**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTSPURSUANT TOSECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                        |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                  |
|       |   | **For the fiscal year ended December 31, 2003**                                                                                                                                                                                  |
|       |   |                                                                                                                                                                                                                                  |
|       |   | **OR**                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                  |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                  |
|       |   | **For the transition period  from                to                ** |

 

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**Commission File Number:  333-98657**

 

**IESICORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    |   | **75-2712191**                          |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State of other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification Number) |
|                                                            |   |                                    |
|                                                            |
| **2301 Eagle Parkway  Suite 200  Fort Worth, Texas 76177**      |
| (Address of principal executive offices,  including zip code)   |
|                                                            |
| **(817) 632-4000**                                              |
| (Registrant’s telephone number, including  area code)      |

 

Securities registered pursuant toSection 12(b) of the Act:  **None**

 

Securities registered pursuant toSection 12(g) of the Act:  **None**

 

Indicate by check mark whether the Registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes    o    No    ý

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.    ý

 

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

 

The number of shares of the Registrant’s Class A voting common stock,par value $.01 per share, and Class B non-voting common stock, par value $.01per share, outstanding as of March 30,** **2004 were 142,000 and 112,980.2, respectively.  There is no trading market for any class ofequity securities of the Registrant. Accordingly, the aggregate market value of the common stock held by non-affiliatesof the Registrant is not determinable. See Part II. Item 5 of this Annual Report on Form 10-K.

 

 

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**INDEX**

 

**IESI CORPORATION**

 

**ANNUALREPORT ON FORM 10-K**

 
| **Item**                                   |   | **Description**                                                                                                    |   |
|--------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|
|                                       |   | PART I                                                                                                        |   |
|                                       |   |                                                                                                               |   |
| Item 1.                                    |   | Business                                                                                                           | 1      |
|                                       |   |                                                                                                               |   |
| Item 2.                                    |   | Properties                                                                                                         | 22     |
|                                       |   |                                                                                                               |   |
| Item 3.                                    |   | Legal Proceedings                                                                                                  | 22     |
|                                       |   |                                                                                                               |   |
| Item 4.                                    |   | Submission of Matters to a Vote of Security  Holders                                                               | 22     |
|                                       |   |                                                                                                               |   |
|                                       |   | PART II                                                                                                       |   |
|                                       |   |                                                                                                               |   |
| Item 5.                                    |   | Market for Registrant’s Common Equity, Related Stockholder Matters  and Issuer Purchases of Equity Securities | 23     |
|                                       |   |                                                                                                               |   |
| Item 6.                                    |   | Selected Financial Data                                                                                            | 24     |
|                                       |   |                                                                                                               |   |
| Item 7.                                    |   | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                        | 26     |
|                                       |   |                                                                                                               |   |
| Item 7A.                              |   | Quantitative and Qualitative Disclosures  about Market Risks                                                       | 63     |
|                                       |   |                                                                                                               |   |
| Item 8.                                    |   | Financial Statements and Supplementary Data                                                                        | 63     |
|                                       |   |                                                                                                               |   |
| Item 9.                                    |   | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                              | 63     |
|                                       |   |                                                                                                               |   |
| Item 9A.                                   |   | Controls and Procedures                                                                                            | 63     |
|                                       |   |                                                                                                               |   |
|                                       |   | PART III                                                                                                      |   |
|                                       |   |                                                                                                               |   |
| Item 10.                                   |   | Directors and Executive Officers of the  Registrant                                                                | 65     |
|                                       |   |                                                                                                               |   |
| Item 11.                                   |   | Executive Compensation                                                                                             | 70     |
|                                       |   |                                                                                                               |   |
| Item 12.                                   |   | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                    | 77     |
|                                       |   |                                                                                                               |   |
| Item  13.                                  |   | Certain Relationships and Related Transactions                                                                     | 84     |
|                                       |   |                                                                                                               |   |
| Item  14.                                  |   | Principal Accounting Fees and Services                                                                             | 89     |
|                                       |   |                                                                                                               |   |
|                                       |   | PART IV                                                                                                       | 90     |
|                                       |   |                                                                                                               |   |
| Item  15.                                  |   | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                                    | 92     |
|                                       |   |                                                                                                               |   |
| SIGNATURES                                 |   |
|                                       |   |
| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |   |

 

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**PARTI**

 

*As used in this Annual Report on Form 10-K, unless the contextotherwise requires, “IESI,” “the Company,” “we,” “us,” or “our” refers to IESICorporation, a Delaware corporation, and its direct and indirect subsidiarieson a consolidated basis.*

 

This Annual Report on Form 10-K contains “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, asamended (the “Securities Act”), and Section 21E of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). These forward-looking statements are not historical facts, but onlypredictions and generally can be identified by use of statements that includephrases such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee”or other words or phrases of similar import. Similarly, statements that describe our objectives, plans or goals arealso forward-looking statements.  Theseforward-looking statements are subject to risks and uncertainties which couldcause actual results to differ materially from those currentlyanticipated.  Factors that couldmaterially affect these forward-looking statements include those identifiedunder Item 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Risk Factors” and elsewhere in this Annual Report on Form10-K as well as in our other filings with the Securities and ExchangeCommission.  All subsequent written andoral forward-looking statements attributable to us or persons acting on ourbehalf are also expressly qualified in their entirety by such factors.  We urge you to consider carefully suchfactors in evaluating the forward-looking statements and caution you not toplace undue reliance on such forward-looking statements.  There may also be additional risks that wedo not presently know of or that we currently believe are immaterial that couldalso impair our business.  In light ofthese risks, uncertainties and assumptions, the forward-looking events may ormay not occur.  The forward-lookingstatements made in this Annual Report on Form 10-K are made only as of the datehereof and we undertake no obligation to update publicly any forward-lookingstatements to reflect new information, future events or otherwise.

 

**Item1.  Business.**

 

**Business Overview**

 

We are one of the leading regional, non-hazardous solid wastemanagement companies in the United States and more than 80% of our collectionrevenue in 2003 was generated in areas where we believe we are among the topthree commercial providers, as measured by collection routes.  We provide collection, transfer, disposaland recycling services in two geographic regions: our South Region, consistingof Texas, Louisiana, Oklahoma, Arkansas and Missouri; and our Northeast Region,consisting of New York, New Jersey, Pennsylvania and Maryland.  In 2003, we were the tenth largest, and thethird largest privately-held, service provider in the approximately$43 billion non-hazardous solid waste management industry in the UnitedStates.

 

We were founded in 1995 and have grown rapidly through a combination ofstrategic acquisitions and internal growth. From 1997, when we had a net loss of $1.4 million, through 2003,when we had a loss before cumulative effect of change in accounting principleof $6.3 million, we grew our revenue at a 70.0% compounded annual growthrate, or CAGR, and our income from operations before depreciation, depletionand amortization, which we define in Note 2 in Part II. Item 6. “SelectedFinancial Data,” at a 117.0% CAGR.  Wegenerated internal growth of 5.9% in 2003, 7.4% in 2002, and 18.7% in2001.  From 1997 through 2003, we alsoincreased our income from operations before depreciation, depletion andamortization from 5.4% of revenue to 23.1% of revenue and decreased our netloss margins before cumulative effect of change in accounting principle from(13.8)% to (2.5)%.  We currently servemore than 535,000 residential customers and approximately 55,000 commercial andindustrial customers.  We generatedrevenue of $256.0 million, income from operations before depreciation,depletion and amortization of

 

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$59.1 million and net loss before cumulative effect of change inaccounting principle of $6.3 million during 2003.

 

We provide our services through a network of vertically integratedassets, including 43 collection operations, 23 transfer stations, 17 landfills,seven recycling facilities and a fleet of more than 780 collectionvehicles.  During 2003, our collectionoperations generated 68.0%, our transfer operations generated 17.9%, ourdisposal operations generated 11.1%, and our recycling and other operationsgenerated 3.0%, of our revenue.  Wecurrently internalize—transfer to and dispose of at our ownlandfills—approximately 58% of the solid waste that we handle.

 

**Industry Overview**

 

The non-hazardous solid waste management industry provides thefollowing distinct services:

 

**•****                                          Collection**.  Collection, or hauling, involves collectingwaste from its multiple sources and transporting it to a transfer station ordisposal facility.  Residentialcollection services are provided by municipalities and by companies whocontract with municipalities or directly with individual homeowners,homeowners’ associations, apartment building owners or similar groups.  Commercial and industrial collectionoperations service businesses and construction and demolition projects.

 

**•****                                          TransferStations**.  A transfer station is afacility where solid waste that has been collected by private companies andmunicipalities is received and then transferred by large-capacity vehicles todisposal sites.  This consolidationreduces the costs associated with transporting the waste to disposal sites and helpsus obtain volume discounts on disposal rates. Transfer stations also improve the efficient utilization of collectionpersonnel and equipment by allowing them to focus on collection operations andspend less time traveling to disposal sites. Transfer stations can handle municipal solid waste, or MSW, receivedfrom residential, commercial and industrial collection operations, wastecollected from construction and demolition, or C&D, operations, orboth.  Some transfer stations areconstructed to receive certain specialized waste, such as asbestos.

 

**•****                                          Landfills**.  Most of the solid waste generated in theUnited States is disposed of in landfills. The cost of disposing of waste in a landfill includes the “tipping fees”charged by the landfill operator and the cost of transporting the waste to thelandfill, which can be significant. Waste collectors who are able to dispose of waste in their own landfillsgenerally secure a significant cost advantage, particularly if the landfill isin close proximity to the source of the solid waste.

 

**•****                                          Recycling**.  Waste recycling includes the collection ofpre-sorted recyclable waste, including paper, cardboard, plastic, glass,aluminum and other metals, from residential and commercial customers and thefurther sorting, binding and preparation of this waste at a recycling facilityfor resale.  Residential and commercialcustomers generally pay a fee for the removal of recyclable waste from theirpremises.  After collection and sorting,purchasers generally pay a fluctuating, spot-market price for recycledmaterials.  Materials for which there isno market are shipped to a disposal facility, generally a landfill.

 

According to industry data, the non-hazardous solid waste managementindustry in the United States generated revenue of approximately$43 billion in 1999 and is growing at an annual rate of approximately3%-4%.  In terms of tonnage, MSW hasincreased at a CAGR of 4.6% during the last five

 

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years.  Growth in the industryis driven by a combination of population growth and economic activity.  In addition, because waste disposal is anessential service, the volatility of the economic cycle has a lesser impact onindustry growth.

 

Collection, transfer and landfill disposal operations, the mostlocalized segments of the non-hazardous solid waste management industry,together account for nearly 90% of the industry’s revenue.  Landfill disposal is generally characterizedas more capital intensive and profitable than the other segments of theindustry.  The landfill disposal segmentof the solid waste management industry has undergone dramatic consolidation inthe past decade, in part due to regulatory changes.  The U.S. Environmental Protection Agency’s, or the EPA’s, promulgationof new regulations in September 1991 tightened landfill design, operationand maintenance standards and has had a substantial impact on theindustry.  The number of MSW landfillsin the United States fell from more than 7,900 in 1989 to 1,858 in 2001.

 

In the late 1990’s, the non-hazardous solid waste management industryexperienced a wave of consolidation that resulted in a few publicly-heldcompanies providing nearly 60% of the collection and landfill services in theUnited States.  Since that time, most ofthese companies have shifted their focus from external expansion to maximizinginternal growth and profitability. Additionally, as a result of the foregoing, these large companies havebeen paring their operations and divesting assets that are of value to thesmaller regional consolidators like us. We believe that the following factors, which represent benefits ofachieving economies of scale and other comparative advantages, will lead toadditional consolidation among privately-held regional and local companies:

 

•                                          substantialcapital resources are necessary to comply with the extensive and changingfederal, state and local laws and regulations applicable to waste collectionand transfer and landfill operations;

 

•                                          permitting,operational regulations and opposition from citizens’ groups make it difficultto obtain and maintain permits necessary to conduct business;

 

•                                          companieswith higher waste internalization rates achieve greater operationalefficiencies and margins; and

 

•                                          continuedprivatization by some municipalities of their collection, transfer and disposaloperations will result in grants of long-term municipal contracts and exclusivefranchise agreements.

 

**Business Strategy**

 

Our goal is to be a highly profitable, vertically integrated solidwaste management company with a significant presence in select markets.  We have built, and seek to continue to buildthrough internal growth and acquisitions, vertically integrated operationswhich may consist of one or more of the following: collection companies,transfer stations, recycling facilities and landfills serving a localmarket.  We believe that we can realizecompetitive advantages and significant future growth by implementing thisstrategy across existing and nearby markets. To achieve our goal, we intend to:

 

***Provide SuperiorCustomer Service.*** We continually aim to improve our customer service quality and offervalue to our customers to solidify our relationships with corporate, municipaland residential accounts.  We believeour individual market and customer focus distinguishes us from, and enables usto effectively compete with, larger waste management companies.  Additionally, we strive to

 

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act with corporate integrity and environmental responsibility, which,in addition to our customer service focus, enables us to retain currentcustomers and gain market share by adding new customers.

 

***Continue to ImproveOperational Efficiencies. ***Wehave developed efficient operating standards tailored to each of ourmarkets.  Using these standards, wetrack collection and disposal routing efficiency and equipmentutilization.  For all of our operations,we implement cost controls, employee training and safety procedures andestablish sales and marketing plans with a view to improving margins andbecoming a low cost operator.  Toimprove the productivity and profitability of a newly-acquired business, weapply to it the same operating standards, information systems and financialcontrols that we employ in our existing operations.  We believe that there are further opportunities to improve ouroperating margins and cash flow by achieving even higher rates of wasteinternalization.

 

***Continue Expansionin Our South Region.***  We have developed leading market positions in secondary marketsin our South Region.  We believe thatour South Region has attractive growth potential on which we intend tocapitalize through the following elements of our strategy:

 

**•****                                          InternalGrowth. **We seek to obtain newmunicipal contracts, focusing on municipalities that we can integrate into ourexisting infrastructure and whose waste flow we can internalize into ourlandfills.  We also seek to increaserevenue by soliciting new residential, commercial and industrial customers inour existing or nearby markets and by marketing additional or upgradedservices.

 

**•****                                          “Tuck-In”Acquisitions. **We intend to continueto expand with a selective acquisition strategy that has historically allowedus to gain market share.  In our“tuck-in” acquisitions, we seek to consolidate collection routes into ourexisting operations while eliminating excess overhead and operating costs.  In markets where we have landfill capacity,we internalize the volume, which increases our profit margins.  We completed 124 acquisitions in our SouthRegion between 1995 and 2003, of which 100 were “tuck-in” acquisitions, and weevaluate acquisition candidates on an ongoing basis.

 

**•****                                          NewMarkets. **We expect to makeselective acquisitions in and around our South Region that are geographicallyclose to our existing operations.  Weplan to expand by acquiring or creating additional fully or partiallyintegrated operations and we continually evaluate candidates for theseacquisitions.

 

***MaximizeProfitability in the Northeast Region.***  Our Northeast Region consists of collectionoperations and transfer stations located in New York City and three regionallandfills—two in Pennsylvania and one in New York State.  New York City is the largest waste producingmunicipality in the United States.  Weintend to capitalize on this position by:

 

**•****                                          IncreasingCapacity of Our Current Network. **Weare currently seeking to obtain permit modifications to expand the permitteddaily volumes of MSW at two of our Northeast Region landfills.  Increasing our permitted landfill volumeswill enable us to solicit additional customers, acquire additional collectionoperations and transfer stations and bid on additional municipal contracts andthereby increase our ability to internalize additional MSW and enhance ourprofitability.

 

**•****                                          AcquiringAdditional Landfills. **We plan toacquire additional landfills that will increase our ability to internalizeadditional MSW and enhance our profitability as described in the precedingparagraph.

 

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**Operations**

 

We provide our services through a network of vertically integratedassets, including 43 collection operations, 23 transfer stations,17 landfills and seven recycling facilities.

 

***Collection***

 

As of December 31, 2003, we provide collection services to morethan 535,000 residential and approximately 55,000 commercial and industrialcustomers.  We maintain a fleet of morethan 780 collection vehicles, which, as of December 31, 2003, had anaverage age of approximately 5.3 years.

 

*Residential.* We provide residential waste management services under a variety ofcontractual arrangements, including contracts with homeowners’ associations,apartment building owners and mobile home park operators, on a subscriptionbasis with individual households and contracts with, or franchises granted by,municipalities.  Our municipal contractsand municipal franchises typically have three to five year terms, subject torenewal options.  Most otherarrangements for residential services have terms that vary from monthly forsubscription service to up to three years for contracts with homeowners’associations.  We seek to enter intoresidential service arrangements where the route density is high.  We base our residential collection fees primarilyon route density, the frequency and level of service, the distance to theprocessing facility or landfill and the cost of processing or disposal.  Collection fees are paid either by themunicipalities from their tax revenue or directly by the residents receivingthe services.

 

*Commercial and Industrial.*  We provide hand collection and containerizedservices to a wide variety of commercial and industrial customers.  We sometimes install stationary compactorsthat compact waste prior to collection on the premises of large volumecustomers.  Most commercial andindustrial customers are provided with containers that are designed to belifted mechanically and either emptied into a collection vehicle’s compactionhopper or, in the case of the large roll-off containers, to be loaded onto thecollection vehicle.  Our standardcontainers generally range in size from one to eight cubic yards and ourroll-off containers generally range in size from 20 to 40 cubic yards.

 

Our contracts with commercial and industrial containers typically haveterms of up to three years, have renewal options and may not be terminated bythe customer prior to the end of the term without a penalty.  Our contracts for roll-off containers mayprovide for temporary services, such as the removal of waste from aconstruction site, and are typically for periods of less than one year.  Our fees from these contracts are generallyfixed over the term of the contract and are determined by factors such as collectionfrequency, type of collection equipment furnished, the distance to theprocessing facility or landfill, cost of disposal and type and volume or weightof the waste collected, as well as general competitive and prevailing localeconomic conditions.

 

***Transfer Stations***

 

Currently, we operate 23 transfer stations, which are located near manyof our collection routes and receive the solid waste that has been collected byour and third-party collection vehicles. We typically use subcontractors to transport the waste from our transferstations to our or third-party landfills. Transfer station fees are generally based on the cost of processing,transportation and disposal of waste.

 

In addition to improving the utilization of collection personnel andequipment, we believe that our transfer stations benefit us by concentratingthe waste stream from a wider area. This increases the volume of waste at the landfills that we operate andgives us greater leverage in negotiating for more favorable disposal rates atthird-party landfills.  Our transferstations also help us build relationships with the municipalities and privateoperators that deliver waste to the transfer stations, which can lead to

 

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additional growth opportunities. We believe that, as increased regulations and public pressure restrictthe development of landfills in urban and suburban areas, transfer stationswill increasingly be used as an efficient means to process and transport wasteto landfills and other disposal sites.

 

***Landfills***

 

We operate 14 MSW landfills—three in our Northeast Region and 11 in ourSouth Region.  We also operate threeC&D landfills in our South Region.

 

We monitor the available permitted disposal capacity of our landfillson a regular basis and evaluate whether to seek to expand this capacity.  In making this evaluation, we considervarious factors, including the volume of waste disposed of at the landfill,available acreage, the likelihood of obtaining the necessary approvals andpermits and the costs associated with these items.

 

***Recycling***

 

Our recycling services include collection of recyclable materials fromresidential, commercial and industrial customers, for which we chargecollection and processing fees.  Ourrecycling operations also process for sale certain recyclable materials, suchas paper, plastics and aluminum, which are marketed as commodities and aresubject to significant price fluctuations. To mitigate our exposure to these price fluctuations, we have enteredinto a long-term agreement with Weyerhaeuser Company to purchase our recycledoffice paper and cardboard.  Ourlandfill located in Seneca Falls, New York has a tire recycling facility thatreduces tires into chips which are then used in the construction of drainageblankets for new disposal cells at the landfill.  The landfill gas recovery system at our Seneca Falls, New Yorklandfill transfers methane gas collected from closed portions of the landfillto an independently owned facility located at the landfill site which convertsthe methane gas into electricity and supplies the landfill’s electricity needsas well as those of the surrounding communities.

 

**Local and Regional Structure**

 

We provide collection, transfer, disposal and recycling services in twogeographic regions: our South Region, which includes ten operating districts inTexas, Louisiana, Oklahoma, Arkansas and Missouri; and our Northeast Region,which includes three operating districts in New York, New Jersey, Pennsylvaniaand Maryland.  See Note 10 to ourconsolidated financial statements included elsewhere in this Annual Report onForm 10-K for a summary of the revenues, profitability and total assets of ourtwo geographic area operating segments. Both our South Region and our Northeast Region are run by local managerswho, along with our Chief Operating Officer and Region Managers, areresponsible for implementing our acquisition program, maintaining servicequality, promoting operational safety, implementing marketing programs, andoverseeing day-to-day operations, including contract administration.

 

We conduct collection operations in 37 operating areas contained withinour districts and regions.  We definethe boundaries for these areas primarily by the area covered by the routes ofour collection operations.  This takes intoaccount the distances from our collection facilities, and locations ofavailable disposal facilities, which affect our ability to provide economicallycompetitive service.  We generallyexclude from our operating areas locations where municipalities conductcollection operations themselves and exclude private haulers and we usually donot consider such municipalities our competitors.  We measure the relative competitive position of our collectionoperations in an area based on our estimates of the number of routes operatedby each competitor in the area, which we believe is a fair method of measuringsuch positions.  Our competitors,particularly those that are larger than us, may define their operation areasusing different criteria.

 

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Our localized structure places decision-making authority close to ourcustomers, which we believe enables us to identify our customers’ needs quicklyand address those needs in a cost-effective manner.  In addition, this localized approach reduces overhead costs andestablishes a highly efficient operating structure that allows for easierexpansion into geographically contiguous markets.  This approach also permits us to operate in small markets in ourSouth Region that our larger competitors often do not find attractive.

 

***South Region***

 

Our South Region’s operations serve customers in the states of Texas,Louisiana, Oklahoma, Arkansas and Missouri. By capitalizing on our senior management team’s extensive experience inacquiring, integrating and operating solid waste management businesses,particularly in the southern United States, we have grown this regiondramatically over the last nine years. We completed 124 acquisitions in our South Region between 1995 and 2003.

 

*Facilities and Services. *Wecurrently operate 40 collection operations, 19 MSW transfer stations, 11 MSWlandfills, three C&D landfills and five recycling facilities in our SouthRegion.  Our South Region’s operationsserve more than 533,000 residential customers and 44,000 commercial andindustrial customers.  This baseincludes customers served pursuant to 273 municipal contracts.  Our South Region generated revenue of $158.2 millionand income from operations before corporate overhead of $14.0 million during2003.  See Note 10 to our consolidatedfinancial statements included elsewhere in this Annual Report on Form 10-K.

 

We seek to create vertically integrated operations within each districtthat include collection, transfer and disposal services.  In addition, we attempt to internalize intoour own landfills as much of the waste that we collect as possible.  In certain districts, such as Fort Worth,Arkansas, Northwest Texas, Louisiana and Missouri, we currently internalize asubstantial majority of our collected waste. In other districts, such as Central Texas, East Texas, South Texas andOklahoma, we currently internalize a smaller percentage of our collected wasteand we rely on other disposal alternatives for the remaining collected waste.

 

In collection areas where we do not currently operate a MSW landfill orlack the MSW landfill capacity necessary to fully service our transfer stationsand collection operations, we utilize a variety of low cost disposalalternatives, including:

 

•                                          negotiatingbelow-market rates through long-term contracts with private operators;

 

•                                          obtainingcompetitive pricing in markets that have numerous disposal options; or

 

•                                          utilizingmunicipal landfills which generally charge the same disposal rates to allcustomers.

 

We also implement strategies to increase the amount of waste weinternalize in order to lower our costs by acquiring or permitting additionallandfill capacity.

 

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The following table summarizes the facilities in each of our SouthRegion’s ten operating districts as of December 31, 2003: 

 
| **District**                  |   | **Collection  Operations** |   | **Transfer  Stations(1)** |   | **Landfills** |   | **Recycling  Facilities** |   |
|-------------------------------|--------|----------------------------|--------|---------------------------|--------|---------------|--------|---------------------------|--------|
|                          |   |                       |   |                      |   |          |   |                      |   |
| Arkansas                      |   | 3                          |   | 2                         |   | 1             |   | 1                         |   |
| Louisiana                     |   | 4                          |   | 3                         |   | 4             |   | 1                         |   |
| Oklahoma                      |   | 4                          |   | 5                         |   | 1             |   | —                    |   |
| Central Texas                 |   | 5                          |   | 1                         |   | 1             |   | —                    |   |
| East Texas/Northern Louisiana |   | 3                          |   | —                    |   | 1             |   | —                    |   |
| Fort Worth                    |   | 9                          |   | 5                         |   | 2             |   | 1                         |   |
| Missouri                      |   | 2                          |   | —                    |   | 1             |   | —                    |   |
| North Texas                   |   | 4                          |   | —                    |   | —        |   | 1                         |   |
| Northwest Texas               |   | 4                          |   | 3                         |   | 2             |   | —                    |   |
| South Texas                   |   | 2                          |   | —                    |   | 1             |   | 1                         |   |
| Total                         |   | 40                         |   | 19                        |   | 14            |   | 5                         |   |

 

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(1)                       Alltransfer stations in our South Region are permitted to accept both MSW andC&D waste.

 

The following table summarizes our landfill operations in our SouthRegion as of December 31, 2003: 

 
| **Landfill**         |   | **Type of Waste** |   | **Estimated Remaining  Operating Lives  (in Years)(1)** |   | **Owned/Operated** |     |
|----------------------|--------|-----------------------------|--------|------------------------------------------------------------------------|--------|--------------------|----------|
|                 |   |                        |   |                                                                   |   |               |     |
| Cherokee Village, AR |   | MSW and C&D             |   | 59                                                                     |   |               | Owned    |   |
| Henderson, TX        |   | MSW and C&D             |   | 28                                                                     |   |               | Owned    |   |
| Iowa Park, TX        |   | MSW and C&D             |   | 101                                                                    |   |               | Owned    |   |
| Jena, LA             |   | MSW and C&D             |   | 1                                                                      |   |               | Operated |   |
| Kountze, TX          |   | MSW and C&D             |   | 23                                                                     |   |               | Owned    |   |
| Oakdale, LA          |   | MSW and C&D             |   | 92                                                                     |   |               | Owned    |   |
| Prague, OK           |   | MSW and C&D             |   | 4                                                                      |   |               | Owned    |   |
| Richwoods, MO        |   | MSW and C&D             |   | 154                                                                    |   |               | Owned    |   |
| Sabine, LA           |   | MSW and C&D             |   | 7                                                                      |   |               | Operated |   |
| St. Joseph, LA  |   | MSW and C&D             |   | 4                                                                      |   |               | Operated |   |
| Weatherford, TX      |   | MSW and C&D             |   | 5                                                                      |   |               | Owned    |   |
| Austin, TX           |   | C&D                     |   | 11                                                                     |   |               | Owned    |   |
| Fort Worth, TX       |   | C&D                     |   | 18                                                                     |   |               | Owned    |   |
| Frederick, OK        |   | C&D                     |   | 18                                                                     |   |               | Operated |   |

 

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(1)          Calculated based oncurrent permitted capacity.  Withrespect to “operated” landfills, “Estimated Remaining Operating Lives (inYears)” represents the lesser of (i) the actual number of years remaining priorto expiration of the applicable operating contract or (ii) the estimatedremaining disposal capacity at the applicable landfill (in years and calculatedbased on current permitted capacity).

 

Our internal and external engineers calculate the estimated remainingoperating life of a landfill (in years) by dividing (a) the landfill’sremaining available volume (in tonnage or yardage), represented by thedifference between (i) the aggregate available landfill volume allocatedto the landfill pursuant to the permits obtained for the landfill and(ii) the volume received to date at the landfill (based on land surveysperiodically performed at the landfill), by (b) the landfill’s estimatedannual volume.

 

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We have requested, or are in the process of requesting, permits toexpand vertically and/or horizontally our landfills in Jena, Sabine, andSt. Joseph, Louisiana and Weatherford, Texas.  If and when granted, and based on the current design of theexpansion area, the applicable landfill lives will be increased to: Jena, morethan 90 years; Sabine, more than 40 years; St. Joseph, more than110 years; and Weatherford, more than 15 years.  Permits are difficult, time consuming and expensive to obtainand, accordingly, we cannot assure you that we will be able to obtain therequested permits.  If we do not obtainone or more of the requested permits to expand these landfills, it could reduceour revenue, hinder our vertical integration and impair our businessstrategy.  In addition, we may have todispose collected waste at landfills operated by third parties or haul thewaste long distances at a higher cost to another of our landfills.  We may also incur closure costs sooner, oraccrue them at a higher rate, or suffer asset impairments.  See Part II. Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RiskFactors—Operating Permits—We may not be able to obtain permits we require tooperate our business.”

 

*South Region Acquisitions. *Wehave pursued a selective acquisition strategy that has allowed us toconsolidate collection routes into our existing operations in order to gainmarket share while eliminating overhead and operating costs.  Additionally, we look to enter new marketsadjacent to our existing operations.  Wecompleted 124 acquisitions in our South Region between 1995 and 2003, of which24 were in new markets and 100 were “tuck-in” acquisitions.

 

The following table summarizes our acquisition activity in our SouthRegion as of December 31, 2003:

 

**South Region Acquisition Summary**

 
|     |   | **Businesses Acquired(1)** |   |
|----------|--------|---------------------------------|--------|
| **Year** |   | **Collection**                  |   | **Transfer Station** |   | **Landfill** |   | **Recycling** |   | **Approximate  Annualized  Revenue(2)** |   |
|     |   |                            |   |   |   |   |   |   |   | **(in millions)** |   |
|     |   |                            |   |   |   |   |   |   |   |   |   |
| 1995     |   | 3                               |   | — |   | — |   | — |   | $0.6 |   |   |
| 1996     |   | 2                               |   | — |   | — |   | — |   | 0.2 |   |   |
| 1997     |   | 6                               |   | 1 |   | 1 |   | — |   | 4.5 |   |   |
| 1998     |   | 35                              |   | 2 |   | 1 |   | 2 |   | 21.5 |   |   |
| 1999     |   | 24                              |   | 3 |   | 2 |   | — |   | 14.9 |   |   |
| 2000     |   | 12                              |   | 3 |   | 3 |   | 3 |   | 23.9 |   |   |
| 2001     |   | 15                              |   | — |   | 1 |   | — |   |  8.1 |   |   |
| 2002     |   | 15                              |   | 7 |   | 5 |   | — |   | 24.9 |   |   |
| 2003     |   | 14                              |   | 1 |   | 1 |   | — |   | 21.4 |   |   |

 

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(1)                Actual number ofbusinesses acquired.  Some acquisitionsincluded more than one business.

 

(2)                Management’sestimates of annualized revenue are derived from unaudited information receivedduring due diligence and are based on short-term historical operations of theacquired businesses prior to the applicable acquisition dates.

 

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***Northeast Region***

 

Our Northeast Region’s operations are located in the states of NewYork, New Jersey, Pennsylvania and Maryland, and consist of three collectionoperations, three MSW transfer stations, one C&D transfer station, threeMSW landfills, one paper recycling facility and one tire recyclingfacility.  Our Northeast Region’soperations serve more than 11,000 commercial customers.  We believe that we are the third largest,and the leading privately-held, non-hazardous solid waste management serviceprovider in New York City.  We believethat our network of transfer stations in New York City would be very hard toduplicate.  We believe that, due to thescarcity of land and the difficulty of obtaining permits for transfer stations,a large majority of the remaining independent collection companies in New YorkCity lack the vertical integration and economies of scale necessary to supplycost-effective services.  Eleven percentof our revenue in 2003 was attributable to our contracts with the City of NewYork to dispose of residential waste collected by the City in Brooklyn, NewYork.  Our Northeast Region generatedrevenue of $97.8 million and income from operations before corporateoverhead of $15.3 million during 2003. See Note 10 to our consolidated financial statements included elsewherein this Annual Report on Form 10-K.  Wecompleted 18 acquisitions between 1998 and 1999 in our Northeast Region,primarily in New York City. Additionally, in October 2003, we purchased the Seneca Meadowslandfill, the largest MSW landfill in New York State, located in Seneca Falls,New York.

 

*Facilities and Services.*  We divide our Northeast Region operationsinto three districts: New York City/New Jersey, Seneca and Pennsylvania.  In our New York City/New Jersey district, wehave collection operations located in the Bronx, New York and in Jersey City,New Jersey, all of which primarily service customers in Manhattan.  We have concentrated our collection routesin Manhattan due to the availability of dense routes, higher margin commercialcustomers, a high mix of recyclable paper product and close proximity to ourtransfer stations and recycling facility. Our collection operations in our Pennsylvania district serve customersin southern Pennsylvania and northern Maryland.

 

Almost all of the MSW and recyclable paper we handle in our NortheastRegion is transferred through our three MSW transfer stations or our recyclingfacility.  We typically transport MSWfrom our transfer stations to our landfills in New York and Pennsylvania, whichare located between 100 - 400 miles outside New York City.  The City of New York awarded us two newthree-year contracts, effective November 2003, each with two optionalone-year renewals, which collectively provide for us to transfer and dispose ofup to an aggregate of 1,500 tons of MSW per day collected by the City.  The new contracts replaced our originalcontracts with the City which expired during 2003.  The City’s trucks collect primarily residential waste in Brooklynand deliver it to two of our Brooklyn transfer stations.  During 2003, the City delivered averagedaily volumes of approximately 1,330 tons pursuant to these contracts.

 

To the extent possible, we seek to internalize all the MSW received byour transfer stations into our landfills in New York and Pennsylvania.  C&D waste that both our collectionoperations and third parties deliver to our C&D transfer station ispartially sorted to remove metals, dirt and small rocks.  The sorted material is sent to facilitiesfor specific uses, and the remaining material is transferred in transfertrailers to our New York landfill or third-party landfills on Long Island, NewYork or in Ohio.

 

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The following table summarizes the facilities in each of our NortheastRegion’s three operating districts as of December 31, 2003: 

 
| **District**             |   | **Collection  Operations** |   | **Transfer Stations** |   | **Landfills** |   | **Recycling  Facilities** |   |
|--------------------------|--------|----------------------------|--------|----------------------------|--------|---------------|--------|---------------------------|--------|
| New York City/New Jersey |   | 2                          |   | 4                          |   | —        |   | 1                         |   |
| Pennsylvania             |   | 1                          |   | —                     |   | 2             |   | —                    |   |
| Seneca                   |   | —                     |   | —                     |   | 1             |   | 1                         |   |
|                     |   |                       |   |                       |   |          |   |                      |   |
| Total                    |   | 3                          |   | 4                          |   | 3             |   | 2                         |   |

 

The following table summarizes our transfer station operations in ourNortheast Region as of December 31, 2003: 

 
| **Transfer Station** |   | **Permitted Maximum  Daily Volume** |   | **Waste Type** |   |
|---------------------------|--------|-----------------------------------------------|--------|---------------------|--------|
|                      |   |                                          |   |                |   |
| 50th Street, Brooklyn     |   | 1,075 tons                                    |   | MSW                 |   |
| Court Street, Brooklyn    |   | 745 tons                                      |   | MSW                 |   |
| Casanova Street, Bronx    |   | 449 cu. yds.                                  |   | MSW                 |   |
| Varick Street, Brooklyn   |   | 1,800 cu. yds.                                |   | C&D             |   |

 

We have a recycling facility in Jersey City, New Jersey, where wecurrently process approximately 5,200 tons of paper products that we collect inManhattan each month.  Approximately 66%of the paper we process at this facility, mostly office paper and corrugatedcardboard, is recycled, and the remaining 34% is sent to a landfill.  The price paid by purchasers for recycledpaper products is based on fluctuating commodity prices.  To mitigate the effect of these pricefluctuations, we have entered into a long-term agreement with Weyerhaeuser topurchase our recycled office paper and cardboard.  This recycling facility represented 3.8% of our NortheastRegion’s 2003 revenue.

 

Our Pennsylvania and Seneca districts are primarily composed oflandfill operations.  We transfer all ofthe MSW waste from our transfer stations in New York City to our threelandfills in Pennsylvania and Seneca Falls. In addition, our Seneca district includes a tire recycling facility.  The following table summarizes our landfilloperations in our Northeast Region as of December 31, 2003: 

 
| **Landfill Location** |   | **Type of  Waste** |   | **Estimated  Remaining  Operating Lives (in Years)(1)** |   | **Owned/  Operated** |   |
|----------------------------|--------|--------------------|--------|------------------------------------------------------------------------|--------|----------------------|--------|
| Bethlehem, PA              |   | MSW                |   | 12                                                                     |   | Owned                |   |
| Chambersburg, PA           |   | MSW                |   | 25                                                                     |   | Owned                |   |
| Seneca Falls, NY           |   | MSW and C&D    |   | 5                                                                      |   | Owned                |   |

 

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(1)             Calculatedbased on current permitted capacity.

 

The permitted average daily volume is currently 1,375 tons for ourBethlehem landfill, 857 tons for our Chambersburg landfill and 6,000 tonsfor our Seneca Falls landfill.

 

In 2004, we intend to request from the New York State Department ofEnvironmental Conservation a permit to expand our landfill in Seneca Fallsvertically and horizontally.  Thelandfill expansion is currently being designed by our internal and externalengineers.  If and when an expansionpermit is granted, and based on the current volumes at the landfill and theconceptual design of the expansion area, the landfill life will be increased tomore than 15 years.  In addition, wehave requested a permit to increase the average daily volume at ourChambersburg landfill to 1,450 tons. Permits are

 

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difficult, time consuming and expensive to obtain and, accordingly, wecannot assure you that we will be able to obtain the requested permits.  If we do not obtain one or more of therequested permits to expand these landfills, it could reduce our revenue,hinder our vertical integration and impair our business strategy.  In addition, we may have to disposecollected waste at landfills operated by third parties or haul the waste longdistances at a higher cost to another of our landfills.  We may also incur closure costs sooner, oraccrue them at a higher rate, or suffer asset impairments.  See Part II. Item 7. “Management’sDiscussion and Analysis of Financial Conditions and Results of Operations—RiskFactors—Operating Permits—We may not be able to obtain permits we require to operateour business.”

 

*Northeast Region Acquisitions.*  We completed our first New York Cityacquisition in February 1998, and to date, we have completed 19acquisitions in our Northeast Region. In October 2003, we completed a significant acquisition byacquiring all of the shares of capital stock of Seneca Meadows Inc., which wasthe owner of the Seneca Meadows landfill, the largest MSW landfill in New YorkState, located in Seneca Falls, New York. The initial purchase price was approximately $187.7 million plusassumed liabilities of $40.1 million. In June 1999, we completed a significant acquisition consisting oftwo New York City MSW transfer stations, two Pennsylvania MSW landfills and twoPennsylvania collection operations for approximately $65.0 million.

 

The following table summarizes our acquisition activity in ourNortheast Region as of December 31, 2003:

 

**Northeast Region Acquisition Summary**

 
|     |   | **Businesses  Acquired(1)** |   |
|----------|--------|-----------------------------|--------|
| **Year** |   | **Collection**              |   | **Landfill** |   | **Transfer Station** |   | **Recycling** |   | **Approximate  Annualized Revenue(2)** |   |
|     |   |                        |   |   |   |   |   |   |   | **(in millions)** |   |
| 1998     |   | 12                          |   | — |   | 3 |   | 2 |   | $36.7 |   |   |
| 1999     |   | 6                           |   | 2 |   | 2 |   | — |   | 31.6 |   |   |
| 2003     |   | —                      |   | 1 |   | — |   | 1 |   | 47.7 |   |   |

 

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(1)          Actual numbers ofbusinesses acquired.  Some acquisitionsincluded more than one business.

 

(2)          Management’s estimatesof annualized revenue are derived from both audited and unaudited informationreceived during due diligence and are based on short-term historical operationsof the acquired businesses prior to the applicable acquisition dates.

 

**Acquisition Program**

 

In pursuing our acquisition strategy, we focus on identifyingattractive markets in which to acquire assets and which we believe providesignificant opportunities to execute our business strategy.  We believe that we have attractive growthpotential in locations close to existing operations in our South Region, whichwill improve our operating margins and cash flow.  We intend to continue to expand by means of acquiring or creatingadditional integrated opportunities or by internalizing acquired businessesinto our existing network.  In ourNortheast Region, we intend to increase the capacity of our existing network byacquiring additional landfills and transfer stations.  For example, we recently acquired the Seneca Meadows landfill inSeneca Falls, New York which has allowed us to internalize 100% of the MSW wehandle at our New York City collection operations and transfer stations.

 

We have developed a set of financial, geographic and managementcriteria to evaluate specific acquisition candidates.  Some of the factors that we consider in evaluating an acquisitioncandidate include:

 

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•                                          expectedreturn on invested capital;

 

•                                          thecandidate’s historical and projected financial performance;

 

•                                          insituations where we retain existing management, the management’s experience andrelationship with the local community;

 

•                                          thecomposition and size of the candidate’s customer base and whether the customerbase is served under municipal contracts or other exclusive arrangements;

 

•                                          whetherthe geographic location of the candidate has a positive projected economic orpopulation growth rate or will enhance or expand our market area or ability toattract other acquisition candidates;

 

•                                          whetherthe acquisition will increase our market share or help protect our existingcustomer base;

 

•                                          whetherthe candidate can be integrated into a vertically integrated operation, eitherimmediately or in the near future, and any other potential synergies that maybe gained by combining the candidate with our existing operations;

 

•                                          resultsof an environmental review typically consisting of a Phase I review, and,in the case of landfills or when concerns are triggered by a Phase Ireview, a Phase II review; and

 

•                                          theexisting liabilities of the candidate.

 

With respect to potential landfill acquisitions in particular, we seekto identify acquisition candidates to improve our vertical integration andoperating margins in our two regions in markets where the economic andregulatory environment makes those acquisitions attractive.  We evaluate landfill candidates bydetermining, among other things:

 

•                                          theamount of waste that could be diverted to the landfill;

 

•                                          whetheraccess to the landfill is economically feasible from our existing market areaseither directly or through transfer stations;

 

•                                          theexpected permitted life of the landfill in terms of the landfill’s futurevolume capacity;

 

•                                          thepotential for expanding the landfill; and

 

•                                          currentdisposal costs compared to the cost of acquiring the landfill.

 

Our method of integrating an acquired company with our existingoperations depends on whether we are acquiring a company in a new market oracquiring a company that will be “tucked into” an existing operation.  Before acquiring a company, we perform extensiveenvironmental, operational, engineering, legal, human resources and financialdue diligence.  Our district managementprepares a written integration plan which is approved by senior managementprior to the close of the acquisition. As part of our due diligence, we also put together a strategy to absorbor integrate the target company’s operations and administration into ourinfrastructure with minimal disruption to the ongoing operations of

 

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both the acquired and existing business operations.  Depending on whether the acquired company isin a new market or in one of our existing markets, our strategy may includeroute consolidations, new maintenance programs or the closure of an office orcollection operation.  In either case,the newly acquired business should immediately be able to take full advantageof our resources and expertise, such as our financial reporting package andbuying power in the areas of insurance, purchasing and benefits.

 

Our board of directors must approve the terms and conditions of allacquisitions with purchase prices in excess of $12.5 million, but hasauthorized our management to approve acquisitions with purchase prices equal toor less than $12.5 million within certain parameters.  We believe our senior management team has aproven track record in integrating acquisitions.  Acquisitions must also be approved by the directors designated bycertain of our key stockholders.  SeePart III. Item 13. “Certain Relationships and Related Transactions—SecondAmended and Restated Stockholders’ Agreement.”

 

**Marketing**

 

Our marketing and sales strategies are formulated at the regionallevel.  We market our services locallythrough our sales managers and representatives, many of whom receive asignificant portion of their compensation based on meeting certain incentivetargets.  As of December 31, 2003,we had approximately 63 sales employees. We also obtain new customers from referral sources, our generalreputation and local market print advertising including local trade publicationsand the “yellow pages.” Leads are also derived from new building permits,business licenses and other public records.

 

In addition to our sales efforts directed at commercial and industrialcustomers, in our South Region we have municipal marketing representatives inmost service areas, who are responsible for working with each municipality orcommunity to which we provide residential service to ensure customersatisfaction.  Our municipalrepresentatives organize and handle bids for renewal and new municipalcontracts in their service areas.

 

Our local presence and identity is an important aspect of our marketingplan, and many of our managers are involved in local governmental, civic andbusiness organizations.  Our name andlogo are displayed on all our containers, trucks and uniforms worn by ouremployees.  Additionally, we attend andmake presentations at municipal and state conferences and industry trade showsand advertise in governmental associations’ membership publications.

 

**Employees**

 

As of December 31, 2003, we had approximately 1,740 full-timeemployees.  Approximately 207, or 12%,of our employees are covered by collective bargaining agreements negotiatedwith three different labor unions.  Ofour unionized employees, 185 are represented by Waste Material, Recycling andGeneral Industrial Laborers, Local 108, under a contract that expires onFebruary 28, 2005.  An additional14 employees are represented by the Private Sanitation UnionLocal 813 (affiliated with the International Brotherhood of Teamsters)under a contract that expires on November 30, 2005.  Another eight employees are represented bythe League of International Federated Employees (Local 890) under acontract that expires on June 30, 2004. We are currently negotiating a collective bargaining agreement withTeamsters Union Local 682 (affiliated with the International Brotherhood ofTeamsters), which would cover six employees. We have never experienced a strike or labor stoppage and we believe ourrelationships with our employees are generally good.

 

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**Risk Management, Insurance and Performance orSurety Bonds**

 

We actively maintain environmental and other risk management programsthat we believe are appropriate for our business.  Our environmental risk management program includes evaluatingexisting facilities, as well as potential acquisition targets, forenvironmental law compliance and operating procedures.  We do not expect environmental compliancecosts or environmental cost accruals to increase on a percentage basis abovecurrent levels, but we cannot predict whether future acquisitions or regulatorychanges will cause these costs to increase. We also maintain a worker safety program that encourages safe practicesin the workplace.

 

We carry a broad range of insurance, which we consider adequate toprotect our assets and operations and are customary for companies in ourindustry.  Our coverage includes generalliability, automotive, comprehensive property damage, workers’ compensation,umbrella and other coverage customary in our industry.  These policies generally exclude coveragefor damages associated with environmental conditions.  We carry separate general pollution liability policies coveringliabilities for environmental problems at our landfills or transferstations.  In addition, we have aseparate clean-up cost cap insurance policy to cover costs in excess of anestimated liability related to a remediation project at our Seneca Falls, NewYork landfill.  See Part II. Item 7.“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—obligations and Commitments”. In recent years, the insurance industry has experienced unusually largefinancial losses and insurers have aggressively raised premiums and deductiblesto offset losses and exposure. Recently, we have experienced increases in premiums significantly abovethe rate of inflation.  To date, we havebeen able to pass these additional costs on to our customers in the form ofprice increases.  There can be noassurance, however, that we will be able to effectively do so in the future.

 

Municipal solid waste collection contracts typically requireperformance bonds or other means of financial assurance to secure contractualperformance.  Certain environmentalregulations also require demonstrated financial assurance to meet closure,final closure and post-closure requirements for landfills.  At December 31, 2003, we had providedcustomers and various regulatory authorities with surety bonds and letters ofcredit in the aggregate amount of approximately $127.4 million to secureour obligations.  Our senior creditfacility provides for the issuance of letters of credit in an aggregate amountup to $80.0 million.  We hadapproximately $49.1 million of outstanding letters of credit atDecember 31, 2003.  Letters ofcredit issued reduce the availability of borrowings under our senior creditfacility for acquisitions and other general corporate purposes.  If we were unable to obtain surety bonds orletters of credit in sufficient amounts or at acceptable rates, we could beprecluded from entering into additional municipal solid waste collectioncontracts or obtaining or retaining landfill operating permits.

 

**Competition**

 

We operate in a highly competitive industry.  Entry into certain segments of our business and the ability tooperate profitably in our industry require substantial amounts of capital andmanagerial experience.

 

Competition in the non-hazardous solid waste management industry comes froma number of large, national, publicly-owned companies, including WasteManagement, Allied Waste Industries, Inc., Republic Services, Inc.  and Vivendi Environnement, S.A., severalregional, publicly-owned companies, such as Waste Connections, Inc., CasellaWaste Systems, Inc., and Waste Industries USA, Inc., and thousands of mid-sizeto small privately-owned companies in their respective markets.  Some of our competitors have significantlylarger operations, and significantly greater financial resources, than wehave.  In addition to national andregional firms and numerous local companies, we compete in a few markets withthose municipalities that maintain waste collection or disposal operations.  These

 

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municipalities may have financial advantages due to their access touser fees and similar charges, tax revenue and tax-exempt financing, and somecontrol of the disposal of waste collected within their jurisdictions.

 

We compete for collection accounts primarily on the basis of price andthe quality of our services.  From timeto time, competitors may reduce the price of their services in an effort toexpand market share or to win a competitively bid municipal contract.

 

In each market in which we operate a landfill, we compete for landfillbusiness on the basis of disposal costs, geographical location and quality ofoperations.  Our ability to obtainlandfill business may be limited by the fact that integrated collectioncompanies also operate landfills to which they send their waste.

 

**Regulation**

 

***Introduction***

 

Our operations, including landfills, waste transportation, transferstations, recycling facilities, vehicle maintenance shops and fuelingfacilities, are subject to extensive and evolving federal, state and localenvironmental laws and regulations, which have become increasingly stringent inrecent years.  The EPA and otherfederal, state and local environmental, land use, health and safety agenciesadminister these laws and regulations. These laws and regulations have required us, as well as the otherindustry participants, to incur substantial operating costs to comply.  Because we have historically been subject tosuch costly regulatory compliance, holding other variables constant, wetypically do not experience material increases in such compliance costs whencomparing year over year results, nor do we anticipate any such materialincreases.  Further regulatory changescould accelerate expenditures for closure and post-closure obligations and obligateus to spend sums in addition to those presently reserved for such purposes,substantially increasing our operating costs.

 

We believe that we are in substantial compliance with applicablefederal, state and local environmental laws, permits, orders andregulations.  We do not anticipate anymaterial costs necessary to bring our operations into compliance (although wecan give you no assurance in this regard). We anticipate that regulation, legislation and regulatory enforcementactions related to the solid waste management industry will continue toincrease.  We attempt to anticipatefuture regulatory requirements and to plan in advance as necessary to complywith them.

 

Our operation of landfills subjects us to certain operational,monitoring, site maintenance, closure, post-closure and other obligations whichcan give rise to significant costs for compliance and corrective measures.  In connection with our acquisition andcontinued operation of existing landfills, we must often spend considerable time,effort and money to obtain permits required to increase the capacity of theselandfills.  We cannot definitivelypredict whether or not we will be able to obtain the governmental approvalsnecessary to establish new or expand existing landfills.  See also Part II. Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources—Liquidity.”

 

The principal federal, state and local statutes and regulations thatapply to our operations are described below. Enforcement actions under these statutes may seek civil and/or criminalpenalties, as well as injunctive relief in some instances.  Some statutes also authorize governmentauthorities to seek damages for injury to natural resources.  All of the federal statutes described belowcontain provisions that authorize, under certain circumstances, lawsuits byprivate citizens to enforce the provisions of the

 

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statutes.  In addition to apenalty award, some of those statutes authorize an award of attorneys’ fees toparties who successfully bring such actions.

 

***The ResourceConservation and Recovery Act of 1976, as amended***

 

RCRA regulates the generation, treatment, storage, handling,transportation and disposal of solid waste and requires states to developprograms to ensure the safe disposal of solid waste.  RCRA divides solid waste into two groups, hazardous andnon-hazardous.  Wastes are generallyclassified as hazardous if they either (i) are specifically included on a listof hazardous wastes, or (ii) exhibit certain characteristics defined ashazardous.  Household wastes are notconsidered hazardous waste under RCRA. Wastes classified as hazardous under RCRA are subject to much stricterregulation than wastes classified as non-hazardous.  Businesses that generate or manage hazardous waste are subject toregulatory obligations above and beyond those imposed on businesses thatgenerate or manage only non-hazardous waste.

 

The EPA regulations issued under Subtitle C of RCRA impose acomprehensive system for tracking the generation, transportation, treatment,storage and disposal of hazardous wastes. The Subtitle C regulations impose obligations on generators, transportersand disposers of hazardous wastes, and generally require permits that arecostly to obtain and maintain for sites where hazardous waste is treated,stored or disposed.  Subtitle Cregulatory requirements include detailed operating, inspection, training andemergency preparedness and response standards, as well as requirements formanifesting, record keeping and reporting, corrective action, facility closure,final closure, post-closure and financial responsibility.  Most states have promulgated regulationsmodeled on some or all of the Subtitle C regulations.  Some state regulations impose different, additional and morestringent obligations, and may regulate certain materials as hazardous wastesthat are not so regulated under the Subtitle C regulations.  We are not in the business of transportingor disposing of wastes that are considered hazardous waste under state and/orfederal regulations.

 

In October 1991, the EPA adopted new Subtitle D regulationsgoverning solid waste landfills.  Theseregulations, which generally became effective in October 1993, includelocation restrictions, facility design standards, operating criteria, closure,final closure and post-closure requirements, financial assurance requirements,groundwater monitoring requirements, groundwater remediation standards andcorrective action requirements.  Inaddition, the Subtitle D regulations require that new landfill sites meetstringent liner design criteria (typically, composite soil and synthetic linersor two or more synthetic liners) intended to keep potentially toxic liquids andleachate out of groundwater and that they have extensive collection systems tocarry away these liquids for treatment prior to disposal.  Groundwater monitoring wells must also beinstalled at virtually all landfills to monitor groundwater quality and,indirectly, the effectiveness of the collection system.  The Subtitle D regulations also require,where certain thresholds are exceeded, that facility owners or operatorscontrol emissions of methane gas generated at landfills in a manner intended toprotect human health and the environment. Each state is required to maintain its landfill regulations to meetthese requirements or they will be automatically imposed by the EPA on landfillowners and operators in that state. Each state is also required to adopt and implement a permit program orother appropriate system to ensure that landfills in the state comply with theSubtitle D regulations.  Various statesin which we operate or in which we may operate in the future have adoptedregulations or programs as stringent as, or more stringent than, the Subtitle Dregulations.  Our landfills are subjectto the requirements of the Subtitle D regulations or more stringent stateregulations.

 

RCRA also regulates underground storage of petroleum and otherregulated materials.  RCRA requiresregistration of underground storage tanks, compliance with technical standardsfor tanks, release

 

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detection and reporting and corrective action, among other things.  Certain of our facilities and operations aresubject to these requirements.

 

From time to time, we may incur costs in complying with the foregoingrequirements in the ordinary course of our operations.

 

***The Federal WaterPollution Control Act of 1972, as amended***

 

This act, commonly known as the Clean Water Act, regulates thedischarge of pollutants into streams and other waters of the United States,from a variety of sources, including solid waste disposal sites.  If runoff from our landfills, transferstations or recycling facilities may be discharged into surface waters, theClean Water Act requires us to apply for and obtain discharge permits, conductsampling and monitoring and, under certain circumstances, reduce the quantityof pollutants in those discharges.  TheEPA has expanded the permit program to include stormwater discharges fromlandfills that receive, or in the past have received, industrial waste.  In addition, if we plan development that mayalter or affect wetlands, we may have to obtain a permit and undertakemitigation measures before development may be commenced.  This requirement is likely to affect theconstruction or expansion of many solid waste disposal sites, including some weown, operate or are developing.

 

***The Comprehensive EnvironmentalResponse, Compensation and Liability Act of 1980, as amended***

 

CERCLA addresses contamination of the environment caused by the releaseor threatened release of hazardous substances. CERCLA’s primary mechanism for accomplishing the cleanup of suchcontamination is to impose strict (i.e. liability imposed without regard to fault) liability for cleanup oncurrent owners and operators of the contaminated site, former site owners andoperators at the time of disposal, and parties who transported or arranged fordisposal of hazardous substances to or at the facility.  Liability under CERCLA can also be joint andseveral, meaning that a party can be held responsible for all the costs ofcleanup, regardless of the extent of its contribution to the contamination.  The costs of a CERCLA cleanup can besubstantial.  Liability under CERCLA canarise from the presence or disposal of even minute amounts of the more than 700“hazardous substances” listed by the EPA.

 

***The Clean Air Act of1970, as amended***

 

The Clean Air Act of 1970, as amended, regulates the emission of airpollutants.  The EPA has applied theClean Air Act to landfills.  InMarch 1996, the EPA adopted New Source Performance Standard and EmissionGuidelines for MSW landfills.  Theseregulations impose limits on air emissions from solid waste landfills.  The emission guidelines propose two sets ofemissions standards, one of which is applicable to all MSW landfills for whichconstruction, reconstruction or modification was commenced before May 30,1991.  The other applies to all MSWlandfills for which construction, reconstruction or modification was commencedon or after May 30, 1991.  The emissionguidelines may be implemented by the states. These guidelines, combined with the permitting programs establishedunder the Clean Air Act Amendments of 1990, potentially subject solid wastelandfills to significant permitting requirements and, in some instances,require installation of costly methane gas recovery systems.  The Clean Air Act or comparable state lawsmay also impose permitting requirements on our recycling facilities, dependingon the operations at each site.

 

***The OccupationalSafety and Health Act of 1970, as amended***

 

The Occupational Safety and Health Act of 1970, as amended, or OSHA,established certain employer responsibilities, including maintenance of aworkplace free of recognized hazards likely to

 

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cause death or serious injury, compliance with standards promulgated bythe Occupational Safety and Health Administration, and various record-keeping,disclosure and procedural requirements. Various standards, including standards for notices of hazards, safety inexcavation and demolition work, and the handling of asbestos, may apply to ouroperations.

 

***Future Legislation***

 

In the future, our collection, transfer and landfill operations mayalso be affected by legislation that has been proposed in the U.S.  Congress governing interstate shipments ofwaste.  This type of proposed federal legislation,which has been introduced regularly in Congress over the last decade, couldprohibit or limit the disposal of out-of-state waste under certaincircumstances.  In the past, proposedlegislation would have required states, under certain circumstances, to reducethe amounts of waste exported to other states. If this or similar legislation is enacted, our ability to acceptout-of-state waste could be limited or eliminated, and any of our landfillsthat receives a significant portion of waste originating from out-of-statecould be materially adversely affected. Our collection, transfer and landfill operations may also be affected by“flow control” legislation.  Certain statesand local governments may enact laws or ordinances directing waste generatedwithin their jurisdiction to a specific facility for disposal orprocessing.  If this or similarlegislation is enacted, state or local governments could act to limit orprohibit disposal or processing of waste in our transfer stations or landfills.

 

***Other FlowControl/Interstate Waste Restrictions***

 

Certain permits and approvals, as well as certain state and localregulations, may require a landfill or transfer station to limit the waste itaccepts to waste that originates from specified geographic areas, restrict theimportation of out-of-state waste or wastes originating outside the localjurisdiction or otherwise discriminate against non-local waste.  These restrictions, generally known as flowcontrol restrictions, are controversial, and some courts have held that someflow control schemes violate constitutional limits on state or local regulationof interstate commerce.  These types ofactions could adversely affect our landfills. These restrictions could also result in higher disposal costs for our collectionoperations.

 

Certain state and local jurisdictions may also seek to enforce flowcontrol restrictions through local legislation or contractually.  In certain cases, we may elect not tochallenge the restrictions.  Theserestrictions could reduce the volume of waste going to landfills in certainareas, which may adversely affect our ability to operate our landfills at theirfull capacity and/or reduce the prices that we can charge for landfill disposalservices.  These restrictions may alsoresult in higher disposal costs for our collection operations.

 

***State and LocalRegulations***

 

*General. *Eachstate where we now operate or may operate in the future has laws andregulations governing the generation, storage, treatment, handling,transportation and disposal of solid waste, water and air pollution and, inmost cases, the siting, design, operation, maintenance, closure, final closureand post-closure maintenance of landfills and transfer stations.  In addition, the State of New York has lawsand regulations specifically governing the management of waste tires applicableto our tire recycling facility. Pursuant to these laws and regulations, state and local permits,registrations and/or approvals for our operations may be required and may besubject to periodic renewal, modification or revocation by the issuingagencies.

 

In addition, many states have adopted statutes comparable to, and insome cases more stringent than, CERCLA. These statutes impose requirements for investigation and cleanup ofcontaminated sites

 

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and liability for costs and damages caused by contamination.  Some even provide for the imposition ofliens on property owned by responsible parties.  Some of those liens may take priority over previously filedinstruments.

 

Furthermore, many municipalities also have local ordinances, laws andregulations affecting our operations. These include land use and health measures that:

 

•                                          limitsolid waste management activities to specified sites or conduct;

 

•                                          includeflow control provisions that direct the delivery of solid wastes to specificfacilities or to facilities in specific areas;

 

•                                          includelaws that grant the right to establish exclusive municipal contracts forcollection services and then put out for bid the right to provide collectionservices; and

 

•                                          banor restrict the movement of solid wastes into a municipality.

 

Permits or other land use approvals with respect to a landfill orrecycling facility, as well as state or local laws and regulations, may specifythe quantity of waste that may be accepted during a given time period, and/orspecify the types of waste that may be accepted at the landfill.  Once an operating permit for a landfill isobtained, it must generally be renewed periodically.

 

The increasing trend at the state and local level has been to mandateand encourage waste reduction at the source and waste recycling, and toprohibit or restrict the disposal of certain types of solid wastes, includingyard wastes, leaves and tires in landfills. If regulations reducing the volume and types of wastes available fortransport to and disposal in landfills are enacted, we could be prevented fromoperating our facilities at their full capacity.

 

Some state and local authorities enforce certain federal laws inaddition to state and local laws and regulations.  For example, in some states, RCRA, OSHA, parts of the Clean AirAct and parts of the Clean Water Act are implemented by local or state authoritiesinstead of by the EPA, and in some states those laws are implemented jointly byfederal, state or local authorities.

 

Some state and local authorities have adopted or proposed laws andregulations that would impose fees on waste disposed of at landfills.  For example, legislation enacted inPennsylvania, effective as of July 2002, imposed an additional disposalfee of $4.00 per ton on all solid waste disposed at MSW landfills inPennsylvania, raising the total disposal fees assessed under state law to MSWlandfill operators to $7.25 per ton. See Part II. Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Sources of Revenue.”  In addition, Pennsylvania and Virginia areboth currently considering legislation that would impose a fee of an additional$5.00 on each ton of waste disposed of at landfills in their respectivestates.  Other states could follow thistrend as well.  Other proposed laws andregulations would impose an annual fee on collection vehicles doing business inthe applicable jurisdiction.  If theselaws or regulations are adopted in jurisdictions where we operate landfills orcollection vehicles, our operations and profitability could be negativelyaffected.

 

*New York City.*  The New York City Business Integrity Commission (f/k/a TradeWaste Commission), or the Business Integrity Commission, regulates and licensesour solid waste operations in New York City. In 1996, the New York City Council enacted Local Law 42 to regulate thewaste hauling industry within the City of New York.  Local Law 42 created the New York City Business IntegrityCommission and established rules for licensing and regulating the operations ofthe private collection industry in New York City.  The law prohibits the collection, disposal or transfer ofcommercial and

 

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industrial waste without a license issued by the Business IntegrityCommission and requires Business Integrity Commission approval of allacquisitions or other business combinations in New York City proposed by alllicensees.  The Business IntegrityCommission issued a license to us for our New York City collection operationson December 1, 1997.  A licenseegenerally must submit for review by the Business Integrity Commission eachacquisition, sale or merger transaction 120 days before the transaction takeseffect, although the amount of time required for review depends on thecomplexity of the transaction and the need by the Business Integrity Commissionto investigate the background of the principals involved.

 

The Business Integrity Commission also sets maximum rates for theindustry and establishes operational requirements.  Until recently, the Business Integrity Commission had placed amaximum limitation of $12.20 per loose yard on the fees a hauler could chargeto a commercial customer for waste collection services.  Disposal facilities in and around New YorkCity charge by the ton.  Based on theweight of certain customers’ loose yardage it historically was not economicalfor us to service customers with heavy waste. Accordingly, our New York City collection business had focused oncustomers that had loose garbage that was lighter and on those customers thathad a large paper recycling component, which enabled us to reduce our cost ofdisposal.  However, effectiveSeptember 2003, the Business Integrity Commission revised the maximum rateto permit haulers to charge commercial customers either the current $12.20 perloose yard rate or a new rate of $160.00 per ton.  The addition of the tonnage rate allows our New York Citycollection operations to service all customers in the areas in which weoperate.

 

***Recycling***

 

Another of the EPA’s objectives is to reduce the industry’s reliance onlandfills by promoting source reduction and recycling.  In 1989, the EPA set a national goal ofrecycling 25% of the waste stream by 1992 and 40% by 1996.  Although this goal was not achieved,significant changes in the level of recycling have occurred.  According to the EPA, in 2001, the MSWrecycling rate was 29.7%.  The EPA’scurrent recycling goal is 35% by 2005.

 

Recycling, now mandated by most states, has received much attentionover the past few years in response to a perceived shortage of landfill spaceand increased disposal fees at landfills. Of equal importance has been the public’s perception that recycling is asocially desirable goal, regardless of cost. Items targeted most often for recycling include aluminum, metal cans,glass, plastics, newspapers and yard waste. Many municipal waste collection and disposal contracts now require thatthe collection and handling of recyclables also be provided by the hauler.

 

Recycling activities do not reduce the amount of waste generated.  Rather, recycling divides existing trashbetween recyclables and unrecyclable trash that will be disposed of at alandfill or an incinerator.  Haulers areusually compensated for recycling collection activities by a municipality witha fixed monthly collection charge per residence and the sale proceeds from therecycled material.  The volatility ofcommodity prices for recycled goods has an effect on profit margins forrecycling operations.

 

While a portion of the commercial, industrial and residential waste isnow recycled industry-wide, the growth of recycling has slowed recently and itsfuture remains uncertain.  Thedetrimental economic effects of recycling often outweigh the perceived socialbenefits.  The imposition of recyclingprograms increases the costs to municipalities and consumers alike.  Much of the projected growth for recyclingwill depend upon new government regulations which could mandate that industriesutilize more recycled products in their manufacturing process.

 

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**Item2.  Properties.**

 

As of December 31, 2003, we operated 43 collectionoperations, 23 transfer stations, 17 landfills and seven recyclingfacilities in our two regions.  See PartI. “Item 1—Business—Operations.” We lease various offices and facilities,including our principal executive offices in Fort Worth, Texas and our regionalexecutive offices in Bayonne, New Jersey.

 

We own more than 780 waste collection vehicles and 200 supportvehicles.  We also own various otherequipment, including, carts, containers, commercial compactors and more than200 pieces of heavy equipment used at our landfills, transfer stations, andrecycling facilities.  We believe thatour existing facilities and equipment are adequate for our current operations.  Substantially all of our assets secure ourobligations under our senior credit facility.

 

**Item3.  Legal Proceedings.**

 

Our Tantalo landfill, operated by our Seneca Meadows, Inc.subsidiary, is the subject of a consent order issued by the New York Departmentof Environmental Conservation in September 2003.  The consent order requires Seneca Meadows, Inc. to develop ahazardous waste disposal site remedial program for the 26 acre, inactivelandfill.  See note 7 to ourconsolidated financial statements included elsewhere in this Annual Report onForm 10-K.  In connection with theTantalo landfill, Seneca Meadows, Inc. has filed a private cost recovery actionin the U.S. District Court for the Western District of New York against severalmanufacturing facilities that disposed of waste at the Tantalo landfill.  Because the remediation effort and the costrecovery action are still in preliminary stages, the total cost of theremediation is subject to change and the outcome of the allocation of costscannot be determined at this time with any certainty.

 

From time to time, we are involved in litigation and administrativeproceedings which arise in the ordinary course of our business.  Management does not believe that any of thelitigations or proceedings in which we are currently involved, eitherindividually or in the aggregate, are likely to have a material adverse effecton our business, financial condition, operating results or cash flows.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

 

No matters were submitted to a vote of our security holders during thefourth quarter of 2003.

 

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**PART II**

 

**Item 5. ****Market for the Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities.**

 

**Market Information**

 

There is no established public trading market for any classes of ourequity securities.

 

As of March 15, 2004, there were eight record holders of our ClassA voting common stock and 17 record holders of our Class B non-voting commonstock.

 

**Dividend Policy**

 

We have not paid cash dividends on either our Class A voting commonstock or Class B non-voting common stock and do not anticipate paying any suchdividends in the foreseeable future.  Weare currently prohibited by the terms of our loan agreements from paying cashdividends.

 

**Recent Sales of Unregistered Securities**

 

On October 10, November 20, and December 30, 2003, weissued an aggregate of 49,660 shares of our Series E convertible preferredstock for an aggregate purchase price of $49.7 million to a group of accreditedinvestors consisting mostly of existing stockholders and their affiliates andour management in a transaction exempt from the registration requirements ofthe Securities Act pursuant to Section 4(2) thereof and Regulation Dpromulgated thereunder.

 

Our Series E convertible preferred stock ranks senior to all otherclasses of our capital stock with respect to the payment of dividends anddistributions of the liquidation preferences applicable to shares of ourcapital stock.  Holders of our Series Econvertible preferred stock are entitled to receive, when, as and if declaredby our board of directors, cash dividends at a rate per annum equal to 10% ofthe liquidation preference applicable to our Series E convertible preferredstock.  The dividends are cumulative,compound on a semi-annual basis and are payable only upon our liquidation,dissolution or winding-up or certain types of sale transactions or asset salesas described in our Fifth Amended and Restated Certificate of Incorporation.

 

Holders of our Series E convertible preferred stock are entitled at anytime to convert all or any portion of their shares of preferred stock into anumber of shares of our Class A voting common stock or, if required byapplicable law, our Class B non-voting common stock, equal to the quotientobtained by dividing (a) the liquidation preference applicable to the shares ofpreferred stock being converted by (b) the then-applicable conversion price forthe shares of preferred stock being converted. The initial conversion price for our Series E convertible preferredstock is $100 per share and is adjustable upon the occurrence of certain eventsset forth in our Fifth Amended and Restated Certificate of Incorporation.

 

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**Item6.  Selected Financial Data.**

 

We set forth below our selected historical consolidated financialdata.  The information in the followingtable is qualified by reference to, and should be read in conjunction with,Item 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and our consolidated financial statements and therelated notes included elsewhere in this Annual Report on Form 10-K.

 

The selected historical statement of operations data and cash flow datafor the years ended December 31, 2001, 2002 and 2003 and the selectedhistorical balance sheet data at December 31, 2002 and 2003 set forthbelow have been derived from our audited consolidated financial statementsincluded elsewhere in this Annual Report on Form 10-K.  The selected historical statement ofoperations data and cash flow data for the years ended December 31, 1999and 2000 and the selected historical balance sheet data at December 31,1999, 2000 and 2001 set forth below have been derived from our audited consolidatedfinancial statements not included in this Annual Report on Form 10-K.  See Part II. Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe notes to our consolidated financial statements regarding acquisitions occurringin 2001, 2002 and 2003 which affect the comparability of the financialinformation presented.

 
|                                                                                                                                                                                                                  |   | **1999**                    |    | **2000** |   | **2001** |   | **2002** |    | **2003(1)** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|----------|--------|----------|--------|----------|---------|-------------|--------|
|                                                                                                                                                                                                                  |   | **(dollars  in thousands)** |    |
| **Statement of Operations Data:**                                                                                                                                                                                     |   |                        |    |     |   |     |   |     |    |        |   |
| Services revenue                                                                                                                                                                                                      |   | $                           | 110,115 |     | $      | 139,634  |   | $        | 185,690 |        | $      | 212,941 |   | $ | 256,015 |   |
| Costs and expenses:                                                                                                                                                                                                   |   |                        |    |     |   |     |   |     |    |        |   |
| Operating                                                                                                                                                                                                             |   | 79,807                      |    | 90,560   |   | 119,816  |   | 139,641  |    | 164,203     |   |
| General and administrative                                                                                                                                                                                            |   | 19,084                      |    | 18,543   |   | 24,063   |   | 25,537   |    | 32,723      |   |
| Depreciation, depletion and amortization                                                                                                                                                                              |   | 15,007                      |    | 20,087   |   | 25,722   |   | 27,849   |    | 41,079      |   |
| Total costs and expenses                                                                                                                                                                                              |   | 113,898                     |    | 129,190  |   | 169,601  |   | 193,027  |    | 238,005     |   |
| Income (loss) from operations                                                                                                                                                                                         |   | (3,783                      | )       | 10,444   |   | 16,089   |   | 19,914   |    | 18,010      |   |
| Interest expense, net                                                                                                                                                                                                 |   | (7,905                      | )       | (11,142  | )      | (12,961  | )      | (14,067  | )       | (20,276     | )      |
| Loss on termination of interest rate swaps                                                                                                                                                                            |   | —                      |    | —   |   | —   |   | (826     | )       | —      |   |
| Loss on extinguishment of debt                                                                                                                                                                                        |   | —                      |    | —   |   | —   |   | (586     | )       | —      |   |
| Other income (expense), net                                                                                                                                                                                           |   | 1,705                       |    | (186     | )      | (178     | )      | (103     | )       | (340        | )      |
| Income (loss) before income taxes                                                                                                                                                                                     |   | (9,983                      | )       | (884     | )      | 2,950    |   | 4,332    |    | (2,606      | )      |
| Income tax expense                                                                                                                                                                                                    |   | (83                         | )       | (171     | )      | (703     | )      | (3,726   | )       | (3,704      | )      |
| Income (loss) before cumulative effect of  change in  accounting principle                                                                                                                                       |   | (10,066                     | )       | (1,055   | )      | 2,247    |   | 606      |    | (6,310      | )      |
| Cumulative effect of change in accounting  principle net of income tax benefit of $0                                                                                                                                  |   | —                      |    | —   |   | —   |   | —   |    | (1,531      | )      |
| Net income (loss)                                                                                                                                                                                                     |   | $                           | (10,066 | )        | $      | (1,055   | )      | $        | 2,247   |        | $      | 606 |   | $ | (7,841 | ) |
| Pro forma income (loss) before cumulative  effect of change in accounting principle, assuming change in accounting  principle described in Note 2 to the consolidated financial statements was  applied retroactively |   | $                           | (10,554 | )        | $      | (1,397   | )      | $        | 1,946   |        | $      | 138 |   | $ | (6,310 | ) |

 

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|                                       |   | **At  December 31,**   |   |
|--------------------------------------------|--------|-----------------------------|--------|
|                                       |   | **1999**                    |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                       |   | **(dollars  in thousands)** |   |
|                                       |   |                        |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                    |   |                        |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                  |   | $                           | 2,048  |   | $ | 5,073 |   | $ | 2,171 |   | $ | 2,590 |   | $ | 4,197 |   |
| Working capital                            |   | 11,184                      |   | 3,828 |   | (158 | ) | 469 |   | (8,003 | ) |
| Property and equipment, net                |   | 133,170                     |   | 175,094 |   | 198,521 |   | 241,870 |   | 488,660 |   |
| Goodwill, net                              |   | 84,215                      |   | 106,224 |   | 107,656 |   | 128,409 |   | 138,336 |   |
| Other intangible assets, net               |   | 14,733                      |   | 14,107 |   | 15,576 |   | 22,666 |   | 32,986 |   |
| Total assets                               |   | 259,254                     |   | 324,239 |   | 354,308 |   | 428,059 |   | 703,047 |   |
| Long-term debt (including current portion) |   | 107,518                     |   | 161,849 |   | 120,351 |   | 198,571 |   | 380,861 |   |
| Redeemable preferred stock                 |   | 121,575                     |   | 131,395 |   | 195,272 |   | 213,350 |   | 283,054 |   |
| Stockholders’ equity (deficit)        |   | 3,019                       |   | (7,860 | ) | (18,353 | ) | (36,224 | ) | (65,751 | ) |
|                                            |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                                                              |   | **1999**                    |    | **2000** |   | **2001** |   | **2002** |   | **2003(1)** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------|---------|----------|--------|----------|--------|----------|--------|-------------|--------|
|                                                                              |   | **(dollars  in thousands)** |    |
| **Other Financial Data:**                                                         |   |                        |    |     |   |     |   |     |   |        |   |
| Cash provided by (used in) operating  activities                                  |   | $                           | (16,855 | )        | $      | 24,588   |   | $        | 28,803 |        | $      | 30,624 |   | $ | 46,484 |   |
| Cash used in investing activities                                                 |   | (101,409                    | )       | (76,035  | )      | (48,642  | )      | (88,111  | )      | (269,579    | )      |
| Cash provided by financing activities                                             |   | 118,501                     |    | 54,471   |   | 16,938   |   | 57,905   |   | 224,702     |   |
| Income from operations before depreciation,  depletion and amortization(2)        |   | $                           | 11,224  |     | $      | 30,531   |   | $        | 41,811 |        | $      | 47,763 |   | $ | 59,089 |   |
| Income from operations before depreciation,  depletion and amortization margin(3) |   | 10.2                        | %       | 21.9     | %      | 22.5     | %      | 22.4     | %      | 23.1        | %      |

 

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(1)           The selected financialdata presented for the year ended December 31, 2003 include the results ofoperations of our Seneca Falls, New York landfill from the acquisition date ofOctober 9, 2003 through  year-end.

 

(2)           In addition todisclosing financial results that are determined in accordance with generallyaccepted accounting principles, or GAAP, we also disclose income fromoperations before depreciation, depletion and amortization, which is not a GAAPmeasure.  We believe that ourpresentation of income from operations before depreciation, depletion andamortization is useful to investors because it is an indicator of the strengthand performance of our ongoing business operations, including our ability tofund capital expenditures and to incur and service debt.  In addition, certain covenants in our seniorcredit facility are tied to a substantially similar measure (which permits usto add back certain additional amounts to income from operations).  While depreciation, depletion andamortization are considered operating costs under GAAP, these expensesrepresent the non-cash current period allocation of costs associated withlong-lived assets acquired or constructed in current and prior periods.  We also use income from operations beforedepreciation, depletion and amortization to evaluate our operations andmanagement performance.  We do notintend for income from operations before depreciation, depletion andamortization to be considered in isolation or as a substitute for GAAPmeasures.  Other companies may definethis financial measure differently. Following is a reconciliation of income from operations beforedepreciation, depletion and amortization to income from operations:

 

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|                                                                    |                                     | **1999**            |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|-------------------------------------------------------------------------|------------------------------------------|---------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                                    |                                     | **(in  thousands)** |   |
|                                                                    |                                     |                |   |     |   |     |   |     |   |     |   |
| Income from operations before depreciation,  depletion and amortization |                                     | $                   | 11,224 |     | $      | 30,531   |   | $        | 41,811 |     | $      | 47,763 |   | $ | 59,089 |   |
| Less:                                                                   | depreciation, depletion and amortization |                | 15,007 |     | 20,087 |     | 25,722 |     | 27,849 |     | 41,079 |   |
|                                                                    |                                     |                |   |     |   |     |   |     |   |     |   |
| Income (loss) from operations                                           |                                     | $                   | (3,783 | )        | $      | 10,444   |   | $        | 16,089 |     | $      | 19,914 |   | $ | 18,010 |   |
|                                                                         |                                          |                     |        |          |        |          |        |          |        |          |        |  |  |  |  |  |  |

 

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(3)                        Income from operations beforedepreciation, depletion and amortization margin represents income fromoperations before depreciation, depletion and amortization expressed as apercentage of revenue.

 

**Item 7****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

*You should read the following discussion in conjunction with Item 6.“Selected Financial Data” and our consolidated financial statements and therelated notes included elsewhere in this Annual Report on Form 10-K.  Some of the statements in the followingdiscussion are forward-looking statements and, accordingly, are subject torisks and uncertainties discussed below under “—Risk Factors” and elsewhere inthis Annual Report on Form 10-K, as well as in our other filings with theSecurities and Exchange Commission, which could cause actual results to differmaterially from those currently anticipated.*

 

**Industry Overview**

 

The non-hazardous solid waste management industry is characterized aslocalized businesses driven by local economic and demographic factors as wellas fluctuations in capacity utilization, in both the collection and landfillbusiness.  The business is competitive,with competition coming from large well capitalized national companies, regionalmulti-location companies (some that are also well capitalized) and smallerindividual local independent businesses. The industry requires substantial labor and capital resources.  Customers require high levels of service,and competitors compete for new collection customers primarily on the basis ofprice and the quality of service. Localized markets typically have limited number of landfill businessesand these businesses compete for customers on the basis of tipping fees,geographic location and the quality of the operations.

 

Generally, the most profitable industry operators are those companiesthat are vertically integrated. Companies with vertical integration have collection routes in a localmarket, use their own transfer stations when required due to the distancebetween the collection route and landfill, and own or operate a landfillservicing the same local market. Companies that have a vertically integrated market benefit from theinternalization of waste (bringing waste to a company-owned landfill) and theability to charge third-party haulers tipping fees either at landfills or attransfer stations.

 

This industry has been consolidating for nearly forty years.  The consolidation in this industry is theresult of several factors, including increasing costs and complexity associatedwith waste management operations, fewer landfills and strict regulatorycompliance.  For many years now, smallindependent operators as well as municipalities have lacked the capitalresources, quality of management, operating skills and the technical expertisenecessary to operate effectively.  Theindustry consolidation coupled with a strict regulatory environment that hasclosed thousands of small poorly run municipal landfills, has caused solidwaste companies to operate larger more regional long-lived landfills.  As the total number of operating landfillshave continue to decrease nationwide, landfills servicing a local market havetended to move a greater distance from the center of the local market.  Strict regulations and increasingtransportation costs have increased collection costs in some markets.  To remain competitively priced,

 

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controlling the point of transfer from collection routes, throughtransfer stations to a landfill owned or operated by the company has becomeincreasingly important.  The solid wasteindustry is experiencing continuing consolidation as companies seek to takeadvantage of economies of scale by increasing route densities and market sharein hauling operations, and by reducing disposal expenses by owning transferstations and controlling landfill operations.

 

We are one of the leading regional, non-hazardous solid wastemanagement companies in the United States and more than 80% of our collectionrevenue in 2003 was generated in areas where we believe we are among the topthree commercial providers, as measured by collection routes.  We provide collection, transfer, disposaland recycling services in two geographic regions: our South Region, consistingof Texas, Louisiana, Oklahoma, Arkansas and Missouri; and our Northeast Region,consisting of New York, New Jersey, Pennsylvania and Maryland.  In 2003, we were the tenth largest, and thethird largest privately held, service provider in the approximately $43 billionnon hazardous solid waste management industry in the United States.  In order to compete in the industry, in thepast five years we have increased through acquisition the number of landfillswe own or operate from two at the end of 1998 to 17 at the end of 2003, and duringthe same period increased our disposal internalization rate into our landfillsfrom under 10.0% to over 58.0% by the end of 2003.  In addition our tuck-in acquisition program focuses on acquiringcollection companies in markets where we can internalize the waste into ournetwork of landfills and transfer stations.

 

**Executive Overview**

 

In 2003, we continued to execute our strategy of growth throughacquisitions within our existing markets. Our 2003 acquisition activity was highlighted by our $227.8 million(subject to adjustment) acquisition in October of Seneca Meadows, Inc.,the owner of the largest MSW landfill in New York State, which has enabled usto internalize 100% of the MSW we handle at our New York City collectionoperations and transfer stations, and our $5.3 million acquisition inJuly of an MSW landfill from the City of Weatherford, Texas which hasenabled us to internalize substantially all of our MSW waste collected in andaround our Fort Worth, Texas district. In addition, in August 2003 we finished construction and openedgreenfield landfills in Richmond, Missouri (near St. Louis) and Oakdale,Louisiana (near Alexandria,) which we had previously acquired in 2002.  In April 2003, we received a landfillexpansion permit for our Bethlehem Pennsylvania landfill which, among otherthings, increased our permitted average daily capacity at the landfill from 750tons to 1,375 tons.  The addition ofthese four new landfills and the Bethlehem landfill expansion increased ourinternalization rate from more than 40% at the beginning of 2002 to more than58% by the end of 2003.  We believe thatthis higher level of internalization will result in higher gross margins,higher levels of depletion expense and higher capital expenditures.

 

Our 20.2% year-over-year revenue growth in 2003 was partially theresult of acquisitions completed during 2003, as well as the rollover effectfrom acquisitions completed in 2002. Our 2003 acquisitions resulted in approximately $19.1 million of our2003 revenue growth.  We estimate thatthese acquisitions should contribute at least $46.0 million of rollover revenuegrowth in 2004.  In general, acquiredcollection operations have lower operating margins than our existing collectionoperations during an initial integration period of three to six monthsfollowing the closing date.  Landfillacquisitions, on the other hand, generally have a more immediate impact on ouroperating margins, as we experienced with our acquisition of the Seneca Falls,New York landfill during the fourth quarter of 2003.

 

Despite challenges related to a poor national economy and adverseweather conditions primarily in our Northeast Region during the first quarterof 2003, we were able to continue to show strong internal growth.  Our 2003 internal revenue growth from newbusiness was 3.1% and from existing business was

 

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2.8% primarily as a result of price increases.  During 2003, we added 13 new municipalcontracts resulting in new aggregate annual revenue of $4.9 million.

 

***Expansion ofManagement***

 

In 2003 and early 2004, we expanded our management infrastructure inthe areas of operations, accounting and management information systems to (i)better support our growth, (ii) help improve our under-performing operations,(iii) increase the focus on reducing accidents, injuries and claims managementand (iv) support our implementation of requirements under the Sarbanes-OxleyAct of 2002.  We also expanded our managementinfrastructure in our Northeast Region by adding a vice president regionalmanager in 2003.

 

***Capital Expenditures***

 

We incurred $54.9 million in capital expenditures in 2003 to continueto grow our business, open the two new greenfield landfills described above,expand our landfill capacity and update our fleet of collection vehicles.  Our collection vehicles had an average ageof 5.3 years at the end of 2003, representing only a slight increase from2002.  In 2003, we narrowed the gapbetween our total capital expenditures and our net cash provided by operatingactivities.  We expect that our net cashprovided by operating activities will exceed our capital expenditures in2004.  We intend to use the excess, if any,to help finance acquisitions and/or reduce our indebtedness.

 

***Financings***

 

During the fourth quarter of 2003, we completed the sale of $48.0million of new equity capital, net of fees and expenses, primarily from ourexisting shareholders and their affiliates and management.  Our Series E convertible preferred stock isthe most senior class of our equity securities and is otherwise substantiallysimilar to our Series D convertible preferred stock.  The new equity helped finance our acquisition of the SenecaFalls, New York landfill.  To date, wehave raised in excess of $240.0 million of equity capital.

 

In October 2003, we also refinanced our senior credit facilitywhich was to mature in August 2005. The expanded $400.0 million senior credit facility includes up to $200.0million in revolving loans, which mature on September 30, 2008, and a$200.0 million term loan, which matures on September 30, 2010.  The $200.0 million term loan and borrowingsof $33.7 million under the revolver were used to refinance our existing seniorcredit facility and to finance a portion of the purchase price and expensesrelated to our acquisition of Seneca Falls, New York landfill.  Future borrowings under the revolver may beused to finance future acquisitions, capital expenditures, working capital andfor other general corporate purposes.

 

**Critical Accounting Policies**

 

The following is a discussion of accounting policies applicable toareas where, in preparing our consolidated financial statements, we applysignificant judgments and estimates that are inherently uncertain and thataffect the reported amounts in such consolidated financial statements:

 

*Landfill Life Cycle Accounting*.  We use life cycle accounting and theunits-of-consumption method to recognize certain landfill costs.  In life cycle accounting, all costs toacquire, construct and close a site and to maintain a site during thepost-closure period are capitalized or accrued and charged to expense based onthe consumption of cubic yards of available airspace (sometimes referred to asdisposal capacity).  During 2003, wecontinued to account for our landfills using this industry-wide accounting

 

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methodology with the exception of capitalized and future landfill finalcapping costs.  Pursuant to SFAS No.143, we accrue future final capping costs for each specific capping event andamortize those capping costs over the estimated disposal capacity related tothat event rather than over the operating life of our entire landfill, as wasour practice prior to our adoption of SFAS No. 143.

 

Airspace estimates and cost estimates for final capping, closure andpost-closure activities are developed annually by independent engineerstogether with our engineers.  Theseestimates are used by our operating and accounting personnel to annually adjustour rates used to expense capitalized landfill development costs and accrueclosure and post-closure costs.  We alsoestimate additional costs, as required under SFAS No. 143, based on the amounta third party would charge us to perform such activities, even when we expectto perform these activities internally. Because landfill final capping, closure and post-closure obligations aremeasured at estimated fair value using present value techniques, changes in theestimated timing of future landfill final capping and closure and post-closureactivities would have an effect on these liabilities, related assets andresults of operations.  Additionally,major changes in our airspace estimates could significantly affect our depletionexpense as well as closure, final closure and post-closure related expenses.

 

We revise our estimates of remaining airspace to be consumed, totalconstruction and other development costs and closure and post-closure costsannually in the ordinary course of our business when we receive updated informationrelated to such airspace and costs.  Atthe time of the acquisition of a new landfill, we typically initially use theexisting estimates of the acquired landfill.

 

As of December 31, 2003, we estimated total future constructionand other development costs for our then existing landfills to be$436.8 million over their then estimated remaining operating lives.  Actual future costs of constructionmaterials and third party labor could differ from the costs we have estimatedand changes in legislative or regulatory requirements may cause changes in thelandfill permitting process or landfill design and development.  Evaluations of new facts and circumstancesrelating to site permit and design criteria or development costs could alsoresult in revisions to our cost estimates. Changes in our construction and other development cost estimates arereflected prospectively in the landfill depletion rates that are updatedannually.

 

Historically, the significant changes we have made to prior remainingairspace, total construction and other development costs and closure andpost-closure costs estimates resulted from our inclusion of additionalremaining airspace related to landfill expansions that had not yet receivedfinal approval from the applicable regulatory agencies, but met the criteriaoutlined below and were deemed probable to be permitted where such additionalcapacity had not been previously included or resulted from our annual update ofthe above costs and remaining airspace estimates related to newly-acquiredlandfills.  In addition, upon theacquisition of landfills, we often use expansion airspace estimates fromsellers in determining our remaining landfill volumes at the newly-acquiredlandfills.  Our post-closing internalanalyses of these estimates have sometimes resulted in changes in the estimatedremaining airspace at these landfills.

 

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The following tables reflects airspaceactivity for our landfills during the periods indicated: 

 
|                                 |   | **Balance as  of  December 31,  2000** |   | **New  Expansions  Undertaken** |   | **Landfills  Acquired,  Net of  Divestitures** |   | **Permits  Granted** |   | **Airspace  Consumed** |   | **Changes in  Engineering  Estimates** |   | **Balance as  of  December 31,   2001** |   |
|--------------------------------------|--------|---------------------------------------------|--------|---------------------------------|--------|------------------------------------------------|--------|----------------------|--------|------------------------|--------|----------------------------------------|--------|----------------------------------------------|--------|
| Permitted airspace:                  |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                         |   |
| Cubic yards (in thousands)           |   | 56,302                                      |   |                            |   | 407                                            |   | 8,000                |   | (2,432                 | )      | 768                                    |   | 63,045                                       |   |
| Number of sites                      |   | 9                                           |   |                            |   | 1                                              |   |                 |   |                   |   |                                   |   | 10                                           |   |
| Expansion airspace:                  |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                         |   |
| Cubic yards (in thousands)           |   | 46,529                                      |   | 9,200                           |   | 9,434                                          |   |                 |   |                   |   | 11,853                                 |   | 77,016                                       |   |
| Number of sites                      |   | 5                                           |   | 1                               |   | 1                                              |   |                 |   |                   |   |                                   |   | 7                                            |   |
|                                 |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                         |   |
| Total available disposable capacity: |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                         |   |
| Cubic yards (in thousands)           |   | 102,831                                     |   | 9,200                           |   | 9,841                                          |   | 8,000                |   | (2,432                 | )      | 12,621                                 |   | 140,061                                      |   |
|                                 |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                         |   |
| Number of sites                      |   | 9                                           |   |                            |   | 1                                              |   |                 |   |                   |   |                                   |   | 10                                           |   |

 
|                                 |   | **Balance as  of   December 31,   2001** |   | **New  Expansions  Undertaken** |   | **Landfills  Acquired,  Net of  Divestitures** |   | **Permits  Granted** |   | **Airspace  Consumed** |   | **Changes in  Engineering  Estimates** |   | **Balance as  of   December 31,   2002** |   |
|--------------------------------------|--------|-----------------------------------------------|--------|---------------------------------|--------|------------------------------------------------|--------|----------------------|--------|------------------------|--------|----------------------------------------|--------|-----------------------------------------------|--------|
|                                 |   |                                          |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                          |   |
| Permitted airspace:                  |   |                                          |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                          |   |
| Cubic yards (in thousands)           |   | 63,045                                        |   |                            |   | 27,091                                         |   | 9,200                |   | (2,787                 | )      | 4,310                                  |   | 100,859                                       |   |
| Number of sites                      |   | 10                                            |   |                            |   | 4                                              |   |                 |   |                   |   |                                   |   | 14                                            |   |
| Expansion airspace:                  |   |                                          |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                          |   |
| Cubic yards (in thousands)           |   | 77,016                                        |   |                            |   | 10,363                                         |   | (9,200               | )      |                   |   | (794                                   | )      | 77,385                                        |   |
| Number of sites                      |   | 7                                             |   |                            |   | 2                                              |   | (1                   | )      |                   |   |                                   |   | 8                                             |   |
|                                 |   |                                          |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                          |   |
| Total available disposable capacity: |   |                                          |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                          |   |
| Cubic yards (in thousands)           |   | 140,061                                       |   | —                          |   | 37,454                                         |   | —               |   | (2,787                 | )      | 3,516                                  |   | 178,244                                       |   |
|                                 |   |                                          |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                          |   |
| Number of sites(1)                   |   | 10                                            |   |                            |   | 4                                              |   |                 |   |                   |   |                                   |   | 14                                            |   |

 
|                                 |   | **Balance as  of  December 31,  2002** |   | **New  Expansions  Undertaken** |   | **Landfills  Acquired,  Net of  Divestitures** |   | **Permits  Granted** |   | **Airspace  Consumed** |   | **Changes in  Engineering  Estimates** |   | **Balance as  of  December 31,  2003** |   |
|--------------------------------------|--------|---------------------------------------------|--------|---------------------------------|--------|------------------------------------------------|--------|----------------------|--------|------------------------|--------|----------------------------------------|--------|---------------------------------------------|--------|
| Permitted airspace:                  |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                        |   |
| Cubic yards (in thousands)           |   | 100,859                                     |   |                            |   | 15,833                                         |   | 8,028                |   | (4,074                 | )      | 6,792                                  |   | 127,438                                     |   |
| Number of sites                      |   | 14                                          |   |                            |   | 2                                              |   |                 |   |                   |   |                                   |   | 16                                          |   |
| Expansion airspace:                  |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                        |   |
| Cubic yards (in thousands)           |   | 77,385                                      |   |                            |   | 47,829                                         |   | (8,028               | )      |                   |   | 2,200                                  |   | 119,386                                     |   |
| Number of sites                      |   | 8                                           |   |                            |   | 3                                              |   | (1                   | )      |                   |   |                                   |   | 10                                          |   |
|                                 |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                        |   |
| Total available disposable capacity: |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                        |   |
| Cubic yards (in thousands)           |   | 178,244                                     |   | —                          |   | 63,662                                         |   | —               |   | (4,074                 | )      | 8,992                                  |   | 246,824                                     |   |
|                                 |   |                                        |   |                            |   |                                           |   |                 |   |                   |   |                                   |   |                                        |   |
| Number of sites(1)                   |   | 14                                          |   |                            |   | 2                                              |   |                 |   |                   |   |                                   |   | 16                                          |   |

 

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(1)          Excludes one landfill operated by us atwhich, pursuant to the terms of the applicable operating contract, we are notresponsible for the construction, closure and post-closure costs (and, as aresult, for which we do not prepare engineering estimates).

 

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As of December 31, 2003, we estimated total future payments forlandfill capping events and final closure and post-closure obligations for ourthen existing landfills to be approximately $189 million.  The post-closure period during which we arerequired to maintain and monitor our landfills usually extends for30 years for MSW landfills and five years for C&D landfills.  Changes in legislative or regulatoryrequirements, including changes in capping or monitoring requirements, typesand quantities of materials used or length of post-closure care could causechanges in our closure and post-closure costs. Changes in our closure and post-closure cost estimates are reflectedprospectively in the closure and post-closure accrual rates that are updatedannually for our operating landfills but are recorded immediately for ourclosed landfills.

 

Our accruals for landfill capping events and final closure and post-closurecosts were $19.9 million as of December 31, 2003, $10.9 millionas of December 31, 2002 and $10.4 million as of December 31,2001.  The net increase of$9.0 million from December 31, 2002 to December 31, 2003resulted from accruals of $1.6 million based on the consumption ofdisposal capacity at our landfills during 2003, $8.9 million based on thehistorical consumption of disposal capacity at landfills we acquired in 2003during the periods prior to such acquisitions and $1.1 million of accretionexpense and $219,000 from a revision of estimates, both related to our adoptionof SFAS No. 143 effective January 1, 2003, offset by $1.9 millionrelated to the cumulative effect of change in accounting principle from theadoption of SFAS No. 143 on January 1, 2003 and actual cash expendituresagainst these accruals during 2003 of $920,000.  The net increase of $463,000 from December 31, 2001 toDecember 31, 2002 resulted from accruals of $358,000 based on theconsumption of disposal capacity at our landfills during 2002 and $147,000based on the historical consumption of disposal capacity at landfills weacquired in 2002 during the periods prior to such acquisitions, offset byactual cash expenditures against these accruals during 2002 of $42,000.

 

Landfill depletion rates are influenced by our original cost basis forthe landfill, including acquisition costs. Landfills acquired with other assets in business acquisitions are valuedat the time of acquisition based upon market value and the purchase price isallocated accordingly.  Landfilldepletion rates are also influenced by site specific engineering and other costfactors and estimates of remaining disposal capacity at our landfills.  Closure and post-closure accrual rates areinfluenced by our closure and post-closure cost estimates and our estimates ofremaining disposal capacity at our landfills. In addition, when we acquire a new landfill, our then current averagelandfill depletion rate per ton and closure and post-closure accrual rate perton will likely be altered based on the acquisition cost for the landfill andour estimates of total construction and other development costs, closure andpost-closure costs and remaining airspace available to be consumed with respectto such landfill.

 

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*Probable to be Permitted Airspace at a Landfill. *We include in ourcalculation of total available landfill airspace expansion areas that have notyet received final approval from regulatory agencies but that, in ourdetermination, are probable to be permitted. We have developed the following five criteria that generally must be metbefore airspace included in an expansion area is determined as probable to bepermitted and, therefore, included in our calculation of total availabledisposal capacity:

 

•                                          theland associated with the expansion airspace is either owned by us or controlledby us pursuant to an option agreement;

 

•                                          weare committed to supporting the expansion project financially and withappropriate resources;

 

•                                          thereare no identified irremediable flaws or impediments associated with theproject, including political impediments;

 

•                                          theexpansion is attainable within a three to five year time frame; and

 

•                                          progressis being made on the project.

 

When our landfill expansion projects meet these criteria, we adjust therates used for each applicable landfill to expense costs to acquire, constructand close a site and to maintain the site during the post-closure period toinclude probable to be permitted airspace and all additional costs to becapitalized or accrued associated with the expansion airspace.  Once a landfill meets these expansioncriteria, our management continually monitors each site’s progress in obtainingthe expansion permit.  If, at any point,we determine that an expansion area no longer meets the required criteria, theprobable to be permitted airspace is removed from the landfill’s totalavailable capacity, the additional costs to be capitalized or accruedassociated with the expansion airspace are removed from the expense calculationand the rates used at the landfill to expense costs to acquire, construct andclose a site and to maintain the site during the post-closure period areadjusted accordingly.  In addition, ifwe remove previously included expansion airspace, the landfill’s futureoperations will typically reflect lower profitability due to higher depletionrates, final closure and post-closure accrual rates and expenses related tosuch removal.  The landfill may alsobecome subject to impairment, which could be material to our results ofoperations during any individual reporting period.  In any of these scenarios, our depletion and closure, finalclosure and post-closure expenses could change significantly.

 

*Useful Lives. *Propertyand equipment are recorded at cost. Depreciation and amortization expense is provided over the estimateduseful lives of the applicable assets using the straight-line method.  Depreciation is calculated on thestraight-line method over the estimated useful lives of the related assetswhich generally range from three to five years for furniture, fixtures andcomputer equipment; five to ten years for containers, compactors, trucks andcollection equipment; and ten to 40 years for buildings and improvements.  We assume no salvage value for ourdepreciable property and equipment.  Ourestimates regarding the useful lives of our depreciable assets are based on ourjudgment.  Accordingly, actual usefullives could differ from our estimates.

 

*Capitalized Interest. *Wecapitalize interest on landfill cell construction projects and otherconstruction projects in accordance with SFAS No. 34, “Capitalization ofInterest Cost.” Capitalizing too much or too little interest expense could leadto a misstatement of interest expense in our statements of operations.  In order to minimize this risk, constructionprojects must meet the following criteria before interest is capitalized: (a)total construction cost must be $100,000 or greater; (b) the construction phasemust last a month or longer; and (c) the assets must have a useful life ofthree years or longer.

 

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*Revenue and Accounts Receivable. *Our revenue consists primarily of collectionfees from various customer types, and transfer and landfill disposal feescharged to third parties.  Advancebillings are recorded as deferred revenue. Our revenue is recognized over the period in which services areprovided.  Reserves for accountsreceivable are provided when a receivable is believed to be uncollectible orgenerally when a receivable is in excess of 90-120 days old.  Establishing reserves against specificaccounts receivable and the overall adequacy of our accounts receivable reserveis a matter of professional judgment. If our judgment and estimates concerning the adequacy of our reservesfor accounts receivable are incorrect, our bad debt expense would change.

 

*Asset Impairment. *Weperiodically evaluate whether events and circumstances have occurred that maywarrant revision of the estimated useful lives of our property and equipmentand amortizable intangible assets or whether the remaining balance of theseassets should be evaluated for possible impairment.  We use an estimate of the undiscounted cash flow over theremaining life of the assets in assessing their recoverability.  We measure impairment loss as the amount ofthe asset, as carried on our books, that exceeds the fair value of the asset.  Our estimates of the future cash flows arebased on our judgment.  Accordingly, wecould designate certain assets as impaired that are not impaired or fail toidentify certain impaired assets.

 

*Derivatives. *Weperiodically use derivatives to limit our exposure to fluctuations in interestrates and limit our exposure to changes in the fair value of our fixed-ratedebt due to fluctuations in interest rates. These derivatives have been accounted for in accordance with SFASNo. 133, “Accounting for Derivative and Hedging Activities,” as amended bySFAS No. 138, “Accounting for Certain Derivative Instruments and CertainHedging Activities.” The hedging relationships we have developed are, in ourjudgment, either 100% effective or highly effective and have been determined byus to meet the criteria for hedge accounting. If these relationships are determined to be other than 100% or highlyeffective, or if they no longer meet the criteria for hedge accounting, ourresults of operations could change.

 

**Sources of Revenue**

 

Our revenue consists primarily of fees we charge customers for solidwaste collection, transfer and disposal and recycling services.  We frequently perform these services underservice agreements with businesses, contracts with municipalities, landlords orhomeowners’ associations, or subscription arrangements with homeowners.  We estimate that more than 40% of our SouthRegion’s revenue was generated from 273 municipal contracts during 2003.  Our contracts with the City of New York representedin the aggregate approximately 30% of our Northeast Region’s, and approximately11% of our overall, revenue in 2003. Contracts with municipalities provide relatively consistent cash flowduring the terms of the contracts.  Ourmunicipal contracts generally last from three to five years and usually haverenewal options.  Many of our municipalcontracts are franchise agreements that give us the exclusive right to providespecified waste services within a specified territory during the contractterm.  These exclusive arrangements aretypically awarded, at least initially, on a competitive bid basis or through aformalized proposal and subsequently on a bid or negotiated renewal basis.  Collection fees are paid either by themunicipalities from their tax revenue or directly by the residents receivingthe services.  Our collection businessfrom time to time also generates revenue from the sale of recyclablecommodities depending on the pricing of the commodities; however, such revenuedoes not represent a significant part of our recycling revenue.  After recyclables are collected, they aredelivered to other sorting facilities operated by third parties.

 

We typically determine the prices for our collection services by thecollection frequency and level of service, route density, volume, weight andtype of waste or recyclable material collected, type of equipment andcontainers furnished, the distance to the disposal or processing facility, thecost of disposing or processing, and prices charged by competitors for similarservices.  The terms of our

 

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contracts sometimes limit our ability to pass on cost increases.  Long-term solid waste collection contractstypically contain a formula, usually based on the consumer price index, whichautomatically adjusts fees, usually on an annual basis, to cover increases insome, but not all of our operating costs.

 

We charge transfer station and landfill customers a “tipping fee”either on a per-ton or per-yard basis for disposing of their MSW, C&D wasteor both at the transfer stations and landfills we operate.  We generally base our transfer station“tipping fees” on market factors and the cost of processing the waste depositedat the transfer station, the cost of transporting the waste to a disposalfacility and the cost of disposal.  Wegenerally base our landfill “tipping fees” on market factors and the type andweight or volume of the waste deposited and the type and size of the vehiclesused in the transportation of the waste.

 

Many of our landfills are assessed state, county or local communityfees based on the volume of tons or yards disposed of during a defined period,usually either monthly or quarterly. The types and amounts of fees charged can vary widely, but typically astate fee is uniformly charged to all landfills within a state.  We report our landfill revenue net of allthese fees.  Since July 2002, theCommonwealth of Pennsylvania has imposed an additional disposal fee of $4.00per ton on all solid waste disposed of at MSW landfills in Pennsylvania,raising the total disposal fees assessed on MSW landfill operators underPennsylvania state law to $7.25 per ton. Landfill operators are authorized to pass through the new fee as asurcharge on any fee schedule established by law or contract.  Similarly, transporters and transfer stationsare authorized to pass the new fee through as a surcharge to the generators ofsuch MSW.  We have passed through thenew fee by increasing the fees we charge at our Pennsylvania landfills, NewYork City transfer stations and New York and Pennsylvania collectionoperations.  Accordingly, the new feehas not had, nor do we expect it to have in the future, a significant effect onour operating income.  In addition,Pennsylvania and Virginia are both currently considering legislation that wouldimpose a fee of an additional $5.00 on each ton of waste disposed of atlandfills in their respective states. Other states could follow this trend as well.

 

Effective September 2003, the City of New York revised its wastecollection services maximum rate to permit haulers to charge commercialcustomers either the current $12.20 per loose yard or a new rate of $160.00 perton.  The disposal facilities in andaround New York City charge by the ton. However, prior to September 2003, the maximum rate was imposed on aper loose yard basis only.  Accordingly,based on the weight of certain customers’ loose yardage, it historically wasnot economical for us to service customers with heavy waste.  As a result, until recently, our New YorkCity collection operations focused on customers that had loose garbage that waslighter and on those customers that have a large paper recycling component,which enabled us to reduce our cost of disposal.  The new tonnage rate will enable our New York City collectionoperations to service all customer in all areas in which we operate.

 

The City of New York awarded us two new three-year contracts, effectiveNovember 2003, each with two optional one-year renewals, whichcollectively provide for us to transfer and dispose of up to an aggregate of1,500 tons of MSW per day collected by the City.  The new contracts replaced our prior contracts with the Citywhich expired in 2003.  The City’strucks collect primarily residential waste in Brooklyn and deliver it to two ofour Brooklyn transfer stations.  In2003, the City delivered average daily volumes of approximately 1,330 tonspursuant to these contracts.

 

During 2002, New York City announced changes to update its Solid WasteManagement Plan, pursuant to which it plans to utilize and upgrade its existingmarine transfer station system instead of private transfer stations to processand transfer its residential waste stream of approximately 12,000 tons of MSWper day.  New York City initiallyintended to implement these changes by retrofitting and repermitting thesemarine transfer stations by 2008 so that the stations could containerize theCity’s

 

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residential MSW on site and then transport the loaded containers toultimate disposal sites by alternative transportation methods, such as barge,rail and truck.  In 2003, New York Citydetermined that this plan was not feasible from a cost standpoint, and decidedto seek proposals from the private industry with respect to the transfer anddisposal of New York City’s residential waste stream.  Additionally, in February 2004, the State of New Jerseyterminated its discussions with the City of New York regarding the building ofa marine transfer station for the City’s garbage on a New Jerseywaterfront.  See “—Risk Factors—CustomerConcentration—The loss of the City of New York as a customer could have asignificant adverse effect on our business and operations.”

 

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

 
|       |   | **2001** |   | **2002** |   | **2003(1)** |   |
|------------|--------|----------|--------|----------|--------|-------------|--------|
|       |   |     |   |     |   |        |   |
| Collection |   | 66.5     | %      |     | 67.2   | %           |   | 68.0 | % |   |
| Transfer   |   | 23.0     |   |     | 22.4   |        |   | 17.9 |   |   |
| Disposal   |   | 7.0      |   |     | 6.8    |        |   | 11.1 |   |   |
| Recycling  |   | 3.0      |   |     | 3.0    |        |   | 2.5 |   |   |
| Other      |   | 0.5      |   |     | 0.6    |        |   | 0.5 |   |   |
| Total      |   | 100.0    | %      |     | 100.0  | %           |   | 100.0 | % |   |

 

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(1) The increase in the percentage of our total reported revenueattributable to our disposal services during 2003 primarily resulted from ouracquisition of the Seneca Falls, New York landfill, which we acquired onOctober 10, 2003.  Excluding theeffects of this acquisition, the percentage would have been substantially thesame as 2002.  In 2003, our servicesrevenue increased by an aggregate of $43.1 million from 2002.  This increase primarily resulted fromincreases in our revenue from collection services ($30.9 million increase from2002) and disposal services ($13.8 million increase from 2002).  Our revenue from transfer services during2003 decreased by $1.9 million from 2002 primarily as a result of the reducedvolumes of waste accepted at our Northeast Region transfer stations during thefirst quarter of 2003 due to the severe winter weather in the region.

 

**Cost Structure**

 

Our operating expenses include labor, fuel, equipment maintenance,“tipping fees” paid to third-party transfer stations and disposal facilities,workers’ compensation, vehicle insurance, third-party transportation expensesand accretion expense.  We monitor thefluctuation in fuel prices and, from time to time, if this cost increases at ahigher rate than inflation, we generally pass the additional cost on to ourcustomers.  Our business strategy is todevelop vertically integrated operations to internalize — the waste that wehandle and thus realize higher margins from our operations.  By disposing of waste at our landfills, weretain the margin generated through disposal operations that would otherwise beearned by third-party landfills.  Wecurrently internalize approximately 58% of the chargeable solid waste that wehandle and deliver the rest to third-party disposal facilities.  Some of our municipal contracts require usto only provide collection services and to dispose of the collected waste at adesignated third-party disposal facility (at no cost to us) with whom the municipalityhas contracted with directly.

 

If the operators of third-party landfills increase their “tippingfees,” we would seek to pass along these increases to our customers, but if wewere unable to do so, our profitability would be adversely affected.  If these operators discontinue their arrangementswith us and we cannot find alternative disposal sites with favorablearrangements, our costs of disposal may rise. Also, our failure to obtain the required permits to establish newlandfills and transfer stations or expand our existing landfills and transferstations could hinder our business strategy to develop vertically integratedoperations.  Failure to expand

 

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capacity could lead to decreased profitability as a result of theincreased “tipping fees” we would have to pay to third-party landfills.

 

We operate 23 transfer stations, which reduce our costs by allowing usto use collection personnel and equipment more efficiently and by consolidatingwaste to gain volume discounts on disposal rates.

 

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

 

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

 

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

 

Effective January 1, 2003, we adopted SFAS No. 143, “Accountingfor Asset Retirement Obligations.”  SeeNote 2 to our consolidated financial statements and related notes includedelsewhere in this Annual Report on Form 10-K. Under SFAS No. 143, costs associated with final capping activities thatoccur during the operating life of a landfill, as well as closure andpost-closure activities, are accounted for as asset retirement obligations on adiscounted basis.  We recognize landfillretirement obligations that relate to closure and post-closure activities overthe operating life of a landfill as landfill airspace is consumed and theobligation is incurred.  We recognizeour final capping obligations on a discrete basis for each expected futurefinal capping event over the number of tons of waste that each final cappingevent is expected to cover.  Thelandfill retirement obligations are initially measured at estimated fairvalue.  Fair value is measured on apresent value basis, using a credit-adjusted, risk-free rate of 10.25% during2003.  Accretion is recorded on alllandfill retirement obligations using the effective interest method.  We amortize landfill retirement costsarising from closure and post-closure obligations, which are capitalized aspart of the landfill asset, using our historical landfill accountingpractices.  We amortize landfillretirement costs arising from final capping obligations, which are alsocapitalized as part of the landfill asset, on a units-of-consumption basis overthe number of tons of waste that each final capping event covers.

 

We periodically evaluate the value and future benefits of our goodwilland other intangible assets. For intangible assets other than goodwill, weassess the recoverability from future operations using cash flows of therelated assets as measures.  Under thisapproach, the carrying value is reduced if it becomes probable that our bestestimate of expected future cash flows from the related intangible assets wouldbe less than the carrying amount of the intangible assets.  As of December 31, 2003, there were noadjustments to the carrying amounts of intangibles other than goodwillresulting from these evaluations.

 

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We test goodwill for impairment using the two-step process prescribedin SFAS No. 142.  The first step isa screen for potential impairment and the second step measures the amount ofthe impairment, if any.  We performedour annual impairment test during the fourth quarter of 2003 and incurred noimpairment.  As of December 31,2003, goodwill and other intangible assets represented approximately 24.4% oftotal assets, 60.5% of redeemable preferred stock and 78.8% of the sum of ourredeemable preferred stock and stockholders’ equity (deficit).

 

**Seasonality**

 

Seasonality and weather can temporarily affect our revenue andexpenses.  We generally experience lowerC&D waste volumes during the winter months when the construction industryslows down.  Frequent and/or heavy snowand ice storms can affect our revenue, primarily from our transfer station andlandfill operations which are volume-based, and the productivity of ourcollection operations.  In our SouthRegion, higher than normal rainfall and more frequent rain and ice storms overa 30 - 90 day period can put additional stress on the construction industry,lowering the volumes of waste we handle. For example, inclement weather in our South Region during the fourthquarter of 2002 and the first two months of 2003 resulted in a reduction in thevolumes of waste we handled during such periods.  Significantly below normal rainfall can lead to higher levels ofconstruction activity, increasing our volumes.

 

**Impact of Inflation**

 

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

 

**Acquisitions**

 

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

 

In accordance with GAAP, we capitalize some expenditures and advancesrelating to pending acquisitions.  Forany pending acquisition that is not consummated, we charge any suchexpenditures and advances against earnings. Therefore, we may incur charges against earnings in future periods,which could have a material adverse effect on our business, financial conditionand results of operations.

 

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

 

*2003*. In October 2003, we acquired all of the shares of capital stock ofSeneca Meadows, Inc., the owner and operator of the Seneca Meadows landfill,located in Seneca Falls, New York, for an aggregate purchase price ofapproximately $227.8 million, consisting of approximately $187.7 millionin

 

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cash and $40.1 million of assumed liabilities.  The acquisition was financed withapproximately $861,000 in cash, $138.8 million in net borrowings and netproceeds of $48.0 million from the issuance of shares of our Series Econvertible preferred stock. Additionally, if certain permits are obtained increasing the allowabledaily disposal volume of the landfill and specific average daily disposalvolume milestones are achieved at the landfill, we will be required to pay tothe former shareholder of the landfill an additional $15.0 million.  In connection with the acquisition, werecorded approximately $5.0 million of definite-lived intangible assets relatedto customer lists with generally two to seven year amortization periods.

 

The following unaudited pro forma results of operations assume that ouracquisition of the landfill occurred as of January 1, 2002 (in thousands):

 
|                                                                      |   | **2002** |          | **2003** |   |
|---------------------------------------------------------------------------|--------|----------|---------------|----------|--------|
| Services revenue                                                          |   | $        | 258,184       |     | $      | 290,432 |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | 3,427    |          | (4,660   | )      |
| Net income (loss)                                                         |   | $        |    3,427 |     | $      |    (6,191 | ) |

 

The unaudited pro forma results do not purport to be indicative of theresults of operations which actually would have resulted had the acquisitionoccurred on January 1, 2002, nor are they necessarily indicative of futureoperating results.

 

We also acquired the hauling and disposal assets of 14 other solidwaste management companies and real estate associated with an operatinglandfill for an aggregate purchase price of approximately $31.6 million,consisting of cash and liabilities assumed. In connection with the acquisitions, we recorded approximately$8.5 million of goodwill, of which approximately $6.7 million isexpected to be deductible for tax purposes, and approximately $6.9 millionof definite-lived intangible assets. The definite-lived intangible assets consist of $4.7 millionrelated to customer lists with generally two to seven year amortization periodand $2.3 million related to non-competition agreements with generally twoto five year amortization periods.  Thepro forma effects of these 14 acquisitions are not significant to our operatingresults.

 

We also incurred approximately $6.0 million of development costsin connection with two “greenfield” landfills, which we previously purchased in2002.  Both landfills included the land and the permit to operate. However, unlike operating landfills, neither greenfield landfill had incurredthe costs of development, which include the infrastructure of an operatinglandfill and initial cell.  Both landfills opened during 2003.

 

*2002. *During2002, we acquired the assets of 17 solid waste management companies as well asreal estate associated with landfill expansions for an aggregate purchase priceof $47.0 million, consisting of cash and liabilities assumed.  In addition, we incurred approximately$340,000 of development costs in connection with two “greenfield” landfillspurchased in 2002.

 

*2001. *During2001, we acquired the assets of 16 solid waste management companies for anaggregate purchase price of approximately $12.1 million, consisting ofcash and liabilities assumed.  Inaddition, we incurred approximately $1.4 million of development costs inconnection with two “greenfield” landfills purchased in 1999.

 

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**Results of Operations**

 

The following table sets forth, for the periods indicated, selectedconsolidated statement of operations data (in thousands) and the percentagerelationship that such data bear to our revenue: 

 

|                                                 |   | **2001** |   | **2002** |   | **2003** |   |
|------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                 |   | **$**    |   | **%**    |   | **$**    |   | **%** |   | **$** |   | **%** |   |
|                                                 |   |     |   |     |   |     |   |   |   |   |   |   |   |
| South Region                                         |   | 106,807  |   | 57.5     |   | 128,334  |   | 60.3 |   | 158,185 |   | 61.8 |   |
| Northeast Region                                     |   | 78,883   |   | 42.5     |   | 84,607   |   | 39.7 |   | 97,830 |   | 38.2 |   |
| Services revenue                                     |   | 185,690  |   | 100.0    |   | 212,941  |   | 100.0 |   | 256,015 |   | 100.0 |   |
| Operating expense                                    |   | 119,816  |   | 64.5     |   | 139,641  |   | 65.6 |   | 164,203 |   | 64.1 |   |
| General and administrative                           |   | 24,063   |   | 13.0     |   | 25,537   |   | 12.0 |   | 32,723 |   | 12.8 |   |
| Depreciation, depletion and amortization             |   | 25,722   |   | 13.9     |   | 27,849   |   | 13.1 |   | 41,079 |   | 16.1 |   |
| Income from operations                               |   | 16,089   |   | 8.7      |   | 19,914   |   | 9.4 |   | 18,010 |   | 7.0 |   |
| Interest expense, net                                |   | (12,961  | )      | (7.0     | )      | (14,067  | )      | (6.6 | ) | (20,276 | ) | (7.9 | ) |
| Loss on termination of interest rate swaps           |   | —   |   | —   |   | (826     | )      | (0.4 | ) | — |   | — |   |
| Loss on extinguishment of debt                       |   | —   |   | —   |   | (586     | )      | (0.3 | ) | — |   | — |   |
| Other income (expense), net                          |   | (178     | )      | (0.1     | )      | (103     | )      | (0.0 | ) | (340 | ) | (0.1 | ) |
| Income tax expense                                   |   | (703     | )      | (0.4     | )      | (3,726   | )      | (1.7 | ) | (3,704 | ) | (1.5 | ) |
| Cumulative effect of change in accounting  principle |   | —   |   | —   |   | —   |   | — |   | (1,531 | ) | (0.6 | ) |
| Net income (loss)                                    |   | 2,247    |   | 1.2      |   | 606      |   | 0.3 |   | (7,841 | ) | (3.1 | ) |

 

**2003 Compared With 2002**

 

*Revenue. *Ourrevenue increased by $43.1 million, or 20.2%, to $256.0 millionduring 2003 from $212.9 million during 2002.  During 2003, acquisitions completed since January 2002contributed $30.6 million, or 14.3%, to the increase in our revenue from2002.  Excluding incremental revenuefrom acquisitions, our revenue increased by $12.5 million, or 5.9%.  Our new business, from both new municipalcontracts and increased sales from existing operations, contributed 3.1% ofsuch increase, while price increases contributed 2.8%.  In our South Region, our revenue increasedby $29.9 million, or 23.3%, to $158.2 million during 2003 from $128.3 millionduring 2002.  In our Northeast Region,our revenue increased by $13.2 million, or 15.6%, to $97.8 million2003 from $84.6 million during 2002. During the winter months of January, February and March 2003,severe weather in our Northeast Region and, to a lesser extent, in our SouthRegion, reduced our roll-off collection, transfer station and landfill revenueby $1.6 million to $1.8 million, as compared to the comparablethree-month period in 2002.

 

*Operating Expenses.*  Our operating expenses increased by $24.6 million, or 17.6%,to $164.2 million during 2003 from $139.6 million during 2002.  Operating expenses as a percentage of ourrevenue decreased by 1.5% to 64.1% during 2003 from 65.6% during 2002.  The increase in our operating expenses wassubstantially due to the increase in our revenue during the same period,including as a result of expenses from acquired operations and newbusiness.  Integration of newly-acquiredbusinesses into our organizational structure typically takes three to six months.  The labor, maintenance, fuel and disposalcosts related to newly-acquired businesses are generally higher during theintegration period.  Start-up andintegration costs related to a municipal contract typically are incurred in theone to two months prior to, and the one to two months after, the commencementof the contract. During this period, labor costs are generally higher due todelivery of containers, residential carts and recycling bins to the newmunicipality and training of newly-hired employees.  In addition, during 2003, our insurance claims expense increasedby $3.0 million from 2002.  This was aresult of the following factors:  (i)our current year claims expense for

 

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accidents and injuries increased by $900,000 over the comparableexpense in 2002 and  (ii) we increasedour future claims development reserve resulting in a charge of $980,000 for2003 claims and (iii) an increase in premium costs and claim processingexpenses during 2003.  Higher averagefuel cost per gallon in 2003 as compared to 2002 also increased operatingexpenses in 2003 by $800,000. The margin improvement in operating expensesduring 2003 was primarily the result of our purchase of the Seneca Falls, NewYork landfill in October 2003.

 

*General and Administrative. *Ourgeneral and administrative expenses increased by $5.9 million, or 7.2%, to$28.1 million during 2003 from $32.7 million during 2002.  General and administrative expenses as apercentage of our revenue increased by 0.8% to 12.8% during 2003 from 12.0%during 2002.  Our general andadministrative expenses increased as a result of our employment of additionalpersonnel from companies acquired and additional corporate and regionaloverhead to accommodate our internal growth from our collectionoperations.  During 2003, we wrote off$170,000 in connection with an aborted debt transaction, primarily related tolegal and accounting fees, we increased our bad debt reserve by an additional$1.6 million to cover expected write-offs at one of our collection divisions inour South Region, as described in more detail in Part II. Item 9A. “Controlsand Procedures,” and paid $130,000 in severance costs to one of our formerexecutive officers.  In addition,accounting fees increased in 2003 by $200,000, primarily related toimplementation of SFAS No. 143.

 

*Depreciation, Depletion and Amortization. *Our depreciation, depletion andamortization expenses increased by $13.3 million, or 47.5%, to$41.1 million during 2003 from $27.8 million during 2002.  Depreciation, depletion and amortization asa percentage of our revenue increased by 3.0% to 16.1% during 2003 from 13.1%during 2002.  This increase resultedprimarily from the inclusion of depreciation, depletion and amortizationexpenses related to businesses acquired in 2003, a full year of depreciation,depletion and amortization expenses related to businesses acquired sinceJanuary 2002, and depreciation of capital assets purchased for internalgrowth.  The Seneca Falls landfill weacquired in October 2003, increased our depreciation, depletion andamortization expenses by $5.4 million. During 2003, we also added three operating landfills, including twogreenfield sites acquired in 2002 which we opened in August 2003 and an operatinglandfill we purchased in July 2003, which have a higher component ofdepreciation, depletion and amortization expenses than a typical haulingoperation.  Additionally, depletionexpense related to the Bethlehem landfill expansion permit we obtained inApril 2003, which increased our daily permitted volume at the landfillfrom 750 tons to 1,375 tons, resulted in an increase to depletion expense for2003 of $1.1 million.

 

*Income from Operations. *Ourincome from operations decreased by $1.9 million, or 9.6%, to$18.0 million during 2003 from $19.9 million during 2002.  Income from operations as a percentage ofour revenue decreased by 2.4% to 7.0% in 2003 from 9.4% during 2002.  Increases in operating expenses fromadditional insurance claims, higher fuel costs, an increase in our bad debtreserve, the write-off of $170,000 in connection with an aborted debttransaction, higher accounting fees related to the implementation of SFAS No.143, severance pay to a former executive, higher depreciation, depletion andamortization expenses related to our Seneca Falls and Bethlehem landfills andour new landfills and the severe winter weather during 2003 resulted in areduction in margin.

 

*Interest Expense, Net. *Ourinterest expense, net, increased $6.2 million, or 44.1%, to$20.3 million during 2003 from $14.1 million during 2002.  Interest expense, net, as a percentage ofour revenue, increased to 7.9% in 2003 from 6.6% during 2002.  This increase was attributable to higherdebt levels during 2003 as compared to 2002, primarily due to our acquisitionof the Seneca Falls landfill in October 2003.  This increase also resulted from the inclusion of a full year ofinterest related to $150.0 million of our 10-1/4% senior subordinated notes due2012 (our “Notes”) which we issued on June 12, 2002 (which was partiallyoffset by interest rate swaps on $50.0 million of this debt), thereduction of capitalized

 

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interest due to the completion of our Bethlehem landfill expansionproject and the increase in debt throughout the year related to capital used tofund internal growth and our ongoing acquisition program.

 

*Loss on Termination of Interest Rate Swaps.*  There was no such expense in 2003.  We incurred a loss on the termination ofinterest rate swaps of $826,000 in 2002 in conjunction with the payoff of thethen outstanding balance under our senior credit facility with the proceedsfrom the offering of our Notes. The loss resulted from our termination ofinterest rate swaps that were in place with respect to a portion of the thenoutstanding debt under our senior credit facility.

 

*Loss on Extinguishment of Debt.*  There was no such expense in 2003.  We incurred a non-cash loss on theextinguishment of debt of $586,000 in 2002 in conjunction with the payoff of a$39.2 million term loan under our senior credit facility with the proceedsfrom the offering of our Notes.  Theloss resulted from our loan transaction costs incurred in previous yearsrelated to the term loan.

 

*Other Expenses. *Ourother expenses increased by $237,000 to $340,000 in 2003 from $103,000 in2002.  The increase was primarily theresult of additional state franchise taxes.

 

*Income Tax Expense. *Ourincome tax expense was unchanged at $3.7 million during 2003 from$3.7 million in 2002.  Income taxexpense as a percentage of revenue was 1.4% for 2003 as compared to 1.7% for2002.  The difference in income taxescomputed at the statutory rate and reported income taxes for 2003 is dueprimarily to state and local income taxes and an increase in the valuationallowance related to deferred tax assets.

 

*Cumulative Effect of Change in Accounting Principle. *We recorded anafter-tax expense of $1.5 million from a cumulative effect of a change inaccounting principle related to our adoption of SFAS No. 143 on January 1,2003.  See Note 2 to our consolidatedfinancial statements and related notes included elsewhere in this Annual Reporton Form 10-K.

 

**2002 Compared With2001**

 

*Revenue. *Ourrevenue increased by $27.2 million, or 14.7%, to $212.9 millionduring 2002 from $185.7 million during 2001.  During 2002, acquisitions completed since January 2001accounted for using the purchase method of accounting, contributed$13.5 million, or 7.3%, to the increase in our revenue from 2001.  Excluding our incremental revenue fromacquisitions, our revenue increased by $13.7 million, or 7.4%.  During 2002, our new business, from both newmunicipal contracts and increased sales from existing operations, contributed3.8% of such increases, while selective price increases contributed 3.6%.  In our South Region, our revenue increasedby $21.5 million, or 20.2%, to $128.3 million during 2002 from$106.8 million during 2001.  In ourNortheast Region, our revenue increased by $5.7 million, or 7.3%, to$84.6 million during 2002 from $78.9 million during 2001.

 

*Operating Expenses.*  Our operating expenses increased by $19.8 million, or 16.5%,to $139.6 million during 2002 from $119.8 million during 2001.  Operating expenses as a percentage of ourrevenue increased by 1.1% to 65.6% during 2002 from 64.5% 2001.  The increase in our operating expenses wasprimarily due to the increase in our revenue during the same period.  We acquired approximately $24.0 millionof new collection revenue during 2002 compared to approximately$6.7 million of new collection revenue during 2001.  In 2002, we were awarded 18 new municipalcontracts representing an aggregate of approximately $7.3 million inannualized revenue compared with awards for 17 new municipal contracts in 2001,representing an aggregate of approximately $4.1 million in annualizedrevenue.  Operating expenses alsoincreased during 2002 due to increases in our general and workers compensationinsurance premiums, increased labor costs related to a renewal of a collectivebargaining agreement covering some of our New York-based employees which becameeffective on March 1, 2002 and an

 

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additional $4.00 per ton disposal fee enacted by Pennsylvania onJuly 9, 2002.  For more informationon the additional Pennsylvania disposal fee, see “—General—Sources of Revenue.”

 

*General and Administrative. *Ourgeneral and administrative expenses increased $1.5 million, or 6.1%, to$25.5 million during 2002 from $24.1 million during 2001.  Our general and administrative expensesincreased as a result of additional personnel from companies acquired andadditional corporate and regional overhead to accommodate our internal growthfrom our collection operations.  Generaland administrative expenses as a percentage of our revenue decreased to 12.0%during 2002 from 13.0% during 2001.

 

*Depreciation, Depletion and Amortization. *Our depreciation, depletion andamortization expenses increased $2.1 million, or 8.3%, to $27.8 millionduring 2002, from $25.7 million during 2001.  This increase resulted primarily from the inclusion ofdepreciation, depletion, and amortization of businesses acquired in 2002, theinclusion in 2002 of 12 months of depreciation, depletion, and amortizationfrom businesses acquired in 2001 and depreciation of capital assets purchasedfor internal growth.  In accordance withSFAS No. 142, goodwill is deemed to have an indefinite life and ouramortization of goodwill ceased on January 1, 2002.  During 2001, goodwill amortization expense was $2.8 million.  Depreciation, depletion and amortization asa percentage of our revenue decreased to 13.1% in 2002 from 13.9% during 2001.

 

*Income from Operations. *Ourincome from operations increased $3.8 million, or 23.8%, to$19.9 million during 2002 from $16.1 million during 2001.  The increase was attributable to operatingincome recognized from acquisitions closed in 2002, the inclusion in 2002 of 12months of operating income from acquisitions closed in 2001, selective priceincreases, greater integration of collection volumes into the transfer stationsand landfills we operate, and internal growth. Income from operations as a percentage of our revenue increased to 9.4% in2002 from 8.7% during 2001.

 

*Interest Expense, Net. *Ourinterest expense, net increased $1.1 million, or 8.5%, to$14.1 million during 2002, from $13.0 million during 2001.  This increase was attributable to higherdebt levels during 2002 as compared to 2001 and by the relatively higher interestrate paid on $150.0 million of our Notes which constituted a substantialportion of our outstanding debt as of December 31, 2002.  Interest expense, net, as a percentage ofour revenue, decreased to 6.6% in 2002 from 7.0% in 2001.

 

*Loss on Termination of Interest Rate Swaps.*  We incurred a loss on the termination ofinterest rate swaps of $826,000 during 2002. There was no such expense in 2001. In conjunction with the payoff of the then outstanding balance under oursenior credit facility with the proceeds from the offering of our Notes, weterminated interest rate swaps that were in place with respect to a portion ofthe then outstanding debt under our senior credit facility.

 

*Loss on Extinguishment of Debt.*  We incurred a non-cash loss on the extinguishmentof debt of $586,000 during 2002.  Therewas no such expense in 2001.  Inconjunction with the payoff of the $39.2 million term loan under oursenior credit facility with the proceeds from the offering of our Notes, wewrote off loan transaction costs incurred in previous years related to the termloan.

 

*Other Expenses. *Ourother expenses decreased to $103,000 in 2002 from $178,000 in 2001.

 

*Income Tax Expense. *Ourincome tax expense increased to $3.7 million during 2002, from $703,000during 2001.  Our effective income taxrate for the year ended December 31, 2002 was 86.0%, which is above thefederal statutory rate of 35.0%, due to state income taxes and an increase inthe valuation allowance established against net operating loss carryforward benefits.The increase in the valuation

 

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allowance is due to a change in the estimated reversal of temporarydifferences related to tax deductible goodwill.  The change in the estimated reversal resulted from the adoptionof SFAS No. 142.

 

**Liquidity and Capital Resources**

 

***CashFlow***

 

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

 
|                                      |   | **2002** |    | **2003** |   |
|-------------------------------------------|--------|----------|---------|----------|--------|
| Net cash provided by operating activities |   | $        | 30,624  |     | $      | 46,484 |   |
| Net cash used in investing activities     |   | $        | (88,111 | )        | $      | (269,579 | ) |
| Net cash provided by financing activities |   | $        | 57,905  |     | $      | 224,702 |   |

 

During 2003, net cash used in investing activities was$269.6 million.  Of this amount,$214.5 million was used for the acquisition of businesses.  Cash used for capital expenditures during2003 was $46.9 million, which was principally for investments in fixedassets, consisting primarily of trucks, containers, landfill and transfer stationequipment, and landfill construction projects. In addition $6.0 million was used for the initial development costsof two permitted landfills acquired in 2002. Net cash provided by financing activities during 2003 was$224.7 million, which consisted of the proceeds from our issuance of ourSeries E convertible preferred stock of $49.7 million and a net borrowingincrease under our senior credit facility of $183.0 million, offset by$1.7 million of expenses related to the issuance of our Series Econvertible preferred stock and $6.3 million of expenses related to therefinancing of our senior credit facility.

 

During 2002, net cash used in investing activities was$88.1 million.  Of this amount,$44.0 million was used for the acquisition of businesses.  Cash used for capital expenditures during2002 was $41.3 million, which was principally for investments in fixedassets, consisting primarily of trucks, containers, landfill and transferstation equipment, and landfill construction projects.  Net cash provided by financing activitiesduring 2002 was $57.9 million, which consisted of the proceeds from theoffering of our Notes, offset by $7.5 million of expenses related to theissuance of our Notes and a net borrowing reduction under our senior creditfacility of $83.7 million.

 

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

 
|                                                                                    |   | **2002**            |    | **2003** |   |
|-----------------------------------------------------------------------------------------|--------|---------------------|---------|----------|--------|
|                                                                                    |   | **(in  thousands)** |    |
| Roll-forward of debt balance:                                                           |   |                |    |     |   |
| Debt balance at beginning of period                                                     |   | $                   | 130,351 |     | $      | 198,571 |   |
| Free cash flow (deficit) before  acquisitions(1)                                        |   | 12,560              |    | 2,402    |   |
| Acquisitions and divestitures                                                           |   | 44,370              |    | 220,563  |   |
| Acquisition-related and other expenditures                                              |   | 557                 |    | 130      |   |
| Debt issue costs                                                                        |   | 7,525               |    | 6,277    |   |
|                                                                                    |   |                |    |     |   |
| Debt increase due to interest rate swap  termination payment                            |   | 826                 |    | —   |   |
| Net proceeds from issuance of preferred  stock                                          |   | —              |    | (48,018  | )      |
| Increase in cash                                                                        |   | 418                 |    | 1,607    |   |
| Addition related to the change in fair  value of interest rate swap from long-term debt |   | 1,964               |    | (966     | )      |
| Addition related to debt issued to sellers  in connection with acquisitions             |   | —              |    | 295      |   |
|                                                                                    |   |                |    |     |   |
| Debt balance at end of period                                                           |   | $                   | 198,571 |     | $      | 380,861 |   |

 

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(1)          Free cash flow (deficit) before acquisitionsis not a measure of liquidity, operating performance or cash flow fromoperating activities under GAAP.  Freecash flow (deficit) before acquisitions is defined as net cash provided byoperating activities, less capital expenditures (other than for acquisitions)and capitalized interest.  We believethat the presentation of free cash flow (deficit) before acquisitions is usefulto investors because it allows them to better assess and understand our abilityto meet debt service requirements and the amount of recurring cash generatedfrom operations after expenditures for fixed assets.  Free cash flow (deficit) before acquisitions does not representour residual cash flow available for discretionary expenditures because we havemandatory debt service requirements and other required expenditures that arenot deducted from free cash flow deficit before acquisitions.  Free cash flow (deficit) before acquisitionsdoes not capture debt repayment and/or the receipt of proceeds from theissuance of debt.  We use free cash flow(deficit) before acquisitions as a measure of recurring operating cashflow.  We do not intend for free cashflow (deficit) before acquisitions to be considered in isolation or as asubstitute for GAAP measures.  Othercompanies may define this financial measure differently.  The most directly comparable GAAP measure tofree cash flow (deficit) before acquisitions is net cash provided by operatingactivities.  Following is areconciliation of free cash flow (deficit) before acquisitions to net cash providedby operating activities:

 

|                                          |                                          | **2002**            |    | **2003** |   |
|-----------------------------------------------|-----------------------------------------------|---------------------|---------|----------|--------|
|                                          |                                          | **(in  thousands)** |    |
| Free cash flow (deficit) before  acquisitions |                                          | $                   | (12,560 | )        | $      | (2,402 | ) |
| Add:                                          | Capital expenditures, excluding  acquisitions |                | 41,331  |     | 46,890 |   |
|                                          | Capitalized interest                          |                | 1,853   |     | 1,995  |   |
|                                          | Other                                         |                | —  |     | 1      |   |
| Net cash provided by operating activities     |                                          | $                   | 30,624  |     | $      | 46,484 |   |

 

***Liquidity***

 

Our business is capital intensive. Our capital requirements include acquisitions, new municipal contractsand fixed asset purchases for internal growth, primarily for trucks, containersand equipment, and for landfill cell construction, landfill development andlandfill closure activities.  We havehistorically financed, and plan to continue to finance, our capital needs withcash provided from operations, borrowings under our senior credit facility,debt or equity offerings, or some combination of the foregoing.

 

On October 10, November 20, and December 30, 2003, weissued an aggregate of 49,660 shares of our Series E convertible preferredstock for an aggregate purchase price of $49.7 million.  Net proceeds from such sale of $48.0 millionwere used to fund the acquisition of the Seneca Falls, New York landfill and topay expenses related thereto.  See PartII. Item 5. “Market for the Registrant’s Common Equity and Related StockholderMatters — Recent Sales of Unregistered Securities” of this Annual Report onForm 10-K.

 

On June 12, 2002, we completed a private offering of our Notes ata price of 100.0%.  These Notes matureon June 15, 2012.  Interest on ourNotes is due on June 15 and December 15 of each year.  Our Notes are guaranteed by all of ourcurrent, and will be guaranteed by certain of our future, subsidiaries and areunsecured senior subordinated obligations that rank junior in right of paymentto all of our existing and future senior debt and secured debt.  The Notes are redeemable on or afterJune 15, 2007 and we may redeem up to 35.0% of the aggregate principalamount of our Notes on or before June 15, 2005 with the proceeds fromqualified public offerings of our equity securities.  The indenture governing our Notes contains covenants which, amongother things, limit our ability to incur additional debt, create liens, engagein sale-leaseback transactions, pay dividends or make other equitydistributions, purchase or redeem capital stock, make investments, sell assets,engage in transactions with affiliates and effect a consolidation ormerger.  These limitations are subjectto certain qualifications and exceptions. As of December 31, 2003, we were in compliance with all covenantscontained in the indenture governing our Notes.

 

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The net proceeds from the offering of the Notes were approximately$144.0 million after deducting the initial purchasers’ discounts and otherexpenses of the offering.  We used$142.8 million of the net proceeds to prepay all of the debt thenoutstanding under the term loan and revolving loan portions of our seniorcredit facility (other than approximately $4.7 million underlying then outstandingletters of credit), and the remainder of the net proceeds for general corporatepurposes, including working capital, and to fund acquisitions.  Upon repayment of the term loan portion ofour senior credit facility, we expensed approximately $586,000 of related debtissue costs.  In addition, we terminatedthree interest rate swap agreements in advance of their respective contracttermination dates.  We recorded a losson the early termination of the interest rate swap agreements of approximately$826,000.

 

In connection with our acquisition of the Seneca Falls, New Yorklandfill, on October 10, 2003, we and our subsidiaries entered into theFifth Amended and Restated Revolving Credit and Term Loan Agreement with asyndicate of lenders led by Fleet National Bank, as administrative agent(“Fleet”), and LaSalle Bank National Association, as syndication agent, andFleet Securities, Inc., as arranger, which amended our then existing seniorcredit facility, dated as of September 14, 2004.  Our senior credit facility, as so amended, includes a$200.0 million senior secured term loan and a $200.0 million seniorsecured revolving loan, including an $80.0 million letter of creditsublimit.  We used the borrowing of the$200.0 million term loan and borrowings of $33.7 million in revolvingloans to pay a portion of the purchase price for our acquisition of the SenecaFalls landfill to refinance our then existing senior credit facility and to payrelated fees and expenses.  Subject tocertain conditions, we may request an increase in the revolving loan or termloan portions of our senior credit facility of up to $50.0 million suchthat the total amount of indebtedness under this senior credit facility wouldequal $450.0 million.  As ofDecember 31, 2003, there was $200.0 million outstanding under theterm loan portion and $29.6 million (excluding $49.1 millionunderlying letters of credit) outstanding under the revolving loan portion ofour senior credit facility.  As of suchdate, we had $121.3 million of unused borrowing capacity under therevolving loan portion (of which $29.4 million was immediately available),including a maximum of $30.8 million underlying letters of credit.  In order to borrow under the revolving loanportion of our senior credit facility, we must satisfy customary conditionsincluding maintaining certain financial ratios.  Our senior credit facility is secured by a pledge of the stock ofour direct and indirect subsidiaries and a lien on substantially all of ourdirect and indirect subsidiaries’ assets.

 

Our senior credit facility permits borrowings at floating interestrates based on, at our option, the designated eurodollar interest rate, whichgenerally approximates LIBOR, or the Fleet prime rate, in each case, plus anapplicable margin, and requires payment of an annual commitment fee based onthe unused portion of the revolving loan portion.  As of December 31, 2003, the interest rate applicable to$25.0 million outstanding under the revolving loan portion of our seniorcredit facility was LIBOR plus 325 basis points, or 4.41%, and the interestrate applicable to the balance of $4.6 million outstanding thereunder wasFleet’s prime rate plus 125 basis points, or 5.25%.  As of December 31, 2003, the interestrate applicable to $100.0 million outstanding under the term loan portionof our senior credit facility was LIBOR plus 300 basis points, or 4.25%, andthe interest rate applicable to the balance of $100.0 million outstandingthereunder was Fleet’s prime rate plus 100 basis points, or 5.0%.  The revolving loan and term loan portions ofour senior credit facility mature on September 30, 2008 andSeptember 30, 2010, respectively.

 

Pursuant to the terms of our senior credit facility, each year,commencing on October 1 and ending on September 30, we are requiredto repay 1.0% (except for the 12-month period prior to maturity when we arerequired to repay 94.0%) of the principal amount of the term loan portion ofour senior credit facility in quarterly installments payable on the lastbusiness day of each calendar quarter. In addition, our senior credit facility requires us to prepay the termloan with, subject to certain conditions and exceptions, 100.0% of the net cashproceeds we receive from any disposition of assets in excess of$5.0 million in the aggregate per year, 100.0% of the net cash proceeds wereceive from the incurrence of

 

45

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any permitted indebtedness (other than up to $100.0 million ofadditional subordinated indebtedness) and 50.0% of the net cash proceeds wereceive in connection with any issuance of our equity (other than equity weissue (i) in an aggregate amount not to exceed $100.0 million, (ii) aspayment in a permitted acquisition or (iii) to employees, consultants or directorsin connection with the exercise of options under bona fide option plans).  We are also required to prepay the term loanwith the percentage of excess consolidated operating cash flow (to becalculated for the period from October 1, 2003 through December 31,2003 and for each fiscal year thereafter, and which includes, generally,consolidated EBITDA, plus or minus net working capital changes andextraordinary cash items, less the sum of (a) capital expenditures,(b)  the cash purchase price of any permitted acquisitions, (c)  cashpayments for taxes, (d) cash payments of interest and (e)  thescheduled principal repayments of indebtedness, in each case of clauses (a)through (e), paid during such period) corresponding to the applicable leverageratio set forth below:

 

| **Leverage  Ratio**               |   | **Percentage  of Excess Consolidated Operating  Cash Flow Required as Mandatory  Prepayment of Term Loan** |   |
|-----------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|
|                              |   |                                                                                                       |   |
| 3 3.50:1.00                  |   | 50%                                                                                                        |   |
|                              |   |                                                                                                       |   |
| 33.00:1.00 and <3.50:1.00 |   | 25%                                                                                                        |   |
|                              |   |                                                                                                       |   |
| <3.00:1.00                     |   | 0%                                                                                                         |   |

 

In the period of October 1, 2003 through December 31, 2003,we performed the calculation and determined that no payment was due for theperiod.

 

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

 

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

 

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

 

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

 

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**•****                                          MinimumInterest Coverage Ratio**—Our consolidated EBITDA(1) to consolidated interest expense ratio for any period offour consecutive fiscal quarters ending on the last day of any fiscal quarterspecified below may not be less than the applicable ratio indicated below: 

 
| **Quarters Ending**                             |   | **Consolidated  EBITDA****(1)****to  Consolidated Interest Expense  Ratio** |   |
|-------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|
|                                            |   |                                                                        |   |
| Through December 31, 2003                  |   | 2.75 to 1.0                                                                 |   |
| March 31, 2004 through June 30,  2004 |   | 3.00 to 1.0                                                                 |   |
| September 30, 2004                         |   | 3.25 to 1.0                                                                 |   |
| December 31, 2004 and thereafter           |   | 3.50 to 1.0                                                                 |   |

 

**•****                                          MinimumConsolidated Net Worth**—Our consolidated net worth (generally, excess of ourassets over our liabilities excluding redeemable preferred stock) at any timemay not be less than approximately $213.4 million, plus (a) theproceeds of any new equity offerings and (b) 50% of our positive consolidatednet income for each fiscal quarter beginning with the first quarter of 2004.

 

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

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

 

As of December 31, 2003, we were in compliance with our seniorcredit facility financial covenants—our consolidated debt to consolidatedEBITDA(1) ratio was 4.18:1, our consolidated senior debt to consolidatedEBITDA(1) ratio was 2.53:1, our consolidated EBITDA(1) to consolidated interestexpense ratio was 2.98:1 and our consolidated net worth was $217.3 million($3.9 million in excess of the minimum required under our senior creditfacility).  In addition, our fiscal 2003annual capital expenditures of $54.9 million less capital purchased fornew municipal contracts of $3.9 million did not exceed 1.6 times ourfiscal 2003 annual depreciation and depletion expense.  Our ability to comply in future periods withthe financial covenants in our senior credit facility will depend on ourongoing financial and operating performance, which, in turn, will be subject toeconomic conditions and to financial, business and other factors, many of whichare beyond our control, and will be substantially dependent on our ability tosuccessfully implement our overall business strategies.

 

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

 

 

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

 

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

 

Environmental laws and regulation, including Subtitle D, thatapply to the non-hazardous solid waste management industry have required us, aswell as others in the industry, to alter the way we conduct our operations andto modify or replace pre-Subtitle D landfills.  These expenditures have been, and will continue to be, substantial;however, we do not anticipate that these expenditures relating to our ongoingoperations will be substantially different than what we have experienced todate.  Legislative or regulatory changescould increase the costs of operating our business, accelerate requiredexpenditures for closure activities and post-closure monitoring and obligate usto spend sums in addition to those presently reserved for such purposes.  These factors could substantially increaseour operating costs and adversely affect our results of operations, financialcondition and cash flow.

 

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

 

Working capital at December 31, 2003 was a deficit of$8.0 million as compared to a working capital surplus of $469,000 atDecember 31, 2002.  Included in thecurrent portion of long-term debt at December 31, 2003 and not at December 31,2002 was $2.5 million of the term loan portion of our senior creditfacility, representing the principal amount required to be repaid in 2004.  In addition, as discussed in Part II. Item9A. “Controls and Procedures,” during 2003, we increased our bad debt reserveby an additional $1.6 million to cover expected write-offs at one of ourcollection divisions in our South Region. The remaining $4.3 million deterioration in working capitalyear-over-year was primarily related to an increase in capital expendituresaccrued in accounts payable at year end 2003, related to landfill constructionprojects and new municipal contracts. There is no covenant in our senior credit facility directly tied toworking capital.  At December 31, 2003,our immediately available borrowing capacity was sufficient to cover theworking capital deficit.

 

We have no off-balance sheet debt or similar obligations, other than asoutlined in the “Significant Commercial Commitments” table below.  See also Part I. Item 1. “Business—RiskManagement, Insurance and Performance or Surety Bonds.”  We have no transactions or obligations withrelated parties that are not disclosed, consolidated into or reflected in ourreported results of operations or financial position.

 

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***Obligations andCommitments***

 

Thefollowing tables outline what we regard as our significant contractualobligations and commercial commitments as of December 31, 2003.  The tables do not represent all of ourcontractual obligations and commercial commitments that we have enteredinto.  

 
|                                            |   | **Payments  Due By Period  (in thousands)** |    |
|-------------------------------------------------|--------|---------------------------------------------|---------|
|                                            |   |                                        |
| **Significant Contractual  Obligations**        |   | **Total**                                   |    | **Less Than  1 Year** |   | **1 to 3  Years** |   | **4 to 5  Years** |   | **Over 5  Years** |   |
|                                            |   |                                        |    |   |   |   |   |   |   |   |   |
| Long-term debt(1)                               |   | $                                           | 380,861 |   | $ | 2,732 |   | $ | 4,031 |   | $ | 33,600 |   | $ | 340,498 |   |
| Operating leases                                |   | 16,493                                      |    | 2,117 |   | 4,303 |   | 3,534 |   | 6,539 |   |
| Disposal contract                               |   | 20,022                                      |    | 8,434 |   | 11,588 |   | — |   | — |   |
| Total significant contractual cash  obligations |   | $                                           | 417,376 |   | $ | 13,283 |   | $ | 19,922 |   | $ | 37,134 |   | $ | 347,037 |   |

 

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(1)     Long-term debt obligations include $150.0 millionaggregate principal amount of our Notes, $200.0 million outstanding on theterm loan portion of our senior credit facility due September 30, 2010 and$29.6 million outstanding under the revolving loan portion of our seniorcredit facility due September 30, 2008. The revolving loan portion of our senior credit facility provides forborrowings of up to $200.0 million, of which $41.0 million wasavailable for borrowing as of December 31, 2003.  Payments listed above exclude related interest payments.

 
|                                     |   | **Amount of  Commitment Expiration Per Period  (in thousands)** |    |
|------------------------------------------|--------|-----------------------------------------------------------------|---------|
| **Significant Commercial  Commitments**  |   | **Total**                                                       |    | **Less Than  1 Year** |   | **1 to 3  Years** |   | **4 to 5  Years** |   | **Over 5  Years** |   |
|                                     |   |                                                            |    |   |   |   |   |   |   |   |   |
| Letters of credit                        |   | $                                                               | 49,149  |   | $ | 49,149 |   | $ | — |   | $ | — |   | $ | — |   |
| Performance and other bonds              |   | 31,080                                                          |    | 31,080 |   | — |   | — |   | — |   |
| Landfill closure bonds                   |   | 47,165                                                          |    | 47,165 |   | — |   | — |   | — |   |
| Total significant commercial commitments |   | $                                                               | 127,394 |   | $ | 127,394 |   | $ | — |   | $ | — |   | $ | — |   |

 

Thetables above do not include expenditures that we will likely be required tomake in connection with the construction of our existing or anticipatedlandfills, replacement of trucks and other equipment or otherwise in theordinary course of our business.  As ofDecember 31, 2003, we estimated that we would spend approximately$436.8 million on our then operated landfills over their then estimatedremaining operating lives, primarily for cell construction and environmentalstructures.  We cannot accuratelypredict the timing and ultimate amount of these expenditures as they will varydepending on the volumes of waste disposed of at such landfills, futurepermitting requirements, acquisition of additional landfills or collectionoperations and other factors many of which are beyond our control.  None of these expenditures representcontractual commitments.

 

We hadan environmental cost accrual on our balance sheet of $25.3 million as ofDecember 31, 2003 consisting of a liability related to an inactivelandfill (“Tantalo”) which we assumed in connection with our acquisition of theSeneca Falls, New York landfill in October 2003.  The liability consists of $16.0 million related to theremediation of the Tantalo landfill and $9.3 million for post-closuremonitoring of Tantalo for 30 years.  Theinitial remediation work will commence in 2004, and the post-closure monitoringperiod is expected to commence in 2007. Tantalo, a 26-acre landfill which stopped accepting waste in 1976,has been identified by the State of NewYork as an Inactive Hazardous Waste Disposal Site.  During its period of operation, Tantalo received both municipaland industrial waste, some of which has been found to exhibit hazardouscharacteristics as defined by the RCRA. Past activities at

 

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Tantalo have resulted in the release of hazardouswastes into the groundwater.  Aremediation program has been developed for Tantalo in conjunction with the NewYork State Department of Environmental Conservation.  The remediation program includes installation of groundwaterbarriers, protective liner caps, leachate and gas collection systems andstorm-water drainage controls, as well as methods to accelerate thedecontamination process.  We havepurchased a ten year “Clean-up Cost Cap Insurance Policy” which provides anadditional $25.0 million of coverage in excess of the remediation portionof the liability.  Cash paid forremediation was approximately $108,000 during 2003.  The remediation costs, which are not discounted, are included inour liabilities as of December 31, 2003 as accrued environmental andlandfill costs.

 

We hadan environmental cost accrual on our balance sheet of $1.9 million as ofDecember 31, 2003 and $1.7 million as of December 31, 2002,consisting of a liability related to a consent decree requiring the relocationof certain waste which we assumed in connection with our acquisition of theChambersburg landfill.  Cash paid forthis relocation was approximately $265,000 during 2003, approximately $525,000during 2002 and approximately $921,000 during 2001.

 

We hadan obligation on our balance sheet of $283.1 million as ofDecember 31, 2003 and $213.4 million as of December 31, 2002,representing the carrying value of our preferred stock as of such dates.  In accordance with EITF Topic No. D-98,Classification and Measurement of Redeemable Securities, we have classified ourpreferred stock outside of permanent equity because, pursuant to the termsthereof, such preferred stock is redeemable upon the occurrence of certaintransactions deemed to be liquidation events. This redemption is not deemed to be solely within our control becauseholders of our preferred stock currently control a majority of the votes of ourboard of directors.  See ourconsolidated financial statements and the related notes included elsewhere inthis Annual Report on Form 10-K.

 

Wehave a disposal contract that requires us to meet specific volumerequirements.  These volume requirementsare measured based on an annual average. In the event we do not meet the required volumes, we would be requiredto make additional payments based on the volume shortfall.  At December 31, 2003, there was no volumerequirement shortfall related to the disposal contract that would have asignificant impact on our business, financial condition, results of operationor cash flows.

 

***Capital Expenditures***

 

Wemade capital expenditures of $54.9 million during 2003, including$3.9 million for new municipal contracts and $2.0 million ofcapitalized interest primarily related to landfill construction and permittingprojects.  In addition, during 2003, weincurred $6.0 million of development costs in connection with two“greenfield” landfills purchased in 2002. Both landfills when purchased included the land and the permit to operate.  However, unlike the purchase of an operatinglandfill, neither greenfield landfill had incurred the costs of development,which include the infrastructure of an operating landfill and initial cell.  Both landfills opened inAugust 2003.  We expect to makecapital expenditures of approximately $48.0 to $52.0 million during 2004in connection with our existing business, including approximately$4.0 million to $5.0 million for new municipal contracts, $2.5 to$3.0 million of capitalized interest primarily related to landfill constructionand permitting projects and $2.5 million to $3.0 million for newtransfer station and “greenfield” landfill projects.  We intend to fund our planned 2004 capital expendituresprincipally through existing cash, internally generated funds and borrowingsunder our senior credit facility.

 

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

 

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

 

**RecentAccounting Pronouncements**

** **

For adescription of new accounting pronouncements that affect us, please see Note 2to our consolidated financial statements included elsewhere in this AnnualReport on Form 10-K.

 

**RiskFactors**

** **

Thefollowing risk factors, among others, could adversely affect our operations andfuture performance and cause our actual results to differ materially from thoseindicated by forward-looking statements made in this Annual Report on Form 10-Kand subsequently presented (in writing or orally) by us or persons acting onour behalf.

 

***Substantial Leverage – Our substantial debt could adverselyaffect our financial condition and make it more difficult for us to makepayments with respect to our debt.***

 

We have a substantialamount of debt with significant debt service requirements.  The following table shows important creditstatistics as of December 31, 2003 (dollars in thousands):

 
| Total indebtedness         |   | $       | 380,861 |   |
|----------------------------|--------|---------|---------|--------|
| Redeemable preferred stock |   | 283,054 |    |
| Stockholders’ deficit |   | (65,751 | )       |

 

This leverage could haveadverse consequences both for us and for our investors.  For example, it could:

 

•              make it moredifficult for us to satisfy our obligations with respect to our debt;

 

•              make us morevulnerable to unfavorable economic conditions and competitive pressures in ourindustry;

 

•              limit our ability toborrow additional funds, whether for working capital, acquisitions, purchasesof machinery, equipment or other assets, or otherwise;

 

•              require us todedicate or reserve a large portion of our cash flow from operations topayments on our debt, which would prevent us from using it for other purposes;

 

•              limit our ability toplan for, or react to, changes in our business or the industry in which weoperate; and

 

•              place us at adisadvantage compared to our competitors that have less debt in relation tocash flow.

 

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***AdditionalBorrowings Available—Despite our current indebtedness levels, we and oursubsidiaries may be able to incur substantially more debt.  This could exacerbate the risk describedabove.***

 

We andour subsidiaries may be able to incur substantial additional indebtedness inthe future.  The indenture governing ourNotes restricts, but does not prohibit, our ability to incur additionalindebtedness.  There are a number ofqualifications and exceptions to these restrictions that could allow us to incursubstantial additional indebtedness, including under our senior creditfacility.  The revolving loan portion ofour senior credit facility currently permits us to borrow up to an aggregateamount of $200.0 million, including up to $80.0 million underlyingletters of credit, subject to satisfying certain financial ratios.  As of December 31, 2003, we had$121.3 million available, including up to $49.1 million underlyingletters of credit, under the revolving loan portion of our senior creditfacility.  As of such date, the termloan portion of our senior credit facility was fully funded and had anoutstanding balance of $200.0 million. Subject to certain conditions, we may request an increase in either therevolving loan portion or the term loan portion of our senior credit facilityof up to $50.0 million such that the total senior credit facility wouldequal $450.0 million.  If new debtis added to our and our subsidiaries’ current debt levels, the related risksthat we and they now face could increase.

 

***Ability To ServiceDebt—We will require a significant amount of cash to service our debt.  Our ability to generate cash depends on manyfactors, some of which are beyond our control.***

 

Ourability to make payments on our debt will depend on our ability to generatecash.  Our success in doing so willdepend on the results of our operations, which in turn depend on many factors,including those described in this “Risk Factors” section and elsewhere inthis Annual Report on Form 10-K.  Ourability to generate adequate cash is also subject to general economic,financial, competitive, legislative, regulatory and other factors that arebeyond our control.  Also, if weconsummate acquisitions in the future, our needs for cash will increase.  Accordingly, our business may not generatesufficient cash flow from operations, and future borrowings may not beavailable to us under our senior credit facility or otherwise, in an amountsufficient to enable us to pay our debt or to fund our other liquidity needs.

 

***Events of Default—Ourfailure to comply with the covenants contained in our senior credit facility orthe indenture governing our Notes, including as a result of events beyond ourcontrol, could result in an event of default, which could materially andadversely affect our operating results and financial condition.***

 

If adefault under the indenture governing our Notes or our senior credit facilityshould occur, the holders of our Notes or the lenders under our senior creditfacility could elect to declare all amounts borrowed, together with accruedinterest, to be immediately due and payable. Furthermore, this could result in all amounts borrowed under otherinstruments, including the indenture governing our Notes or our senior creditfacility, that contain cross-acceleration or cross-default provisions beingdeclared immediately due and payable and the lenders could terminate allcommitments thereunder.  In such event,we may not be able to pay the accelerated amounts or borrow funds sufficient tomake any such payment.  Even ifadditional financing could be obtained, it may not be on terms that arefavorable or acceptable to us.  Further,if we are unable to repay, refinance or restructure our debt under our seniorcredit facility, the lenders under our senior credit facility could proceedagainst the collateral securing that indebtedness.  In such event, any proceeds received upon a realization of thecollateral would be applied first to amounts due under our senior credit facilitybefore any proceeds would be available to make payments on our Notes.

 

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***CovenantRestrictions—Covenant restrictions in our senior credit facility and theindenture governing our Notes may limit our ability to operate our business.***

 

Oursenior credit facility and the indenture governing our Notes contain covenantsthat restrict our ability to operate our business.  The indenture governing our Notes restricts our ability to, amongother things, incur additional debt, sell assets, create liens or otherencumbrances, make certain guarantees of debt, make specified payments,including dividends, engage in transactions with affiliates and enter into amerger or consolidation.  Our seniorcredit facility contains similar restrictions and also requires us to complywith certain financial covenants and ratios, including a leverage ratio, asenior leverage ratio, an interest coverage ratio, a minimum consolidated networth and a limit on capital expenditures. These restrictions, covenants and ratios may limit our ability tooperate our business, finance future operations, respond to changing businessand economic conditions, secure additional financing, if needed, and takeadvantage of potential business opportunities as they arise.  Furthermore, our ability to comply withthese restrictions, covenants and ratios may be affected by changes in economicor business conditions, other events beyond our control or significant assetimpairments resulting from a failure to obtain extensions that we are currentlyseeking with respect to the permitted lives of some of our landfills.  If we do not comply with these or otherprovisions contained in our senior credit facility and the indenture governingour Notes, we could default under these agreements, and the associated debt,together with accrued interest, could then be declared immediately due andpayable.  If our indebtedness wereaccelerated, we may not be able to repay the amounts due or borrow sufficientfunds to refinance the debt. Acceleration of the debt under our senior credit facility wouldconstitute an event of default under the indenture governing our Notes.

 

***ControllingStockholders—The interests of our controlling stockholders could conflict withthose of other holders of our securities.***

 

ThayerEquity Investors IV, LP and its affiliates, TC Carting L.L.C., TC Carting IIL.L.C., and TC Carting III L.L.C., control a majority of our capitalstock.  As a result, Thayer and itsaffiliates effectively control the outcome of most matters submitted to a voteof our stockholders.  In addition,pursuant to our Second Amended and Restated Stockholders’ Agreement, Thayer andTC Carting are entitled to designate up to four of eight members of our boardof directors.  Our Second Amended andRestated Stockholders’ Agreement also requires us to obtain the consent of thedirectors designated by Thayer and TC Carting for certain material corporateactions, including the issuance of additional debt and the declaration ofdividends.  See Part III. Item 13.“Certain Relationships and Related Transactions—Second Amended and RestatedStockholders’ Agreement.”  Thayer’s andits affiliates’ interests may not be aligned with those of our othersecurityholders and transactions may be pursued that could enhance Thayer’s andits affiliates’ equity investments while involving risks to our othersecurityholders’ interests.

 

***CapitalRequirements—Our business is capital intensive and may consume cash in excessof cash flow from our operations and borrowings.***

 

Ourability to remain competitive, sustain our growth and operations, and expandour operations largely depends on our cash flow from operations and our accessto capital.  We intend to fund our cashneeds through our operating cash flow and borrowings under our senior creditfacility.  We have historically alsofinanced some of our liquidity requirements through private sales of shares ofour preferred stock.  We may requireadditional equity or debt financing to fund our growth and debt repaymentobligations.

 

Ourcapital expenditures, including capitalized interest and initial developmentcosts for newly-acquired permitted landfills, were $54.9 million during2003.  If we undertake acquisitions orexpand our operations, our capital expenditures, including closure, finalclosure and post-closure and remediation

 

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expenditures, may increase.  The increase in expenditures may result in low levels of workingcapital or require us to finance working capital deficits.

 

Inaddition, if we must close a landfill sooner than we currently anticipate, orif we reduce our estimate of a landfill’s remaining available volume, we may berequired to incur such costs earlier or accrue liabilities for them at a higherrate.

 

Ourcash needs will increase if the expenditures for closure, final closure andpost-closure monitoring increase above the current reserves taken for thesecosts.  Expenditures for these costs mayincrease as a result of any federal, state or local government regulatoryaction taken to accelerate such expenditures. These factors, together with those discussed above, could substantiallyincrease our operating costs and therefore impair our ability to invest in ourexisting or new facilities.

 

We mayneed to refinance our senior credit facility, our Notes or other debt to paythe principal amounts due at maturity. In addition, we may need additional capital to fund future acquisitionsand the integration of solid waste management businesses.  Our business may not generate sufficientcash flow, we may not be able to obtain sufficient funds to enable us to payour debt obligations and capital expenditures or we may not be able torefinance on commercially reasonable terms, if at all.

 

***Ongoing InternalInvestigation—We face risks related to an ongoing internal investigation ofcertain accounting matters.***

 

In March 2004, we discovered that the manager of a division in ourSouth Region had engaged in misconduct that violated our internal policiesresulting in an overstatement of our South Region’s accounts receivable byapproximately $1.6 million as of December 31, 2003 and an understatementof expenses by approximately $833,000 during 2003.  Based upon the internal investigation we have been conducting, inconsultation with the audit committee of our board of directors, as furtherdescribed in Part II Item 9A.”Controls and Procedures,” we have takensteps to improve our disclosure controls and procedures and internal controlover financial reporting, including segregation of the accounting and financialreporting duties from the management duties at this division.  The implementation of these initiatives isone of our highest priorities. Our board of directors, in coordination with ouraudit committee, will continually assess the progress and sufficiency of theseinitiatives and make adjustments as necessary. However, no assurance can be given that we will be able to successfullyimplement our revised disclosure controls and procedures and revised internalcontrol over financial reporting or that our revised disclosure controls andprocedures or revised internal control over financial reporting will beeffective in remedying all of the identified deficiencies in our disclosurecontrols and procedures and our internal control over financial reporting orany deficiencies that have not yet been identified.  If we are unable to implement these changes effectively orefficiently, there could be a material adverse effect on our operations orfinancial results.  Further, our ongoinginvestigation may uncover additional facts that could result in additionaladjustments to our financial statements in future or prior periods.

 

***Constraints toGrowth—Our growth strategy depends, in part, on our acquiring other solid wastemanagement or related businesses and expanding our existing landfills and otheroperations, which we may be unable to do.***

 

Ourgrowth strategy is based, in part, on our ability to acquire other solid wastemanagement businesses, particularly transfer stations and landfilloperations.  The success of thisacquisition strategy will depend, in part, on our ability to accomplish thefollowing:

 

•              identify suitablebusinesses to buy;

 

•              complete thepurchase of those businesses on terms acceptable to us;

 

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•              complete theacquisition in the time frame we expect;

 

•              improve the resultsof operations of the businesses that we buy and successfully integrate theiroperations into our own; and

 

•              avoid or overcomeany concerns expressed by regulators, including antitrust concerns.

 

Therecan be no assurance that we will be successful in pursuing any or all of thesesteps.  Our failure to implement ouracquisition strategy could have an adverse effect on other aspects of ourbusiness strategy and our business in general. For example, our ability to continue to successfully implement ourvertical integration strategy will depend on our ability to identify andacquire or develop additional suitable landfills, collection operations andtransfer stations and obtain necessary permits.  We may not be able to find appropriate acquisition candidates,acquire those candidates that we find, obtain necessary permits or integrateacquired businesses effectively or profitably.

 

Manyof our competitors are also seeking to acquire collection operations, transferstations and landfills, including many competitors that have greater financialresources than we do.  Increasedcompetition may reduce the number of acquisition targets available to us andmay lead to unfavorable terms as part of any acquisition, including highpurchase prices.  If acquisitioncandidates are unavailable or too costly, we may need to change our businessstrategy.

 

Wealso cannot be certain that we will have enough capital or be able to raiseenough capital by issuing stock or debt instruments or through other financingmethods on reasonable terms, if at all, to complete the purchases of thebusinesses that we want to buy. Acquisitions may increase our capital requirements, and therebyexacerbate the risks mentioned under “—Capital Requirements—Our business iscapital intensive and may consume cash in excess of cash flow from ouroperations and borrowings” above.

 

Oursenior credit facility requires us to obtain the consent of certain lendersunder our senior credit facility before engaging in any acquisition thatinvolves cash consideration in excess of $15.0 million.  Acquisitions in excess of $5.0 millionmust also be approved by the directors designated by certain of our keystockholders.  The indenture governingour Notes also restricts our ability to consummate acquisitions.

 

Ouracquisitions also involve the potential risk that we fail to assess accuratelyall of the pre-existing liabilities of the operations acquired, includingliabilities of the type described under “—Environmental Contamination—We mayhave liability for environmental contamination” below.

 

Ourgrowth strategy also calls for expanding the total capacity and increasing thedaily volume limits of a number of our facilities, including our MSW landfillin Seneca Falls, New York, our largest landfill in our Northeast Region, whichcurrently has an estimated remaining operating life, based on current volumes,of more than five years.  Failure toexpand capacity could have a material adverse effect on our operations orfinancial condition.

 

We donot know whether our growth strategy will continue to be effective.  Our integration plan for acquisitionscontemplates certain cost savings, including from the elimination ofduplicative personnel and facilities. Unforeseen factors may offset the estimated cost savings or othercomponents of our integration plan in whole or in part and, as a result, we maynot realize any cost savings or other benefits from future acquisitions.  Also, our increased size means that federaland state government regulators, such as antitrust regulators, may examine ouracquisitions more closely.  They mayobject to certain purchases or place conditions on them that would limit theirbenefit to us.

 

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If weare unsuccessful in implementing our acquisition strategy or expanding ourexisting landfills and other operations for the reasons discussed above orotherwise, our business, financial condition and results of operations could bematerially adversely affected.

 

***Growth—We may not beable to successfully manage our growth.***

 

Ourgrowth strategy places significant demands on our financial, operational andmanagement resources.  In order tocontinue our growth, we will need to add administrative, management and otherpersonnel, and make additional investments in operations and systems.  We may not be able to find and trainqualified personnel, or do so on a timely basis, or expand our operations andsystems to the extent, and in the time, required.

 

***Competition—Competitioncould reduce our profitability or limit our ability to grow.***

 

Thenon-hazardous solid waste management industry is very competitive and we expectthat increased consolidation in the industry will increase competitivepressures.  Competition may require usto discount our prices, which could reduce our revenue and have a materialadverse effect on our business, financial condition and results of operations.

 

Weface competition from several larger and better capitalized competitors and alarge number of local and regional competitors.  Because companies can enter the collection and transportationsegments of the solid waste management industry with very little capital ortechnical know-how, there are a large number of regional and local companies inthe industry.  We face competition fromthese businesses in the markets we currently serve.  Similar competition may exist in each location into which we tryto expand in the future.  Ourcompetitors could also take actions that would hurt our growth strategy,including the support of regulations that could delay or prevent us fromobtaining or keeping permits.  They mayalso give financial support to citizen groups that oppose our plans to locate adisposal or transfer facility at a particular location.

 

Ineach market in which we operate a landfill, we compete for solid waste volumeon the basis of disposal or “tipping” fees, geographical location and qualityof operations.  Our ability to obtainsolid waste volume for our landfills may be limited by the fact that some majorcollection companies also operate landfills to which they send theirwaste.  In markets in which we do notoperate a landfill, our collection operations may operate at a disadvantage tofully integrated competitors.

 

***State and MunicipalLandfill Alternatives—State and municipal requirements to reduce landfilldisposal by encouraging various alternatives may adversely affect our abilityto operate our landfills at full capacity.***

*** ***

Statesand localities increasingly have supported the following alternatives to orrestrictions on current landfill disposal:

 

•              recycling;

 

•              incinerating;

 

•              composting;

 

•              reducing waste atthe source;

 

•              prohibiting disposalof certain types of waste at landfills; and

 

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•              limiting landfillcapacity.

 

Manystates have enacted, or are currently considering or have considered enacting,laws regarding waste disposal, including:

 

•              requiring countiesto use waste planning, composting, recycling or other programs to reduce theamount of waste deposited in landfills; and

 

•              prohibiting thedisposal of yard waste, tires and other items in landfills.

 

Thesetrends may reduce the volume of waste destined for landfills in certain areas,which could lead to our landfills operating at a reduced capacity or force usto charge lower prices for landfill disposal services.  These results could have a material adverseeffect on our business, financial condition and results of operations.

 

***Loss of Contracts—Wemay lose contracts through competitive bidding or early termination, whichwould cause our revenue to decline.***

 

Wederive a substantial portion of our revenue from services provided undermunicipal contracts and exclusive franchise agreements.  Many of these may be subject to competitivebidding at some time in the future.  Wealso intend to bid on additional municipal contracts and franchise agreements.  Whether we are the successful bidder for anyparticular municipal contract is subject to significant uncertainty.  In addition, some of our customers mayterminate their contracts with us before the end of the contract term.  If we are not able to replace revenue fromcontracts lost through competitive bidding, early termination or from therenegotiation of existing contracts with other revenue within a reasonable timeperiod, our revenue would decline.

 

***GeographicConcentration—We are geographically concentrated in the northeastern andsouthern United States and susceptible to those regions’ local economies andregulations.***

 

Weoperate in the following nine states: Texas, Arkansas, Missouri, Oklahoma,Louisiana, New York, New Jersey, Pennsylvania and Maryland.  We estimate that more than 43% of ourrevenue during 2003 was derived from services provided in Texas and more than28% of our revenue during 2003 was derived from services provided in NewYork.  Accordingly, our business andfinancial results would be harmed by downturns in the economies of Texas or NewYork and other factors affecting such states, such as state regulationsaffecting the solid waste management industry and severe weatherconditions.  In addition, the costs andtime involved in obtaining permits for, and the scarcity of, availablelandfills in the northeastern United States could make it difficult for us toexpand vertically in our Northeast Region.

 

OurC&D waste services constitute a substantial portion of our business in ourSouth Region.  The C&D waste marketis more cyclical than the MSW market because it is based on the volume ofconstruction projects.  If our SouthRegion suffers a recession or other economic downturn, we would likelyexperience reduced revenue from our C&D operations in that region.

 

***CustomerConcentration—The loss of the City of New York as a customer could have asignificant adverse effect on our business and operations.***

*** ***

11% ofour revenue in 2003 was attributable to our contracts with the City of New Yorkto dispose of residential waste collected by the City in Brooklyn, NewYork.  These contracts expire onOctober 31, 2006 and may be renewed by the City for two additionalone-year terms.

 

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During2002, New York City announced changes to update its Solid Waste ManagementPlan, pursuant to which it plans to utilize and upgrade its existing marinetransfer station system instead of private transfer stations to process andtransfer its residential waste stream of approximately 12,000 tons of MSW perday.  New York City initially intendedto implement these changes by retrofitting and repermitting these marinetransfer stations by 2008 so that the stations could containerize the City’sresidential MSW on site and then transport the loaded containers to ultimatedisposal sites by alternative transportation methods, such as barge, rail andtruck.  In 2003, New York Citydetermined that this plan was not feasible from a cost standpoint, and decidedto seek proposals from the private industry with respect to the transfer anddisposal of New York City’s residential waste stream.  Additionally, in February 2004, the State of New Jerseyterminated its discussions with the City of New York regarding the building ofa marine transfer station for the City’s garbage on a New Jerseywaterfront.  Our contracts with the Cityof New York could be terminated or not renewed or extended upon the expirationof their initial terms if these changes are implemented as presently proposedor for any other reason.  If these contractsare terminated or not renewed or extended and we are not able to replace therevenue from the contracts with other revenue within a reasonable time period,our revenue would decline.

 

***Surety Bonds,Letters of Credit and Insurance—If we are unable to obtain performance orsurety bonds, letters of credit or insurance, we may not be able to enter intoadditional MSW collection contracts or retain necessary landfill operatingpermits.***

 

MSWcollection contracts, other municipal contracts and landfill closureobligations may require performance or surety bonds, letters of credit or otherfinancial assurance to secure contractual performance or comply with state orlocal law.  We typically satisfy theserequirements by posting bonds and, as of December 31, 2003, we had$78.2 million of such bonds in place. Alternatively, we may use letters of credit, for which we have an$80.0 million sub-limit available under our senior credit facility.  Closure bonds may become more difficult orcostly to obtain in the future.  If wewere to draw fully upon our senior credit facility commitments or were unableto obtain performance or surety bonds or additional letters of credit insufficient amounts or at acceptable rates, we could be precluded from enteringinto additional MSW collection contracts or obtaining or retaining landfilloperating permits.  Any futuredifficulty in obtaining insurance also could impair our ability to securefuture contracts that are conditioned upon the contractor having adequateinsurance coverage.  Accordingly, ourfailure to obtain performance or surety bonds, letters of credit or otherfinancial assurances or to maintain adequate insurance coverage could limit ouroperations or violate state or local requirements.

 

***Key Executives—Wedepend heavily on our senior management.***

 

Wedepend heavily on a limited number of senior executives.  Our future success will depend on, amongother things, our ability to keep the services of these executives and to hireother highly qualified employees at all levels.  We compete with other potential employers for employees, and wemay not be successful in hiring and keeping the services of executives andother employees that we need.  The lossof the services of, or our inability to hire, executives or key employees couldhinder our business operations and growth.

 

***Labor Unions—Effortsby labor unions to organize our employees could divert management attention andincrease our operating expenses.***

 

Laborunions may make attempts to organize our non-unionized employees.  Some groups of our employees have chosen tobe represented by unions, and we have negotiated collective bargainingagreements with them.  We cannot predictwhich, if any, groups of employees may seek union representation in the futureor the outcome of any collective bargaining. The negotiation of these agreements could divert management attentionand the terms of any agreements could result in increased

 

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operating expenses and lower operating margins.  If we are unable to negotiate acceptablecollective bargaining agreements, we may have to wait through “cooling off”periods, which are often followed by union-initiated work stoppages, includingstrikes.  Although we have neverexperienced a work stoppage, we may in the future.  Depending on the type and duration of any work stoppage, ouroperating expenses could increase significantly, which could have a materialadverse effect on our business, results of operations and financial condition.

 

***Legislation andGovernmental Regulation—We are subject to extensive legislation andgovernmental regulation that may restrict our operations or increase our costsof operations.***

 

Ourequipment, facilities and operations are subject to extensive and changingfederal, state and local laws and regulations relating to environmentalprotection, health, safety, land use, transportation and related matters.  These include, among others, laws andregulations governing the use, treatment, storage and disposal of solid andhazardous wastes and materials, air quality, water quality, permissible ormandatory methods of processing waste and the remediation of contaminationassociated with the release of hazardous substances.  Environmental laws and regulations have been enforced morestringently in recent years because of greater public interest in protectingthe environment.

 

Ourcompliance with regulatory requirements is costly.  We are often required to enhance or replace our equipment and tomodify landfill operations and, in some cases, we could be required to closelandfills.  We may not be able to offsetthe cost of complying with these standards. In addition, environmental regulatory changes or an inability to obtainextensions to the life of a landfill could accelerate or increase accruals orexpenditures for closure, final closure and post-closure monitoring at solidwaste facilities and obligate us to spend sums in addition to those presentlyaccrued for such purposes.

 

Extensiveregulations govern the design, operation and closure of landfills.  In October 1991, the EPA establishedminimum federal requirements for landfills under Subtitle D of the ResourceConservation and Recovery Act of 1976, also referred to as the Subtitle Dregulations.  If we fail to comply withthe Subtitle D regulations, we could be required to undertake investigatory orremedial activities, curtail operations or close a landfill temporarily orpermanently, or be subject to monetary penalties.

 

Certainof our waste disposal operations traverse state and county boundaries.  In the future, our collection, transfer andlandfill operations may be affected by proposed federal legislation governinginterstate shipments of waste.  Althoughno such legislation has been enacted, it has been proposed regularly inCongress over the last ten years.  Suchproposed federal legislation would have prohibited or limited the disposal ofout-of-state waste and may require states, under certain circumstances, toreduce the amount of waste exported to other states.  If this or similar legislation is enacted in states in which weoperate landfills that receive a significant portion of waste originating fromout-of-state, our operations could be negatively affected.  In addition, we believe that several stateshave proposed or have considered adopting legislation that would regulate theinterstate transportation and disposal of waste in the states’ landfills.

 

Ourcollection, transfer and landfill operations may also be affected by “flowcontrol” legislation.  Some states andlocal governments may enact laws or ordinances directing waste generated withintheir jurisdiction to a specific facility for disposal or processing.  If this or similar legislation is enacted,state or local governments could act to limit or prohibit disposal orprocessing of waste in our transfer stations or landfills.

 

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In1996, the New York City Council enacted Local Law 42, which prohibits thecollection, disposal or transfer of commercial and industrial waste without alicense issued by the Business Integrity Commission and requires BusinessIntegrity Commission approval of all acquisitions or other businesscombinations in New York City proposed by all licensees.  See Part I. Item 1. “Business—Regulation—Stateand Local Regulations—New York.”  Theneed for review by the Business Integrity Commission could delay ourconsummation of acquisitions in New York City. The delay or prevention of our acquisitions could limit our ability togrow our business in New York City.

 

Fromtime to time, states and local authorities consider and sometimes adopt laws orregulations imposing fees or other charges on waste disposed of at landfillslocated in those states.  If anysignificant fees are imposed in states in which we operate and we are not ableto pass the fees through to our customers, our operations and profitabilitycould be negatively affected.

 

Theoperational and financial effects discussed above associated with compliancewith the laws and regulations to which we are subject could require us to makematerial expenditures or otherwise materially adversely affect the way weoperate our business, as well as have a material adverse effect on our resultsof operations and financial condition.

 

***Operating Permits—Wemay not be able to obtain permits we require to operate our business.***

 

Permits,licenses and approvals to operate or expand non-hazardous solid waste landfillshave become increasingly difficult, time consuming and expensive toobtain.  Obtaining permits often takesyears as a result of numerous hearings and the time needed to comply with landuse, environmental and other regulatory requirements.  Granting of these permits is also often subject to resistancefrom citizen or other groups.  Ourability to continue to sustain our current vertical integration strategy willdepend on our ability to establish new landfills and transfer stations, expandour landfills and transfer stations and increase applicable daily or periodictonnage allowances.  Our failure toobtain the required permits to establish new landfills and transfer stations orexpand the permitted capacity of our existing landfills and transfer stationscould hinder our vertical integration and impair our business strategy,particularly in our Northeast Region, where we are currently seeking to expandthe more than five year estimated remaining operating life, based on currentvolumes, of our Seneca Meadows landfill. More specifically, if we fail to obtain such permits, we may have to disposecollected waste at landfills operated by our competitors or haul the waste longdistances at a higher cost to another of our landfills, or we may incur closurecosts sooner, or accrue them at a higher rate, or suffer assetimpairments.  Failure to obtain permitscould, therefore, significantly increase our waste disposal expenses and have amaterial adverse effect on our business, financial condition, results ofoperation and ability to comply with covenants in our senior credit facilityand thereby impair our access to capital.

 

***EnvironmentalLitigation—We may be subject to legal action relating to compliance withenvironmental laws.***

 

Solidwaste management companies like us are often subject to close scrutiny byfederal, state and local regulators, as well as private citizens, and may besubject to judicial and administrative proceedings relating to their compliancewith environmental and local land use laws.

 

Ingeneral, environmental laws authorize federal or state environmental regulatoryagencies and attorneys general to bring administrative or judicial actions forviolations of environmental laws. Potential penalties for such violations may include, among other things,civil and criminal monetary penalties, imprisonment, permit suspension or revocation,and injunctive relief.  These agenciesand attorneys general may also attempt to revoke or deny renewal of ouroperating permits, franchises or licenses for violations or alleged violationsof environmental laws or regulations. Under certain

 

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circumstances, citizens are also authorized to filelawsuits to compel compliance with environmental laws and to impose monetarypenalties.  Surrounding landowners mayassert claims alleging environmental damage, personal injury or propertydamage.

 

Fromtime to time, we have received, and we expect in the future to receive,citations or notices from governmental authorities alleging that our operationsare not in compliance with our permits or certain applicable environmental orland use laws or regulations.  Wegenerally seek to work with the relevant authorities to resolve the issuesraised by these citations or notices. However, we may not always be successful in resolving these types ofissues without resorting to litigation or other formal proceedings.  Any adverse outcome in these proceedings,whether formal or informal, could result in negative publicity, and reduce thedemand for our services and our revenue. A significant judgment against us, the loss of a significant permit orlicense or the imposition of a significant fine could also have a materialnegative effect on our financial condition.

 

***EnvironmentalContamination—We may have liability for environmental contamination.***

 

Wecould be liable to federal or state governments or other parties if hazardoussubstances contaminate or have contaminated our properties, including soil orwater under our properties, or if hazardous substances from our propertiescontaminate or have contaminated the properties of others.  We could be liable for this type ofcontamination even if the contamination did not result from our activities oroccurred before we owned or operated the properties.  We also could be liable for environmental contamination atproperties to which we transported hazardous substances or arranged to havehazardous substances transported, treated or disposed.  Certain environmental laws such as thefederal Comprehensive Environmental Response, Compensation and Liability Act of1980, as amended, or CERCLA, and similar state laws, impose joint and severaland strict liability in connection with environmental contamination, whichmeans that we could have to pay all recoverable damages, even if we were onlypartially responsible or not responsible at all for the injury giving rise tothe damages.  While we may seekcontribution for these expenses from others, we may not be able to identify whothe other responsible parties are and we may not be able to compel them tocontribute to these expenses or they may be insolvent or unable to afford tocontribute.  If we do incur liabilityunder CERCLA or similar state laws and if we cannot identify other parties whowe can compel to contribute to our expenses and who are financially able to doso, it could have a material adverse effect on our business, financialcondition and results of operations. See Part I. Item 1. “Business—Regulation.”

 

Inaddition, we have previously acquired, and may in the future acquire,businesses that may have handled and stored hazardous substances, includingpetroleum products, at their facilities. These businesses may have released hazardous substances into soil orgroundwater.  They also may havetransported or disposed of hazardous substances or arranged to havetransported, disposed of or treated hazardous substances to or at otherproperties where hazardous substances were released into soil orgroundwater.  Depending on the nature ofour acquisition of these businesses and other factors, we could be liable forthe cost of cleaning up any contamination, and other damages, for which thebusinesses we acquired or acquire are liable. Any indemnities or warranties we obtained or obtain in connection withthe purchases of these businesses may not suffice to cover these liabilities, dueto limited scope, amount or duration, the financial limitations of the partywho gave or gives the indemnity or warranty or other reasons.

 

Accordingly,we could be subject to legal actions brought by governmental or private partiesin connection with environmental contamination.  Any substantial liabilities associated with environmentalcontamination, whether to federal or state environmental authorities or otherparties, could have a material adverse effect on our business, financialcondition and results of operations.

 

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We may also be susceptible to negative publicity if we are identifiedas the source of potential environmental contamination.  If an accident occurred with one of ourtransportation trucks, with the potential risk of even minor environmentalcontamination, the resulting media coverage could have a material adverseeffect on our business, financial condition and results of operations.

 

***Environmental andOther Liabilities—We will always face the risk of liability, and insurance maynot always be available or sufficient.***

 

Ourindustry presents risks of liability under statutes, regulations, contracts andtort law.  If we fail to comply with anyduty imposed by these laws and contracts, liability for environmentalcontamination, personal injury or property damage may result.  We maintain pollution liability, generalliability and workers’ compensation insurance which we believe is adequate toprotect our business and employees.  Ifa claim is made against us for which we are uninsured, or for which we areunderinsured, it could have a material adverse effect on our business,financial condition and results of operations.

 

Becausewe believe that the cost for environmental liability insurance is high relativeto the coverage it would provide, we generally maintain our coverage atstatutorily required levels.  Due to thelimited nature of our insurance coverage for environmental liability, anysubstantial liability for environmental damage in excess of our coverage thatwe may incur could have a material adverse effect on our business, financialcondition and results of operations.

 

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**Item 7A.*  *Quantitativeand Qualitative Disclosures About Market Risks.**

 

In thenormal course of business, we are exposed to market risk, including changes ininterest rates and certain commodity prices. We use hedge agreements to manage a portion of our risks related tointerest rates.  While we are exposed tocredit risk in the event of non-performance by counterparties to our hedgeagreements, in all cases such counterparties are highly rated financialinstitutions and we do not anticipate non-performance.  We do not hold or issue derivative financialinstruments for trading purposes.  Wemonitor our hedge positions by regularly evaluating the positions at market andby performing sensitivity analyses.

 

Wehave performed sensitivity analyses to determine how market rate changes willaffect the fair value of our market risk sensitive hedge positions and allother debt.  Such an analysis isinherently limited in that it represents a singular, hypothetical set ofassumptions.  Actual market movementsmay vary significantly from our assumptions. Fair value sensitivity is not necessarily indicative of the ultimatecash flow or earnings effect we would recognize from the assumed market ratemovements.  As of December 31,2003, we were exposed to cash flow and earnings risk due to changes in interestrates with respect to the entire $29.6 million outstanding balance underthe revolving loan portion of our senior credit facility, the entire$200.0 million outstanding balance under the term loan portion of oursenior credit facility and $50.0 million of our Notes.  A one percentage point increase in interestrates on our variable rate debt as of December 31, 2003 would decrease ourannual pre-tax income by approximately $2.8 million.  Because all of our remaining debt is atfixed rates, changes in market interest rates would not significantly impactour cash flows or results of operations.

 

InAugust 2002, we entered into two interest rate swap agreements, which areeffective through June 15, 2012, with two financial institutions.  Under each swap agreement, the fixedinterest rate on $25.0 million of our Notes effectively was converted toan interest rate of 5.275% and 5.305%, respectively, plus an applicablefloating rate margin which is based on six month LIBOR and which is readjustedsemiannually on June 15 and December 15 of each year.  The applicable floating rate margin was1.42% and 1.23% as of December 31, 2002 and 2003, respectively.

 

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Wemarket a variety of recyclable materials, including cardboard, office paper,plastic containers, glass bottles and ferrous and aluminum metals.  We operate seven recycling facilities andsell other collected recyclable materials to third parties for processingbefore resale.  In a few markets, we sharethe profits from our resale of recycled materials with other parties to ourrecycling contracts.  At our tirerecycling facility, we use the recycled tire chips in the construction ofdrainage blankets for new disposal cells at our Seneca Falls, New Yorklandfill.  To reduce our exposure tocommodity price risk with respect to recycled materials, we have adopted apricing strategy of charging collection and processing fees for recyclingvolume collected from third parties. Although there can be no assurance of market recoveries in the event ofa decline, because of the provisions within certain of our contracts which passcommodity risk along to the customers, we believe, given historical trends andfluctuations within the recycling commodities market, that a 10% increase inaverage recycled commodity prices from the prices that were in effect atDecember 31, 2003 would not have a material impact on our cash flows orpre-tax income.

 

**Item 8.*  *FinancialStatements and Supplementary Data.**

** **

Ourconsolidated financial statements and the report of independent auditorsthereon set forth on pages F-1 through F**-**34 herein are incorporated herein byreference.

 

**Item 9.*  *Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure*.***

** **

Notapplicable.

 

**Item 9A.*  *Controlsand Procedures.**

** **

OurChief Executive Officer and Chief Financial Officer have concluded, based ontheir evaluation as of the end of the period covered by this Annual Report onForm 10-K, that, with the exceptions described below, our disclosure controlsand procedures (as defined in the Securities Exchange Act of 1934 Rules13a-15(e) and 15d-15(e)) are effective to ensure that information required tobe disclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  With the exceptions described below, therewere no changes in our internal control over financial reporting during ourfourth quarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

In March 2004, we discovered that the manager of a division in ourSouth Region had engaged in misconduct that violated our internal policiesresulting in an overstatement of our South Region’s accounts receivable as ofDecember 31, 2003 and an understatement of its expenses during 2003.  This division accounted for approximately4.5% of our consolidated revenues during 2003. Based on our internal investigation described below, we believe thatsuch division’s accounts receivable were overstated by approximately $1.6million and expenses were understated by approximately $833,000 for 2003.  We previously disclosed in our QuarterlyReport on Form 10-Q for the period ended September 30, 2003 that, duringthe three months ended September 30, 2003, we increased our bad debtreserve by $250,000 to cover expected write-offs related to this division.  While we initially believed that thisincrease in bad debt reserve related to an accounts receivable collectionissue, we now believe it is related to the subject matter of the investigationdescribed below.

 

During their audit of our 2003 financial statements, our auditorsselected three customer accounts receivable balances at the division inquestion to be confirmed by our customers. Based on the responses of these customers to our auditors, we suspectedthat the applicable accounts receivable balances were possibly overstated.  We immediately

 

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commenced an investigation, in consultation with our audit committee,and concluded that, in addition to  theaccounts receivable balances for these three customers, many other customeraccounts receivable balances at the division were overstated.  Based on the overstated accounts receivablebalances, we have taken additional charges in 2003 to our allowance fordoubtful accounts receivable of $1.6 million related to this division.

 

During our investigation we also concluded that expenses in 2003 wereunderstated by $833,000 at this division. We determined that invoices for numerous vendors for services providedin 2003 were not paid on time, were not accrued into liabilities as ofDecember 31, 2003 and were not expensed in the proper period.

 

At the beginning of our investigation, we took the appropriate actionto control the management of this division. Our corporate and region management immediately took over directsupervision of this division.  Ourinvestigation is still ongoing and we still have not yet determined our exactcourse of action with respect to the manager of this division.  We expect that our corporate and regionmanagement will remain in direct supervision of this division until ourinvestigation is concluded.

 

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

 

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**PARTIII**

 

**Item 10.*  *Directors and ExecutiveOfficers of the Registrant*.***

** **

Thetable below sets forth certain information regarding our directors andexecutive officers and certain significant employees: 

 
| **Name**                   |   | **Age** |   | **Positions**                                                                      |
|----------------------------|--------|---------|--------|------------------------------------------------------------------------------------|
| Jeffrey J. Keenan(1)       |   | 47      |   | Chairman of the Board                                                              |
| Charles F. Flood           |   | 58      |   | President, Chief Executive Officer and Director                                    |
| Thomas J. Cowee            |   | 47      |   | Senior Vice President, Chief Financial Officer, Treasurer and Assistant  Secretary |
| Thomas L. Brown            |   | 50      |   | Senior Vice President and Chief Operating Officer                                  |
| Thomas J. Fowler           |   | 53      |   | Senior Vice President, General Counsel and Secretary                               |
| P. Lawrence McGee          |   | 53      |   | Senior Vice President and Chief Development Officer                                |
| Edward L. Apuzzi           |   | 37      |   | Vice President, Operations-Northeast Region                                        |
| Stephen T. Moody           |   | 35      |   | Vice President, Assistant Secretary and Corporate Controller                       |
| Gordon D. Peckham          |   | 58      |   | Vice President, Operations-South Region                                            |
| Charles R. Cummings(2)     |   | 67      |   | Director                                                                           |
| Daniel M. Dickinson (1)(2) |   | 42      |   | Director                                                                           |
| James J. Forese(1)         |   | 68      |   | Director                                                                           |
| Leslie J. Lieberman        |   | 47      |   | Director                                                                           |
| Bruce R. McMaken(2)        |   | 43      |   | Director                                                                           |
| Robert E. Michalik         |   | 35      |   | Director                                                                           |

 

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(1)           Member of the compensation committee of our board ofdirectors.

(2)           Member of the audit committee of our board ofdirectors.

 

***Directors***

 

All ofthe members of our board of directors were elected pursuant to our SecondAmended and Restated Stockholders’ Agreement. See Part III. Item 13. “Certain Relationships and RelatedTransactions—Second Amended and Restated Stockholders’ Agreement.”

 

**Jeffrey J. Keenan**is one of our founders and has beenChairman of our board of directors since 1997 and of our compensation committeesince January 2004.  From 1997 to1999, he was also our Vice President and helped establish our Northeast Regionoperations.  Mr. Keenan iscurrently the President of The United Company, a diversified private holdingcompany with operations in energy, real estate, golf course ownership andmanagement, private equity and financial services.  From 1985 to 1997, Mr. Keenan served as a Partner and ManagingDirector at two private equity funds, AEA Investors, Inc. and Acadia Partners,where he had senior responsibility for sourcing and managing private equityinvestments.  From 1983 to 1985, Mr.Keenan served as an Associate and Vice President in the Financial RestructuringGroup at Lehman Brothers. Mr. Keenan is the Managing Member of IESI CapitalLLC, IESI Capital II LLC, IESI Capital III LLC, IESI Capital IV LLC, IESICapital V LLC and IESI Capital VI LLC (collectively, “IESI Capital”), each ofwhich owns shares of our common and/or preferred stock.  He has served as a member of the board ofdirectors of more than 20 private and public companies.  Mr. Keenan has a B.A., M.B.A. and J.D. fromThe University of Chicago.

 

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**Charles F. Flood**is one of our founders and has been ourPresident, Chief Executive Officer and a member of our board of directors sinceour inception.  From 1989 to 1995, hewas employed with Waste Management, as Group President from 1993 to 1995 in thenortheastern United States, Regional Vice President from 1991 to 1993 in thesouth central United States and as Vice President of Operations in Texas from1989 to 1991.  Mr. Flood was Presidentof Laidlaw Waste Services’ U.S. solid waste operations from 1986 to 1987.  Mr. Flood was President of the NorthAmerican solid waste operations for GSX Corporation from 1984 to 1986.  Mr. Flood was the Region Vice President of theSouthern Region of SCA Services, Inc., from 1976 to 1984.  Mr. Flood has over 35 years of experience inthe solid waste management industry. Mr. Flood has a B.S. in education from the University of Miami.

 

**Charles R. Cummings**is one of our founders and has been amember of our board of directors since 1997 and of our audit committee sinceJune 1999.  Mr. Cummings iscurrently the Chairman and Chief Executive Officer of O.I.I. InternationalInc., a privately-held company engaged in the design, manufacture anddistribution of intraocular refractive lenses. Mr. Cummings serves as the Chairman or President of severalother privately-held companies engaged in equipment rental, production of foodflavorings, food services and oil and gas production.  From 1990 to 2002, Mr. Cummings was associated with AEAInvestors, Inc., serving as a Managing Director from 1990 to 1994 and as aconsultant from 1994 until 2002.  From1982 to 1990, Mr. Cummings was the President and Chief Executive Officer offour companies: Coke Enterprises, Inc, Global Transportation Services, Inc.,Republic Supply Company, and Vision Hardware Group.  Prior to that he was a Partner with Arthur Young &Company.  Mr. Cummings holds aB.B.A. degree in accounting from Texas Tech University.

 

**Daniel M. Dickinson**has been a member of our board ofdirectors since May 2001 and our audit committee and compensation committeesince January 2004.  Mr. Dickinsonhas been employed since 2001 by, and is currently a Managing Partner of, ThayerCapital Partners, a private investment firm located in Washington, D.C.consisting of numerous legal entities associated with the management of threeprivate equity investment partnerships. Prior to Thayer Capital Partners, Mr. Dickinson spent more thanfourteen years in mergers & acquisitions, most recently as Co-Head ofGlobal M&A at Merrill Lynch.  Hisroles at Merrill Lynch also included leading the European M&A Group and,prior to that, the Global Manufacturing and Services M&A effort.  Mr. Dickinson is also a director of SunburstTechnologies and Mistras Holdings.  Mr.Dickinson has a J.D. and M.B.A. from The University of Chicago and a B.S. inMechanical Engineering and Materials Science, magna cum laude, from DukeUniversity.

 

**James J. Forese**has been a member of our board ofdirectors since October 2003.  Mr.Forese joined Thayer Capital Partners in July 2003 and currently serves asan Operating Partner and Chief Operating Officer.  From 1996 to 2003, Mr. Forese worked for IKON Office Solutions,most recently as the Chairman and Chief Executive Officer.  Prior to joining IKON, Mr. Forese spent 36years with IBM Corporation, most recently as Chairman of IBM CreditCorporation.  In addition, Mr. Foreseheld numerous other positions during his tenure at IBM Corporation including asenior executive with IBM World Trade Europe/Middle East/Africa and IBM WorldTrade Americas, President of the Office Products Division, Corporate VicePresident and Controller and Corporate Vice President of Finance.  Mr. Forese currently serves on the Board ofDirectors of American Management Systems, NUI Corporation, Spherion Corporationand Anheuser-Busch Companies, Inc.  Mr.Forese earned a B.E.E. in Electrical Engineering from Rensselaer PolytechnicInstitute and an M.B.A. from Massachusetts Institute of Technology (MIT).

 

**Leslie J. Lieberman** has been a member of our board of directors sinceJanuary 2004. In 2000, Mr. Lieberman founded Sterling Partners, LLC, aninvestment vehicle that focuses primarily on private equity investments. Since1995, Mr. Lieberman has been the Managing Member of SEI Capital, LLC (“SEICapital”), which is the general partner of Suez Equity Investors, L.P. (“SuezEquity”), a private equity fund that focuses on investments in middle marketcompanies. From 1992 to 1999, Mr. Lieberman was the Executive Managing Directorof Indosuez Capital (which he founded in 1992 with Banque

 

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Indosuez). Prior to 1992, Mr. Lieberman served as amanaging director in the mergers and acquisitions departments of Kidder Peabody& Co. Inc. and Drexel Burnham Lambert. Mr. Lieberman graduated with an M.B.A. from the University ofPennsylvania’s Wharton School and received his B.A. from Franklin and MarshallCollege where he was elected to Phi Beta Kappa.

 

**Bruce R. McMaken**has been a member of our board ofdirectors since 1997.  Mr. McMaken hasbeen employed since 1992 by, and is currently a Senior Vice President andManaging Director of Corporate Finance for, Sanders Morris Harris Inc. (“SandersMorris Harris”), an investment banking firm. Mr. McMaken serves as one of the managers of Environmental OpportunitiesFund, L.P. (“EOF”), Environmental Opportunities Fund II, L.P. (“EOF2”) andEnvironmental Opportunities Fund II (Institutional), L.P. (“EOF2(I)”), threeprivate equity funds managed by affiliates of Sanders Morris Harris.  Mr. McMaken is also a director of KnightTrading Group, Inc.  Mr. McMaken has aB.A. from Cornell University.

 

**Robert E. Michalik**has been a member of our board of directorssince 1998.  He is a Managing Directorof Kinderhook Industries, LLC, a private investment firm he help found in2003.  From 1996 to 2003, Mr. Michalikwas a Managing Director of Thayer Capital Partners.  From 1995 to 1996, Mr. Michalik was an associate at UBS CapitalCorporation.  Prior to that, Mr.Michalik worked in the mergers and acquisitions department at Morgan Stanley& Company, Inc.  Since formingKinderhook, Mr. Michalik has led three investments and serves as Chairman ofthe Board of United Tote Corporation, a leading provider of pari mutualwagering systems and Sheridan Square Acquisition, Inc., the largest independentrecord company in the United States.  Mr. Michalik also serves on theboard of directors of Notification Technologies, Inc., a provider of onlinecommunication services primarily targeted to K-12 schools and Raleigh CycleLtd., one of the world’s largest bicycle companies.  Mr.Michalik has a B.A. in economics from Yale University and an M.B.A. degree fromHarvard Business School.

 

***Executive Officersand Significant Employees***

 

Additionalinformation regarding our executive officers and certain significant employeeswho are not also directors is provided below.

 

**Thomas J. Cowee**has been our Chief Financial Officer,Senior Vice President, Treasurer and Assistant Secretary since 2000.  From 1997 to 2000, Mr. Cowee was our ChiefFinancial Officer, Vice President, Treasurer and Secretary.  From 1995 to 1997, Mr. Cowee was AssistantCorporate Controller of USA Waste Services, Inc.  Prior to that, beginning in 1979, Mr. Cowee held variouspositions with Waste Management: from 1994 to 1995, Mr. Cowee was Division VicePresident and Controller of its Texas operations, and from 1993 to 1994, Mr.Cowee was Vice President and Regional Controller of its Pennsylvania HaulingRegion—East Group.  Mr. Cowee has over20 years of financial management experience in the solid waste managementindustry.  Mr. Cowee has a B.S. inaccounting from Ohio State University.

 

**Thomas L. Brown**has been our Senior Vice President andChief Operating Officer since January 2000.  Prior to that, Mr. Brown was our Vice President, Operations—SouthRegion since 1997.  Prior to that, Mr.Brown was employed with Waste Management as Regional President beginning in1996 and as Division President from 1993 to 1996.  Mr. Brown has over 23 years experience in the solid wastemanagement industry.  Mr. Brown has anA.S. in accounting from Missouri Southern College.

 

**Thomas J. Fowler**has been our Senior Vice President,General Counsel and Secretary since January 2003.  From 1994 to February 2003, Mr. Fowlerwas Vice President and General Counsel of Unity Hunt, Inc.  From 1992 to 1994, Mr. Fowler had his ownlaw practice, and was Corporate Secretary and Legal Counsel for Laidlaw WasteSystems, Inc. from 1987 to 1992.  Mr.Fowler has a J.D. and B.S.

 

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in accounting from St. Mary’s University of SanAntonio and a B.A. in biology from the University of Texas.

 

**P. Lawrence McGee**has been our Senior Vice President andChief Development Officer since January 2000.  From 1999 to 2000, Mr. McGee was our Vice President ofDevelopment and in 1998, he provided acquisition consulting services to us.  From 1995 to 1998, Mr. McGee was employed withBrowning Ferris Industries, Inc. as Vice President and Assistant CorporateController.  Prior to that, since 1981,Mr. McGee held various positions with Waste Management and from 1990 to 1995Mr. McGee was Vice President and Regional Controller of the Texas operations ofWaste Management.  Mr. McGee has a B.S.in accounting from the University of Tennessee.

 

**Edward L. Apuzzi**has been our Vice President—NortheastRegion since October 2003.  From1998 to 2003, Mr. Apuzzi was Director of Business Development for our NortheastRegion.  Prior to that, Mr. Apuzzi wasCEO of Vibro, Inc. and a principal of CORE Recycling, both of which we acquiredin 1998.  From 1992 to 1995, Mr. Apuzzipracticed law with the law firms of Smith, Stratton, Wise, Heher & Brennanin Princeton, New Jersey and Condon & Forsyth in New York, New York.  Mr. Apuzzi has an A.B. from PrincetonUniversity and a J.D. from Fordham University School of Law.

 

**Stephen T. Moody**has been our Vice President and CorporateController since 2000.  From 1997 to2000, Mr. Moody was our Corporate Controller. Prior to that, Mr. Moody worked for five years with Coopers &Lybrand in both litigation services and audit. Mr. Moody has a B.B.A. in accounting from Texas A&M University.

 

**Gordon D. Peckham**has been our Vice President—South Regionsince January 2000.  From 1999 to2000, Mr. Peckham was our Vice President—Operations—Southeast Region since1999.  We divested the operationsconstituting our former Southeast Region at year-end 1999.  Prior to that, Mr. Peckham spent 24 years invarious different managerial capacities with four different waste servicescompanies, including six years as a Division President with Waste Management.

 

**Committeesof Our Board of Directors**

** **

Ourby-laws provide that our board of directors may establish committees toexercise certain powers delegated by our board of directors.  Our board of directors has established anaudit committee, the members of which are Messrs. Cummings, Dickinson andMcMaken, and a compensation committee, the members of which are Messrs.Dickinson, Forese and Keenan.  Bothcommittees are made up of directors who are not employees of the Company butwho may, collectively, be deemed to beneficially own a majority of the sharesof our capital stock.  See Part III.Item 12. “Security Ownership of Certain Beneficial Owners and Management.” Theaudit committee oversees actions taken by our independent auditors and reviewsour internal controls and procedures. The compensation committee reviews and approves the compensation of ourofficers and management personnel and administers our 1999 stock option plan,as amended, and annual bonus plans for management employees.

 

**Compensationof Directors**

 

Noneof the members of our board of directors receives compensation for service onour board of directors or any committee of our board of directors.  Each of our directors is entitled to bereimbursed for reasonable out-of-pocket expenses incurred in connection withattendance at our board of directors’ meetings or of any committee thereof.

 

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**AuditCommittee Financial Expert**

** **

Our board of directors has determined that CharlesR. Cummings, chairman of the audit committee of our board of directors, meetsthe SEC criteria of an “audit committee financial expert.”  Each of the other members of the auditcommittee have financial management experience or are financiallyliterate.  In determining whether Mr.Cummings is independent (as defined in Item 7(d)(3)(iv) of Schedule 14Aunder the Exchange Act), we have used the definition of audit committee memberindependence of the New York Stock Exchange (“NYSE”) which requires that adirector satisfy both the general independence requirements of the NYSE and theindependence requirements of Rule 10A-3 under the Exchange Act.  Our board of directors has determined thatMr. Cummings satisfies the general independence requirements of the NYSE butmay not be deemed to satisfy the additional audit committee independencerequirements of Rule 10A-3 because Mr. Cummings currently serves as one of ouraffiliate’s designees to our board of directors.  Because we are not a “listed issuer,” we are not required tocomply with the provisions of Rule 10A-3.

 

**Code ofEthics**

** **

We have adopted a code of ethics for certainexecutive officers including our chief executive officer, chief financialofficer and chief accounting officer. Our code of ethics is publicly available on our website at www.iesi.com.  Any waivers from or amendments to our codeof ethics will be posted on our website.

 

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**Item 11.*  *ExecutiveCompensation.**

** **

Thefollowing table sets forth information about the cash and other compensationpaid by us during 2003, 2002 and 2001 to our Chief Executive Officer and ourother four most highly compensated executive officers serving at the end of2003 (collectively, the “named executive officers”):

 

**SummaryCompensation Table**

** **
|                                                                                |   |     |    | **Annual  Compensation** |    | **Long-Term  Compensation  Awards** |   |                               |      |
|-------------------------------------------------------------------------------------|--------|----------|---------|--------------------------|---------|-------------------------------------|--------|------------------------------------|-----------|
| **Name and Principal Position**                                                     |   | **Year** |    | **Salary**               |    | **Bonus(1)**                        |   | **Other  Annual  Compensation(2)** |      | **Securities  Underlying  Options/SARs** | ** ** | **All Other  Compensation(3)** | ** ** |
|                                                                                |   |     |    |                     |    |                                |   |                               |      |   |   |   |   |
| Charles F. Flood                                                                    |   | 2003     |    | $                        | 324,808 |                                | $      | 162,500                            |      | — |   | — |   | $ |   | 9,484 |   |   |
| President and Chief Executive Officer                                               |   | 2002     |    | 300,000                  |    | 90,000                              |   | —                             |      | 55,000(4) |   | 8,338 |   |   |
|                                                                                | 2001   |     | 290,000 |                     | 72,500  |                                | — |                               | —    |   | 4,834 |   |   |
|                                                                                |   |     |    |                     |    |                                |   |                               |      |   |   |   |   |   |
| Thomas J. Cowee                                                                     |   |     |    |                     |    |                                |   |                               |      |   |   |   |   |   |
| Senior Vice President, Chief  Financial Officer, Treasurer and  Assistant Secretary |   | 2003     |    | 229,846                  |    | 115,000                             |   | —                             |      | — |   | 5,681 |   |   |
|                                                                                | 2002   |     | 210,000 |                     | 75,000  |                                | — |                               | 23,000(4) |   | 5,310 |   |   |
| 2001                                                                                |   | 200,000  |    | 50,000                   |    | —                              |   |                               |      | 3,142 |   |
|                                                                                |   |     |    |                     |    |                                |   |                               |      |   |   |   |   |   |
| Thomas L. Brown                                                                     |   | 2003     |    | 207,938                  |    | 65,000                              |   | —                             |      | 1,000 |   | 6,313 |   |   |
| Senior Vice President and Chief  Operating Officer                                  |   | 2002     |    | 200,000                  |    | 50,000                              |   | —                             |      | 12,000(4) |   | 4,784 |   |   |
|                                                                                | 2001   |     | 190,000 |                     | 47,500  |                                | — |                               | —    |   | 3,106 |   |   |
|                                                                                |   |     |    |                     |    |                                |   |                               |      |   |   |   |   |   |
| P. Lawrence McGee                                                                   |   | 2003     |    | 186,908                  |    | 100,000                             |   | —                             |      | 3,000 |   | 7,339 |   |   |
| Senior Vice President and Chief Development  Officer                                |   | 2002     |    | 175,000                  |    | 68,750                              |   | —                             |      | 6,000(4) |   | 2,847 |   |   |
|                                                                                | 2001   |     | 160,000 |                     | 40,000  |                                | — |                               | —    |   | 3,664 |   |   |
|                                                                                |   |     |    |                     |    |                                |   |                               |      |   |   |   |   |   |
| Edward L Apuzzi(5)  Vice President—Northeast Region                            |   |     |    |                     |    |                                |   |                               |      |   |   |   |   |   |
|                                                                                | 2003   |     | 169,885 |                     | 75,000  |                                | — |                               | 500       |   | 6,311 |   |   |
|                                                                                     |        |          |         |                          |         |                                     |        |                                    |           |  |  |  |  |  |  |  |  |  |

 

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(1)   Includes amounts earned during the years presentedeven if paid in a subsequent year and does not include amounts paid during theyears presented which were earned in a prior year.

 

(2)   For the years presented, perquisites and otherpersonal benefits did not exceed the lesser of $50,000 or 10% of total annualsalary and bonus for any of our named executive officers.

 

(3)   For the years presented, “All Other Compensation”consists of the matching contributions we made under our 401(k) plan, and thelife insurance premiums we paid, on behalf of our named executiveofficers.  During 2003, we made thefollowing matching contributions under our 401(k) plan: Mr. Flood, $6,000;Mr. Cowee, $4,608; Mr. Brown, $4,799; Mr. McGee, $6,000; and Mr.Apuzzi, $6,000.  During the same period,we also paid the following life insurance premiums: Mr. Flood, $3,484;Mr. Cowee, $1,073; Mr. Brown, $1,514; Mr. McGee, $1,339;and Mr. Apuzzi, $311.

 

(4)   Includes the following options that were granted onAugust 1, 2002 under the terms of our option exchange program in exchangefor options cancelled on December 20, 2001:  Mr. Flood, 50,000; Mr. Cowee, 20,000; Mr. Brown, 6,000; and Mr.McGee, 4,500.

 

(5)   Mr. Apuzzi’s term as Vice President – Northeast Regioncommenced in October 2003.

 

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**Option Grants in 2003**

 

Thefollowing table provides information with respect to stock options granted toour named executive officers during 2003: 

 
|              |   | **Individual  Grants**                                          |   | **Potential  Realizable  Value At Assumed  Annual Rates of Stock  Price Appreciation for  Option Term(2)** |   |
|-------------------|--------|-----------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------|--------|
| **Name**          |   | **Number of  Securities  Underlying  Options/SARs  Granted(1)** |   | **% of Total  Options  Granted to  Employees in  2003**                                                    |   | **Exercise  or  Base Price per  Share** |   | **Expiration  Date** |   | **5%** |   | **10%** |   |
| Charles F. Flood  |   | —                                                          |   | —                                                                                                     |   | — |   | — |   | — |   | — |   |
|              |   |                                                            |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Thomas J. Cowee   |   | —                                                          |   | —                                                                                                     |   | — |   | — |   | — |   | — |   |
|              |   |                                                            |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Thomas L. Brown   |   | 1,000                                                           |   | 4.4                                                                                                        |   | 95.00 |   | 6/30/13 |   | N/A |   | N/A |   |
|              |   |                                                            |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| P. Lawrence McGee |   | 3,000                                                           |   | 13.3                                                                                                       |   | 95.00 |   | 6/30/13 |   | N/A |   | N/A |   |
|              |   |                                                            |   |                                                                                                       |   |   |   |   |   |   |   |   |   |
| Edward L. Apuzzi  |   | 500                                                             |   | 2.2                                                                                                        |   | 95.00 |   | 6/30/13 |   | N/A |   | N/A |   |

 

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(1)   All of the stock options shown are exercisable forshares of our Class A voting common stock, were granted on July 1, 2003and have a maximum term of ten years, subject to earlier termination in theevent of the optionee’s cessation of service with us.  Each of the options will become exercisable on the eighthanniversary of the date of grant, subject to acceleration upon an initialpublic offering of shares of our common stock or if we experience specifickinds of changes in control.

 

(2)   There is no established trading market for any classof our equity securities.

 

**AggregatedOption Exercises in Last Fiscal Yearand Fiscal Year-End Option Values**

 

Thefollowing table provides information with respect to the unexercised optionsheld by our named executive officers as of the end of 2003:

 
|              |   | **Number of  Securities  Underlying Unexercised  Options at FY-End** |   | **Value of  Unexercised  In-the-Money  Options at FY-End(1)** |   |
|-------------------|--------|----------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|
| **Name**          |   | **Exercisable**                                                      |   | **Unexercisable**                                             |   | **Exercisable** |   | **Unexercisable** |   |
| Charles F. Flood  |   | —                                                               |   | 55,000                                                        |   | — |   | N/A |   |
|              |   |                                                                 |   |                                                          |   |   |   |   |   |
| Thomas J. Cowee   |   | —                                                               |   | 23,000                                                        |   | — |   | N/A |   |
|              |   |                                                                 |   |                                                          |   |   |   |   |   |
| Thomas L. Brown   |   | —                                                               |   | 13,000                                                        |   | — |   | N/A |   |
|              |   |                                                                 |   |                                                          |   |   |   |   |   |
| P. Lawrence McGee |   | —                                                               |   | 9,000                                                         |   | — |   | N/A |   |
|              |   |                                                                 |   |                                                          |   |   |   |   |   |
| Edward L. Apuzzi  |   | —                                                               |   | 2,850                                                         |   | — |   | N/A |   |

 

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(1)           Thereis no established trading market for any class of our equity securities.

 

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**Employment Contracts**

** **

Weentered into employment agreements, effective as of January 1, 2004, witheach of Mr. Flood and Mr. Cowee. These agreements expire on December 31, 2006, unless earlierterminated by the executive or us.

 

Pursuantto his employment agreement, Mr. Flood serves as our President and ChiefExecutive Officer at a minimum base salary of $350,000 per annum which issubject to annual review and increase in the sole discretion of our board ofdirectors.

 

Pursuantto his employment agreement, Mr. Cowee serves as our Senior Vice President andChief Financial Officer at a minimum base salary of $240,000 per annum which issubject to annual review and increase in the sole discretion of our board ofdirectors.

 

Undereach of these employment agreements, the executive may receive, in the solediscretion of our board of directors, an annual performance-based bonus of upto 100% of his salary in any given year in accordance with the bonus plan ineffect at such time.  Each executive isentitled to receive all benefits made available to our executives generally, amonthly car allowance ($1,000 in the case of Mr. Flood and $750 in thecase of Mr. Cowee) and reimbursement of reasonably documented expensesincurred in the performance of the executive’s duties, including up to $2,500in annual country club dues. Mr. Flood is entitled to four weeks, and Mr. Cowee is entitledto three weeks, of paid vacation time per year.

 

If weterminate the executive’s employment for “cause” or the executive terminateshis employment without “good reason,” as such terms are defined in therespective employment agreements, the executive will be entitled to receive allsalary and benefits accrued up to and including the date of termination.  In addition, we will have the option,exercisable during the 90-day period following such termination, to purchaseall of our stock then owned by the executive, exclusive of unexercised options,at fair market value, as determined in good faith by our board ofdirectors.  We will be entitled to paythe purchase price for such stock either in cash or by issuing a promissorynote with an interest rate of 10% per annum and the principal payable in nomore than three annual installments.  Ifwe terminate the executive’s employment without “cause” or the executiveterminates his employment for “good reason,” the executive will be entitled toreceive his base salary then in effect and certain benefits for 36 months.  In addition, the executive will have theoption, exercisable during the 90-day period following such termination, torequire us to purchase all of our stock then owned by him, exclusive ofunexercised options, at fair market value, as determined in good faith by ourboard of directors.  We will be entitledto pay the purchase price for such stock either in cash or by issuing apromissory note with an interest rate of 10% per annum and the principal payablein no more than three equal annual installments.  A representative or executor may also exercise the executive’sput option within 90 days of the executive’s death or permanent disability.

 

In theevent of a “change of control,” as defined in the respective employmentagreements, following which the executive terminates his employment other thanfor “good reason,” the executive will be entitled to receive all salary andbenefits accrued up to and including the date of such termination.  In the event of a “change of control”following which we terminate the executive’s employment without “cause,” theexecutive will be entitled to receive his base salary then in effect, a bonusequal to 33% of his base compensation and certain benefits, each for threeyears.

 

In theevent of executive’s permanent disability or death, any and all stock optionsthat have been granted to executive by the Company shall be exercisable byexecutive and/or his successor, assigns, administrators or executors during theten years (plus any replacement options and or time extensions to the existingoptions) that said stock option(s) are outstanding.

 

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Messrs.Flood and Cowee are also bound in their employment agreements bynon-interference, non-solicitation and non-competition covenants for a periodof one year following the termination of their employment (other than atermination without “cause” or for “good reason” in which they are bound forone year after the last payment of base salary).  The geographic scope of these covenants extends to anyjurisdiction in North America where competition may arise where our customershave operations, provided that such customers had a relationship with us within90 days prior to the alleged breach of the covenant.  Each executive is subject to a confidentiality obligation to usfor all our confidential information and trade secrets learned during thecourse of his employment with us.

 

Weentered into employment agreements, effective as of January 1, 2004, witheach of Mr. Brown and Mr. McGee. These agreements expire on December 31, 2005, unless earlierterminated by the executive or us.

 

Pursuantto his employment agreement, Mr. Brown serves as our Senior Vice President andChief Operating Office at a minimum base salary of $225,000 per annum which issubject to annual review and increase in the sole discretion of our board ofdirectors.

 

Pursuantto his employment agreement, Mr. McGee serves as our Senior Vice President andChief Development Officer at a minimum base salary of $205,000 per annum whichis subject to annual review and increase in the sole discretion of our board ofdirectors.

 

Undereach of these employment agreements, the executive may receive, in the solediscretion of our board of directors, an annual performance-based bonus of upto 100% of his salary in any given year in accordance with the bonus plan ineffect at such time.  Each executive isentitled to receive all benefits made available to our executives generally, amonthly car allowance of $700 and reimbursement of reasonably documentedexpenses incurred in the performance of the executive’s duties.  Each of Messrs. Brown and McGee is entitledto three weeks of paid vacation time per year.

 

If weterminate the executive’s employment for “cause” or the executive terminateshis employment without “good reason,” as such terms are defined in therespective employment agreements, the executive will be entitled to receive allsalary and benefits accrued up to and including the date of termination.  In addition, we will have the option,exercisable during the 90-day period following such termination, to purchaseall of the shares of our capital stock then owned by the executive, exclusiveof unexercised options, at fair market value, as determined in good faith byour board of directors.  We will beentitled to pay the purchase price for such stock either in cash or by issuinga promissory note with an interest rate of 10% per annum and the principalpayable in no more than three annual installments.  If we terminate the executive’s employment without “cause” or theexecutive terminates his employment for “good reason,” the executive will beentitled to receive his base salary then in effect and certain benefits for 24months following such termination.  Inaddition, the executive will have the option, exercisable during the 90-dayperiod following such termination, to require us to purchase all of the sharesof our capital stock then owned by him, exclusive of unexercised options, atfair market value, as determined in good faith by our board of directors.  We will be entitled to pay the purchaseprice for such stock either in cash or by issuing a promissory note with aninterest rate of 10% per annum and the principal payable in no more than threeequal annual installments.  Arepresentative or executor may also exercise the executive’s put option within90 days of the executive’s death or permanent disability.

 

In theevent of a “change of control,” as defined in the respective employmentagreements, following which the executive terminates his employment other thanfor “good reason,” the executive will be entitled to receive all salary andbenefits accrued up to and including the date of such termination.  In the event of a “change of control”following which we terminate the executive’s employment without

 

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“cause,” the executive will be entitled to receive hisbase salary then in effect, a bonus equal to 33% of his base compensation andcertain benefits for two years following such termination.

 

In theevent of the executive’s permanent disability or death, any and all stockoptions that have been granted to the executive will be exercisable by theexecutive and/or his successor, assigns, administrators or executors during theten years (plus any replacement options and or time extensions to the existingoptions) that such stock option(s) are outstanding.

 

Messrs.Brown and McGee are bound in their employment agreements by non-interference,non-solicitation and non-competition covenants for a period of one yearfollowing the termination of their employment (other than a termination without“cause” or for “good reason,” in which case they are bound for one year afterthe last payment of base salary).  Thegeographic scope of these covenants extends to any jurisdiction in NorthAmerica where competition may arise where our customers have operations,provided that such customers had a relationship with us within 90 days prior tothe alleged breach of the covenant. Each executive is subject to a confidentiality obligation to us for allour confidential information and trade secrets learned during the course of hisemployment with us.

 

Weentered into an employment agreement, effective as of July 1, 2003, withMr. Apuzzi.  The agreement expireson December 31, 2005, unless earlier terminated by the executive or us.

 

Pursuantto his employment agreement, Mr. Apuzzi serves as our Vice President, Operation– Northeast Region at a minimum base salary of $187,500 per annum which is subjectto annual review and increase in the sole discretion of our board of directors.

 

Underthe employment agreement, Mr. Apuzzi may receive, in the sole discretion of ourChief Executive Officer, in consultation with our board of directors, an annualperformance-based bonus of up to 25% of his salary in any given year inaccordance with the bonus plan in effect at such time.  Mr. Apuzzi is entitled to receive allbenefits made available to our executives generally, a monthly car allowance of$800 and reimbursement of reasonably documented expenses incurred in theperformance of the executive’s duties. Mr. Apuzzi is entitled to three weeks of paid vacation time peryear.

 

If weterminate Mr. Apuzzi’s employment for “cause” or Mr. Apuzzi terminates hisemployment without “good reason,” as such terms are defined in Mr. Apuzzi’semployment agreement, Mr. Apuzzi will be entitled to receive all salary,benefits accrued up to and including the date of termination and reimbursementof all outstanding expenses.  If weterminate Mr. Apuzzi’s employment without “cause” or Mr. Apuzzi terminates hisemployment for “good reason,” Mr. Apuzzi will be entitled to receive his basesalary then in effect and certain benefits for the remainder of the term of hisemployment agreement.

 

Mr.Apuzzi is bound in his employment agreement by non-interference,non-solicitation and non-competition covenants for a period of six monthsfollowing the termination of his employment. The type of business and geographic scope of these covenants extends toany non-hazardous waste disposal business within 50 miles of New York Citywhere our customers have operations, provided that such customers had arelationship with us within 90 days prior to the alleged breach of thecovenant.  Mr. Apuzzi is subject to aconfidentiality obligation to us for all our confidential information and tradesecrets learned during the course of his employment with us.

 

Mr.Apuzzi and Joseph LoVerde, each an employee of our wholly-owned subsidiary,IESI NJ Corporation, have a joint right of first option to purchase thefollowing businesses in the event IESI NJ Corporation decides to sell, orreceives an offer to purchase, any such business: the New York City HaulingCompany, located in the Bronx, New York; the Varick Street C&D TransferStation located in Brooklyn, New York; and Jersey City Recycling located inJersey City, New Jersey.  In the eventthat Mr.

 

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Apuzzi exercises the joint right of first option, thenthe remaining term of his employment agreement shall expire on the date of suchexercise.

 

**Amended 1999 Stock Option Plan**

** **

InJanuary 1999, we adopted our 1999 stock option plan which permits us tomake grants of non-qualified stock options exercisable for shares of our ClassA voting common stock to certain of our key employees, consultants, advisorsand directors.  The plan authorizes theissuance of options to acquire up to 200,000 shares of our Class A votingcommon stock.  In January 2003, ourboard of directors approved an amendment to our 1999 stock option planincreasing the number of authorized shares thereunder by 50,000 to a total of250,000 shares.  This amendment wasapproved in March 2003 by the holders of a majority of the outstandingshares of our Class A voting common stock and preferred stock approved thisamendment.  In January 2004, ourboard of directors and the holders of a majority of the outstanding shares ofour Class A voting common stock and preferred stock approved an amendment toour 1999 stock option plan further increasing the number of authorized sharesthereunder by 150,000 to a total of 400,000 shares.  We may not grant to any individual optionee an option or optionsto purchase, in the aggregate, more than 100,000 shares of our Class A votingcommon stock.  The compensationcommittee of our board of directors administers the plan.  Subject to the provisions of the plan, thecompensation committee may (a) select those employees and individuals to begranted options, (b) determine the size, type and terms of options granted, (c)accelerate the exercisability of options and (d) generally administer andinterpret the plan.  The exercise priceper share for an option when granted is to be determined by the compensationcommittee of our board of directors and may be equal to or greater than thethen fair market value per share of our Class A voting common stock.  Until such time as our stock is publiclytraded, our compensation committee in its discretion will determine the fairmarket value of our Class A voting common stock.

 

Optionsgranted under the plan are subject to certain vesting schedules determined bythe compensation committee in its discretion, terminate up to ten years fromthe date of grant and may be exercised for specified periods after terminationof the optionee’s employment or service relationship with us.  Upon exercise of an option, the exerciseprice must be paid in full, either in cash, or, in the discretion of thecompensation committee, by delivery of shares of our Class A voting commonstock that have been owned by the optionee for at least six months, or by anycombination of the two.  The exerciseprice may also be paid, in the discretion of the compensation committee, by a brokerunder irrevocable instructions to deliver to us the amount of sale or loanproceeds sufficient to pay the exercise price. The compensation committee is authorized to allow any other method ofpayment that is consistent with applicable law and the purpose of the plan,including payment by means of a cashless exercise.

 

In theevent of (a) the consummation of a tender offer for ownership of 50% or more ofour outstanding voting stock, (b) the merger, reorganization or consolidationor (c) the sale of all or substantially all of our assets or 50% or more of ouroutstanding voting stock, each option outstanding on the date of such change ofcontrol shall become fully vested and exercisable, subject to certain furtherterms and conditions in the discretion of the compensation committee.

 

Ourboard of directors may amend or suspend all or any part of the plan, providedthat, without prior stockholder approval, no amendment may increase the numberof shares that may be issued under the plan or to an individual stockholder.  No amendment or suspension of the plan mayadversely affect the rights of any optionee without the optionee’s writtenconsent.

 

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**401(k) Plan**

** **

Wemaintain a 401(k) Savings Plan, a plan established pursuant to Sections 401(a)and 401(k) of the Internal Revenue Code, for the benefit of our non-unionemployees.  All of our non-unionemployees are eligible to participate on the first day of the month followingtheir employment.  Subject to variouslimits, eligible employees may defer up to 25% of their annual cashcompensation on a pre-tax basis.  Wehave the discretion to match a percentage of a participating employee’s pre-taxdeferrals up to 6% of the employee’s annual cash compensation.  Historically, the percentage for thisdiscretionary match has been 50%. Participating employees fully vest with respect to our matchingcontributions after three years of service with us.

 

**Annual Bonus Plans**

** **

Thecompensation committee of our board of directors annually adopts a new bonusplan for our management employees. Under the plans, bonuses for corporate management are based on ourannual consolidated EBIT and free cash flow and bonuses for our regional,district and division management and employees are based on the EBIT and freecash flow for their respective regions, districts or divisions.

 

Each of our executive officers is eligible for abase bonus equal to 33% of his base salary. Fifty percent of the base bonus is contingent upon achieving budgetedEBIT and the other fifty percent is contingent upon achieving budgeted freecash flow, in each case, on a consolidated basis or for the applicable region(in the case of region Vice Presidents). If we exceed either or both of our budgeted (or region-budgeted in thecase of our region Vice Presidents) annual EBIT or free cash flow, each of ourexecutive officers will be eligible for an additional bonus of up to 75% of hisbase salary.  If we do not attain eitheror both of our budgeted (or region-budgeted in the case of our region VicePresidents) annual EBIT or free cash flow, bonuses for each are discretionaryand subject to approval of the compensation committee of our board ofdirectors.

 

**Compensation Committee Interlocks and InsiderParticipation**

** **

During2003, the members of the compensation committee of our board of directors wereThiery de Vergnes, Bruce R. McMaken and Robert G. Michalik.  In January 2004, Messrs. de Vergnes,McMaken and Michalik resigned from, and Messrs. Keenan, Forese and Dickinsonwere appointed to, the compensation committee.

 

Mr. McMakenis one of the managers of EOF, EOF2 and EOF2(I) and is also a member of theinvestment committees of Environmental Opportunities Management Company, L.L.C.(“EOM”), the general partner of EOF, and Fund II Mgt. Co., LLC (“FMII”), the generalpartner of EOF2 and EOF2(I).  Mr.McMaken is a Senior Vice President and Managing Director of Corporate Financefor Sanders Morris Harris, the controlling member of EOM, FMII and SOFManagement LLC (“SOF Management”), which is the controlling member of SandersOpportunity Fund, L.P. (“SOF”) and Sanders Opportunity Fund (Institutional),L.P. (“SOF(I)”).  Each of EOF, EOF2,EOF2(I), SOF and SOF(I) has entered into certain agreements with us asdescribed under Item 13. “Certain Relationships and Related Transactions” andowns shares of our capital stock.  SeePart III. Item 12. “Security Ownership of Certain Beneficial Owners andManagement.”

 

UntilJune 30, 2003, Mr. Michalik was a Managing Director of TC EquityPartners IV, L.L.C. (“TC Equity IV”), the general partner of Thayer EquityInvestors IV, L.P. (“Thayer Equity IV”), which is the managing member of TCCarting III, L.L.C. (“TC Carting III”), and was also a Managing Director of TCManagement Partners IV, L.L.C. (“TC Management IV”), the managing member of TCCo-Investors IV, LLC (“TC Co-Investors IV”), which is the managing member of TCCarting II, L.L.C. (“TC Carting

 

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II”).  UntilJune 30, 2003, Mr. Michalik was also a Managing Director of TC EquityPartners, L.L.C. (“TC Equity”), the general partner of Thayer Equity InvestorsIII, L.P. (“Thayer Equity III”), which is the managing member of TC Carting,L.L.C. (“TC Carting”).  Each of ThayerEquity IV, TC Carting, TC Carting II and TC Carting III has entered intocertain agreements with us as described under Item 13. “Certain Relationshipsand Related Transactions” and owns shares of our capital stock.  See Part III. Item 12. “Security Ownershipof Certain Beneficial Owners and Management.”

 

Mr. de Vergnesis a member of SEI Capital, the general partner of Suez Equity.  Mr. de Vergnes is also a partner of SEIAssociates.  Each of Suez Equity and SEIAssociates has entered into certain agreements with us as described under Item13.  “Certain Relationships and RelatedTransactions” and owns shares of our capital stock.  See Part III. Item 12. “Security Ownership of Certain BeneficialOwners and Management.”

 

**Item12.  Security Ownership of****Certain Beneficial Owners and Management and RelatedStockholders Matters.**

** **

As ofMarch 15, 2004, the following shares of our capital stock were issued andoutstanding:  142,000 shares of ourClass A voting common Stock, 112,980.18 of our Class B non-votingcommon stock, 32,000 shares of our Series A convertible preferred stock,20,100 shares of our Series B convertible preferred stock, 55,000 sharesof our Series C convertible preferred stock, 55,000 shares of ourSeries D convertible preferred stock and 49,660 shares of our Series Econvertible preferred stock.

 

Subjectto applicable law, holders of shares of our Class B non-voting commonstock are entitled at any time to convert each share of our Class Bnon-voting common stock into one share of our Class A voting common stock,subject to adjustment.  Holders of sharesof our preferred stock are entitled at any time to convert all or any portionof their shares of preferred stock into shares of our Class A votingcommon stock or, if required by applicable law, our Class B non-votingcommon stock, at the conversion rates set forth in our Fifth Amended andRestated Certificate of Incorporation. See note 1 to the beneficial ownership table below.

 

Theprincipal record owners of our shares of capital stock are as follows:

 

•              Class A votingcommon stock: IESI Capital LLC, 53.5%; EOF, 28.9%; and Jim Sowell ConstructionCo., Inc. (“Sowell Construction”), 8.5%;

 

•              Class Bnon-voting common stock: Suez Equity and its affiliate, SEI Associates(together with Suez Equity, “Suez”), an aggregate of 44.3%; and BancBostonInvestments, Inc. (“BancBoston”), 17.7%;

 

•              Series Aconvertible preferred stock: TC Carting, 50.0%; IESI Capital II LLC, 13.7%;Suez, 12.5%; EOF and its affiliates, EOF2 and EOF2(I), an aggregate of 12.5%;BancBoston, 5.0%; and Sowell Construction, 6.3%;

 

•              Series Bconvertible preferred stock: TC Carting, 69.7%; IESI Capital III LLC, 6.0%;Suez, 10.0%; EOF2 and its affiliate, EOF2(I), an aggregate of 11.9%; andBancBoston, 2.0%;

 

•              Series Cconvertible preferred stock: Thayer Equity IV, 75.9%; IESI Capital IV LLC, 12.3%;and Suez, 11.8%;

 

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•              Series Dconvertible preferred stock: Thayer Equity IV and its affiliate, TC Carting II,an aggregate of 72.7%; IESI Capital V LLC, 11.8%; Indosuez Capital Partners2001, L.P. (“Indosuez”), 11.8%; and EOF2 and its affiliate, EOF2(I), anaggregate of 3.6%; and

 

•              Series E convertiblepreferred stock:  TC Carting III, 80.5%;IESI Capital VI LLC, 15.4%; and SOF and its affiliate, SOF(I), an aggregate of2.0%.

 

Ourstockholders include certain investment funds and their affiliates.  As of March 15, 2004, thesestockholders had the interests in shares of our Class A voting commonstock set forth in the table below, assuming conversion of all shares of ourClass B non-voting common stock and all shares of all series of ourpreferred stock into shares of our Class A voting common stock.  In addition, certain members of ourmanagement hold, in addition to their direct investments in us, interests inone or more of the IESI Capital entities. 

 
| **Investment Fund**         |   | **Percent of    Total Voting   Shares** |   |
|-----------------------------|--------|-----------------------------------------|--------|
| Thayer Capital Funds        |   | 63.5                                    |   |   |
| IESI Capital                |   | 14.4                                    |   |   |
| Suez                        |   | 6.6                                     |   |   |
| Sanders Morris Harris Funds |   | 6.0                                     |   |   |
| Indosuez                    |   | 3.5                                     |   |   |
| BancBoston Investments      |   | 1.7                                     |   |   |

 

Thefollowing table sets forth certain information as of March 15, 2004regarding the beneficial ownership of our capital stock by:

 

•              each person known tous to be the beneficial owner of more than 5% of the outstanding shares of anyclass of our voting securities;

 

•              each of ourdirectors;

 

•              each of ourexecutive officers named in the Summary Compensation Table; and

 

•              all of our directorsand executive officers as a group.

 

Webelieve that each individual or entity named has sole investment and votingpower with respect to the capital stock indicated as beneficially owned bythem, except as otherwise noted.  Unlessotherwise noted below, the address of each beneficial owner listed in the tablebelow is c/o IESI Corporation, 2301 Eagle Parkway, Suite 200, Fort Worth, Texas76117.

 

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| **Name**                                                                                                      |   | **Class A  Voting   Common   Stock(1)** |   | **Percent  of  Class** |   | **Series A  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Series B  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Series C  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Series D  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Series E  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Percent  of Total  Voting  Shares(2)** |   |
|---------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|------------------------------------------|--------|
|                                                                                                          |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| Thayer Equity Investors  IV, L.P.                                                                             |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| TC Carting, L.L.C.                                                                                            |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| TC Carting II, L.L.C.                                                                                         |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| TC Carting III, L.L.C.                                                                                        |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| c/o Thayer Equity Investors IV, L.P.  1455 Pennsylvania Avenue, N.W., Suite 350 Washington, D.C. 20004(3)(19) |   | 1,478,473                               |   | 91.2                   | %      | 16,000                                      |   | 50.0                   | %      | 14,000                                      |   | 69.7                   | %      | 41,750                                      |   | 75.9                   | %      | 40,000                                      |   | 72.7                   | %      | 40,000                                      |   | 80.5                   | %      | 63.5                                     | %      |
| IESI Capital LLC                                                                                              |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| IESI Capital II LLC                                                                                           |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| IESI  Capital III LLC                                                                                         |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| IESI  Capital IV LLC                                                                                          |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| IESI  Capital V LLC                                                                                           |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| IESI  Capital VI LLC                                                                                          |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| c/o IESI Capital LLC  11201 Brookwood Street  Leawood, Kansas 66211(4)(19)                                    |   | 334,273                                 |   | 83.5                   | %      | 4,400                                       |   | 13.8                   | %      | 1,200                                       |   | 6.0                    | %      | 6,750                                       |   | 12.3                   | %      | 6,500                                       |   | 11.8                   | %      | 7,600                                       |   | 15.4                   | %      | 14.4                                     | %      |
| Suez  Equity Investors, L.P.                                                                                  |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| Suez  Associates                                                                                              |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| c/o Suez Equity Investors, L.P.,   712 Fifth Avenue, 24th Floor,  New York, New York 10019(5)(19)             |   | 153,355                                 |   | 51.9                   | %      | 4,000                                       |   | 12.5                   | %      | 2,000                                       |   | 10.0                   | %      | 6,500                                       |   | 11.8                   | %      | —                                      |   | —                 |   | —                                      |   | —                 |   | 6.6                                      | %      |
| Environmental Opportunities Fund, L.P.                                                                        |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| Environmental Opportunities Fund II, L.P.                                                                     |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| Environmental Opportunities Fund II  (Institutional), L.P.                                                    |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| Sanders Opportunity Fund, L.P.                                                                                |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| Sanders Opportunity Fund (Institutional), L.P.                                                                |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| c/o Sanders Morris Harris  3100 Chase Tower  600 Travis Street, Suite 3100,  Houston, Texas 77002(6)(19)      |   | 140,000                                 |   | 58.1                   | %      | 4,000                                       |   | 12.5                   | %      | 2,400                                       |   | 11.9                   | %      | —                                      |   | —                 |   | 2,000                                       |   | 3.6                    | %      | 1,000                                       |   | 2.0                    | %      | 6.0                                      | %      |
| Indosuez Capital Partners 2001, L.P.(7)(19)                                                                   |   | 81,250                                  |   | 36.4                   | %      | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | 6,500                                       |   | 11.8                   | %      | —                                      |   | —                 |   | 3.5                                      | %      |
| BancBoston Investments Inc.(8)(19)                                                                            |   | 40,000                                  |   | 24.7                   | %      | 1,600                                       |   | 5.0                    | %      | 400                                         |   | 2.0                    | %      | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | 1.7                                      | %      |
| Jim Sowell Construction Co., Inc.(9)(19)                                                                      |   | 35,500                                  |   | 21.5                   | %      | 2,000                                       |   | 6.3                    | %      | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | 1.5                                      | %      |

 

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| **Name**                                                          |   | **Class A  Voting   Common   Stock(1)** |   | **Percent  of  Class** |   | **Series A  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Series B  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Series C  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Series D  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Series E  Convertible  Preferred  Stock** |   | **Percent  of  Class** |   | **Percent  of Total  Voting  Shares(2)** |   |
|-------------------------------------------------------------------|--------|-----------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|---------------------------------------------|--------|------------------------|--------|------------------------------------------|--------|
|                                                              |   |                                    |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                        |   |                   |   |                                     |   |
| Jeffrey  J. Keenan(4)                                             |   | 334,273                                 |   | 83.5                   | %      | 4,400                                       |   | 13.8                   | %      | 1,200                                       |   | 6.0                    | %      | 6,750                                       |   | 12.3                   | %      | 6,500                                       |   | 11.8                   | %      | 7,600                                       |   | 15.4                   | %      | 14.4                                     | %      |
| Charles F. Flood(10)(19)                                          |   | 5,050                                   |   | 3.5                    | %      | —                                      |   | —                 |   | 100                                         |   | *                      |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | *                                        |   |
| Charles R. Cummings(11)(19)                                       |   | 3,000                                   |   | 2.1                    | %      | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | *                                        |   |
| Daniel M. Dickinson(12)                                           |   | 1,178,473                               |   | 89.2                   | %      | —                                      |   | —                 |   | —                                      |   | —                 |   | 41,750                                      |   | 75.9                   | %      | 40,000                                      |   | 72.7                   | %      | 40,000                                      |   | 80.5                   | %      | 50.6                                     | %      |
| James  J. Forese                                                  |   | —                                  |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                   |   |
| Leslie J. Lieberman(5)                                            |   | 153,355                                 |   | 51.9                   | %      | 4,000                                       |   | 12.5                   | %      | 2,000                                       |   | 10.0                   | %      | 6,500                                       |   | 11.8                   | %      | —                                      |   | —                 |   | —                                      |   | —                 |   | 6.6                                      | %      |
| Bruce R. McMaken(13)                                              |   | 130,000                                 |   | 56.3                   | %      | 4,000                                       |   | 12.5                   | %      | 2,400                                       |   | 11.9                   | %      | —                                      |   | —                 |   | 2,000                                       |   | 3.6                    | %      | —                                      |   | —                 |   | 5.6                                      | %      |
| Robert  E. Michalik                                               |   | —                                  |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                   |   |
| Thomas  J. Cowee(14)                                              |   | —                                  |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                   |   |
| Thomas  L. Brown(15)                                              |   | —                                  |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                   |   |
| P. Lawrence McGee(16)                                             |   | —                                  |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                   |   |
| Edward L. Apuzzi(17)(19)                                          |   | 1,000                                   |   | *                      |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | —                                      |   | —                 |   | *                                        |   |
| All directors and executive officers as a group  (15 persons)(18) |   | 1,805,151                               |   | 99.0                   | %      | 12,400                                      |   | 38.8                   | %      | 5,700                                       |   | 28.4                   | %      | 55,000                                      |   | 100                    | %      | 48,500                                      |   | 88.2                   | %      | 47,660                                      |   | 96.0                   | %      | 77.6                                     | %      |

 

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*              Less than 1%

 

(1)           In accordance with Rule 13d-3 under the ExchangeAct, for purposes of this table, a person is deemed to be the beneficial ownerof any shares of capital stock if such person has or shares voting power orinvestment power with respect to such shares, or has the right to acquire beneficialownership at any time within 60 days of the date of the table.  Any shares of capital stock not outstandingwhich are subject to any such right to acquire beneficial ownership within60 days are deemed to be outstanding for the purpose of computing thepercentage of outstanding shares of the class owned by such person, but are notdeemed to be outstanding for the purpose of computing the percentage of theclass by any other person.  As usedherein, “voting power” is the power to vote or direct the voting of shares and“investment power” is the power to dispose or direct the disposition of shares.

 

All shares of our Class Bnon-voting common stock (subject to applicable law) and all series of ourpreferred stock are convertible at any time, at the option of the holderthereof, into shares of our Class A voting common stock (or, if required byapplicable law, Class B non voting common stock).  Accordingly, for purposes of determining the number of shares ofClass A voting common stock held by a person, the information in the tableassumes the conversion by such person of:

 

•              shares of ourClass B non-voting common stock into shares of our Class A votingcommon stock on a 1 for 1 basis;

 

•              shares of our Series A convertiblepreferred stock and Series B convertible preferred stock into shares ofour Class A voting common stock on a 1 for 10 basis;

 

•              shares of our Series C convertiblepreferred stock into shares of our Class A voting common stock on a 1 for6.67 basis;

 

•              shares of our Series D convertiblepreferred stock into shares of our Class A voting common stock on a 1 for12.5 basis; and

 

•              shares of our Series E convertiblepreferred stock into shares of our Class A voting common stock on a 1 for 10basis.

 

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(2)           Assumes the conversion of all shares of ourClass B non-voting common stock and preferred stock into shares of ourClass A voting common stock on the basis described in note 1 above.

 

(3)           TC Carting, TC Carting II, TC Carting III and ThayerEquity IV may be deemed to be affiliated with one another.  See Part III. Item 13. “CertainRelationships and Related Transactions.” Includes (a) 16,000 shares of our Series A convertiblepreferred stock and 14,000 shares of our Series B convertible preferredstock owned by TC Carting, (b) 41,750 shares of our Series Cconvertible preferred stock and 39,967.677 shares of our Series Dconvertible preferred stock owned by Thayer Equity IV, (c) 32.323 sharesof our Series D convertible preferred stock owned by TC Carting II, and(d) 40,000 shares of our Series E convertible preferred stock owned by TCCarting III.  Messrs. Daniel M.Dickinson, Frederick V. Malek, Scott Rued and Jeffrey W. Goettman, ManagingPartners of TC Equity IV, the general partner of Thayer Equity IV, which is themanaging member of TC Carting III, may also be deemed to be the beneficialowners of the shares owned by Thayer Equity IV and TC Carting III.  Messrs. Malek and Carl Rickertsen and Dr. PaulG. Stern, the managing members of TC Equity, the general partner of ThayerEquity III, which is the managing member of TC Carting, may also be deemed tobe the beneficial owners of the shares owned by TC Carting.  Messrs. Dickinson, Malek, Goettman and Rued,managing partners of TC Management IV, the managing member of TC Co-Investors,which is the managing member of TC Carting II, may also be deemed to be thebeneficial owners of the shares owned by TC Carting II.  Each of Messrs. Dickinson, Malek, Rued,Goettman and Rickertsen and Dr. Stern disclaims such beneficial ownership.

 

(4)           The IESI Capital entities may be deemed to beaffiliated with one another.  See PartIII. Item 13. “Certain Relationships and Related Transactions.”  Includes (a) 76,000 shares of ourClass A voting common stock owned by IESI Capital LLC, (b) 4,400shares of our Series A convertible preferred stock owned by IESI CapitalII LLC, (c) 1,200 shares of our Series B convertible preferred stockowned by IESI Capital III LLC, (d) 6,750 shares of our Series Cconvertible preferred stock owned by IESI Capital IV LLC, (e) 6,500 sharesof our Series D convertible preferred stock owned by IESI Capital V LLCand (f) 7,660 shares of our Series E convertible preferred stock owned by IESICapital VI LLC.  Mr. Keenan, themanaging member of the IESI Capital entities is a beneficial owner of theshares owned by IESI Capital.

 

(5)           Suez Equity and Suez Associates may be deemed to beaffiliated with each other.  Includes(a) 45,930 shares of our Class B non-voting common stock, 3,674.4 sharesof our Series A convertible preferred stock, 1,837.2 shares of ourSeries B convertible preferred stock and 6,274.15 shares of ourSeries C convertible preferred stock owned by Suez Equity and(b) 4,070 shares of our Class B non-voting common stock, 325.6 sharesof our Series A convertible preferred stock, 162.80 shares of ourSeries B convertible preferred stock and 225.85 shares of ourSeries C convertible preferred stock owned by SEI Associates.  Mr. Lieberman, the managing member ofSEI Capital, the general partner of Suez Equity, and the managing partner ofSEI Associates, may be deemed to be the beneficial owner of the shares owned bySuez Equity and SEI Associates.  SeePart III. Item 13. “Certain Relationships and Related Transactions.”  Mr. Lieberman disclaims such beneficialownership.

 

(6)           EOF, EOF2, EOF2, EOF2(I), SOF and SOF(I) may be deemedto be affiliated with one another.  SeePart III. Item 13. “Certain Relationships and Related Transactions.”  Includes (a) 41,000 shares of ourClass A voting common stock and 1,600 shares of our Series Aconvertible preferred stock owned by EOF, (b) 1,875 shares of ourSeries A convertible preferred stock, 1,887 shares of our Series Bconvertible preferred stock and 1,570 shares of our Series D convertiblepreferred stock owned by EOF2(I), (c) 525 shares of our Series Aconvertible preferred stock, 513 shares of our Series B convertiblepreferred stock and 430 shares of our Series D convertible preferred stockowned by EOF2, (d) 753 shares of our Series E convertible preferred stock ownedby SOF(I) and (e) 247 shares of our Series E convertible preferred stock ownedby SOF.  Sanders Morris Harris, thecontrolling member of EOM (which is the general partner of EOF), FMII (which isthe general partner of EOF2 and EOF2(I)) and SOF Management (which is thegeneral partner of SOF and SOF(I)) may be deemed to be the beneficial owner ofthe shares held by EOF, EOF2, EOF2(I), SOF and

 

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SOF(I).  See Part III. Item 13. “CertainRelationships and Related Transactions.”  Messrs. Bruce McMaken and Kenneth Ch’uan-K’ai Leung, members of theinvestment committee of EOM, may also be deemed to be the beneficial owners ofthe shares owned by EOF.  Messrs. BruceCummings, McMaken and Ch’uan-K’ai Leung, members of the investment committee ofFMII, may also be deemed to be the beneficial owners of the shares owned byEOF2 and EOF2(I).  Each ofMessrs. McMaken, Ch’uan-K’ai Leung and Cummings disclaims such beneficialownership.

 

(7)           The general partner of Indosuez Capital Partners 2001,L.P. is Indosuez CM II, Inc., a wholly-owned subsidiary of Indosuez NorthAmerica Holdings, Inc., which, in turn, is a wholly-owned subsidiary of CreditAgricole Indosuez, a French socíete anonyme, which, in turn, is a wholly-ownedsubsidiary of Credit Agricole SA, a French socíete anonyme whose securities arelisted on the Paris Stock Exchange.  Theaddress for Indosuez Capital Partners 2001, L.P. is 666 Third Avenue,9th Floor, New York, New York 10017.

 

(8)           The address for such beneficial owner is c/o FleetNational Bank, 100 Federal Street, MA DE 10008H, Boston, Massachusetts, 02110.

 

(9)           Includes (a) 12,000 shares of our Class Avoting common stock, (b) 2,000 shares of our Series A convertible preferredstock and (c) a warrant to purchase 3,500 shares of our Class Avoting common stock.  Mr. James E.Sowell may be deemed to be the beneficial owner of the shares owned by SowellConstruction.  The address for suchbeneficial owners is 1601 Elm Street, Suite 300, Dallas, Texas, 75201.

 

(10)         Includes (a) 4,050 shares of our Class A Votingcommon stock and (b) 100 shares of our Series B convertible preferredstock.  Does not include (i) anyportion of the 6,750 shares of our Series C convertible preferred stockowned by IESI Capital IV LLC of which Mr. Flood owns a 4.4% membershipinterest, (ii) any portion of the 6,500 shares of our Series Dconvertible preferred stock owned by IESI Capital V LLC of which Mr. Floodowns a 3.8% membership interest or (iii) any portion of the 7,660 shares ofSeries E convertible preferred stock owned by IESI Capital VI LLC of which Mr.Flood owns a 1.3% membership interest.

 

(11)         Does not include any portion of the 7,660 shares ofour Series E convertible preferred stock owned by IESI Capital VI LLC of whichMr. Cummings owns a 1.3% membership interest.

 

(12)         Includes (a) 41,750 shares of our Series Cconvertible preferred stock, (b) 40,000 shares of our Series D convertiblepreferred stock, and (c) 40,000 shares of our Series E convertible preferredstock owned by Thayer Equity IV, TC Carting II and TC Carting III.  See note 3 above.  Mr. Dickinson may be deemed to be the beneficial owner ofthe shares owned by Thayer Equity IV, TC Carting II and TC Carting III.  See Part III. Item 13. “CertainRelationships and Related Transactions.” Mr. Dickinson disclaims such beneficial ownership.  The address for Mr. Dickinson is c/o ThayerEquity Investors IV, L.P., 1455 Pennsylvania Avenue, N.W., Suite 350,Washington, D.C. 20004.

 

(13)         Includes (a) 41,000 shares of our Class Avoting common stock, (b) 4,000 shares of our and 1,600 shares of our Series A convertible preferred stock, (c)2,400 shares of our Series B convertible preferred stock and (d) 2,000shares of our Series D convertible preferred stock owned by EOF, EOF2 andEOF(I).  See note 6 above.  Mr. McMaken may be deemed to be thebeneficial owner of the shares owned by EOF, EOF2 and EOF2(I).  See Part III. Item 13. “CertainRelationships and Related Transactions.” Mr. McMaken disclaims such beneficial ownership.  The address for Mr. McMaken is  c/o Sanders Morris Harris, 3100 Chase Tower,600 Travis Street, Suite 3100, Houston, Texas, 77002.

 

(14)         Does not include (a) any portion of the 6,500 sharesof our Series D convertible preferred stock owned by IESI Capital V LLC ofwhich Mr. Cowee owns a 0.4% membership interest or (b) any portion of the7,660 shares of Series E convertible preferred stock owned by IESI Capital VILLC of which Mr. Cowee owns a 0.3% membership interest.

 

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(15)         Does not include (a) any portion of the 6,750shares of our Series C convertible preferred stock owned by IESI CapitalIV LLC of which Mr. Brown owns a 1.5% membership interest or (b) anyportion of the 6,500 shares of our Series D convertible preferred stockowned by IESI Capital V LLC of which Mr. Brown owns a 0.3% membershipinterest.

 

(16)         Does not include (a) any portion of the 6,750 sharesof our Series C convertible preferred stock owned by IESI Capital IV LLCof which Mr. McGee owns a 1.1% membership interest or (b) any portion ofthe 7,660 shares of Series E convertible preferred stock owned by IESI CapitalVI LLC of which Mr. McGee owns a 1.0% membership interest.

 

(17)         Includes 1,000 shares of our Class B non-voting commonstock.  Does not include any portion ofthe 7,660 shares of our Series E convertible preferred stock owned by IESICapital VI LLC of which Mr. Apuzzi owns a 0.1% membership interest.

 

(18)         Consists of shares held by members of management andcertain stockholders that may be deemed to be beneficially owned by certainmembers of our board of directors. Certain of such members of our board of directors disclaim suchbeneficial ownership.

 

(19)         As a result of our Second Amended and RestatedStockholders’ Agreement described in Part III. Item 13.  “Certain Relationships and RelatedTransactions—Second Amended and Restated Stockholders’ Agreement,” TC Carting,TC Carting II, TC Carting III, Thayer Equity IV, the IESI Capital entities,Suez Equity, SEI Associates, EOF, EOF2, EOF2(I), SOF, SOF(I), IndoSuez, SowellConstruction, BancBoston, Charles R. Cummings, Charles F. Flood and Edward L.Appuzi, among others, may be deemed to constitute a “group” for purposes ofSection 13(d) of the Exchange Act and, accordingly, each of theseshareholders may be deemed to share voting or dispositive power with respect tothe shares held by the other parties. Each of the foregoing disclaims any beneficialownership of the shares of capital stock held by the others.

 

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**Equity Compensation Plan Information**

 

The following tablesummarizes information about securities authorized for issuance under ourequity compensation plans as of December 31, 2003:

 
|                                                        |   | **(a)**                                                                                     |   | **(b)**                                                                     |   | **(c)**                                                                                                                                                |   |
|-------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Plan Category**                                           |   | **Number of  Securities to  be Issued Upon Exercise  of Outstanding Options  and Warrants** |   | **Weighted-Average  Exercise Price of  Outstanding  Options and  Warrants** |   | **Number of  Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected in  Column (a))** |   |
|                                                        |   |                                                                                        |   |                                                                        |   |                                                                                                                                                   |   |
| Equity compensation plans  approved by security holders     |   | 208,661.7                                                                                   |   |                                                                        | $      | 82.77                                                                                                                                                  |   |   | 41,338.3 |   |   |
|                                                        |   |                                                                                        |   |                                                                        |   |                                                                                                                                                   |   |   |   |   |
| Equity compensation plans not  approved by security holders |   | 750.0                                                                                       | (1)    |                                                                        | $      | 100.00                                                                                                                                                 |   |   | — |   |   |
|                                                        |   |                                                                                        |   |                                                                        |   |                                                                                                                                                   |   |   |   |   |
| Total                                                       |   | 209,411.7                                                                                   |   |                                                                        | $      | 82.83                                                                                                                                                  |   |   | 41,338.3 |   |   |

 

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(1)           Represents shares issuable upon exercise of anoutstanding, fully vested warrant issued in 1998 as consideration for servicesrendered to us.  The warrant has anexercise price of $100.00 and expires on December 31, 2006.

 

**Item 13.**  Certain Relationships andRelated Transactions*.*

** **

Mr. Keenan, the Chairman of our board of directorsand of the compensation committee of our board of directors, is a managingmember of IESI Capital VI LLC, as well as the other IESI Capital entities.  Mr. Keenan also owns a membership interestin each of these entities.  IESI CapitalVI LLC purchased shares of our Series E convertible preferred stock pursuant tothe stock purchase agreement described below and the other IESI Capitalentities own shares of our capital stock. See Part III. Item 12. “Security Ownership of Certain Beneficial Owners andManagement.”

 

In April 2003, we purchased an airplane fromMr. Keenan for an aggregate purchase price of $1.2 million, representingthe airplane’s fair value as determined by two independent appraisals.  During 2002, we paid Mr. Keenan$1.0 million as an advance towards the purchase price and in April 2003we paid him the remaining balance of $150,000.

 

Mr. Dickinson,a member of our board of directors as well as the audit and compensationcommittees of our board of directors, is a Managing Partner of, and Mr.Michalik, also a member of our board of directors, was until June 30, 2003a Managing Director of, TC Equity IV, the general partner of Thayer Equity IV,which owns shares of our capital stock and which is the managing member of TCCarting III, which also owns shares of our capital stock.  In addition, Mr. Dickinson is aManaging Partner of TC Management IV, the managing member of TC Co-InvestorsIV, which is the managing member of TC Carting II, which owns shares of ourcapital stock.  Until June 30,2003, Mr. Michalik was a Managing Director of TC Equity, the generalpartner of Thayer Equity III, which is the managing member of TC Carting, whichowns shares of our capital stock.  Mr.Forese is the Chief Operating Officer and Operating Partner of ManagementEmployment, LLC, a subcontractor of TC Management IV, and managing agent ofThayer Equity IV.

 

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Mr. McMaken,a member of our board of directors as well as the audit and compensationcommittees of our board of directors, is one of the managers of EOF, EOF2 andEOF2(I) and is also a member of the investment committees of EOM, the generalpartner of EOF, and FMII, the general partner of EOF2 and EOF2(I).  In addition, Mr. McMaken serves as anofficer of Sanders Morris Harris, the controlling member of EOM and FMII.  EOF, EOF2 and EOF2(I) own shares of ourcapital stock.  See Part III. Item 12.“Security Ownership of Certain Beneficial Owners and Management.”  Don A. Sanders is a member of SOFManagement, the general partner of SOF and SOF(I).  Mr. Sanders, SOF and SOF(I) purchased shares of our Series E convertiblepreferred stock pursuant to the stock purchase agreement described below.  Mr. Sanders is an officer of Sanders MorrisHarris and a member of the board of directors of its parent, Sanders MorrisHarris Group, Inc.

 

Mr.Lieberman, a member of our board of directors, is the managing member of SEICapital, the general partner of Suez Equity, and the managing partner of SEIAssociates.  Suez Equity and SEIAssociates own shares of our capital stock. See Part III. Item 12. “Security Ownership of Certain Beneficial Ownersand Management.”

 

Mr. deVergnes, who was a member of our board of directors and compensation committeeuntil October 10, 2003, is also a member of SEI Capital and a partner ofSEI Associates.

 

During 2003,we paid to Fleet, the administrative agent under our senior credit facility, anaggregate amount of $5,515,873 in fees and expenses.  Fleet is an affiliate of BancBoston, which owns shares of ourcapital stock.  See Part III. Item 12.“Securities Ownership of Certain Beneficial Owners and Management.”

 

During2003, we paid two companies affiliated with two of our employees approximately$760,000 for temporary labor services and $116,000 for maintenance relatedservices, respectively.  One of theseemployees is the manager of a division in our South Region who is the subjectof our ongoing investigation described in Part II. Item 9A. “Controls andProcedures.”

 

**StockPurchase Agreement**

 

Pursuantto a stock purchase agreement, dated as of October 10, 2003, onOctober 10, November 20, and December 30, 2003, we issued anaggregate of 49,660 shares of our Series E convertible preferred stock for anaggregate purchase price of $49.7 million, as follows:  40,000 shares to TC Carting III, 7,660shares to IESI Capital VI LLC, 1,000 shares to Don A. Sanders, 247 shares toSOF(I) and 753 shares to SOF.  Shares ofour Series E convertible preferred stock are convertible into shares of ourClass A voting common stock or Class B non-voting common stock.  See Part II. Item 5. “Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Security — Recent Sales of Unregistered Issuances of Securities.”  Each purchaser received a closing fee equalto 3% of the aggregate purchase price of the shares of our Series E convertiblestock purchased by such purchaser.  Inaddition, in connection with these investments, the purchasers entered into ourSecond Amended and Restated Stockholders’ Agreement and our Amended andRestated Subordinate Registration Rights Agreement.  See “—Second Amended and Restated Stockholders’ Agreement” and “—Registration Rights — Amended and Restated Subordinate Registration RightsAgreement.”

 

**SecondAmended and Restated Stockholders’ Agreement**

** **

Weentered into a Second Amended and Restated Stockholders’ Agreement, dated as ofOctober 10, 2003, with certain of our stockholders and warrantholders.  The terms of our SecondAmended and Restated Stockholders’ Agreement are as follows:

 

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***Board of Directors***

*** ***

Ourboard of directors currently consists of eight members designated as follows:

 

•              IESI Capital isentitled to designate one director, with Mr. Keenan serving as its currentdesignee;

 

•              Mr. Flood isentitled to be a director as long as he is our Chief Executive Officer;

 

•              EOF is entitled todesignate one director, with Mr. McMaken serving as its current designee;

 

•              TC Carting isentitled to designate two directors, with Messrs. Michalik and Dickinsonserving as its current designees;

 

•              Thayer Equity IV isentitled to designate two directors, with Messrs. Cummings and Forese servingas its current designees; and

 

•              Suez Equity isentitled, subject to certain regulatory requirements, to designate onedirector, with Mr. Lieberman serving as its current designee.

 

In theevent of a tie in any vote of our board of directors, the TC Carting directornominee who has been designated by TC Carting as the tie-breaker has the rightto cast the tie-breaking vote.  Inaddition, James E. Sowell is entitled to designate a representative to attendand observe all of our board of directors’ meetings and receive all informationand consents distributed to directors. In the event that Suez Equity fails or is unable to designate a directorbased on certain regulatory requirements, our board of directors will consistof not more than seven members and Suez Equity will be entitled to designate arepresentative to observe all of our board of directors’ meetings and receiveall information and consents distributed to directors.

 

Anycommittee that our board of directors may constitute shall includerepresentatives designated by the following entities in the same proportions asthey are represented on our board of directors:

 

•              IESI Capital;

 

•              EOF;

 

•              TC Carting; and

 

•              Thayer Equity IV;

 

***Restrictions on Transfer***

 

Thereare certain restrictions with respect to the sale, transfer or otherdisposition of our capital stock, including the following:

 

•              if any stockholderproposes to transfer shares of our capital stock, we have a 10-day period toelect to purchase such shares;

 

•              if any stockholderor group of stockholders proposes to transfer shares constituting at least 5%of the outstanding shares of our capital stock, calculated on an as-convertedbasis into shares of our Class A voting common stock, all of our otherstockholders will 

 

87

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be entitled to sell a pro rata portion of their stock in the sale atthe same price and on the same terms and conditions as are applicable to theshares proposed to be transferred by such stockholder or group of stockholders;

 

•              if TC Carting, TCCarting II, TC Carting III or Thayer Equity IV propose to transfer a majorityof the outstanding shares of our capital stock, calculated on an as-convertedbasis into shares of our Class A voting common stock, to a non-affiliate,they may require all other stockholders to transfer the same percentage oftheir stock under the same terms and conditions and, if stockholder approval isnecessary, that all other stockholders vote in favor of the transfer; and

 

•              all of ourstockholders have certain preemptive rights with respect to issuances of ourequity securities, other than (i) issuances of our securities to ouremployees, officers and directors under our benefit plans, (ii) certainspecified issuances made as part of the consideration paid by us in connectionwith any merger, consolidation or purchase of the assets or business of anotherentity and (iii) issuances pursuant to a public offering of equity securitiespursuant to an effective registration statement under the Securities Act.

 

Uponexercise of their warrants, holders of our warrants will have the same rightsas stockholders under, and will be subject to the terms of, our Second Amendedand Restated Stockholders’ Agreement with respect to those shares.

 

***Approval by TC Cartingand Thayer Equity IV***

*** ***

Wemust obtain the consent of the directors designated by Thayer Equity IV and TCCarting before we may, among other things:

 

•              substantially changeour business or financial plan;

 

•              make any expenditurefor fixed or capital assets greater than 10% of the limit set forth in ourbusiness or financial plan (which limit is set by our board of directorsannually and is approximately $49.9 million for 2004);

 

•              incur an amount inexcess of $5.0 million in connection with an acquisition;

 

•              sell control of allor substantially all of our assets or any of our capital stock;

 

•              acquire all orsubstantially all the ownership interests or assets, or any division, ofanother company;

 

•              modify our seniorcredit facility or incur certain other debt;

 

•              enter into anymaterial transaction with an affiliate;

 

•              lend funds;

 

•              declare a dividend;or

 

•              change our Chairman,Chief Executive Officer, Chief Operating Officer or Chief Financial Officer.

 

88

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***Amendment***

*** ***

Amendmentsto our Second Amended and Restated Stockholders’ Agreement require our consentand the written consent of holders of not less than 70% of the shares of ourcapital stock, calculated on an as-converted basis into shares of ourClass A voting common stock.

 

***Termination***

*** ***

Withthe exception of the provision relating to composition of our board ofdirectors, all provisions of our Second Amended and Restated Stockholders’Agreement will terminate upon (a) the effective date of an initial publicoffering of at least $20 million of our common stock or (b) anymerger, sale or other transaction involving the transfer of ownership of morethan 50% of our then outstanding voting stock.

 

**RegistrationRights**

** **

***Amended and RestatedRegistration Rights Agreement***

*** ***

Weentered into an Amended and Restated Registration Rights Agreement, dated as ofJune 30, 1999, with all our then existing stockholders and our warrantholders.

 

OurAmended and Restated Registration Rights Agreement provides that the holders ofat least 15% of the shares of our capital stock, calculated on an as-convertedbasis into shares of our Class A voting common stock, may request, on anyof three occasions on or after the earlier of the effective date of an initialpublic offering of our capital stock and June 25, 2002, that we registerour capital stock; however, less than 15% may demand registration if theanticipated aggregate price of the capital stock to be registered would exceed$5 million, subject to certain exceptions.  In addition, whenever we propose to register a public offering ofcommon stock, upon any request by the stockholders, we are required to use ourbest efforts to include their shares in the offering.

 

Pursuantto our Amended and Restated Registration Rights Agreement, our stockholdershave agreed with us that they will not effect any public sale or distributionof our equity securities during the seven-day period prior to, and the 90-dayperiod following, the effective date of any registration statement.

 

Wewill bear all registration expenses, except underwriting discounts and sellingcommissions, incurred in connection with the registrations describedabove.  We have agreed with thestockholders to indemnify each other against certain liabilities, includingliabilities under federal and state securities laws.

 

***Amended and RestatedSubordinate Registration Rights Agreement***

*** ***

Inconnection with the issuance of our Series E convertible preferred stock,we were not able to obtain all signatures necessary to amend and restate theJune 1999 Amended and Restated Registration Rights Agreement.  Accordingly, we entered into an Amended andRestated Subordinate Registration Rights Agreement.  Pursuant to our Amended and Restated Subordinate RegistrationRights Agreement, holders of at least 15% of the shares of our capital stock,calculated on an as-converted basis into shares of our Class A votingcommon stock, may request on any of three occasions on or after the earlier ofthe effective date of an initial public offering of our capital stock andDecember 31, 2004, that we register the shares of our capital stock heldby such holders; however, less than 15% may demand registration if the anticipatedaggregate price of the capital stock to be registered would exceed$25 million, subject to certain exceptions.  In addition, whenever we propose to register a public offering ofcommon stock, upon

 

89

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any request by the stockholders, we are required touse our best efforts to include their shares in the offering.

 

Pursuantto our Amended and Restated Subordinate Registration Rights Agreement, weagreed along with our stockholders not to effect any public sale ordistribution of our equity securities during the seven-day period prior to, andthe 90-day period following, the effective date of any registration statement.

 

Wewill bear all registration expenses, except underwriting discounts and sellingcommissions, incurred in connection with the registrations describedabove.  We have agreed with thestockholders to indemnify each other against certain liabilities, includingliabilities under federal and state securities laws.

 

**Item 14.**  Principal Accounting Feesand Services.

** **

**Auditand Non-Audit Fees**

** **

Thefollowing table summarizes the fees billed to us by Ernst & Young LLPduring 2003 and 2002:

 
|                   |   | **2003** |      | **2002** |   |
|------------------------|--------|----------|-----------|----------|--------|
| Audit Fees             |   | $        | 698,634   |     | $      | 891,981 |   |
| Audit-Related  Fees(1) |   | 702,433  |      | 41,240   |   |
| Tax  Fees(2)           |   | 185,758  |      | 175,329  |   |
| All Other  Fees        |   | —   |      | —   |   |
|                   |   |     |      |     |   |
| Total                  |   | $        | 1,586,825 |     | $      | 1,108,550 |   |

 

----

(1)     Audit-Related Fees consist ofassurance and related services that are reasonably related to the performanceof the audit or review of our financial statements.

 

(2)     Tax Fees consist of theaggregate fees billed for professional services rendered by Ernst & YoungLLP for tax compliance, tax advice and tax planning.

 

90

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**PART IV**

 

**Item 15.**  Exhibits, FinancialStatement Schedules, and Reports on Form 8-K.

** **

(a)           The following documents are filed as part of thisAnnual Report on Form 10-K: 

 
| (1)    |   | Financial Statements:                                                                                                                                                                                                                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | (i)            Report of Independent Auditors.                                                                                                                                                                                                               |
|   |   | (ii)           Consolidated  Balance Sheets as of December 31, 2003 and 2002.                                                                                                                                                                                |
|   |   | (iii)          Consolidated  Statements of Operations for the Years Ended December 31, 2003, 2002 and  2001.                                                                                                                                                      |
|   |   | (iv)          Consolidated  Statements of Stockholders’ Equity (Deficit) for the Years Ended  December 31, 2003, 2002 and 2001.                                                                                                                              |
|   |   | (v)           Consolidated  Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and  2001.                                                                                                                                                  |
|   |   | (vi)          Notes  to Consolidated Financial Statements.                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                |
| (2)    |   | Financial Statement Schedules:   Consolidated financial statement schedules not filed herein have been  omitted either because they are not applicable or the required information is  presented in the notes to our consolidated financial statements included  elsewhere in this Annual Report on Form 10-K. |
|   |   |                                                                                                                                                                                                                                                                                                                |
| (3)    |   | Exhibits:  The exhibits that  are filed as part of this Annual Report on Form 10-K or incorporated by  reference herein are set forth in the accompanying Exhibit Index.                                                                                                                                       |

 

91

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| (b)    |   | Reports on Form 8-K During the Last Quarter of the  Fiscal Year Covered by this Report:                                                                                                                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | (i)            On October 14,  2003, we furnished (but not filed) a Current Report on Form 8-K announcing  our acquisition of Seneca Meadows, Inc.                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | (ii)           On October 23,  2003, we filed a Current Report on Form 8-K reporting the closing of our  acquisition of Seneca Meadows, Inc., our sale of shares of our Series E  convertible preferred stock and the refinancing of our senior credit  facility, and to file copies of the related documents.   |
|   |   | (iii)          On November 12,  2003, we furnished (but not filed) a Current Report on Form 8-K reporting our  financial results for the nine months ended September 30, 2003.                                                                                                                                   |
|   |   | (iv)          On November 14,  2003, we furnished (but not filed), a Current Report on Form 8-K reporting  additional financial results for the nine months ended September 30,  2003.                                                                                                                           |
|   |   | (iv)          On December 23,  2003, we filed a Current Report on Form 8-K/A, Amendment No. 1, to file the  financial statements of the business acquired and the pro forma financial  information required under Items 7(a) and 7(b) of Form 8-K, respectively,  relating to our acquisition of Seneca Meadows, Inc. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                    |
| (c)    |   | Exhibits:                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | The exhibits that are filed as part of this Annual Report on Form  10-K or incorporated by reference herein are set forth in the accompanying  Exhibit Index.                                                                                                                                                                                                           |

 

92

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this AnnualReport on Form 10-K to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | IESI CORPORATION |
|--------|------------------|
|   |             |
|   |             |
|   | By:              | /s/ Charles F.  Flood |   |
|   |             | Charles F. Flood  President and Chief Executive Officer |   |

 

Date:  March 30**,**2004

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Annual Reporton Form 10-K has been signed by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated. 

 
| **Signature**                |   | **Title**                                                                                                                                          |   | **Date**            |
|------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|
|                         |   |                                                                                                                                               |   |                |
| /s/ Jeffrey J. Keenan   |   | Chairman of the Board of Directors                                                                                                                 |   | March 30, 2004 |
| Jeffrey J. Keenan            |   |                                                                                                                                               |   |                |
|                         |   |                                                                                                                                               |   |                |
| /s/ Charles F. Flood    |   | President, Chief Executive Officer and Director (Principal Executive  Officer)                                                                     |   | March 30, 2004 |
| Charles F. Flood             |   |                                                                                                                                               |   |                |
|                         |   |                                                                                                                                               |   |                |
| /s/ Thomas J. Cowee     |   | Senior Vice President, Chief Financial Officer, Treasurer and  Assistant Secretary (Principal Financial Officer and Principal Accounting  Officer) |   | March 30, 2004 |
| Thomas J. Cowee              |
|                         |   |                                                                                                                                               |   |                |
|                         |   |                                                                                                                                               |   |                |
| /s/ Charles R. Cummings |   | Director                                                                                                                                           |   | March 30, 2004 |
| Charles R. Cummings          |   |                                                                                                                                               |   |                |
|                         |   |                                                                                                                                               |   |                |
| /s/ Daniel M. Dickinson |   | Director                                                                                                                                           |   | March 30, 2004 |
| Daniel M. Dickinson          |   |                                                                                                                                               |   |                |
|                         |   |                                                                                                                                               |   |                |
| /s/ James  J. Forese    |   | Director                                                                                                                                           |   | March 30, 2004 |
| James J. Forese              |   |                                                                                                                                               |   |                |
|                         |   |                                                                                                                                               |   |                |
|                         |   | Director                                                                                                                                           |   | March 30, 2004 |
| Leslie J. Lieberman          |   |                                                                                                                                               |   |                |
|                         |   |                                                                                                                                               |   |                |
| /s/ Bruce R. McMaken    |   | Director                                                                                                                                           |   | March 30, 2004 |
| Bruce R. McMaken             |   |                                                                                                                                               |   |                |
|                         |   |                                                                                                                                               |   |                |
| /s/ Robert E. Michalik  |   | Director                                                                                                                                           |   | March 30, 2004 |
| Robert E. Michalik           |   |                                                                                                                                               |   |                |

 

93

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**IESI CORPORATION**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Auditors                                                                                            | F-2 |
|---------------------------------------------------------------------------------------------------------------------------|-----|
| Consolidated Balance Sheets as of December 31, 2003 and 2002                                                         | F-3 |
| Consolidated Statements of Operations for  the Years Ended December 31, 2003, 2002 and 2001                          | F-4 |
| Consolidated Statements of Stockholders’  Equity (Deficit) for the Years Ended December 31, 2003, 2002 and 2001 | F-5 |
| Consolidated Statements of Cash Flows for the Years Ended  December 31, 2003, 2002 and 2001                          | F-6 |
| Notes to Consolidated Financial Statements                                                                                | F-7 |

 

F-1

----

 

**Reportof Independent Auditors**

 

The Board of Directors

IESI Corporation

 

We have audited the accompanying consolidated balance sheets of IESICorporation and subsidiaries as of December 31, 2003 and 2002, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for each of the three years in the period ended December 31,2003.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position of IESICorporation and subsidiaries at December 31, 2003 and 2002, and theconsolidated results of their operations and their cash flows for each of thethree years in the period ended December 31, 2003, in conformity withaccounting principles generally accepted in the United States.

 

As discussed in Note 2 to the consolidated financial statements,effective January 1, 2003, the Company adopted Statement of FinancialAccounting Standards No. 143, Accounting for Asset Retirement Obligations.

 

As discussed in Note 2 to the consolidated financial statements,effective January 1, 2002, the Company adopted Statement of FinancialAccounting Standards No. 142, Goodwill and Other Intangible Assets.

 

 
|                | /s/ Ernst & Young LLP |   |
|---------------------|---------------------------|--------|
|                |
| March 26, 2004 |
| Fort Worth, Texas   |

 

F-2

----

 

**IESI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                                                                                                                                                                                                   |   | **December 31,** |        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                                                                                                                                                                                                                                                                                                                   |   | **2003**              |        | **2002** |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                                        |   |                  |        |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                              |   | $                     | 4,197,157   |   | $ | 2,589,726 |   |
| Accounts receivable-trade, less allowance  of $2,397,000 and $941,000 at December 31, 2003 and 2002, respectively                                                                                                                                                                                                                                                 |   | 30,585,797            |        | 24,723,534 |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                  |   | 1,356,471             |        | 849,649 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                              |   | 4,782,446             |        | 3,949,590 |   |
|                                                                                                                                                                                                                                                                                                                                                                   |   |                  |        |   |   |
| Total current assets                                                                                                                                                                                                                                                                                                                                                   |   | 40,921,871            |        | 32,112,499 |   |
| Property and equipment, net of accumulated  depreciation of $110,218,000 and $73,475,000 at December 31, 2003 and  2002, respectively                                                                                                                                                                                                                             |   | 488,659,850           |        | 241,869,538 |   |
| Goodwill                                                                                                                                                                                                                                                                                                                                                               |   | 138,335,715           |        | 128,409,308 |   |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                                                           |   | 32,986,163            |        | 22,666,277 |   |
| Other assets                                                                                                                                                                                                                                                                                                                                                           |   | 2,143,616             |        | 3,001,394 |   |
|                                                                                                                                                                                                                                                                                                                                                                   |   |                  |        |   |   |
| Total assets                                                                                                                                                                                                                                                                                                                                                           |   | $                     | 703,047,215 |   | $ | 428,059,016 |   |
| **Liabilities and Stockholders’ Equity  (Deficit)**                                                                                                                                                                                                                                                                                                               |   |                  |        |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                   |   |                  |        |   |   |
| Accounts payable-trade                                                                                                                                                                                                                                                                                                                                                 |   | $                     | 27,448,950  |   | $ | 17,086,458 |   |
| Accrued expenses and other current  liabilities                                                                                                                                                                                                                                                                                                                        |   | 17,512,525            |        | 13,387,878 |   |
| Deferred revenue                                                                                                                                                                                                                                                                                                                                                       |   | 1,231,758             |        | 984,101 |   |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                      |   | 2,731,595             |        | 184,825 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                              |   | 48,924,828            |        | 31,643,262 |   |
| Long-term debt                                                                                                                                                                                                                                                                                                                                                         |   | 378,129,393           |        | 198,386,401 |   |
| Accrued environmental and landfill costs                                                                                                                                                                                                                                                                                                                               |   | 47,456,769            |        | 12,539,318 |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                                                  |   | 9,949,611             |        | 6,770,058 |   |
| Other liabilities                                                                                                                                                                                                                                                                                                                                                      |   | 1,282,992             |        | 1,593,534 |   |
| Total liabilities                                                                                                                                                                                                                                                                                                                                                      |   | 485,743,593           |        | 250,932,573 |   |
| Commitments and contingencies                                                                                                                                                                                                                                                                                                                                          |   |                  |        |   |   |
| Redeemable preferred stock:                                                                                                                                                                                                                                                                                                                                            |   |                  |        |   |   |
| Redeemable Series A Convertible Preferred  Stock, 32,000 shares authorized, issued and outstanding, liquidation  preference of $40,000,000 at December 31, 2003 and 2002                                                                                                                                                                                          |   | 39,683,637            |        | 39,683,637 |   |
| Redeemable Series B Convertible Preferred  Stock, 20,100 shares authorized, issued and outstanding, liquidation  preference of $25,125,000 at December 31, 2003 and 2002                                                                                                                                                                                          |   | 24,808,636            |        | 24,808,636 |   |
| Redeemable Series C Convertible Preferred  Stock, 55,000 shares authorized, issued and outstanding, liquidation  preference of $105,448,126 and $91,247,703 at December 31, 2003 and  2002, respectively                                                                                                                                                          |   | 103,405,665           |        | 89,205,242 |   |
| Redeemable Series D Convertible Preferred  Stock, 55,000 and 145,000 shares authorized, 55,000 and 55,000 shares issued  and outstanding, liquidation preference of $68,655,338 and $62,272,416, at  December 31, 2003 and 2002, respectively                                                                                                                     |   | 66,035,461            |        | 59,652,539 |   |
| Redeemable Series E Convertible Preferred  Stock, 55,000 and 0 shares authorized, 49,660  and 0 shares issued and outstanding, liquidation preference of  $50,762,561 and $0, at December 31, 2003 and 2002, respectively                                                                                                                                    |   | 49,120,889            |        | — |   |
|                                                                                                                                                                                                                                                                                                                                                                   |   |                  |        |   |   |
| Total redeemable preferred stock                                                                                                                                                                                                                                                                                                                                       |   | 283,054,288           |        | 213,350,054 |   |
| Stockholders’ equity (deficit):                                                                                                                                                                                                                                                                                                                                   |   |                  |        |   |   |
| Common stock, par value $.01 at  December 31, 2003 and 2002, respectively: Authorized shares: Class  A-4,200,000 and 3,600,000, Class B Convertible-450,000 and 450,000, at  December 31, 2003 and 2002, respectively; issued and outstanding  shares: Class A-142,000, Class B Convertible-112,980, at  December 31, 2003 and 2002 |   | 2,550                 |        | 2,550 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                             |   | —                |        | — |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                    |   | (65,753,216           | )           | (36,226,161 | ) |
| Cumulative other comprehensive income                                                                                                                                                                                                                                                                                                                                  |   | —                |        | — |   |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                                              |   | (65,750,666           | )           | (36,223,611 | ) |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                                                                                                                                                                                                             |   | $                     | 703,047,215 |   | $ | 428,059,016 |   |

 

See accompanying notes.

 

F-3

----

 

**IESI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                                                                                                                        |   | **Year  Ended December 31,** |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|-------------|
|                                                                                                                                                                        |   | **2003**                               |        | **2002** |   | **2001** |   |
|                                                                                                                                                                        |   |                                   |        |   |   |   |   |
| Services revenue                                                                                                                                                            |   | $                                      | 256,015,678 |   | $ | 212,940,552 |   | $ | 185,690,309 |   |
| Costs and expenses:                                                                                                                                                         |   |                                   |        |   |   |   |   |
| Operating                                                                                                                                                                   |   | 164,203,396                            |        | 139,640,790 |   | 119,816,245 |   |
| General and administrative                                                                                                                                                  |   | 32,722,982                             |        | 25,536,654 |   | 24,062,826 |   |
| Depreciation, depletion and amortization                                                                                                                                    |   | 41,079,389                             |        | 27,848,910 |   | 25,721,970 |   |
|                                                                                                                                                                        |   | 238,005,767                            |        | 193,026,354 |   | 169,601,041 |   |
| Income from operations                                                                                                                                                      |   | 18,009,911                             |        | 19,914,198 |   | 16,089,268 |   |
| Interest expense, net                                                                                                                                                       |   | (20,275,874                            | )           | (14,067,694 | ) | (12,960,630 | ) |
| Loss on termination of interest rate swaps                                                                                                                                  |   | —                                 |        | (825,665 | ) | — |   |
| Loss on extinguishment of debt                                                                                                                                              |   | —                                 |        | (585,591 | ) | — |   |
| Other expense, net                                                                                                                                                          |   | (340,516                               | )           | (103,487 | ) | (178,238 | ) |
| Income (loss) before income taxes                                                                                                                                           |   | (2,606,479                             | )           | 4,331,761 |   | 2,950,400 |   |
| Income tax expense                                                                                                                                                          |   | (3,703,961                             | )           | (3,726,254 | ) | (703,501 | ) |
| Income (loss) before cumulative effect of  change in accounting principle                                                                                                   |   | (6,310,440                             | )           | 605,507 |   | 2,246,899 |   |
| Cumulative effect of change in accounting  principle net of income tax benefit of $0                                                                                        |   | (1,530,708                             | )           | — |   | — |   |
| Net income (loss)                                                                                                                                                           |   | $                                      | (7,841,148  | ) | $ | 605,507 |   | $ | 2,246,899 |   |
| Pro forma income (loss) before cumulative  effect of change in accounting principle, assuming change in accounting  principle described in Note 2 was applied retroactively |   | $                                      | (6,310,440  | ) | $ | 138,176 |   | $ | 1,945,523 |   |

 

See accompanying notes.

 

F-4

----

 

**IESI CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’****EQUITY (DEFICIT)**

 
|                                                                                    |   | **Common Stock** |   | **Additional  Paid-In  Capital** |      | **Accumulated  Deficit** |   | **Cumulative  Other  Comprehensive   Income** |   |     |        |
|-----------------------------------------------------------------------------------------|--------|------------------|--------|----------------------------------|-----------|--------------------------|--------|-----------------------------------------------|--------|----------|-------------|
|                                                                                    |   | **Shares**       |   | **Par Amount**                   | **Total** |                     |
| Balance at December 31, 2000                                                       |   | 2,713,893        |   | $                                | 27,139    |                     | $      | 9,574,060                                     |   | $        | (17,461,534 | ) | $ | — |   | $ | (7,860,335 | ) |
|                                                                                    |   |             |   |                             |      |                     |   |                                          |   |     |        |   |   |
| Comprehensive income:                                                                   |   |             |   |                             |      |                     |   |                                          |   |     |        |   |   |
| Net income                                                                              |   | —           |   | —                           |      | —                   |   | 2,246,899                                     |   | —   |        | 2,246,899 |   |
| Other comprehensive income:                                                             |   |             |   |                             |      |                     |   |                                          |   |     |        |   |   |
| Unrealized gain on market value of interest  rate swaps, net of tax of $266,456         |   | —           |   | —                           |      | —                   |   | —                                        |   | 398,476  |        | 398,476 |   |
| Comprehensive income                                                                    |   | —           |   | —                           |      | —                   |   | —                                        |   | —   |        | 2,645,375 |   |
| Accretion of dividends on Series C and D  Preferred Stock                               |   | —           |   | —                           |      | (9,607,737               | )      | (1,889,444                                    | )      | —   |        | (11,497,181 | ) |
| Allocation of beneficial conversion feature  from issuance of Series D Preferred Stock  |   | —           |   | —                           |      | 1,650,000                |   | —                                        |   | —   |        | 1,650,000 |   |
| Recognition of beneficial conversion  feature from issuance of Series D Preferred Stock |   | —           |   | —                           |      | —                   |   | (1,650,000                                    | )      | —   |        | (1,650,000 | ) |
| Common stock returned from escrow                                                       |   | (164,091         | )      | (1,641                           | )         | (1,639,271               | )      | —                                        |   | —   |        | (1,640,912 | ) |
| 1-for-10 reverse stock split                                                            |   | (2,294,822       | )      | (22,948                          | )         | 22,948                   |   | —                                        |   | —   |        | — |   |
| Balance at December 31, 2001                                                       |   | 254,980          |   | 2,550                            |      | —                   |   | (18,754,079                                   | )      | 398,476  |        | (18,353,053 | ) |
| Comprehensive income:                                                                   |   |             |   |                             |      |                     |   |                                          |   |     |        |   |   |
| Net income                                                                              |   | —           |   | —                           |      | —                   |   | 605,507                                       |   | —   |        | 605,507 |   |
| Other comprehensive income:                                                             |   |             |   |                             |      |                     |   |                                          |   |     |        |   |   |
| Unrealized loss on market value of interest  rate swaps, net of tax of  $(595,917) |   | —           |   | —                           |      | —                   |   | —                                        |   | (893,875 | )           | (893,875 | ) |
| Reclassification of loss on termination of  interest rate swaps, net of tax of $330,266 |   | —           |   | —                           |      | —                   |   | —                                        |   | 495,399  |        | 495,399 |   |
| Comprehensive income                                                                    |   | —           |   | —                           |      | —                   |   | —                                        |   | —   |        | 207,031 |   |
| Accretion of dividends on Series C and D  Preferred Stock                               |   | —           |   | —                           |      | —                   |   | (18,077,589                                   | )      | —   |        | (18,077,589 | ) |
| Balance at December 31, 2002                                                       |   | 254,980          |   | 2,550                            |      | —                   |   | (36,226,161                                   | )      | —   |        | (36,223,611 | ) |
| Net loss                                                                                |   | —           |   | —                           |      | —                   |   | (7,841,148                                    | )      | —   |        | (7,841,148 | ) |
| Accretion of dividends on Series C, D and E  Preferred Stock                            |   | —           |   | —                           |      | (1,489,800               | )      | (20,196,107                                   | )      | —   |        | (21,685,907 | ) |
| Allocation of beneficial conversion feature  from issuance of Series E Preferred Stock  |   | —           |   | —                           |      | 1,489,800                |   | —                                        |   | —   |        | 1,489,800 |   |
| Recognition of beneficial conversion  feature from issuance of Series E Preferred Stock |   | —           |   | —                           |      | —                   |   | (1,489,800                                    | )      | —   |        | (1,489,800 | ) |
| Balance at December 31, 2003                                                       |   | 254,980          |   | $                                | 2,550     |                     | $      | —                                        |   | $        | (65,753,216 | ) | $ | — |   | $ | (65,750,666 | ) |

 

See accompanying notes.

 

F-5

----

 

**IESICORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH****FLOWS**

 
|                                                                                                                         |   | **Year Ended  December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                                         |   | **2003**                          |       | **2002** |   | **2001** |   |
| **Operating  Activities**                                                                                                    |   |                              |       |   |   |   |   |
| Net income (loss)                                                                                                            |   | $                                 | (7,841,148 | ) | $ | 605,507 |   | $ | 2,246,899 |   |
| Cumulative effect of change in accounting  principle                                                                         |   | 1,530,708                         |       | — |   | — |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities:                                    |   |                              |       |   |   |   |   |
| Depreciation, depletion and amortization                                                                                     |   | 41,079,389                        |       | 27,848,910 |   | 25,721,970 |   |
| Amortization of deferred financing costs                                                                                     |   | 2,530,677                         |       | 2,386,222 |   | 1,543,023 |   |
| Capping, closure and post-closure accretion                                                                                  |   | 1,305,517                         |       | — |   | — |   |
| Provision for doubtful accounts                                                                                              |   | 3,002,895                         |       | 962,512 |   | 1,233,554 |   |
| Write off of costs associated with  transactions in process                                                                  |   | 170,535                           |       | 980,000 |   | 1,570,000 |   |
| Loss on extinguishment of debt                                                                                               |   | —                            |       | 585,591 |   | — |   |
| Gain on sale of waste management operations                                                                                  |   | —                            |       | — |   | (3,541 | ) |
| Deferred income tax expense                                                                                                  |   | 2,672,731                         |       | 3,286,331 |   | 408,892 |   |
| Changes in operating assets and  liabilities, net of effects of acquired waste management operating assets and  liabilities: |   |                              |       |   |   |   |   |
| Accounts receivable, net                                                                                                     |   | (412,055                          | )          | (2,031,598 | ) | (7,052,394 | ) |
| Prepaid expenses and other current assets                                                                                    |   | (583,114                          | )          | 184,703 |   | 1,472,401 |   |
| Accounts payable                                                                                                             |   | 7,479,985                         |       | 480,228 |   | 3,541,518 |   |
| Accrued expenses and other liabilities                                                                                       |   | (3,154,545                        | )          | (4,664,351 | ) | (309,514 | ) |
| Capping, closure and post-closure  expenditures                                                                              |   | (1,297,763                        | )          | — |   | — |   |
| Net cash provided by operating activities                                                                                    |   | 46,483,812                        |       | 30,624,055 |   | 30,372,808 |   |
| **Investing  Activities**                                                                                                    |   |                              |       |   |   |   |   |
| Purchases of property and equipment                                                                                          |   | (46,890,208                       | )          | (41,330,847 | ) | (30,804,989 | ) |
| Acquisitions of waste management operations                                                                                  |   | (214,545,084                      | )          | (44,029,297 | ) | (14,191,160 | ) |
| Initial development costs for newly  acquired permitted landfills                                                            |   | (6,018,195                        | )          | (340,466 | ) | (1,437,234 | ) |
| Capitalized interest                                                                                                         |   | (1,994,671                        | )          | (1,852,980 | ) | (1,601,635 | ) |
| Deferred costs associated with transactions  in process                                                                      |   | (130,396                          | )          | (557,265 | ) | (2,177,060 | ) |
| Net cash used in investing activities                                                                                        |   | (269,578,554                      | )          | (88,110,855 | ) | (50,212,078 | ) |
| **Financing  Activities**                                                                                                    |   |                              |       |   |   |   |   |
| Borrowings under long-term debt                                                                                              |   | 293,100,000                       |       | 217,800,000 |   | 23,800,000 |   |
| Payments on long-term debt                                                                                                   |   | (110,138,953                      | )          | (151,543,866 | ) | (56,415,262 | ) |
| Net proceeds from issuance of preferred  stock                                                                               |   | 48,018,328                        |       | — |   | 52,380,123 |   |
| Debt issue costs                                                                                                             |   | (6,277,202                        | )          | (7,525,327 | ) | (2,826,853 | ) |
| Payments on interest rate swap termination                                                                                   |   | —                            |       | (825,665 | ) | — |   |
| Net cash provided by financing activities                                                                                    |   | 224,702,173                       |       | 57,905,142 |   | 16,938,008 |   |
| Net increase (decrease) in cash and cash  equivalents                                                                        |   | 1,607,431                         |       | 418,342 |   | (2,901,262 | ) |
| Cash and cash equivalents at beginning of  year                                                                              |   | 2,589,726                         |       | 2,171,384 |   | 5,072,646 |   |
| Cash and cash equivalents at end of year                                                                                     |   | $                                 | 4,197,157  |   | $ | 2,589,726 |   | $ | 2,171,384 |   |
| **Supplemental  Disclosure**                                                                                                 |   |                              |       |   |   |   |   |
| Cash paid for interest                                                                                                       |   | $                                 | 18,889,438 |   | $ | 14,810,992 |   | $ | 11,516,830 |   |
| Cash paid for income taxes                                                                                                   |   | $                                 | 856,230    |   | $ | 674,027 |   | $ | 60,505 |   |
| **Noncash Investing  and Financing Activities**                                                                              |   |                              |       |   |   |   |   |
| Liability assumed in connection with  acquisition of business                                                                |   | $                                 | 44,801,000 |   | $ | — |   | $ | 1,200,000 |   |

 

See accompanying notes.

 

F-6

----

 

**IESI CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMEN****TS**

 

**1. Business and Organization**

 

IESI Corporation (IESI) is a Delaware holding company incorporated inMarch 1997. IESI and its subsidiaries (together, the Company) is aregional, integrated non-hazardous solid waste management company that providescollection, transfer, disposal, and recycling services to commercial,industrial and residential customers. The Company was formed in order to participatein the consolidation of the fragmented solid waste industry. The Company isexecuting this strategy through an acquisition program, which targetsbusinesses in two principal geographic regions, the Northeast and the SouthUnited States. The Company is currently operating in nine states: Arkansas,Louisiana, Maryland, Missouri, New Jersey, New York, Oklahoma, Pennsylvania,and Texas.

 

**2. Summary of Significant Accounting Policies**

 

**Basis of Presentation**

 

The accompanying consolidated financial statements include the accountsof IESI and its subsidiaries. All significant inter-company accounts andtransactions have been eliminated.

 

**Use of Estimates**

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the amounts reported in the financial statements andrelated notes. Actual results could differ from these estimates andassumptions.

 

As it relates to estimates and assumptions in rates per ton, significantengineering and accounting input is required. The Company reviews theseestimates and assumptions not less than annually. In many circumstances, theultimate outcome of the estimates and assumptions may not be known for decadesinto the future. Actual results could differ materially from these estimatesand assumptions due to changes in environmental-related regulations, changes infuture operational plans, and inherent imprecision associated with estimatingenvironmental matters so far into the future.

 

**New Accounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Board (FASB)issued SFAS No. 143, “Accounting for Asset Retirement Obligations.”  SFAS No. 143 applies to all legallyenforceable obligations associated with the retirement of tangible long-livedassets and provides the accounting and reporting requirements for suchobligations.  SFAS No. 143 requiresamounts initially recognized as an asset retirement obligation to be measured atfair value.  The recognized asset retirementcost is capitalized as part of the cost of the asset and is depreciated overthe useful life of the asset.  TheCompany adopted SFAS No. 143 effective January 1, 2003.

 

We have adopted SFAS No. 143 as of January 1, 2003 and recordedapproximately $1,500,000 as a cumulative effect of a change in accountingprinciple.  The adoption of SFAS No. 143had no impact on our cash flow.

 

F-7

----

 

The following table summarizes the impact of our initial adoption of SFASNo. 143 on our landfill and environmental liabilities.  The table also includes our landfill andenvironmental remediation liabilities as of January 1, 2002 computed on apro forma basis as if the provisions of SFAS No. 143 had been applied duringall periods effected:

 
|                                                      |   | **Balance at  December 31,  2002** |       | **Change** |   | **Balance at  January 1, 2003** |   | **Pro Forma  Balance at January  1, 2002(1)** |       |
|-----------------------------------------------------------|--------|-----------------------------------------|------------|------------|--------|--------------------------------------|--------|-----------------------------------------------|------------|
| Landfill closure/post closure liabilities                 |   | $                                       | 10,853,142 |       | $      | (1,864,496                           | )      | $                                             | 8,988,646  |   | $ | 6,625,859 |   |
| Environmental remediation liabilities                     |   | 1,686,176                               |       | 232,534    |   | 1,981,710                            |   | 2,305,417                                     |       |
|                                                      |   |                                    |       |       |   |                                 |   |                                          |       |
| Total landfill and environmental  remediation liabilities |   | $                                       | 12,539,318 |       | $      | (1,631,962                           | )      | $                                             | 10,907,356 |   | $ | 8,931,276 |   |

 

----

(1)          The pro forma computations have beenperformed based on assumptions and interest rates at January 1, 2003, thedate of adoption of SFAS No. 143.

 

The following table summarizes the pro forma impact to income (loss)before cumulative effect of change in accounting principle for the years endedDecember 31, 2003, 2002 and 2001 of the accounting change implementedbeginning January 1, 2003:

 
|                                                                                |   | **Year Ended  December 31,** |       |
|-------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                |   | **2003**                          |       | **2002** |   | **2001** |   |
| Reported income (loss) before cumulative  effect of change in accounting principle  |   | $                                 | (4,142,550 | ) | $ | 605,507 |   | $ | 2,246,899 |   |
| Adoption of SFAS No. 143, net of tax                                                |   | —                            |       | (467,331 | ) | (301,376 | ) |
| Pro forma income (loss) before cumulative  effect of change in accounting principle |   | $                                 | (4,142,550 | ) | $ | 138,176 |   | $ | 1,945,523 |   |

 

The application of SFAS No. 143 increased loss before cumulative effectof changes in accounting principle for the year ended December 31, 2003 byapproximately $391,000, net of tax.

 

The following table summarizes the impact on income from operations ofapplying the provisions of SFAS No. 143 on income before cumulative effect ofchange in accounting principle for the year ended December 31, 2003.

 
|                               |   | **Year Ended  December 31,  2003** |    |
|------------------------------------|--------|-----------------------------------------|---------|
| Increase to operating expense      |   | $                                       | 189,000 |   |
| Increase to depletion expense      |   | 202,000                                 |    |
| Decrease to income from operations |   | $                                       | 391,000 |   |

 

SFAS No. 143, which primarily impacts the accounting for our landfilloperations, does not change the basic landfill accounting followed historicallyby us along with others in the waste industry. In general, the waste industry has recognized expenses associated withboth amortization of capitalized costs and future closure and post-closureobligations on a units-of-consumption basis as airspace is consumed over thelife of the related landfill.  Thispractice, referred to as life cycle accounting within the waste industry isstill being followed, except as discussed below.

 

Under the new rules, costs associated with future final cappingactivities that occur during the operating life of a landfill, which werepreviously recognized on an undiscounted basis over the operating life of thelandfill as airspace is consumed, are now accounted for as an asset retirementobligation, on a discounted basis.  Werecognize landfill retirement obligations that relate to closure and post-closureactivities over the operating life of a landfill as landfill airspace isconsumed and the obligation is incurred. We recognize our final capping obligations on a discrete basis for eachexpected future final capping event over the number of tons of waste that eachfinal capping event is expected to cover. These obligations are initially measured at estimated fair value.  Fair value is measured on a present valuebasis, using a credit-adjusted, risk-free rate, of 10.25% during 2003.  Accretion expense is recorded on alllandfill retirement obligations using the effective interest method.  Landfill retirement costs arising fromclosure and post-closure obligations are capitalized as part of the landfillasset and amortized using our

 

F-8

----

 

existing landfill accounting practices.  Landfill retirement costs arising from final capping obligations,which are also capitalized as part of the landfill asset, are amortized on aunits-of-consumption basis over the number of tons of waste that each finalcapping event covers.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costsassociated with exit or disposal activities, such as restructurings,involuntarily terminating employees and consolidating facilities.  SFAS No. 146 excludes from its scope exitand disposal activities conducted in connection with a business combination andthose activities to which SFAS Nos. 143 and 144 are applicable.  SFAS No. 146 is effective for exit anddisposal activities that are initiated after December 31, 2002.  The adoption of this statement did not havea material effect on the consolidated financial position or results ofoperations.

 

In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 elaborates on the disclosuresthat a guarantor should make in its interim and annual financial statementsregarding its obligations relating to the issuance of certain guarantees.  It also requires a guarantor to recognize,at the time it issues a guarantee, a liability for the fair value of theobligation undertaken in issuing the guarantee.  FIN 45 provides specific guidance identifying thecharacteristics of contracts that are subject to its guidance and it alsoprovides for scope exceptions from the guidance in its entirety and from onlythe initial recognition and measurement provisions.  The recognition and measurement provisions of FIN 45 applyon a prospective basis to guarantees issued or modified after December 31,2002, regardless of the guarantor’s fiscal year end.  The disclosure requirements of FIN 45 are effective forinterim and annual period financial statements ending after December 15,2002.  The Company’s adoption of FIN 45did not have a material impact on its financial position, results of operationsor disclosure requirements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities andEquity.”  SFAS No. 150 establishesstandards for classifying and measuring certain financial instruments withcharacteristics of both liabilities and equity.  SFAS No. 150 is effective for financial instruments entered intoor modified after May 31, 2003, and otherwise is effective at the beginning ofthe first interim period beginning after June 15, 2003.  In November 2003, the FASB issued anFASB Staff Position delaying the effective date for certain instruments andentities.  SFAS No. 150 had no impact onour consolidated financial statements.

 

**Cash and Cash Equivalents**

 

Cash and cash equivalents include cash on deposit and highly liquid investmentswith original maturities of three months or less.

 

**Concentrations of Credit Risk**

 

The Company provides services to commercial, industrial, municipal, andresidential customers. Financial instruments that potentially subject theCompany to concentrations of credit risks consist primarily of accountsreceivable from these customers. Credit risk on accounts receivable isminimized as a result of the large and diverse nature of the Company’s customerbase. The Company performs ongoing credit evaluations of its customers, butgenerally does not require collateral to support accounts receivable.  Credit losses are provided for in thefinancial statements.

 

One customer accounted for approximately 11%, 14% and 15% of theCompany’s services revenue for the periods ended December 31, 2003, 2002and 2001, respectively. At December 31, 2003 and 2002, this same customeraccounted for approximately 20% and 30%, respectively, of accounts receivable.

 

F-9

----

 

**Accounts Receivable**

 

The Company’s accounts receivable are recorded when billed, advanced oraccrued and represent claims against third parties that will be settled incash.  The carrying value of the tradereceivables, net of the allowance for doubtful accounts, represents theirestimated net realizable value.  TheCompany estimates the allowance for doubtful accounts based on historicalcollection trends, type of customer, such as municipal or non-municipal, theage of outstanding trade receivables and existing economic conditions.  If circumstances indicate that specificaccounts receivable balances may be impaired, further consideration is given tothe collectibility of those balances and the allowance is adjusted accordingly.  Past-due trade receivable balances arewritten-off when the Company’s internal collection efforts have beenunsuccessful in collecting the amount due. Credit losses have been withinmanagement’s expectations.

 

Following is a summary of the Company’s allowance for doubtful accountsfor fiscal 2003, 2002 and 2001:

 
|                                    |   | **Year Ended  December 31,** |      |
|-----------------------------------------|--------|-----------------------------------|-----------|
|                                    |   | **2003**                          |      | **2002** |   | **2001** |   |
| Allowance for doubtful accounts         |   |                              |      |   |   |   |   |
| Balance at beginning of year            |   | $                                 | 941,000   |   | $ | 939,000 |   | $ | 1,293,000 |   |
| Additions charged to income             |   | 3,003,000                         |      | 962,000 |   | 1,234,000 |   |
| Additions from acquisitions             |   | 151,000                           |      | 225,000 |   | 50,000 |   |
| Balances written off, net of recoveries |   | (1,698,000                        | )         | (1,185,000 | ) | (1,638,000 | ) |
| Balance at end of year                  |   | $                                 | 2,397,000 |   | $ | 941,000 |   | $ | 939,000 |   |

 

**Property and Equipment**

 

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

 

The Company revises the estimated useful lives of property andequipment acquired through business acquisitions to conform with its’ policiesregarding property and equipment. Depreciation is calculated on thestraight-line method over the estimated useful lives of the related assetswhich generally range from three to five years for furniture and fixtures andcomputer equipment, five to 10 years for containers, compactors, trucksand collection equipment, and 10 to 40 years for buildings andimprovements. The Company assumes no salvage value for its depreciable propertyand equipment. Depreciation expense on property and equipment was approximately$21,441,000, $16,550,000 and $13,443,000 during 2003, 2002 and 2001,respectively.

 

Landfills and landfill improvements are stated at cost and are depletedbased on consumed airspace. Landfill improvements include direct costs incurredto obtain landfill permits and direct costs incurred to construct and developthe site. All indirect landfill development costs are expensed as incurred.Depletion expense was approximately $15,788,000, $8,085,000 and $6,988,000during 2003, 2002 and 2001, respectively.

 

Interest is capitalized on certain projects under development includinglandfill projects and probable landfill expansion projects, and on certainassets under construction, including operating landfills. The capitalization ofinterest for operating landfills is based on the costs incurred on discretecell construction projects. Interest capitalized was approximately $1,995,000,$1,853,000 and $1,602,000 during 2003, 2002 and 2001, respectively.

 

F-10

----

 

Property and equipment consisted of the following at December 31:

 
|                                        |   | **2003**    |        | **2002**    |   |
|---------------------------------------------|--------|-------------|-------------|-------------|--------|
| Land                                        |   | $           | 9,189,881   |        | $      | 4,428,264 |   |
| Landfills                                   |   | 389,028,075 |        | 153,067,613 |   |
| Vehicles                                    |   | 90,346,853  |        | 72,693,739  |   |
| Containers and compactors                   |   | 52,677,979  |        | 45,021,821  |   |
| Machinery and equipment                     |   | 33,085,294  |        | 20,199,485  |   |
| Buildings and improvements                  |   | 18,722,952  |        | 15,535,880  |   |
| Furniture and office equipment              |   | 5,826,441   |        | 4,397,468   |   |
|                                        |   | 598,877,475 |        | 315,344,270 |   |
| Less accumulated depreciation and depletion |   | 110,217,625 |        | 73,474,732  |   |
|                                        |   | $           | 488,659,850 |        | $      | 241,869,538 |   |

 

**Landfill Accounting**

 

Effective January 1, 2003, our method of accounting for landfillfinal capping, closure and post-closure changed as a result of our adoption ofSFAS No. 143.  With the exception of theaccounting for capitalized and future landfill final capping costs, SFAS No.143 does not change basic life-cycle accounting.  The table below compares our historical practices to the method prescribedby SFAS No. 143.

 
| **Description**  |   | **Previous  Definition**                                                                                                                                                                                                                   |   | **Definition  Under  SFAS No. 143** |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|
|             |   |                                                                                                                                                                                                                                       |   |                                     |
| **Definitions:** |   |                                                                                                                                                                                                                                       |   |                                     |
|             |   |                                                                                                                                                                                                                                       |   |                                     |
| Final Capping    |   | Included installation of flexible membrane and geosynthethic clay  liners, drainage and compacted soil layers and topsoil constructed over areas  of landfill where total airspace capacity has been consumed.                             |   | No change.                               |
|             |   |                                                                                                                                                                                                                                       |   |                                     |
| Closure          |   | Included last final capping event, final portion of methane gas  collection system to be constructed, demobilization, and the routine maintenance  costs incurred after site ceases to accept waste, but prior to being  certified closed. |   | No change.                               |
|             |   |                                                                                                                                                                                                                                       |   |                                     |
| Post-closure     |   | Included routine monitoring and maintenance of a landfill after it  has closed, ceased to accept waste and been certified as closed by the  applicable state regulatory agency.                                                            |   | No change.                               |

 
| **Description**    |   | **Previous  Practice** |   | **Practice  Under SFAS No. 143**                      |
|--------------------|--------|------------------------|--------|-------------------------------------------------------|
|               |   |                   |   |                                                  |
| **Discount Rate:** |   | None.                  |   | Credit-adjusted, risk-free rate (10.25% during 2003). |

 

F-11

----

 
| **Description**                      |   | **Previous  Practice**                                                                                                                                                                                                |   | **Practice  Under SFAS No. 143**                                                                                                                                                                                                                                                                             |
|--------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
| **Cost Estimates:**                  |   | Cost were estimated based on performance, principally by third  parties, with a small portion performed by us.                                                                                                        |   | No change, except that the cost of any activities performed  internally must be increased to represent an estimate of what a third party  would charge to perform such activity.                                                                                                                             |
|                                 |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
| **Inflation:**                       |   | Not applicable.                                                                                                                                                                                                       |   | 2.5% during 2003, based on the prior 10 year average.                                                                                                                                                                                                                                                        |
|                                 |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
| **Recognition of Liability:**        |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
|                                 |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
| Final Capping                        |   | Costs were capitalized as spent, except for the last final capping  event that occurs after the landfill closes, which was accounted for as part  of closure.                                                         |   | All final capping is recorded as a liability and asset when  incurred;  the discounted cash flow  associated with each final capping event is recorded to the accrued liability  with a corresponding increase to landfill assets as airspace is consumed  related to the specific final capping event. |
|                                 |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
| Closure and post-closure             |   | Accrued over the life of the landfill, the undiscounted cash flow  associated with such liabilities was recorded to accrued liabilities, with a  corresponding charge to cost of operations as airspace was consumed. |   | Accrued over the life of the landfill;  the discounted cash flow associated with such liabilities is  recorded to accrued liabilities, with a corresponding increase in landfill  assets as airspace is consumed.                                                                                       |
|                                 |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
| **Statement of Operations Expense:** |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
|                                 |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
| Liability accrual                    |   | Expense charged to cost of operations at same amount accrued to  liability.                                                                                                                                           |   | Not applicable.                                                                                                                                                                                                                                                                                              |
|                                 |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
| Landfill asset amortization          |   | Not applicable.                                                                                                                                                                                                       |   | The landfill asset is amortized to depreciation, depletion and  amortization expense as airspace is consumed over life of specific final  capping event or life of landfill for closure and post-closure.                                                                                                    |
|                                 |   |                                                                                                                                                                                                                  |   |                                                                                                                                                                                                                                                                                                         |
| Accretion                            |   | Not applicable.                                                                                                                                                                                                       |   | Expense, charged to cost of operations, is accreted at  credit-adjusted, risk-free rate (10.25% during 2003) under the effective  interest method.                                                                                                                                                           |

 

**Goodwill and Other Intangible Assets**

 

Intangible assets consist primarily of the cost of acquired businessesin excess of the fair value of net assets acquired (goodwill). In accordancewith SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets” (SFASNo. 142), the Company did not amortize goodwill that arose from purchases of

 

F-12

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businesses after June 30, 2001. Through December 31, 2001,the Company continued the amortization of goodwill that was recorded prior toJuly 1, 2001.  Amortization ofgoodwill ceased on January 1, 2002.

 

The following table presents the effect on net income (loss), asreported, of the non-amortization provisions of SFAS No. 142 had suchprovisions been in effect as of the beginning of each year presented.  The amortization expense and adjusted netincome (loss) for the three years ended December 31, 2003 is as follows: 

 
|                          |   | **Year Ended  December 31,** |       |
|-------------------------------|--------|-----------------------------------|------------|
|                          |   | **2003**                          |       | **2002** |   | **2001** |   |
| Net income (loss) as reported |   | $                                 | (7,841,148 | ) | $ | 605,507 |   | $ | 2,246,899 |   |
| Amortization, net of tax      |   | —                            |       | — |   | 2,153,065 |   |
| Adjusted net income (loss)    |   | $                                 | (7,841,148 | ) | $ | 605,507 |   | $ | 4,399,964 |   |

 

Other intangibles consist of values assigned to customer lists andcovenants not-to-compete, costs incurred to obtain debt financing and otherseparately identifiable intangible assets. Other intangibles are recorded at cost and, except for debt issue costs,amortized over periods ranging from five to seven years, computed on thestraight-line method. Amortization expense was approximately $3,850,000$3,214,000 and $5,291,000 during 2003, 2002 and 2001, respectively. The Companydefers costs incurred in obtaining debt and amortizes, as additional interestexpense, these costs over the term of the related debt using the effectiveinterest method.  Debt issue costamortization was approximately $2,531,000 $2,386,000 and $1,543,000 during2003, 2002 and 2001, respectively. Other intangible assets consisted of the following at December 31:

 
|                          |   | **2003**   |       | **2002**   |   |
|-------------------------------|--------|------------|------------|------------|--------|
| Customer lists                |   | $          | 23,707,139 |       | $      | 14,033,330 |   |
| Noncompetition agreements     |   | 7,277,689  |       | 7,195,483  |   |
| Debt issue costs              |   | 22,007,533 |       | 15,900,865 |   |
| Other                         |   | 951,088    |       | 1,033,983  |   |
|                          |   | 53,943,449 |       | 38,163,661 |   |
| Less accumulated amortization |   | 20,957,286 |       | 15,497,384 |   |
|                          |   | $          | 32,986,163 |       | $      | 22,666,277 |   |

 

The Company assesses whether goodwill is impaired on an annualbasis.  Upon determining the existenceof goodwill impairment, the Company measures that impairment based on theamount by which the book value of goodwill exceeds its implied fair value.  The implied fair value of goodwill isdetermined by deducting the fair value of a reporting unit’s identifiableassets and liabilities from the fair value of the reporting unit as a whole, asif that reporting unit had just been acquired and the purchase price were beinginitially allocated.  The Company'sreporting units are consistent with its reportable segments.  Additional impairment assessments may beperformed on an interim basis if the Company encounters events or changes incircumstances that would indicate, more likely than not, the book value ofgoodwill has been impaired.

 

On an ongoing basis, management reviews the valuation and amortizationof other intangible assets with consideration toward recovery through futureoperating results.  The Company periodicallyevaluates the value and future benefits of its other intangible assets.  The Company assesses recoverability fromfuture operations using cash flows of the related acquired business asmeasures. In accordance with SFAS No. 144, Accounting for the Impairmentor Disposal of Long-Lived Assets, the carrying value would be reduced toestimated fair value if it becomes probable that the Company’s estimate forexpected future cash flows of the related business would be less than thecarrying amount of the related intangible

 

F-13

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assets. There have been no adjustments to the carrying amount ofintangible assets resulting from these evaluations during the three years endedDecember 31, 2003.

 

Scheduled estimated amortization of other intangible assets is asfollows:

 
| 2004       |   | $         | 7,527,000  |   |
|------------|--------|-----------|------------|--------|
| 2005       |   | 6,455,000 |       |
| 2006       |   | 5,303,000 |       |
| 2007       |   | 4,903,000 |       |
| 2008       |   | 3,783,000 |       |
| Thereafter |   | 5,015,000 |       |
|       |   | $         | 32,986,000 |   |

 

**Accrued Expenses and Other CurrentLiabilities**

 

The following is a summary of accrued expenses and other currentliabilities at December 31:

 
|                                                    |   | **2003**  |       | **2002**  |   |
|---------------------------------------------------------|--------|-----------|------------|-----------|--------|
| Acquisition related accrued liabilities                 |   | $         | 1,489,429  |      | $      | 2,740,190 |   |
| Interest                                                |   | 2,104,923 |       | 1,169,589 |   |
| Accrued payroll and other employee related  liabilities |   | 3,613,059 |       | 2,663,757 |   |
| Accrued insurance liabilities                           |   | 5,062,902 |       | 2,874,036 |   |
| Other                                                   |   | 5,242,212 |       | 3,940,306 |   |
|                                                    |   | $         | 17,512,525 |      | $      | 13,387,878 |   |

 

**Revenue Recognition**

 

Revenue is recognized as services are provided to customers. Certaincustomers are billed in advance and, accordingly, recognition of the relatedrevenue is deferred until the services are provided.

 

**Advertising Costs**

 

All advertising costs are expensed when paid. Advertising costs were$610,000, $512,000 and $381,000 in 2003, 2002 and 2001, respectively.

 

**Income Taxes**

 

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

 

**Stock-Based Compensation**

 

The Company accounts for stock option grants to employees using theintrinsic value method in accordance with the Accounting Principles BoardOpinion No. 25 (APB No. 25), Accounting for Stock Issued toEmployees, and related interpretations. The Company grants stock options for afixed number of shares to employees with stock option exercise prices equal tothe fair value of the shares on the date of grant and, accordingly, recognizesno compensation expense for the stock option grants.

 

F-14

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The following schedule reflects the impact on net income if theCompany had applied the fair value recognition provisions of SFAS No. 123 tostock based employee compensation:

 
|                                                     |   | **2003** |       | **2002** |   | **2001** |   |
|----------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
|                                                     |   |     |       |     |   |     |   |
| Net income (loss):                                       |   |     |       |     |   |     |   |
| As reported                                              |   | $        | (7,841,148 | )        | $      | 605,507  |   | $ | 2,246,899 |   |
| Less: compensation expense per SFAS No.  123, net of tax |   | (149,859 | )          | (58,970  | )      | (134,766 | )      |
| Pro forma net income (loss) for SFAS No.  123            |   | $        | (7,991,007 | )        | $      | 546,537  |   | $ | 2,112,133 |   |

 

The effects of applying SFAS No. 123 in the pro forma disclosuremay not be indicative of future amounts as additional option grants in futureyears are anticipated.

 

**Risks and Uncertainties**

 

The Company’s business could be impacted by federal and statelegislative changes in the area of environmental policy. As ofDecember 31, 2003, management believes that the Company has no significantrisk of a near-term severe impact resulting from such changes.

 

**Fair Values of Financial Instruments**

 

The Company’s financial instruments consist primarily of cash, tradereceivables, trade payables, debt instruments, and interest rate swaps. Thecarrying values of cash, trade receivables, and trade payables are consideredto be representative of their respective fair values.  At December 31, 2003, the carrying amount of the Company’sSenior Subordinated Notes due 2012, issued in June 2002 (SeniorSubordinated Notes), excluding $999,000 related to the fair value of theCompany’s interest rate swaps, was $150,000,000.  The fair value of such debt was estimated at $166,500,000.  The fair value is based on quoted marketprices.  The carrying values of theCompany’s revolving credit loan and other debt instruments approximate theirfair values as of December 31, 2003 and 2002, based on current incrementalborrowing rates for similar types of borrowing arrangements. The Company’sinterest rate swaps are recorded at their fair values based on estimated cashflows calculated using interest rate yield curves as of December 31, 2003.

 

**Derivative Financial Instruments**

 

From time to time, the Company uses derivatives to manage interest raterisk. The Company’s policy is to use derivatives for risk management purposesonly, which includes maintaining the ratio between the Company’s fixed andfloating rate debt obligations that management deems appropriate, and prohibitsentering into such contracts for trading purposes. To minimize credit risk, theCompany enters into derivatives only with counterparties (primarily financialinstitutions) which have substantial financial resources. The amount of gainsor losses from the use of derivative financial instruments has not been, and isnot expected to be, material to the Company’s financial statements.

 

In June 1998, the FASB issued SFAS No. 133, Accounting forDerivatives and Hedging Activities, which was amended by SFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities(an Amendment of FASB Statement 133), (collectively SFAS No. 133). SFASNo. 133 establishes accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts, and for hedging activities.

 

SFAS No. 133 requires the Company to recognize all derivatives onthe balance sheet at fair value. Derivatives that are not hedges must beadjusted to fair value through income. If the derivative is a

 

F-15

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hedge, depending on the nature of the hedge, changes in the fair valueof derivatives will either be offset against the change in fair value of thehedged assets, liabilities, or firm commitments through earnings or recognizedin other comprehensive income until the hedged item is recognized inearnings. The ineffective portion of a derivative’s change in fair value isimmediately recognized in earnings.

 

The Company has evaluated its derivativeinstruments, consisting solely of two interest rate swaps as of December 31,2003 effective through June 2012 and believes these instruments qualify forhedge accounting pursuant to SFAS No. 133.  Because the relevant terms of the interest rate swaps and thespecific cash flows related to the debts they have been designated to hedge arevirtually identical, there was no material ineffectiveness required to berecognized in earnings. In addition, there are no components of the derivativeinstruments’ gain or loss that have been excluded from the assessment of hedgeeffectiveness. The fair value of the Company’s interest rate swaps wasapproximately $999,000 at December 31, 2003 and has been included in thecarrying amount of the Senior Subordinated Notes and other assets in theconsolidated balance sheet.

 

**Reclassifications**

 

Certain reclassifications have been made inprior years’ financial statements to conform to the 2003 presentation.

 

**3.  Acquisitions**

 

All acquisitions were accounted for aspurchases and, accordingly, the operations of the acquired companies since theacquisition dates are included in the accompanying consolidated financialstatements.

 

**2003**

 

In October 2003, the Company acquired SenecaMeadows, Inc. (“SMI”), the owner and operator of the Seneca Meadows landfill(SML) for an aggregate purchase price of approximately $227,757,000 consistingof approximately $187,679,000 in cash and approximately $40,078,000 ofliabilities assumed (see Note 7). The Company funded the acquisition withapproximately $861,000 in cash, $138,800,000 in net borrowings (see Note 5) andnet proceeds of $48,018,000 from the issuance of Series E convertible preferredstock (see Note 9). Additionally, if certain permits are obtained increasingthe allowable daily disposal volume at the SML and specific average dailydisposal volume milestones are achieved at the SML, the Company will berequired to pay to SMI’s former shareholder $15,000,000 as additional purchaseprice.  In connection with theacquisition, the Company recorded approximately $5,000,000 of amortizingintangibles related to customer lists with generally two to seven yearamortization periods.

 

The following table summarizes the assets andliabilities recorded at the date of purchase for the SMI acquisition:

 

| **Assets**                                  |   |        | ** **  |
|---------------------------------------------|--------|-------------|-------------|
|                                        |   |        |        |
| Accounts receivable-trade, net of allowance |   | $           | 6,839,000   |   |
| Other current assets                        |   | 206,000     |        |
| Property and equipment                      |   | 215,712,000 |        |
| Other intangible assets                     |   | 5,000,000   |        |
|                                        |   |        |        |
| Total Assets                                |   | $           | 227,757,000 |   |
|                                        |   |        |        |
| **Liabilities**                             |   |        | ** **  |
|                                        |   |        |        |
| Accounts payable-trade                      |   | $           | 2,883,000   |   |
| Other current liabilities                   |   | 2,410,000   |        |
| Notes payable                               |   | 294,000     |        |
| Accrued environmental and landfill costs    |   | 34,015,000  |        |
| Other liabilities                           |   | 476,000     |        |
|                                        |   |        |        |
| **Total Liabilities**                       |   | $           | 40,078,000  |   |

 

F-16

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The following unaudited pro forma results ofoperations assume that the Company’s acquisition of SMI acquired in October2003 and accounted for using the purchase method of accounting, occurred as ofJanuary 1, 2002:

 

|                                                                      |   | **2003** |        | **2002** |   |
|---------------------------------------------------------------------------|--------|----------|-------------|----------|--------|
| Services revenue                                                          |   | $        | 290,432,000 |     | $      | 258,184,000 |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | $        | (4,660,000  | )        | $      | 3,427,000 |   |
| Net income (loss)                                                         |   | $        | (6,191,000  | )        | $      | 3,427,000 |   |

 

The unaudited pro forma results do notpurport to be indicative of the results of operations which actually would haveresulted had the acquisition occurred on January 1, 2002, nor are theynecessarily indicative of future operating results.

 

Additionally in 2003, the Company acquiredthe hauling and disposal assets of 14 other solid waste management companies andreal estate associated with an operating landfill for an aggregate purchaseprice of approximately $31,589,000 consisting of cash and liabilitiesassumed.  In connection with theacquisitions, the Company recorded approximately $8,523,000 of goodwill, ofwhich approximately $6,650,000 is expected to be deductible for tax purposes,and approximately $6,948,000 of amortizing intangible assets.  The amortizing intangible assets consist of$4,731,000 related to customer lists with generally two to seven yearamortization period and $2,285,000 related to non-competition agreements withgenerally two to five year amortization periods.  The pro forma effects of these 14 acquisitions are notsignificant to the Company’s operating results.

 

The allocation of the purchase price forcertain acquisitions closed during the current period are preliminary and willbe finalized upon completion of valuations of certain assets and liabilities,which the Company expects to occur by March 31, 2004.  Upon completion of such valuations, the Company may be requiredto reallocate a portion of such purchase price between assets andliabilities.  The Company does notbelieve any such reallocation will have a material effect on its consolidatedfinancial statements.

 

Also in 2003, the Company incurredapproximately $6,018,000 of development costs in connection with two“greenfield” landfills, which the Company purchased in 2002.  Bothlandfills included the land and the permit to operate.  However, unlikethe purchase of an operating landfill, neither greenfield landfill had incurredthe costs of development, which include the infrastructure of an operatinglandfill and initial cell.  Both landfills opened during year endedDecember 31, 2003.

 

**2002**

 

During the year, the Company acquired thehauling and disposal assets of 17 waste management companies and real estateassociated with planned landfill development and expansions.  The total purchase price of the 17 wastemanagement companies and real estate was approximately $46,996,000 consistingof cash and liabilities assumed.  TheCompany recorded approximately $20,744,000 of goodwill, of which approximately$5,291,000 is expected to be deductible for tax purposes, and approximately$5,359,000 of amortizing intangible assets related to the acquisition of the 17waste management companies.  Theamortizing intangible assets consist of $2,907,000****of customer lists with athree to eight year amortization period, $1,901,000 of non-compete agreementswith a two to five year

 

F-17

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amortization period and $551,000 other intangibles assets related tolong-term contracts with a seven to thirty-three year amortization period.

 

Certain of the acquisitions in 2002 containitems with the potential for the Company to pay contingent purchase price uponthe achievement of specific criteria, including specific monthly revenue levelsfor hauling assets and specific average daily volume levels at thelandfills.  As of December 31, 2002, theCompany accrued $2,370,000 of additional contingent purchase price payments,representing payments the Company considered probable.  During 2003, the Company paid approximately$1,760,000 of this additional contingent purchase price.  The remaining amount is expected to be paidduring 2004 and 2005.  An additional$11,000,000 of contingent purchase price payments was not accrued as ofDecember 31, 2003 as the occurrence of the specific criteria which would giverise to such payments was not considered probable.  These payments relate to volume levels at specific landfills andcould occur anytime during the remaining operating life of the specificlandfills.

 

The following unaudited pro forma results ofoperations assume that the Company’s acquisitions of the 17 waste managementcompanies acquired during the year and accounted for using the purchase methodof accounting, occurred as of January 1, 2001:

 

|             |   | **2002** |        | **2001** |   |
|------------------|--------|----------|-------------|----------|--------|
| Services revenue |   | $        | 224,934,000 |     | $      | 207,141,000 |   |
| Net income       |   | $        | 109,000     |     | $      | 414,000 |   |

 

The unaudited pro forma results do notpurport to be indicative of the results of operations which actually would haveresulted had the acquisition occurred on January 1, 2001, nor are theynecessarily indicative of future operating results.

 

Also in 2002, the Company incurred approximately$340,000 of development costs in connection with two “greenfield” landfills,which the Company purchased during 2002.  Both landfills included the landand the permit to operate.  However, unlike the purchase of an operatinglandfill, neither greenfield landfill had incurred the costs of development,which include the infrastructure of an operating landfill and initialcell.  Both landfills opened during year ended December 31, 2003.

 

**2001**

 

In June 2001, the Company acquired theassets of Capital City Roll-Offs, Inc. (Capital). The approximate totalpurchase price of Capital was $1,644,000 consisting of cash and liabilitiesassumed.

 

The following unaudited pro forma results ofoperations assume that the Company’s acquisition of Capital, accounted forusing the purchase method of accounting, occurred as of January 1, 2001:

 

|              |   | **Year Ended  December 31,  2001** |        |
|-------------------|--------|-----------------------------------------|-------------|
| Services revenue  |   | $                                       | 186,402,079 |   |
| Net income (loss) |   | $                                       | 2,300,564   |   |

 

The unaudited pro forma results do notpurport to be indicative of the results of operations which actually would haveresulted had the acquisition occurred on January 1, 2001, nor are theynecessarily indicative of future operating results.

 

During the year, the Company acquired theassets of 15 other waste management companies. The approximate total purchaseprice of the 15 waste management companies was $10,451,000, consisting of cashand liabilities assumed.

 

F-18

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In addition, during 2001, the Companyincurred approximately $1,437,000 of development costs in connection with a“greenfield” landfill, which the Company purchased in 1999.  The landfillincluded the land and the permit to operate.  However, unlike the purchaseof an operating landfill, the greenfield landfill had not incurred the costs ofdevelopment, which include the infrastructure of an operating landfill andinitial cell.  The landfill opened during the year ended December 31,2001.

 

**4.  Landfill and Accrued Environmental Costs**

 

The following is a roll-forward of amountsaccrued for final closure and post-closure costs and environmental costs: 

 
|                                                 |   | **Final  Closure/  Post-Closure  Costs** |       | **Environmental  Costs** |   | **Total**  |   |
|------------------------------------------------------|--------|------------------------------------------|------------|--------------------------|--------|------------|--------|
|                                                 |   |                                     |       |                     |   |       |   |
| Balance at December 31, 2000                    |   | $                                        | 9,439,354  |                     | $      | 3,132,166  |   | $ | 12,571,520 |   |
| Obligations incurred                                 |   | 465,779                                  |       | —                   |   | 465,779    |   |
| Obligations acquired through acquisitions            |   | 565,092                                  |       | —                   |   | 565,092    |   |
| Obligations settled                                  |   | (80,987                                  | )          | (921,247                 | )      | (1,002,234 | )      |
|                                                 |   |                                     |       |                     |   |       |   |
| Balance at December 31, 2001                    |   | $                                        | 10,389,238 |                     | $      | 2,210,919  |   | $ | 12,600,157 |   |
| Obligations incurred                                 |   | 358,487                                  |       | —                   |   | 358,487    |   |
| Obligations acquired through acquisitions            |   | 147,177                                  |       | —                   |   | 147,177    |   |
| Obligations settled                                  |   | (41,760                                  | )          | (524,743                 | )      | (566,503   | )      |
|                                                 |   |                                     |       |                     |   |       |   |
| Balance at December 31, 2002                    |   | $                                        | 10,853,142 |                     | $      | 1,686,176  |   | $ | 12,539,318 |   |
| Cumulative effect of change in accounting  principle |   | (1,864,465                               | )          | 232,534                  |   | (1,631,931 | )      |
| Obligations incurred                                 |   | 1,596,020                                |       | 70,780                   |   | 1,666,800  |   |
| Obligations acquired through acquisitions            |   | 8,928,303                                |       | 25,725,000               |   | 34,653,303 |   |
| Obligations settled                                  |   | (919,923                                 | )          | (375,618                 | )      | (1,295,541 | )      |
| Revisions in estimates                               |   | 219,303                                  |       | —                   |   | 219,303    |   |
| Accretion                                            |   | 1,116,529                                |       | 188,988                  |   | 1,305,517  |   |
|                                                 |   |                                     |       |                     |   |       |   |
| Balance at December 31, 2003                    |   | $                                        | 19,928,909 |                     | $      | 27,527,860 |   | $ | 47,456,769 |   |

 

**LifeCycle Accounting**

 

The Company uses life cycle accounting andthe units-of-consumption method to recognize certain landfill costs. In lifecycle accounting, all costs to acquire, construct, close and maintain a siteduring the post-closure period are capitalized or accrued and charged toexpense based upon the consumption of cubic yards or tons of availableairspace. Costs and airspace estimates are developed annually by independentengineers together with the Company’s engineer. These estimates are used by theCompany’s operating and accounting personnel to annually adjust the Company’srates used to expense capitalized costs and accrue closure and post-closurecosts. Changes in these estimates primarily relate to changes in availableairspace, inflation rates and applicable regulations. Changes in available airspaceprimarily include changes due to the addition of airspace lying in expansionareas deemed probable to be permitted.

 

**AirspaceAmortization and Final Closure / Post-Closure Rate Per Unit**

 

The Company expenses amounts for landfillairspace usage and landfill final closure and post-closure costs for each unitof waste accepted for disposal at its landfills. In determining the amount toexpense for each unit of waste accepted, the Company estimates the total costto develop each landfill site to its final capacity and the total final closureand post-closure costs for each landfill site. The Company’s

 

F-19

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engineers also estimate the capacity of the landfill. The expense foreach unit is then calculated based on the total costs remaining to be providedand the total remaining capacity. Estimates for projected landfill site costsand for final closure and post-closure costs are developed using input from theCompany’s engineers and accountants and are reviewed by management, typicallyat least once per year.

 

**TotalAvailable Disposal Capacity**

 

As of December 31, 2003, the Companyowned or operated 14 MSW landfills and three C&D landfills. Based onengineering estimates, the total available disposal capacity of 16 of suchlandfills is approximately 246,824,000 in-place cubic yards, which consists ofapproximately 127,438,000 in-place cubic yards of estimated permitted airspaceand approximately 119,386,000 in-place cubic yards of estimated additionalairspace deemed probable to be permitted. Additionally, the Company operates one landfill at which, pursuant tothe terms of the operating contract, the Company is not responsible forconstruction, closure and post-closure costs and, as a result, for which the Companyprepares no engineering estimates.

 

**Probableto be Permitted Expansion Airspace**

 

Before airspace included in an expansion areais determined as probable to be permitted and, therefore, included in theCompany’s calculation of total available disposal capacity, generally thefollowing criteria must be met:

 

1.                                       Theland associated with the expansion airspace is either owned by the Company orcontrolled by the Company pursuant to an option agreement;

 

2.                                       TheCompany is committed to supporting the expansion project financially and withappropriate resources;

 

3.                                       Thereare no identified fatal flaws or impediments associated with the project,including political impediments;

 

4.                                       Theexpansion is attainable within a three to five year time frame;

 

5.                                       Progressis being made on the project.

 

Upon meeting the Company’s expansioncriteria, the rates used for each applicable landfill to expense costs toacquire, construct, close and maintain a site during the post-closure periodare adjusted to include probable to be permitted airspace and all additionalcosts to be capitalized or accrued associated with the expansion airspace. Oncea landfill meets the Company’s expansion criteria, management continuouslymonitors each site’s progress in obtaining the expansion permit. If at anypoint it is determined that an expansion area no longer meets the requiredcriteria, the probable to be permitted airspace is removed from the landfill’stotal available capacity and the rates used at the landfill to expense costs toacquire, construct, close and maintain a site during the post-closure periodare adjusted accordingly. Additionally, the landfill’s future operations willtypically reflect lower profitability due to higher amortization rates, finalclosure and post-closure rates, and expenses related to the removal ofpreviously included expansion airspace. The landfill may also become subject toimpairment, which could be material to the results of operations of anyindividual reporting period.

 

**CapitalizedLandfill Costs**

 

Capitalized landfill costs includeexpenditures for land, operating agreements, permitting costs, cellconstruction costs and environmental structures. Capitalized permitting andcell construction costs are limited to direct costs relating to theseactivities, including legal, engineering and construction associated

 

F-20

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with excavation, liners and site berms. Interest is capitalized onlandfill construction projects while the assets are undergoing activities toready them for their intended use. Capitalized landfill costs, excluding the estimated residual value ofunpermitted land, are depleted as airspace is consumed using theunits-of-consumption method.  As ofDecember 31, 2003, the Company expected to spend an estimated additional$436,800,000 on existing landfills, primarily related to cell construction andenvironmental structures, over their expected remaining lives.

 

**Closureand Post-Closure Costs**

 

Landfill site closure and post-closure costsinclude estimated costs to be incurred for landfill capping events, finalclosure of the landfills and estimated costs for providing requiredpost-closure monitoring and maintenance of landfills. These costs are accruedas asset retirement obligations and charged to operations based upon consumedairspace in relation to total available disposal capacity using theunits-of-consumption method of amortization. The Company estimates future costrequirements for final closure and post-closure monitoring and maintenance forits solid waste facilities based on the technical standards of theEnvironmental Protection Agency’s Subtitle D regulations and applicable stateand local regulations. Reviews of the future requirements for closure andpost-closure monitoring and maintenance costs for the Company’s operatinglandfills are performed by the Company’s engineer and independent engineers atleast annually.  The total estimatedfuture payments related to landfill capping events, final closure andpost-closure monitoring and maintenance was estimated to be approximately$189,000,000 as of December 31, 2003.

 

A number of the Company’s landfills werepreviously operated by other entities. Accordingly, the Company assessed andrecorded a final closure and post-closure liability as of the date of thelandfill acquisition based upon the estimated total final closure andpost-closure costs and the percentage of total available disposal capacityutilized as of such date. Thereafter, the difference between the final closureand post-closure costs accrued and the total estimated final closure andpost-closure costs to be incurred are accrued as asset retirement obligationsand charged to expense as the remaining airspace is consumed. Estimatedaggregate final closure and post-closure costs will be fully accrued for theCompany’s landfills at the time such facilities cease to accept waste and areclosed.

 

The Company pays annual premiums to obtainperformance bonds underwritten by a large insurance carrier, which support theCompany’s financial assurance obligations for its facilities’ closure andpost-closure costs. These premiums are expensed as incurred.

 

**5.  Long-Term Debt**

 

Long-term debt consisted of the following atDecember 31: 

 

|                                        |   | **2003**    |        | **2002**    |   |
|---------------------------------------------|--------|-------------|-------------|-------------|--------|
|                                        |   |        |        |        |   |
| Revolving credit loan                       |   | $           | 29,600,000  |        | $      | 46,400,000 |   |
| Term loan                                   |   | 200,000,000 |        | —      |   |
| Senior subordinated notes due June 15, 2012 |   | 150,998,599 |        | 151,964,430 |   |
| Other                                       |   | 262,389     |        | 206,796     |   |
| Total long-term debt                        |   | 380,860,988 |        | 198,571,226 |   |
| Less current portion                        |   | 2,731,595   |        | 184,825     |   |
|                                        |   | $           | 378,129,393 |        | $      | 198,386,401 |   |

 

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Scheduled maturities of long-term debt are asfollows:

 

| 2004       |   | $           | 2,731,595   |   |
|------------|--------|-------------|-------------|--------|
| 2005       |   | 2,030,794   |        |
| 2006       |   | 2,000,000   |        |
| 2007       |   | 2,000,000   |        |
| 2008       |   | 31,600,000  |        |
| Thereafter |   | 339,500,000 |        |
|       |   | $           | 379,862,389 |   |

 

On October 10, 2003, the Company entered intothe Fifth Amended and Restated Revolving Credit and Term Loan Agreement (theCredit Facility).  The Credit Facilityis provided by a syndicate of lenders led by Fleet National Bank, asadministrative agent (Fleet), and LaSalle National Bank Association, assyndication agent, and includes a $200,000,000 senior secured term loan, a$200,000,000 senior secured revolving loan and has a maximum of$80,000,000 letters of credit sub-limit. Subject to certain conditions, the Company may request an increase inthe revolving loan portion or the term loan portion of the Credit Facility ofup to $50,000,000 such that the total of the revolving loan and term loanportions would equal $450,000,000.  Asof December 31, 2003, there was $29,600,000 (excluding $49,100,000underlying letters of credit) outstanding under the revolving loan portion ofthe Credit Facility and $121,300,000 of remaining capacity (of which$29,408,000 was immediately available for borrowing) under the revolving loanportion, plus a maximum of $30,800,000 underlying letters of credit.  In order to borrow under the revolving loanportion of the Credit Facility, the Company must satisfy customary conditionsincluding maintaining certain financial ratios.  If a default under the indenture governing the Notes (“Notes”) orCredit Facility should occur, the holders of our Notes or the lenders under theCredit Facility could elect to declare all amounts borrowed to be immediatelydue and payable.  Furthermore, thiscould result in all amounts borrowed under other instruments, including theindenture governing our Notes or the Credit Facility, that containcross-acceleration or cross-default provisions being declared immediately dueand payable and the lenders could terminate all commitments there under.  The Credit Facility is secured by a pledgeof the stock of the Company’s direct and indirect subsidiaries and a lien onsubstantially all of the Company’s direct and indirect subsidiaries’ assets.  The Credit Facility also contains covenantswhich restrict the Company’s ability to, among other things, incur additionaldebt, create liens, dispose of assets, make investments, engage in transactionswith affiliates, enter into a merger or consolidation, make specified payments,including dividends, and enter into certain franchise agreements.  These limitations are subject to certainqualifications and exceptions.

 

Pursuant to the terms of the Credit Facility,each year, commencing on October 1 and ending on September 30, the Company isrequired to repay 1.0% (except for the 12-month period prior to maturity whenit is required to repay 94.0%) of the principal amount of the term loan portionof its senior credit facility in quarterly installments payable on the lastbusiness day of each calendar quarter. In addition, the Company’s senior credit facility requires it to prepaythe term loan with, subject to certain conditions and exceptions, 100.0% of thenet cash proceeds it receives from any disposition of assets in excess of$5.0 million in the aggregate per year, 100.0% of the net cash proceeds itreceives from the incurrence of any permitted indebtedness (other than up to$100.0 million of additional subordinated indebtedness) and 50.0% of the netcash proceeds it receives in connection with any issuance of the Company’sequity (other than equity the Company issues (i) in an aggregate amount not toexceed $100.0 million, (ii) as payment in a permitted acquisition or (iii)to employees, consultants or directors in connection with the exercise ofoptions under bona fide option plans). The Company is also required to prepay the term loan with the percentageof excess consolidated operating cash flow (to be calculated for the periodfrom October 1, 2003 through December 31, 2003 and for each fiscal yearthereafter, and which includes, generally, consolidated EBITDA, plus or minusnet working capital changes and extraordinary cash items, less the sum of(a) capital expenditures, (b)  the cash purchase price of anypermitted acquisitions, (c)  cash payments for taxes, (d) cashpayments of interest and (e)  the scheduled principal repayments ofindebtedness, in each case of clauses (a) through (e), paid during such period)corresponding to the applicable leverage ratio set forth below:

 

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

 

In the period of October 1, 2003 throughDecember 31, 2003, we performed the calculation and determined that no paymentwas due for the period.

 

The Credit Facility permits borrowings atfloating interest rates based, at the Company’s option, on the designatedEurodollar interest rate, which generally approximates LIBOR, or the Fleetprime rate, in each case, plus an applicable margin, and requires payment of anannual commitment fee based on the unused portion of the revolving loan portion.  As of December 31, 2003, the interestrate applicable to $25,000,000 outstanding under the revolving loan portion ofthe Company’s senior credit facility was LIBOR plus 325 basis points, or 4.41%,and the interest rate applicable to the remaining balance of $4,600,000outstanding there under was Fleet’s prime rate plus 100 basis points, or5.25%.  As of December 31, 2003,the interest rate applicable to $100,000,000 outstanding under the term loanportion of its senior credit facility was LIBOR plus 300 basis points, or4.25%, and the interest rate applicable to the remaining balance of$100,000,000 outstanding there under was Fleet’s prime rate plus 75 basispoints, or 5.00%.  The revolving loanportion of the Credit Facility expires on September 30, 2008 and the termloan portion of the Credit Facility expires on September 30, 2010.

 

On June 12, 2002, the Company issued$150,000,000 of 10.25% Senior Subordinated Notes due 2012 (the Notes) in aprivate placement.  Interest is payablesemi-annually on June 15th and December 15th. In December 2002, the Company filed a registration statement under theSecurities Act of 1933, as amended, to register new 10.25% Senior SubordinatedNotes due 2012 (Exchange Notes) and to offer to exchange the Exchange Notes forthe Notes.  The net proceeds from theoffering of the Notes were approximately $144,000,000, after deducting theinitial purchasers’ discounts and other expenses of the offering.  The Company used $142,800,000 of theseproceeds to repay amounts under the term loan and revolving credit loanportions of its credit facility.  Uponrepayment of the term loan portion of its credit facility, the Company expensedapproximately $586,000 of debt issue costs related to the term loan portion ofits credit facility during the year ended December 31, 2002.  In addition, the Company terminated threeinterest rate swap agreements in advance of the contract termination dates. TheCompany recorded a loss on the early termination of the interest rate swapagreements of approximately $826,000 during the year ended December 31, 2002.

 

The Notes are guaranteed by all of IESI’scurrent subsidiaries, all of which are 100% owned by IESI.  Condensed consolidating financialinformation is not provided as IESI has no independent assets or operations,the subsidiary guarantees are full and unconditional and joint and several andthere are no significant restrictions on the ability of the Company or anysubsidiary guarantor to obtain funds from its subsidiaries by dividend or loan.

 

In August 2002, the Company entered intotwo interest rate swap agreements, which are effective through June 15, 2012,with two financial institutions.  Undereach swap agreement, the fixed interest rate on $25,000,000 of the SeniorSubordinated Notes effectively was converted to an interest rate of 5.275% and5.305%, respectively, plus an applicable floating rate margin that is based onsix month LIBOR which is readjusted semiannually on June 15 and December 15 ofeach year.

 

F-23

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**6.  Income Taxes**

 

The provision for income taxes for each ofthe last three years consists of: 

 

|     |   | **2003**  |      | **2002**  |   | **2001**  |   |
|----------|--------|-----------|-----------|-----------|--------|-----------|--------|
|     |   |      |      |      |   |      |   |
| Federal: |   |      |      |      |   |      |   |
| Current  |   | $         | —    |      | $      | —    |   | $ | — |   |
| Deferred |   | 2,469,659 |      | 3,026,884 |   | 376,611   |   |
| State:   |   |      |      |      |   |      |   |
| Current  |   | 1,031,230 |      | 439,923   |   | 294,609   |   |
| Deferred |   | 203,072   |      | 259,447   |   | 32,281    |   |
|     |   | $         | 3,703,961 |      | $      | 3,726,254 |   | $ | 703,501 |   |

 

At December 31, 2003, the Company had afederal net operating loss carryforward of approximately $45,059,000, which is availableto reduce future taxable income and will begin to expire in 2012.

 

The Company’s net operating losscarryforwards expire at specific future dates and utilization of certaincarryforwards is limited to specific amounts each year. Due to the uncertainnature of their ultimate realization, the Company has established a valuationallowance against these carryforward benefits and will recognize benefits onlyas reassessment demonstrates they are more likely than not to be realized.Realization is dependent upon future taxable earnings in specific taxjurisdictions.  During 2003, thevaluation allowance increased due to the change in the temporary differencesrelated to tax deductible goodwill, resulting from the adoption of SFASNo. 142, in 2002.  Also during2003, the valuation allowance was reduced by approximately $237,000 as a resultof the recognition of deferred tax liabilities resulting from certain purchasebusiness combinations.

 

Significant components of the Company’sdeferred income tax liabilities and assets as of December 31 are asfollows: 

 

|                                  |   | **2003**   |       | **2002**   |   |
|---------------------------------------|--------|------------|------------|------------|--------|
|                                  |   |       |       |       |   |
| Deferred income tax liabilities:      |   |       |       |       |   |
| Depreciation and amortization         |   | $          | 24,104,121 |       | $      | 20,893,551 |   |
| Other                                 |   | 204,759    |       | —     |   |
| Total deferred income tax liabilities |   | 24,308,880 |       | 20,893,551 |   |
| Deferred income tax assets:           |   |       |       |       |   |
| Allowance for doubtful accounts       |   | 910,860    |       | 357,580    |   |
| Other                                 |   | 871,894    |       | 634,624    |   |
| Net operating loss carryforward       |   | 17,122,540 |       | 14,087,575 |   |
| Valuation allowance                   |   | (3,189,554 | )          | (106,637   | )      |
| Total deferred income tax assets      |   | 15,715,740 |       | 14,973,142 |   |
| Net deferred income tax liability     |   | $          | 8,593,140  |       | $      | 5,920,409 |   |

 

F-24

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The following is a reconciliation of thefederal statutory income tax rate to the effective income tax rate for 2003,2002 and 2001: 

 

|                                        |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                        |   |     |   |     |   |     |   |
| Federal statutory income tax rate (benefit) |   | (34.0    | )%     | 34.0     | %      | 34.0     | %      |
| State income taxes, net of federal benefit  |   | 38.8     | %      | 13.6     | %      | 10.0     | %      |
| Change in valuation allowance               |   | 128.1    | %      | 35.3     | %      | (25.6    | )%     |
| Non-deductible amortization                 |   | —   |   | —   |   | 4.4      | %      |
| Other                                       |   | 9.2      | %      | 3.1      | %      | 1.0      | %      |
|                                        |   | 142.1    | %      | 86.0     | %      | 23.8     | %      |

 

**7.  Commitments and Contingencies**

 

The Company has operating lease agreementsfor service facilities, office space and equipment. Some of these lease agreementscontain renewal clauses that allow the Company, at its option, to extend theterm of the leases for additional periods. At December 31, 2003, totalfuture minimum payments under the noncancelable operating leases with terms ofone year or more consisted of: 

 

|                         |   | **Operating  Leases** |       |
|------------------------------|--------|----------------------------|------------|
|                         |   |                       |       |
| 2004                         |   | $                          | 2,117,000  |   |
| 2005                         |   | 2,280,000                  |       |
| 2006                         |   | 2,023,000                  |       |
| 2007                         |   | 1,931,000                  |       |
| 2008                         |   | 1,603,000                  |       |
| Thereafter                   |   | 7,731,000                  |       |
| Total minimum lease payments |   | $                          | 17,685,000 |   |

 

Rental expense was $3,532,000, $3,164,000 and$2,989,000 during 2003, 2002 and 2001, respectively.

 

In certain business combinations, the Companyagrees to pay additional amounts to sellers contingent upon achievement by theacquired businesses of certain negotiated goals, such as targeted revenue levelsor targeted disposal volumes. Contingent payments, when incurred, are recorded as purchase priceadjustments or expense, as appropriate, based on the nature of each contingentpayment.

 

The Company has a certain disposal contractthat requires the Company to meet specific volume requirements.  These volume requirements are measured basedon an annual average.  In the event theCompany does not meet the required volumes, the Company would be required tomake additional payment based on the volume shortfall.  At December 31, 2003, there was no volumerequirement shortfall related to the disposal contract that would have asignificant impact on the Company’s business, financial condition, results ofoperation or cash flows.

 

The Company’s business activities areconducted in the context of a developing and changing statutory and regulatoryframework. Governmental regulation of the waste management industry requiresthe Company to obtain and retain numerous governmental permits to conductvarious aspects of its operations. These permits are subject to revocation,modification or denial. The costs and other capital expenditures, which may berequired to obtain or retain the applicable permits or comply with applicableregulations, could be significant. Any revocation, modification or denial ofpermits could have a material adverse effect on the Company.

 

The Company is subject to liability for anyenvironmental damage that its solid waste facilities may cause to neighboringlandowners or residents, particularly as a result of the contamination of soil,

 

F-25

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groundwater or surface water, and especially drinking water, includingdamage resulting from conditions existing prior to the acquisition of suchfacilities by the Company. The Company may also be subject to liability for anyoff-site environmental contamination caused by pollutants or hazardoussubstances whose transportation, treatment or disposal was arranged by theCompany or its predecessors.

 

The Company has an accrued environmentalliability of approximately $25,253,000 on its balance sheet at December 31,2003, related to an inactive landfill (hereinafter referred to as Tantalo)which the Company assumed as part of the SMI acquisition in October 2003.  The liability consists of approximately$15,971,000 related to the remediation of Tantalo and approximately $9,282,000post closure monitoring of Tantalo for 30 years.  The initial remediation work will commence in 2004, and thepost-closure monitoring period is expected to commence in 2007.  Tantalo is a 26-acre landfill that stoppedaccepting waste in 1976 and has been identified by the State of New York as anInactive Hazardous Waste Disposal Site. During its period of operation, Tantalo received both municipal andindustrial waste, some of which has been found to exhibit “hazardous”characteristics as defined by the US Resource Conservation and RecoveryAct.  Past activities at Tantalo haveresulted in the release of hazardous wastes into the groundwater.  A remediation program has been developed forTantalo in conjunction with the New York State Department of EnvironmentalConservation. The remediation program includes: installation of groundwaterbarriers, protective liner caps, leachate and gas collection systems andstorm-water drainage controls, as well as methods to accelerate thedecontamination process.  In addition,simultaneously with the acquisition of SMI, the Company purchased a “CleanupCost Cap Insurance Policy”, with a ten year policy period, which provides anadditional $25,000,000 of coverage in excess of the remediation portion of theliability.  Remediation costs incurredwere approximately $108,000 during the year ended December 31, 2003.  The remediation costs, which are notdiscounted, are included in the company’s liabilities at December 31, 2003 in“Accrued environmental and landfill costs.”

 

Estimates of the method and ultimate cost ofremediation require a number of assumptions and are inherently difficult, andthe ultimate outcome may differ materially from current estimates.  However, the Company believes that itsextensive experience in the environmental services industry, together alongwith its use of third-party consulting engineers provides a reasonable basisfor estimating its aggregate liability. As additional information becomes available, estimates are adjusted asnecessary.  It is possible thattechnological, regulatory or enforcement developments, the results ofenvironmental studies, or other factors could necessitate the recording ofadditional liabilities which could be material.  The estimated environmental remediation liabilities have not beenreduced for possible recoveries from other potentially responsible thirdparties.

 

As part of a Host Community Agreement (HCA)between the Company and the Town of Seneca Falls in which the Seneca MeadowsLandfill is located, the Company has agreed to guarantee the market value ofcertain homeowners’ properties within a certain distance of the landfill basedon a Property Value Protection Program (PVPP) incorporated into the HCA.  Under the PVPP, the Company would beresponsible for the difference between the sale value and the hypotheticalmarket value of the homeowners’ properties assuming a previously approvedexpansion of the landfill had not been approved, if any.  The Company does not believe it is possibleto determine the contingent obligation associated with the PVPP guarantees, butdoes not believe it would have a material effect on the Company’s financialposition or results of operations.  Asof December 31, 2003, the Company has not been required to compensate anyhomeowner under the PVPP.

 

In the normal course of its business and as aresult of the extensive governmental regulation of the solid waste industry,the Company is subject to various judicial and administrative proceedingsinvolving federal, state or local agencies. In these proceedings, an agency mayseek to impose fines on the Company or to revoke or deny renewal of anoperating permit held by the Company. From time to time the Company may also besubject to actions brought by citizens’ groups or adjacent landowners or

 

F-26

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residents in connection with the permitting and licensing of landfillsand transfer stations, or alleging environmental damage or violations of thepermits and licenses pursuant to which the Company operates.

 

In addition, the Company may become party tovarious claims and suits pending for alleged damages to persons and property,alleged violations of certain laws and alleged liabilities arising out ofmatters occurring during the normal operation of the waste management business.However, as of December 31, 2003, there were no proceedings or litigationinvolving the Company that the Company believed would have a material adverseimpact on its business, financial condition, results of operations or cashflows.

 

**8.  Redeemable Preferred Stock**

 

In 2003, the Company issued 49,660 shares ofSeries E Convertible Preferred Stock (Series E Preferred) at $1,000per share. At the closing, the Company paid the holders of the Series EPreferred a 3% fee, which was accounted for as a reduction of the carryingvalue of the Series E Preferred. The Series E Preferred was issuedwith a beneficial conversion feature. The amount of the beneficial conversionfeature was $1,489,800, which represents the excess of fair value of commonstock that the holder would receive at conversion over the proceeds received.As the Series E Preferred is convertible at any time at the option of theholder into Common Stock of the Company, the discount related to the beneficialconversion feature was amortized upon issuance. The difference between theredemption value and carrying value as of December 31, 2003 of $1,641,672will be recognized upon the determination that redemption is probable. As ofDecember 31, 2003, redemption was considered uncertain as redemption iscontingent upon the occurrence of a Liquidation, Sale Transaction or Asset Sale(LSA Event).

 

The holders of the Series E Preferred,subject to certain regulatory requirements applicable to such holders, alongwith the Series A, B, and C Preferred holders are entitled to voteseparately as a class (Preferred Holders) on each matter required to be submittedto a vote of holders of Common Stock. In respect to the election of the membersof the Board of Directors, the holders of Series A, B and C Preferred votetogether with the holders of Class A Common Stock, with each holder havingone vote per share, while the holders of the Series D and E Preferred haveno right to vote. Certain matters requiring a vote, such as amending theCompany’s Certificate of Incorporation or by-laws, issuing additional shares ofpreferred stock or authorizing and issuing capital stock, must obtain theapproval of not less than 75% of the Preferred Holders.

 

The Company entered into a Second Amended andRestated Stockholders’ Agreement, dated as of October 10, 2003.  Per the terms of the Company’s SecondAmended and Restated Stockholders’ Agreement, the Company’s board of directorscurrently consists of eight members designated as follows:

 

•                                          Mr. Floodis entitled to be a director as long as he is the Company's Chief ExecutiveOfficer;

 

•                                          ThreePreferred Holders are entitled to designate one director each;

 

F-27

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•                                          TwoPreferred Holders are entitled to designate two directors each.

 

The Series E Preferred shall be entitledto receive, when and if declared by the Company’s Board of Directors, a dividendat a rate of 10% per annum, or $100 per share. Such dividends accrue andcompound semiannually on a cumulative basis whether or not they have beendeclared. During 2003, the carrying amount of the Series E Preferred wasincreased for accumulated and unpaid dividends of $1,102,561 in the aggregate,or $22.20 per share.

 

The Series E Preferred ranks senior toall other classes of stock with respect to the payment of dividends anddistributions of the applicable liquidation preferences. In the event of an LSAEvent, the holders of the Series E Preferred are entitled to a LiquidationPreference equal to $1,000 per share, plus all accrued and unpaid dividends foreach share of the Series E Preferred, if any, before any distribution ofassets are made to the holders of Series A, B, C and D Preferred and theholders of Common Stock of the Company. In the event of a Sales Transaction (asdefined in the Company’s Certificate of Incorporation), each holder of theSeries E Preferred has the right to redeem for cash its Series EPreferred shares along with all accrued and unpaid dividends. In the event ofan Asset Sale (as defined in the Company’s Certificate of Incorporation) of theCompany, the Series E Preferred shares along with all accrued and unpaiddividends will be redeemed into cash. The Series E Preferred shares areconvertible into the Company’s Common Stock at the Company’s option upon an IPOonly if the Series E Preferred’s calculated annual return is at least 25%.The Series E Preferred is convertible at any time into Common Stock of theCompany at $100 per Common Share at the option of the holder.

 

In 2001, the Company issued 55,000 shares ofSeries D Convertible Preferred Stock (Series D Preferred) at $1,000per share. At the closing, the Company paid the holders of the Series DPreferred a 3% fee, which was accounted for as a reduction of the carryingvalue of the Series D Preferred. The Series D Preferred was issuedwith a beneficial conversion feature. The amount of the beneficial conversionfeature was $1,650,000, which represents the excess of fair value of commonstock that the holder would receive at conversion over the proceeds received.As the Series D Preferred is convertible at any time at the option of theholder into Common Stock of the Company, the discount related to the beneficialconversion feature was amortized upon issuance. The difference between theredemption value and carrying value as of December 31, 2003, of $2,619,877will be recognized upon the determination that redemption is probable. As ofDecember 31, 2003, redemption was considered uncertain as redemption iscontingent upon the occurrence of a Liquidation, Sale Transaction or Asset Sale(LSA Event).

 

The holders of the Series D Preferred,subject to certain regulatory requirements applicable to such holders, alongwith the Series A, B and C Preferred holders are entitled to voteseparately as a class (Preferred Holders) on each matter required to besubmitted to a vote of holders of Common Stock. In

 

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respect to the election of the members of the Board of Directors, theholders of Series A, B and C Preferred vote together with the holders ofClass A Common Stock, with each holder having one vote per share, whilethe holders of the Series D Preferred have no right to vote. Certainmatters requiring a vote, such as amending the Company’s Certificate ofIncorporation or by-laws, issuing additional shares of preferred stock orauthorizing and issuing capital stock, must obtain the approval of not lessthan 75% of the Preferred Holders.

 

The Series D Preferred shall be entitledto receive, when and if declared by the Board of Directors, a dividend at arate of 10% per annum, or $100 per share. Such dividends accrue and compound semiannuallyon a cumulative basis whether or not they have been declared. During 2003 and2002, the carrying amount of the Series D Preferred was increased foraccumulated and unpaid dividends of $6,382,922 and $5,789,499 in the aggregate,or $116.05 and $105.26 per share, respectively.

 

The Series D Preferred ranks junior tothe Series E Preferred and senior to all other classes of stock with respect tothe payment of dividends and distributions of the applicable liquidationpreferences. In the event of an LSA Event, the holders of the Series DPreferred are entitled to a Liquidation Preference equal to $1,000 per share,plus all accrued and unpaid dividends for each share of the Series DPreferred, if any, before any distribution of assets are made to the holders ofSeries A, B and C Preferred and the holders of Common Stock of theCompany. In the specific event of a Sales Transaction (as defined in theCompany’s Certificate of Incorporation), it is the right of each holder of theSeries D Preferred to redeem into cash its Series D Preferred sharesalong with all accrued and unpaid dividends. In the specific event of an AssetSale (as defined in the Company’s Certificate of Incorporation) of the Company,the Series D Preferred shares along with all accrued and unpaid dividendswill be redeemed into cash. The Series D Preferred shares are convertibleinto the Company’s Common Stock at the Company’s option upon an IPO only if theSeries D Preferred’s calculated annual return is at least 25%. The Series DPreferred is convertible at any time into Common Stock of the Company at $80per Common Share at the option of the holder.

 

In 1999, the Company issued 55,000 shares ofSeries C Convertible Preferred Stock (Series C Preferred) at $1,000per share. At the closing, the Company paid the holders of the Series CPreferred a 3% fee, which was accounted for as a reduction of the carryingvalue of the Series C Preferred. The difference between the redemptionvalue and carrying value as of December 31, 2003, of $2,042,461 will berecognized upon the determination that redemption is probable. As ofDecember 31, 2002, redemption is considered uncertain as redemption iscontingent upon the occurrence of an LSA Event.

 

The Series C Preferred shall be entitledto receive, when and if declared by the Board of Directors, a dividend at arate of 15% per annum, or $150 per share. Such dividends accrue and compoundsemiannually on a cumulative basis whether or not they have been declared.During 2003, 2002 and 2001 the carrying amount of the Series C Preferredwas increased for accumulated and unpaid dividends of $14,200,423, $12,288,090and $10,014,264 in the aggregate, or $258.19, $223.42 and $182.08 per share,respectively.

 

The Series C Preferred ranks junior tothe Series D and E Preferred and senior to all other classes of stock withrespect to the payment of dividends and distributions of the applicableliquidation preferences. Upon the occurrence of an LSA Event, the holders ofthe Series C Preferred are entitled to a Liquidation Preference equal to$1,000 per share plus all accrued and unpaid dividends for each share of theSeries C Preferred, if any, before any distribution of assets made to theholders of Series A and B Preferred Stock and Common Stock of the Company.In the specific event of a Sales Transaction, it is the right of each holder ofthe Series C preferred to redeem into cash its Series C Preferredshares along with all accrued and unpaid dividends. In the specific event of anAsset Sale of the Company, the Series C Preferred shares along with allaccrued and unpaid dividends will be redeemed into cash. The Series CPreferred shares are convertible into the Company’s Common Stock at theCompany’s option upon an

 

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IPO (as defined in the Company’s Certificate of Incorporation) only ifthe Series C Preferred calculated annual return is at least 25% annually.The Series C Preferred is convertible at any time along with all accruedand unpaid dividends into Common Stock of the Company at $150 per Common Shareat the option of the holder.

 

The Company has 32,000 shares ofSeries A Convertible Preferred Stock (Series A Preferred) and 20,100shares of Series B Convertible Preferred Stock (Series B Preferred),both issued at $1,250 per share. Upon the occurrence of an LSA Event of theCompany, the holders of the Series A and B Preferred are entitled to aLiquidation Preference equal to the $1,250 per share plus all declared andunpaid dividends, if any, on each share before any distribution of assets madeto the holders of Common Stock of the Company. So long as shares ofSeries E Preferred, D Preferred or Series C Preferred areoutstanding, the Company may not declare or pay any dividends on shares ofSeries A Preferred or Series B Preferred. Additionally, holders ofSeries A and B Preferred are entitled to receive dividends only asdividends are declared and paid on the common stock. The difference between theredemption value and carrying value as of December 31, 2003 of $507,727will be recognized upon the determination that redemption is probable. As ofDecember 31, 2003, redemption is considered uncertain as redemption iscontingent upon the occurrence of an LSA Event.

 

The Series A and B Preferred rank juniorto the Series E, D and C Preferred, equally as to each other and senior toall other classes of stock with respect to the payment of dividends anddistributions of the applicable liquidation preferences. In the event of aSales Transaction, Asset Sale or IPO (a Triggering Event) and the calculatedinternal rate of return, calculated in accordance with the formula provided inthe Company’s Certificate of Incorporation, with respect to the Series Aand B Preferred is less than 25%, the then-applicable conversion price pershare will be reduced, effective as of the date of such triggering event, tothe higher of (a) $80 per share (subject to adjustment in certaincircumstances) or (b) a price per share that, after giving effect to suchreduction, will yield an internal rate of return (calculated in accordance withthe same formula) of 25%. In the specific event of a Sales Transaction, it isthe right of the each holder of the Series A and B Preferred to redeeminto cash its shares of Series A and B Preferred, along with all accruedand unpaid dividends. In the specific event of an Asset Sale of the Company,the Series A and B Preferred shares along with all accrued and unpaiddividends will be redeemed into cash. The shares are convertible into shares ofCommon Stock of the Company at the Company’s option upon an IPO. The shares areconvertible at any time into Common Stock of the Company at $125 per CommonShare at the option of the holder.

 

The Company’s Series A, B, C, D and EPreferred is considered redeemable due to certain terms of the Preferred Sharesand due to a majority of members of the Board of Directors being holders ofPreferred Shares. Certain events, as defined, can trigger redemption and theoccurrence of such events is effectively controlled by the holders of thePreferred Shares.

 

**9.  Stockholders’ Equity**

 

In September 2001, the Company completeda 1-for-10 reverse stock applicable to all authorized and outstanding shares ofcommon stock.

 

The Company’s Certificate of Incorporationauthorizes 4,650,000 shares of common stock consisting of 4,200,000 shares ofClass A voting common stock and 450,000 shares of Class B convertiblenon-voting common stock. Holders of Class A common stock are entitled toone vote per share for each share held of record on all matters submitted to avote of stockholders. Except as required by law, holders of Class B commonstock are not entitled to vote. At any time, holders of the Class B commonstock can convert, on a 1-for-1 basis, such stock into shares of Class Acommon stock.

 

The Company adopted the 1999 Stock OptionPlan (the Plan) in January 1999 and amended the Plan in March 2003.  Options granted under the Plan arenonqualified stock options (options). The Plan

 

F-30

----

 

provides for the granting of options to key employees, certainconsultants and advisors who perform services for the Company, and members ofthe Board of Directors of the Company. Under the Plan, the Company isauthorized to issue up to 250,000 shares of the Company’s Class A Common Stock.

 

Options issued under the Plan expire10 years from date of grant and become fully vested and exercisable fiveto eight years from date of grant. All granted options become fully vested andexercisable upon a change in control of the Company.  In addition, upon the occurrence of an initial public offering ofthe Company’s common stock, the options vest on an accelerated basis fromimmediately to on a pro-rata basis up to four years from the date of grant.

 

The following table, adjusted for all periodsto reflect the 1-for-10 reverse stock split, summarizes activity of theCompany’s stock options: 
|                                                                                          |   | **Shares** |             | **Weighted  Average  Exercise Price** |   | **Weighted  Average  Fair Value at the  Date of Grant** |   |
|-----------------------------------------------------------------------------------------------|--------|------------|------------------|---------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                                          |   |       |             |                                  |   |                                                    |   |
| Options outstanding at December 31,  2000                                                |   | 128,162    |             | $                                     | 102.20 |                                                    | — |   |
| Granted                                                                                       |   | 22,600     |             | $                                     | 150.00 |                                                    | $      | 21.80 |   |
| Canceled                                                                                      |   | (138,366   | )                | $                                     | 110.20 |                                                    | — |   |
| Options outstanding at December 31,  2001                                                |   | 12,396     |             | $                                     | 100.00 |                                                    | — |   |
| Granted                                                                                       |   | 180,266    |             | $                                     | 80.00  |                                                    | $      | 3.06 |   |
| Canceled                                                                                      |   | (2,850     | )                | $                                     | 80.00  |                                                    | — |   |
| Options outstanding at December 31,  2002                                                |   | 189,812    |             | $                                     | 81.31  |                                                    | — |   |
| Granted                                                                                       |   | 22,600     |             | $                                     | 95.00  |                                                    | $      | 2.08 |   |
| Canceled                                                                                      |   | (1,450     | )                | $                                     | 87.20  |                                                    |   |   |
| Options outstanding at December 31,  2003                                                |   | 210,962    |             |                                  |   |                                                    |   |
|                                                                                          |   |       |             |                                  |   |                                                    |   |
| Weighted average remaining contractual life  of options outstanding at December 31, 2003 |   | 8.43 years |             |                                  |   |                                                    |   |
| The range of exercise prices of options  outstanding at December 31, 2003                |   | $          | 80.00 to $100.00 |                                  |   |                                                    |   |   |
|                                                                                               |        |            |                  |                                       |        |                                                         |        |  |  |  |

 

No shares were exercisable atDecember 31, 2003, 2002 or 2001.

 

The fair value of each option is estimated onthe date of grant using the Black-Scholes option-pricing model with thefollowing assumption: 

 

|                            |   | **2003**   |   | **2002**   |   |
|---------------------------------|--------|------------|--------|------------|--------|
|                            |   |       |   |       |   |
| Expected dividend yield         |   | 0          | %      | 0          | %      |
| Expected stock price volatility |   | 1          | %      | 1          | %      |
| Risk free interest rate         |   | 1.25       | %      | 1.61       | %      |
| Expected life of options        |   | 1.75 years |   | 2.42 years |   |

 

Of the 4,395,020 shares of Class A votingcommon stock and Class B non-voting common stock authorized but unissued as ofDecember 31, 2003, the following shares were reserved for issuance: 

 

| Conversion of Series A |   | 500,000   |   |
|------------------------|--------|-----------|--------|
| Conversion of Series B |   | 314,063   |   |
| Conversion of Series C |   | 702,988   |   |
| Conversion of Series D |   | 858,192   |   |
| Conversion of Series E |   | 507,626   |   |
| Common stock options   |   | 210,962   |   |
|                   |   | 3,093,831 |   |

 

F-31

----

 

Upon termination, a certain employee of theCompany can require the Company to purchase that employee’s outstanding stockat fair market value as determined in good faith by the Board of Directors ofthe Company.

 

**10.  Segment Reporting**

 

The Company’s two geographic regions are theCompany’s reportable segments. The segments provide integrated waste managementservices consisting of collection, transfer, disposal, and recycling servicesto commercial, industrial, municipal, and residential customers. Summarizedfinancial information concerning the Company’s reportable segments for therespective years ended December 31 is shown in the following table: 

 
|                                                                                                    |   | **South  Region** |        | **Northeast  Region** |       | **Corporate  Functions** |       | **Total**   |       |
|---------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|-----------------------|------------|--------------------------|------------|-------------|------------|
|                                                                                                    |   |              |        |                  |       |                     |       |        |       |
| **Year ended December 31, 2003**                                                                   |   |              | ** **  |                  | ** ** |                     | ** ** |        | ** ** |
| Outside revenues                                                                                        |   |              |        |                  |       |                     |       |        |       |
| Collection                                                                                              |   | $                 | 140,607,597 |                  | $          | 33,492,208               |       | $           | —     |   | $ | 174,099,805 |   |
| Transfer                                                                                                |   | 4,562,257         |        | 41,223,008            |       | —                   |       | 45,785,265  |       |
| Disposal                                                                                                |   | 9,639,844         |        | 18,679,218            |       | —                   |       | 28,319,062  |       |
| Recycling                                                                                               |   | 2,674,848         |        | 3,720,016             |       | —                   |       | 6,394,864   |       |
| Other                                                                                                   |   | 701,058           |        | 715,624               |       | —                   |       | 1,416,682   |       |
| Total outside revenues                                                                                  |   | 158,185,604       |        | 97,830,074            |       | —                   |       | 256,015,678 |       |
| Income (loss) from operations                                                                           |   | 11,726,877        |        | 15,275,620            |       | (8,992,586               | )          | 18,009,911  |       |
| Depreciation, depletion and amortization                                                                |   | 26,327,102        |        | 14,072,262            |       | 680,025                  |       | 41,079,389  |       |
| Purchases of property and equipment                                                                     |   | 36,131,770        |        | 12,473,462            |       | 279,647                  |       | 48,884,879  |       |
| Acquisitions of waste operations and  initial development costs for newly-acquired permitted landfills. |   | 32,884,743        |        | 187,678,536           |       | —                   |       | 220,563,279 |       |
| Goodwill Acquired                                                                                       |   | 8,522,881         |        | —                |       | —                   |       | 8,522,881   |       |
| Goodwill                                                                                                |   | 90,707,519        |        | 47,628,196            |       | —                   |       | 138,335,715 |       |
| Total assets                                                                                            |   | $                 | 302,854,805 |                  | $          | 378,653,540              |       | $           | 21,538,870 |   | $ | 703,047,215 |   |
| **Year ended December 31, 2002**                                                                   |   |              | ** **  |                  | ** ** |                     | ** ** |        | ** ** |
| Outside revenues                                                                                        |   |              |        |                  |       |                     |       |        |       |
| Collection                                                                                              |   | $                 | 112,157,748 |                  | $          | 31,019,630               |       | $           | —     |   | $ | 143,177,378 |   |
| Transfer                                                                                                |   | 4,531,093         |        | 43,139,053            |       | —                   |       | 47,670,146  |       |
| Disposal                                                                                                |   | 7,752,210         |        | 6,763,089             |       | —                   |       | 14,515,299  |       |
| Recycling                                                                                               |   | 2,651,559         |        | 3,651,458             |       | —                   |       | 6,303,017   |       |
| Other                                                                                                   |   | 1,241,389         |        | 33,323                |       | —                   |       | 1,274,712   |       |
| Total outside revenues                                                                                  |   | 128,333,999       |        | 84,606,553            |       | —                   |       | 212,940,552 |       |
| Income (loss) from operations                                                                           |   | 16,111,068        |        | 12,206,502            |       | (8,403,372               | )          | 19,914,198  |       |
| Depreciation, depletion and amortization                                                                |   | 20,063,067        |        | 7,178,368             |       | 607,475                  |       | 27,848,910  |       |
| Purchases of property and equipment                                                                     |   | 32,245,712        |        | 9,861,896             |       | 1,076,219                |       | 43,183,827  |       |
| Acquisitions of waste operations                                                                        |   | 43,671,250        |        | 698,513               |       | —                   |       | 44,369,763  |       |
| Goodwill Acquired                                                                                       |   | 20,753,125        |        | —                |       | —                   |       | 20,753,125  |       |
| Goodwill                                                                                                |   | 80,781,112        |        | 47,628,196            |       | —                   |       | 128,409,308 |       |
| Total assets                                                                                            |   | $                 | 259,880,930 |                  | $          | 151,673,046              |       | $           | 16,505,040 |   | $ | 428,059,016 |   |

 

F-32

----

 
|                                     |   | **South  Region** |        | **Northeast  Region** |   | **Corporate  Functions** |   | **Total**   |      |
|------------------------------------------|--------|-------------------|-------------|-----------------------|--------|--------------------------|--------|-------------|-----------|
|                                     |   |              |        |                  |   |                     |   |        |      |
| **Year ended December 31, 2001**    |   |              |        |                  |   |                     |   |        |      |
| Outside revenues                         |   |              |        |                  |   |                     |   |        |      |
| Collection                               |   | $                 | 94,569,239  |                  | $      | 28,938,761               |   | $           | —    |   | $ | 123,508,000 |   |
| Transfer                                 |   | 3,155,898         |        | 39,572,298            |   | —                   |   | 42,728,196  |      |
| Disposal                                 |   | 6,233,082         |        | 6,762,644             |   | —                   |   | 12,995,726  |      |
| Recycling                                |   | 2,047,233         |        | 3,603,701             |   | —                   |   | 5,650,934   |      |
| Other                                    |   | 801,732           |        | 5,721                 |   | —                   |   | 807,453     |      |
| Total outside revenues                   |   | 106,807,184       |        | 78,883,125            |   | —                   |   | 185,690,309 |      |
| Income (loss) from operations            |   | 13,140,189        |        | 10,095,720            |   | (7,146,641               | )      | 16,089,268  |      |
| Depreciation, depletion and amortization |   | 16,921,772        |        | 8,277,993             |   | 522,205                  |   | 25,721,970  |      |
| Purchases of property and equipment      |   | 24,902,403        |        | 6,907,824             |   | 596,397                  |   | 32,406,624  |      |
| Acquisitions of waste operations         |   | 12,481,295        |        | 3,147,099             |   | —                   |   | 15,628,394  |      |
| Goodwill Acquired                        |   | 6,143,011         |        | —                |   | —                   |   | 6,143,011   |      |
| Goodwill                                 |   | 60,027,987        |        | 47,628,196            |   | —                   |   | 107,656,183 |      |
| Total assets                             |   | $                 | 196,373,949 |                  | $      | 149,838,183              |   | $           | 8,095,944 |   | $ | 354,308,076 |   |

 

**11.  Employee Benefit Plans**

 

The Company has a defined contribution 401(k)savings plan that covers substantially all non-union employees meeting certainminimum eligibility requirements. Participating employees can elect to defer aportion of their compensation and contribute it to the plan on a pre-tax basis.The Company also matches certain amounts, as defined.

 

Contributions made by the Company under theplan were $496,000, $483,000 and $390,000 for the years ended December 31,2003, 2002 and 2001, respectively.

 

**12.  Related Parties**

 

During 2003, IESI paid two companiesaffiliated with two employees of the Company approximately $760,000 fortemporary labor services and $116,000 for maintenance related services,respectively.

 

During 2003, IESI paid a company affiliatedwith a director of the Company $150,000 as final payment for the purchase of anairplane.  During 2002, IESI paid thesame company a down payment of $1,000,000 related to the purchase of theairplane.

 

IESI paid a company affiliated with adirector of the Company approximately $250,000 during both 2002 and 2001 for expensesrelated to financing transactions.

 

**13.  Quarterly Financial Data (Unaudited)**

 

Historically, the Company’s quarterlyoperating results have fluctuated.  Thefluctuations may be caused by many factors, including revenue mix and generaleconomic conditions.  The Company’srevenues and income from operations typically reflect seasonal patterns.  The Company’s operating revenues tend to besomewhat lower in the winter months, primarily due to the lower volume ofconstruction and demolition waste.  Thevolumes of industrial and residential waste in certain regions where theCompany operates also

 

F-33

----

 

tend to decrease during the winter months.  The Company’s first and fourth quarter results of operations typicallyreflect this seasonality.

 

The following table summarizes the unauditedquarterly results of operations for 2003 and 2002:

 
|                                                             |   | **First  Quarter(a)(c)** |       | **Second  Quarter(c)** |   | **Third  Quarter(c)** |   | **Fourth  Quarter(c)** |       |
|------------------------------------------------------------------|--------|--------------------------|------------|------------------------|--------|-----------------------|--------|------------------------|------------|
| **2003**                                                         |   |                     |       |                   |   |                  |   |                   |       |
| Services revenues                                                |   | $                        | 55,413,871 |                   | $      | 60,899,514            |   | $                      | 64,175,475 |   | $ | 75,526,818 |   |
| Income from operations                                           |   | 3,436,670                |       | 4,860,908              |   | 4,694,023             |   | 5,018,310              |       |
| Loss before cumulative effect of change in  accounting principle |   | (500,913                 | )          | (23,921                | )      | (2,836,009            | )      | (2,949,597             | )          |
| Net Loss                                                         |   | $                        | (2,031,621 | )                      | $      | (23,921               | )      | $                      | (2,836,009 | ) | $ | (2,949,597 | ) |

 
|                   |   | **First  Quarter** |       | **Second  Quarter** |   | **Third  Quarter(b)** |   | **Fourth  Quarter** |       |
|------------------------|--------|--------------------|------------|---------------------|--------|-----------------------|--------|---------------------|------------|
| **2002**               |   |               |       |                |   |                  |   |                |       |
| Services revenues      |   | $                  | 46,657,958 |                | $      | 52,370,268            |   | $                   | 57,220,618 |   | $ | 56,691,708 |   |
| Income from operations |   | 5,071,194          |       | 6,064,804           |   | 4,924,722             |   | 3,853,478           |       |
| Net income (loss)      |   | $                  | 109,617    |                | $      | 934,180               |   | $                   | (263,534   | ) | $ | (174,756 | ) |

 

----

(a)                                  Thefirst quarter of 2003 results include a net of tax charge of $1,476,450 relatedto the cumulative effect of a change in accounting principle for the initialadoption of SFAS No. 143.  See Note 2for further discussion.  Approximately$54,000 of this amount was recorded by the Company in the fourth quarter of 2003due to a minor revision in our engineering estimates for one of our landfills.  For purposes of quarterly reporting withinthis table, we have revised our net income (loss) amount previously reported inour 2003 quarterly report.

 

(b)                                 Includedin the third quarter of 2002 income from operations are pre-tax chargestotaling $980,000, of which $828,000 related to the write-off of certainlandfill and transfer station development projects and $152,000 related to thewrite-off of legal, engineering and other professional fees incurred inconnection with aborted acquisitions.

 

(c)                                  Inthe fourth quarter of 2003 the Company recorded approximately $2,168,000 ofexpenses related to misconduct of a manager in the Company's South Region.  For purposes of quarterly reporting withinthis table, we have revised our net income (loss) amount previously reported inour 2003 quarterly reports to reflect the allocation of such expenses to theappropriate quarters.  Included in thefirst, second, third and fourth quarters of 2003 are expenses of $125,000,$125,000, $419,000 and $1,749,000, respectively.

 

 

**14.  Subsequent Events**

 

In January 2004, the Company entered intofour, three-year interest rate swap agreements with financialinstitutions.  Under each swapagreement, the variable interest rate on $25.0 million outstanding under theCompany’s senior credit facility effectively was converted to a fixed interestrate of 2.58%, 2.61%, 2.71% and 2.75%, respectively, plus an applicable LIBORmargin.

 

On January 28, 2004, the CompensationCommittee of the Board of Directors of the Company granted non-qualified stockoptions to purchase an aggregate of 79,794 shares of the Company’s Class Avoting common stock to certain employees and directors of the Company pursuantto the Company’s 1999 Stock Option Plan, as amended (the Plan).  On the same date, the Board of Directorsalso approved an amendment to the Plan increasing the number of optionsauthorized to be granted thereunder from 250,000 to 400,000.  The options were granted at an exerciseprice of $100.00 per share, which was equal to or greater than the estimatedfair value of the underlying shares. Options granted under the Plan expire 10  years from the date of grant and become fully vested over theperiods ranging for 5 to 8 years.

 

In March 2004, following an internalinvestigation, the Company discovered that the manager of a division in theCompany’s South Region had engaged in misconduct resulting in an overstatementof the South Region’s accounts receivable and an understatement of its expensesduring 2003.  As a result of thisincident, the Company recorded in general and administrative expenses reservesfor bad debts of $1,600,000 and recorded in operating expenses an accrual of$833,000 related to operating expenses that had not been accrued as of December31, 2003.

 

F-34

----

 

**Exhibit Index**

 
| **Exhibit  Number** |   | **Document  Name**                                                                                                                                                                                                                                                                                                                                    |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                                                                                                                                  |
| 2.1                 |   | Stock  Purchase Agreement, dated as of May 22, 2003, by and among IESI NY  Corporation, Frank DiMino, Seneca Meadows, Inc. and Macedon Homes  Incorporated, as amended.  (Incorporated  by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on  October 23, 2003 (File No. 333-98657).)                                          |
| 3.1                 |   | Fifth  Amended and Restated Certificate of Incorporation of IESI Corporation (the  “Company”).  (Incorporated by  reference to Exhibit 3.1 to our Current Report on Form 8-K filed on October  23, 2003 (File No. 333-98657).)                                                                                                         |
| 3.2                 |   | Fourth  Amended and Restated By-Laws of the Company.   (Incorporated by reference to Exhibit 3.2 to our Current Report on  Form 8-K filed on October 23, 2003 (File No. 333-98657).)                                                                                                                                                             |
| 4.1                 |   | Indenture,  dated as of June 12, 2002, among the Company, the subsidiary guarantors named  therein and The Bank of New York, as trustee.  (Incorporated by reference to Exhibit 4.1 to our Registration  Statement on Form S-4 (File No. 333-98657).)                                                                                            |
| 4.2                 |   | Form of 101⁄4%  Senior Subordinated Notes due 2012 (included in Exhibit 4.1).  (Incorporated by reference to Exhibit 4.2  to our Registration Statement on Form S-4 (File No. 333-98657).)                                                                                                                                                    |
| 4.3                 |   | Supplemental  Indenture No. 1, dated as of October 16, 2002, among the Company, the  Existing Subsidiary Guarantors named therein, the New Subsidiary Guarantors  named therein and The Bank of New York, as Trustee.  (Incorporated by reference to Exhibit 4.4 to our Registration  Statement on Form S-4 (File No. 333-98657).)          |
| 4.4                 |   | Supplemental  Indenture No. 2, dated as of November 20, 2002, among the Company,  the Existing Subsidiary Guarantors named therein, the New Subsidiary  Guarantor named therein and The Bank of New York, as Trustee.  (Incorporated by reference to Exhibit 4.5  to our Registration Statement on Form S-4 (File No. 333-98657).)     |
| 4.5                 |   | Supplemental  Indenture No. 3, dated as of October 10, 2003, among the Company, the  Existing Subsidiary Guarantors named therein, the New Subsidiary Guarantor  named therein and The Bank of New York, as Trustee.  (Incorporated by reference to Exhibit 4.1 to our Current Report  on Form 8-K filed October 23, 2003 (File No. 333-98657).) |
| 10.1                |   | Purchase  Agreement, dated June 7, 2002, among the Company, the subsidiary guarantors  named therein, Credit Suisse First Boston Corporation, Salomon Smith Barney  Inc., Fleet Securities, Inc. and J.P. Morgan Securities, Inc.  (Incorporated by reference to Exhibit 10.1  to our Registration Statement on Form S-4 (File No. 333-98657).)  |
| 10.2                |   | Stock Purchase  Agreement, dated as of October 10, 2003, by and among the Company and the  purchasers named on the signature pages thereto.  (Incorporated by reference to Exhibit 10.2 to our Current  Report on Form 8-K filed October 23, 2003) (File No. 333-98657).)                                                                        |
| 10.3                |   | Amended and  Restated Registration Rights Agreement, dated June 30, 1999, among the  Company and the stockholders named on the signature pages thereto.  (Incorporated by reference to Exhibit 10.4  to our Registration Statement on Form S-4 (File No. 333-98657).)                                                                            |
| 10.4                |   | Amended and  Restated Subordinate Registration Rights Agreement, dated as of October 10,  2003, by and among the Company and the stockholders named on the signature  pages thereto.  (Incorporated by  reference to Exhibit 10.4 to our Current Report on Form 8-K filed October 23,  2003).)                                                   |
| 10.5                |   | Second  Amended and Restated Stockholders’ Agreement, dated as of October 10, 2003,  by and among the Company and the stockholders and warrantholders named on the  signature pages thereto.   (Incorporated by reference to Exhibit 10.3 to our Current Report                                                                             |

 

----

 
| **Exhibit  Number** |   | **Document  Name**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   | on Form 8-K  filed October 23, 2003 (File No. 333-98657).)                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.6                |   | Fifth  Amended and Restated Revolving Credit and Term Loan Agreement, dated as of  October 10, 2003, among the Company, the subsidiaries thereof listed on  Schedule 2 thereto, the lenders listed on Schedule 1 thereto, Fleet National  Bank, as administrative agent, LaSalle Bank National Association, as  syndication agent, and Fleet Securities, Inc. as arranger.  (Incorporated by reference to Exhibit 10.1  to our Current Report on Form 8-K filed October 23, 2003 (File No.  333-98657).) |
| 10.7                |   | Solid Waste  Disposal Agreement, dated March 31, 2001, by and between IESI TX Corporation  and Waste Management of Texas, Inc.   Confidential treatment has been granted for certain confidential  commercial and financial information in this document.  (Incorporated by reference to Exhibit 10.9  to our Registration Statement on Form S-4 (File No. 333-98657).)                                                                                                                             |
| 10.8                |   | Department  of Sanitation, City of New York, Service and Supply Agreements, each dated  September 19, 2003, by and between the City of New York, acting by and  through the Department of Sanitation, and IESI NY Corporation, together with  related bid sheets and signature pages, each dated February 4, 2003.*                                                                                                                                                                                           |
| 10.9                |   | Employment  Agreement, dated as of January 1, 2004, by and between the Company and  Charles F. Flood.+*                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.10               |   | Employment  Agreement, dated as of January 1, 2004, by and between the Company and Thomas  J. Cowee.+*                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11               |   | Employment  Agreement, dated as of January 1, 2004, by and between the Company and Thomas  L. Brown.+*                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12               |   | Severance  Agreement, dated as of June 29, 2001, by and between the Company and  Christopher V. Della Pietia.   (Incorporated by reference to Exhibit 10.14 to our Registration  Statement on Form S-4 (File No. 333-98657).)+                                                                                                                                                                                                                                                                           |
| 10.13               |   | Employment  Agreement, dated as of January 1, 2004, by and between the Company and P.  Lawrence McGee.+*                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14               |   | Employment  Agreement, dated as of January 1, 2004, by and between the Company and Thomas  J. Fowler.+*                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.15               |   | Employment  Agreement, dated as of January 1, 2004, by and between the Company and  Stephen T. Moody.+*                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.16               |   | Employment  Agreement, dated as of January 1, 2004, by and between the Company and Gordon  P. Peckham.+*                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.17               |   | Employment  Agreement, dated as of January 1, 2004, by and between IESI NJ Corporation  and Edward Apuzzi.+*                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.18               |   | 1999 Stock  Option Plan, as amended.   (Incorporated by reference to Exhibit 10.1 to our Quarterly Report on  Form 10-Q for the quarter ended June 30, 2003 (File No. 333-98657).)+                                                                                                                                                                                                                                                                                                                      |
| 10.19               |   | Form of  Stock Option Agreement under the 1999 Stock Option Plan, as amended.  (Incorporated by reference to Exhibit  10.18 to our Registration Statement on Form S-4 (File No. 333-98657).)+                                                                                                                                                                                                                                                                                                            |
| 12.1                |   | Computation of  Ratio of Earnings to Fixed Charges.*                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 21.1                |   | Subsidiaries  of the Company.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1                |   | Certification  of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.*                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31.2                |   | Certification  of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.*                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32.1                |   | Certification  of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.*                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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| **Exhibit  Number** |   | **Document  Name**                                                                                         |
|---------------------|--------|------------------------------------------------------------------------------------------------------------|
| 32.2                |   | Certification  of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.* |

 

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*  Filed herewith.

+  Management contract or compensatory plan or arrangement.

 

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