the sellers. We were able to negotiate
a settlement with the former owners of Florida Recycling and negotiate an amendment to our senior
credit facilities. As a result of these negotiations, we believe we are well positioned to meet
our future covenants. We have also instituted a strict discipline in our cash and working capital
management. As a result, we have had limited borrowings under our revolving credit facility since
our October bank amendment. With the expected opening of the Florida transfer stations in the
second quarter of 2005, we believe that our operating cash flow, availability under our revolving
credit facilities and the $7.5 million March 2005 equity infusion required under our credit
agreement will provide us with more than sufficient liquidity to execute our business plan in 2005. Sources of Revenue Our revenue consists primarily of fees charged to customers for solid waste collection,
landfill disposal, transfer and recycling services. We derive a substantial portion of our collection revenue from services provided to
commercial, industrial and residential customers that are generally performed under service
agreements or pursuant to contracts with municipalities. We recognize revenue when services are
rendered. Amounts billed to customers prior to providing the related services are reflected as
deferred revenue and reported as revenue in the periods in which the services are rendered. We provide collection services for commercial and industrial customers generally under one to
five year service agreements. We determine the fees we charge our customers based on a variety of
factors, including collection frequency, level of service, route 20




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density, the type, volume and
weight of the waste collected, type of equipment and containers furnished, the distance to the
disposal or processing facility, the cost of disposal or processing and prices charged by
competitors for similar services. Our contracts with commercial and industrial customers typically
allow us to pass on increased costs resulting from variable items such as disposal and fuel costs
and surcharges. Our ability to pass on cost increases is however sometimes limited by the terms of
our contracts. We provide residential waste collection services through a variety of contractual
arrangements, including contracts with municipalities, owners and operators of large residential
complexes, mobile home parks and homeowners associations or subscription arrangements with
individual homeowners. Our contracts with municipalities are typically for terms of up to five
years and contain a formula, generally based on a predetermined published price index, for
automatic adjustments to fees to cover increases in some, but not all, of our operating costs.
Certain of our contracts with municipalities contain renewal provisions. The fees we charge for
residential solid waste collection services provided on a subscription basis are based primarily on
route density, the frequency and level of service, the distance to the disposal or processing
facility, the cost of disposal or processing and prices we charge in the market for similar
services. We charge our landfill and transfer station customers a tipping fee on a per ton basis for
disposing of their solid waste at our transfer stations and landfills. We generally base our
landfill tipping fees on market factors and the type and weight of, or volume of the waste
deposited. We generally base our transfer station tipping fees on market factors and the cost of
processing the waste deposited at the transfer station, the cost of transporting the waste to a
disposal facility and the cost of disposal. Material recovery facilities generate revenue from the sale of recyclable commodities. In an
effort to reduce our exposure to commodity price fluctuations on recycled materials, where
competitive pressures permit, we charge collection or processing fees for recycling volume
collected from our customers. Expense Structure Our cost of operations primarily includes tipping fees and related disposal costs, labor and
related benefit costs, equipment maintenance, fuel, vehicle and workers compensation insurance and
landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated
operations in each of our markets which will allow us to internalize our own collection volume into
our landfills and transfer stations. Internalization lowers our disposal costs by allowing us to
eliminate tipping fees otherwise paid to an independent landfill operator. We believe
internalization provides us with a competitive advantage by allowing us to be a low cost provider
in our markets. Historically our internalization has been relatively low, but as a result of the
recent opening of our landfills in Florida and Arizona and the opening and expected opening of
transfer stations in these regions, we expect our internalization will gradually increase over time
as we develop our network of transfer stations and maximize delivery of our collection volumes to
these landfill sites. In markets where we do not have our own landfills, we seek to secure long-term disposal
arrangements with municipalities or private owners of landfills or transfer stations. In these
markets, our ability to maintain competitive prices for our collection services is generally
dependent upon our ability to secure low cost disposal pricing. If owners of third party disposal
sites discontinue our arrangements, we would have to seek alternative disposal sites which could
impact our profitability and cash flow. In addition, if third party disposal sites increase their
tipping fees and we are unable to pass these increases on to our collection customers, our
profitability and cash flow would be negatively impacted. We believe the age and condition of a fleet has a significant impact on operating costs
including, but not limited to, repairs and maintenance, insurance and driver training and retention
costs. Through capital investment, we seek to maintain an average fleet age of approximately six
years. We believe this enables us to minimize our repair and maintenance costs, safety and
insurance costs and employee turnover related costs. Selling, general and administrative expense includes managerial costs, information systems,
sales force, administrative expenses and professional fees. We have made a significant investment
in information systems and in assembling our management team to support our growth strategy. We
expect selling, general and administrative expense to decline as a percentage of revenue in 2005 as
we spread our overhead costs over a larger revenue base. Depreciation, depletion and amortization expense includes depreciation of fixed assets over
their estimated useful lives using the straight-line method, depletion of landfill costs, including
capping, closure and post-closure obligations using the units-of-consumption method, and
amortization of intangible assets including customer relationships and contracts and covenants
not-to-compete which are amortized over the expected life of the benefit to be received by such
intangibles. As further discussed in Note 2 to 21




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the Consolidated Financial Statements, effective
January 1, 2004, we changed our method of accounting for asset retirement obligations. We capitalize certain third party costs related to pending acquisitions or development
projects. These costs remain deferred until we cease to be engaged on a regular and ongoing basis
with completion of the proposed acquisition, at which point they are charged currently in earnings.
In the event that the target is acquired, these costs are incorporated in the cost of the acquired
business. We expense indirect and internal costs including executive salaries, overhead and travel
costs related to acquisitions as they are incurred. Recent Acquisitions During July 2003, we purchased the site for our Cactus Regional Landfill. During May 2004, we
received the permits and authorizations necessary for the operation of the landfill. As a
condition of the purchase, we issued 1,250,000 Common Shares valued at $5.5 million to the sellers
during the second quarter of 2004. Additionally, the sellers are entitled to contingent payments
based upon the landfill achieving certain defined average tons of waste per day. Should the
landfill achieve a maximum 5,000 tons per day, the total contingent payments would not exceed $18.0
million. In November 2003, we entered into an agreement to acquire the assets of Allied Waste
Industries, Inc.s (Allied) northern and central Florida operations (the Allied Assets) for a
purchase price of approximately $120.0 million, subject to an adjustment for working capital. The
primary metropolitan areas served by the Allied Assets are Tampa, Sarasota and Jacksonville,
Florida. On December 31, 2003, we completed the first phase of the Allied Assets acquisition.
During the first six months of 2004, we completed the acquisition of the remaining Allied Assets.
In the second quarter of 2004, we divested certain landfill and related assets and liabilities
acquired from Allied in exchange for a collection operation in the metropolitan Orlando area and
cash proceeds of $10.0 million. Proceeds in excess of net assets exchanged reduced goodwill from
the original Allied Assets acquisition by $8.6 million. In February 2004, we acquired a permitted undeveloped municipal solid waste landfill in Fort
Bend County, Texas (the Fort Bend Regional Landfill). The landfill commenced operations during
August of 2004. The purchase price was comprised of $5.1 million in cash, a seller financed
promissory note of $5.0 million which has since been repaid and the issuance of 4,375,000 Common
Shares valued at approximately $25.0 million. Fort Bend Regional Landfill, which serves the
metropolitan Houston area, is approximately 2,600 acres and has an initial permitted capacity of
47.6 million cubic yards. In April 2004, we completed the acquisition of the shares of Florida
Recycling Services, Inc. (Florida Recycling) for an aggregate purchase price of approximately
$99.0 million in cash, working capital of approximately $2.2 million, and the issuance of 9,250,000
Common Shares valued at approximately $51.4 million. Florida Recycling operations are based in
central Florida, primarily serving the Orlando, Daytona, Fort Myers, and Tampa markets. Following
our acquisition, the performance of the operations of Florida Recycling was below our expectations
and we conducted a review of Floridas Recycling business in an effort to identify the factors
contributing to the lower than expected level of performance. Based on the results of this review,
it appeared that the 2003 financial statements of Florida Recycling, provided by the sellers,
contained misstatements and could not be relied upon. As such, we have begun a re-audit of the
historical financial statements of Florida Recycling. On September 24, 2004, we reached an
agreement with the selling shareholders of Florida Recycling to adjust the purchase price paid for
the shares of Florida Recycling whereby, in October 2004, the selling shareholders paid us $7.5
million in cash and returned 500,000 shares of our common stock. The cash and the shares received
(valued at their quoted market price as of September 24, 2004), with a total value of approximately
$8.6 million, are recorded as income. As part of the settlement
and upon its completion, we will receive title to a 2,000 ton per day recycling and transfer
facility in Sanford, Florida. We expect to continue to make strategic acquisitions which we intend to finance through cash
on hand, our Senior Secured Credit Facilities subject to the limitations on our investing
activities set out in the Credit Facilities Agreement, as amended, and/or the issuance of other
debt and equity financings. We expect that we will continue to rationalize certain aspects of our
operations in markets where we are not internalized through either divestiture or asset swap
transactions in order to enhance density and/or internalization opportunities in existing markets
where we are vertically integrated. Factors that Might Affect Future Results We have recently acquired and commenced operations at three large municipal solid waste
landfill sites in the United States that we believe will materially affect our revenue,
profitability and cash flow going forward. The following summarizes our three recently acquired landfills: 22




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
    JED Landfill  a municipal solid waste landfill with 24.0 million cubic yards of initial
permitted capacity, located in Osceola County, Florida. The landfill is located
approximately 20 miles south of metropolitan Orlando and is well positioned to serve the
Orlando metropolitan area and the surrounding counties. The facility opened for operation in
the first quarter of 2004. Part of our strategy is to maximize the internalization of waste
volumes to our JED Landfill. The execution of this strategy is dependent partly upon the
opening of two transfer stations in central Florida. The Taft transfer station and recycling
facility, located south of Orlando, is owned and operated by a third party with whom we have
entered into a 10-year disposal agreement. The Taft facility has received a modified permit
allowing it to accept up to 1,500 tons of Class I and Class III solid waste combined per
day, subject to completion of certain building modifications expected to be completed in the
second quarter of 2005. The other transfer station and recycling facility, located in
Sanford, Florida, is fully permitted to accept up to 2,000 tons per day of Class I municipal
solid waste upon completion of construction which is also expected in the second quarter of
2005. Ownership of the Sanford facility also referred to as the Ice House facility, will be
transferred to us upon completion of construction pursuant to the terms of our settlement
agreement with the former owners of Florida Recycling. We had previously expected that these
transfer stations would be operational by the fourth quarter of 2004.
    Cactus Regional Landfill  a municipal solid waste landfill with 224.0 million cubic
yards of initial permitted capacity, located in Pinal County, Arizona. The landfill is
located between Phoenix and Tucson, Arizona and is well-positioned to serve both markets.
The facility opened for operation in the third quarter of 2004. Also in the second and
third quarters of 2004, we began operations at our two newly constructed transfer stations
in the Phoenix market area.
    Fort Bend Regional Landfill  a municipal and industrial solid waste landfill with 48.0
million cubic yards of initial permitted capacity, located in Fort Bend County, Texas. The
landfill is located approximately 15 miles southwest of metropolitan Houston and is
well-positioned to serve the Houston metropolitan area, including Fort Bend County. The
facility opened for operation in the third quarter of 2004. We have constructed a transfer
station in Houston,which is permitted to accept up to 850 tons per day of municipal solid
waste and began operations in January 2005. Critical Accounting Policies General Our discussion and analysis of our financial condition and results of operations are based
upon our Consolidated Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of the financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis we evaluate our estimates, including those related to areas that require a
significant level of judgments or are otherwise subject to an inherent degree of uncertainty. These
areas include allowances for doubtful accounts, landfill airspace, intangible and long-lived
assets, closure and post-closure liabilities, revenue recognition, income taxes and commitments and
contingencies. We base our estimates on historical experience, our observance of trends in
particular areas, information or valuations and various other assumptions that we believe to be
reasonable under the circumstances and which form the basis for making judgments about the carrying
value of assets and liabilities that may not be readily apparent from other sources. Actual amounts
could differ significantly from amounts previously estimated. We believe that of our significant accounting policies (refer to Note 2 of the Notes to
Consolidated Financial Statements contained elsewhere in this annual report) the following may
involve a higher degree of judgment and complexity: Revenue Recognition We recognize revenue when services, such as providing collection services or accepting waste
at our disposal facilities, are rendered. Amounts billed to customers prior to providing the
related services are reflected as deferred revenue and reported as revenue in the period in which
the services are rendered. Accounts Receivable and Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts based on their expected collectibility. We
perform credit evaluations of our significant customers and establish an allowance for doubtful
accounts based on the aging of our receivables, payment performance factors, historical trends, and
other information. In general, we reserve a portion of those receivables outstanding more than 90
days and 100% of those outstanding over 120 days. We evaluate and revise our reserve on a monthly
basis based upon a review of specific 23




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##### Table of Contents



accounts outstanding and our history of uncollectible
accounts. Business Acquisitions and Goodwill We account for business acquisitions using the purchase method of accounting. The total cost
of an acquisition is allocated to the underlying net assets based on their respective estimated
fair values. As part of this allocation process, management must identify and attribute values and
estimated lives to the intangible assets acquired. Such determinations involve considerable
judgment, and often involve the use of significant estimates and assumptions, including those with
respect to future cash inflows and outflows, discount rates and asset lives. These determinations
will affect the amount of amortization expense recognized in future periods. Assets acquired in a
business combination that will be sold are valued at fair value less cost to sell. Results of
operating these assets are recognized currently in the period in which those operations occur. We have fully adopted SFAS No. 142, Goodwill and Other Intangible Assets, and test goodwill
for impairment using the two-step process. The first step is a screen for potential impairment,
while the second step measures the amount of the impairment, if any. The first step of the goodwill
impairment test compares the fair value of a reporting unit with its carrying amount, including
goodwill. In determining the fair value, we may utilize: (i) discounted future cash flows; (ii)
operating results based upon a comparative multiple of earnings or revenues; (iii) offers from
interested investors, if any; or (iv) appraisals. Significant estimates used in the fair value
calculation utilizing discounted future cash flows include, but are not limited to: (i) estimates
of future revenue and expense growth by reporting unit (ii) future estimated effective tax rates,
which we estimate to range between 37% and 40%; (iii) future estimated rate of capital expenditures
as well as future required investments in working capital; (iv) estimated average cost of capital,
which we estimated to range between 8.0% and 10.0%; and (v) the future terminal value of our
reporting unit, which is based upon its ability to
exist into perpetuity. Significant estimates used in the fair value calculation utilizing
market value multiples include but are not limited to: (i) estimated future growth potential of the
reporting unit; (ii) estimated multiples of revenue or earnings a willing buyer is likely to pay;
and (iii) estimated control premium a willing buyer is likely to pay. Judgments regarding the existence of impairment indicators are based on legal factors, market
conditions and operational performance of the acquired businesses. Future events could cause us to
conclude that impairment indicators exist and that goodwill associated with the acquired businesses
is impaired. Additionally, as the valuation of identifiable goodwill requires significant estimates
and judgment about future performance, cash flows and fair value, our future results could be
affected if these current estimates of future performance and fair value change. Any resulting
impairment loss could have a material adverse impact on our financial condition and results of
operations. Acquisition deposits and deferred acquisition costs include capitalized incremental direct
costs associated with proposed business combinations that are currently being negotiated. These
costs remain deferred until we cease to be engaged on a regular and ongoing basis with completion
of the proposed acquisition, at which point they are charged to earnings. In the event that the
target is acquired, these costs are incorporated in the cost of the acquired business. Indirect and
internal costs, including executive salaries, overhead and travel costs related to acquisitions,
are expensed as incurred. Long-Lived Assets We periodically evaluate whether events and circumstances have occurred that may warrant
revision of the estimated useful life of property and equipment or whether the remaining balance of
property and equipment, or other long-lived assets including amortizing intangible assets, should
be evaluated for possible impairment. Instances that may lead to an impairment include: (i) a
significant decrease in the market price of a long-lived asset group; (ii) a significant adverse
change in the extent or manner in which a long-lived asset or asset group is being used or in its
physical condition; (iii) a significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset or asset group, including an adverse action or
assessment by a regulator; (iv) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition or construction of a long-lived asset or asset group; (v) a
current-period operating or cash flow loss combined with a history of operating or cash flow losses
or a projection or forecast that demonstrates continuing losses associated with the use of a
long-lived asset or asset group; or (vi) a current expectation that, more likely than not, a
long-lived asset or asset group will be sold or otherwise disposed of significantly before the end
of its previously estimated useful life. Upon recognition of an event, as previously described, we use an estimate of the related
undiscounted cash flows, excluding interest, over the remaining life of the property and equipment
and long-lived assets in assessing their recoverability. We measure 24




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##### Table of Contents



impairment loss as the amount
by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). We primarily
employ two methodologies for determining the fair value of a long-lived asset: (i) the amount at
which the asset could be bought or sold in a current transaction between willing parties or (ii)
the present value of estimated expected future cash flows grouped at the lowest level for which
there are identifiable independent cash flows. Costs associated with arranging financing are deferred and expensed over
the related financing arrangement using the effective interest method. Should we repay an
obligation earlier then its contractual maturity, any remaining deferred financing costs are
charged to earnings. Landfill Sites Landfill sites are recorded at cost. Capitalized landfill costs include expenditures for land,
permitting costs, cell construction costs and environmental structures. Capitalized permitting and
cell construction costs are limited to direct costs relating to these activities, including legal,
engineering and construction costs associated with excavation, liners and site berms, leachate
management facilities and other costs associated with environmental management equipment and
structures. Costs related to acquiring land, excluding the estimated residual value of un-permitted,
non-buffer land, and costs related to permitting and cell construction are depleted as airspace is
consumed using the units-of-consumption method. Environmental structures, which include leachate
collection systems, methane collection systems and groundwater monitoring wells, are charged to
expense over the shorter of their useful life or the life of the landfill. Capitalized landfill costs may also include an allocation of the purchase price paid for
landfills. For landfills purchased as part of a group of several assets, the purchase price
assigned to the landfill is determined based upon the discounted expected future cash flows of the
landfill relative to the other assets within the acquired group. If the landfill meets our
expansion criteria, the purchase price is further allocated between permitted airspace and
expansion airspace based upon the ratio of permitted versus probable expansion airspace to total
available airspace. Landfill sites are amortized using the units-of-consumption method over the
total available airspace including probable expansion airspace where appropriate. We assess the carrying value of our landfill sites in accordance with the provisions of SFAS
No. 144. These provisions, as well as possible instances that may lead to impairment, are addressed
in Long-Lived Assets. There are certain indicators previously discussed that require
significant judgment and understanding of the waste industry when applied to landfill development
or expansion. We identified three sequential steps that landfills generally follow to obtain expansion
permits. These steps are as follows: (i) obtaining approval from local authorities; (ii) submitting
a permit application to state or provincial authorities; and (iii) obtaining permit approval from
state or provincial authorities. Before expansion airspace is included in our calculation of total available disposal capacity,
the following criteria must be met: (i) the land associated with the expansion airspace is either
owned by us or is controlled by us pursuant to an option agreement; (ii) we are committed to
supporting the expansion project financially and with appropriate resources; (iii) there are no
identified fatal flaws or impediments associated with the project, including political impediments;
(iv) progress is being made on the project; (v) the expansion is attainable within a reasonable
time frame; and (vi) based upon senior managements review of the status of the permit process to
date we believe it is more likely than not the expansion permit will be received within the next
five years. Upon meeting our expansion criteria, the rates used at each applicable landfill to
expense costs to acquire, construct, close and maintain a site during the post-closure period are
adjusted to include probable expansion airspace and all additional costs to be capitalized or
accrued associated with the expansion airspace. Once expansion airspace meets the criteria for inclusion in our calculation of total available
disposal capacity, management continuously monitors each sites progress in obtaining the expansion
permit. If at any point it is determined that an expansion area no longer meets the required
criteria, the probable expansion airspace is removed from the landfills total available capacity
and the rates used at the landfill to expense costs to acquire, construct, close and maintain a
site during the post-closure period are adjusted accordingly. The following table reflects landfill capacity activity for permitted landfills owned by us
for the years ended December 31, 2004, 2003 and 2002 (in thousands of cubic yards). 25




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##### Table of Contents



December 31, 2004Balance,
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance,Beginning
    
    
    Landfills
    
    
    Landfills
    
    
    Airspace
    
    
    Endof Period
    
    
    Acquired
    
    
    Divested
    
    
    Consumed
    
    
    of PeriodUnited StatesPermitted capacity
    
    
    26,084
    
    
    
    244,000
    
    
    
    (94
    )
    
    
    (1,107
    )
    
    
    268,883Probable expansion capacity
    
    
    18,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,300Total available airspace
    
    
    44,384
    
    
    
    244,000
    
    
    
    (94
    )
    
    
    (1,107
    )
    
    
    287,183Number of sites
    
    
    3
    
    
    
    2
    
    
    
    (1
    )
    
    
    
    
    
    
    4CanadaPermitted capacity
    
    
    10,871
    
    
    
    1,430
    
    
    
    
    
    
    
    (659
    )
    
    
    11,642Probable expansion capacity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available airspace
    
    
    10,871
    
    
    
    1,430
    
    
    
    
    
    
    
    (659
    )
    
    
    11,642Number of sites
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    3TotalPermitted capacity
    
    
    36,955
    
    
    
    245,430
    
    
    
    (94
    )
    
    
    (1,766
    )
    
    
    280,525Probable expansion capacity
    
    
    18,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,300Total available airspace
    
    
    55,255
    
    
    
    245,430
    
    
    
    (94
    )
    
    
    (1,766
    )
    
    
    298,825Number of sites
    
    
    5
    
    
    
    3
    
    
    
    (1
    )
    
    
    
    
    
    
    7
 December 31, 2003Balance,
    
    
    Landfills
    
    
    
    
    
    
    
    
    
    
    Balance,Beginning
    
    
    Expanded or
    
    
    Landfills
    
    
    Airspace
    
    
    Endof Period
    
    
    Acquired
    
    
    Divested
    
    
    Consumed
    
    
    of PeriodUnited StatesPermitted capacity
    
    
    
    
    
    
    26,084
    
    
    
    
    
    
    
    
    
    
    
    26,084Probable expansion capacity
    
    
    
    
    
    
    18,300
    
    
    
    
    
    
    
    
    
    
    
    18,300Total available airspace
    
    
    
    
    
    
    44,384
    
    
    
    
    
    
    
    
    
    
    
    44,384Number of sites
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3CanadaPermitted capacity
    
    
    7,618
    
    
    
    3,863
    
    
    
    
    
    
    
    (610
    )
    
    
    10,871Probable expansion capacity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available airspace
    
    
    7,618
    
    
    
    3,863
    
    
    
    
    
    
    
    (610
    )
    
    
    10,871Number of sites
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2TotalPermitted capacity
    
    
    7,618
    
    
    
    29,947
    
    
    
    
    
    
    
    (610
    )
    
    
    36,955Probable expansion capacity
    
    
    
    
    
    
    18,300
    
    
    
    
    
    
    
    
    
    
    
    18,300Total available airspace
    
    
    7,618
    
    
    
    48,247
    
    
    
    
    
    
    
    (610
    )
    
    
    55,255Number of sites
    
    
    2
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    5
 December 31, 2002Balance,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance,Beginning
    
    
    Landfills
    
    
    Landfills
    
    
    Airspace
    
    
    Endof Period
    
    
    Acquired
    
    
    Divested
    
    
    Consumed
    
    
    of PeriodCanadaPermitted capacity
    
    
    5,832
    
    
    
    2,167
    
    
    
    
    
    
    
    (381
    )
    
    
    7,618Probable expansion capacity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available airspace
    
    
    5,832
    
    
    
    2,167
    
    
    
    
    
    
    
    (381
    )
    
    
    7,618Number of sites
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    2
 26




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##### Table of Contents



Accrued Closure and Post-Closure Obligations On January 1, 2003, we adopted the provisions of Statement of Financial Accounting Standards,
or SFAS, No. 143 Accounting for Asset Retirement Obligations. SFAS No. 143 required us to change
our methodology used to record liabilities related to final capping, closure and post-closure of
our landfill operations. Under the provisions of the new statement, we recognize, as an asset, the
fair value of the liability for an asset retirement obligation. The asset is then depleted,
consistent with other capitalized landfill costs,
over the remaining useful life of the site based upon units of consumption as airspace in the
landfill is consumed. Additionally, we recognize a liability for the present value of the estimated
future asset retirement obligation. The liability will be adjusted for (i) additional liabilities
incurred or settled, (ii) accretion of the liability to its future value and (iii) revisions in the
estimated cash flows relative to closure and post-closure costs. As further discussed in Note 2 to
the consolidated financial statements, effective January 1, 2004 we changed our methodology used to define an obligating
event. Accrued closure and post-closure obligations represent an estimate of the future obligation
associated with closure and post-closure monitoring of the solid waste landfills owned by us.
Site-specific closure and post-closure engineering cost estimates are prepared for the landfills we
own. The impact of changes in estimates, based on an annual update, is accounted for on a
prospective basis. We calculate closure and post closure liabilities by estimating the total future
obligation in current dollars, inflating the obligations based upon the expected date of the
expenditure using an inflation rate of 2.0% and discounting the inflated total to its present value
using an 8.5% credit-adjusted risk-free discount rate. For 2005, we expect our inflation rate to
approximate 2.5% and discount rate to approximate 9.5%. Accretion of discounted cash flows
associated with the closure and post closure obligations is accrued over the estimated life of the
landfill. Accounting for Income Taxes We use the asset and liability method to account for income taxes. Significant management
judgment is required in determining the provision for income taxes, deferred tax assets and
liabilities and any valuation allowance recorded against net deferred tax assets. In preparing the
Consolidated Financial Statements, we are required to estimate the income taxes in each of the
jurisdictions in which we operate. This process involves estimating the actual current tax
liability together with assessing temporary differences resulting from differing treatment of
items, such as deferred revenue, property, plant and equipment and losses for tax and accounting
purposes. These differences result in deferred tax assets, which include tax loss carry-forwards,
and liabilities, which are included within the consolidated balance sheet. We then assess the
likelihood that deferred tax assets will be recovered from future taxable income, and to the extent
that recovery is not likely or there is insufficient operating history, a valuation allowance is
established. To the extent a valuation allowance is established or increased in a period, we
include an expense within the tax provision of the consolidated statement of operations. Risk Management Our U.S.-based automobile, general liability and workers compensation insurance coverage is
subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per
claim, plus claims handling expense under our workers compensation and our auto and general
liability insurance programs, respectively. Claims in excess of such deductible levels are fully
insured subject to our policy limits. However, we have a limited claims history for our U.S.
operations and it is reasonably possible that recorded reserves may not be adequate to cover future
payments of claims. We have collateral requirements that are set by the insurance companies which
underwrite our insurance programs. Collateral requirements may change from time to time, based on,
among other things, the size of our business, our claims experience, financial performance or
credit quality and retention levels. As of December 31, 2004 we have posted letters of credit with
our U.S. insurer of approximately $3.0 million to cover the liability for losses within the
deductible limit. During the first quarter of 2005, we increased this letter of credit to $8.4
million. Provisions for retained claims are made by charges to expense based upon periodic
evaluations by management of the estimated ultimate liabilities on reported and unreported claims.
Adjustments, if any, to the estimated reserves resulting from ultimate claim payments will be
reflected in operations in the periods in which such adjustments become known. Translation and
remeasurement of foreign currency Certain of our operations are domiciled in Canada; as such, we translate the results of
operations and financial condition of our Canadian operations into U.S. dollars. Therefore,
reported results of operations and financial condition are subject to changes in the exchange
relationship between the two currencies. For example, as the relationship of the Canadian dollar
strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are
unfavorably affected. Assets and liabilities of Canadian operations have been translated from
Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet
dates, and 27




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##### Table of Contents



revenue and expenses of Canadian operations have been translated from Canadian dollars
into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and
losses on translation of the Canadian operations into U.S. dollars are reported as a separate
component of shareholders equity and are included in comprehensive income (loss). Separately,
monetary assets and liabilities denominated in U.S. dollars held by our Canadian operations are
re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The
effects of re-measurement are reported currently as a component of net income (loss). Currently, we
do not hedge our exposure to changes in foreign exchange rates. Operating Results Results of Operations for each of the Three Years Ended December 31, 2004, 2003 and 2002 The following tables sets forth our consolidated results of operations for each of the three
years ended December 31, 2004, 2003
and 2002 (in thousands): 2004U.S.
    
    
    
    
    
    
    Canada
    
    
    
    
    
    
    TotalRevenue
    
    $
    168,067
    
    
    
    100.0
    %
    
    $
    142,718
    
    
    
    100.0
    %
    
    $
    310,785
    
    
    
    100.0
    %Operating expenses:Cost of operations (exclusive of
depreciation
and amortization)
    
    
    123,534
    
    
    
    73.5
    %
    
    
    96,366
    
    
    
    67.5
    %
    
    
    219,900
    
    
    
    70.8
    %Selling, general and
administrative expense
    
    
    33,166
    
    
    
    19.7
    %
    
    
    22,361
    
    
    
    15.7
    %
    
    
    55,527
    
    
    
    17.9
    %Stock-based compensation (benefit) expense
    
    
    26
    
    
    
    
    
    
    
    (116
    )
    
    
    -0.1
    %
    
    
    (90
    )
    
    
    0.0
    %Severance and other related costs
    
    
    2,563
    
    
    
    1.5
    %
    
    
    176
    
    
    
    0.1
    %
    
    
    2,739
    
    
    
    0.9
    %Settlement with sellers of Florida Recycling
    
    
    (8,635
    )
    
    
    -5.1
    %
    
    
    
    
    
    
    
    
    
    
    (8,635
    )
    
    
    -2.8
    %Depreciation, depletion
and amortization
    
    
    17,888
    
    
    
    10.6
    %
    
    
    16,316
    
    
    
    11.4
    %
    
    
    34,204
    
    
    
    11.0
    %Foreign exchange gain
and other
    
    
    
    
    
    
    
    
    
    
    (377
    )
    
    
    -0.3
    %
    
    
    (377
    )
    
    
    -0.1
    %Income (loss) from operations
    
    $
    (475
    )
    
    
    -0.2
    %
    
    $
    7,992
    
    
    
    5.7
    %
    
    $
    7,517
    
    
    
    2.3
    %
 2003U.S.
    
    
    
    
    
    
    Canada
    
    
    
    
    
    
    TotalRevenue
    
    $
    1,765
    
    
    
    100.0
    %
    
    $
    124,985
    
    
    
    100.0
    %
    
    $
    126,750
    
    
    
    100.0
    %Operating expenses:Cost of operations (exclusive of depreciation
and amortization)
    
    
    1,300
    
    
    
    73.7
    %
    
    
    82,274
    
    
    
    65.8
    %
    
    
    83,574
    
    
    
    65.9
    %Selling, general and
administrative expense
    
    
    4,617
    
    
    
    261.6
    %
    
    
    24,241
    
    
    
    19.4
    %
    
    
    28,858
    
    
    
    22.8
    %Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    2,677
    
    
    
    2.1
    %
    
    
    2,677
    
    
    
    2.1
    %Depreciation, depletion
and amortization
    
    
    200
    
    
    
    11.3
    %
    
    
    14,727
    
    
    
    11.8
    %
    
    
    14,927
    
    
    
    11.8
    %Foreign exchange loss
and other
    
    
    
    
    
    
    
    
    
    
    1,760
    
    
    
    1.4
    %
    
    
    1,760
    
    
    
    1.4
    %Loss from operations
    
    $
    (4,352
    )
    
    
    -246.6
    %
    
    $
    (694
    )
    
    
    -0.5
    %
    
    $
    (5,046
    )
    
    
    -4.0
    %
 28




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##### Table of Contents



2002U.S.
    
    
    
    
    
    
    Canada
    
    
    
    
    
    
    TotalRevenue
    
    $
    
    
    
    
    0.0
    %
    
    $
    98,846
    
    
    
    100.0
    %
    
    $
    98,846
    
    
    
    100.0
    %Operating expenses:Cost of operations (exclusive of depreciation
and amortization)
    
    
    
    
    
    
    0.0
    %
    
    
    64,436
    
    
    
    65.2
    %
    
    
    64,436
    
    
    
    65.2
    %Selling, general and
administrative expense
    
    
    
    
    
    
    0.0
    %
    
    
    15,238
    
    
    
    15.4
    %
    
    
    15,238
    
    
    
    15.4
    %Stock-based compensation expense
    
    
    
    
    
    
    0.0
    %
    
    
    1,046
    
    
    
    1.1
    %
    
    
    1,046
    
    
    
    1.1
    %Depreciation, depletion
and amortization
    
    
    
    
    
    
    0.0
    %
    
    
    10,718
    
    
    
    10.8
    %
    
    
    10,718
    
    
    
    10.8
    %Foreign exchange loss and other
    
    
    
    
    
    
    0.0
    %
    
    
    (2,159
    )
    
    
    -2.2
    %
    
    
    (2,159
    )
    
    
    -2.2
    %Income from operations
    
    $
    
    
    
    
    0.0
    %
    
    $
    9,567
    
    
    
    9.7
    %
    
    $
    9,567
    
    
    
    9.7
    %
 Revenue A summary of our revenue for each of the three years ended December 31, 2004, 2003 and 2002 is
as follows (in thousands): 2004
    
    
    2003
    
    
    2002Collection
    
    $
    259,983
    
    
    
    78.3
    %
    
    $
    103,215
    
    
    
    74.0
    %
    
    $
    80,145
    
    
    
    72.6
    %Landfill disposal
    
    
    27,101
    
    
    
    8.2
    
    
    
    13,173
    
    
    
    9.4
    
    
    
    9,459
    
    
    
    8.6Transfer station
    
    
    27,892
    
    
    
    8.4
    
    
    
    17,315
    
    
    
    12.4
    
    
    
    16,728
    
    
    
    15.1Material recovery facilities
    
    
    10,531
    
    
    
    3.2
    
    
    
    4,859
    
    
    
    3.5
    
    
    
    3,155
    
    
    
    2.8Other specialized services
    
    
    6,402
    
    
    
    1.9
    
    
    
    955
    
    
    
    0.7
    
    
    
    943
    
    
    
    0.9331,909
    
    
    
    100.0
    %
    
    
    139,517
    
    
    
    100.0
    %
    
    
    110,430
    
    
    
    100.0
    %Intercompany elimination
    
    
    (21,124
    )
    
    
    
    
    
    
    (12,767
    )
    
    
    
    
    
    
    (11,584
    )$
    310,785
    
    
    
    
    
    
    $
    126,750
    
    
    
    
    
    
    $
    98,846
 Revenue was $310.8 million for the year ended December 31, 2004 and $126.8 million for the
year ended December 31, 2003, an increase of $184.0 million or in excess of 100%. The increase in
revenue for our United States operations of $166.3 million or in excess of 100% was primarily
driven by acquisitions of $147.9 million, volume at our new landfills of $7.8 million and internal
growth of $10.6 million. Our internal growth in the U.S. was driven primarily by hurricane related
collection volumes in Florida during 2004. The increase in revenue for our Canadian operations of
$17.7 million or 14.2% is primarily due to increased volume of
$4.2 million or 3.4%, pricing
increases of $3.7 million or 3.0%, and acquisitions of
$0.4 million or 0.3%. In addition, the
favorable effects of foreign exchange movements increased Canadian revenue by $9.4 million or 7.5%. Revenue was $126.8 million for the year ended December 31, 2003 and $98.8 million for the year
ended December 31, 2002, an increase of $28.0 million or
28.2%. The favorable effects of foreign
exchange movements increased revenue by 14.0%, reflecting the strengthening of the Canadian dollar
versus the U.S. dollar during 2003. Increased collection and landfill disposal volumes increased
revenue by 8.0%, which was primarily due to new residential waste collection agreements in our
Canadian operations. New acquisitions increased revenue by 5.1% and pricing increases increased
revenue by 1.1%. Cost of Operations Cost of operations was $219.9 million for the year ended December 31, 2004 and $83.6 million
for the year ended December 31, 2003, an increase of $136.3 million or in excess of 100%. As a
percentage of revenue, cost of operations was 70.8% for the year ended December 31, 2004 and 65.9%
for the year ended December 31, 2003. The increase in cost of operations for our United States
operations of $122.2 million or in excess of 100% was primarily driven by acquisitions and an
increase in landfill operating costs at our recently opened landfill sites. As a percentage of
revenue, cost of operations in our United States operations was 73.5% for the year ended December
31, 2004 and 73.7% for the year ended December 31, 2003. Our lower margins in the United States,
as compared to Canada, are primarily driven by the higher mix of lower margin collection revenue in
the United States. We expect that our U.S. operating margins will improve as we increase internal
and external volumes at our new landfill and transfer station sites. 29




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The increase in cost of operations for 2004 in Canada is primarily due to disposal and
sub-contractor costs of $3.0 million or 3.6%, increased labor of
$3.0 million or 3.6%, and fuel and
other operating costs of $1.3 or 1.5%. The unfavorable effects of foreign exchange movements
increased cost of operations by $6.8 million or 8.1%. The increase in disposal, subcontractor, and
labor costs in aggregate dollars and as a percentage of revenue is due to increased disposal
volumes as well as higher transportation and fuel costs in our Canadian operations coupled with a
higher mix of lower margin collection revenue. Cost of operations was $83.6 million for the year ended December 31, 2003 and $64.4 million
for the year ended December 31, 2002. As a percentage of revenue, cost of operations was 65.9% for
the year ended December 31, 2003, and 65.2% for the year ended December 31, 2002. The increase in
cost of operations as a percentage of revenue was primarily related to higher costs of labor on
lower margin residential contracts that were in place during 2003. The overall increase in cost of
operations of 29.7% was primarily due to the effects of foreign currency movements, 13.5%,
increased costs of disposal, 7.5%, increased labor costs, 6.6%, and labor and disposal costs at our
newly acquired U.S. operations, 2.1%. The increase in Canadian operating costs was primarily the
result of new waste collection agreements. Selling, General and Administrative Expense Selling, general and administrative expense, excluding stock-based compensation expense, was
$55.5 million for the year ended December 31, 2004 and $28.9 million for the year ended December
31, 2003, an increase of $26.6 million or in excess of 100%. As a percentage of revenue, selling,
general and administrative expense was 17.9% for the year ended
December 31, 2004 and 22.8% for the
year ended December 31, 2003. The overall increase in selling, general and administrative expense
is primarily due to acquisitions in the U.S., and to increased salaries, systems and other overhead
costs incurred in connection with our expansion into the U.S. In connection with our migration
transaction, we incurred legal and professional fees of $0.8 million for the year ended December
31, 2004. Concurrent with our bank amendment, we incurred approximately $0.8 million of legal and
professional fees that were currently expensed. During 2004, our compliance efforts with
Sarbanes-Oxley increased our overhead spending on third party professionals by approximately $0.9
million. Separately, during the third quarter of 2004 and as part of our cost reduction
initiatives, we reduced our workforce by approximately 55 employees and incurred approximately $2.7
million, of which $1.7 million related to
our former President, in severance charges and other related costs. As a result of the
workforce reduction, we expect an annual savings of $3.2 million in salary and related costs. The
unfavorable effects of foreign exchange movements increased selling, general and administrative
expense by $1.5 million or 5.2%. We expect selling, general and administrative expense as a
percentage of revenue to decline in 2005 as compared to 2004 due to having a full year impact from
our 2004 acquisitions and revenue generated by our newly opened landfills. Selling, general and administrative expense, excluding stock-based compensation expense, was
$28.9 million for the year ended December 31, 2003 and $15.2 million for the year ended December
31, 2002. As a percentage of revenue, selling, general and
administrative expense was 22.8% for the
year ended December 31, 2003 and 15.4% for the year ended December 31, 2002. The overall increase
in selling, general and administrative expense of 89.4%, as well as the increase as a percentage of
revenue, was primarily due to increased salaries, systems and other overhead costs to build our
infrastructure and enable us to execute our acquisition strategy as well as increased professional
and legal fees relative to our Migration Transaction. The unfavorable effects of foreign exchange
movements were 12.7%. Stock-based compensation expense (benefit) Stock-based compensation expense (benefit) relates to warrants issued to an executive officer
in 2001 for which variable accounting applies and options or warrants issued to non-employees for
services rendered. Stock-based compensation expense (benefit) is partially based on changes
in our stock price. Depreciation, Depletion and Amortization Depreciation, depletion and amortization was $34.2 million for the year ended December 31,
2004 and $14.9 million for the year ended December 31, 2003, an increase of $19.3 million or in
excess of 100%. As a percentage of revenue, depreciation, depletion and amortization was 11.0% and
11.8% for the years ended December 31, 2004 and 2003, respectively. The overall increase in
depreciation, depletion and amortization was due to our acquisitions in the United States coupled
with depletion at our three newly opened landfills, $17.7 million, and increased depreciation on
our vehicle fleet, related equipment and other increases, $0.5 million. The unfavorable effects of
foreign exchange movements increased depreciation, depletion and amortization by $1.1 million. As
a percentage of revenue, depreciation, depletion and amortization decreased in 2004 as compared to
2003 due to an increased mix of 30




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collection revenue. Landfill depletion rates ranged from $1.14 to
$7.73 per ton for our landfills in the United States and C$3.31 to C$15.88 per tonne for our
landfills in Canada. Depreciation, depletion and amortization was $14.9 million for the year ended December 31,
2003 and $10.7 million for the year ended December 31, 2002. As a percentage of revenue,
depreciation, depletion and amortization was 11.8% for the year ended December 31, 2003 and 10.8%
for the year ended December 31, 2002. The increase in depreciation, depletion and amortization of
$4.2 million or 39.3% was due to unfavorable effects of foreign exchange movements of 15.2%,
depreciation on our trucks and containers of 10.7%, depletion of approximately 10.5%, depreciation
at our newly acquired U.S. operations of 1.9% and amortization and other of 1.0%. Depreciation of
our trucks and containers increased primarily due to an increase in our fleet size and number of
containers. Depletion increased primarily due to increased disposal volumes as well as depletion
related to our closure and post-closure obligations. Landfill depletion rates during the year ended
December 31, 2003 for our two Canadian operating landfills ranged from C$4.00 to C$14.06 per tonne.
We had no operating landfills in the United States during 2003. For the year ended December 31,
2002, landfill depletion rates ranged from C$3.00 to C$11.19 per tonne. Foreign Exchange Loss (Gain) and Other The foreign exchange loss in 2004 and 2003 was the result of re-measuring U.S.
dollar denominated cash balances into Canadian dollars. The foreign exchange gains in 2002 were the
result of re-measuring our U.S. dollar denominated debt balances into Canadian dollars. As part of
the June 2002 refinancing of our senior credit facility, our U.S. dollar denominated debt was
repaid. Interest Expense The components of interest expense, including cumulative mandatorily redeemable preferred
stock dividends and amortization of issue costs, for the years ended December 31, 2004, 2003 and
2002 are as follows: 2004
    
    
    2003
    
    
    2002Preferred Stock and
amortization of issue costs
    
    $
    17,582
    
    
    $
    10,161
    
    
    $
    Credit facility and Senior
Subordinated Note interest
    
    
    19,858
    
    
    
    4,011
    
    
    
    3,330Amortization of debt issue costs
    
    
    10,294
    
    
    
    3,281
    
    
    
    1,855Capitalized interest
    
    
    (178
    )
    
    
    
    
    
    
    Other interest expense
    
    
    864
    
    
    
    986
    
    
    
    542$
    48,420
    
    
    $
    18,439
    
    
    $
    5,727
 The increase in interest expense is due primarily to (i) increased amortization of debt issue
costs, which includes a $6.5 million charge for the remaining unamortized debt issue costs
associated with the repayment of our 364-day Credit Facility in April 2004, (ii) increased interest
expense relative to our senior credit facilities and 9 1/2% Subordinated Notes and (iii) increased
non-cash dividends and amortization of issue costs relative to our cumulative mandatorily
redeemable preferred stock. The weighted average interest rate on credit facility borrowings was
7.11%, 6.54%, and 6.74%, for the years ended December 31, 2004, 2003 and 2002, respectively. Changes in fair value of warrants pending registration Due to the nature of certain financial penalties within the registration rights agreement in
our April 2004 private placement, the Common Shares, warrants and related proceeds from this
offering were classified outside of shareholders equity until the registration was declared
effective during August of 2004. Such amounts were reclassified to permanent equity during the
third quarter of 2004. Income Tax Provision (Benefit) The income tax provision (benefit) was $7.6 million for the year ended December 31, 2004,
$(0.6) million for the year ended December 31, 2003 and $1.7 million for the year ended December
31, 2002. The provision (benefit) is in excess of amounts at the combined federal and
state/provincial statutory rates due to the non-deductible nature of dividends accrued on our
preferred shares coupled with valuation allowances on our net operating losses in the United
States. As
of December 31, 2004, we had $75.3 million of gross net-operating loss carry-forwards, of
which, $45.6 million related to U.S. 31




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operations. Refer to Note 14 of our Consolidated Financial
Statements for the amount of net operating loss carry-forwards expiring in each future year. We
have determined that the realization of the future tax benefit related to the Canadian loss
carryforwards totaling $29.7 million is more likely than not and accordingly, have not provided a
tax valuation allowance against the benefit of these tax loss carryforwards as they are expected to
be utilized through future operations and certain tax planning strategies. Due to the start-up
nature of our U.S. operations, we have provided a valuation allowance for our net operating loss
carryforwards generated in the United States. Separately, changes in our ownership structure may
result in limitations on the utilization of loss carry-forwards, as imposed by Section 382 of the
U.S. Internal Revenue Code. Liquidity and Capital Resources Our principal capital requirements are to fund capital expenditures, debt service and business
and asset acquisitions. Significant sources of liquidity are cash on hand, working capital,
borrowings from our Senior Credit Facilities and proceeds from debt and equity issuances. Senior Secured Credit Facilities On April 30, 2004, we entered into new Senior Secured Credit Facilities (the Credit
Facilities) with a syndicate of lenders. The Credit Facilities consist of a five-year revolving
credit facility in the amount of $60.0 million, up to $15.0 million of which is available to our Canadian
operations, and a seven-year term loan facility in the amount of $100.0 million. The Credit
Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined, at our
option. The Credit Facilities are secured by substantially all of the assets of our U.S. restricted
subsidiaries. Our Canadian operations guarantee and pledge all of their assets only in support of
the portion of the revolving credit facility available to them. Separately, 65% of the Common
Shares of our first tier foreign subsidiaries, including Capital, are pledged to secure obligations
under the Credit Facilities. As of December 31, 2004, $15.0 million was drawn under the revolving
credit facility and $13.3 million was used to support outstanding letters of credit. As of June 30, 2004, we failed to meet certain of the financial covenants contained in the
Credit Facilities. On October 4, 2004, we entered into an amendment to the Credit Facilities with
the administrative agent for the lenders. The amendment includes changes to certain of the
financial and other covenants contained in the Credit Facilities and increases the current interest
rates payable on amounts outstanding by 125 basis points to 450 basis points over Euro dollar
loans. Until we meet certain target leverage ratios, as defined, availability under the amended
facility is reduced to $50.0 million, up to $12.5 million of which is available for our Canadian
operations. In connection with the amendment, we paid a fee of approximately $0.4 million to our
lenders. As of December 31, 2004, we are in compliance with the financial covenants, as amended,
and we expect to continue to be in compliance in future periods. The amendment also requires us to
receive an equity investment of at least $7.5 million prior to March 28, 2005. On September 30,
2004,
we entered into a standby purchase agreement with Michael G. DeGroote pursuant to which we may
require Mr. DeGroote to purchase shares of our common stock for a purchase price of $7.5 million on
or before March 28, 2005. As of March 4, 2005, we exercised our rights under the purchase agreement
thereby requiring Mr. DeGroote to purchase such shares. Our Credit Facilities, as amended, contain certain financial and other covenants that restrict
our ability to, among other things, make capital expenditures, incur indebtedness, incur liens,
dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions.
Our financial covenants include: (i) minimum consolidated interest coverage, (ii) maximum total
leverage and (iii) maximum senior secured leverage. The covenants and restrictions limit the manner
in which we conduct our operations and could adversely affect our ability to raise additional
capital. The following table sets forth our financial covenant levels for each of the next four
quarters: Maximum Consolidated
    
    Maximum Consolidated Senior
    
    Minimum ConsolidatedFiscal Quarter
    
    Leverage Ratio
    
    Secured Leverage Ratio
    
    Interest Coverage RatioFQ1 2005
    
    
    7.00:1.00
    
    
    
    3.00:1.00
    
    
    
    1.75:1.00FQ2 2005
    
    
    6.50:1.00
    
    
    
    2.75:1.00
    
    
    
    1.75:1.00FQ3 2005
    
    
    5.75:1.00
    
    
    
    2.50:1.00
    
    
    
    1.75:1.00FQ4 2005
    
    
    5.25:1.00
    
    
    
    2.50:1.00
    
    
    
    2.00:1.00
 Senior Subordinated Notes On April 30, 2004, we completed a private offering of 9 1/2% Senior Subordinated Notes
(Subordinated Notes) due 2014 for gross proceeds of $160.0 million. The Subordinated Notes mature
on April 15, 2014. Interest on the Subordinated Notes is payable semiannually on October 15 and
April 15. The Subordinated Notes are redeemable, in whole or in part, at our option, on or after
April 32




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15, 2009, at a redemption price of 104.75% of the principal amount, declining ratably in
annual increments to par on or after April 15, 2012, together with accrued interest to the
redemption date. In addition, prior to April 15, 2007, we may redeem up to 35.0% of the aggregate
principal amount of the Subordinated Notes with the proceeds of certain equity offerings, at a
redemption price equal to 109.5% of the principal amount. Upon a change of control, as such term is
defined in the Indenture, we are required to offer to repurchase all the Subordinated Notes at
101.0% of the principal amount, together with accrued interest and liquidated damages, if any, and
obtain the consent of our senior lenders to such payment or repay our indebtedness under our Credit
Facilities. The Subordinated Notes are unsecured and are subordinate to our existing and future senior
secured indebtedness, including our Credit Facilities, structurally subordinated to existing and
future indebtedness of our non-guarantor subsidiaries, rank equally with any unsecured senior
subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our
obligations with respect to the Subordinated Notes, including principal, interest, premium, if any,
and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior
subordinated basis by all of our existing and future domestic restricted subsidiaries. The Canadian
operations are not guarantors under the Subordinated Notes. The Subordinated Notes contain certain covenants that, in certain circumstances and subject to
certain limitations and qualifications, restrict, among other things (i) the incurrence of
additional debt; (ii) the payment of dividends and repurchases of stock; (iii) the issuance of
preferred stock and the issuance of stock of our subsidiaries; (iv) certain investments; (v) the
repurchase of our Preferred Stock; (vi) transactions with affiliates and (vii) certain sales of
assets. We also entered into a Registration Rights Agreement with the initial purchasers of the
Subordinated Notes in which we agreed to (i) file a registration statement with respect to the
Subordinated Notes within 120 days of the closing date of the issuance of the notes (August 28,
2004), pursuant to which we will exchange the Subordinated Notes for registered notes with terms
identical to the Subordinated Notes; (ii) have such registration statement declared effective
within 210 days of the issuance date; (iii) maintain the effectiveness of such registration
statement for minimum periods specified in the agreement and (iv) file a shelf registration
statement in the circumstances and within the time periods specified in the agreement. As we need
to file our re-audited Florida Recycling financial statements and pro forma financial statements
prior to filing the registration statement, we have not filed the registration statement with
respect to the Subordinated Notes and, therefore, we are required to pay liquidated damages, in
cash, in an amount equal to $0.05 per week per $1,000 in principal amount, of the unregistered
Subordinated Notes, for each week that the default continues for the first 90-days following
default (approximately $8,000 per week.) Thereafter, the amount of liquidated damages increases by
an additional $0.05 per week per $1,000 in principal amount of unregistered Subordinated Notes for
each subsequent 90-day period until all defaults have been cured, to a maximum of $0.50 per week
per $1,000 in principal amount of unregistered Subordinated Notes outstanding. These liquidated
damages are payable at the same time as interest payments due under the Subordinated Notes.
Currently, our interest penalty approximates $24,000 per week until May 26, 2005 when it will
increase to $32,000 per week. Equity Placement On April 30, 2004, we raised approximately $50.7 million, after deducting expenses of
approximately $2.9 million, from the sale of 13,400,000 Common Shares and warrants to purchase
1,340,000 Common Shares in private placement transactions to certain
investors. Sanders Morris Harris Inc. acted as the placement agent for the issuance and was
paid a placement agent fee of approximately $2.7 million. Don A. Sanders, a director of ours at the
time of such issuance, is a principal of Sanders Morris Harris Inc. On March 4, 2005, we exercised our put rights under our standby purchase agreement with
Michael DeGroote, thereby requiring Mr. DeGroote to purchase shares of our common stock for $7.5
million on or before March 28, 2005. Pursuant to the standby purchase agreement, the price per
share will be equal to 85% of the average of the closing price of our common stock during the ten
trading days ending on the second trading day preceding the closing of the transaction. Mr.
DeGroote will also receive warrants to purchase our common stock equal to 10% of the shares issued
with an exercise price equal to the purchase price for the Common Shares. Upon closing the
transaction, Mr. DeGroote will receive a $375,000 commitment
fee, which is in addition to the $375,000 fee upon execution of the
standby purchase agreement. This equity infusion
was required as a condition to our amended credit facility and will provide additional liquidity
for us. Cumulative Mandatory Redeemable Preferred Stock In May 2003, we issued 55,000 shares of redeemable Preferred Stock (the Preferred Stock) to
Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively Kelso), pursuant to the terms
of an agreement dated as of May 6, 2003, as amended in February and June 2004 (the Subscription
Agreement), at a price of $1,000 per share. We also issued to Kelso warrants to purchase 7,150,000 33




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shares of our common stock (on a one-for-one basis) for $3.00 per share. The warrants are
exercisable at anytime until May 6, 2010. The issuance of the Preferred Stock resulted in proceeds
of approximately $49.5 million, net of fees of approximately $5.5 million. The shares of Preferred
Stock are non-voting. The Preferred Stock entitles the holders to cash dividends of 17.75% per
annum compounding and accruing quarterly in arrears. The liquidation preference approximated $73.4
million as of December 31, 2004. The Preferred Stock entitles the holders to a liquidation
preference of $1,000 per share, adjusted for any stock dividend, stock split, reclassification,
recapitalization, consolidation or similar event affecting the Preferred Stock, plus the amount of
any accrued but unpaid dividends on such share as of any date of determination. As we are not permitted to declare and pay cash dividends pursuant to the terms of our Credit
Facilities, the dividend payments accrue. The Preferred Stock, including all accrued and unpaid
dividends, must be redeemed in full by no later than May 6, 2015. Until May 6, 2006, we may redeem
all or any part of the Preferred Stock on payment of the sum of $1,000 per share plus accrued and
unpaid dividends calculated as if the Preferred Stock were redeemed on May 6, 2006, or
approximately $92.7 million. If we do not exercise our option to redeem all of the Preferred Stock
by May 6, 2009, Kelso may require us to initiate a sale of our assets on terms acceptable to our
board consistent with the exercise of their fiduciary duties. Pursuant to an amendment to the
Certificate of Designations dated April 30, 2004, if we determine, after conducting a sale process,
that any such sale would not yield sufficient proceeds to repay in full the indebtedness then
outstanding under our Credit Facilities and the redemption amount of our Subordinated Notes issued
on April 30, 2004, or at least $320.0 million, then we may elect to delay such sale. The sale date
may be delayed until the earliest to occur of (i) the final maturity date of the Subordinated Notes
(April 15, 2014); (ii) the date on which our Credit Facilities and the Subordinated Notes are fully
repaid or otherwise satisfied or (iii) a sale of our assets to a third party. We refer to this date
as the delayed sale date. If we do not initiate and complete a sale of our assets within 20 months
of initiation of the sale process by the holders of the Preferred Stock, then on notice from the
holders of the Preferred Stock, all outstanding Preferred Stock will become due and payable on the
first anniversary of the date on which the holders of Preferred Stock gave notice requiring the
initiation of a sale process, for a liquidation amount of 1.20 times the liquidation preference of
$1,000 per share. If the sale day has been delayed, then we are not required to pay this increased
liquidation amount until the delayed sale date. Also pursuant to the Amended Certificate of Designations, if we become subject to a
liquidation or insolvency event (as such terms are defined in our Amended and Restated Credit
Agreement dated April 30, 2004) or in the event of a change of control (as such term is defined in
the Amended Certificate of Designations), all payments and other distributions to holders of
Preferred Stock will be subordinate to the repayment in full of our Credit Facilities. This
provision does not prohibit any accrual or increase in the dividend rate or in the liquidation
preference of the Preferred Stock as provided for in the Amended Certificate of Designations, or
the distribution of additional shares or other equity securities to the holders of Preferred Stock,
so long as such additional shares or other equity securities are subject to at least equivalent
subordination provisions. In addition, the Amended Certificate of Designations prohibits us from
making any payment or distribution to the holders of Preferred Stock in the event of a sale of our
assets, or the exercise by the holders of the Preferred Stock of their right to require payment of
the liquidation amount of their shares as a result of the failure to consummate a sale of our
assets as described in the preceding paragraph, unless such payment or distribution is expressly
permitted pursuant to the terms of the agreement then governing our Credit Facilities. Migration Transaction As part of our business strategy to expand into the United States, we entered into a migration
transaction that became effective on July 31, 2004. Under the migration transaction, our corporate
structure was reorganized so that Waste Services, Inc., a Delaware company, became the ultimate
parent company of our corporate group. Prior to the migration transaction, we were a subsidiary of
Capital, a company amalgamated under the laws of the Province of Ontario, Canada. After the
migration transaction, Capital became our subsidiary. The migration transaction occurred by way of a plan of arrangement under the Business
Corporations Act (Ontario) and consisted primarily of: (1) the exchange of 87,657,035 Common Shares
of Capital for 87,657,035 shares of our common stock; and (2) the conversion of the remaining
9,229,676 Common Shares of Capital held by non-US residents who elected to receive exchangeable
shares into 9,229,676 exchangeable shares of Capital (now Waste Services (CA) Inc.). The
transaction was approved by the Ontario Superior Court of Justice on July 30, 2004 and by our
shareholders at a special meeting held on July 27, 2004. The terms of the exchangeable shares of Capital are the economic and functional equivalent of
our common stock. Holders of exchangeable shares (1) will receive the same dividends as holders of
shares of our common stock and (2) will be entitled to vote on the same matters as holders of
shares of our common stock. Such voting is accomplished through the one (1) share of Special Voting
Preferred Stock held by Computershare Trust Company of Canada as trustee, who will vote on the
instructions of the holders of the exchangeable shares (one vote for each exchangeable share). As
such, the exchangeable shares are a component 34




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of our common equity. Upon the occurrence of certain events, such as the liquidation of Capital, or after the
redemption date, our Canadian holding company, Capital Holdings will have the right to purchase
each exchangeable share for a share of our common stock, plus all declared and unpaid dividends on
the exchangeable share. Unless certain events occur, such redemption date will not be earlier than
December 31, 2016. Holders of exchangeable shares also have the right at any time at their option,
to exchange their exchangeable shares for shares of our common stock. Surety Bonds and Letters of Credit Municipal solid waste services contracts, permits and licenses to operate transfer stations,
landfills and recycling facilities may require performance or surety bonds, letters of credit or
other means of financial assurance to secure contractual performance. As of December 31, 2004, we
had provided customers and various regulatory authorities with such bonds and letters of credit
amounting to approximately $67.7 million to collateralize our obligations. The majority of these
obligations expire over the next year and will need to be renewed. Cash Flows The following discussion relates to the major components of the changes in cash flows for the
years ended December 31, 2004 and 2003. Cash Flows from Operating Activities Cash
provided by operating activities were $24.7 million for the year ended December 31, 2004
and $9.4 million for the year ended December 31, 2003. The increase in cash provided by operating
activities is primarily due to cash generated from our Canadian operations and domestic
acquisitions as well as improvements in working capital. Cash provided by operating activities were $9.4 million for the year ended December 31, 2003,
and $13.7 million for the year ended December 31, 2002. The decrease in cash provided by operating
activities is primarily due to increased overhead spending, as previously discussed, partly offset
by increased cash from our working capital. Cash Flows used in Investing Activities Cash
used in investing activities was $198.2 million for the year ended December 31, 2004 and
$195.6 million for the year ended December 31, 2003. The increase in cash used in investing
activities is primarily due to the various business acquisitions we completed during 2004 and increased capital
expenditures. Capital expenditures were $46.2 million for the year ended December 31, 2004. We
expect our capital expenditures to range from $37.0 to $38.0 million for all of 2005. Proceeds
from business divestures of $14.2 million primarily related to the sale of non-core assets acquired
as part of the Allied and Florida Recycling transactions. We intend to finance future capital expenditures and business
acquisitions through operating cash flow, borrowings under our existing credit facilities, proceeds
from asset sales and the issuance of equity and/or other debt securities. Cash used in investing activities was $195.6 million for the year ended December 31, 2003, and
$39.8 million for the year ended December 31, 2002. The increase in cash used in investing
activities during 2003 was primarily due to our acquisition activity. During the year ended
December 31, 2003, we purchased certain assets from Allied for $81.1 million in cash, all the
membership interests in the entity which owns the JED Landfill for $68.1 million in cash, and we
acquired a number of smaller companies for an aggregate cash purchase price of approximately $12.2
million. Capital expenditures also increased by $12.3 million for the year ended December 31, 2003
versus 2002 primarily due to increased spending related to landfill development, and in the prior
year, approximately $1.8 million in capital expenditures was financed with capital leases. In
addition, cash deposits for pending business acquisitions increased $9.9 million over the prior
year. Cash Flows from Financing Activities Cash provided by financing activities was $160.7 million for the year ended December 31, 2004
and $205.1 million for the year ended December 31, 2003. The decrease in cash flows from financing
activities is due to overall lower equity offerings and related proceeds offset by releases of cash
collateral supporting outstanding letters of credit. 35




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##### Table of Contents



Cash provided by financing activities was $205.1 million for the year ended December 31,
2003, and $25.4 million for the year ended December 31, 2002. As previously discussed, the increase
in cash flows from financing activities is primarily due to proceeds from our Credit Facilities and
the issuance of Series 1 preferred shares, Preferred Stock, and our Common Shares, the proceeds of
which were primarily used to finance acquisitions and repay our previous senior secured
credit facility. New Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requiresall share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than July 1, 2005. Early adoption will be permitted
in periods in which financial statements have not yet been issued. We expect to adopt Statement
123(R) on July 1, 2005. Statement 123(R) permits public companies to adopt its requirements using one of two methods:  1.
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of Statement 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of Statement
123 for all awards granted to employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date.  2.
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of
adoption. We have not yet determined either the method of adoption or the impact that the new standard is
expected to have on our financial statements. Seasonality We expect the results of our Canadian operations to vary seasonally, with revenue typically
lowest in the first quarter of the year, higher in the second and third quarters, and lower in the
fourth quarter than in the third quarter. The seasonality is attributable to a number of factors.
First, less solid waste is generated during the late fall, winter and early spring because of
decreased construction and demolition activity. Second, certain operating costs are higher in the
winter months because winter weather conditions slow waste collection activities, resulting in
higher labor costs, and rain and snow increase the weight of collected waste, resulting in higher
disposal costs, which are calculated on a per ton basis. Also, during the summer months, there are
more tourists and part-time residents in some of our service areas, resulting in more residential
and commercial collection. Consequently, we expect operating income to be generally lower during
the winter. The effect of seasonality on our results of operations from our U.S. operations, which
are located in warmer climates than our Canadian operations, is less significant than that of our
Canadian operations. Off-Balance Sheet Financing We have no off-balance sheet debt or similar obligations, other than our letters of credit and
performance and surety bonds discussed previously, which are not debt. We have no transactions or
obligations with related parties that are not disclosed, consolidated into or reflected in our
reported results of operations or financial position. We do not guarantee any third party debt. We
have entered into a put or pay disposal agreement with RCI Environment Inc., Centres de
Transbordement et de Valorisation Nord Sud Inc., RCM Environment Inc. (collectively the RCI
Companies) and Intersan Inc. pursuant to which we have posted a letter of credit for C$4.0 million
to secure our obligations and those of the RCI Companies to Intersan Inc. Concurrently with the put
or pay disposal agreement with the RCI Companies, we entered into a three year agreement with Waste
Management of Canada Corporation (formerly Canadian Waste Services Inc.) to allow us to deliver
non-hazardous solid waste to their landfill in Michigan. Details of these agreements are further
described in Note 12 of our annual financial statements for the year ended December 31, 2004. 36




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##### Table of Contents



Tabular Disclosure of Contractual Obligations We have various commitments primarily related to funding of short-term debt, our Preferred
Stock, closure and post-closure obligations and capital and operating
lease commitments. You should also read our discussion regarding
Liquidity and Capital Resources contained herein. The
following table provides details regarding our contractual obligations and other commercial
commitments subsequent to December 31, 2004 (in thousands): Beyond2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    5 Years
    
    
    TotalContractual cash obligations:Existing credit facilities
    
    $
    1,000
    
    
    $
    1,000
    
    
    $
    1,000
    
    
    $
    1,000
    
    
    $
    16,000
    
    
    $
    254,250
    
    
    $
    274,250Capital lease obligations
    
    
    1,341
    
    
    
    630
    
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,430Other long-term debt
    
    
    166
    
    
    
    177
    
    
    
    190
    
    
    
    203
    
    
    
    217
    
    
    
    2,177
    
    
    
    3,130Operating lease commitments
    
    
    5,081
    
    
    
    4,674
    
    
    
    4,033
    
    
    
    3,510
    
    
    
    2,594
    
    
    
    9,669
    
    
    
    29,561Cumulative mandatorily redeemable
preferred
stock(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,142
    
    
    
    
    
    
    
    156,142Closure and post-closure obligations(2)
    
    
    
    
    
    
    
    
    
    
    730
    
    
    
    4,681
    
    
    
    2,019
    
    
    
    183,158
    
    
    
    190,588$
    7,588
    
    
    $
    6,481
    
    
    $
    6,412
    
    
    $
    9,394
    
    
    $
    176,972
    
    
    $
    449,254
    
    
    $
    656,101
   (1)
    
    This table includes our cumulative mandatorily redeemable preferred stock, which must be
redeemed in full no later than May 2015. The future payment of $156.1 million represents the
principal, plus accrued dividends at 17.75% compounded quarterly to May 6, 2009, which is the
earliest date Kelso may require us to repay the obligation. If we do not redeem by May 6,
2009, Kelso may require us to initiate a sale of our assets on terms acceptable to our board
of directors. Refer to Note 11 of the consolidated financial statements.(2)
    
    Future payments on closure and post-closure obligations are undiscounted and contemplate full
utilization of current and probable expansion airspace. Other Contractual Arrangements In
connection with a certain acquisition in December 2003 and the issuance of the 600,000 Common Shares, we
entered into a reimbursement agreement whereby for a period of one year after the second
anniversary of the closing date, we will reimburse the seller for any loss on sales of shares below
$4.75 per share. In the normal course of our business, we have other commitments and contingencies relating to
environmental and legal matters. For a further discussion of commitments and contingencies, see
Note 12 to our Consolidated Financial Statements contained elsewhere in this annual report. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk A portion of our operations are domiciled in Canada; as such, we translate the results of our
operations and financial condition of our Canadian operations into U.S. dollars. Therefore, our
reported results of operations and financial condition are subject to changes in the exchange
relationship between the two currencies. For example, as the relationship of the Canadian dollar
strengthens against the U.S. dollar our revenue is favorably affected and conversely our expenses
are unfavorably affected. Assets and liabilities of Canadian operations have been translated from
Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet
date, and revenue and expenses of Canadian operations have been translated from Canadian dollars
into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and
losses on translation of the Canadian operations into U.S. dollars are reported as a separate
component of shareholders equity and are included in comprehensive income (loss). Separately,
monetary assets and liabilities denominated in U.S. dollars held by our Canadian operation are
re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The
effects of re-measurement are reported currently as a component of net income (loss). Currently, we
do not hedge our exposure to changes in foreign exchange rates. For each of the three years ended
December 31, 2004, 2003 and 2002 we estimate that a 5.0% increase or decrease in the relationship of the
Canadian dollar to the U.S. dollar would increase or decrease operating profit from our Canadian
operations by less than $0.4 million. As of December 31, 2004, we were exposed to variable interest rates under our Credit
Facilities, as amended. The interest rates payable on our revolving and term facilities are based
on a spread over base Eurodollar loans as defined. A 25 basis point increase in base interest rates
would increase annual cash interest expense by approximately $0.3 million. 37




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Item 8.Financial Statements and Supplementary Data All financial statements and supplementary data that are required by this Item are listed in
Part IV, Item 15 of this annual report, are presented beginning on Page F-1. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PricewaterhouseCoopers LLP (PwC), Toronto, Ontario audited our Consolidated Financial
Statements for the year ended December 31, 2002. In February 2003, PwC informed us that they
declined to stand for reelection as our independent accountants. The report of PwC on our
consolidated financial statements as of and for the year ended December 31, 2002 did not
contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principle. In connection with their audit for the year ended December 31, 2002 and for the interim period
through the filing date of this report, there were no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of PwC, would have caused them to make reference thereto in their
report on the financial statements for such year. During the year ended December 31, 2002, there
were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K with respect to us. On October 7, 2003, the Audit Committee of our Board of Directors approved the engagement of
the firm BDO Dunwoody LLP (BDO), Toronto, Ontario to act as our new independent accountants to
audit our financial statements for the year ending December 31, 2003. During the years ended
December 31, 2001 and 2002 and through October 7, 2003, we did not consult with BDO regarding
either (i) the application of accounting principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on our financial statements; or (ii)
any matter that was either the subject of a disagreement, as contemplated by Item 304(a)(1)(iv) of
Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event,
as that term is defined in Item 304(a)(1)(v) of Regulation S-K. As a result of our migration transaction, the Audit Committee of the Board of Directors on
July 27, 2004 appointed the U.S. member firm of BDO world wide, BDO Seidman LLP, as our principal
independent auditor for the year ended December 31, 2004. BDO, the Canadian member
firm of BDO world wide, will continue to provide audit, audit-related and tax services as we
continue to have significant operations located in Canada. BDO Dunwoody LLPs audit report on our
Financial Statements for the year ended December 31, 2003, did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principle. For
the year ended December 31, 2003 and through the filing date of this report, there have been no
disagreements with BDO on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements if not resolved to BDOs satisfaction would have caused them to make reference to the subject matter of the
disagreement in connection with their report. For the years ended December 31, 2003, and through
July 27, 2004, there were no reportable events as that term is described in Item 304(a)(1)(v) of
Regulation S-K. During the years ended December 31, 2003, and through July 27, 2004, we did not consult BDO
Seidman, LLP with respect to the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be rendered on our financial
statements, or any other matters or reportable events as defined in Item 304(a)(1)(v) of Regulation
S-K, other than in connection with carrying out the review procedures required under Appendix K of
the SEC Practice Section rules (subsequently adopted by the PCAOB). 38




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##### Table of Contents



Item 9A.Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to
be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported accurately within the time periods specified in the Securities and Exchange
Commissions (SEC) rules and forms. As of the end of the period covered by this report, an
evaluation was performed under the supervision and with the participation of management, including
the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule
13a-15). Based upon this evaluation, the CEO and CFO concluded that our disclosure controls and
procedures are effective. The conclusions of the CEO and CFO from this evaluation were communicated
to the Audit Committee. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Management's Report on Internal Control Over Financial Reporting The report is included in Item 8 of this annual report. Attestation Report of
Registered Public Accounting Firm The
report is included in Item 8 of this annual report. 
 Item 9B. Other Information None. 
 PART III 
 Item 10.Directors and Executive Officers of the Registrant Directors The following table sets forth certain information with respect to our directors as of March
1, 2005: Name
    
    Age
    
    Since
    
    PositionDavid Sutherland-Yoest
    
    48
    
    September 6, 2001
    
    Chairman, Chief Executive Officer
and DirectorGary W. DeGroote (3)
    
    49
    
    September 6, 2001
    
    DirectorMichael B. Lazar (3)
    
    35
    
    May 6, 2003
    
    DirectorGeorge E. Matelich (2)
    
    48
    
    May 6, 2003
    
    DirectorLucien Rémillard
    
    57
    
    September 6, 2001
    
    DirectorJack E. Short (1)(2)
    
    63
    
    July 28, 2004
    
    DirectorWallace L. Timmeny(1)(2)(3)
    
    67
    
    July 28, 2004
    
    DirectorMichael J. Verrochi(1)(2)
    
    64
    
    July 28, 2004
    
    Director
   (1)
    
    Member of the Audit Committee. 39




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##### Table of Contents



(2)
    
    Member of the Governance Committee.(3)
    
    Member of the Compensation Committee. Biographical information regarding each of our directors is set forth below: David Sutherland-Yoesthas been Chairman and Chief Executive Officer and a director since
September 6, 2001. Mr. Sutherland-
Yoest also held the position of Chairman and Chief Executive Officer of H2O
Technologies Ltd., a water purification company, from March 2000 to October 2003 and served as a
director of H2O Technologies Ltd. from March 2000 to January 2004. Mr. Sutherland-Yoest
served as the Senior Vice President  Atlantic Area of Waste Management, Inc. from July 1998 to
November 1999. From August 1996 to July 1998, he was
the Vice Chairman and Vice President  Atlantic Region of USA Waste Services, Inc., or USA Waste and the President of Canadian Waste
Services, Inc., which, during such time, was a subsidiary of USA Waste. Prior to joining USA
Waste, Mr. Sutherland-Yoest was President, Chief Executive Officer and a director of Envirofil,
Inc. Between 1981 and 1992, he served in various capacities at Laidlaw Waste Systems, Inc. and
Browning-Ferris Industries, Ltd. Gary W. DeGrootehas been a director since September 6, 2001. Mr. DeGroote has been the
President and sole director of GWD Management Inc., a private investment holding company since
1981. From 1991 to 1995, Mr. DeGroote was President and a director of Republic Environmental
Systems Ltd. From 1976 through 1989, Mr. DeGroote served in various positions at Laidlaw Waste
Systems Ltd. and its affiliates, including as Vice President and served as a member of the board of
directors of Laidlaw Inc. from 1983 to 1989. Mr. DeGroote also serves as a director of Century
Business Services, Inc. Lucien Rémillardhas been a director since September 6, 2001. Mr. Rémillard has been the
President and Chief Executive Officer of RCI Environnement Inc., a waste management company, since
1997. From 1981 to 1995, Mr. Rémillard was the President and Chief Executive Officer of Intersan,
Inc., a waste management company. Mr. Rémillard has also served as a director of the Greater
Montreal Area Comite Paritaire des Boueurs, the organization regulating labor relations for the
Montreal solid waste removal industry, since 1983. Mr. Rémillard is also Chairman of the board of
directors of Remstar Corporation, an independent distribution and film production company. Jack E. Shortbecame a director on July 28, 2004. In July 2001, Mr. Short was appointed by
the Federal Bankruptcy court for Northern Oklahoma to act as plan agent in the consolidated
bankruptcy of Manchester Gas Storage, Inc., and MGL, Inc. In March 2004, a court order was given
to close the case and discharge the plan agent. In June 2002, Mr. Short was appointed to the board
of T.D. Williamson, Inc. and serves on the finance and audit committees of that company. In July
2004, Mr. Short was appointed to the board of AAON, Inc. and serves on the audit and governance
committees. Mr. Short was a partner at PricewaterhouseCoopers LLP from 1976 to 1981 and was
readmitted to the partnership in 1987 and was a partner until his retirement in 2001. From 1981 to
1987, Mr. Short was in private industry. In 1994, Mr. Short was appointed for a five-year term to
the Oklahoma Board of Accountancy, serving as its chairman for two of those years. Wallace L. Timmenybecame a director on July 28, 2004. Mr. Timmeny has been a partner in the
law firm of Dechert LLP since 1996. Mr. Timmeny is a past chairman of
the Executive Council of the Securities Law Committee of the Federal Bar Association. From 1965 to
1979, Mr. Timmeny was an attorney with the U.S. Securities and Exchange Commission and ultimately
the deputy director of its Division of Enforcement. Mr. Timmeny serves on the board of directors
for Quanta Capital Holdings Ltd. and Friedman, Billings, Ramsey Group, Inc. Michael J. Verrochibecame a director on July 28, 2004. Mr. Verrochi is currently Chairman
and Chief Executive Officer of Verrochi Realty Trust and Chairman and Chief Executive Officer of
Monadnock Mountain Spring Water. Mr. Verrochi served in senior executive positions, including
Executive Vice-President, with Browning-Ferris Industries, Inc., a solid waste management company,
and as a member of its board of directors. George E. Matelichhas been a director since May 6, 2003. Mr. Matelich has been a Managing
Director of Kelso & Company since 1990. Mr. Matelich has been affiliated with Kelso & Company
since 1985. Mr. Matelich serves as a director of Optigas,
Inc. and as a Trustee of the University of Puget Sound. Mr. Matelich is a nominee to the Board of
Directors of Kelso Investment Associates VI, L.P. and KEP VI, LLC, affiliates of Kelso & Company, as
holders of our Preferred Stock. Michael B. Lazarhas been a director since May 6, 2003. Mr. Lazar is a Managing Director at
Kelso & Company. Mr. Lazar joined Kelso in 1993 and has been involved in the firms private equity
transactions since that time. Prior to joining Kelso & 40




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Company, Mr. Lazar worked in the Acquisition
Finance Group at Chemical Securities, Inc. (predecessor to JP Morgan Securities, Inc.). Mr. Lazar
started his career in the Corporate Finance and Structured Finance Groups at Chemical Bank as an
Investment Banking Analyst. Mr. Lazar is also a director of Endurance Business Media, Inc. Mr.
Lazar is a nominee to the Board of Directors of Kelso Investment
Associates VI, L.P. and KEP VI, LLC,
affiliates of Kelso & Company, as holders of our Preferred Stock. We have a separately designated standing Audit Committee. On August 11, 2004, following
completion of the migration transaction pursuant to which we became the parent company of Waste
Services (CA) Inc. (the Migration), Jack E. Short, Wallace L. Timmeny and Michael J. Verrochi
were appointed to the Audit Committee and Jack E. Short was named the Chair. Our board of
directors determined at that time that we have at least one audit committee financial expert
serving on the Audit Committee, Jack E. Short, who is an independent director. Prior to the Migration, the members of the Audit Committee of Waste Services (CA) Inc. were
George E. Matelich, Gary W. DeGroote and Don A. Sanders. George E. Matelich was the Chair and was
designated by the board of directors of Waste Services (CA) Inc. as the audit committee financial
expert. Section 16 (a) Beneficial Ownership Reporting Compliance Based solely on a review of reports of ownership, reports of changes of ownership and written
representations under Section 16 (a) of the Exchange Act that were furnished to us during fiscal
2004 for persons who were, at any time during fiscal 2004, our directors or executive officers or
beneficial owners of more than 10% of the outstanding shares of our common stock, all filing
requirements for reporting persons were met except by Larry D. Henk who filed one late report with
respect to one transaction and by Westbury Bermuda Limited which filed one late report with respect
to one transaction. Code of Ethics We have adopted a Code of Business Conduct and Ethics which applies to all of our employees,
including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer and
Corporate Controller. A copy of the Code of Business Conduct and Ethics may be accessed on our
website http://www.wasteservicesinc.com. 
 Item 11.Executive Compensation Compensation Paid to Named Executive Officers The following table provides information relating to compensation for our last three years for
each person who served as the Chief Executive Officer during fiscal 2004 and our four other most
highly compensated executive officers serving at the end of 2004. The amounts shown include
compensation for services in all capacities that were provided to us and our direct and indirect
subsidiaries and predecessors. 41




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##### Table of Contents



Summary Compensation Table Long-TermCompensationAwardsSecuritiesUnderlyingAnnual Compensation
    
    
    Options/
    
    
    All OtherName and Principal Position
    
    Year
    
    
    Salary ($)(1)
    
    
    Bonus ($)
    
    
    SARS
    
    
    Compensation(In thousands of U.S. dollars)David Sutherland-Yoest
    
    
    2004
    
    
    $
    476.7
    
    
    $
    
    
    
    
    
    
    
    $
    Chairman and Chief Executive Officer
    
    
    2003
    
    
    
    223.1
    
    
    
    428.3
    
    
    
    1,000,000
    
    
    
    2002
    
    
    
    210.2
    
    
    
    
    
    
    
    
    
    
    
    Charles A. Wilcox
    
    
    2004
    
    
    
    192.1
    
    
    
    125.0
    
    
    
    1,250,000
    
    
    
    11.5
    (2)President and Chief Operating Officer
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effective July 14, 2004
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ivan R. Cairns
    
    
    2004
    
    
    
    330.3
    
    
    
    
    
    
    
    
    
    
    
    4.8
    (3)Executive Vice-President, General Counsel
and Corporate Secretary
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    600,000
    
    
    
    Effective January 5, 2004
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mark A. Pytosh
    
    
    2004
    
    
    
    312.3
    
    
    
    
    
    
    
    1,500,000
    
    
    
    18.9
    (4)Executive Vice-President
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effective February 23, 2004
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ronald L. Rubin
    
    
    2004
    
    
    
    293.1
    
    
    
    
    
    
    
    
    
    
    
    22.7
    (5)Executive Vice-President and Chief
Financial Officer
    
    
    2003
    
    
    
    98.5
    
    
    
    230.0
    
    
    
    500,000
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    All our named executive officers took a salary reduction of 20% of their base salary during the
last 4 months of 2004.(2)
    
    Consists of $10,500 in health insurance premiums and $1,000 in term life insurance premiums.(3)
    
    Consists of contributions to our Canadian deferred profit sharing plan.(4)
    
    Consists of $17,400 in health insurance premiums and $1,500 in term life insurance premiums.(5)
    
    Consists of $20,900 in health insurance premiums and $1,800 in term life insurance premiums. The following table summarizes options granted to the named executive officers during 2004: Option/SAR Grants in Last Year Individual GrantsNumber ofSecurities
    
    Percent of Total
    
    
    
    
    
    
    
    Potential Realizable ValueUnderlying
    
    Options/SARs
    
    
    
    
    
    
    
    at Assumed Annual Rates ofOptions/SARs
    
    Granted to
    
    Exercise or
    
    
    
    Stock Price Appreciation forGranted (#)
    
    Employees
    
    Base Price
    
    Expiration
    
    Options TermName
    
    Exercisable
    
    in Year
    
    ($/Sh)
    
    Date
    
    5% ($)
    
    10% ($)($ in thousands)Charles A. Wilcox
    
    
    1,250,000
    (1)
    
    
    22.84
    %
    
    
    4.52
    
    
    06/23/09
    
    $
    1,741
    
    
    $
    3,904Mark A. Pytosh
    
    
    1,000,000
    (2)
    
    
    18.27
    %
    
    
    5.20
    
    
    03/30/09
    
    
    1,686
    
    
    
    3,803500,000
    (3)
    
    
    9.14
    %
    
    
    4.42
    
    
    05/11/09
    
    
    693
    
    
    
    1,557
   (1)
    
    Exercisable from June 23, 2006.(2)
    
    Exercisable from March 30, 2006(3)
    
    Exercisable from May 11, 2006 42




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Year-End Option/SAR Values The following table shows the value of unexercised options held by the named executive
officers at the end of 2004. No options were exercised by the named executive officers during 2004. Number of SecuritiesUnderlying Unexercised
    
    Value of UnexercisedOptions/SARs at
    
    In-the-Money Options/SARsYear End (#)
    
    at Year End ($)Name
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableDavid Sutherland-Yoest
    
    
    
    
    1,000,000
    
    
    
    $
    Charles A. Wilcox
    
    
    
    
    1,250,000
    
    
    
    $
    Ivan R. Cairns
    
    
    
    
    600,000
    
    
    
    $
    Mark A. Pytosh
    
    
    
    
    1,500,000
    
    
    
    $
    Ronald L. Rubin
    
    
    
    
    500,000
    
    
    
    $
    
 Directors Compensation The Board of Directors has determined that the outside directors will receive the
following compensation for acting as directors effective from July 31, 2004:  
    $15,000 as an annual retainer for each Director
    $20,000 as additional annual retainer for Chair of the Audit Committee
    $15,000 as an additional retainer for members of the Audit Committee
    $5,000 as an additional annual retainer for Chair of the Compensation Committee
    $5,000 as additional annual retainer for the Chair of the Corporate Governance Committee
    $1,500 or $500 per meeting participation in person or by telephone, respectively. Employment Agreements David Sutherland-Yoest.Mr. Sutherland-Yoest is employed as our Chairman and Chief Executive
Officer pursuant to an employment agreement enter into on September 7, 2001. The agreement had an
initial term of three years, which term has automatically extended and will continue until notice
is given that the employment term will not be extended. Under this employment agreement, Mr.
Sutherland-Yoest is entitled to a base salary as determined from time to time by the Board of
Directors on the recommendation of the Compensation Committee, plus an annual bonus of up to 100%
of his base salary, subject to satisfaction of annual performance objectives mutually agreed upon
by the Board of Directors and Mr. Sutherland-Yoest at the beginning of each year. The employment
agreement provides for the following benefits upon termination: (a) if the agreement is terminated
upon death or total disability or by Mr. Sutherland-Yoest within six months following a change of
control, Mr. Sutherland-Yoest or his beneficiaries will be paid his base salary for a period of
three years from the effective date of termination plus a lump sum payment equal to three times the
average of the cash bonuses paid to him in each of the two most recently completed years, he will
receive company benefits for a period of three years, and any stock options granted will continue
to vest as if Mr. Sutherland-Yoest were still employed; (b) if the agreement is terminated for
cause, Mr. Sutherland-Yoest will be entitled to receive all accrued but unpaid base salary,
expenses and any earned benefits; (c) if the agreement is terminated by Mr. Sutherland-Yoest
voluntarily, Mr. Sutherland-Yoest will be entitled to receive any accrued but unpaid base salary,
expenses and any earned benefits; and (d) if the agreement is terminated without cause, Mr.
Sutherland-Yoest will continue to receive his base salary and will receive company benefits until
the first anniversary of the effective date of termination, and any stock options will vest and be
exercisable until the end of the option term as set out in the option grant. Mr. Sutherland-Yoests
employment agreement also provides for other customary benefits and perquisites and prohibits him
from competing with us during the term of his employment and for a specified period following
termination. Charles A. Wilcox.Mr. Wilcox is employed as our President and Chief Operating Officer
pursuant to the terms of an employment agreement entered into as of July 1, 2004. The employment
agreement is for an indefinite term. Mr. Wilcox is entitled to a base salary of $450,000 and a
discretionary cash bonus of up to 75% of his base salary in fiscal 2004 and thereafter of up to
100% of his base salary. Mr. Wilcox received a one-time bonus of $125,000 at the time of entering
into his employment agreement. His employment agreement provides for the following termination
benefits: (a) upon Mr. Wilcoxs death or if we terminate Mr. Wilcoxs employment by reason of his
total disability, Mr. Wilcox or his beneficiaries are entitled to continue to receive his base
salary for three years and is entitled to payment of his average bonus paid in the prior three
years (or where Mr. Wilcox has been employed for less than three years, his full bonus entitlement
in the immediately preceding fiscal year) in monthly installments over thirty-six months and all of
his options then outstanding vest immediately and continue to be exercisable for the balance of
their term; (b) upon termination of the agreement by us without cause or by Mr. Wilcox for good
reason, Mr. Wilcox is entitled to continue to receive his base salary for a period three years and
to payment of his average bonus in the prior three years (or where Mr. Wilcox has been 43




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employed for less than three years, his full bonus entitlement in the immediately preceding fiscal
year), in equal installments over thirty-six months and all of Mr. Wilcoxs options then vest and
continue to be exercisable for the balance of their term. If Mr. Wilcoxs employment is terminated
by us without cause or by him for good reason and a change of control has occurred with the two
years preceding or the one year after the effective date of his termination, then Mr. Wilcox is
entitled to receive a lump sum payment of three times both his base salary and his average bonus.
If Mr. Wilcox terminates his employment voluntarily or if his employment is terminated for cause,
Mr. Wilcox is only entitled to receive any accrued by unpaid base salary, expenses and any unearned
benefits. Mr. Wilcoxs employment agreement also provides for other customary benefits and
perquisites, some of which will continue after his
termination, and prohibits Mr. Wilcox from competing against us during the term of his
employment and for a specified period following his termination.. Ivan R. Cairns. Mr. Cairns is employed as our Executive Vice-President, General Counsel and
Corporate Secretary pursuant to an employment agreement effective January 5, 2004. The term of Mr.
Cairns employment is indefinite. Mr. Cairns is entitled to a base salary of $330,000 and a
discretionary annual cash bonus of up to 100% of his base salary. The employment agreement
provides for the following termination benefits: (a) upon Mr. Cairns death or if the agreement is
terminated by us by reason of Mr. Cairns total disability, Mr. Cairns or his beneficiaries are
entitled to continue to receive his base salary for three years and is entitled to payment of his
average bonus paid in the prior three years (or where Mr. Cairns has been employed for less than
three years, his full bonus entitlement in the immediately preceding fiscal year) in monthly
installments over thirty-six months and all of his options then outstanding vest immediately and
continue to be exercisable for the balance of their term; (b) upon termination of the agreement by
us without cause or by Mr. Cairns for good reason, Mr. Cairns is entitled to continue to receive
his base salary for a period two years and to payment of his average bonus in the prior two years,
in equal installments over twenty-four months and all of Mr. Cairns options then vest and continue
to be exercisable for the balance of their term. If however, Mr. Cairns employment is terminated
by us without cause or by him for good reason and a change of control has occurred with the two
years preceding or the one year after the effective date of his termination, then Mr. Cairns is
entitled to receive a lump sum payment of three times his base salary and his average bonus. If
Mr. Cairns terminates his employment voluntarily or if his employment is terminated for cause, Mr.
Cairns is only entitled to receive any accrued by unpaid base salary, expenses and any unearned
benefits. Mr. Cairns employment agreement also provides for other customary benefits and
perquisites, some of which will continue after his termination, and prohibits Mr. Cairns from
competing against us during the term of his employment and for a specified period following his
termination. Mark A. Pytosh. Mr. Pytosh entered into an employment agreement with us effective February 23,
2004. The employment agreement is for an indefinite term. By the terms of his employment
agreement, Mr. Pytosh is entitled to a base salary of $400,000 and a discretionary cash bonus of up
to 100% of his base salary. The employment agreement provides for the following termination
benefits: (a) upon Mr. Pystoshs death or if we terminate Mr. Pytoshs employment by reason of his
total disability, Mr. Pytosh or his beneficiaries are entitled to continue to receive his base
salary for three years and is entitled to payment of his average bonus paid in the prior three
years (or where Mr. Pytosh has been employed for less than three years, his full bonus entitlement
in the immediately preceding fiscal year) in monthly installments over thirty-six months and all of
his options then outstanding vest immediately and continue to be exercisable for the balance of
their term; (b) upon termination of the agreement by us without cause or by Mr. Pytosh for good
reason, Mr. Pytosh is entitled to continue to receive his base salary for a period of two years and
to payment of his average bonus in the prior two years (or where Mr. Pytosh has been employed for
less than two years, his full bonus entitlement in the immediately preceding fiscal year), in equal
installments over twenty-four months and all of Mr. Pytoshs options then vest and continue to be
exercisable for the balance of their term. If Mr. Pytoshs employment is terminated by us without
cause or by him for good reason and a change of control has occurred with the two years preceding
or the one year after the effective date of his termination, then Mr. Pytosh is entitled to receive
a lump sum payment of three times both his base salary and his average bonus. If Mr. Pytosh
terminates his employment voluntarily or if his employment is terminated for cause, Mr. Pytosh is
only entitled to receive any accrued by unpaid base salary, expenses and any unearned benefits.
Mr. Pytoshs employment agreement also provides for other customary benefits and perquisites, some
of which will continue after his termination, and prohibits Mr. Pytosh from competing against us
during the term of his employment and for a specified period following his termination Ronald L. Rubinentered into an employment agreement with us effective September 2, 2003. The
agreement is for an initial term of two years and automatically renews thereafter for successive
one year terms. Mr. Rubin is entitled to receive a base salary of $300,000 and a discretionary
annual cash bonus of up to 80% of his base salary. Mr. Rubin also received a one-time payment of
$150,000 on signing his employment agreement. The employment agreement provides for the following
termination benefits: (a) if the agreement is terminated upon Mr. Rubins death or total disability
or by us without cause or by Mr. Rubin for good reason, Mr. Rubin or his beneficiaries will
continue to be paid his base salary for the remainder of his employment term and all outstanding
options granted to Mr. Rubin prior to his termination shall vest and be exercisable in accordance
with the terms of the stock option plan pursuant to which the options were granted; (b) if the
agreement is terminated by us without cause or by Mr. Rubin for good reason and a change of control
has occurred within the two year period preceding or within the one year period following the
effective date of 44




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termination, Mr. Rubin is entitled to receive a lump sum payment equal to his
base salary then in effect immediately upon termination and Mr. Rubins options will vest as
described above; (c) if the agreement is terminated for cause or by Mr. Rubin voluntarily and
without good reason, Mr. Rubin is entitled to receive any accrued but unpaid base salary, expenses
and any unearned benefits. The employment agreement also provides for other customary benefits and
perquisites and prohibits Mr. Rubin from competing with us during the term of his employment and
for a specified period following termination. Compensation Committee Interlocks and Insider Participation Effective August 11, 2004, the Compensation Committee was established following completion of
the Migration. Wallace L. Timmeny, Chair, Gary W. DeGroote and Michael B. Lazar were appointed to
the Compensation Committee at that time. None of the members of our Compensation Committee
currently serve as our officers or employees or of any of our subsidiaries nor are any of the
current members former officers of ours or any of our subsidiaries. Prior to the Migration, Don A.
Sanders, Gary W. DeGroote and Lucien Rémillard served on the compensation committee of Waste
Services (CA) Inc. No member of the Waste Services (CA) Inc.
Compensation Committee was an officer or employee or former officer of Waste Services (CA)
Inc. or any of its subsidiaries. In April 2004, we entered into a placement agent agreement with Sanders Morris Harris Inc., or
SMH, pursuant to which we agreed to pay SMH a fee for the private placement of 1,340,000 shares of
our common stock sold through SMH to certain investors We paid SMH a fee of approximately $2.7
million pursuant to the agreement. Don A. Sanders is a principal of SMH and was a director and a
member of our Compensation Committee at the time of the payment to SMH. In November 2002, we entered into a Put or Pay Disposal Agreement with RCI Environnement Inc.,
Centres de Transbordement et de Valorisation Nord Sud Inc., RCM Environnement Inc., collectively
the RCI Companies, and Intersan Inc., or Intersan, a subsidiary of Canadian Waste Services Inc (now
Waste Management of Canada Corporation.), pursuant to which we and the RCI Companies agreed to
deliver to certain of Intersans landfill sites and transfer stations in Quebec, Canada, over the
first five-year term of the Agreement, 850,000 metric tons of waste per year, and for the next two
years after the expiration of the first five-year term, 710,000 metric tons of waste per year at a
fixed disposal rate set out in the Put or Pay Disposal Agreement. If we and the RCI Companies fail
to deliver the required tonnage, we are jointly and severally required to pay to Intersan, C$23.67
per metric ton for every metric ton below the required tonnage. If a portion of the annual tonnage
commitment is not delivered to a specific site, we are also required to pay C$8.00 per metric ton
for every metric ton below the site specific allocation. Our obligations to Intersan are secured by
a letter of credit for C$4.0 million. No payments were made or required to be made to Intersan
pursuant to the Put or Pay Disposal Agreement in the period from January 1, 2004 to December 31,
2004. Lucien Rémillard is also a director of and controls the RCI Companies and is a director and
was a member of our Compensation Committee for part of our 2004 fiscal year. Concurrently with the Put or Pay Disposal Agreement, we entered into a three-year agreement
with Waste Management, Inc. to allow us to deliver up to 75,000 metric tons of non-hazardous waste
in the first year and up to 100,000 metric tons in years two and three of the Agreement to Waste
Managements landfill in Michigan at negotiated fixed rates per ton. During 2004, David Sutherland-Yoest, our Chairman and Chief Executive Officer, conducted
ongoing negotiations with Lucien Rémillard with respect to our potential acquisition of the solid
waste collection and disposal assets owned by Mr. Rémillard in Quebec. In connection with these
negotiations, we have reimbursed Mr. Rémillards company for expenses in the aggregate amount of
approximately C$2.2 million for services provided by third parties to December 31, 2004 in
connection with preparing audited financial statements of the business and with ongoing efforts to
expand the capacity of a solid waste landfill. There is no assurance that an acquisition of the
business will be completed and, if not, we will not be reimbursed for the expenses we incurred. During 2004, David Sutherland-Yoest, our Chairman and Chief Executive Officer, used the
services of an aircraft owned by Gary W. DeGroote at a total cost of C$0.2 million. This amount
was based upon the fixed and operating expenses of the aircraft. During 2004, we entered into a lease of office premises in an office tower in Burlington,
Ontario owned by Westbury International (1991) Corporation, a property development company controlled
by Michael H. DeGroote, Gary W. DeGrootes brother. The leased premises consist of approximately
9,255 square feet. The term of the lease is 10.5 years, with a right to extend for a further five
years. Base rent escalates from Cdn. $0.1 million to Cdn.$0.2 million per year in increments over
the term of the lease. 45




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Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth information regarding the beneficial ownership of our shares of
common stock and exchangeable shares as of March 1, 2005, by each person or entity that is known by
us to own more than 5% of the shares of common stock and exchangeable shares. As of such date,
the number of issued and outstanding shares in our capital stock was 99,593,680, including
exchangeable shares of Waste Services (CA) Inc. not owned directly or indirectly by us. Unless
otherwise indicated, the address of each beneficial holder listed below is c/o Waste Services,
Inc., 1122 International Blvd., Suite 601, Burlington, Ontario L7L 6Z8. Shares Beneficially OwnedPercentage ofNumber of
    
    Total IssuedCommon/Exchangeable
    
    Common/ExchangeableName of Beneficial Owner(1)
    
    Shares
    
    SharesWestbury (Bermuda) Limited(2)
    
    
    20,383,355
    
    
    
    20.0
    %Kelso & Company, L.P.(3)
    
    
    7,150,000
    
    
    
    6.7
    %
   (1)
    
    Beneficial ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In general, a person who has voting power or investment power with
respect to securities is treated as a beneficial owner of those securities. Common Shares
subject to options or warrants currently exercisable or exercisable within 60 days of March 1,
2005 count as outstanding for computing the percentage beneficially owned by the person
holding these options or warrants .(2)
    
    Consists of 17,900,022 shares of common stock and 2,483,333 shares of common stock
issuable upon the exercise of warrants. The stockholder of Westbury Bermuda Limited is
Westbury Trust. The trustees of Westbury Trust are Robert Martyn, Gary W. DeGroote and Rick
Burdick. The address for Westbury Bermuda Limited is Victoria Hall, 11 Victoria Street, P.O.
Box HM 1065, Hamilton, Bermuda, HMEX.(3)
    
    Consists of 6,435,000 shares of common stock issuable upon the exercise of warrants issued to
Kelso Investment Associates VI, L.P. and 715,000 shares of common stock issuable upon the
exercise of warrants issued to KEP VI, LLC. Kelso Investment Associates VI, L.P. and KEP VI,
LLC are affiliates of Kelso & Company, L.P. The address of Kelso & Company, L.P. is 320 Park
Avenue, 24th Floor, New York, New York, 10022 Information regarding share ownership as of March 1, 2005 of our directors and named executive
officers is set forth below: Outstanding
    
    
    % ofName
    
    Shares(1)
    
    
    Shares(2)David Sutherland-Yoest(3)
    
    
    4,466,362
    
    
    
    4.4
    %Gary W. DeGroote(4)
    
    
    2,385,000
    
    
    
    2.4
    %Michael B. Lazar (5)
    
    
    14,562
    
    
    
    *George E. Matelich (6)
    
    
    774,697
    
    
    
    *Lucien Rémillard (7)
    
    
    3,073,497
    
    
    
    3.1
    %Jack E. Short
    
    
    10,000
    
    
    
    *Wallace L. Timmeny
    
    
    8,500
    
    
    
    *Michael J. Verrochi
    
    
    385,739
    
    
    
    *Charles A. Wilcox
    
    
    300,000
    
    
    
    *Ivan R. Cairns
    
    
    2,500
    
    
    
    *Mark A. Pytosh
    
    
    420,000
    
    
    
    *Ronald L. Rubin
    
    
    15,000
    
    
    
    *Brian A. Goebel
    
    
    
    
    
    
    *All executive officers and directors as a group
(13 persons)
    
    
    11,855,857
    
    
    
    11.8
    %
   *
    
    Less than one (1%) percent.(1)
    
    In general, a person who has voting power or investment power with respect to securities is
treated as a beneficial owner of those securities. Common Shares subject to options or
warrants currently exercisable or exercisable within 60 days of March 1, 2005 count as
outstanding for computing the percentage beneficially owned by the person holding these
options or warrants. 46




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(2)
    
    Percentages based upon 99,593,680 shares of common stock outstanding as of March 1, 2005,
which includes 6,569,910 exchangeable shares of Waste Services (CA) Inc. not owned directly or
indirectly by us.(3)
    
    Consists of 1,949,497 exchangeable shares of Waste Services (CA) Inc. owned by D.S.Y.
Investments Ltd., of which Mr. Sutherland-Yoest is the sole director and stockholder, as well
as 751,665 shares of common stock owned by Mr. Sutherland-Yoest personally and 1,000,000 shares of common stock issuable upon the exercise of currently
exercisable warrants to purchase Common Shares, 500,000 Common Shares owned by Mr.
Sutherland-Yoests wife and 265,200 shares of common stock owned by Mr. Sutherland-Yoests
daughter, Christina Sutherland-Yoest, which Mr. Sutherland-Yoest may be deemed to beneficially
own. Mr. Sutherland-Yoest disclaims beneficial ownership with respect to the shares owned by
his wife and his daughter.(4)
    
    Consists of 2,275,000 exchangeable shares of Waste Services (CA) Inc. owned by GWD Management
Inc., and 110,000 shares of common stock issuable upon exercise of currently exercisable
options to purchase Common Shares issued to Mr. DeGroote. Mr. DeGroote is the controlling
stockholder and director of GWD Management Inc.(5)
    
    Mr. Lazar is a Managing Director of Kelso & Company, L.P. Affiliates of Kelso & Company, L.P.
own currently exercisable warrants to purchase 7,150,000 shares of common stock. Mr. Lazar
disclaims beneficial ownership of the shares owned by affiliates of Kelso & Company, L.P.(6)
    
    Consists of 728,797 shares of common stock owned by Mr. Matelich, 900 shares of common stock
owned by Mr. Matelichs children and 45,000 shares of common stock issuable upon the exercise
of currently exercisable options to purchase Common Shares issued to Mr. Matelich. Mr.
Matelich disclaims beneficial ownership of the shares owned by his children. Mr. Matelich is
a Managing Director of Kelso & Company, L.P. Affiliates of Kelso & Company, L.P. own
currently exercisable warrants to purchase 7,150,000 shares of common stock. Mr. Matelich
disclaims beneficial ownership of the shares owned by affiliates of Kelso & Company, L.P.(7)
    
    Consists of 1,500,000 exchangeable shares of Waste Services (CA) Inc. owned by Historia
Investments Inc., 1,478,497 shares of common stock owned by The Victoria Bank (Barbados)
Incorporated, and 95,000 shares of
common stock issuable upon the exercise of currently exercisable options to purchase Common
Shares issued to Mr. Rémillard. Mr. Rémillard is the controlling stockholder of Historia Investments Inc. and is
indirectly the controlling stockholder of The Victoria Bank (Barbados) Incorporated, and is
deemed to beneficially own the Common Shares owned by each such entity


Mr. Rémillard disclaims beneficial ownership of the Common
Shares owned by The Victoria Bank (Barbados) Incorporated and Historia Investments Inc. Securities Authorized for Issuance under Equity Compensation Plans The following table summarizes securities authorized for issuance under our existing equity
compensation plans as at December 31, 2004: (c)(a)
    
    
    (b)
    
    
    Number of securities remainingNumber of Securities to
    
    
    Weighted-average
    
    
    available for future issuance underbe issued upon exercise
    
    
    exercise price of
    
    
    equity compensation plans (excludingof outstanding options,
    
    
    outstanding options,
    
    
    securities to be issued upon exercise ofPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    outstanding options, warrants or rights)Equity compensation
plans approved by
security holders
    
    
    12,652,964
    
    
    $
    4.91
    
    
    
    5,763,376
    (1)Equity compensation
plans not approved by
security holders
    
    
    1,000,000
    (2)
    
    $
    2.70
    
    
    
    Total
    
    
    13,652,964
    
    
    $
    4.74
    
    
    
    5,763,376
    (1)
   (1)
    
    Under our 1999 Stock Option Plan, we may grant options to a maximum of 19% of our issued
Common Shares and common share equivalents outstanding from time to time. 47




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(2)
    
    Warrants to purchase 1,000,000 of our Common Shares, at an exercise price of $2.70 per share,
were granted to David Sutherland-Yoest in September 2001 as a term of the commencement of his
employment. As of December 31,
2004, all of the warrants had vested. The warrants expire in September 2011 and are
exercisable until their expiration so long as Mr. Sutherland-Yoest is an employee. In the
event of a change of control, or if Mr. Sutherland-Yoests employment is terminated by reason
of death, disability or by us without cause, the warrants continue to be
exercisable as if Mr. Sutherland-Yoest had remained an employee. If Mr. Sutherland-Yoests
employment is terminated by his voluntary resignation or by us for cause, all vested warrants
may be exercised within 180 days of the date of such termination. 
 Item 13.Certain Relationships and Related Transactions Other than those listed in this section, we have not entered into any material transactions
during the period beginning on January 1,
2004 through March 1, 2005 in which any of our directors, officers or holders of more than 5%
of our common stock, or any member of the immediate family of any such director or officer or
shareholder has or had any interest. Advisory Services In February 2004, we paid Kelso & Company, L.P. a $0.5 million fee in connection with
services related to the arrangement of the senior secured credit facilities that were entered into
on December 31, 2003. Two of our directors are nominees to the
Board of Kelso & Company, L.P. and are affiliates of
Kelso & Company, L.P. George E. Matelich is a Managing Director of Kelso & Company, L.P., and Michael B. Lazar is
a Managing Director of Kelso & Company, L.P. Placement Agent Fees Sanders Morris Harris Inc. or SMH acted as placement agent on the issuance of 1,340,000 Common
Shares and were paid a placement agent fee of approximately $2.7 million on April 30, 2004. SMH is
a beneficial owner of our common stock and Don A. Sanders, a director at the time that the payments
were made, is a principal of SMH. Lease of Premises In 2003, we purchased furnishings and leasehold improvements from H2O Technologies,
Ltd. for $0.3 million and assumed a lease of premises from David Sutherland-Yoest. David
Sutherland-Yoest, our Chairman and Chief Executive Officer served, until October of 2003, as
Chairman and Chief Executive Officer of H2O Technologies, Ltd. and, until January 2004,
as a director of H2O Technologies, Ltd. The purchase price was determined based on an
appraisal. The lease expires on March 31, 2005 with annual rent and operating costs of less than
$0.1 million. Florida Recycling Acquisition On April 30, 2004, we acquired from. Larry Henk, our then President and Chief Operating
Officer, 3% of the total issued common stock of Florida Recycling Services, Inc., or FRS which Mr.
Henk had acquired prior to his commencing his employment with us. Mr. Henk was paid approximately
$3.0 million in cash and was issued 277,500 Common Shares as consideration. Under an agreement with
the sellers of FRS entered into prior to Mr. Henks employment, Mr. Henk was paid a fee of
approximately $2.5 million by the sellers following the closing of our acquisition of the shares of
FRS. In September, 2004 pursuant to an agreement with the sellers of FRS, Mr. Henk agreed to repay
$22,500 of the proceeds he received and return 15,000 Common Shares to us. Standby Purchase Agreement On September 30, 2004 we entered into a standby purchase agreement with Michael G. DeGroote,
Gary W. DeGrootes father, pursuant to which we may require him to purchase shares of our common
stock having an aggregate purchase price of $7.5 million on
March 28, 2005. On March 4, 2005, we
exercised our put rights under the standby purchase agreement. The shares will be purchased at 85%
of the average of the closing prices of our common stock during the period from the eleventh
trading day through the second trading day preceding the closing of the transaction, on March 28,
2005. Mr. DeGroote will also receive warrants to purchase our common stock equal to 10% of the
shares issued with an exercise price equal to the purchase price for the Common Shares. We paid
Mr. DeGroote a commitment fee of $375,000 at the time of entering into the agreement and will pay
him a further commitment fee of $375,000 on March 28, 2005. 48




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Other Transactions During 2004, David Sutherland-Yoest, our Chairman and Chief Executive Officer, used the
services of an aircraft owned by Gary W. DeGroote at a total cost of C$0.2 million. This amount
was based upon the fixed and operating expenses of the aircraft. During 2004, David Sutherland-Yoest, our Chairman and Chief Executive Officer, conducted
ongoing negotiations with Lucien Rémillard with respect to the potential acquisition by Waste
Services of the solid waste collection and disposal assets owned by Mr. Rémillard in Quebec. In
connection with these negotiations, Waste Services has reimbursed Mr Rémillards company for
expenses in the aggregate amount of approximately C$2.2 million for services provided by third
parties to December 31, 2004 in connection with preparing audited financial statements of the
business and with ongoing efforts to expand the capacity of a solid waste landfill. There is no
assurance that an acquisition of the business will be completed and, if not, Waste Services will
not be reimbursed for the expenses it has incurred. During 2004, we entered into a lease of office premises in an office tower in Burlington,
Ontario owned by Westbury International (1991) Corporation, a property development company controlled
by Michael H. DeGroote, Gary W. DeGrootes brother. The leased premises consist of approximately
9,255 square feet. The term of the lease is 10.5 years, with a right to extend for a further five
years. Base rent escalates from Cdn. $0.1 million to Cdn.$0.2 million per year in increments over
the term of the lease. 
 Item 14.Principal Accountant Fees and Services Audit Fees Audit
fees billed or expected to be billed for the 2004 audit by BDO
Seidman, LLP approximate $1.278 million. Audit fees billed and
paid for 2004 quarterly review and 2003 audit by BDO Dunwoody, LLP
approximated $134,000 and $596,000, respectively. Audit
fees were $366,000 in 2003 for PricewaterhouseCoopers LLP (related to
the 2002 audit). Audit-Related Fees Audit-related
fees billed for 2004 by BDO Seidman, LLP approximate $5,500.
Audited-related fees billed and paid for 2004 and 2003 by
BDO Dunwoody, LLP approximated $259,000 and $73,000, respectively.
The BDO Dunwoody, LLP fees primarily related to certain financing
transactions which were closed during the first quarter of 2004.
Audit related fees were $534,000 in 2003 for PricewaterhouseCoopers
LLP. Tax Fees Tax
related fees were approximately $40,000 for 2004 by BDO Seidman, LLP.
Tax fees were $17,000 in 2004 for BDO Dunwoody LLP. Tax fees were $92,000 in 2003 for PricewaterhouseCoopers LLP. These fees primarily relate to the preparation of our tax
returns and related consulting services. All Other Fees All
other fees were nil in 2004 and 2003 for BDO Seidman, LLP,
BDO Dunwoody, LLP, and PricewaterhouseCoopers LLP. Pre-Approval Policies and Procedures The audit committee approves all audit, audit-related services, tax services and other
services provided by BDO Seidman LLP. Any services provided by BDO Seidman LLP that are not
specifically included within the scope of the audit must be pre-approved by the audit committee in
advance of any engagement. Under the Sarbanes-Oxley Act of 2002, audit committees are permitted to
approve certain fees for audit-related services, tax services and other services pursuant to a de
minimus exception prior to the completion of an audit engagement. In 2004, none of the fees paid to
BDO Seidman LLP were approved pursuant to the de minimus exception. 49




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##### Table of Contents



PART IV 
 Item 15.Exhibits, Financial Statement Schedules Consolidated Financial Statements (a)(1) Consolidated Financial Statements Managements
Report on Internal Controls over Financial Reporting
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Shareholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements (2) Financial Statement Schedules Schedule II  Valuation and Qualifying Accounts schedule has been omitted as the required
information is included in the Notes to Consolidated Financial Statements included herewith. All other schedules have been omitted because they are not applicable. (3) Exhibits Documents filed as exhibits to this report or incorporated by reference: 2.1
    
    
    Plan of Arrangement under Section 182 of the Business Corporations
Act (Ontario)3.1
    
    
    Amended and Restated Certificate of Incorporation of Waste Services,
Inc. (Incorporated by reference to Exhibit 3.1 to Form 8-K (No. 000-
25955) filed August 2, 2004).3.2
    
    
    Provisions for Exchangeable Shares of Waste Services (CA) Inc.3.3
    
    
    Certificate of Designation of Special Voting Preferred Stock of Waste
Services, Inc. (Incorporated by reference to Exhibit 3.2
Form 8-K
(No. 000-25955) filed August 2, 2004).3.4
    
    
    By-law No. 1 of Waste Services, Inc. (Incorporated by reference to
Exhibit 3.3 to Form 8-K (No. 000-25955) filed August 2, 2004).3.5
    
    
    Certificate of Designations of Waste Services, Inc.
(Incorporated by reference to Exhibit 1.3 to Form 20-F (No.
000-25955) filed July 15, 2003).3.6
    
    
    Amended Certificate of Designations of Waste Services, Inc.
(Incorporated by reference to Exhibit 4.1 to Form 8-K (No.
000-25955) filed May 10, 2004).4.1
    
    
    Preferred Subscription Agreement dated as of May 6, 2003,
among Waste Services, Inc., Capital Environmental Resource
Inc., Kelso Investment Associates VI, L.P. and KEP VI LLC
(Incorporated by reference to Exhibit 4.4 to Form 20-F (No.
000-25955) filed July 15, 2003).4.2
    
    
    Amending Agreement No. 1 to Preferred Subscription Agreement
dated as of February 13, 2003, among Waste Services, Inc.,
Capital Environmental Resource Inc., Kelso Investment
Associates VI, L.P. and KEP VI, LLC (Incorporated by
reference to Exhibit 4.1 to Form 6-K (No. 000-25955) filed
February 26, 2004).4.3
    
    
    Amending Agreement No. 2 to Preferred Subscription Agreement
dated June 8, 2004 (incorporated by reference to Exhibit 4.1 to
Form 8-K (No. 00-259551 filed June 9, 2004).4.4
    
    
    Form of Warrants to Purchase Common Stock by and between the
 50




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##### Table of Contents



Company and certain investors (Incorporated by reference to
Exhibit 4.2 to Form 20-F (No. 000-25955) filed July 15, 2003)4.5
    
    
    Warrant Agreement dated as of May 6, 2003, between Waste
Service Inc., and certain holders of the Preferred Stock
(Incorporated by reference to Exhibit 4.6 to Form 20-F (No.
000-25955) filed July 15, 2003).4.6
    
    
    Warrant, dated July 27, 2001 issued by us to David
Sutherland-Yoest (Incorporated by reference to Exhibit 4.8
to Form 20-F (No. 000-25955) filed July 12, 2002).4.7
    
    
    Form of Warrant to Purchase Common Shares by and between
Capital Environmental Resource Inc. and certain investors.1/2
(Incorporated by reference to Exhibit 4.4 to Form 8-K (No.
000-25955) filed May 10, 2004).4.8
    
    
    Indenture regarding 91/2% Senior Subordinated Notes among
Waste Services, Inc., the Guarantors and Wells Fargo Bank,
National Association, as trustee, dated as of April 30, 2004
(Incorporated by reference to Exhibit 4.3 to Form 8-K (No.
000-25955) filed May 10, 2004).4.9
    
    
    Voting and Exchange Trust Agreement among Waste Services, Inc.,
Capital Environmental Resource Inc. and Computershare Trust Company
of Canada dated July 31, 2004.4.10
    
    
    Support Agreement dated July 31, 2004, among Waste Services, Inc.
Capital Environmental Holding Company and Capital Environmental
Resource Inc.4.11
    
    
    Standby Purchase Agreement dated as of September 30, 2004 between
Waste Services, Inc. and Michael DeGroote (Incorporated by reference
to Exhibit 10.2 to Form 8-K (No. 000-25955) filed on October 5,
2004.)10.1
    
    
    Capital Environmental Resource Inc. 1999 Stock Option Plan
(Incorporated by reference to Exhibit 4 to Schedule 13D
dated February 5, 2002 and filed by certain holders of the
Companys Common Shares with the Commission on February 15, 2002).10.2
    
    
    Purchase Agreement dated November 13, 2003, between Allied
Waste Industries, Inc., Waste Services, Inc., and Capital
Environmental Resource Inc. (Incorporated by reference to
Exhibit 10.1 to Form 6-K/A (No. 000-25955), filed January 20, 2003).10.3
    
    
    Amended and Restated Stock Purchase Agreement dated as of
March 11, 2004, by and among Waste Services, Inc., certain
affiliates of Waste Services, Inc., Capital Environmental
Resource Inc., Florida Recycling Services, Inc. and certain
affiliates thereof. (Incorporated by reference to Exhibit
10.5 to Form 8-K (No. 000-25955) filed May 10, 2004).10.4
    
    
    First Amendment to Amended and Restated Stock Purchase Agreement
and Settlement Agreement dated September 24, 2004 (Incorporated by
Reference to Exhibit 10.2 to Form 8-K (No. 000-25955) filed
September 24, 2004.)10.5
    
    
    Form of Subscription Agreement dated as of April 30, 2004,
between Capital Environmental Resource Inc. and certain
investors. (Incorporated by reference to Exhibit 10.1 to Form 8-K
(No. 000-25955) filed May 10, 2004).10.6
    
    
    Form of Registration Rights Agreement dated as of April 30, 2004,
among us and certain investors. (Incorporated by
Reference to Exhibit 10.2 to Form 8-K (No. 000-25955) filed
filed May 10, 2004).10.7
    
    
    91/2% Senior Subordinated Notes Registration Rights Agreement
dated April 20, 2004. (Incorporated by reference to Exhibit 10.3
to Form 8-K (No. 000-25955) filed May 10, 2004).10.8
    
    
    Amended and Restated Credit Agreement dated as of April 30, 2004,
Among Capital Environmental Resource Inc., Waste Services, Inc., the
several lenders from time to time parties thereto, Lehman Brothers
Inc., as Arranger, CIBC World Markets Corp., as Syndication Agent,
Bank of
 51




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##### Table of Contents



America, N.A., as Documentation Agent, Canadian Imperial
Bank of Commerce, as Canadian Agent, and Lehman Commercial Paper
Inc., as Administrative Agent. (Incorporated by reference to Exhibit
10.4 to Form 8-K (No. 000-25955) filed May 20, 2004).10.9
    
    
    First Amendment to Amended and Restated Credit Agreement dated as of
August 25, 2004 (Incorporated by reference to Exhibit 10.1 to Form
8-K (No. 000-25955) field August 27, 2004.)10.10
    
    
    Second Amendment to Amended and Restated Credit Agreement dated as
of October 4, 2004 (incorporated by reference to Exhibit 10.1 to
Form 8-K (No. 000-25955) field October 5, 2004.)10.12
    
    
    Employment Agreement dated as of September 7, 2001, between us and
David Sutherland-Yoest (Incorporated by reference to Exhibit 4.9 to
Form 20-F (No. 000-25955) filed July 12, 2002).10.13
    
    
    Employment Agreement dated as of July 1, 2004 between Waste
Services, Inc. and Charles A. Wilcox10.14
    
    
    Employment Agreement dated January 5, 2004, between us and Ivan R.
Cairns. (Incorporated by reference to Exhibit 10.1 to Form 10-Q (No.
000-25955), filed May 17, 2004).10.15
    
    
    Employment Agreement dated as of February 23, 2004, between Capital
Environmental Resource Inc., Waste Services, Inc. and Mark A.
Pytosh. (Incorporated by reference to Exhibit 10.2 to Form 10-Q (No.
000-25955), filed May 17, 2004).
10.2 to Form 10-Q (No. 000-25955), filed May 17, 2004).10.16
    
    
    Employment Agreement dated July 23, 2003, between Capital Environmental Resource, Inc.
and Ronald L. Rubin (Incorporated by reference to Exhibit 4.26 to Form 20-F for the year ended
December 31, 2003 (No. 000-25955), filed March 31, 2004.10.17
    
    
    Employment Agreement dated October 1, 2003, between Capital Environmental Resource, Inc. and
Brian A. Goebel (Incorporated by reference to Exhibit 4.27 to Form 20-F for the year ended
December 31, 2003 (No. 000-25955), filed March 31, 2004.14.1
    
    
    Code of Ethics (Incorporated by reference to Exhibit 14.1 to Form 10-K for the year ended
December 31, 2003 (No. 000-25955), filed June 9, 2004.16.1
    
    

Letter
from PricewaterhouseCoopers LLP, Toronto, Canada dated June 8, 2004 (Incorporated by reference to Exhibit 16.1 to Form 10-K for the year ended December 31, 2003 (No. 000-25955),
filed June 9, 2004.16.2
    
    
    Letter from BDO Dunwoody LLP to the Securities and Exchange Commission dated July 27, 2004
(Incorporated by reference to Exhibit 16.1 to Form 8-K (No. 000-25955), filed July 27, 2004.18.1
    
    
    Letter regarding change in accounting principle executed by BDO Dunwoody LLP on May 12, 2004
(Incorporated by reference to Exhibit 18.1 to Form 10-Q for the quarterly period ended March 31,
2004 (No. 000-25955), filed May 17, 2004.21.1
    
    
    List of Subsidiaries23.1
    
    

Consent
of BDO Seidman LLP23.2
    
    
    Consent of BDO Dunwoody LLP.23.3
    
    
    Consent of PricewaterhouseCoopers LLP.23.4
    
    
    Consent of PricewaterhouseCoopers LLP.31.1
    
    
    Certification of Chairman pursuant to Rule 15d-14(a) under
the Securities Exchange Act of 1934 as amended of David
Sutherland-Yoest, Chief Executive Officer.31.2
    
    
    Certification pursuant to Rule 15d-14(a) under the
Securities Exchange Act of 1934 as amended of Ronald L.
Rubin, Chief Financial Officer.32.1
    
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the U.S.
Sarbanes-Oxley Act of 2002.
 52




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. WASTE SERVICES, INC./s/     DAVID SUTHERLAND-YOESTDavid Sutherland-YoestChairman of the Board,
Chief Executive Officer and Director March 15, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Signature
    
    Title
    
    Date/s/ DAVID SUTHERLAND-YOEST

David Sutherland-Yoest
    
    Chairman of the Board, Chief
Executive Officer
Director
    
    March 15, 2005/s/ RONALD L. RUBIN

Ronald L. Rubin
    
    Executive Vice President and Chief
Financial Officer
    
    March 15, 2005/s/ BRIAN A. GOEBEL

Brian A. Goebel
    
    Vice President, Corporate Controller
and Chief Accounting Officer
    
    March 15, 2005/s/ GARY W. DEGROOTE

Gary W. DeGroote
    
    Director
    
    March 15, 2005/s / MICHAEL B. LAZAR

Michael B. Lazar
    
    Director
    
    March 15, 2005/s/ GEORGE E. MATELICH

George E. Matelich
    
    Director
    
    March 15, 2005/s/ LUCIEN REMILLARD

Lucien Rémillard
    
    Director
    
    March 15, 2005/s/ JACK E. SHORT

Jack E. Short
    
    Director
    
    March 15, 2005/s/ WALLACE L. TIMMENY

Wallace L. Timmeny
    
    Director
    
    March 15, 2005/s / MICHAEL J. VERROCHI

Michael J. Verrochi
    
    Director
    
    March 15, 2005
 53




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Management's
Report on Internal Control Over Financial Reporting
    

    F-1Reports of Independent Registered Public Accounting Firms
    
    
    F-2Consolidated Balance Sheets
    
    
    F-6Consolidated Statements of Operations and Comprehensive Income (Loss)
    
    
    F-7Consolidated Statements of Shareholders Equity
    
    
    F-8Consolidated Statements of Cash Flows
    
    
    F-9Notes to Consolidated Financial Statements
    
    
    F-10
 ( i )




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MANAGEMENTS REPORT
ON INTERNAL CONTROLOVER FINANCIAL REPORTING Management including the Chief

Executive Officer and the Chief Financial Officer,
is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined
in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Our internal controls
were designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation
and presentation of the consolidated financial statements for external purposes in accordance with accounting principles
generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition. We conducted an evaluation of the effectiveness of our

internal controls over financial reporting based on the framework in
Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness
of controls and a conclusion on this evaluation. Through this
evaluation, we did not identify any material weaknesses
in our internal controls. There are inherent limitations in the effectiveness of any system of internal
controls over financial reporting; however, based on our evaluation, we have concluded that our internal controls
over financial reporting were effective as of December 31, 2004. BDO Seidman, LLP, an independent registered public
accounting firm, has issued an attestation report on
our assessment of internal control over financial reporting, which is included herein. F-1




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Report of Independent
Registered Public Accounting Firm on
Internal Control over Financial Reporting To the Board of Directors and Stockholders of
Waste Services, Inc. We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting appearing under
Item 8 of Part II of this Form 10-K,
that Waste Services, Inc. (the Company) maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America. A companys internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United
States of America, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on
the criteria established in Internal Control  Integrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2004, based on the criteria established in Internal Control  Integrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet of the Company as of December 31, 2004 and the related
consolidated statements of operations and comprehensive income
(loss), shareholders equity and cash flows
for the year ended December 31, 2004 and our report dated March 9, 2005 expressed an unqualified
opinion on those consolidated financial statements. /s/ BDO Seidman, LLP Los Angeles, California
March 9, 2005 F-2




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Report of Independent Registered Public Accounting Firm The Board of Directors and
Stockholders of
Waste Services, Inc. We have audited the accompanying consolidated balance sheet of Waste Services, Inc., (the
Company) as of December 31, 2004 and the related consolidated statements of operations and
comprehensive income (loss), shareholders equity and cash flows for the year ended December 31,
2004. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Waste Services, Inc. as of December 31, 2004 and the
results of its operations and cash flows for the year ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2004, the
Company changed its method of accounting for closure and post-closure obligations and the
associated asset retirement costs. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, based on the criteria established in Internal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 9, 2005 expressed an unqualified opinion
thereon. /s/ BDO Seidman, LLP Los Angeles, California
March 9, 2005 F-3




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REPORT OF INDEPENDENT AUDITORS To the Shareholders of
Capital Environmental Resource Inc. We have audited the consolidated balance sheet of Capital Environmental Resource Inc. (the
Company) as at December 31, 2003 and the consolidated statements of operations and comprehensive
income (loss), shareholders equity and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Canada and
the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2003 and the results of its
operations and its cash flows for the year then ended in accordance with generally accepted
accounting principles in the United States. BDO DUNWOODY LLP Chartered Accountants
Toronto, Ontario
March 12, 2004 Comments by Auditor for U.S. Readers on Canada-U.S. Reporting Difference In the United States, reporting standards for auditors require the addition of an explanatory
paragraph when there is a change in accounting principle that has a material effect on the
comparability of the Companys financial statements, such as the change described in Note 2 to the
Consolidated Financial Statements. Although we conducted our audit in accordance with the standards
of the Public Company Accounting Oversight Board (United States), our report to the shareholders
dated March 12, 2004 is expressed in accordance with Canadian reporting standards which do not
require a reference to such a change in accounting principles in the auditors report when the
change is properly accounted for and adequately disclosed in the financial statements. BDO DUNWOODY LLP Chartered Accountants
Toronto, Ontario
March 12, 2004 F-4




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REPORT OF INDEPENDENT AUDITORS To the Shareholders of
Capital Environmental Resource Inc. We have audited the consolidated statements of operations and comprehensive income (loss),
shareholders equity and cash flows of Capital Environmental
Resource Inc. (the Company) for the
year ended December 31, 2002. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audit. We conducted our audit in accordance with generally accepted auditing standards in Canada and
the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material
respects, the results of the Companys operations and its cash flows for the year ended December
31, 2002, in accordance with generally accepted accounting principles in the United States. As described in Note 1 to the financial statements included in the Companys 2002 Form 20-F/A
(Amendment No. 2), the Company has restated the consolidated statements for the year ended December
31, 2002, to account for the beneficial conversion feature associated with the issuance of the
Series 1 Preferred Shares. Accordingly, our previous audit report dated March 20, 2003, has been
withdrawn. PRICEWATERHOUSECOOPERS LLP Chartered Accountants
Toronto, Canada
March 20, 2003, except for the effect of the restatement
      related to the beneficial conversion feature as described in Note 1
      to the financial statements included in the Companys 2002 Form 20-F/A
      (Amendment No. 2), which is as of November 4, 2003 Comments by Auditors for U.S. Readers on Canada-United States Reporting Difference In the United States, reporting standards for auditors require the addition of an explanatory
paragraph (following the opinion paragraph) when there is a change in accounting principles that
has a material effect on the comparability of the Companys financial statements, such as the
adoption of SFAS 142 described in Note 2 to the consolidated financial statements included in the
Companys 2002 Form 20-F/A (Amendment No. 2). Our report to the stockholders dated March 20, 2003,
except for the effect of the restatement related to the beneficial conversion feature as described
in Note 1 to the financial statements included in the Companys 2002 Form 20-F/A (Amendment No. 2),
which is as of November 4, 2003, is expressed in accordance with Canadian reporting standards,
which do not require a reference to such a change in accounting principles in the auditors report
when the change is properly accounted for and adequately disclosed in the financial statements. PRICEWATERHOUSECOOPERS LLP Chartered Accountants
Toronto, Canada
March 20, 2003, except for the effect of the restatement
      related to the beneficial conversion feature as described in Note 1
      to the financial statements included in the Companys 2002 Form 20-F/A
      (Amendment No. 2), which is as of November 4, 2003 F-5




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WASTE SERVICES INC. CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars, except share amounts) As of December 31, 2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,507
    
    
    $
    21,062Restricted cash
    
    
    
    
    
    
    14,433Accounts receivable (net of allowance for doubtful accounts
of $1,264 and $620 as of December 31, 2004 and 2003, respectively)
    
    
    47,856
    
    
    
    26,999Prepaid expenses and other current assets
    
    
    10,940
    
    
    
    29,649Total current assets
    
    
    67,303
    
    
    
    92,143Property and equipment, net
    
    
    130,467
    
    
    
    74,521Landfill sites, net
    
    
    169,616
    
    
    
    117,541Deferred income taxes, net
    
    
    1,202
    
    
    
    1,135Goodwill and other intangible assets, net
    
    
    327,756
    
    
    
    163,380Other assets
    
    
    24,239
    
    
    
    22,278Total assets
    
    $
    720,583
    
    
    $
    470,998LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    25,949
    
    
    $
    12,074Accrued expenses and other current liabilities
    
    
    42,533
    
    
    
    25,401Short-term financing and current portion of long-term debt
    
    
    1,166
    
    
    
    172,280Total current liabilities
    
    
    69,648
    
    
    
    209,755Long-term debt
    
    
    276,214
    
    
    
    3,130Accrued closure, post-closure and other obligations
    
    
    10,974
    
    
    
    8,791Cumulative mandatorily redeemable Preferred Stock (net of
discount of $8,426 and $13,558 as of December 31, 2004 and 2003,
respectively)
    
    
    64,971
    
    
    
    48,205Total liabilities
    
    
    421,807
    
    
    
    269,881Commitments and contingencies (See Note 12)Shareholders equity:Common stock of Waste Services, Inc. $0.01 par value; 500,000,000 shares authorized;
90,358,196 and nil shares issued and outstanding as of
December 31, 2004 and 2003, respectively
    
    
    904
    
    
    
    Additional paid-in capital
    
    
    345,904
    
    
    
    Treasury stock of Waste Services, Inc. at cost, 500,000 and nil shares as of
December 31, 2004 and 2003, respectively, at cost
    
    
    (1,235
    )
    
    
    Common stock of Waste Services (CA) Inc. no par value; nil and 68,338,828
shares issued and outstanding as of December 31, 2004 and 2003, respectively
    
    
    
    
    
    
    215,395Options, warrants and deferred stock-based compensation
    
    
    28,282
    
    
    
    25,828Accumulated other comprehensive income
    
    
    29,133
    
    
    
    15,952Accumulated deficit
    
    
    (104,212
    )
    
    
    (56,058
    )Total shareholders equity
    
    
    298,776
    
    
    
    201,117Total liabilities and shareholders equity
    
    $
    720,583
    
    
    $
    470,998
 The accompanying notes are an integral part of these Consolidated Financial Statements. F-6




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##### Table of Contents



WASTE SERVICES INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands of US dollars, except per share amounts) For the Years Ended December 31, Statements of Operations 2004
    
    
    2003
    
    
    2002Revenue
    
    $
    310,785
    
    
    $
    126,750
    
    
    $
    98,846Operating and other expenses:Cost of operations (exclusive of depreciation and amortization)
    
    
    219,900
    
    
    
    83,574
    
    
    
    64,436Selling, general and administrative expense
(exclusive of stock-based compensation)
    
    
    58,266
    
    
    
    28,858
    
    
    
    15,238Stock-based compensation expense (benefit)
    
    
    (90
    )
    
    
    2,677
    
    
    
    1,046Settlement with sellers of Florida Recycling
    
    
    (8,635
    )
    
    
    
    
    
    
    Depreciation, depletion and amortization
    
    
    34,204
    
    
    
    14,927
    
    
    
    10,718Foreign exchange loss (gain) and other
    
    
    (377
    )
    
    
    1,760
    
    
    
    (2,159
    )Income (loss) from operations
    
    
    7,517
    
    
    
    (5,046
    )
    
    
    9,567Interest expense
    
    
    30,838
    
    
    
    8,278
    
    
    
    5,727Changes in fair value of warrants
    
    
    (111
    )
    
    
    
    
    
    
    Cumulative mandatorily redeemable preferred stock dividends and
amortization of issue costs
    
    
    17,582
    
    
    
    10,161
    
    
    
    Income (loss) before income taxes
    
    
    (40,792
    )
    
    
    (23,485
    )
    
    
    3,840Income tax provision (benefit)
    
    
    7,587
    
    
    
    (587
    )
    
    
    1,713Income (loss) before cumulative effect of change in accounting principle
    
    
    (48,379
    )
    
    
    (22,898
    )
    
    
    2,127Cumulative effect of change in accounting principle, net of provision
for income taxes of $132 and $256 for the year ended
December 31, 2004 and 2003, respectively
    
    
    225
    
    
    
    518
    
    
    
    Net income (loss)
    
    
    (48,154
    )
    
    
    (22,380
    )
    
    
    2,127Deemed dividend on Series 1 Preferred Stock
    
    
    
    
    
    
    (54,572
    )
    
    
    (14,717
    )Net loss attributable to common shareholders
    
    $
    (48,154
    )
    
    $
    (76,952
    )
    
    $
    (12,590
    )Basic and diluted loss per share:Basic and diluted loss per share attributable to common shareholders
before cumulative effect of change in
accounting principle
    
    $
    (0.55
    )
    
    $
    (1.99
    )
    
    $
    (0.39
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    0.01
    
    
    
    Loss per share  basic and diluted
    
    $
    (0.55
    )
    
    $
    (1.98
    )
    
    $
    (0.39
    )Weighted average common stock outstanding  basic and diluted
    
    
    88,232
    
    
    
    38,782
    
    
    
    32,414Statements of Comprehensive Income (Loss)Net income (loss)
    
    $
    (48,154
    )
    
    $
    (22,380
    )
    
    $
    2,127Foreign currency translation adjustment
    
    
    13,181
    
    
    
    19,903
    
    
    
    355Comprehensive income (loss)
    
    $
    (34,973
    )
    
    $
    (2,477
    )
    
    $
    2,482
 The accompanying notes are an integral part of these Consolidated Financial Statements. F-7




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##### Table of Contents



WASTE SERVICES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands of US dollars and share amounts) Options,Waste Services
    
    
    Waste Services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants and
    
    
    Accumulated(CA) Inc.
    
    
    (CA) Inc.
    
    
    Waste Services, Inc.
    
    
    Additional
    
    
    Treasury
    
    
    Deferred
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Preferred Stock
    
    
    Common Stock
    
    
    Paid in
    
    
    Shares
    
    
    Stock-Based
    
    
    Comprehensive
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    at Cost
    
    
    Compensation
    
    
    Income
    
    
    Deficit
    
    
    EquityBalance, December 31, 2001
    
    
    23,697
    
    
    $
    85,173
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    851
    
    
    $
    (4,306
    )
    
    $
    (35,805
    )
    
    $
    45,913Issuance of Series 1 Preferred Stock
    
    
    
    
    
    
    
    
    
    
    11,321
    
    
    
    28,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,068Conversion of Series 1 Preferred to Common Stock
    
    
    11,321
    
    
    
    28,068
    
    
    
    (11,321
    )
    
    
    (28,068
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options and warrants
    
    
    177
    
    
    
    308
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    308Additional value of warrants and deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,046
    
    
    
    
    
    
    
    
    
    
    
    1,046Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    355
    
    
    
    
    
    
    
    355Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,127
    
    
    
    2,127Balance, December 31, 2002
    
    
    35,195
    
    
    
    113,549
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,897
    
    
    
    (3,951
    )
    
    
    (33,678
    )
    
    
    77,817Warrants issued in connection with Redeemable Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,774
    
    
    
    
    
    
    
    
    
    
    
    13,774Issuance of Series 1 Preferred Stock
    
    
    
    
    
    
    
    
    
    
    28,146
    
    
    
    76,236
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,586
    
    
    
    
    
    
    
    
    
    
    
    83,822Issuance of Common Stock
    
    
    4,850
    
    
    
    24,812
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,812Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    138Conversion of Series 1 Preferred to Common Stock
    
    
    28,146
    
    
    
    76,236
    
    
    
    (28,146
    )
    
    
    (76,236
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options and warrants
    
    
    148
    
    
    
    798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (244
    )
    
    
    
    
    
    
    
    
    
    
    554Additional value of warrants and deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,677
    
    
    
    
    
    
    
    
    
    
    
    2,677Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,903
    
    
    
    
    
    
    
    19,903Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,380
    )
    
    
    (22,380
    )Balance, December 31, 2003
    
    
    68,339
    
    
    
    215,395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,828
    
    
    
    15,952
    
    
    
    (56,058
    )
    
    
    201,117Sale of common shares and warrants
    
    
    13,400
    
    
    
    49,126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,552
    
    
    
    
    
    
    
    
    
    
    
    51,678Common shares and warrants issued in acquisitions
    
    
    14,837
    
    
    
    80,856
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,071Exercise of options and warrants
    
    
    311
    
    
    
    1,253
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    (220
    )
    
    
    
    
    
    
    
    
    
    
    1,041Deferred stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    122Migration transaction
    
    
    (96,887
    )
    
    
    (346,630
    )
    
    
    
    
    
    
    
    
    
    
    87,658
    
    
    
    877
    
    
    
    345,753
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of exchangeable shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,660
    
    
    
    27
    
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Settlement with sellers of Florida Recycling
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,235
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,235
    )Other paid in capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,181
    
    
    
    
    
    
    
    13,181Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,154
    )
    
    
    (48,154
    )Balance, December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    90,358
    
    
    $
    904
    
    
    $
    345,904
    
    
    $
    (1,235
    )
    
    $
    28,282
    
    
    $
    29,133
    
    
    $
    (104,212
    )
    
    $
    298,776
 The accompanying notes are an integral part of these Consolidated Financial Statements. F-8




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##### Table of Contents



WASTE SERVICES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US dollars) For the Years Ended December 31, 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    (48,154
    )
    
    $
    (22,380
    )
    
    $
    2,127Adjustments to reconcile net income (loss) to net cash flows
from operating activities -Depreciation, depletion, and amortization
    
    
    34,204
    
    
    
    14,927
    
    
    
    10,718Non-cash component of
settlement with sellers of
Florida Recycling
    
    
    (1,235
    )
    
    
    
    
    
    
    Cumulative mandatorily redeemable preferred stock dividends
and amortization of issue costs
    
    
    17,582
    
    
    
    10,161
    
    
    
    Amortization of debt issue costs
    
    
    10,294
    
    
    
    3,281
    
    
    
    1,855Deferred income tax provision (benefit)
    
    
    7,218
    
    
    
    (990
    )
    
    
    (464
    )Foreign exchange loss (gain)
    
    
    (90
    )
    
    
    1,915
    
    
    
    (1,441
    )Non-cash stock-based compensation (benefit)
    
    
    (90
    )
    
    
    2,677
    
    
    
    1,046Cumulative effect of change in accounting principle, net of tax
    
    
    (225
    )
    
    
    (518
    )
    
    
    Changes in fair value of warrants
    
    
    (111
    )
    
    
    
    
    
    
    Other non-cash items
    
    
    86
    
    
    
    455
    
    
    
    844Changes in operating assets and liabilities (excluding the effects
of acquisitions) -Accounts receivable
    
    
    (7,085
    )
    
    
    (1,749
    )
    
    
    (1,880
    )Prepaid expenses and other current assets
    
    
    (2,303
    )
    
    
    (5,959
    )
    
    
    1,267Accounts payable
    
    
    3,363
    
    
    
    3,886
    
    
    
    (446
    )Accrued expenses and other current liabilities
    
    
    11,243
    
    
    
    3,740
    
    
    
    2824,697
    
    
    
    9,446
    
    
    
    13,654Cash flows from investing activities:Cash used in business combinations and significant asset
acquisitions, net of cash acquired
    
    
    (164,679
    )
    
    
    (161,371
    )
    
    
    (27,197
    )Capital expenditures
    
    
    (46,209
    )
    
    
    (24,438
    )
    
    
    (12,157
    )Proceeds from business divestitures
    
    
    14,231
    
    
    
    952
    
    
    
    416Deposits for business acquisitions and other
    
    
    (1,551
    )
    
    
    (10,776
    )
    
    
    (839
    )(198,208
    )
    
    
    (195,633
    )
    
    
    (39,777
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    283,000
    
    
    
    166,493
    
    
    
    57,200Principal repayments of debt
    
    
    (187,158
    )
    
    
    (74,251
    )
    
    
    (57,544
    )Sale of common shares and warrants
    
    
    53,600
    
    
    
    
    
    
    
    Proceeds and deposits from release of restricted cash
and release of collateral supporting letters of credit
    
    
    24,341
    
    
    
    (9,929
    )
    
    
    Proceeds from the issuance of Series 1 Preferred Shares
    
    
    
    
    
    
    86,189
    
    
    
    30,000Proceeds from the issuance of mandatorily redeemable Preferred Shares
    
    
    
    
    
    
    55,000
    
    
    
    Proceeds from the exercise of options and warrants
    
    
    1,041
    
    
    
    554
    
    
    
    308Fees paid for financing transactions
    
    
    (14,141
    )
    
    
    (18,967
    )
    
    
    (4,555
    )160,683
    
    
    
    205,089
    
    
    
    25,409Effect of exchange rate changes on cash and cash equivalents
    
    
    273
    
    
    
    385
    
    
    
    20Increase (decrease) in cash and cash equivalents
    
    
    (12,555
    )
    
    
    19,287
    
    
    
    (694
    )Cash and cash equivalents, beginning of period
    
    
    21,062
    
    
    
    1,775
    
    
    
    2,469Cash and cash equivalents, end of period
    
    $
    8,507
    
    
    $
    21,062
    
    
    $
    1,775
 The accompanying notes are an integral part of these Consolidated Financial Statements. F-9




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##### Table of Contents



WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of US dollars unless otherwise stated) 1.    Organization of Business and Basis of Presentation The accompanying Consolidated Financial Statements include the accounts of Waste Services,
Inc. (Waste Services), successor to Capital Environmental Resource Inc. now known as Waste
Services (CA) Inc. (Capital or the Canadian operations) and its wholly owned subsidiaries
(collectively, we, us or our). We are a multi-regional, integrated solid waste services
company, providing collection, transfer, landfill disposal and recycling services for commercial,
industrial and residential customers in the United States and Canada. In 2003, we initiated a
disposal-based growth strategy to enter the United States solid waste market and establish leading,
vertically integrated market positions. Under this strategy, we enter geographic markets with
attractive growth or competitive characteristics by acquiring and developing landfill disposal
capacity, then acquiring and developing waste collection and transfer operations. As part of our
business strategy to expand into the United States, we entered into a migration transaction, which
was completed effective July 31, 2004. Under the migration transaction, our corporate structure was
reorganized so that Waste Services, a Delaware company, is the ultimate parent company of our
corporate group. Prior to the migration transaction, Waste Services was a subsidiary of Capital.
After the migration transaction, Capital became Waste Services subsidiary. Effective with the
completion of the migration on July 31 2004, the historical equity balances of Capital were
reclassified into the equity of Waste Services. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Significant estimates include
the allowance for doubtful accounts, depletion of landfill development costs, intangible assets,
goodwill, liabilities for landfill capping, closure and post-closure obligations, insurance
reserves, liabilities for potential litigation and deferred taxes. A portion of our operations are domiciled in Canada; as such, for each reporting period, we
translate the results of operations and financial condition of our Canadian operations into U.S.
dollars. Therefore, reported results of operations and financial condition are subject to changes
in the exchange relationship between the two currencies. For example, as the relationship of the
Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely
expenses are unfavorably affected. Assets and liabilities of Canadian operations have been
translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant
balance sheet dates, and revenue and expenses of Canadian operations have been translated from
Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period.
Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are
reported as a separate component of shareholders equity and are included in comprehensive income
(loss). Separately, monetary assets and liabilities denominated in U.S. dollars held by our
Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated
into U.S. dollars. The effects of re-measurement are reported currently as a component of net
income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates. 2.    Summary of Significant Accounting Policies Adoption of New Accounting Standard On January 1, 2003, we adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 143 Accounting for Asset Retirement Obligations. SFAS No. 143 required us to change
our methodology used to record liabilities related to capping, closure and post-closure of our
landfill operations. Under SFAS No. 143, we are required to recognize as an asset, the fair value
of the liability for an asset retirement obligation. The asset is then depleted, consistently with
other capitalized landfill costs, over the remaining useful life of the site based upon units of
consumption as airspace in the landfill is consumed. Upon adoption, the liability we recognized
represented the present value of the total estimated future asset retirement obligation. The
methodology we used to define the cost pool related to an obligating event included total capping,
closure and post-closure costs to be incurred, on a discounted basis, over the remaining life of
the site. In connection with the opening of our JED Landfill in Florida in the first quarter of 2004, we
re-evaluated and changed the methodology used to define an obligating event, and we segregated the
cost pool for the obligation into closure and post-closure obligations and landfill capping
obligations. Effective January 1, 2004, we recognize the fair value of the liability for the
closure and post-closure obligation over the life of the landfill as waste is placed in the site as
opposed to the time at which the landfill commences operations. Additionally, under our new method,
we view landfill capping events, which occur in phases throughout the life of a landfill, as
discrete activities that are recognized as asset retirement obligations separately from other
closure and post-closure obligations. These capping events occur generally during the operating
life of a landfill and can be associated with specific waste placed under an area to be capped. As
a result, we use a separate capping rate per ton to recognize the principal amount of the retirement obligation and related asset associated with each capping event. We deplete the asset
recorded pursuant to this approach as waste volume covered by the capping event is placed into the landfill. F-10




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WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) We believe this method is preferable as it (i) provides a better measure of the fair value of
the asset retirement obligation by more precisely matching the landfill obligating events with the
recognition of the fair value of the asset retirement obligation; (ii) is more consistent with our
policies for the allocation of purchase price in landfill acquisitions and the related valuation of
assumed retirement obligations; (iii) reflects a more accurate rate of accretion thereby creating a
more accurate value of our current and future retirement obligations and (iv) is the predominant
method used in our industry. The effect of the change in methodology, had it been adopted January 1, 2003, would have been
to increase net loss before cumulative effect of change in accounting principle as of December 31,
2003 by approximately $0.4 million. The effect of this change on basic or diluted loss per share as
of December 31, 2004 would have been $0.01. The
following table summarizes the balance sheet impact of our change in accounting methodology for
asset retirement obligations SFAS No. 143: Adjustment forChange inDecember 31, 2003
    
    
    Accounting
    
    
    January 1, 2004Landfill sites
    
    $
    128,044
    
    
    $
    (3,191
    )
    
    $
    124,853Accumulated depletion
    
    
    (10,503
    )
    
    
    717
    
    
    
    (9,786
    )Landfill sites, net
    
    $
    117,541
    
    
    $
    (2,474
    )
    
    $
    115,067Accrued closure and post-closure obligations
    
    $
    7,737
    
    
    $
    (2,831
    )
    
    $
    4,906Deferred income tax asset (liability)
    
    $
    3,727
    
    
    $
    (132
    )
    
    $
    3,595
 Business Combinations and Acquisitions We allocate the purchase price of an acquired business, on a preliminary basis, to the
identified assets and liabilities acquired based on their estimated fair values at the dates of
acquisition, with any residual amounts allocated to goodwill. The purchase price allocations are
considered preliminary until we have obtained all required information to complete its allocation.
Although the time required to obtain the necessary information will vary with circumstances
specific to an individual acquisition, the allocation period for finalizing purchase price
allocations generally does not exceed one year from the date of consummation of an acquisition.
Adjustments to the allocation of purchase price may decrease those amounts allocated to goodwill
and, as such, may increase those amounts allocated to other tangible or intangible assets, which
may result in higher depreciation or amortization expense in future periods. Assets acquired in a
business combination that will be sold are valued at fair value less cost to sell. Results of
operating these assets are recognized currently in the period in which those operations occur. The
value of shares issued in connection with an acquisition is based upon the average market price of
our Common Stock during the five day period consisting of the period two days before, the day of
and the two days after the terms of the acquisition are agreed to and/or announced. Cash and Cash Equivalents and Restricted Cash Cash and cash equivalents are defined as cash and short-term highly liquid deposits with
initial maturities of three months or less. As of December 31, 2003, restricted cash amounted to
$14.4 million, which represented funds held in escrow to finance the acquisition of certain assets
from Allied Waste Industries, Inc. or Allied. Concentration of Credit Risk Financial instruments that potentially subject us to credit risk consist primarily of cash and
cash equivalents and trade accounts receivable. We place our cash and cash equivalents only with
high credit quality financial institutions. Our customers are diversified as to both geographic and
industry concentrations. Therefore, our trade accounts receivable are not subject to a
concentration of credit risk. F-11




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WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts based on the expected collectibility. We
perform credit evaluations of significant customers and establish an allowance for doubtful
accounts based on the aging of receivables, payment performance factors, historical trends, and
other information. In general, we reserve a portion of those receivables outstanding more than 90
days and 100% of those outstanding over 120 days. We evaluate and revise our reserve on a monthly
basis based upon a review of specific accounts outstanding and our history of uncollectible
accounts. The changes to the allowance for doubtful accounts for the years ended December 31, 2004, 2003
and 2002 are as follows: 2004
    
    
    2003
    
    
    2002Balance at beginning of the year
    
    $
    620
    
    
    $
    350
    
    
    $
    507Acquisitions
    
    
    1,380
    
    
    
    243
    
    
    
    148Provisions
    
    
    2,243
    
    
    
    229
    
    
    
    425Impact of foreign exchange fluctuations
    
    
    12
    
    
    
    73
    
    
    
    3Bad debts charged to reserves, net of recoveries
    
    
    (2,991
    )
    
    
    (275
    )
    
    
    (733
    )Balance at end of the year
    
    $
    1,264
    
    
    $
    620
    
    
    $
    350
 Property and Equipment Property and equipment are recorded at cost less accumulated depreciation. Improvements or
betterments, which extend the life of an asset, are capitalized. Expenditures for maintenance and
repair costs are expensed as incurred. Gains and losses resulting from property and equipment
retirements or disposals are credited or charged to earnings in the year of disposal. Depreciation
is computed over the estimated useful life using the straight-line method as follows: Buildings
    
    10 to 25 yearsVehicles
    
    10 yearsContainers, compactors, landfill, and recycling equipment
    
    5 to 12 yearsFurniture, fixtures and other office equipment
    
    3 to 5 yearsLeasehold improvements
    
    Shorter of term of
lease or estimated
life
 Long-Lived Assets We periodically evaluate whether events and circumstances have occurred that may warrant
revision of the estimated useful life of property and equipment or whether the remaining balance of
property and equipment, or other long-lived assets, should be evaluated for possible impairment.
Instances that may lead to an impairment include: (i) a significant decrease in the market price of
a long-lived asset group; (ii) a significant adverse change in the extent or manner in which a
long-lived asset or asset group is being used or in its physical condition; (iii) a significant
adverse change in legal factors or in the business climate that could affect the value of a
long-lived asset or asset group, including an adverse action or assessment by a regulator; (iv) an
accumulation of costs significantly in excess of the amount originally expected for the acquisition
or construction of a long-lived asset or asset group; (v) a current-period operating or cash flow
loss combined with a history of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived asset or asset group; or
(vi) a current expectation that, more likely than not, a long-lived asset or asset group will be
sold or otherwise disposed of significantly before the end of its previously estimated useful life. We use an estimate of the related undiscounted cash flows, excluding interest, over the
remaining life of the property and equipment and long-lived assets in assessing their
recoverability. We measure impairment loss as the amount by which the carrying amount of the
asset(s) exceeds the fair value of the asset(s). We primarily employ two methodologies for
determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought
or sold in a current transaction between willing parties or (ii) the present value of estimated
expected future cash flows grouped at the lowest level for which there are identifiable independent
cash flows. Landfill Sites Landfill sites are recorded at cost. Capitalized landfill costs include expenditures for land,
permitting costs, cell construction costs and environmental structures. Capitalized permitting and cell construction costs are limited
to direct costs relating to these activities, including legal, engineering and construction costs associated with excavation, liners and site
berms, leachate management facilities and other costs associated with environmental equipment and
structures. F-12




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WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) Costs related to acquiring land, excluding the estimated residual value of un-permitted, non-buffer
land, and costs related to permitting and cell construction are depleted as airspace is consumed
using the units-of-consumption method. Environmental structures, which include leachate collection
systems, methane collection systems and groundwater monitoring wells, are charged to expense over
the shorter of their useful life or the life of the landfill. Capitalized landfill costs may also include an allocation of the purchase price paid for
landfills. For landfills purchased as part of a group of several assets, the purchase price
assigned to the landfill is determined based upon the discounted expected future cash flows of the
landfill relative to the other assets within the acquired group. If the landfill meets our
expansion criteria, the purchase price is further allocated between permitted airspace and
expansion airspace based upon the ratio of permitted versus probable expansion airspace to total
available airspace. Landfill sites are amortized using the units-of-consumption method over the
total available airspace including probable expansion airspace where appropriate. We assess the carrying value of our landfill sites in accordance with the provisions of SFAS
No. 144 Accounting for the Impairment of Long-Lived Assets. These provisions, as well as possible
instances that may lead to impairment, are addressed in the Long-Lived Assets discussion. There are
certain indicators previously discussed that require significant judgment and understanding of the
waste industry when applied to landfill development or expansion. We have identified three sequential steps that landfills generally follow to obtain expansion
permits. These steps are as follows: (i) obtaining approval from local authorities; (ii) submitting
a permit application to State or Provincial authorities; and (iii) obtaining permit approval from
state or provincial authorities. Before expansion airspace is included in our calculation of total available disposal capacity,
the following criteria must be met: (i) the land associated with the expansion airspace is either
owned by us or is controlled by us pursuant to an option agreement; (ii) we are committed to
supporting the expansion project financially and with appropriate resources; (iii) there are no
identified fatal flaws or impediments associated with the project, including political impediments;
(iv) progress is being made on the project; (v) the expansion is attainable within a reasonable
time frame; and (vi) based upon senior managements review of the status of the permit process to
date, we believe it is likely the expansion permit will be received within the next five years.
Upon meeting our expansion criteria, the rates used at each applicable landfill to expense costs to
acquire, construct, close and maintain a site during the post-closure period are adjusted to
include probable expansion airspace and all additional costs to be capitalized or accrued
associated with the expansion airspace. Once expansion airspace meets our criteria for inclusion in our calculation of total available
disposal capacity, management continuously monitors each sites progress in obtaining the expansion
permit. If at any point it is determined that an expansion area no longer meets the required
criteria, the probable expansion airspace is removed from the landfills total available capacity
and the rates used at the landfill to expense costs to acquire, construct, close and maintain a
site during the post-closure period are adjusted accordingly. Goodwill and Other Intangible Assets We account for our goodwill in accordance with the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. In general, goodwill is tested for impairment on an annual basis. In
testing for impairment, we use the two-step impairment test prescribed by SFAS No. 142. The first
step of the goodwill impairment test compares the fair value of a reporting unit with its carrying
amount, including goodwill. In determining the fair value, we may utilize: (i) discounted future
cash flows; (ii) operating results based upon a comparative multiple of earnings or revenues; (iii)
offers from interested investors, if any; or (iv) appraisals. If the fair value exceeds the
carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of
the impairment test is unnecessary. The second step, if necessary, compares the implied fair value
of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is
determined by deducting the fair value of a reporting units identifiable assets and liabilities
from the fair value of the reporting unit as a whole, as if that reporting unit had just been
acquired and the purchase price were being initially allocated. If the implied fair value is less
than the carrying value, an impairment charge is recorded to earnings. In addition, we evaluate a reporting unit for impairment if events or circumstances change between
annual tests, indicating a possible impairment. Examples of such events or circumstances include:
(i) a significant adverse change in legal factors or in the business climate; (ii) an adverse
action or assessment by a regulator; (iii) a more likely than not expectation that a reporting unit
or a significant portion thereof will be sold; or (iv) the testing for recoverability under SFAS No. 144 of a
significant asset group within the reporting unit. F-13




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WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) Other intangible assets primarily include customer relationships and contracts and covenants
not-to-compete. Other intangible assets are recorded at their cost, less accumulated amortization
and are amortized over the expected benefit to be received by such intangibles. We periodically
evaluate the carrying value and remaining estimated useful life of its other intangible assets
subject to amortization in accordance with the provisions of SFAS No. 144. Other Non-Current Assets Acquisition deposits and deferred acquisition costs include capitalized incremental direct
costs associated with proposed business combinations that are currently being negotiated. These
costs remain deferred until we cease to be engaged on a regular and ongoing basis with completion
of the proposed acquisition, at which point they are charged to earnings. In the event that the
target is acquired, these costs are incorporated in the cost of the acquired business. Indirect and
internal costs, including executive salaries, overhead and travel costs related to acquisitions,
are expensed as incurred. Costs associated with arranging financing are deferred and expensed over
the related financing arrangement using the effective interest method. Should we repay an
obligation earlier then its contractual maturity, any remaining deferred financing costs are
charged to earnings. Fair Value of Financial Instruments The book values of the cash and cash equivalents, accounts receivable and accounts payable
approximate their respective fair values due to the short-term nature of these instruments.
Borrowings under our senior credit facilities as of December 31, 2004 have carrying values that
approximate their respective fair values based on the current rate offered to us for instruments
with similar market risk and maturities. The fair value of our 9.5% Senior Subordinated Notes at
December 31, 2004 is estimated at $159.2 million based on the year end quoted market price. The
fair value of our mandatorily redeemable preferred shares at December 31, 2004 is estimated at
$73.4 million based up the aggregate liquidation preference as there is no quoted market price
available for this security. Environmental Costs We accrue for costs associated with environmental remediation obligations when such costs are
probable and can be reasonably estimated. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of the remedial
feasibility study. Such accruals are adjusted as further information develops or circumstances
change. Cost of future expenditures for environmental remediation obligations are not discounted to
their present value. Accrued Closure and Post-Closure Obligations Accrued closure and post-closure costs represent an estimate of the current value of the
future obligations associated with closure and post-closure monitoring of solid waste landfills.
Closure and post-closure monitoring and maintenance costs represent the costs related to cash
expenditures yet to be incurred when a landfill facility ceases to accept waste and closes.
Accruals for closure and post-closure monitoring and maintenance consider site inspection,
groundwater monitoring, leachate management, methane gas management and recovery, and operating and
maintenance costs to be incurred during the period after the facility closes. Certain of these
environmental costs, principally capping and methane gas management costs, are also incurred during
the operating life of the site in accordance with the landfill operating requirements. Site
specific closure and post-closure engineering cost estimates are prepared annually. The impact of
changes in estimates is accounted for on a prospective basis. Landfill closure and post-closure liabilities are calculated by estimating the total
obligation of capping and closure events in current dollars, inflating the obligation based upon
the expected date of the expenditure using an inflation rate of 2.0% and discounting the inflated
total to its present value using an 8.5% credit-adjusted risk-free discount rate. Accretion of
discounted cash flows associated with the closure and post closure obligations is accrued over the
life of the landfill, as a charge to cost of operations. Revenue Recognition We recognize revenue when services, such as providing hauling services and accepting waste at
our disposal facilities, are rendered. Amounts billed to customers, prior to providing the related
services, are reflected as deferred revenue and reported as revenues in the period in which the
services are rendered. F-14




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WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) Royalty Arrangements It is customary in the waste industry for landfill acquisition agreements to include royalty
arrangements. Amounts paid under these royalty arrangements are charged to operations based upon a
systematic and rational allocation of the royalty over the period in which the royalty is incurred. Advertising Costs We expense advertising costs as they are incurred. Advertising expense for the year ended
December 31, 2004, was $0.8 million (2003  $0.5 million; 2002  $0.3 million), which is included
in selling, general and administrative expense on the accompanying Statements of Operations. Risk Management Our U.S.-based automobile, general liability and workers compensation insurance coverage is
subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per
claim, plus claims handling expense under our workers compensation and our auto and general
liability insurance programs, respectively. Claims in excess of such deductible levels are fully
insured subject to our policy limits. However, we have a limited claims history for our U.S.
operations and it is reasonably possible that recorded reserves may not be adequate to cover future
payments of claims. We have collateral requirements that are set by insurance companies, which
underwrite our insurance programs. Collateral requirements may change from time to time, based on,
among other things, size of our business, our claims experience, financial performance or credit
quality and retention levels. As of December 31, 2004 we have posted letters of credit with our
U.S. insurer of approximately $3.0 million to cover the liability for losses within the deductible
limit. During the first quarter of 2005, we increased this letter of credit to $8.4 million.
Provisions for retained claims are made by charges to expense based upon periodic evaluations by
management and outside actuaries of the estimated ultimate liabilities on reported and unreported
claims. Adjustments, if any, to the estimated reserves resulting from ultimate claim payments will
be reflected in operations in the periods in which such adjustments become known. Stock-Based Compensation Plans Our stock-based compensation plans are accounted for under the recognition and measurement
principles of Accounting Principles Board Opinion (APB) No. 25 Accounting for Stock Issued to
Employees, and related interpretations. Pro forma information regarding the impact of stock-based
compensation on net income and earnings per share is required by SFAS No. 123 Accounting for
Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation  Transition
and Disclosure. Such pro forma information, determined as if we had accounted for its employee
stock options under the fair value recognition provisions of SFAS No. 123, is illustrated in the
following table: 2004
    
    
    2003
    
    
    2002Net loss attributable to Common Shareholders as reported
    
    $
    (48,154
    )
    
    $
    (76,952
    )
    
    $
    (12,590
    )Stock-based employee compensation expense
pursuant to SFAS No. 123, net of tax
    
    
    (10,312
    )
    
    
    (3,483
    )
    
    
    (1,632
    )Pro forma net loss attributable to Common Shareholders
    
    $
    (58,466
    )
    
    $
    (80,435
    )
    
    $
    (14,222
    )Basic and diluted loss per share:As reported
    
    $
    (0.55
    )
    
    $
    (1.98
    )
    
    $
    (0.39
    )Pro forma
    
    $
    (0.66
    )
    
    $
    (2.07
    )
    
    $
    (0.44
    )
 The fair value of options granted up to December 31, 2004, was estimated using the
Black-Scholes option pricing model using the following assumptions: 2004
    
    2003
    
    2002Annual dividend yield
    

    
    
    

    
    Weighted-average expected lives (years)
    
    3 years
    
    3 years
    
    3 yearsRisk-free interest rate
    
    
    2.57% - 3.25
    %
    
    
    3.05% - 3.47
    %
    
    
    3.46% - 4.62
    %Volatility
    
    
    84
    %
    
    
    72
    %
    
    
    72
    %
 F-15




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WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) The weighted-average grant-date fair value of options granted was $2.33 for the year ended
December 31, 2004 (2003  $2.42; 2002  $2.68). Compensation expense recognized for stock options subject to variable accounting is based on
the intrinsic value (the difference between the exercise price and quoted market price) of the
options at the end of each reporting period. Changes in the intrinsic value are recognized until
such options are exercised, expired or forfeited. Income Taxes We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
Accordingly, deferred income taxes have been provided to show the effect of temporary differences
between the recognition of revenue and expenses for financial and income tax reporting purposes and
between the tax basis of assets and liabilities and their reported amounts in the financial
statements. In assessing the realizability of deferred tax assets, management assesses the
likelihood that deferred tax assets will be recovered from future taxable income, and to that
extent that recovery is not likely or there is insufficient operating history, a valuation
allowance is established. We adjust the valuation allowance in the period management determines it
is more likely than not that deferred tax assets will or will not be realized. Net Income (Loss) Per Share Information Basic earnings (loss) per share is calculated by dividing income (loss) available to common
shareholders by the weighted average number of Common Shares outstanding for the period including
6,569,910 exchangeable shares of WSI (CA). Diluted earnings (loss) per share is calculated based on
the weighted average shares of Common Stock outstanding, including
the exchangeable shares, during the year plus the dilutive effect of
Common Stock purchase warrants and stock options using the treasury stock method and the dilutive
effects of the Convertible Series 1 Preferred Shares using the if-converted method. Contingently
issuable shares are included in the computation of basic earnings (loss) per share when issuance of
the shares is no longer contingent. Due to the net losses attributable to Common Shareholders for
the years ended December 31, 2004, 2003 and 2002, basic and diluted loss per share were the same,
as the effect of potentially dilutive securities would have been anti-dilutive. New Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123 (revised 2004), SharesBased Payment, (SFAS
No. 123(R)), which amends SFAS No. 123,Accounting for StockBased Compensation,and
supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees.SFAS No. 123(R) requires
compensation expense to be recognized for all share-based payments made to employees based on the
fair value of the award at the date of grant, eliminating the intrinsic value alternative allowed
by SFAS No. 123. Generally, the approach to determining fair value under the original pronouncement
has not changed. However, there are revisions to the accounting guidelines established, such as
accounting for forfeitures, that will change our accounting for stock-based awards in the future. SFAS
No. 123(R) must be adopted in the first interim or annual period beginning after June 15,
2005. The statement allows companies to adopt its provision using either of the following
transition alternatives: (i) The modified prospective method, which results in the recognition of compensation expense
using SFAS 123(R) for all share-based awards granted after the effective date and the recognition
of compensation expense using SFAS 123 for all previously granted sharebased awards that remain
unvested at the effective date; or (ii) The modified retrospective method, which results in applying the modified prospective method
and restating prior periods by recognizing the financial statement impact of sharebased payments
in a matter consistent with the pro forma disclosure requirements of SFAS No. 123. The modified
retrospective method may be applied to all prior periods presented or previously reported interim
periods of the year of adoption. We have not yet determined either the method of adoption or the impact that the new standard
is expected to have on our financial statements. F-16




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##### Table of Contents



WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) 3.    Business Combinations, Significant Asset Acquisitions and Disposals of Businesses Business Combinations and Significant Asset Acquisitions In November 2003, we entered into an agreement to acquire the assets of Allied Waste
Industries, Inc.s (Allied) northern and central Florida operations (the Allied Assets) for a
purchase price of approximately $120.0 million subject to an adjustment for working capital. The
primary metropolitan areas served by the Allied Assets are Tampa, Sarasota and Jacksonville,
Florida. On December 31, 2003, we completed the first phase of the Allied Assets acquisition.
During the first six months of 2004, we completed the acquisition of the remaining Allied Assets.
In the second quarter of 2004, we divested a certain landfill and related assets and liabilities in
exchange for a collection operation in the metropolitan Orlando area and cash proceeds of $10.0
million. Proceeds in excess of net assets exchanged reduced goodwill from the original Allied
Assets acquisition by $8.6 million. In April 2004, we also completed the acquisition of the issued and outstanding shares of
Florida Recycling Services, Inc. (Florida Recycling) for an aggregate purchase price of
approximately $99.0 million in cash, working capital of approximately $2.2 million, and the
issuance of 9,250,000 Common Shares valued at approximately $51.4 million. Florida Recycling
operations are based in central Florida, primarily serving the Orlando, Daytona, Fort Myers, and
Tampa markets. Following the acquisition, the performance of the operations of Florida Recycling
were below our expectations and we conducted a review of Floridas Recycling business in an effort
to identify the factors contributing to the lower than expected level of performance. Based on the
results of this review, it appears that the 2003 financial statements of Florida Recycling,
provided by the sellers, contained misstatements and could not be relied upon. As such, we have
begun a re-audit of the historical financial statements of Florida Recycling. On September 24,
2004, we reached an agreement with the selling shareholders of Florida Recycling to adjust the
purchase price paid for the shares of Florida Recycling whereby, in October 2004, the selling
shareholders paid us $7.5 million in cash and returned 500,000 shares of our common stock. The cash
and the shares received (valued at the quoted market price as of September 24, 2004), with a total
value of approximately $8.6 million, have been recorded as income in accordance with SFAS No. 141.
As part of the settlement and upon its completion, we will receive title to a 2,000 ton per day
recycling and transfer facility in Sanford, Florida. In February 2004, we acquired a permitted undeveloped municipal solid waste landfill in Fort
Bend County, Texas (the Fort Bend Regional Landfill). The landfill commenced operations during
August of 2004. The purchase price was comprised of $5.1 million in cash, a seller financed
promissory note of $5.0 million which has since been repaid and the issuance of 4,375,000 Common
Shares valued at approximately $25.0 million. Fort Bend Regional Landfill, which serves the
metropolitan Houston area, is approximately 2,600 acres and has an initial permitted capacity of
47.6 million cubic yards. In addition to the landfill, we acquired a leasehold interest in a fully
permitted transfer station site near Houston, which opened in January 2005. In connection with the
acquisition of the Fort Bend Regional Landfill, we entered into a royalty agreement, under which we
will be required to pay a royalty of $0.25 per ton of eligible waste, as defined in the agreement,
received at the landfill after we commence operations at the site and for the first five years
subsequent to the date of the royalty agreement and $0.35 per ton of eligible waste thereafter. During the first quarter of 2004, we acquired the assets of three collection businesses in the
metropolitan Phoenix area for aggregate cash consideration of approximately $8.4 million plus the
issuance of 989,800 Common Shares valued at approximately $5.7 million. Separately, in January
2004, we acquired an industrial-permitted waste landfill site in Saskatchewan, Canada. The purchase
price was comprised of $1.1 million in cash and the issuance of 12,000 Common Shares valued at
approximately $0.1 million. During July 2003, we purchased Cactus Waste Systems, LLC for $0.6 million in cash and a $1.2
million option that we exercised in September 2003 to purchase an 800-acre site in Pinal County,
Arizona, which has been zoned to permit the development of a landfill. During May 2004, we received
the permits and authorizations necessary for the operation of the landfill (the Southeast Regional
Landfill) and, as a condition of the purchase, we issued 1,250,000 Common Shares valued at $5.5
million to the sellers during the second quarter of 2004 which has been capitalized as a cost of
the landfill. The landfill began operations July 2004. The sellers are entitled to contingent
payments based upon the landfill achieving certain defined average tons of waste per day. Should
the landfill achieve a maximum 5,000 tons per day, the total contingent payments would not exceed
$18.0 million. Additionally, we F-17




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WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) entered into a royalty agreement whereby we will pay the sellers a royalty of $0.50 per ton on all
waste deposited at the Southeast Regional Landfill after the earlier to occur of July 2006 or the
receipt of 1,250 tons of waste per day at the landfill. Details of the net assets acquired and cash used in asset and business acquisitions for the
years ended December 31 are as follows: 2004Allied
    
    
    Florida
    
    
    AllAssets
    
    
    Recycling
    
    
    Others
    
    
    Total
    
    
    2003
    
    
    
    2002Purchase price:Cash
    
    $
    45,988
    
    
    $
    104,234
    
    
    $
    18,350
    
    
    $
    168,572
    
    
    $
    161,371
    
    
    
    $
    30,607Seller financed note payable
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    5,000
    
    
    
    
    
    
    
    
    Common stock and warrants
    
    
    
    
    
    
    51,357
    
    
    
    36,721
    
    
    
    88,078
    
    
    
    18,382
    
    
    
    
    Total purchase price
    
    
    45,988
    
    
    
    155,591
    
    
    
    60,071
    
    
    
    261,650
    
    
    
    179,753
    
    
    
    
    30,607Allocated as follows:Working capital assumed:Cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,184Accounts receivable
    
    
    3,755
    
    
    
    7,426
    
    
    
    409
    
    
    
    11,590
    
    
    
    6,676
    
    
    
    
    1,371Prepaid expenses and other current assets
    
    
    182
    
    
    
    935
    
    
    
    69
    
    
    
    1,186
    
    
    
    324
    
    
    
    
    74Accounts payable
    
    
    
    
    
    
    (8,604
    )
    
    
    (738
    )
    
    
    (9,342
    )
    
    
    (976
    )
    
    
    
    (822
    )Accrued expenses and other
current liabilities
    
    
    (870
    )
    
    
    (4,410
    )
    
    
    
    
    
    
    (5,280
    )
    
    
    (6,930
    )
    
    
    
    (463
    )Net working capital
    
    
    3,067
    
    
    
    (4,653
    )
    
    
    (260
    )
    
    
    (1,846
    )
    
    
    (906
    )
    
    
    
    1,344Property and equipment
    
    
    10,728
    
    
    
    23,911
    
    
    
    6,044
    
    
    
    40,683
    
    
    
    103,124
    
    
    
    
    18,041Landfill sites
    
    
    
    
    
    
    
    
    
    
    41,982
    
    
    
    41,982
    
    
    
    
    
    
    
    
    Other assets
    
    
    
    
    
    
    271
    
    
    
    
    
    
    
    271
    
    
    
    
    
    
    
    
    Deferred taxes
    
    
    
    
    
    
    
    
    
    
    (334
    )
    
    
    (334
    )
    
    
    
    
    
    
    
    578Long-term debt assumed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,429
    )
    
    
    
    Accrued closures, post-closure and other
obligations assumed
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    (52
    )
    
    
    (1,483
    )
    
    
    
    (896
    )Net book value of assets acquired and
liabilities assumed
    
    
    13,795
    
    
    
    19,529
    
    
    
    47,380
    
    
    
    80,704
    
    
    
    96,306
    
    
    
    
    19,067Excess purchase price to be allocated
    
    $
    32,193
    
    
    $
    136,062
    
    
    $
    12,691
    
    
    $
    180,946
    
    
    $
    83,447
    
    
    
    $
    11,540Allocated as follows:Goodwill
    
    $
    23,201
    
    
    $
    108,906
    
    
    $
    12,667
    
    
    $
    144,774
    
    
    $
    66,639
    
    
    
    $
    9,348Other intangible assets
    
    
    8,992
    
    
    
    27,156
    
    
    
    24
    
    
    
    36,172
    
    
    
    16,808
    
    
    
    
    2,192Total allocated
    
    $
    32,193
    
    
    $
    136,062
    
    
    $
    12,691
    
    
    $
    180,946
    
    
    $
    83,447
    
    
    
    $
    11,540
 The above table includes cash deposits and acquisition related costs of $4.0 million and
1,000,000 common shares and warrants valued at $5.7 million, which relate to the Florida Recycling
acquisition that were paid or deposited during 2003 and have been capitalized to the cost of the
acquisition during 2004. As we are continuing to accumulate required information, these purchase
price allocations are preliminary and may be subject to change. We believe the primary value of an acquisition is the opportunities made available by
vertically integrating operations within a certain geographic market. The following unaudited condensed consolidated pro forma statement of operations data shows
the results of our operations for the years ended December 31,
2004, 2003 and 2002 as if completed business combinations had occurred at the beginning of
current and most recent prior period (in thousands except
per share amounts): F-18




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WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) 2004
    
    
    2003
    
    
    2002Revenue
    
    $
    355,004
    
    
    $
    314,914
    
    
    $
    165,583Net loss attributable to common shareholders
    
    $
    (53,132
    )
    
    $
    (98,457
    )
    
    $
    (8,963
    )Basic and diluted net loss per Common Share
    
    $
    (0.59
    )
    
    $
    (2.02
    )
    
    $
    (0.27
    )Basic and diluted pro forma weighted average
number of common shares outstanding
    
    
    90,503
    
    
    
    48,632
    
    
    
    33,014
 Due to the pending re-audit of the Florida Recycling financial statements for each of the
three years ended December 31, 2003, we have re-cast these
pro-forma disclosures using our best
estimate of the actual historical results of Florida Recycling. These estimates are subject to
change pending the completion of the re-audit. These unaudited condensed pro forma consolidated
results have been prepared for comparative purposes only and are not necessarily indicative of the
actual results of operations had the acquisitions taken place as of the beginning of the respective
periods or the results of our future operations. Furthermore, the pro forma results do not give
effect to all cost savings or incremental costs that may occur as a result of the integration and
consolidation of the acquisitions. 4.    Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following as of December 31, 2004 and
2003: 2004
    
    
    2003Prepaid expenses
    
    $
    6,990
    
    
    $
    6,623Cash collateral desposits for letters of credit
    
    
    
    
    
    
    9,929Debt issue costs related to the 364-day senior secured
credit facility
    
    
    
    
    
    
    8,829Other current assets
    
    
    3,950
    
    
    
    4,268Total
    
    $
    10,940
    
    
    $
    29,649
 5.    Property and Equipment Property and equipment consist of the following as of December 31, 2004 and 2003: 2004
    
    
    2003Land and buildings
    
    $
    18,872
    
    
    $
    6,132Vehicles
    
    
    101,215
    
    
    
    62,182Containers, compactors, landfill and recycling equipment
    
    
    61,550
    
    
    
    39,902Furniture, fixtures, other office equipment and leasehold improvements
    
    
    8,562
    
    
    
    5,927Total property and equipment
    
    
    190,199
    
    
    
    114,143Less: Accumulated depreciation
    
    
    (59,732
    )
    
    
    (39,622
    )Property and equipment, net
    
    $
    130,467
    
    
    $
    74,521
 Included in property and equipment at December 31, 2004, are vehicles held under capital
leases with a cost of $2.8 million (2003  $5.7 million) and accumulated depreciation of $0.7
million (2003  $1.9 million). 6.    Landfill Sites, Accrued Closure, Post-Closure and Other Obligations Landfill Sites Landfill sites consist of the following as of December 31, 2004 and 2003: F-19




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WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) 2004
    
    
    2003Landfill sites
    
    $
    188,616
    
    
    $
    128,044Accumulated depletion
    
    
    (19,000
    )
    
    
    (10,503
    )Landfill sites, net
    
    $
    169,616
    
    
    $
    117,541
 On an annual basis, we update the development cost estimates, closure and post-closure
and future capacity estimates for its landfills. Future capacity estimates are updated using
surveys to estimate utilized disposal capacity and remaining disposal capacity. These cost and
capacity estimates are reviewed and approved by senior management on an annual basis. The change in landfill sites for the years ended December 31, 2004, 2003, and 2002 is as
follows: 2004
    
    
    2003
    
    
    2002Balance, beginning of period
    
    $
    117,541
    
    
    $
    13,084
    
    
    $
    3,768Acquisitions
    
    
    41,982
    
    
    
    90,094
    
    
    
    11,936Additional landfill site costs
    
    
    12,839
    
    
    
    12,268
    
    
    
    368Additional asset retirement obligations
    
    
    858
    
    
    
    
    
    
    
    Depletion
    
    
    (8,105
    )
    
    
    (4,789
    )
    
    
    (3,124
    )Divestitures
    
    
    (154
    )
    
    
    
    
    
    
    Capitalized interest
    
    
    178
    
    
    
    
    
    
    
    Purchase price allocation adjustments for prior acquisitions
    
    
    5,907
    
    
    
    
    
    
    
    Effect of foreign exchange rate fluctuations
    
    
    1,044
    
    
    
    3,227
    
    
    
    136Change in accounting principle
    
    
    (2,474
    )
    
    
    3,657
    
    
    
    Balance, end of period
    
    $
    169,616
    
    
    $
    117,541
    
    
    $
    13,084
 Accrued Closure, Post-Closure and Other Obligations Accrued closure, post-closure and other obligations consist of the following as of December
31, 2004 and 2003: 2004
    
    
    2003Accrued closure and post-closure obligations
    
    $
    6,390
    
    
    $
    7,737Deferred income tax liability
    
    
    3,984
    
    
    
    Capital lease obligations
    
    
    416
    
    
    
    911Other obligations
    
    
    184
    
    
    
    143$
    10,974
    
    
    $
    8,791
 F-20




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##### Table of Contents



WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) Accrued closure and post-closure obligations include the costs associated with obligations for
closure and post-closure of our landfills. The anticipated timeframe for paying these costs varies
based on the remaining useful life of each landfill as well as the duration of the post-closure
monitoring period. The changes to accrued closure and post-closure obligations are as follows: 2004
    
    
    2003Balance, beginning of period
    
    $
    7,737
    
    
    $
    1,925Acquisitions
    
    
    52
    
    
    
    1,483Accretion
    
    
    463
    
    
    
    455Additional asset retirement obligations
    
    
    858
    
    
    
    Divestitures
    
    
    (146
    )
    
    
    Purchase price allocation adjustments for prior acquisitions
    
    
    (92
    )
    
    
    Effect of foreign exchange rate fluctuations
    
    
    349
    
    
    
    991Change in accounting principle
    
    
    (2,831
    )
    
    
    2,883Balance, end of period
    
    $
    6,390
    
    
    $
    7,737
 The aggregate non-discounted annual payments required in respect of accrued closure and
post-closure obligations for our permitted sites as of December 31, 2004 are as follows: Amount2005
    
    $
    2006
    
    
    2007
    
    
    7302008
    
    
    4,6812009
    
    
    2,019Thereafter
    
    
    183,158Total
    
    $
    190,588
 The above future expenditures for closure and post-closure obligations assume full utilization
of permitted and probable expansion airspace. 7.    Other Assets Other assets consisted of the following as of December 31, 2004 and 2003: 2004
    
    
    2003Debt and redeemable Preferred Stock issue costs, net of accumulated amortization
of $2,271 as of December 31, 2004 and $496 as of December 31, 2003, respectively
    
    $
    10,833
    
    
    $
    2,096Acquisition deposits and deferred acquisition costs
    
    
    12,576
    
    
    
    20,182Other assets
    
    
    830
    
    
    
    $
    24,239
    
    
    $
    22,278
 F-21




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##### Table of Contents



WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) 8.    Goodwill and Other Intangible Assets Goodwill and other intangible assets consist of the following as of December 31, 2004 and
2003: 2004
    
    
    2003Other intangible assets subject to amortization:Customer relationships and contracts
    
    $
    50,495
    
    
    $
    17,909Non-competition agreements and other
    
    
    4,126
    
    
    
    2,65354,621
    
    
    
    20,562Less: Accumulated amortization:Customer relationships and contracts
    
    
    (5,913
    )
    
    
    (837
    )Non-competition agreements and other
    
    
    (1,782
    )
    
    
    (889
    )Other intangible assets subject to amortization, net
    
    
    46,926
    
    
    
    18,836Goodwill
    
    
    280,830
    
    
    
    144,544Goodwill and other intangible assets, net
    
    $
    327,756
    
    
    $
    163,380
 The changes in goodwill for the years ended December 31, 2004 and 2003 are as follows: 2004
    
    
    2003U.S.
    
    
    Canada
    
    
    Total
    
    
    TotalBalance, beginning of period
    
    $
    65,822
    
    
    $
    78,722
    
    
    $
    144,544
    
    
    $
    64,365Acquisitions
    
    
    144,460
    
    
    
    314
    
    
    
    144,774
    
    
    
    66,639Divestitures
    
    
    (8,599
    )
    
    
    
    
    
    
    (8,599
    )
    
    
    Effect of foreign exchange rate fluctuations
    
    
    
    
    
    
    6,219
    
    
    
    6,219
    
    
    
    13,989Purchase price allocation adjustments for
prior acquisitions
    
    
    (6,108
    )
    
    
    
    
    
    
    (6,108
    )
    
    
    (449
    )Balance, end of period
    
    $
    195,575
    
    
    $
    85,255
    
    
    $
    280,830
    
    
    $
    144,544
 Amortization expense of other intangible assets for the year ended December 31, 2004, was
$6.1 million (2003  $0.8 million; 2002  $0.6 million). Estimated future amortization of other
intangible assets based on balances existing at December 31, 2004, is as follows: Amount2005
    
    $
    6,7582006
    
    
    6,1342007
    
    
    5,0442008
    
    
    4,2022009
    
    
    3,568Thereafter
    
    
    21,220Total
    
    $
    46,926
 As of December 31, 2004, the weighted average amortization period for other intangible
assets is as follows: Customer relationships and contracts
    
    11.5 yearsNon-competition agreements and other
    
    3.0 years
 F-22




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) 9. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following as of December 31,
2004 and 2003: 2004
    
    
    2003Accrued compensation, benefits and subcontractor
costs
    
    $
    8,393
    
    
    $
    5,665Accrued waste disposal costs
    
    
    8,220
    
    
    
    2,631Accrued acquisition costs
    
    
    2,230
    
    
    
    1,804Accrued insurance
    
    
    2,860
    
    
    
    3,383Current portion of capital lease obligations
    
    
    567
    
    
    
    1,128Deferred revenue
    
    
    9,443
    
    
    
    5,834Accrued interest
    
    
    4,762
    
    
    
    Other accrued expenses and liabilities
    
    
    6,058
    
    
    
    4,956Total
    
    $
    42,533
    
    
    $
    25,401
 10. Debt Debt consists of the following as of December 31, 2004 and 2003: 2004
    
    
    2003Senior Secured Credit Facilities:Revolving credit facility, floating interest rate at 6.71% as of December 31, 2004 due April 2009
    
    $
    15,000
    
    
    $
    Term loan
facility, floating interest rate at 6.78% as of December 31,
2004, due $250 per quarter with balance due April 2011
    
    
    99,250
    
    
    
    Senior Subordinated Notes fixed rate at 9.5% due 2014
    
    
    160,000
    
    
    
    Other subordinated promissory notes payable, interest at 6.67%, due through June 2017
    
    
    3,130
    
    
    
    3,285364-day Senior Secured Credit Facility (repaid in full on April 30, 2004)
    
    
    
    
    
    
    172,125277,380
    
    
    
    175,410Less: Current portion
    
    
    (1,166
    )
    
    
    (172,280
    )Long-term portion
    
    $
    276,214
    
    
    $
    3,130
 Senior Secured Credit Facilities On April 30, 2004, we entered into new Senior Secured Credit Facilities (the Credit
Facilities) with a syndicate of lenders. The Credit Facilities consist of a five-year revolving
credit facility in the amount of $60.0 million, up to $15.0 million of which is available to our
Canadian operations, and a seven-year term loan facility in the amount of $100.0 million. The
Credit Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined,
at our option. The Credit Facilities are secured by substantially all of the assets of our U.S.
restricted subsidiaries. Our Canadian operations guarantee and pledge all of their assets only in
support of the portion of the revolving credit facility available to them. Separately, 65% of the
Common Shares of Waste Services first tier foreign subsidiaries, including Capital, are pledged to
secure obligations under the Credit Facilities. As of December 31, 2004, $15.0 million was
drawn under the revolving credit facility and $13.3 million was used to support outstanding letters
of credit. As of June 30, 2004, we failed to meet certain of the financial covenants contained in the
Credit Facilities. On October 4, 2004, we entered into an amendment to the credit agreement with
the administrative agent for the lenders. The amendment includes changes to certain of the
financial and other covenants contained in the credit facilities and increases the current interest
rates payable on amounts outstanding by 125 basis points to 450 basis points over Euro dollar
loans. Until we meet certain target leverage ratios, as defined, availability under the amended
facility is reduced to $50.0 million up to $12.5 million of which is available for our Canadian
operations. In connection with the amendment, we paid a fee of approximately $0.4 million to our
lenders. As of December 31, 2004, we are in compliance with the financial covenants, as amended and
we expect to continue to be in compliance in future periods. The amendment also requires us to
receive an equity investment of at least $7.5 million prior to March 28, 2005. On September 30,
2004, we entered into a standby purchase agreement with Michael G. DeGroote pursuant to which we
may require Mr. DeGroote to purchase shares of our common stock for a purchase price of $7.5
million on or before March 28, 2005. As of March 4, 2005, we exercised our rights under the
purchase agreement thereby requiring Mr. DeGroote to purchase such shares. F-23




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) Our Credit Facilities, as amended, contain certain financial and other covenants that restrict
our ability to, among other things, make capital expenditures, incur indebtedness, incur liens,
dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions.
Our financial covenants include: (i) minimum consolidated interest coverage, (ii) maximum total
leverage and (iii) maximum senior secured leverage. The covenants and restrictions limit the manner
in which we conduct our operations and could adversely affect our ability to raise additional
capital. Senior Subordinated Notes On April 30, 2004, we completed a private offering of 9 1/2% Senior Subordinated Notes
(Subordinated Notes) due 2014 for gross proceeds of $160.0 million. The Subordinated Notes mature
on April 15, 2014. Interest on the Subordinated Notes is payable semiannually commencing October
15, 2004. The Subordinated Notes are redeemable, in whole or in part, at our option, on or after
April 15, 2009, at a redemption price of 104.75% of the principal amount, declining ratably in
annual increments to par on or after April 15, 2012, together with accrued interest to the
redemption date. In addition, prior to April 15, 2007, we may redeem up to 35.0% of the aggregate
principal amount of the Subordinated Notes with the proceeds of certain equity offerings, at a
redemption price equal to 109.5% of the principal amount. Upon a change of control, as such term is
defined in the Indenture, we are required to offer to repurchase all the Subordinated Notes at
100.0% of the principal amount, together with accrued interest and liquidated damages, if any, and
obtain the consent of our senior lenders to such payment or repay our indebtedness under our Credit
Facilities. The Subordinated Notes are unsecured and are subordinate to our existing and future senior
secured indebtedness, including our Credit Facilities, structurally subordinated to existing and
future indebtedness of our non-guarantor subsidiaries, rank equally with any unsecured senior
subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our
obligations with respect to the Subordinated Notes, including principal, interest, premium, if any,
and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior
subordinated basis by all of our existing and future domestic restricted subsidiaries. The Canadian
operations are not guarantors under the Subordinated Notes. The Subordinated Notes contain certain covenants that, in certain circumstances and subject to
certain limitations and qualifications, restrict, among other things (i) the incurrence of
additional debt; (ii) the payment of dividends and repurchases of stock; (iii) the issuance of
preferred stock and the issuance of
stock of our subsidiaries; (iv) certain investments; (v) the repurchase of our Preferred
Stock; (vi) transactions with affiliates and (vii) certain sales of assets. We also entered into a Registration Rights Agreement with the initial purchasers of the
Subordinated Notes in which we agreed to (i) file a registration statement with respect to the
Subordinated Notes within 120 days of the closing date of the issuance of the notes (August 28,
2004), pursuant to which we will exchange the Subordinated Notes for registered notes of Waste
Services with terms identical to the Subordinated Notes; (ii) have such registration statement
declared effective within 210 days of the issuance date; (iii) maintain the effectiveness of such
registration statement for minimum periods specified in the agreement and (iv) file a shelf
registration statement in the circumstances and within the time periods specified in the agreement.
As a result of needing to file our re-audited Florida Recycling financial statements and pro forma
financial statements, we have not filed the registration statement with respect to the Subordinated
Notes and, therefore, we are required to pay liquidated damages, in cash, in an amount equal to
$0.05 per week per $1 in principal amount, of the unregistered Subordinated Notes, for each week
that the default continues for the first 90-days following default
(approximately $8,000 per week.)
Thereafter, the amount of liquidated damages increases by an additional $0.05 per week per $1 in
principal amount of unregistered Subordinated Notes for each subsequent 90-day period until all
defaults have been cured, to a maximum of $0.50 per week per $1 in principal amount of unregistered
Subordinated Notes outstanding. These liquidated damages are payable at the same time as interest
payments due under the Subordinated Notes. Currently, our interest
penalty approximates $24,000 per
week until May 26, 2005 when it will increase to $32,000 per week. 364-day Senior Secured Credit Facility (Repaid in full on April 30, 2004) On December 31, 2003, we entered into a $220.0 million 364-day Senior Secured Credit Facility
(the 364-day Facility) comprised of a $195.0 million term loan and a $25.0 million revolving
credit facility, which was secured by substantially all of our current and future acquired assets.
Initial borrowings under the 364-day Facility were used to finance the acquisition of certain of
the Allied Assets and to repay our prior senior credit facility in full. The 364-day Facility bore
interest at 9.0% per annum and was repaid in April 2004 with the proceeds of the Credit Facilities,
Subordinated Notes and an equity private placement. F-24




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) The aggregate annual principal repayments required in respect to debt as of December 31, 2004
are as follows: Amount2005
    
    $
    1,1662006
    
    
    1,1772007
    
    
    1,1902008
    
    
    1,2032009
    
    
    16,217Thereafter
    
    
    256,427Total
    
    $
    277,380
 11. Cumulative Mandatorily Redeemable Preferred Shares In May 2003, we issued 55,000 shares of redeemable Preferred Stock (the Preferred Stock) to
Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively Kelso), pursuant to the terms
of an agreement dated as of May 6, 2003, as amended in February 2004, (the Subscription
Agreement), at a price of $1,000 per share. We also issued to Kelso 7,150,000 warrants to purchase
shares of our common stock (on a one-for-one basis) for $3.00 per share. The warrants are
exercisable at any time until May 6, 2010. The issuance of the Preferred Stock resulted in proceeds
of approximately $49.5 million, net of fees of approximately $5.5 million. The shares of Preferred
Stock are non-voting. The Preferred Stock entitles the holders to cash dividends of 17.75% per
annum compounding and accruing quarterly in arrears. The liquidation preference approximated $73.4
million as of December 30, 2004. The Preferred Stock entitles the holders to a liquidation
preference of $1,000 per share, adjusted for any stock dividend, stock split, reclassification,
recapitalization, consolidation or similar event affecting the Preferred Stock, plus the amount of
any accrued but unpaid dividends on such share as of any date of determination. As we are not permitted to declare and pay cash dividends pursuant to the terms of our Credit
Facilities, the dividend payments will accrue. The Preferred Stock, including all accrued and
unpaid dividends, must be redeemed in full by no later than May 6, 2015. Until May 6, 2006, we may
redeem all or any part of the Preferred Stock on payment of the sum of $1,000 per share plus
accrued and unpaid dividends calculated as if the Preferred Stock were redeemed on May 6, 2006, or
approximately $92.7 million subject to the restrictions in our Credit Facility and our Senior
Subordinated Notes. If we do not exercise our option to redeem all of the Preferred Stock by May 6,
2009, Kelso may require us to initiate a sale of our assets on terms acceptable to our board
consistent with the exercise of their fiduciary duties. Pursuant to an amendment to the Certificate
of Designations of Waste Services dated April 30, 2004, if we determine, after conducting a sale
process, that any such sale would not yield sufficient proceeds to repay in full the indebtedness
then outstanding under our Credit Facilities and the redemption amount of our Subordinated Notes
issued on April 30, 2004, or at least $320.0 million, then we may elect to delay such sale. The
sale date may be delayed until the earliest to occur of (i) the final maturity date of the
Subordinated Notes (April 15, 2014); (ii) the date on which our Credit Facilities and the
Subordinated Notes are fully repaid or otherwise satisfied or (iii) a sale of our assets to a third
party. We refer to this date as the delayed sale date. If we do not initiate and complete a sale of
our assets within 20 months of initiation of the sale process by the holders of the Preferred
Stock, then on notice from the holders of the Preferred Stock, all outstanding Preferred Stock will
become due and payable on the first anniversary of the date on which the holders of Preferred Stock
gave notice requiring the initiation of a sale process, for a liquidation amount of 1.20 times the
liquidation preference of $1,000 per share. If the sale day has been delayed, then we are not
required to pay this increased liquidation amount until the delayed sale date. Also pursuant to the Amended Certificate of Designations, if we become subject to a
liquidation or insolvency event (as such terms are defined in our Amended and Restated Credit
Agreement dated April 30, 2004) or in the event of a change of control (as such term is defined in
the Amended Certificate of
Designations), all payments and other distributions to holders of Preferred Stock will be
subordinate to the repayment in full of our Credit Facilities. This provision does not prohibit any
accrual or increase in the dividend rate or in the liquidation preference of the Preferred Stock as
provided for in the Amended Certificate of Designations, or the distribution of additional shares
or other equity securities to the holders of Preferred Stock, so long as such additional shares or
other equity securities are subject to at least equivalent subordination provisions. In addition,
the Amended Certificate of Designations prohibits us from making any payment or distribution to the
holders of Preferred Stock in the event of a sale of our assets, or the exercise by the holders of
the Preferred Stock of their right to require payment of the liquidation amount of their shares as
a result of the failure to consummate a sale of our assets as described in the preceding paragraph,
unless such payment or distribution is expressly permitted pursuant to the terms of the agreement
then governing our Credit Facilities. Due to its redeemable provisions we classified the Preferred Stock as a liability. We also
allocated the relative fair value of the proceeds to Preferred Stock and warrants. The 7,150,000
warrants have an allocated value on the date of issue of approximately $14.8 million. The value
allocated to the warrants was treated as a component of equity, with an offsetting amount treated
as a discount F-25




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) which will accrete to interest expense using the effective interest method over the life of the
Preferred Stock which is the earliest redemption date of May 6, 2006. 12. Commitments and Contingencies Leases The following is a schedule of future minimum lease payments as of December 31, 2004: Operating
    
    
    CapitalLeases
    
    
    Leases
    
    
    Total2005
    
    $
    5,081
    
    
    $
    1,341
    
    
    $
    6,4222006
    
    
    4,674
    
    
    
    630
    
    
    
    5,3042007
    
    
    4,033
    
    
    
    459
    
    
    
    4,4922008
    
    
    3,510
    
    
    
    
    
    
    
    3,5102009
    
    
    2,594
    
    
    
    
    
    
    
    2,594Thereafter
    
    
    9,669
    
    
    
    
    
    
    
    9,669$
    29,561
    
    
    
    2,430
    
    
    $
    31,991Less: amount representing interest
    
    
    
    
    
    
    (1,447
    )983Less: current portion of capital lease
obligations
    
    
    
    
    
    
    567Long-term capital lease obligations
    
    
    
    
    
    $
    416
 We have entered into operating lease agreements, primarily consisting of leases for our
various facilities. Total rent expense, under operating leases charged to operations, was
approximately $4.0 million for the year ended December 31, 2004 (2003  $2.2 million; 2002  $1.8
million). We lease certain heavy equipment and hauling vehicles under capital lease agreements. The
assets related to these leases have been capitalized and are included in property and equipment. Surety Bonds and Letters of Credit Municipal solid waste services contracts, permits and licenses to operate transfer stations,
landfills and recycling facilities may require performance or surety bonds, letters of credit or
other means of financial
assurance to secure contractual performance. As of December 31, 2004, we have provided
customers and various regulatory authorities with such bonds and letters of credit amounting to
approximately $67.7 million (2003  $19.6 million) to collateralize its obligations. The royalty of
these obligations expire over the next year and will need to be renewed. Environmental Risks We are subject to liability for environmental damage that its solid waste facilities may
cause, including damage to neighboring landowners or residents, particularly as a result of the
contamination of soil, groundwater or surface water, including damage resulting from conditions
existing prior to the acquisition of such facilities. Pollutants or hazardous substances whose
transportation, treatment or disposal was arranged by us or our predecessors, may also subject us
to liability for any off-site environmental contamination caused by these pollutants or hazardous
substances. Any substantial liability for environmental damage incurred by us could have a material
adverse effect on our financial condition, results of operations or cash flows. As of the date of
these Consolidated Financial Statements, we estimate the range of reasonably possible loss related
to environmental matters to be insignificant and is not aware of any such environmental liabilities
that would be material to us operations or financial condition. Disposal Agreement On November 22, 2002, we entered into a Put or Pay Disposal Agreement, or the Disposal
Agreement, with RCI Environment Inc., Centres de Transbordement et de Valorisation Nord Sud Inc.,
RCM Environment Inc., collectively the RCI Companies, and Intersan Inc., or Intersan, a
subsidiary of Canadian Waste Services Inc., pursuant to which we, together with the RCI Companies,
agreed to deliver to certain of Intersans landfill sites and transfer stations in Quebec, Canada,
over the next 5 years, 850,000 metric tonnes of waste per year, and for the next 2 years after the
expiration of the first 5 year term, 710,000 metric tonnes of waste per year F-26




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) at a fixed disposal rate set out in the Disposal Agreement. If we and the RCI Companies fail to
deliver the required tonnage, we are jointly and severally required to pay to Intersan, C$23.67
per metric tonne for every tonne below the required tonnage. If a portion of the annual tonnage
commitment is not delivered to a specific site we are also required to pay C$8.00 per metric tonne
for every tonne below the site specific allocation. Our obligations to Intersan are secured by a
letter of credit for C$4.0 million. We do not anticipate material future payments under the
Disposal Agreement and accordingly, have not provided for a liability pursuant to this agreement as
of December 31, 2004, or 2003. The companies within the RCI Group are controlled by a director of
ours and/or individuals related to that director. Concurrently with the Disposal Agreement, we entered into a three-year agreement with Canadian
Waste Services, Inc. to allow us to deliver up to 75,000 tons in year one and up to 100,000 tons in
years two and three of non-hazardous solid waste to their landfill in Michigan at negotiated fixed
rates per ton. Collective Bargaining Agreements As of December 31, 2004, approximately 37% of our employees were subject to various collective
bargaining agreements. Currently, there are no significant grievances with regards to these
agreements. Legal Proceedings In the normal course of our business and as a result of the extensive governmental regulation
of the solid waste industry, we may periodically become subject to various judicial and
administrative proceedings involving federal, provincial, state or local agencies. In these
proceedings, an agency may seek
to impose fines on us or revoke or deny renewal of an operating permit or license held by us.
From time to time, we may also be subject to actions brought by citizens groups, adjacent
landowners or residents in connection with the permitting and licensing of transfer stations and
landfills or allegations related to environmental damage or violations of the permits and licenses
pursuant to which we operate. In addition, we may become party to various claims and suits for
alleged damages to persons and property, alleged violations of certain laws and alleged liabilities
arising out of matters occurring during the normal operation of a waste management business. In December 2002, Canadian Waste Services Inc., or Canadian Waste, one of our competitors,
commenced an action in the Court of Queens Bench of Alberta against us and one of our employees in
Western Canada who had previously been employed by Canadian Waste. The action alleges breach of the
employment contract between the employee and Canadian Waste, and breach of fiduciary duties. The
action also alleges that we participated in those alleged breaches. The action seeks damages in the
amount of approximately C$14.5 million, and an injunction enjoining the employee from acting
contrary to his alleged employment contract and fiduciary duties. On February 7, 2003, Canadian Waste commenced an action in the Court of Queens Bench of
Alberta against us alleging breach of a landfill tipping agreement that we had entered into with
Canadian Waste. The action alleges that we have breached the agreement by not paying certain
amounts invoiced to us by Canadian Waste relating to increased costs incurred by Canadian Waste in
its operation of the Ryley landfill and at which we deposited certain quantities of waste pursuant
to the agreement. Canadian Waste seeks damages in the amount of approximately C$1.3 million. The
agreement contains an arbitration clause that prohibits court action and requires arbitration with
respect to certain disputes. In the District Court of Harris County, Texas, Waste Management, Inc. filed a suit against our
President and Chief Operating Officer, Charles A. Wilcox, for breach of contract, including breach
of a non-competition agreement, and for a temporary and a permanent injunction. Mr. Wilcox is
presently subject to a temporary order restraining him from engaging in certain activities adverse
to the interests of Waste Management, Inc. Mr. Wilcox intends to vigorously defend this action. We
intend to vigorously defend these actions both with respect to
liability and damages. No provision has been made in these financial
statements for the above matters. We do not believe that the possible
losses in respect of all or any of these matters would have a
material adverse impact on our business, financial condition, results
of operations or cash flows. In March 2005, we filed a Complaint against Waste Management, Inc. in the United States
District Court in the Middle District of Florida (Orlando). The Complaint alleges that Waste
Management sought to prevent us from establishing ourselves as an effective competitor to Waste
Management in the State of Florida, by tortuously interfering with our business relationships and
committing antitrust violations under both federal and Florida law.
We are seeking in excess of $25.0 million
in damages against Waste Management. If we are successful in our suit under antitrust laws, Waste
Management would be liable for treble damages or in excess of $75.0 million. F-27




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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) 13. Capital Stock Migration Transaction As part of our business strategy to expand into the United States, we entered into a migration
transaction effective July 31, 2004. Under the migration transaction, our corporate structure was
reorganized so that Waste Services became the ultimate parent company of our corporate group. Prior
to the migration transaction, we were a subsidiary of Capital, a company amalgamated under the laws
of the Province of Ontario, Canada. After the migration transaction, Capital became a subsidiary of
Waste Services, Inc. The migration transaction occurred by way of a plan of arrangement under the Business
Corporations Act (Ontario) and consisted primarily of: (1) the exchange of 87,657,035 Common Shares
of Capital for 87,657,035 shares of our common stock; and (2) the conversion of the remaining
9,229,676 Common Shares of Capital held by non-US residents who elected to receive exchangeable
shares into 9,229,676 exchangeable shares of Capital (now Waste Services (CA) Inc.). The
transaction was approved by the Ontario Superior Court of Justice on July 30, 2004 and by our
shareholders at a special meeting held on July 27, 2004. The terms of the exchangeable shares of Capital are the economic and functional equivalent of our
common stock. Holders of exchangeable shares (1) will receive the same dividends as holders of
shares of our common stock and (2) will be entitled to vote on the same matters as holders of
shares of our common stock. Such voting is accomplished through the one (1) share of Special Voting
Preferred Stock held by Computershare Trust Company of Canada as trustee, who will vote on the
instructions of the holders of the exchangeable shares (one vote for
each exchangeable share). As such, the exchangeable shares are
classified as part of our equity. Upon the occurrence of certain events, such as the liquidation of Capital, or after the
redemption date, our Canadian holding company, Capital Holdings will have the right to purchase
each exchangeable share for a share of our common stock, plus all declared and unpaid dividends on
the exchangeable share. Unless certain events occur, such redemption date will not be earlier than
December 31, 2016. Holders of exchangeable shares also have the right at any anytime at their
option, to exchange their exchangeable shares for shares of our common stock. Equity Placement On April 30, 2004, we raised approximately $50.7 million, after deducting expenses of
approximately $2.9 million, from the sale of 13,400,000 Common Shares and warrants to purchase
1,340,000 Common Shares of Capital in private placement transactions to certain investors. Sanders
Morris Harris Inc. acted as the placement agent for the issuance and was paid a placement agent fee
of approximately $2.7 million. Don A. Sanders, a director of ours at the time of such issuance, is
a principal of Sanders Morris Harris Inc. On
March 4, 2005, we exercised our put rights under our standby purchase agreement with
Michael DeGroote, thereby requiring Mr. DeGroote to purchase shares of our common stock for $7.5
million on or before March 28, 2005. Pursuant to the standby purchase agreement, the price per
share will be equal to 85% of the average closing price of our common stock for the ten trading
days ending on the second trading day preceding the closing of the transaction. Mr. DeGroote will
also receive warrants to purchase our common stock equal to 10% of the shares issued with an
exercise price equal to the purchase of the Common Shares. Upon closing the transaction, Mr.
DeGroote will receive a $375,000 commitment fee, which is in
addition to the $375,000 fee he received upon execution of the
standby purchase agreement. This equity infusion was required as a
condition to our amended credit facility. Series 1 Preferred Shares During 2003 and 2002, we completed several private offerings of its Series 1 Preferred Shares,
which were converted to Common Shares. The Series 1 Preferred Shares were non-voting and were not
entitled to receive any dividends declared by us. The following table sets forth the varied
tranches of Series 1 Preferred Shares issued during 2003 (amounts in thousands except share and per
share amounts): F-28




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) Series 1 Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrant ExercisePeriod
    
    Shares
    
    
    Price Per Share
    
    
    Gross Proceeds
    
    
    Net Proceeds
    
    
    Warrants Issued
    
    
    Price Per ShareMarch  June
    
    
    10,241,666
    
    
    $
    3.00
    
    
    $
    30,725
    
    
    $
    28,925
    
    
    
    2,048,333
    
    
    $
    3.00June(a)
    
    
    5,000,000
    
    
    $
    3.00
    
    
    
    15,000
    
    
    
    14,100
    
    
    
    1,000,000
    
    
    $
    3.00July(b)
    
    
    4,154,667
    
    
    $
    3.00
    
    
    
    12,464
    
    
    
    11,600
    
    
    
    830,933
    
    
    $
    3.00September(b)
    
    
    8,750,000
    
    
    $
    3.20
    
    
    
    28,000
    
    
    
    27,877
    
    
    
    1,575,000
    
    
    $
    3.2028,146,333
    
    
    
    
    
    
    $
    86,189
    
    
    $
    82,502
    (c)
    
    
    5,454,266
   (a)
    
    The proceeds from this issue were received and recorded as of June 25, 2003; the shares were issued July 8, 2003.(b)
    
    A shareholder and certain of our officers and directors and/or their affiliates, purchased 1,762,500 Series 1
Preferred Shares in these private placement transactions.(c)
    
    Separately, we recorded a tax asset of $1.3 million for the deductible portion of the fees paid. We accounted for the issuance of the Series 1 Preferred Shares as the issuance of three
differing securities: (i) Series 1 Preferred Shares convertible into Common Shares; (ii) warrants
exercisable for Common Shares; and (iii) a beneficial conversion feature embedded in the Series 1
Preferred Shares. The gross proceeds from the offerings were allocated based upon the relative fair
value of the Series 1 Preferred Shares on the commitment date (date of issue), and the warrants.
The fair value of the Common Shares at the commitment date was compared to the gross proceeds
allocated to the Series 1 Preferred Shares based upon their relative fair The excess of fair value of the Common Shares over the gross proceeds allocated to the Series
1 Preferred Shares was deemed to be the value associated with the beneficial conversion feature of
the Series 1 Preferred Shares and was recorded as a non-cash dividend on the Series 1 Preferred
Shares. Value ascribed to the beneficial conversion feature of the Series 1 Preferred Shares and
the allocated fair value of the warrants approximated $54.6 million for the year ended December 31,
2003, which was recognized as a deemed dividend to the Series 1 Preferred Shareholders. At our annual meeting held in December 2003, the shareholders approved the conversion of the
Series 1 Preferred Shares to Common Shares, thereby effecting the exchange on the basis of one
Common Share for each one Series 1 Preferred Share and the exercisability of the warrants that were
issued with the Series 1 Preferred Shares. On February 6, 2002, we completed a private placement sale to certain investors, including
some of our shareholders, directors and officers, of 11,320,754 Series 1 Preferred Shares at a
price of $2.65 per share, resulting in net proceeds to us of approximately $28.1 million. There
were no warrants issued relative to the 2002 Series 1 Preferred Shares. The closing market price of
our common stock, as reported by NASDAQ, on February 6, 2002 was $3.95 per share resulting in a
beneficial conversion feature of $1.30 per share or approximately $14.7 million, which was
recognized as a deemed dividend to the Series 1 Preferred Shareholders. Under the terms of the
Preferred Shares, the holders had agreed to hold a stockholders meeting to approve the conversion
and were required under contract to vote their Common Shares in favor of the conversion. As the
holders of the Preferred Shares represented the majority of the outstanding Common Shares of Waste
Services, the conversion of Preferred Shares was assumed at the time of their issuance. On March
27, 2002, the stockholders approved the conversion and all outstanding Series 1 Preferred Shares
were converted into Common Shares. Employee and Director Stock Option Plans and Option Grants Under the 1997 Stock Option Plan, we may grant options to acquire Common Shares up to a
maximum of 10% of the then issued and outstanding Common Shares on an as converted basis. All of
the options issued under the 1997 plan vested on completion of the initial public offering of our
securities. No options will remain exercisable later than five years after the grant date, unless
the Board of Directors determines otherwise. Under the 1999 Stock Option Plan, we may grant options to acquire Common Shares up to a
maximum of 19% of the
then issued and outstanding shares of Common Stock and Common Stock equivalents, including stock
options issued under the 1997 Stock Option Plan. Options granted to non-employee directors will
generally vest one year from the date of grant. Options granted to employees become exercisable
only after the second anniversary of the grant date, unless otherwise determined by the
Compensation Committee. No option will remain exercisable later than five years after the grant
date, unless the Compensation Committee determines otherwise. Upon a change of control event,
options become immediately exercisable. F-29




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) All options granted under the 1997 and 1999 Stock Option Plans have been granted at or above
market price. The weighted average exercise price of the aggregate outstanding options at December
31, 2004, was $4.91 (2003  $4.71; 2002  $4.18). The weighted average contractual life of the
options outstanding as at December 31, 2004, was 3.10 years (2003  4.24 years). As of December 31,
2004, the weighted average exercise price of options that were exercisable was $3.90 (2003  $5.07;
2002  $9.12). Certain of our options are priced in Canadian dollars and certain options are priced
in US dollars. Stock option activity, for employee options covered by the 1997 and 1999 Stock
Option Plans for the years ended December 31, 2004, 2003 and 2002 is as follows: 2004
    
    
    2003
    
    
    2002Options outstanding at beginning of the year
    
    
    7,806,699
    
    
    
    2,435,816
    
    
    
    1,871,713Options granted during the year
    
    
    5,472,000
    
    
    
    5,493,000
    
    
    
    1,065,500Options exercised during the year
    
    
    (192,500
    )
    
    
    (20,000
    )
    
    
    (85,388
    )Options forfeited during the year
    
    
    (433,235
    )
    
    
    (102,117
    )
    
    
    (416,009
    )Options outstanding at end of the year
    
    
    12,652,964
    
    
    
    7,806,699
    
    
    
    2,435,816Options exercisable at end of the year
    
    
    2,727,964
    
    
    
    1,790,699
    
    
    
    284,500Weighted average exercise price: (C$ Options In C$)Options granted
    
    $
    7.37
    
    
    $
    6.49
    
    
    $
    5.87Options exercised
    
    $
    5.22
    
    
    $
    4.05
    
    
    $
    7.22Options forfeited
    
    $
    8.33
    
    
    $
    9.47
    
    
    $
    10.94Options outstanding at end of the year
    
    $
    6.45
    
    
    $
    6.15
    
    
    $
    5.70Option price ranges: (C$ Options In C$)Options granted
    
    $
    3.23-8.40
    
    
    $
    5.25-7.28
    
    
    $
    4.95-9.20Options exercised
    
    $
    4.05-6.03
    
    
    $
    4.05
    
    
    $
    7.22Options forfeited
    
    $
    5.25-18.05
    
    
    $
    5.89-14.44
    
    
    $
    7.22-14.44Options outstanding at end of the year
    
    $
    3.23-18.05
    
    
    $
    4.05-18.05
    
    
    $
    4.05-18.05Weighted average exercise price: (US$ Options)Options granted
    
    $
    4.82
    
    
    $
    4.49
    
    
    $
    3.37Options exercised
    
    $
    3.73
    
    
    $
    
    
    
    $
    3.39Options forfeited
    
    $
    7.42
    
    
    $
    6.34
    
    
    $
    7.50Options outstanding at end of the year
    
    $
    4.61
    
    
    $
    4.55
    
    
    $
    5.97Option price ranges: (US$ Options)Options granted
    
    $
    2.70-6.25
    
    
    $
    3.89-5.52
    
    
    $
    3.12-4.15Options exercised
    
    $
    3.46-4.15
    
    
    $
    
    
    
    $
    2.43-4.00Options forfeited
    
    $
    3.89-12.00
    
    
    $
    4.00-12.00
    
    
    $
    4.00-14.50Options outstanding at end of the year
    
    $
    2.70-6.25
    
    
    $
    3.12-12.00
    
    
    $
    3.12-14.44
 14. Income Taxes The income tax provision (benefit) for the years ended December 31, 2004, 2003 and 2002
consists of the following: 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Canada
    
    
    369
    
    
    
    403
    
    
    
    2,177Current
income tax provision
    
    
    369
    
    
    
    403
    
    
    
    2,177Federal and state deferred
    
    
    3,984
    
    
    
    
    
    
    
    Foreign deferred
    
    
    3,234
    
    
    
    (990
    )
    
    
    (464
    )Deferred
income tax provision (benefit)
    
    
    7,218
    
    
    
    (990
    )
    
    
    (464
    )Provision (benefit) for income taxes
    
    $
    7,587
    
    
    $
    (587
    )
    
    $
    1,713
 Pre-tax
income (loss) from our U.S. operations was $(48.6) million, $(17.3) million and
nil for the years ended December 31, 2004, 2003, 2002, respectively. Pre-tax income (loss) from
our Canadian operations was $7.8 million, $(6.1) million and $3.8 million for the years ended
December 31, 2004, 2003, 2002, respectively. F-30




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##### Table of Contents



WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) As
discussed in Note 13, pursuant to the migration transaction we
reorganized from a Canadian company to a U.S. company in 2004.
Accordingly, for the following reconciliation, statutory rates are
based upon U.S. federal income tax rates in 2004 and Canadian federal
and provincial rates in 2003 and 2002. The reconciliation of the difference between income taxes at the statutory rate and the income
tax provision (benefit) before cumulative effect of change in accounting principle for the years
ended December 31, 2004, 2003 and 2002 is as follows: 2004
    
    
    2003
    
    
    2002Provision at statutory rate
    
    $
    (14,277
    )
    
    $
    (8,675
    )
    
    $
    1,482State, net of federal benefit
    
    
    499
    
    
    
    
    
    
    
    Effect of change in enacted rates on deferred taxes
    
    
    
    
    
    
    (478
    )
    
    
    96Non-deductible warrant expense
    
    
    514
    
    
    
    903
    
    
    
    404Non-deductible interest expense and preferred stock dividends
    
    
    6,921
    
    
    
    3,790
    
    
    
    59Non-deductible foreign exchange (gains) and loss
    
    
    (16
    )
    
    
    366
    
    
    
    (558
    )Other permanent differences
    
    
    (601
    )
    
    
    509
    
    
    
    13Undistributed earnings in foreign subsidiary
    
    
    1,866
    
    
    
    
    
    
    
    Valuation allowance
    
    
    12,412
    
    
    
    2,641
    
    
    
    Large corporations tax
    
    
    269
    
    
    
    357
    
    
    
    217Income tax provision (benefit)
    
    $
    7,587
    
    
    $
    (587
    )
    
    $
    1,713
 The income tax provision
of $0.1 and $0.3 million for December 31, 2004 and 2003,
respectively, related to the cumulative effect of change in accounting principle and was provided at
statutory rates. Significant components of our deferred income tax assets and liabilities as of
December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Deferred income tax assets:Tax loss carry forward  United States
    
    $
    15,955
    
    
    $
    2,641Tax loss carry forward  Canada
    
    
    10,602
    
    
    
    11,392Accruals not currently deductibles  United States
    
    
    1,753
    
    
    
    Less: Valuation allowance  United States
    
    
    (15,842
    )
    
    
    (2,641
    )Net deferred tax assets
    
    
    12,468
    
    
    
    11,392Deferred income tax liabilities:Book basis
in property and goodwill in excess of tax basis  United States
    
    
    (3,984
    )
    
    
    Book basis in property in excess of tax basis  Canada
    
    
    (9,400
    )
    
    
    (7,665
    )Undistributed earnings in foreign subsidiary  United States
    
    
    (1,866
    )
    
    
    Net deferred income tax asset (liability)
    
    
    (2,782
    )
    
    
    3,727Less: current portion of deferred taxes
    
    
    
    
    
    
    (2,592
    )Net deferred income tax asset (liability)
long-term
    
    $
    (2,782
    )
    
    $
    1,135
 Due to the lack of
operating history relative to our US operations, we have provided a
valuation allowance for our US net operating loss carryforwards and deferred tax assets, net of certain deferred
tax liabilities. We have provided deferred
taxes on the undistributed earnings of our Canadian Subsidiary as it
is likely such earnings will be recognized as taxable income
domestically in connection with certain non-recurring tax planning
initiatives related to our migration transaction. Gross net operating loss carry-forwards expire as follows: US
    
    
    Canada
    
    
    Total2005
    
    $
    
    
    
    $
    
    
    
    $
    2006
    
    
    
    
    
    
    
    
    
    
    2007
    
    
    
    
    
    
    
    
    
    
    2008
    
    
    
    
    
    
    8,451
    
    
    
    8,4512009
    
    
    
    
    
    
    11,893
    
    
    
    11,893Thereafter
    
    
    45,586
    
    
    
    9,405
    
    
    
    54,991Total net operating loss carryforwards
    
    $
    45,586
    
    
    $
    29,749
    
    
    $
    75,335
 For tax purposes, generally goodwill acquired as a result an asset-based United States
acquisition is deducted over a 15-year period and 75% of goodwill acquired in an asset-based
Canadian acquisition is deducted based on a seven-percent declining balance. F-31




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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) The changes to the deferred tax valuation allowance for the years ended December 31, 2004,
2003 and 2002 are as follows: 2004
    
    
    2003
    
    
    2002Balance at beginning of the year
    
    $
    2,641
    
    
    $
    
    
    
    $
    6,981Additions to valuation allowance
    
    
    12,412
    
    
    
    2,641
    
    
    
    593Reversal related to acquisitions
    
    
    
    
    
    
    
    
    
    
    (5,074
    )Adjustments to valuation
allowance
    
    
    789
    
    
    
    
    
    
    
    (2,500
    )Balance at end of the year
    
    $
    15,842
    
    
    $
    2,641
    
    
    $
    
 15. Net Loss Per Share Information The following table sets forth the calculation of the numerator and denominator used in the
computation of basic and diluted net loss per share for the years ended December 31, 2004, 2003 and
2002: 2004
    
    
    2003
    
    
    2002Numerator:Net loss attributable to common shareholders
    
    $
    (48,154
    )
    
    $
    (76,952
    )
    
    $
    (12,590
    )Denominator:Basic and diluted pro forma weighted average
number of common shares outstanding
    
    
    88,232
    
    
    
    38,782
    
    
    
    32,414Antidilutive securities not included in the diluted
earnings per share calculation:Series 1 Preferred Shares
    
    
    
    
    
    
    13,582
    
    
    
    1,520Options to purchase Common Shares
    
    
    299
    
    
    
    707
    
    
    
    450Warrants to purchase Common Shares
    
    
    2,189
    
    
    
    3,189
    
    
    
    437
 16. Retirement Plan We sponsor a defined contribution Deferred Profit Sharing Plan, or DPSP, for our Canadian
domiciled employees. Eligible employees may contribute pre-tax compensation to a Registered
Retirement Savings Plan, subject to certain governmental limits and restrictions. We matched 100%
of the employee contributions, up to the first 3% of the employees compensation which is deferred.
Participant
contributions vest immediately and employer contributions vest after two years of employment.
During 2004, the matched contributions totaled approximately $0.2 million (2003  $0.3 million;
2002  $0.2 million). During 2004, we established a 40l(k) Plan for employees located in the United States. The
domestic plan provides for employees to contribute up to fifty percent of their eligible
compensation, subject to certain IRS limits. We match fifty percent of the employee
contributions, up to the first 6% of the employees contribution. Participant contributions vest
immediately and employer contributions vest after two years of employment. During 2004, we matched
contributions totaling approximately $0.2 million 17. Segment Information We have determined our operating and reporting segments pursuant to the requirements of SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information. In making this
determination, we considered its organization/reporting structure and the information used by our
chief operating decision makers to make decisions about resource allocation and performance
assessment. We are organized along geographic locations or regions within the U.S. and Canada. Our
Canadian operations are organized between two regions, Eastern and Western Canada while the U.S. is
organized into Florida (North, Central, Gulf), Texas and Arizona. We believe our domestic U.S. and
our Canadian geographic segments meet the Aggregation Criteria set forth in SFAS 131 for the
following reasons: (i) the nature of the service, waste collection and disposal, is economically
the same and transferable across locations; (ii) the type and class of customer is consistent among
regions/districts; (iii) the methods used to deliver services are essentially the same (e.g.
containers collect waste at market locations and trucks collect and transfer waste to landfills);
and (iv) the regulatory environment is consistent within Canada and the U.S., respectively. We operated exclusively in Canada during 2002. We re-entered the United States in May 2003 with the
acquisition of the JED Landfill in Osceola County, Florida. We do not have significant (in volume
or dollars) inter-segment operation-related transactions. F-32




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) For further information regarding our segments see Note 21. 18. Related Party Transactions During 2004, David Sutherland-Yoest, our Chairman and Chief Executive Officer, used the
services of an aircraft owned by Gary W. DeGroote at a total cost of C$0.2 million. This amount
was based upon the fixed and operating expenses of the aircraft. During 2004, David Sutherland-Yoest, our Chairman and Chief Executive Officer, conducted
ongoing negotiations with Lucien Remillard with respect to the potential acquisition by Waste
Services of the solid waste collection and disposal assets owned by Mr. Remillard in Quebec. In
connection with these negotiations, Waste Services has reimbursed Mr Remillards company for
expenses in the aggregate amount of approximately C$2.2 million for services provided by third
parties to December 31, 2004 in connection with preparing audited financial statements of the
business and with ongoing efforts to expand the capacity of a solid waste landfill. There is no
assurance that an acquisition of the business will be completed and, if not, Waste Services will
not be reimbursed for the expenses it has incurred. During 2004, Waste Services entered into a lease of office premises in an office tower in
Burlington, Ontario owned by Westbury International 1991 Corporation, a property development
company controlled by Michael H. DeGroote, a brother of Gary W.
DeGroote, one of our directors. The leased premises consist
of approximately 9,255 square feet. The term of the lease is 10.5 years, with a right to extend
for a further five years. Base rent escalates from Cdn. $0.1 million to Cdn.$0.2 million per year
in increments over the term of the lease. We paid Kelso and Company, L.P., an affiliate of Kelso, an advisory services fee of $1.65
million in connection with the issuance of 55,000 shares of WSI Preferred Stock to Kelso in May
2003. In February
2004, we also paid Kelso and Company, L.P., a $0.5 million fee in connection with services
related to the arrangement of the 364-Day Credit facilities that was entered into on December 31,
2003 and repaid in full on April 30, 2004. Two of our directors, George E. Matelich and Michael B.
Lazar are Managing Directors of Kelso & Company L.P. Effective March 31, 2003, we entered into a placement agent agreement with Sanders Morris
Harris Inc., or SMH, pursuant to which we agreed to pay SMH a fee for Series 1 preferred shares
sold through SMH. To date, we have paid SMH fees of $1.9 million pursuant to the agreement. SMH is
a beneficial owner of our Common Shares. However, effective July 31, 2004 Don Sanders, a principal
of SMH, is no longer one of the our directors. During 2003, we purchased legal services for less than $0.1 million from Durkin and Durkin. A
former executive officer, Thomas E. Durkin III, is an inactive partner in Durkin and Durkin. In 2003, we purchased furnishings and leasehold improvements from H(2)O
Technologies, Ltd. for $0.3 million and assumed a lease of premises from David Sutherland-Yoest.
David Sutherland-Yoest, our Chairman and Chief Executive Officer was, until October of 2003,
Chairman and Chief Executive Officer of H(2)O Technologies, Ltd. and until January 2004,
was a director of H(2)O Technologies, Ltd. The lease expires on March 31, 2005 with
annual rent and operating costs of less than $0.1 million. Certain affiliates of our officers and directors were purchasers of Series 1 Preferred Shares
in September 2003. An independent committee consisting of David Sutherland-Yoest and George E.
Matelich reviewed and approved the terms of issuance of the
Series 1 Preferred Shares in which the shareholder, officers and directors or their affiliates were
purchasers. In November of 2002, we entered into a Put or Pay Disposal agreement with the RCI Companies
which are controlled by one of our directors, Mr. Lucien Rémillard. Concurrently with the Put or
Pay Disposal Agreement, we entered into a disposal agreement with Canadian Waste Services Inc.
which provides us with access to Canadian Wastes Michigan landfill at negotiated fixed rates per
ton. During the year ended December 31, 2002, we paid fees for financial advisory services to SMH
of approximately $1.3 million. During the year ended December 31, 2002, we also purchased legal
services for approximately $125,000 from a law firm of which an executive officer of ours is an
inactive partner. During the year ended December 31, 2002, we
paid a director $30,000 for certain
services rendered. These transactions are in the normal course of operations and are recorded at the exchange
amount, which is the consideration agreed to between the respective parties. F-33




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) 19. Supplementary Cash Flow Information Supplemental non-cash financing activities during the years ended December 31, 2004, 2003 and
2002 are as follows: 2004
    
    
    2003
    
    
    2002Financing activities:Beneficial conversion feature of Series 1 Preferred
Shares
    
    $
    
    
    
    $
    54,572
    
    
    $
    14,717Common Shares issued on acquisition
    
    
    88,078
    
    
    
    18,382
    
    
    
    Common Shares issued on deposit for acquisition
    
    
    
    
    
    
    6,430
    
    
    
    Assets acquired under capital leases
    
    
    
    
    
    
    
    
    
    
    1,786
 Other cash flow information: 2004
    
    
    2003
    
    
    2002Cash paid for interest
    
    $
    15,782
    
    
    $
    5,147
    
    
    $
    3,766Cash paid for income taxes
    
    
    341
    
    
    
    1,220
    
    
    
    2,085
 20. Selected Quarterly Financial Data (unaudited) The following table summarizes the unaudited quarterly results of operations as reported for
2004 and 2003 (in thousands of US dollars, except per share amounts): (See also our note on
Business Combinations Note 3) 2004First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterRevenue
    
    $
    50,317
    
    
    $
    72,626
    
    
    $
    94,615
    
    
    $
    93,227Income from operations
    
    
    205
    
    
    
    871
    
    
    
    5,660
    
    
    
    781Net loss before cumulative effect of change in
accounting principal
    
    
    (10,959
    )
    
    
    (18,615
    )
    
    
    (5,719
    )
    
    
    (13,086
    )Cumulative effect of change in accounting principle
    
    
    225
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    (10,734
    )
    
    
    (18,615
    )
    
    
    (5,719
    )
    
    
    (13,086
    )Basic and diluted loss per share before cumulative
effect of change in accounting principle
    
    $
    (0.15
    )
    
    $
    (0.21
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic and diluted loss per share
    
    $
    (0.15
    )
    
    $
    (0.21
    )
    
    $
    (0.06
    )
    
    $
    (0.14
    )Shares used in computing per share amounts
    
    
    70,583
    
    
    
    88,855
    
    
    
    96,854
    
    
    
    96,418
 2003First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterRevenue
    
    $
    25,280
    
    
    $
    31,282
    
    
    $
    34,748
    
    
    $
    35,440Income (loss) from operations
    
    
    1,064
    
    
    
    (18
    )
    
    
    (841
    )
    
    
    (5,251
    )Net loss before cumulative effect of change in
accounting principal
    
    
    (299
    )
    
    
    (3,506
    )
    
    
    (7,121
    )
    
    
    (11,972
    )Cumulative effect of change in accounting principle
    
    
    518
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    219
    
    
    
    (3,506
    )
    
    
    (7,121
    )
    
    
    (11,972
    )Net loss attributable to Common Shareholders
    
    
    (8,313
    )
    
    
    (15,995
    )
    
    
    (40,672
    )
    
    
    (11,972
    )Basic and diluted loss per share before cumulative
effect of change in accounting principle
    
    $
    (0.25
    )
    
    $
    (0.42
    )
    
    $
    (1.06
    )
    
    $
    (0.28
    )Cumulative effect of change in accounting principle
    
    
    0.01
    
    
    
    
    
    
    
    
    
    
    
    Basic and diluted loss per share
    
    $
    (0.24
    )
    
    $
    (0.42
    )
    
    $
    (1.06
    )
    
    $
    (0.28
    )Shares used in computing per share amounts
    
    
    35,195
    
    
    
    37,865
    
    
    
    38,447
    
    
    
    43,531
 F-34




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) 21. Condensed Consolidating Financial Statements of Waste Services Inc. Waste Services, our Parent company, is the primary obligor under the Subordinated Notes,
however our Parent has no independent assets or operations and the guarantees of the domestic
restricted subsidiaries are full and unconditional and joint and several with respect to the Senior Subordinated Notes, including principal, interest, premium, if
any, and liquidated damages, if any. Our Canadian operations are not guarantors under the Senior
Subordinated Notes. We operated exclusively in Canada during 2002 and as such, there were no
domestic guarantor financial statements for 2002 historical period. Presented below are Consolidating Balance Sheets as of December 31, 2004 and December 31, 2003
and the related Condensed Consolidating Statements of Operations and Cash Flows for the years then
ended of Waste Service Inc. and the guarantor subsidiaries, our U.S.
operations, (Guarantors) and the subsidiaries
which are not guarantors, our Canadian operations, (Non-guarantors): December 31, 2004Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,223
    
    
    $
    2,284
    
    
    $
    
    
    
    $
    8,507Accounts receivable, net
    
    
    24,509
    
    
    
    23,347
    
    
    
    
    
    
    
    47,856Prepaid expenses and other current assets
    
    
    6,440
    
    
    
    4,500
    
    
    
    
    
    
    
    10,940Total current assets
    
    
    37,172
    
    
    
    30,131
    
    
    
    
    
    
    
    67,303Property and equipment, net
    
    
    64,805
    
    
    
    65,662
    
    
    
    
    
    
    
    130,467Landfill sites, net
    
    
    155,710
    
    
    
    13,906
    
    
    
    
    
    
    
    169,616Deferred income taxes, net
    
    
    
    
    
    
    1,202
    
    
    
    
    
    
    
    1,202Goodwill and other intangible assets, net
    
    
    240,578
    
    
    
    87,178
    
    
    
    
    
    
    
    327,756Other assets
    
    
    12,105
    
    
    
    12,134
    
    
    
    
    
    
    
    24,239Investment in subsidiary
    
    
    125,482
    
    
    
    
    
    
    
    (125,482
    )
    
    
    Total assets
    
    $
    635,852
    
    
    $
    210,213
    
    
    $
    (125,482
    )
    
    $
    720,583LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    15,757
    
    
    $
    10,192
    
    
    $
    
    
    
    $
    25,949Accrued expenses and other current liabilities
    
    
    31,104
    
    
    
    11,429
    
    
    
    
    
    
    
    42,533Short-term financing and current portion of long-term debt
    
    
    1,166
    
    
    
    
    
    
    
    
    
    
    
    1,166Total current
liabilities
    
    
    48,027
    
    
    
    21,621
    
    
    
    
    
    
    
    69,648Long-term debt
    
    
    276,214
    
    
    
    
    
    
    
    
    
    
    
    276,214Accrued closure, post-closure and other obligations
    
    
    5,628
    
    
    
    5,346
    
    
    
    
    
    
    
    10,974Cumulative mandatorily redeemable Preferred Stock, net
    
    
    64,971
    
    
    
    
    
    
    
    
    
    
    
    64,971Total liabilities
    
    
    394,840
    
    
    
    26,967
    
    
    
    
    
    
    
    421,807Shareholders equity:Common stock of Waste Services, Inc
    
    
    904
    
    
    
    
    
    
    
    
    
    
    
    904Additional paid-in capital
    
    
    322,400
    
    
    
    
    
    
    
    23,504
    
    
    
    345,904Treasury stock of Waste Services, Inc.
    
    
    (1,235
    )
    
    
    
    
    
    
    
    
    
    
    (1,235
    )Exchangeable shares of Waste Services (CA) Inc.
    
    
    
    
    
    
    33,022
    
    
    
    (33,022
    )
    
    
    Common stock of Waste Services (CA) Inc.
    
    
    
    
    
    
    115,964
    
    
    
    (115,964
    )
    
    
    Options, warrants and deferred stock-based compensation
    
    
    13,774
    
    
    
    14,508
    
    
    
    
    
    
    
    28,282Accumulated other comprehensive income
    
    
    
    
    
    
    29,133
    
    
    
    
    
    
    
    29,133Accumulated deficit
    
    
    (94,831
    )
    
    
    (9,381
    )
    
    
    
    
    
    
    (104,212
    )Total shareholders equity
    
    
    241,012
    
    
    
    183,246
    
    
    
    (125,482
    )
    
    
    298,776Total liabilities and shareholders
equity
    
    $
    635,852
    
    
    $
    210,213
    
    
    $
    (125,482
    )
    
    $
    720,583
 F-35




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) December 31, 2003Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,843
    
    
    $
    12,219
    
    
    $
    
    
    
    $
    21,062Restricted cash
    
    
    14,433
    
    
    
    
    
    
    
    
    
    
    
    14,433Accounts receivable, net
    
    
    6,557
    
    
    
    20,442
    
    
    
    
    
    
    
    26,999Prepaid expenses and other current assets
    
    
    10,015
    
    
    
    19,634
    
    
    
    
    
    
    
    29,649Total current assets
    
    
    39,848
    
    
    
    52,295
    
    
    
    
    
    
    
    92,143Property and equipment, net
    
    
    13,948
    
    
    
    60,573
    
    
    
    
    
    
    
    74,521Landfill sites, net
    
    
    101,356
    
    
    
    16,185
    
    
    
    
    
    
    
    117,541Deferred income taxes, net
    
    
    
    
    
    
    1,135
    
    
    
    
    
    
    
    1,135Goodwill and other intangible assets, net
    
    
    82,118
    
    
    
    81,262
    
    
    
    
    
    
    
    163,380Other assets
    
    
    2,096
    
    
    
    20,182
    
    
    
    
    
    
    
    22,278Due to (from) affiliates
    
    
    
    
    
    
    16,758
    
    
    
    (16,758
    )
    
    
    Investment in subsidiaries
    
    
    
    
    
    
    8,747
    
    
    
    (8,747
    )
    
    
    Total assets
    
    $
    239,366
    
    
    $
    257,137
    
    
    $
    (25,505
    )
    
    $
    470,998LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,282
    
    
    $
    6,792
    
    
    $
    
    
    
    $
    12,074Accrued expenses and other current liabilities
    
    
    9,813
    
    
    
    15,588
    
    
    
    
    
    
    
    25,401Short-term financing and current portion of long-term debt
    
    
    172,280
    
    
    
    
    
    
    
    
    
    
    
    172,280Total current liabilities
    
    
    187,375
    
    
    
    22,380
    
    
    
    
    
    
    
    209,755Long-term debt
    
    
    3,130
    
    
    
    
    
    
    
    
    
    
    
    3,130Accrued closure, post-closure and other obligations
    
    
    1,483
    
    
    
    7,308
    
    
    
    
    
    
    
    8,791Cumulative mandatorily redeemable Preferred Stock, net
    
    
    48,205
    
    
    
    
    
    
    
    
    
    
    
    48,205Due to affiliates
    
    
    16,758
    
    
    
    
    
    
    
    (16,758
    )
    
    
    Total liabilities
    
    
    256,951
    
    
    
    29,688
    
    
    
    (16,758
    )
    
    
    269,881Shareholders equity:Common stock of Waste Services (CA) Inc
    
    
    
    
    
    
    215,395
    
    
    
    
    
    
    
    215,395Contributed capital
    
    
    8,747
    
    
    
    
    
    
    
    (8,747
    )
    
    
    Options, warrants and deferred stock-based compensation
    
    
    13,774
    
    
    
    12,054
    
    
    
    
    
    
    
    25,828Accumulated other comprehensive income
    
    
    
    
    
    
    15,952
    
    
    
    
    
    
    
    15,952Accumulated deficit
    
    
    (40,106
    )
    
    
    (15,952)
    
    
    
    
    
    
    
    (56,058
    )Total shareholders equity
    
    
    (17,585
    )
    
    
    227,449
    
    
    
    (8,747
    )
    
    
    201,117Total liabilities and shareholders equity
    
    $
    239,366
    
    
    $
    257,137
    
    
    $
    (25,505
    )
    
    $
    470,998
 F-36




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) December 31, 2004Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    168,067
    
    
    $
    142,718
    
    
    $
    
    
    
    $
    310,785Operating and other expenses:Cost of operations (exclusive of depreciation and amortization)
    
    
    123,534
    
    
    
    96,366
    
    
    
    
    
    
    
    219,900Selling, general and administrative expense
(exclusive of stock-based compensation)
    
    
    33,166
    
    
    
    22,361
    
    
    
    
    
    
    
    55,527Stock-based compensation expense (benefit)
    
    
    26
    
    
    
    (116
    )
    
    
    
    
    
    
    (90
    )Severance and other related costs
    
    
    2,563
    
    
    
    176
    
    
    
    
    
    
    
    2,739Settlement with sellers of Florida Recycling
    
    
    (8,635
    )
    
    
    
    
    
    
    
    
    
    
    (8,635
    )Depreciation, depletion and amortization
    
    
    17,888
    
    
    
    16,316
    
    
    
    
    
    
    
    34,204Foreign exchange gain and other
    
    
    
    
    
    
    (377
    )
    
    
    
    
    
    
    (377
    )Equity loss
(earnings) in investees
    
    
    (3,151
    )
    
    
    39,082
    
    
    
    (35,931
    )
    
    
    Income (loss) from operations
    
    
    2,676
    
    
    
    (31,090
    )
    
    
    35,931
    
    
    
    7,517Interest expense
    
    
    30,517
    
    
    
    321
    
    
    
    
    
    
    
    30,838Changes in fair value of warrants
    
    
    
    
    
    
    (111
    )
    
    
    
    
    
    
    (111
    )Cumulative mandatorily redeemable preferred stock dividends and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    amortization of issue costs
    
    
    17,582
    
    
    
    
    
    
    
    
    
    
    
    17,582Loss before income taxes
    
    
    (45,423
    )
    
    
    (31,300
    )
    
    
    35,931
    
    
    
    (40,792
    )Income tax provision
    
    
    3,983
    
    
    
    3,604
    
    
    
    
    
    
    
    7,587Loss before cumulative effect of change in accounting principle
    
    
    (49,406
    )
    
    
    (34,904
    )
    
    
    35,931
    
    
    
    (48,379
    )Cumulative effect of change in accounting principle, net of provision
for income taxes of $132 and $256 for the year ended
December 31, 2004 and 2003, respectively
    
    
    
    
    
    
    225
    
    
    
    
    
    
    
    225Net loss
    
    
    (49,406
    )
    
    
    (34,679
    )
    
    
    35,931
    
    
    
    (48,154
    )Deemed dividend on Series 1 Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss attributable to Common Shareholders
    
    $
    (49,406
    )
    
    $
    (34,679
    )
    
    $
    35,931
    
    
    $
    (48,154
    )
 F-37




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##### Table of Contents



WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) December 31, 2003Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    
    
    
    
    ConsolidatedRevenue
    
    $
    1,765
    
    
    $
    124,985
    
    
    $
    
    
    
    
    
    
    
    $
    126,750Operating and other expenses:Cost of operations (exclusive of depreciation and
amortization)
    
    
    1,300
    
    
    
    82,274
    
    
    
    
    
    
    
    
    
    
    
    83,574Selling, general and administrative expense
(exclusive of stock-based compensation)
    
    
    4,617
    
    
    
    24,241
    
    
    
    
    
    
    
    
    
    
    
    28,858Stock-based compensation expense
    
    
    
    
    
    
    2,677
    
    
    
    
    
    
    
    
    
    
    
    2,677Depreciation, depletion and amortization
    
    
    200
    
    
    
    14,727
    
    
    
    
    
    
    
    
    
    
    
    14,927Foreign exchange loss and other
    
    
    
    
    
    
    1,760
    
    
    
    
    
    
    
    
    
    
    
    1,760Equity loss
in investees
    
    
    
    
    
    
    17,345
    
    
    
    (17,345
    )
    
    
    
    
    
    
    Loss from operations
    
    
    (4,352
    )
    
    
    (18,039
    )
    
    
    17,345
    
    
    
    
    
    
    
    (5,046
    )Interest expense
    
    
    264
    
    
    
    8,014
    
    
    
    
    
    
    
    
    
    
    
    8,278Intercompany interest expense (income)
    
    
    2,568
    
    
    
    (2,568
    )
    
    
    
    
    
    
    
    
    
    
    Cumulative mandatorily redeemable preferred stock dividends and
amortization of issue costs
    
    
    10,161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,161Loss before income taxes
    
    
    (17,345
    )
    
    
    (23,485
    )
    
    
    17,345
    
    
    
    
    
    
    
    (23,485
    )Income tax provision
    
    
    
    
    
    
    (587
    )
    
    
    
    
    
    
    
    
    
    
    (587
    )Loss before cumulative effect of change in accounting principle
    
    
    (17,345
    )
    
    
    (22,898
    )
    
    
    17,345
    
    
    
    
    
    
    
    (22,898
    )Cumulative effect of change in accounting principle, net of provision
for income taxes of $256 for the year ended
December 31, 2003
    
    
    
    
    
    
    518
    
    
    
    
    
    
    
    
    
    
    
    518Net loss
    
    
    (17,345
    )
    
    
    (22,380
    )
    
    
    17,345
    
    
    
    
    
    
    
    (22,380
    )Deemed dividend on Series 1 Preferred Stock
    
    
    
    
    
    
    (54,572
    )
    
    
    
    
    
    
    
    
    
    
    (54,572
    )Net loss attributable to Common Shareholders
    
    $
    (17,345
    )
    
    $
    (76,952
    )
    
    $
    17,345
    
    
    
    
    
    
    $
    (76,952
    )
 F-38




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##### Table of Contents



WASTE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) December 31, 2004Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash
flows from (used in) operating activities:
    
    $
    (665
    )
    
    $
    25,362
    
    
    $
    
    
    
    $
    24,697Cash
flows from investing activities:Cash used in business combinations and significant asset
acquisitions, net of cash acquired
    
    
    (163,555
    )
    
    
    (1,124
    )
    
    
    
    
    
    
    (164,679
    )Capital expenditures
    
    
    (33,159
    )
    
    
    (13,050
    )
    
    
    
    
    
    
    (46,209
    )Proceeds from business divestitures
    
    
    14,231
    
    
    
    
    
    
    
    
    
    
    
    14,231Deposits for business acquisitions and other
    
    
    1,359
    
    
    
    (2,910
    )
    
    
    
    
    
    
    (1,551
    )Intercompany
    
    
    
    
    
    
    (78,985
    )
    
    
    78,985
    
    
    
    (181,124
    )
    
    
    (96,069
    )
    
    
    78,985
    
    
    
    (198,208
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    283,000
    
    
    
    
    
    
    
    
    
    
    
    283,000Principal repayments of debt
    
    
    (186,031
    )
    
    
    (1,127
    )
    
    
    
    
    
    
    (187,158
    )Sale of common shares and warrants
    
    
    
    
    
    
    53,600
    
    
    
    
    
    
    
    53,600Proceeds
from release of restricted cash and release of collateral supporting letters of credit
    
    
    14,433
    
    
    
    9,908
    
    
    
    
    
    
    
    24,341Proceeds from the exercise of options and warrants
    
    
    
    
    
    
    1,041
    
    
    
    
    
    
    
    1,041Fees paid for financing transactions
    
    
    (11,218
    )
    
    
    (2,923
    )
    
    
    
    
    
    
    (14,141
    )Intercompany
    
    
    78,985
    
    
    
    
    
    
    
    (78,985
    )
    
    
    179,169
    
    
    
    60,499
    
    
    
    (78,985
    )
    
    
    160,683Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    273
    
    
    
    
    
    
    
    273Decrease in cash and cash equivalents
    
    
    (2,620
    )
    
    
    (9,935
    )
    
    
    
    
    
    
    (12,555
    )Cash and cash equivalents, beginning of period
    
    
    8,843
    
    
    
    12,219
    
    
    
    
    
    
    
    21,062Cash and cash equivalents, end of period
    
    $
    6,223
    
    
    $
    2,284
    
    
    $
    
    
    
    $
    8,507
 F-39




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##### Table of Contents



WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands of US dollars unless otherwise stated) December 31, 2003Guarantors
    
    
    Non-Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash
flows from (used in) operating activities:
    
    $
    (2,682
    )
    
    $
    12,128
    
    
    $
    
    
    
    $
    9,446Cash flows from investing activities:Cash used in business combinations and significant asset
acquisitions, net of cash acquired
    
    
    (159,913
    )
    
    
    (1,458
    )
    
    
    
    
    
    
    (161,371
    )Capital expenditures
    
    
    (10,260
    )
    
    
    (14,178
    )
    
    
     
    
    
    
    (24,438
    )Proceeds from business divestitures
    
    
    
    
    
    
    952
    
    
    
    
    
    
    
    952Deposits for business acquisitions and other
    
    
    
    
    
    
    (10,776
    )
    
    
    
    
    
    
    (10,776
    )Intercompany
    
    
    (15,524
    )
    
    
    
    
    
    
    15,524
    
    
    
    (185,697
    )
    
    
    (25,460
    )
    
    
    15,524
    
    
    
    (195,633
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    157,692
    
    
    
    8,801
    
    
    
    
    
    
    
    166,493Principal repayments of debt
    
    
    (1,144
    )
    
    
    (73,107
    )
    
    
    
    
    
    
    (74,251
    )Proceeds from release of restricted cash (cash collateral deposits for
supporting letters of credit
    
    
    
    
    
    
    (9,929
    )
    
    
    
    
    
    
    (9,929
    )Proceeds from the issuance of Series 1 Preferred Shares
    
    
    
    
    
    
    86,189
    
    
    
    
    
    
    
    86,189Proceeds from the issuance of mandatorily redeemable Preferred Shares
    
    
    55,000
    
    
    
    
    
    
    
    
    
    
    
    55,000Proceeds from the exercise of options and warrants
    
    
    
    
    
    
    554
    
    
    
    
    
    
    
    554Fees paid for financing transactions
    
    
    (14,326
    )
    
    
    (4,641
    )
    
    
    
   
    
    
    (18,967
    )Intercompany
    
    
    
    
    
    
    15,524
    
    
    
    (15,524
    )
    
    
    197,222
    
    
    
    23,391
    
    
    
    (15,524
    )
    
    
    205,089Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    385
    
    
    
    
    
    
    
    385Increase in cash and cash equivalents
    
    
    8,843
    
    
    
    10,444
    
    
    
    
    
    
    
    19,287Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    1,775
    
    
    
    
    
    
    
    1,775Cash and cash equivalents, end of period
    
    $
    8,843
    
    
    $
    12,219
    
    
    $
    
    
    
    $
    21,062
 F-40