** **

**UNITEDSTATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**FOR ANNUALAND TRANSITION REPORTS PURSUANT TO****SECTIONS13 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, 2002**                                                                                                           |
|                                                                                                                                                       |   |                                                                                           |
| **OR**                                                                                                                                                     |
|                                                                                                                                                       |   |                                                                                           |
| o                                                                                                                                                          |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
|                                                                                                                                                       |   |                                                                                           |
| **For  the transition period from          to            ** |
|                                                                                                                                                       |   |                                                                                           |
| **Commission  File Number:  333-98657**                                                                                                               |

 

 

**IESICORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                                |   | **75-2712191**                           |
|-----------------------------------------------------------------------------|--------|------------------------------------------|
| (State of other  jurisdiction of incorporation or organization)             |   | (I.R.S. Employer  Identification Number) |
|                                                                        |
| **6125 Airport Freeway**                                                    |
| **Suite 202**                                                               |
| **Haltom City, Texas 76117**                                                |
| (Address of  principal executive offices, including zip code)               |
|                                                                        |
| **(817) 314-5800**                                                          |
| **(**Registrant’s  telephone number, including area code)              |
|                                                                        |
| Securities  registered pursuant to Section 12(b) of the Act:  **None** |
|                                                                        |
| Securities  registered pursuant to Section 12(g) of the Act:  **None** |

 

Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes    o    No    ý

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.   ý

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes    o    No    ý

 

The number of shares ofthe Registrant’s Class A voting common stock, par value $.01 per share, andClass B non-voting common stock, par value $.01 per share, outstanding as ofMarch 25, 2003 were 142,000 and112,980.2, respectively.  There is notrading market for any class of equity securities of the Registrant.  Accordingly, the aggregate market value ofthe common stock held by non-affiliates of the Registrant is notdeterminable.  See Part II, Item 5 ofthis Annual Report on Form 10-K.

 

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# **INDEX**

 

**IESI CORPORATION**

 

**ANNUAL REPORT ON FORM 10-K**

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

** **

**i**

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** **

**PART I**

** **

*As used in this Annual Report on Form 10-K, unless thecontext otherwise requires, “IESI,” “the Company,” “we,” “us,” or “our” refersto IESI Corporation, a Delaware corporation, and its direct and indirectsubsidiaries on a consolidated basis. All information in this Annual Report on Form 10-K gives effect to a1-for-10 reverse stock split of shares of our Class A voting common stock andClass B non-voting common stock which was effective on September 10, 2001.*

 

This Annual Report on Form 10-K contains“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”), and Section 21E ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements are nothistorical facts, but only predictions and generally can be identified by useof statements that include phrases such as “believe,” “expect,” “anticipate,”“intend,” “plan,” “foresee” or other words or phrases of similar import.  Similarly, statements that describe ourobjectives, plans or goals are also forward-looking statements.  These forward-looking statements are subjectto risks and uncertainties which could cause actual results to differmaterially from those currently anticipated. Factors that could materially affect these forward-looking statementsinclude those identified under Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—RiskFactors” and elsewhere in this Annual Report on Form 10-K as well as in ourother filings with the Securities and Exchange Commission.  All subsequent written and oralforward-looking statements attributable to us or persons acting on our behalfare also expressly qualified in their entirety by such factors.  We urge you to carefully consider suchfactors in evaluating the forward-looking statements and caution you not toplace undue reliance on such forward-looking statements.  There may also be additional risks that wedo not presently know of or that we currently believe are immaterial which couldalso impair our business.  In light ofthese risks, uncertainties and assumptions, the forward-looking events may ormay not occur.  The forward-lookingstatements made in this Annual Report on Form 10-K are made only as of the datehereof and we undertake no obligation to publicly update any forward-lookingstatements to reflect new information, future events or otherwise.

 

**Item 1.  Business.**

** **

**BusinessOverview**

** **

We are one of the leading regional, non-hazardoussolid waste management companies in the United States and more than 80% of ourcollection revenue in 2002 was generated in areas where we believe we are amongthe top three 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.  We are the tenth largest, and the thirdlargest privately-held, service provider in the approximately$43 billion non-hazardous solid waste management industry in theUnited States.

 

We were founded in 1995 and have grown rapidly througha combination of strategic acquisitions and internal growth.  From 1997, when we had a net loss of$1.4 million, through 2002, when we had net income of $0.6 million,we grew our revenue at an 83% compounded annual growth rate, or CAGR, and ouradjusted EBITDA at a 141% CAGR.  Wegenerated internal growth of 7.4% in 2002, 18.7% in 2001 and 14.7% in2000.  From 1997 through 2002, we alsoincreased our adjusted EBITDA margins from 5.7% to 22.8% and our net incomemargins from (13.8)% to 0.3%.  Wecurrently serve more than 485,000 residential customers and approximately51,000 commercial and industrial customers. We generated 

 

1

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revenue of$212.9 million, adjusted EBITDA of $48.6 million and net income of$0.6 million during 2002.

 

We provide our services through anetwork of vertically integrated assets, including 36 collection operations, 22transfer stations, 15 landfills, seven recycling facilities and a fleet of morethan 675 collection vehicles.  During2002, our collection operations generated 67.2%, our transfer operations generated22.4%, our disposal operations generated 6.8%, and our recycling and otheroperations generated 3.6%, of our revenue. We currently internalize—transferand dispose of at our own landfills—approximately 40% of the solid waste thatwe handle.

 

**IndustryOverview**

** **

The non-hazardous solid waste managementindustry provides the following 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 stationis a facility where solid waste that has been collected by private companiesand municipalities is received, compacted and then transferred by large-capacityvehicles to disposal sites.  Thisconsolidation reduces costs by increasing the density of the waste beingtransported.  Transfer stations alsoimprove the efficient utilization of collection personnel and equipment byallowing them to focus on collection operations and spend less time travellingto disposal sites.  Transfer stationscan handle municipal solid waste, or MSW, received from residential, commercialand industrial collection operations, waste collected from construction anddemolition, or C&D, operations, or both. Some transfer stations are constructed to receive certain specializedwaste, 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, or for which the market price is not sufficient to cover processing,are shipped to a disposal facility, generally a landfill.

 

According to industry data, the non-hazardoussolid waste management industry in the United States generated revenue ofapproximately $43 billion in 1999 and is growing at an annual rate of

 

2

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approximately 3%-4%.  In terms of tonnage, MSW has increased at aCAGR of 4.6% during the last five years. Growth in the industry is driven by a combination of population growthand economic activity.  In addition,because waste disposal is an essential service, the volatility of the economiccycle has a lesser impact on industry growth.

 

Collection, transfer and landfill disposal operations,the most localized segments of the non-hazardous solid waste managementindustry, 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,promulgation of new regulations in September 1991 tightened landfill design,operation and 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 2,142 in 2000.

 

In the late 1990’s, the non-hazardous solidwaste management industry experienced a wave of consolidation that resulted ina few publicly-held companies providing nearly 60% of the collection andlandfill services in the United States. Since that time, most of these companies have shifted their focus fromexternal expansion to maximizing internal growth and profitability.  Additionally, as a result of the foregoing,these large companies have been paring their operations and divesting assetsthat are of value to the smaller regional consolidators like us.  We believe that the following factors, whichrepresent benefits of achieving economies of scale and other comparativeadvantages, will lead to additional consolidation among privately-heldregional 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;

 

•                                          permittingand operational regulations make it difficult to obtain and maintain permitsnecessary 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 andexclusive franchise agreements.

 

**CompetitiveStrengths**

** **

We believe that we benefit from the followingcompetitive strengths:

 

***Predictable Revenue Stream with a Solid Base of MunicipalAgreements. ***Becausewaste disposal is an essential service, the volatility of the economic cyclehas a lesser impact on industry growth. In addition, we estimate that, during 2002, more than 30% of our SouthRegion’s revenue was generated from municipal contracts, which typically grantus the exclusive right to collect MSW in a particular municipality, usually fora three to five year term, subject to renewal options.  We also have municipal contracts with theCity of New York that provide for us to transfer and dispose of up to anaggregate of 1,650 tons of solid waste per day collected by the City.  These contracts represented approximately34% of our Northeast Region’s 2002 revenue. At December 31, 2002, we had 256 

 

3

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municipal contracts.  We have been able to maintain and extendthese contracts because of our high levels of service and performance.  From 1998 through 2002, we received contractextensions on 76 of the 83 municipal contracts that came up for renewal.

 

***Proven Record of Acquisition-Based and InternalGrowth.*** We haveexecuted a selective acquisition strategy whereby we have completed more than120 acquisitions since 1995.  We havebeen successful in integrating acquired operations into our regions andcapitalizing on the synergies created. In addition, we have been able to generate internal growth through priceand volume increases.  We had averageprice increases of 3.6% in 2002, 3.4% in 2001 and 4.1% in 2000 and the volumeincreases from our continuing operations—those that we operated during therelevant periods—were 3.8% in 2002, 15.3% in 2001 and 10.6% in 2000.  From 1997 through 2002, we increased ouradjusted EBITDA margins from 5.7% to 22.8% and our net income margins from(13.8)% to 0.3%.** **From 1997, when wehad a net loss of $1.4 million, through 2002, when we had net income of$0.6 million, we grew our revenue at a CAGR of 83% and our adjusted EBITDAat a CAGR of 141%.

* *

***Leading Market Positions.***  More than 80% of our collection revenue in2002 was generated in areas where we believe we are among the top threecommercial providers, as measured by collection routes.  Within our two regions, we providecollection services in 35 areas, which we define based on the location of ouroperations and customers.  We believethat we are the operator with the greatest number of collection routes in 18 ofthose areas, the second greatest number of routes in seven of those areas, andthe third greatest number of routes in four others.  In some of those areas we are the sole provider of collectionservices, and we have a limited number of competitors in others.  In addition, in New York City, we are thethird largest, and the leading privately-held, non-hazardous solidwaste management company.  We haveachieved these leading positions by providing high quality, verticallyintegrated services, made possible in part by our localized focus andexecution, which provide us with operating leverage and a competitive advantagein attracting and retaining customers as compared to our localcompetitors.  For more information onhow we define our collection areas, see “—Local and Regional Structure.”

* *

***Integrated Network of Assets and Regulatory Experience. ***We have built anetwork of integrated assets in many of our local markets that we believe wouldbe difficult, expensive and time-consuming for new competitors toreproduce or develop.  Our 15 landfillsand 22 transfer stations are strategically located to serve most of our 36collection operations.  Our portfolio ofintegrated assets in many of our markets enables us to competeeffectively.  In addition, the extensivefederal, state and local laws and regulations governing the solid wastemanagement industry typically require governmental approval for newfacilities.  We have significantexperience in obtaining and maintaining permits, authorizations and other typesof governmental approvals and believe we have a good reputation andrelationship with industry regulators.

* *

***Experienced Management Team.***  Our core management team, consisting of ourChief Executive Officer, Chief Operating Officer, Chief Financial Officer andChief Development Officer, has 98 years of experience in the solid wastemanagement industry.  Before joining us,each of these officers served in key management positions in large nationalwaste management companies.

 

**BusinessStrategy**

 

Our goal is to be a highly profitable, verticallyintegrated solid waste management company with a significant presence in selectmarkets.  We have built, and seek tocontinue to build through internal growth and acquisitions, verticallyintegrated operations which may consist of one or more of the following:collection companies; transfer stations; recycling facilities; and landfillsserving a local 

 

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market.  We believe that we can realize competitiveadvantages and significant future growth by implementing this strategy acrossexisting and nearby markets.  To achieveour goal, we intend to:

 

***Provide Superior Customer Service.***  We continually aim to improve our customerservice quality and offer value to our customers to solidify our relationshipswith corporate, municipal and residential accounts.  We believe our individual market and customer focus distinguishesus from, and enables us to effectively compete with, larger waste managementcompanies.  Additionally, we strive toact with corporate integrity and environmental responsibility, which, inaddition to our customer service focus, enables us to retain current customersand gain market share by adding new customers.

* *

***Continue to Improve Operational Efficiencies. ***We have developedefficient operating standards tailored to each of our markets.  Using these standards, we track collectionand disposal routing efficiency and equipment utilization.  For all of our operations, we implement costcontrols, employee training and safety procedures and establish sales andmarketing plans with a view to improving margins and becoming a low costoperator.  To improve the productivityand profitability of a newly-acquired business, we apply to it the sameoperating standards, information systems and financial controls that we employin our existing operations.  We believethat there are further opportunities to improve our operating margins and cashflow by achieving even higher rates of waste internalization.

* *

***Continue Expansion in Our South Region.***  We have developed leading market positionsin secondary markets in our South Region. We believe that our South Region has attractive growth potential onwhich we intend to capitalize through the following elements of our strategy:

 

•                                          **InternalGrowth. **We seek to obtainnew municipal contracts, focusing on municipalities that we can integrate intoour existing 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 tocontinue to expand with a selective acquisition strategy that has historicallyallowed us 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 EBITDA and profit margins.  We completed 111 acquisitions in our SouthRegion between 1995 and 2002, of which 89 were “tuck-in” acquisitions,and we evaluate 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.

* *

***Maximize Profitability in the Northeast Region.***  Our Northeast Region operations primarilyservice New York City, which is the largest waste producing municipality in theUnited States.  We intend to capitalizeon this position by:

 

•                                          **IncreasingCapacity of Our Current Network. **Weare currently seeking to obtain permit modifications to expand the permittedvolumes of waste that our landfills and transfer stations in our NortheastRegion may handle.  Increasing ourpermitted landfill volumes will enable us to internalize more of the waste wehandle and thereby retain the 

 

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margin generated by disposal operations that wouldotherwise be earned by third-party disposal facilities.

 

•                                          **AcquiringAdditional Landfills. **Weplan to acquire additional landfills to internalize more of the waste wehandle, which will increase our capacity for, and margins on, waste that wecurrently dispose of in third-party facilities.

 

**Operations**

** **

We provide our services through a network ofvertically integrated assets, including 36 collection operations,22 transfer stations, 15 landfills and seven recycling facilities.

 

***Collection***

 

We provide collection services to more than 485,000residential and approximately 51,000 commercial and industrial customers.  We maintain a fleet of more than 675collection vehicles, which, as of December 31, 2002, had an average age ofapproximately 5.1 years.

* *

*Residential.*  We provide residential waste management services under a varietyof contractual 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 contracts and municipalfranchises typically have three to five year terms, subject to renewaloptions.  Most other arrangements forresidential services have terms that vary from monthly for subscription serviceto up to three years for contracts with homeowners’ associations.  We seek to enter into residential servicearrangements where the route density is high. We base our residential collection fees primarily on route density, thefrequency and level of service, the distance to the processing facility orlandfill, the cost of processing or disposal. Collection fees are paid either by the municipalities from their taxrevenue or directly by the residents receiving the 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 volume customers.  Most commercial and industrial customers areprovided with containers that are designed to be lifted mechanically and eitheremptied into a collection vehicle’s compaction hopper or, in the case of thelarge roll-off containers, to be loaded onto the collection vehicle.  Our standard containers generally range insize from one to eight cubic yards and our roll-off containers generallyrange in size from 20 to 40 cubic yards.

 

Our contracts with commercial and industrialcontainers typically have terms of up to three years, have renewal options andmay not be terminated by the customer prior to the end of the term without apenalty.  Our contracts for roll-offcontainers may provide for temporary services, such as the removal of wastefrom a construction site, and are typically for periods of less than oneyear.  Our fees from these contracts aregenerally fixed over the term of the contract and are determined by factorssuch as collection frequency, type of collection equipment furnished, thedistance to the processing facility or landfill, cost of disposal and type andvolume or weight of the waste collected, as well as general competitive andprevailing local economic conditions.

*** ***

***Transfer Stations***

 

Currently, we operate 22 transfer stations, which arelocated near many of our collection routes and receive the solid waste that hasbeen collected by our and third-party collection vehicles.  We 

 

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typically usesubcontractors to transport the waste from our transfer stations to our orthird-party landfills.  Transferstation fees are generally based on the cost of processing, transportation anddisposal of waste.

 

In addition to improving the utilization of collectionpersonnel and equipment, 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.  Ourtransfer stations also help us build relationships with the municipalities andprivate operators that deliver waste to the transfer stations, which can leadto additional growth opportunities.  Webelieve that, as increased regulations and public pressure restrict thedevelopment of landfills in urban and suburban areas, transfer stations willincreasingly be used as an efficient means to process and transport waste tolandfills and other disposal sites.

*** ***

***Landfills***

 

We operate 12 MSW landfills (ten of which arecurrently active)—two in our Northeast Region and ten in our South Region(eight of which are currently active). We also operate three C&D landfills in our South Region.

 

We monitor the available permitted disposal capacityof our landfills on a regular basis and evaluate whether to seek to expand thiscapacity.  In making this evaluation, weconsider various factors, including the volume of waste disposed of at thelandfill, available acreage, the likelihood of obtaining the necessary approvalsand permits and the costs associated with these items.

*** ***

***Recycling***

 

Our recycling services include collection ofrecyclable materials from residential, commercial and industrial customers, forwhich we charge collection and processing fees.  Our recycling operations also process for sale certain recyclablematerials, such as paper, plastics and aluminum, which are marketed ascommodities and are subject to significant price fluctuations.  To mitigate our exposure to these pricefluctuations, we have entered into a long-term agreement with WeyerhaeuserCompany to purchase our recycled office paper and cardboard.

 

**Localand Regional Structure**

 

We provide collection, transfer, disposal andrecycling services in two geographic regions: our South Region, which includesten operating districts in Texas, Louisiana, Oklahoma, Arkansas and Missouri;and our Northeast Region, which includes two operating districts in New York,New Jersey, Pennsylvania and Maryland. Both our South Region and our Northeast Region are run by local managerswho, along with our Chief Operating Officer, are responsible for implementingour acquisition program, maintaining service quality, promoting operationalsafety, implementing marketing programs, and overseeing day-to-dayoperations, including contract administration.

 

We conduct collection operations in 35 operating areascontained within our districts and regions. We define the boundaries for these areas primarily by the area coveredby the routes of our collection operations. This takes into account the distances from our collection facilities,and locations of available disposal facilities, which affect our ability toprovide economically competitive service. We exclude from our operating areas, locations where municipalitiesconduct collection operations themselves and exclude private haulers and we 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 

 

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positions.  Our competitors, particularly those that arelarger than us, may define their operation areas using different criteria.

 

Our localized structure places decision-makingauthority close to our customers, which we believe enables us to identify ourcustomers’ needs quickly and address those needs in a cost-effectivemanner.  In addition, this localizedapproach reduces overhead costs and establishes a highly efficient operatingstructure that allows for easier expansion into geographically contiguousmarkets.  This approach also permits usto operate in small markets in our South Region which our larger competitorsoften do not find attractive.

*** ***

***South Region***

 

Our South Region’s operations serve customers in thestates of Texas, Louisiana, Oklahoma, Arkansas and Missouri.  By capitalizing on our senior managementteam’s extensive experience in acquiring, integrating and operating solid wastemanagement businesses, particularly in the southern United States, we havegrown this region dramatically.  Wecompleted 111 acquisitions in our South Region between 1995 and 2002.

* *

*Facilities and Services. *We currently operate 33 collection operations, 17 MSWtransfer stations, eight MSW landfills, three C&D landfills and sixrecycling facilities in our South Region. We currently also have two landfills in our South Region underconstruction, each of which we anticipate opening in mid-2003.  Our South Region’s operations serve morethan 485,000 residential customers and 37,000 commercial and industrialcustomers.  This base includes customersserved pursuant to 256 municipal contracts. Our South Region generated revenue of $128.3 million and income fromoperations before corporate overhead of $16.1 million during 2002.

 

We seek to create vertically integrated operationswithin each district that include collection, transfer and disposalservices.  In addition, we attempt tointernalize into our own landfills as much as possible of the waste that wecollect.  In certain districts, such asEast Texas, Arkansas, Northwest Texas and Louisiana, we currently internalize asubstantial majority of our collected waste. In other districts, such as Central Texas and Fort Worth, we currentlyinternalize our collected C&D waste but rely on other disposal alternativesfor our collected MSW.

 

In collection areas where we do not currently operatea MSW landfill or lack the MSW landfill capacity necessary to fully service ourtransfer stations and collection operations, we utilize a variety of low costdisposal alternatives, including:

 

•                                          negotiatingbelow-market rates through long-term contracts with privateoperators;

 

•                                          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 ofwaste we internalize in order to lower our costs by acquiring or permittingadditional landfill capacity.

 

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The following table summarizes the facilities in eachof our South Region’s ten operating districts as of December 31, 2002: 

 
| **District**                  |   | **Collection****Operations** |   | **Transfer  Stations(1)** |   | **Landfills** |   | **Recycling  Facilities** |   |
|-------------------------------|--------|------------------------------|--------|---------------------------|--------|---------------|--------|---------------------------|--------|
|                          |   |                         |   |                      |   |          |   |                      |   |
| Arkansas                      |   | 3                            |   | 2                         |   | 1             |   | 2                         |   |
| Louisiana                     |   | 4                            |   | 3                         |   | 4             |   | 1                         |   |
| Oklahoma                      |   | 3                            |   | 6                         |   | 2             |   | —                    |   |
| Central Texas                 |   | 3                            |   | 1                         |   | 1             |   | —                    |   |
| East Texas/Northern Louisiana |   | 3                            |   | —                    |   | 1             |   | —                    |   |
| Fort Worth                    |   | 6                            |   | 2                         |   | 1             |   | 1                         |   |
| Missouri                      |   | —                       |   | —                    |   | 1             |   | —                    |   |
| North Texas                   |   | 4                            |   | —                    |   | —        |   | 1                         |   |
| Northwest Texas               |   | 5                            |   | 3                         |   | 1             |   | —                    |   |
| South Texas                   |   | 2                            |   | —                    |   | 1             |   | 1                         |   |
| Total                         |   | 33                           |   | 17                        |   | 13            |   | 6                         |   |

 

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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 operationsin our South Region as of December 31, 2002: 

 
| **Landfill**         |   | **Type of Waste** |   | **Estimated Remaining****Operating Lives****(in Years)(1)** |   | **Owned/Operated** |
|----------------------|--------|-----------------------------|--------|----------------------------------------------------------------------------|--------|--------------------|
|                 |   |                        |   |                                                                       |   |               |
| Cherokee Village, AR |   | MSW and C&D             |   | 88                                                                         |   | Owned              |
| Henderson, TX        |   | MSW and C&D             |   | 33                                                                         |   | Owned              |
| Iowa Park, TX        |   | MSW and C&D             |   | 94                                                                         |   | Owned              |
| Jena, LA             |   | MSW and C&D             |   | 1                                                                          |   | Operated           |
| Kountze, TX          |   | MSW and C&D             |   | 47                                                                         |   | Owned              |
| Oakdale, LA(2)       |   | MSW and C&D             |   | 50                                                                         |   | Owned              |
| Prague, OK           |   | MSW and C&D             |   | 8                                                                          |   | Owned              |
| Sabine, LA           |   | MSW and C&D             |   | 8                                                                          |   | Operated           |
| St. Joseph, LA  |   | MSW and C&D             |   | 6                                                                          |   | Operated           |
| Austin, TX           |   | C&D                     |   | 12                                                                         |   | Owned              |
| Fort Worth, TX       |   | C&D                     |   | 24                                                                         |   | Owned              |
| Frederick, OK        |   | C&D                     |   | 19                                                                         |   | Operated           |
| Richwoods, MO(2)     |   | MSW and C&D             |   | 64                                                                         |   | Owned              |

 

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(1)          Calculated based oncurrent permitted capacity.  Withrespect to “operated” landfills, “Estimoated 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).

 

(2)          Represent recentlyacquired, fully permitted landfills which are currently underconstruction.  We anticipate opening thelandfills in mid-2003.

 

Our internal and external engineers calculate theestimated remaining operating life of a landfill (in years) by dividing(a) the landfill’s remaining available volume (in tonnage or yardage),represented 

 

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by the difference between(i) the aggregate available landfill volume allocated to the landfillpursuant to the permits obtained for the landfill and (ii) the volumereceived to date at the landfill (based on land surveys periodically preformedat the landfill), by (b) the landfill’s estimated annual volume.

 

We have requested, or are in the process ofrequesting, permits to vertically and/or horizontally expand our landfills inJena, Sabine, and St. Joseph, LA and in Prague, OK.  If and when granted, and based on thecurrent design of the expansion area, the applicable landfill lives will beincreased to: Jena, more than 75 years; Sabine, more than 40 years;St. Joseph, more than 160 years; and Prague, more than 60 years.  Permits are difficult, time consuming andexpensive to obtain and, accordingly, we cannot assure you that we will be ableto obtain the requested permits.  If wedo not obtain one or more of the requested permits to expand these landfills,it could reduce our 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 Item 7. “Management’s Discussion andAnalysis 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. *We have pursued a selective acquisition strategy thathas allowed us to consolidate collection routes into our existing operations inorder to gain market share while eliminating overhead and operating costs.  Additionally, we look to enter new marketsadjacent to our existing operations.  Wecompleted 111 acquisitions in our South Region between 1995 and 2002, of which23 were in new markets and 89 were “tuck-in” acquisitions.

 

The following table summarizes our acquisitionactivity in our South Region as of December 31, 2002:

** **

**South RegionAcquisition Summary**

** **
|     |   | **Businesses Acquired** |   |
|----------|--------|------------------------------|--------|
| **Year** |   | **Collection**               |   | **Transfer Station** |   | **Landfill** |   | **Recycling** |   | **Approximate****AnnualizedRevenue(1)** |   |
|     |   |                         |   |   |   |   |   |   |   | **(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 |   |   |
|          |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

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***Northeast Region***

 

Our Northeast Region’s operations are located in thestates of New York, New Jersey, Pennsylvania and Maryland, and consist of threecollection operations, three MSW transfer stations, one C&D transferstation, one asbestos transfer station, two MSW landfills and one paperrecycling facility.  Our Northeast Region’soperations serve more than 14,000 commercial customers.  We believe that we are the third largest,and the leading privately-held, non-hazardous solid wastemanagement service provider in New York City. We believe that our network of transfer stations in New York City wouldbe very hard to duplicate going forward. We believe that, due to the scarcity of land and the difficulty ofobtaining permits for transfer stations, a large majority of the remaining independentcollection companies in New York City lack the vertical integration andeconomies of scale necessary to supply cost-effective services.  Our Northeast Region generated revenue of$84.6 million and income from operations before corporate overhead of$12.2 million during 2002.  We havecompleted 18 acquisitions since 1998 in our Northeast Region, primarily in NewYork City.

* *

*Facilities and Services.*  We divide our Northeast Region operationsinto two districts: New York/New Jersey and Pennsylvania. In our New York/NewJersey district, we have collection operations located in Bronx, New York andin Jersey City, New Jersey, both of which primarily service customers inManhattan.  In New York City, we haveconcentrated our collection routes in Manhattan due to the availability ofdense routes, high margin commercial customers, a high mix of recyclable paperproduct, and close proximity to our transfer stations and recyclingfacility.  Our collection operations inour Pennsylvania district serve customers in southern Pennsylvania and northernMaryland.

 

Almost all of the MSW and recyclable paper we handlein our Northeast Region is transferred through our three MSW transfer stationsor our recycling facility.  We typicallytransport MSW from our transfer stations to landfills in Pennsylvania which arelocated between 100 - 300 miles outside New York City.  In August 2000, the City of New York awardedus two three-year contracts, each with two optional one-yearrenewals, which collectively provide for us to transfer and dispose of up to anaggregate of 1,650 tons of MSW per day collected by the City.  The City’s trucks collect primarilyresidential waste in Brooklyn and deliver it to two of our Brooklyn transferstations.  The City delivers averagedaily volumes of approximately 1,350 tons pursuant to these contracts.  The City recently completed a solicitationof bids for the disposal of up to 4,000 tons of MSW per day that the Citycollects in Brooklyn which includes the waste currently covered by our existingcontracts with the City.  We submitted bidsto transfer and dispose up to 1,500 tons of the waste covered by thesolicitation of bids.  We cannot predictwhether we will be successful in all or any portion of our bids, or what effectthe bids submitted by us and our competitors will have on our existingcontracts or the City’s options to renew those contracts.  See Item 7. “Management Discussion andAnalysis of Financial Condition and Results of Operations—General—Sourcesof Revenue.”

 

To the extent possible, we seek to internalize all theMSW received by our transfer stations into our landfills.  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 facilities forspecific uses, and the remaining material is transferred in transfer trailersto third-party landfills on Long Island, New York or in Ohio.  Asbestos that has been abated by otherparties is delivered to our asbestos transfer station and is placed on long-haultrailers and transferred to our landfills in Pennsylvania.

 

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The following table summarizes the facilities in eachof our Northeast Region’s operating districts as of December 31, 2002: 

 
| **District**        |   | **Collection  Operations** |   | **Transfer  Stations** |   | **Landfills** |   | **Recycling****Facilities** |   |
|---------------------|--------|----------------------------|--------|------------------------|--------|---------------|--------|-----------------------------|--------|
|                |   |                       |   |                   |   |          |   |                        |   |
| New York/New Jersey |   | 2                          |   | 5                      |   | —        |   | 1                           |   |
| Pennsylvania        |   | 1                          |   | —                 |   | 2             |   | —                      |   |
|                |   |                       |   |                   |   |          |   |                        |   |
| Total               |   | 3                          |   | 5                      |   | 2             |   | 1                           |   |

 

The following table summarizes our transfer stationoperations in our Northeast Region as of December 31, 2002: 

 
| **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             |
| Fifth Street, Brooklyn    |   | 500 cu. yds.                                    |   | Abated Asbestos     |

 

We have a recycling facility in Jersey City, NewJersey, where we currently process approximately 5,900 tons of paper productsthat we collect in Manhattan each month. Approximately 72% of the paper we process at this facility, mostlyoffice paper and corrugated cardboard, is recycled, and the remaining 28% issent to a landfill.  The price paid bypurchasers for recycled paper products is based on fluctuating commodityprices.  To mitigate the effect of theseprice fluctuations, we have entered into a long-term agreement withWeyerhaeuser to purchase our recycled office paper and cardboard.  This recycling facility represented 4.3% ofour Northeast Region’s 2002 revenue.

 

Our Pennsylvania district is primarily composed oflandfill operations.  In 2002, wetransferred over 30% of the total waste we handled in New York City to ourPennsylvania landfills.  The followingtable summarizes our landfill operations in our Northeast Region as ofDecember 31, 2002: 

 
| **Landfill Location** |   | **Type of****Waste** |   | **Estimated Remaining****Operating Lives (in Years)(1)** |   | **Owned/****Operated** |   |
|----------------------------|--------|---------------------------|--------|------------------------------------------------------------------------------|--------|------------------------|--------|
| Bethlehem, PA              |   | MSW                       |   |                                                                         | 0.3    |                   |   | Owned |   |
| Chambersburg, PA           |   | MSW                       |   |                                                                         | 26.0   |                   |   | Owned |   |

 

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(1)           Calculated based on current permitted capacity.

 

The permitted average daily volume is currently 750tons for our Bethlehem landfill and 857 tons for our Chambersburglandfill.

 

We have requested a permit to vertically andhorizontally expand our Bethlehem landfill. If and when such permit is granted, and based on the current design ofthe expansion area, the landfill life will increase to 14 years and thepermitted average daily capacity will increase to 1,375 tons.  In November 2002, we received a Phase Ienvironmental assessment approval from the Pennsylvania Department ofEnvironmental Protection, or PA DEP, with respect to our permit expansionapplication.  The PA DEP is currentlyundertaking a Phase II technical review of our application and we expectto receive final approval thereof in April 2003.  If the Phase II review is successfully completed andapproved, the permit should be issued shortly thereafter.  Pending issuance of the permit, we recentlybegan reducing the daily 

 

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volume of waste we acceptat the landfill so as to extend the remaining operating life of the landfillunder the existing permit to mid-April. In addition, we have requested a permit to increase the average dailyvolume at our Chambersburg landfill to 1,450 tons.  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 Item 7. “Management’s Discussion andAnalysis of Financial Conditions and Results of Operations—Risk Factors—OperatingPermits—We may not be able to obtain permits we require to operate ourbusiness.”

 

*Northeast Region Acquisitions.*  We completed our first New York Cityacquisition in February 1998, and to date, we have completed 18 acquisitions inour Northeast Region.  In June 1999, wecompleted a significant acquisition consisting of two New York City MSWtransfer stations, two Pennsylvania MSW landfills and two Pennsylvaniacollection operations for approximately $65.0 million.  These two landfills receive 90% of ourcollection route volumes in our Northeast Region, allowing us to internalizemuch of the waste from our collection routes and achieve vertical integration.

 

**Northeast RegionAcquisition Summary**

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

 

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

 

**AcquisitionProgram**

 

In pursuing our acquisition strategy, we focus onidentifying attractive markets in which to acquire assets and which we believeprovide significant opportunities to execute our business strategy.  We believe that we have attractive growthpotential into locations close to existing operations in our South Region,which will improve our operating margins and cash flow.  We intend to continue to expand by means ofacquiring or creating additional integrated opportunities or by internalizingacquired businesses into our existing network. In our Northeast Region, we intend to increase the capacity of our existingnetwork by acquiring additional landfills to internalize the waste we collector handle at our transfer stations.

 

We have developed a set of financial, geographic andmanagement criteria to evaluate specific acquisition candidates.  Some of the factors that we consider inevaluating an acquisition candidate include:

 

•                                          expectedreturn on invested capital;

 

•                                          thecandidate’s historical and projected financial performance;

 

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•                                          in situationswhere 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;

 

•                                          whether thegeographic 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;

 

•                                          whether theacquisition will increase our market share or help protect our existing customerbase;

 

•                                          whether thecandidate may 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;

 

•                                          results of anenvironmental review typically consisting of a Phase I review, and, in thecase of landfills or when concerns are triggered by a Phase I review, aPhase II review; and

 

**•**                                          theexisting liabilities of the candidate.

 

With respect to potential landfill acquisitions inparticular, we seek to identify acquisition candidates to improve our verticalintegration and operating margins in our two regions in markets where theeconomic and regulatory environment makes those acquisitions attractive.  We evaluate landfill candidates bydetermining, among other things:

 

•                                          the amount ofwaste that could be diverted to the landfill;

 

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

 

•                                          the expectedpermitted life of the landfill in terms of the landfill’s future volumecapacity;

 

•                                          the potentialfor expanding the landfill; and

 

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

 

Our method of integrating an acquired company with ourexisting operations will depend on whether we are acquiring a company in a newmarket or acquiring a company that will be “tucked into” an existingoperation.  Before acquiring a company,we perform extensive environmental, operational, engineering, legal, humanresources and financial due diligence. Our district management prepares a written integration plan which isapproved by senior management prior to the close of the acquisition.  As part of our due diligence, we also puttogether a strategy to absorb or integrate the target company’s operations andadministration into our infrastructure with minimal disruption to the ongoingoperations of 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 

 

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acquired business shouldimmediately be able to take full advantage of our resources and expertise, suchas our financial reporting package and buying power in the areas of insurance,purchasing and benefits.

 

Our board of directors must approve the terms andconditions of all acquisitions with purchase prices in excess of$12.5 million, but has authorized our management to approve acquisitionswith purchase prices equal to or less than $12.5 million within certainparameters.  We believe our seniormanagement team has a proven track record in integrating acquisitions.  Acquisitions must also be approved by thedirectors designated by certain of our key stockholders.  See Item 13. “Certain Relationships andRelated Transactions—Amended and Restated Stockholders’ Agreement.”

** **

**Marketing**

 

Our marketing and sales strategies are formulated atthe regional level.  We market ourservices locally through our sales managers and representatives, many of whomreceive a significant portion of their compensation based on meeting certainincentive targets.  As of December 31,2002, we had approximately 53 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 atcommercial and industrial customers, in our South Region we have municipalmarketing representatives in most service areas, who are responsible forinterfacing with each municipality or community to which we provide residentialservice to ensure customer satisfaction. Our municipal representatives organize and handle bids for renewal andnew municipal contracts in their service areas.

 

Our local presence and identity is an important aspectof our marketing plan, and many of our managers are involved in localgovernmental, civic and business organizations.  Our name and logo are displayed on all our containers, trucks anduniforms worn by our employees. Additionally, we attend and make presentations at municipal and stateconferences and industry trade shows and advertise in governmentalassociations’ membership publications.

** **

**Employees**

 

As of December 31, 2002, we had approximately1,400 full-time employees. Approximately 212, or 15%, of our employees are covered by collectivebargaining agreements negotiated with three different labor unions.  Of our unionized employees, 189 arerepresented by Waste Material, Recycling and General Industrial Laborers,Local 108, under a contract that expires on February 28, 2005.  An additional 15 employees arerepresented by the Private Sanitation Union Local 813 (affiliated with theInternational Brotherhood of Teamsters) under a contract that expires onNovember 30, 2005.  Another eightemployees are represented by the League of International Federated Employees(Local 890) under a contract that expires on June 30, 2004.  We believe our relationships with ouremployees are generally satisfactory.

** **

**RiskManagement, Insurance and Performance or Surety Bonds**

 

We actively maintain environmental and other riskmanagement programs that we believe are appropriate for our business.  Our environmental risk management programincludes evaluating existing facilities, as well as potential acquisitiontargets, for environmental law compliance and operating procedures.  We do not expect environmental compliancecosts to increase on a percentage basis above current levels but we cannotpredict whether future acquisitions or regulatory changes will cause these 

 

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costs to increase.  We also maintain a worker safety programthat encourages safe practices in the workplace.

 

We carry a broad range of insurance, which we consideradequate to protect our assets and operations and customary for companies inour industry.  Our coverage includesgeneral liability, 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 a separate general pollution liability policy coveringliabilities for environmental problems at our landfills or transferstations.  In recent years, theinsurance industry has experienced unusually large financial losses andinsurers have aggressively raised premiums and deductibles to offset losses andexposure.  Recently, we have experiencedincreases in premiums significantly above the rate of inflation.  To date, we have been able to pass theseadditional costs on to our customers in the form of price increases.

 

Municipal solid waste collection contracts typicallyrequire performance bonds or other means of financial assurance to securecontractual performance.  Certainenvironmental regulations also require demonstrated financial assurance to meetclosure, final closure and post-closure requirements for landfills.  At December 31, 2002, we had providedcustomers and various regulatory authorities with surety bonds and letters ofcredit in the aggregate amount of approximately $70.8 million to secureour obligations.  Our senior creditfacility provides for the issuance of letters of credit in an aggregate amountup to $30.0 million.  We hadapproximately $8.9 million of outstanding letters of credit atDecember 31, 2002.  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 businessand the ability to operate profitably in our industry require substantialamounts of capital and managerial experience.

 

Competition in the non-hazardous solid wastemanagement industry comes from a number of large, national, publicly-ownedcompanies, including Waste Management, Allied Waste Industries, Inc., RepublicServices, Inc.  and VivendiEnvironnement, several regional, publicly-owned companies, such as WasteConnections, Inc., Casella Waste Systems, Inc., and Waste Industries USA, Inc.,and from thousands of mid-size to small privately-owned companiesin their respective markets.  Certain ofour competitors have significantly larger operations, and significantly greaterfinancial resources, than we have.  Inaddition to national and regional firms and numerous local companies, wecompete in a few markets with those municipalities that maintain wastecollection or disposal operations. These municipalities may have financial advantages due to their accessto user fees and similar charges, tax revenue and tax-exempt financing,and some control of the disposal of waste collected within their jurisdictions.

 

We compete for collection accounts primarily on thebasis of price and the quality of our services.  From time to time, competitors may reduce the price of theirservices in an effort to expand market share or to win a competitively bidmunicipal contract.

 

In each market in which we operate a landfill, wecompete for landfill business on the basis of disposal costs, geographicallocation and quality of operations.  Ourability to obtain landfill business may 

 

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be limited by the factthat integrated collection companies also operate landfills to which they sendtheir waste.

** **

**Regulation**

*** ***

***Introduction***

 

Our operations, including landfills, wastetransportation, transfer stations, recycling facilities, vehicle maintenanceshops and fueling facilities, are subject to extensive and evolving federal,state and local environmental laws and regulations, which have becomeincreasingly stringent in recent years. The EPA and other federal, state and local environmental, land use, healthand safety agencies administer these laws and regulations.  These laws and regulations have required us,as well as the other industry participants, to incur substantial operatingcosts to comply.  Because we havehistorically been subject to such costly regulatory compliance, holding othervariables constant, we typically do not experience material increases in suchcompliance costs when comparing year over year results, nor do we anticipateany such material increases.  However,further regulatory changes could accelerate expenditures for closure andpost-closure obligations and obligate us to spend sums in addition to thosepresently reserved for such purposes substantially increasing our operatingcosts.

 

We believe that we are in substantial compliance withapplicable federal, state and local environmental laws, permits, orders andregulations.  We do not anticipate anymaterial costs necessary to bring our operations into compliance (althoughthere can be 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 certainoperational, monitoring, site maintenance, closure, post-closure and otherobligations which give rise to increased costs for compliance and correctivemeasures.  In connection with ouracquisition and continued operation of existing landfills, we must often spendconsiderable time, effort and money to obtain permits required to increase thecapacity of these landfills.  We cannotdefinitively predict whether or not we will be able to obtain the governmentalapprovals necessary to establish new or expand existing landfills.  See also Item 7. “Management’s Discussionand Analysis of Financial Condition and Results of Operations—Liquidity andCapital Resources—Liquidity.”

 

The principal federal, state and local statutes andregulations that apply to our operations are described below.  Enforcement actions under these statutes mayseek civil and/or criminal penalties, as well as injunctive relief in someinstances.  All of the federal statutesdescribed below contain provisions that authorize, under certain circumstances,lawsuits by private citizens to enforce the provisions of the statutes.  In addition to a penalty award, some ofthose statutes authorize an award of attorneys’ fees to parties whosuccessfully bring such actions.

 

***The Resource Conservation and Recovery Act of 1976, asamended***

 

RCRA regulates the generation, treatment, storage,handling, transportation and disposal of solid waste and requires states todevelop programs to ensure the safe disposal of solid waste.  RCRA divides solid waste into two groups,hazardous and non-hazardous. Wastes are generally classified as hazardous if they either (i) arespecifically included on a list of hazardous wastes, or (ii) exhibit certaincharacteristics defined as hazardous. Household wastes are specifically designated as non-hazardous.  Wastes classified as hazardous under RCRAare subject to much stricter regulation than wastes classified 

 

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as non-hazardous.  Businesses that generate or manage hazardouswaste are subject to regulatory obligations above and beyond those imposed onbusinesses that generate or manage only non-hazardous waste.

 

The EPA regulations issued under Subtitle C of RCRAimpose a comprehensive system for tracking the generation, transportation,treatment, storage and disposal of hazardous wastes.  The Subtitle C regulations impose obligations on generators,transporters and disposers of hazardous wastes, and generally require permitsthat are costly to obtain and maintain for sites where hazardous waste istreated, 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 do not transport or dispose of hazardouswastes.

 

In October 1991, the EPA adopted new Subtitle Dregulations governing solid waste landfills. These regulations, which generally became effective in October 1993,include location restrictions, facility design standards, operating criteria,closure, final closure and post-closure requirements, financial assurancerequirements, groundwater monitoring requirements, groundwater remediationstandards and corrective action requirements. In addition, the Subtitle D regulations require that new landfill sitesmeet stringent liner design criteria (typically, composite soil and syntheticliners or two or more synthetic liners) intended to keep potentially toxicliquids and leachate out of groundwater and that they have extensive collectionsystems to carry 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 petroleumand other regulated materials.  RCRArequires registration of underground storage tanks, compliance with technicalstandards for tanks, release detection and reporting and corrective action,among other things.  Certain of ourfacilities and operations are subject to these requirements.

 

From time to time, we may incur costs in complyingwith the foregoing requirements in the ordinary course of our operations.

 

***The Federal Water Pollution Control Act of 1972, asamended***

 

This act, commonly known as the Clean Water Act,regulates the discharge of pollutants into streams and other waters of theUnited States, from a variety of sources, including solid waste disposalsites.  If runoff from our landfills ortransfer stations may be discharged into surface waters, the Clean Water Actrequires us to apply for and obtain discharge permits, conduct sampling andmonitoring and, 

 

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under certaincircumstances, reduce the quantity of pollutants in those discharges.  The EPA has expanded the permit program toinclude stormwater discharges from landfills that receive, or in the past havereceived, industrial waste.  Inaddition, if we plan development that may alter or affect wetlands, we may haveto obtain a permit and undertake mitigation measures before development may becommenced.  This requirement is likelyto affect the construction or expansion of many solid waste disposal sites,including some we own, operate or are developing.

 

***The Comprehensive Environmental Response, Compensationand Liability Act of 1980, as amended***

 

CERCLA addresses contamination of the environmentcaused by the release or threatened release of hazardous substances.  CERCLA’s primary mechanism for accomplishingthe cleanup of such contamination is to impose strict (i.e.  liability imposed without regard to fault),joint and several liability for cleanup on current owners and operators of thecontaminated site, former site owners and operators at the time of disposal,and parties who transported or arranged for disposal of hazardous substances toor at the facility.  The costs of aCERCLA cleanup can be substantial. Liability under CERCLA can arise from the presence or disposal of evenminute amounts of the more than 700 “hazardous substances” listed by the EPA.

 

***The Clean Air Act of 1970, as amended***

 

The Clean Air Act of 1970, as amended, regulates theemission of air pollutants.  The EPA hasapplied the Clean Air Act to landfills. In March 1996, the EPA adopted New Source Performance Standard andEmission Guidelines for MSW landfills. These regulations impose limits on air emissions from solid wastelandfills.  The emission guidelinespropose two sets of emissions standards, one of which is applicable to all MSWlandfills for which construction, reconstruction or modification was commencedbefore May 30, 1991.  The other appliesto all MSW landfills for which construction, reconstruction or modification wascommenced on or after May 30, 1991.  Theemission guidelines may be implemented by the states.  These guidelines, combined with the permitting programsestablished under the Clean Air Act Amendments of 1990, potentially subjectsolid waste landfills to significant permitting requirements and, in someinstances, require installation of costly methane gas recovery systems.

 

***The Occupational Safety and Health Act of 1970, asamended***

 

The Occupational Safety and Health Act of 1970, asamended, or OSHA, established certain employer responsibilities, includingmaintenance of a workplace free of recognized hazards likely to cause death orserious injury, compliance with standards promulgated by the OccupationalSafety and Health Administration, and various record-keeping, disclosureand procedural requirements.  Variousstandards, including standards for notices of hazards, safety in excavation anddemolition work, and the handling of asbestos, may apply to our operations.

 

***Future Legislation***

 

In the future, our collection, transfer and landfilloperations may also be affected by legislation that was proposed in theU.S.  Congress governing interstateshipments of waste.  This type ofproposed federal legislation could prohibit or limit the disposal of out-of-statewaste under certain circumstances.  Inthe past, proposed legislation would have required states, under certaincircumstances, to reduce the amounts of waste exported to other states.  If this or similar legislation is enacted,our ability to accept out-of-state waste could be limited oreliminated, and any of our landfills that receives a significant 

 

19

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portion of wasteoriginating from out-of-state could be materially adverselyaffected.  Our collection, transfer andlandfill operations may also be affected by “flow control” legislation.  Certain states and local governments mayenact laws or ordinances directing waste generated within their jurisdiction toa specific facility for disposal or processing.  If this or similar legislation is enacted, state or localgovernments could act to limit or prohibit disposal or processing of waste inour transfer stations or landfills.

 

***Other Flow Control/Interstate Waste Restrictions***

 

Certain permits and approvals, as well as certainstate and local regulations, may require a landfill or transfer station tolimit the waste it accepts to waste that originates from specified geographicareas, restrict the importation of out-of-state waste or wastesoriginating outside the local jurisdiction or otherwise discriminate againstnon-local waste.  Theserestrictions, generally known as flow control restrictions, are controversial,and some courts have held that some flow control schemes violate constitutionallimits on state or local regulation of interstate commerce.  These types of actions could adverselyaffect our landfills.  Theserestrictions could also result in higher disposal costs for our collectionoperations.

 

Certain state and local jurisdictions may also seek toenforce flow control restrictions through local legislation orcontractually.  In certain cases, we mayelect not to challenge the restrictions. These restrictions could reduce the volume of waste going to landfillsin certain areas, which may adversely affect our ability to operate ourlandfills at their full capacity and/or reduce the prices that we can chargefor landfill disposal services.  Theserestrictions may also result in higher disposal costs for our collection operations.

 

***State and Local Regulations***

* *

*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.  State and local permits and approvals forthese operations may be required and may be subject to periodic renewal,modification or revocation by the issuing agencies.  In addition, many states have adopted statutes comparable to, andin some cases more stringent than, CERCLA. These statutes impose requirements for investigation and cleanup ofcontaminated sites and liability for costs and damages caused bycontamination.  Some even provide forthe imposition of liens on property owned by responsible parties.  Some of those liens may take priority overpreviously filed instruments. Furthermore, many municipalities also have local ordinances, laws andregulations affecting our operations. These include land use and health measures that:

 

•                                          limit solidwaste management activities to specified sites or conduct;

 

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

 

•                                          include lawsthat grant the right to establish exclusive municipal contracts for collectionservices and then put out for bid the right to provide collection services; and

 

•                                          ban orrestrict the movement of solid wastes into a municipality.

 

Permits or other land use approvals with respect to alandfill, as well as state or local laws and regulations, may specify thequantity of waste that may be accepted at the landfill during a given time 

 

20

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period, and/or specifythe 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 hasbeen to mandate and encourage waste reduction at the source and wasterecycling, and to prohibit or restrict the disposal of certain types of solidwastes, including yard wastes, leaves and tires in landfills.  If regulations reducing the volume and typesof wastes available for transport to and disposal in landfills are enacted, wecould be prevented from operating our facilities at their full capacity.

 

Some state and local authorities enforce certainfederal laws in addition to state and local laws and regulations.  For example, in some states, RCRA, OSHA,parts of the Clean Air Act and parts of the Clean Water Act are implemented bylocal or state authorities instead of by the EPA, and in some states those lawsare implemented jointly by federal, state or local authorities.

 

Some states and local authorities have adopted orproposed laws and regulations that would impose fees on waste disposed of atlandfills.  For example, new legislationwas recently enacted in Pennsylvania that, effective as of July 9, 2002,imposes an additional disposal fee of $4.00 per ton on all solid waste disposedat MSW landfills in Pennsylvania, raising the total disposal fees assessedunder state law to MSW landfill operators to $7.25 per ton.  See Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Sources ofRevenue.”  Similarly, Virginia hasconsidered legislation that would impose a fee of an additional $5 on each tonof waste disposed of at landfills in that state.  Other proposed laws and regulations would impose an annual fee oncollection vehicles doing business in the applicable jurisdiction.  If these laws or regulations are adopted injurisdictions where we operate landfills or collection vehicles, our operationsand profitability could be negatively affected.

* *

*New York City.*  The New York City Trade Waste 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 Trade Waste Commission andestablished rules for licensing and regulating the operations of the privatecollection industry in New York City. The law prohibits the collection, disposal or transfer of commercial andindustrial waste without a license issued by the Trade Waste Commission andrequires Trade Waste Commission approval of all acquisitions or other businesscombinations in New York City proposed by all licensees.  The Trade Waste Commission issued a licenseto us for our New York City collection operations on December 1, 1997.  A licensee generally must submit for reviewby the Trade Waste Commission each acquisition, sale or merger transaction 120days before the transaction takes effect, although the amount of time requiredfor review depends on the complexity of the transaction and the need by theTrade Waste Commission to investigate the background of the principals involved.

 

The Trade Waste Commission also sets maximum rates forthe industry and establishes operational requirements.  In May 1997, the Trade Waste Commissionlowered the maximum collection rates that licensed companies may charge.  The Trade Waste Commission has placed amaximum limitation of $12.20 per loose yard on the fees a hauler can charge toa commercial customer for waste collection services.  Disposal facilities in and around New York City charge by theton.  Based on the weight of certaincustomers’ loose yardage it is not economical for us to service heavy weightedcustomers.  Accordingly, our New YorkCity collection business focuses on customers that have loose garbage that islighter and on those customers that have a large paper recycling component,which enables us to reduce our cost of disposal.

 

21

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***Recycling***

 

Another of the EPA’s objectives is to reduce theindustry’s reliance on landfills by promoting source reduction andrecycling.  In 1989, the EPA set anational goal of recycling 25% of the waste stream by 1992 and 40% by1996.  Although this goal was notachieved, significant changes in the level of recycling have occurred.  According to the EPA, in 1998, the MSWrecycling rate was 28.2%.  The EPA’scurrent recycling goal is 35% by 2005.

 

Recycling, now mandated by most states, has receivedmuch attention over the past few years in response to a perceived shortage oflandfill space and increased disposal fees at landfills.  Of equal importance has been the public’sperception that recycling is a socially desirable goal, regardless ofcost.  Items targeted most often forrecycling include aluminum, metal cans, glass, plastics, newspapers and yardwaste.  Many municipal waste collectionand disposal contracts now require that the collection and handling ofrecyclables also be provided by the hauler.

 

Recycling activities do not reduce the amount of wastegenerated.  Rather, recycling dividesexisting trash between recyclables and unrecyclable trash that will be disposedof at a landfill or an incinerator. Haulers are usually compensated for recycling collection activities by amunicipality with a fixed monthly collection charge per residence and the saleproceeds from the recycled material.  Thevolatility of commodity prices for recycled goods has an effect on profitmargins for recycling operations.

 

While a portion of the commercial, industrial andresidential waste is now recycled industry-wide, the growth of recyclinghas slowed recently and its future remains uncertain.  The detrimental economic effects of recycling often outweigh theperceived social benefits.  Theimposition of recycling programs increases the costs to municipalities andconsumers alike.  Much of the projectedgrowth for recycling will depend upon new government regulations which couldmandate that industries utilize more recycled products in their manufacturingprocess.

 

**Item 2.  Properties**.

 

As of December 31, 2002, we operated36 collection operations, 22 transfer stations, 13 landfills andseven recycling facilities in our two regions. As of such date, we also had two landfills under construction, each ofwhich we anticipate opening in mid-2003. For more information, see Item 1. “Business—Operations.”

 

We lease various offices and facilities, including ourprincipal executive offices in Haltom City, Texas and our regional executiveoffices in Bayonne, New Jersey.

 

We own more than 675 waste collection vehicles and 150support vehicles.  We also own variousother equipment, including, carts, containers, commercial compactors and morethan 130 pieces of heavy equipment used at our landfills, transfer stations,and recycling facilities.  We believethat our existing facilities and equipment are generally adequate for our currentoperations.  Substantially all of ourassets secure our obligations under our senior credit facility.

 

**Item 3.  LegalProceedings**.

 

From time to time, we are involved in litigation andadministrative proceedings which arise in the ordinary course of ourbusiness.  Management does not believethat any of the litigations or proceedings in which we are currently involved,either individually or in the aggregate, are likely to have a material adverseeffect on our business, financial condition, operating results or cash flows.

 

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

 

No matters were submitted to a vote of our securityholders during the fourth quarter of 2002.

 

 

22

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**PARTII**

** **

**Item5**.  Market for the Registrant’s Common Equityand Related Stockholder Matters.

 

**Market Information**

 

There is no established public trading market for anyclass of equity securities of the Company.

 

As of March 15, 2003, there were eight record holdersof our Class A voting common stock and 17 record holders of our Class Bnon-voting common stock.

 

**DividendPolicy**

 

We have not paid cashdividends on either our Class A voting common stock or Class B non-votingcommon stock and do not anticipate paying any such dividends in the foreseeablefuture.  We are currently prohibited bythe terms of our loan agreements from paying cash dividends.

 

**RecentSales of Unregistered Securities**

 

None.

 

23

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**Item6**.  Selected Financial Data.

 

We set forth below our selected historicalconsolidated financial data.  Theinformation in the following table is qualified by reference to, and should beread in conjunction with, Item 7. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our consolidated financialstatements and the related notes included elsewhere in this Annual Report onForm 10-K.

 

The selected historical statement of operations dataand cash flow data for the years ended December 31, 2000, 2001 and 2002and the selected historical balance sheet data at December 31, 2001 and2002 set forth below have been derived from our audited consolidated financialstatements included 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, 1998and 1999 and the selected historical balance sheet data at December 31,1998, 1999 and 2000 set forth below have been derived from our audited consolidatedfinancial statements not included in this Annual Report on Form 10-K.  See Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the notes to ourconsolidated financial statements regarding acquisitions occurring in 2000,2001 and 2002 which affect the comparability of the financial informationpresented.   

 
|   |   | **1998**                   |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|--------|--------|----------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|   |   | **(dollars in thousands)** |   |

 
| **Statement of Operations Data:**           |   |   |   |    |   |    |   |    |    |    |   |
|---------------------------------------------|--------|--------|--------|---------|--------|---------|--------|---------|---------|---------|--------|
| Services revenue                            |   | $      | 48,800 |    | $      | 110,115 |   | $       | 139,634 |    | $      | 185,690 |   | $ | 212,941 |   |
| Costs and expenses:                         |   |   |   |    |   |    |   |    |    |    |   |
| Operating                                   |   | 35,003 |   | 79,807  |   | 90,560  |   | 119,816 |    | 139,641 |   |
| General and administrative                  |   | 7,332  |   | 19,084  |   | 18,543  |   | 24,063  |    | 25,537  |   |
| Start-up and integration                    |   | 1,775  |   | —  |   | —  |   | —  |    | —  |   |
| Depreciation, depletion and  amortization   |   | 5,749  |   | 15,007  |   | 20,087  |   | 25,722  |    | 27,849  |   |
| Total costs and expenses                    |   | 49,859 |   | 113,898 |   | 129,190 |   | 169,601 |    | 193,027 |   |
| Income (loss) from operations               |   | (1,059 | )      | (3,783  | )      | 10,444  |   | 16,089  |    | 19,914  |   |
| Interest expense, net                       |   | (2,590 | )      | (7,905  | )      | (11,142 | )      | (12,961 | )       | (14,067 | )      |
| Loss on termination of interest  rate swaps |   | — |   | —  |   | —  |   | —  |    | (826    | )      |
| Loss on extinguishment of debt              |   | — |   | —  |   | —  |   | —  |    | (586    | )      |
| Other income (expense), net                 |   | (208   | )      | 1,705   |   | (186    | )      | (178    | )       | (103    | )      |
| Income (loss) before income  taxes          |   | (3,857 | )      | (9,983  | )      | (884    | )      | 2,950   |    | 4,332   |   |
| Income tax expense                          |   | — |   | (83     | )      | (171    | )      | (703    | )       | (3,726  | )      |
| Net income (loss)                           |   | $      | (3,857 | )       | $      | (10,066 | )      | $       | (1,055  | )       | $      | 2,247 |   | $ | 606 |   |

 

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|                                        |   | **At December 31,**        |   |
|---------------------------------------------|--------|----------------------------|--------|
|                                        |   | **1998**                   |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|                                        |   | **(dollars in thousands)** |   |
| **Balance Sheet Data:**                     |   |                       |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                   |   | $                          | 1,811  |   | $ | 2,048 |   | $ | 5,073 |   | $ | 2,171 |   | $ | 2,590 |   |
| Working capital                             |   | 395                        |   | 11,184 |   | 3,828 |   | (158 | ) | 469 |   |
| Property and equipment, net                 |   | 42,211                     |   | 133,170 |   | 175,094 |   | 198,521 |   | 241,870 |   |
| Goodwill, net                               |   | 64,659                     |   | 84,215 |   | 106,224 |   | 107,656 |   | 128,409 |   |
| Other intangible assets, net                |   | 9,182                      |   | 14,733 |   | 14,107 |   | 15,576 |   | 22,666 |   |
| Total assets                                |   | 136,432                    |   | 259,254 |   | 324,239 |   | 354,308 |   | 430,852 |   |
| Long-term debt (including  current portion) |   | 33,847                     |   | 107,518 |   | 161,849 |   | 130,351 |   | 198,571 |   |
| Redeemable preferred stock                  |   | 64,367                     |   | 121,575 |   | 131,395 |   | 195,272 |   | 213,350 |   |
| Stockholders’ equity (deficit)         |   | 16,786                     |   | 3,019 |   | (7,860 | ) | (18,353 | ) | (36,224 | ) |
|                                             |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

** **
|                                             |   | **1998**                   |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|--------------------------------------------------|--------|----------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                             |   | **(dollars in thousands)** |   |
| **Other Financial Data:**                        |   |                       |   |     |   |     |   |     |   |     |   |
| Cash provided by (used in)  operating activities |   | $                          | (79    | )        | $      | (16,855  | )      | $        | 24,588 |     | $      | 28,803 |   | $ | 30,624 |   |
| Cash used in investing  activities               |   | (89,683                    | )      | (101,409 | )      | (76,035  | )      | (48,642  | )      | (88,111  | )      |
| Cash provided by (used in)  financing activities |   | 89,734                     |   | 118,501  |   | 54,471   |   | 16,938   |   | 57,905   |   |
| EBITDA(1)                                        |   | $                          | 4,482  |     | $      | 12,929   |   | $        | 30,345 |     | $      | 41,633 |   | $ | 47,660 |   |
| EBITDA margin(2)                                 |   | 9.2                        | %      | 11.7     | %      | 21.7     | %      | 22.4     | %      | 22.4     | %      |
| Adjusted EBITDA(3)                               |   | $                          | 4,482  |     | $      | 12,929   |   | $        | 30,345 |     | $      | 43,203 |   | $ | 48,640 |   |
| Adjusted EBITDA margin(4)                        |   | 9.2                        | %      | 11.7     | %      | 21.7     | %      | 23.3     | %      | 22.8     | %      |

** **

----

(1)               EBITDArepresents earnings before interest (including a non-cash loss onextinguishment of debt and loss on termination of interest rate swaps), incometaxes, depreciation, depletion and amortization.  The following table shows how we derive EBITDA: 

 
|                                        |   | **1998**           |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   |
|---------------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                        |   | **(in thousands)** |   |
|                                        |   |               |   |     |   |     |   |     |   |     |   |
| Net income (loss)                           |   | $                  | (3,857 | )        | $      | (10,066  | )      | $        | (1,055 | )        | $      | 2,247 |   | $ | 606 |   |
| Interest expense, net                       |   | 2,590              |   | 7,905    |   | 11,142   |   | 12,961   |   | 14,067   |   |
| Loss on extinguishment of debt              |   | —             |   | —   |   | —   |   | —   |   | 586      |   |
| Loss on termination of interest  rate swaps |   | —             |   | —   |   | —   |   | —   |   | 826      |   |
| Income tax expense                          |   | —             |   | 83       |   | 171      |   | 703      |   | 3,726    |   |
| Depreciation, depletion and  amortization   |   | 5,749              |   | 15,007   |   | 20,087   |   | 25,722   |   | 27,849   |   |
| EBITDA                                      |   | $                  | 4,482  |     | $      | 12,929   |   | $        | 30,345 |     | $      | 41,633 |   | $ | 47,660 |   |

** **

----

(1)           EBITDA is not a measure of operating income, operatingperformance or liquidity under GAAP.  Wepresent EBITDA because we understand it is used by some investors to determinea company’s historical ability to service and incur debt and fund ongoingcapital expenditures and because certain covenants in our senior creditfacility are tied to a substantially similar measure (which permits us to addback certain additional amounts to net income (loss)).  Nevertheless, EBITDA should not beconsidered in isolation or as a substitute 

 

25

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for operating income (as determined in accordance withGAAP) as an indicator of our operating performance, or of cash flows fromoperating activities (as determined in accordance with GAAP), or as a measureof liquidity.  In addition, becauseEBITDA is not calculated identically by all companies, our measurement ofEBITDA may not be comparable to similarly titled measures reported by othercompanies.  See our consolidatedfinancial statements and related notes and Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included elsewherein this Annual Report on Form 10-K.

 

(2)                                  EBITDA margin represents EBITDA expressed as apercentage of revenue.

 

(3)                                  Adjusted EBITDA represents EBITDA before non-cashcharges of $1.2 million in 2001 and $828,000 in 2002 incurred to write offcosts related to certain landfill and transfer station development projects,non-cash charges of $370,000 in 2001 primarily related to accounting andlegal fees incurred in connection with an aborted equity and debt transactionconducted in late 2000 and in 2001 and a non-cash charge of $152,000 in 2002primarily related to legal, engineering and other professional fees incurred inconnection with aborted acquisitions. We believe disclosing adjusted EBITDA helps investors more meaningfullyevaluate our ability to service debt. However, we urge investors to carefully review the GAAP financialinformation included in this Annual Report on Form 10-K.  The following table shows how we deriveadjusted EBITDA: 

 
|                                                |   | **2001** |   | **2002** |   |
|-----------------------------------------------------|--------|----------|--------|----------|--------|
| EBITDA                                              |   | $        | 41,633 |     | $      | 47,660 |   |
| Adjustments to EBITDA:                              |   |     |   |     |   |
| Landfill and transfer station  development projects |   | 1,200    |   | 828      |   |
| Aborted financing transaction                       |   | 370      |   | —   |   |
| Aborted acquisitions                                |   | —   |   | 152      |   |
| Adjusted EBITDA                                     |   | $        | 43,203 |     | $      | 48,640 |   |

 

(4)                                  Adjusted EBITDA margin represents adjusted EBITDAexpressed as a percentage of revenue.

 

26

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**Item7****.****                 Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

* *

*You should read the following discussion in conjunction withItem 6. “Selected Financial Data” and our consolidated financial statements andthe related 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 subjectto risks and uncertainties discussed below under “—Risk Factors” and elsewherein this 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.*

** **

**General**

** **

We are one of the leading regional, non-hazardoussolid waste management companies in the United States.  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.  We are the tenth largest, and the thirdlargest privately-held, service provider in the approximately $43 billionnon-hazardous solid waste management industry in the United States.

 

***CriticalAccounting Policies***

 

The following is a discussion of accounting policiesapplicable to areas where, in preparing our consolidated financial statements,we apply significant judgments and estimates that are inherently uncertain andthat affect the reported amounts in such consolidated financial statements:

* *

*Landfill Life Cycle Accounting*.  We use life cycle accounting and the units-of-consumptionmethod to recognize certain landfill costs. In life cycle accounting, all costs to acquire, construct and close asite and to maintain the site during the post-closure period arecapitalized or accrued and charged to expense based on the consumption of cubicyards of available airspace (sometimes referred to as disposal capacity).  Costs and airspace estimates are developedannually by independent engineers together with our engineers.  These estimates are used by our operatingand accounting personnel to annually adjust our rates used to expensecapitalized costs and accrue closure and post-closure costs.  These estimates do not take into accountdiscounts for the present value of total estimated costs.  Major changes in the costs or airspaceestimates could significantly affect our depletion and closure, final closureand post-closure expenses.

 

We revise our estimates of remaining airspace to beconsumed, total construction and other development costs and closure andpost-closure costs annually in the ordinary course of our business when wereceive updated information related to such airspace and costs.  Historically, the only material changes wehave made to prior remaining airspace, total construction and other developmentcosts and closure and post-closure costs estimates resulted from our inclusionof additional remaining airspace related to landfill expansions that had notyet received final approval from the applicable regulatory agencies but met thecriteria outlined below and were deemed probable to be permitted where suchadditional capacity had not been previously included or resulted from ourannual update of the above costs and remaining airspace estimates related tonewly-acquired landfills.  At thetime of the acquisition of a new landfill, we typically initially use theexisting estimates of the acquired landfill.

 

As of December 31, 2002, we estimated totalfuture construction and other development costs for our then existing landfillsto be $394.6 million over their then estimated remaining operatinglives.  This amount includesapproximately $100.9 million related to future landfill capping events which,under 

 

27

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SFAS No. 143, effectiveas of January 1, 2003, will be accounted for as asset retirementobligations.  Actual future costs ofconstruction materials and third party labor could differ from the costs wehave estimated and changes in legislative or regulatory requirements may causechanges in the landfill permitting process or landfill design anddevelopment.  Evaluations of new factsand circumstances relating to site permit and design criteria or developmentcosts could also result in revisions to our cost estimates.  Changes in our construction and otherdevelopment cost estimates are reflected prospectively in the landfilldepletion rates that are updated annually.

 

The following tables reflect airspace activity for ourlandfills during the periods indicated:

 
|                                  |   | **Balance as of****December 31,1999** |   | **New****ExpansionsUndertaken** |   | **Landfills****Acquired,   Net  of   Divestitures** |   | **Permits****Granted** |   | **Airspace****Consumed** |   | **Changes in****EngineeringEstimates** |   | **Balance as of****December 31,2000** |   |
|---------------------------------------|--------|---------------------------------------|--------|---------------------------------|--------|----------------------------------------------------------|--------|------------------------|--------|--------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
| Permitted airspace:                   |   |                                  |   |                            |   |                                                     |   |                   |   |                     |   |                                   |   |                                  |   |
| Cubic yards (in thousands)            |   | 45,060                                |   |                            |   | 13,671                                                   |   |                   |   | (1,578                   | )      | (851                                   | )      | 56,302                                |   |
| Number of sites                       |   | 5                                     |   |                            |   | 4                                                        |   |                   |   |                     |   |                                   |   | 9                                     |   |
| Expansion airspace:                   |   |                                  |   |                            |   |                                                     |   |                   |   |                     |   |                                   |   |                                  |   |
| Cubic yards (in thousands)            |   | 16,170                                |   |                            |   | 18,570                                                   |   |                   |   |                     |   | 11,789                                 |   | 46,529                                |   |
| Number of sites                       |   | 2                                     |   |                            |   | 3                                                        |   |                   |   |                     |   |                                   |   | 5                                     |   |
|                                  |   |                                  |   |                            |   |                                                     |   |                   |   |                     |   |                                   |   |                                  |   |
| Total available disposable  capacity: |   |                                  |   |                            |   |                                                     |   |                   |   |                     |   |                                   |   |                                  |   |
| Cubic yards (in thousands)            |   | 61,230                                |   | —                          |   | 32,241                                                   |   | —                 |   | (1,578                   | )      | 10,938                                 |   | 102,831                               |   |
| Number of sites                       |   | 5                                     |   |                            |   | 4                                                        |   |                   |   |                     |   |                                   |   | 9                                     |   |

 
|                                  |   | **Balance as of  December 31,****2000** |   | **New****ExpansionsUndertaken** |   | **Landfills****Acquired,   Net  of   Divestitures** |   | **Permits****Granted** |   | **Airspace****Consumed** |   | **Changes in****EngineeringEstimates** |   | **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                                    |   |

 

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|                                  |   | **Balance as of****December 31,2001** |   | **New****ExpansionsUndertaken** |   | **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                       |   | 10                                    |   |                            |   | 4                                                  |   |                   |   |                     |   |                                    |   | 14                                    | (1)    |

 

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(1)          Excludesone landfill operated by us at which, pursuant to the terms of the applicableoperating contract, we are not responsible for the construction, closure andpost-closure costs (and, as a result, for which we do not prepare engineeringestimates).

 

As of December 31, 2002, we estimated totalfuture payments for closure and post-closure obligations for our then existinglandfills to be approximately $40.1 million.  This amount does not include approximately $100.9 million relatedto future landfill capping events which, under SFAS No. 143, effective as ofJanuary 1, 2003, will be accounted for as asset retirement obligations.  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 final closure and post-closurecosts were $10.9 million as of December 31, 2002, $10.4 million as ofDecember 31, 2001 and $9.4 million as of December 31, 2000.  The net increase of $463,000 fromDecember 31, 2001 to December 31, 2002 resulted from accruals of$358,000 based on the consumption of disposal capacity at our landfills during2002 and $147,000 based on the historical consumption of disposal capacity atlandfills we acquired in 2002 during the periods prior to such acquisitions,offset by actual cash expenditures against these accruals during 2002 of$42,000.  The net increase of $1.0million from December 31, 2000 to December 31, 2001 resulted from accruals of$466,000 based on the consumption of disposal capacity at our landfills during2001 and $565,000 based on the historical consumption of disposal capacity atlandfills we acquired in 2001 during the periods prior to such acquisitions,offset by actual cash expenditures against these accruals during 2001 of$81,000.

 

Landfill depletion rates are influenced by ouroriginal cost basis for the landfill, including acquisition costs.  Landfills acquired with other assets inbusiness acquisitions are valued at the time of acquisition based upon marketvalue and the purchase price is allocated accordingly.  Landfill depletion rates are also influencedby site specific engineering and other cost factors and estimates of remainingdisposal capacity at our landfills. Closure and post-closure accrual rates are influenced by our closure and

 

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post-closure costestimates and our estimates of remaining disposal capacity at ourlandfills.  In addition, when we acquirea new landfill, our then current average landfill depletion rate per ton andclosure and post-closure accrual rate per ton will likely be altered based onthe acquisition cost for the landfill and our estimates of total constructionand other development costs, closure and post-closure costs and remainingairspace available to be consumed with respect to such landfill.

 

The following table summarizes, for the periodsindicated, information related to our average depletion rate per cubic yard andaverage final closure and post-closure accrual rate per cubic yard: 

 

|                                                                |   | **2000**                                                                 |    | **2001** |   | **2002(1)** |   |
|---------------------------------------------------------------------|--------|--------------------------------------------------------------------------|---------|----------|--------|-------------|--------|
|                                                                |   | **(in thousands, except number of   landfills and per cubic yard data)** |    |
| Number of landfills                                                 |   | 9                                                                        |    | 10       |   | 14          |   |
| Total available disposal  capacity (in cubic yards)                 |   | 102,831                                                                  |    | 140,061  |   | 178,244     |   |
| Capitalized landfill costs, net                                     |   | $                                                                        | 97,932  |     | $      | 112,589     |   | $ | 130,519 |   |
| Estimated future landfill  development costs                        |   | $                                                                        | 200,123 |     | $      | 235,100     |   | $ | 394,577 |   |
| Estimated total landfill  development costs                         |   | $                                                                        | 298,055 |     | $      | 347,689     |   | $ | 525,096 |   |
| Average depletion rate per  cubic yard                              |   | $                                                                        | 2.898   |     | $      | 2.482       |   | $ | 2.946 |   |
| Estimated future final  closure/post-closure costs, net             |   | $                                                                        | 24,683  |     | $      | 28,255      |   | $ | 40,144 |   |
| Average final closure and  post-closure accrual rate per cubic yard |   | $                                                                        | 0.240   |     | $      | 0.202       |   | $ | 0.225 |   |

 

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(1)        Excludes onelandfill operated by us at which, pursuant to the terms of the applicableoperating contract, we are not responsible for the construction, closure andpost-closure costs (and, as a result, for which we do not prepare engineeringestimates).

 

The period-to-period increases in ourestimated total landfill development costs resulted primarily from ourinvestment in new landfills during the applicable periods and the estimatedfuture landfill development costs related to such new landfills.  In addition, during 2001 and 2002, weincluded development costs with respect to new landfill expansions.  The period-to-period increasesin our estimated future final closure and post-closure costs resultedprimarily from the current and future liabilities we assumed in connection withour investments in new landfills.  Inaddition, during 2001 and 2002, we included final closure and post-closureobligations for new landfill expansions. Our estimates for future landfill development costs and future finalclosure and post-closure costs historically have not been discounted fortheir present value.  As of January 1,2003, upon our adoption of Financial Accounting Standards Board, or FASB,Statement of Financial Accounting Standards, or SFAS, No. 143, “Accounting forAsset Retirement Obligations,” our practice has changed.  See “—Recent Accounting Announcements.”

* *

*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 which generally must bemet before airspace included in an expansion area is determined as probable tobe permitted and, therefore, included in our calculation of total availabledisposal capacity:

 

•                                          the land associated with the expansion airspace iseither owned by us or controlled by us pursuant to an option agreement;

 

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**•**                                          we are committed to supporting the expansionproject financially and with appropriate resources;

 

•                                          there are no identified fatal flaws or impedimentsassociated with the project, including political impediments;

 

•                                          the expansion is attainable within a three to fiveyear time frame; and

 

•                                          progress is being made on the project.

 

When our landfill expansion projects meet thesecriteria, we adjust the rates used for each applicable landfill to expensecosts to acquire, construct and close a site and to maintain the site duringthe post-closure period to include probable to be permitted airspace andall additional costs to be capitalized or accrued associated with the expansionairspace.  Once a landfill meets theseexpansion criteria, our management continually monitors each site’s progress inobtaining the expansion permit.  If, atany point, we determine that an expansion area no longer meets the requiredcriteria, the probable to be permitted airspace is removed from the landfill’stotal available 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 relatedto such 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-linemethod.  Depreciation is calculated onthe straight-line method over the estimated useful lives of the relatedassets which generally range from three to five years for furniture, fixturesand computer equipment; five to ten years for containers, compactors, trucksand collection equipment; and ten to 40 years for buildings andimprovements.  We assume no salvage valuefor our depreciable property and equipment. Our estimates regarding the useful lives of our depreciable assets arebased on our judgment.  Accordingly,actual useful lives could differ from our estimates.

* *

*Capitalized Interest. *We capitalize interest on landfill cell constructionprojects and other construction projects in accordance with SFAS No. 34,“Capitalization of Interest Cost.” Capitalizing too much or too little interestexpense could lead to a misstatement of interest expense in our statements ofoperations.  In order to minimize thisrisk, construction projects must meet the following criteria before interest iscapitalized: (a) total construction cost must be $100,000 or greater; (b) theconstruction phase must last a month or longer; and (c) the assets must have auseful life of three years or longer.

* *

*Revenue and Accounts Receivable. *Our revenue consists primarily of collectionfees from various customer types, and transfer and landfill disposal feescharged to third parties.  Advance billingsare recorded as deferred revenue.  Ourrevenue is recognized over the period in which services are provided.  Reserves for accounts receivable areprovided when a receivable is believed to be uncollectible or generally when areceivable is in excess of 90-120 days old.  Establishing reserves against specific accounts receivable andthe overall adequacy of our accounts receivable reserve is a matter ofprofessional judgment.  If our judgmentand estimates concerning the adequacy of our reserves for accounts receivableare incorrect, our bad debt expense would change.

 

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*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 theasset.  Our estimates of the future cashflows are based on our judgment. Accordingly, we could designate certain assets as impaired that are notimpaired or fail to identify 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.

 

***Sourcesof Revenue***

 

Our revenue consists primarily of fees we chargecustomers for solid waste collection, transfer and disposal and recyclingservices.  We frequently perform theseservices under service agreements with businesses, contracts withmunicipalities, landlords or homeowners’ associations, or subscription arrangementswith homeowners.  We estimate that morethan 30% of our South Region’s revenue was generated from 256 municipalcontracts during 2002.  Our contractswith the City of New York represented in the aggregate approximately 34% of ourNortheast Region’s, and approximately 14% of our overall, revenue in 2002.  Contracts with municipalities providerelatively consistent cash flow during the terms of the contracts.  Our municipal contracts generally last fromthree to five years and usually have renewal options.  Many of our municipal contracts are franchise agreements thatgive us the exclusive right to provide specified waste services within aspecified territory during the contract term. These exclusive arrangements are typically awarded, at least initially,on a competitive bid basis or through a formalized proposal and subsequently ona bid or negotiated renewal basis. Collection fees are paid either by the municipalities from their taxrevenue or directly by the residents receiving the services.  Our collection business also generates revenuefrom the sale of recyclable commodities. These recyclables when collected are either delivered to a sortingfacility operated by us or a third party facility.

 

We typically determine the prices for our collectionservices by the collection frequency and level of service, route density,volume, weight and type of waste collected, type of equipment and containersfurnished, the distance to the disposal or processing facility, the cost ofdisposing or processing, and prices charged by competitors for similarservices.  The terms of our contractssometimes limit our ability to pass on cost increases.  Long-term solid waste collectioncontracts typically contain a formula, normally based on the consumer priceindex, which automatically adjusts fees to cover increases in some, but not allof our operating costs.

 

We charge transfer station and landfill customers a“tipping fee” either on a per-ton or per-yard basis for disposingof their MSW, C&D waste or both at the transfer stations and landfills weoperate.  We generally base our transferstation “tipping fees” on market factors and the cost of processing the wastedeposited at the transfer station, the cost of transporting the waste to adisposal facility and the cost of disposal. We generally base our landfill “tipping fees” on market factors and thetype and weight or 

 

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volume of the wastedeposited and the type and size of the vehicles used in the transportation ofthe waste.

 

Many of our landfills are assessed state, county orlocal community fees based on the volume of tons or yards disposed of during adefined period, usually either monthly or quarterly.  The types and amounts of fees charged can vary widely buttypically a state fee is uniformly charged to all landfills within astate.  We report our revenue net of allthese fees.

 

New legislation was recently enacted in Pennsylvaniathat, effective as of July 9, 2002, imposes an additional disposal fee of$4.00 per ton on all solid waste disposed of at MSW landfills in Pennsylvania,raising the total disposal fees assessed under state law to MSW landfilloperators to $7.25 per ton.  Landfilloperators are authorized to pass through the new fee as a surcharge on any feeschedule established by law or contract. Similarly, transporters and transfer stations are authorized to pass thenew fee through as a surcharge to the generators of such MSW.  We passed through the new fee by increasingthe fees we charge at our Pennsylvania landfills, New York City transferstations and New York City and Pennsylvania collection operations.  Accordingly, we do not expect the new fee tohave a significant effect on our operating income.

 

The City of New York has placed a maximum limitationof $12.20 per loose yard on the fees a hauler can charge to a commercialcustomer for waste collection services. The disposal facilities in and around New York City charge by theton.  Based on the weight of certaincustomers’ loose yardage, it is not economical for us to service heavy weightedcustomers.  Accordingly, our New YorkCity collection business focuses on customers that have loose garbage that islighter and on those customers that have a large paper recycling component,which enables us to reduce our cost of disposal.

 

New York City recently announced changes to update itsSolid Waste Management Plan, in which it plans to utilize and upgrade itsexisting marine transfer station system instead of private transfer stations toprocess and transfer its residential waste stream of approximately 12,000 tonsof MSW per day.  New York City intendsto implement these changes by retrofitting and repermitting these marinetransfer stations by 2008 so that the stations can 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 addition, the New York CityDepartment of Sanitation recently completed a solicitation of bids for thedisposal of up to 4,000 tons of MSW per day that the City collects inBrooklyn.  The waste covered by thesolicitation of bids includes the waste currently covered by our existingcontracts with the City as well as a larger, existing contract between the Cityand Waste Management.  We submitted bidsto transfer and dispose up to an aggregate of 1,500 tons of the waste coveredby the solicitation of bids.  Upon theexpiration of our current contracts in September 2003, the City will be ina position to, at its option, accept a bid or bids from one or more of ourcompetitors, accept our bid and enter into a new contract with us or reject allor any portion of our bids and choose to exercise one or both of its one-yearextension options on our current contracts. Although only one competing bid, which covers 2,800 tons of waste,included a bid price lower than ours, we cannot predict whether we will besuccessful in all or any portion of our bids, or what effect the bids submittedby us and our competitors will have on our existing contracts or the City’soptions to renew those contracts.  See“—Risk Factors—Customer Concentration—The loss of the City of New York as acustomer could have a significant adverse effect on our business andoperations.”

 

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

 
|       |   | **2000** |   | **2001** |   | **2002** |   |
|------------|--------|----------|--------|----------|--------|----------|--------|
|       |   |     |   |     |   |     |   |
| Collection |   | 69.8     | %      | 66.5     | %      | 67.2     | %      |
| Transfer   |   | 17.5     |   | 23.0     |   | 22.4     |   |
| Disposal   |   | 6.9      |   | 7.0      |   | 6.8      |   |
| Recycling  |   | 4.7      |   | 3.0      |   | 3.0      |   |
| Other      |   | 1.1      |   | 0.5      |   | 0.6      |   |
| Total      |   | 100.0    | %      | 100.0    | %      | 100.0    | %      |

 

***CostStructure***

 

Our cost of operations include labor, fuel, equipmentmaintenance and “tipping fees” paid to third-party disposal facilities,workers’ compensation and vehicle insurance, third-party transportationexpenses, and closure, final closure and post-closure landfillaccruals.  We monitor the fluctuation infuel prices and, from time to time, if this cost increases at a higher ratethan inflation, we generally pass the additional cost on to our customers.  Our business strategy is to developvertically integrated operations to internalize the waste that we handle andthus realize higher margins from our operations.  By disposing of waste at our operated landfills, we retain themargin generated through disposal operations that would otherwise be earned bythird-party landfills.  Wecurrently internalize approximately 40% of the solid waste that we handle anddeliver the rest to third-party disposal facilities.  If the operators of third-partylandfills increase their “tipping fees,” we would seek to pass along theseincreases to our customers, but if we are unable to do so, our profitabilitywould be affected.  If these operatorsdiscontinue their arrangements with us and we cannot find alternative disposalsites with favorable arrangements, our costs of disposal may rise.  Also, our failure to obtain the requiredpermits to establish new landfills and transfer stations or expand our existinglandfills and transfer stations could hinder our business strategy to developvertically integrated operations, particularly in our Northeast Region where weare currently seeking to expand the three and one-half month estimatedremaining operating life, based on current volumes, of our Bethlehemlandfill.  Failure to expand capacitycould lead to decreased profitability as a result of the increased “tippingfees” we would have to pay to third-party landfills.

 

We operate 22 transfer stations which reduce our costsby allowing us to use collection personnel and equipment more efficiently andby consolidating waste to gain volume discounts on disposal rates.  We have a limited number of municipalcontractual obligations that require us to deliver waste collected under thecontracts to a designated disposal facility.

 

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

 

Depreciation, depletion and amortization expenseincludes depreciation of fixed assets over their estimated useful lives usingthe straight-line method, depletion of landfill costs using life cycleaccounting and the units-of-consumption method and amortization ofgoodwill and other intangible assets using the straight-line method.  Goodwill amortization includes theamortization of costs paid in excess of the fair value of net assets acquiredprior to July 1, 2001 in business combinations accounted for aspurchases.  In allocating the purchaseprice of an acquired company among its assets, we first assign value to thetangible assets, followed by intangible assets, including non-competitioncovenants and certain contracts that are determinable both in terms of size andlife.  We determine the value of the 

 

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intangible assets otherthan goodwill by considering, among other things, the present value of the cashflows associated with those assets. Beginning January 1, 2002, we have no longer amortized any goodwillin accordance with the adoption of SFAS No. 142, “Goodwill and OtherIntangible Assets.” Also in accordance with SFAS No. 142, we have recordedno amortization for goodwill acquired subsequent to June 30, 2001.  Goodwill resulting from acquisitionscompleted prior to July 1, 2001 was amortized on a straight-line basisover the period of the then expected benefit of up to 40 years.  See “—Recent Accounting Pronouncements.”

 

We capitalize some third-party expendituresrelated to pending acquisitions or development projects, such as legal andengineering expenses.  We expenseindirect acquisition costs, such as executive and corporate overhead, publicrelations and other corporate services, as we incur them.  We charge against net income any unamortizedcapitalized expenditures and advances, net of any portion that we believe wemay recover, through sale or otherwise, that relates to any operation that ispermanently shut down and any pending acquisition or landfill developmentproject that is not expected to be completed. We routinely evaluate all capitalized costs and expense those related toprojects that we believe are not likely to be completed.

 

We accrue for estimated landfill closure, finalclosure and post-closure maintenance costs based on engineeringestimates.  These estimates do not takeinto account discounts for the present value of total estimated costs.  We will have additional material financialobligations relating to closure, final closure and post-closure costs forany disposal facilities we may operate in the future.  In such cases, we will accrue for those obligations over theuseful life of any such disposal facility, based on engineering estimates andthe units-of-consumption method.

 

We periodically evaluate the value and future benefitsof our goodwill and other intangible assets. For other intangible assets, weassess the recoverability from future operations using cash flows and incomefrom operations of the related acquired businesses as measures.  Under this approach, the carrying value isreduced if it becomes probable that our best estimate of expected future cashflows from the related intangible assets would be less than the carrying amountof the intangible assets.  As ofDecember 31, 2002, there were no adjustments to the carrying amounts of otherintangibles resulting from these evaluations. We test goodwill for impairment using the two-step processprescribed in SFAS No. 142. The first step is a screen for potentialimpairment, while the second step measures the amount of the impairment, ifany.  We performed the first of therequired impairment tests of goodwill and indefinite-lived intangibleassets based on the carrying values as of January 1, 2002 and incurred noimpairment of goodwill upon the initial adoption of SFAS No. 142.  We also performed our annual impairment testduring 2002 and incurred no impairment. As of December 31, 2002, goodwill and other intangible assetsrepresented approximately 35.1% of total assets, 70.8% of redeemable preferredstock and 85.3% of the sum of our redeemable preferred stock and stockholders’equity (deficit).

 

***Seasonality***

 

Seasonality and weather can temporarily affect some ofour revenue and expenses.  We generallyexperience lower C&D waste volumes during the winter months when theconstruction industry slows down. Frequent and/or heavy snow and ice storms can affect the productivity ofour operations.  In our South Region,higher than normal rainfall and more frequent rain and ice storms over a 30 -90 day time 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 normalrainfall can lead to higher levels of construction activity, increasing ourvolumes.

 

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***Impactof Inflation***

 

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

 

***Acquisitions***

 

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

 

In accordance with generally accepted accountingprinciples, we capitalize some expenditures and advances relating to pendingacquisitions.  For any pendingacquisition that is not consummated, we charge any such expenditures and advancesagainst earnings.  Therefore, we mayincur charges against earnings in future periods, which could have a materialadverse effect on our business, financial condition and results of operations.

 

All of our acquisitions were accounted for aspurchases and, accordingly, only the operations of acquired companies since theacquisition dates are included in our consolidated financial statements.  These acquisitions were financed through acombination of funds borrowed under our senior credit facility and proceedsfrom private offerings of 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.

* *

*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 $47.3 million, consisting of cash and liabilities assumed.

* *

*2001. *During2001, we acquired the assets of 16 solid waste management companies for anaggregate purchase price of approximately $12.1 million, consisting of cash andliabilities assumed.

* *

*2000. *InNovember 2000, we purchased substantially all of the assets of Omega One Companyand Omega One Waste, LLC and certain assets from Waste Management, Inc.  The aggregate purchase price of the combinedtransaction consisted of approximately $38.6 million in cash and liabilitiesassumed.  Assets acquired from the Omegaentities included three collection operations in Louisiana.  Assets acquired from Waste Managementincluded one collection operation, one transfer station and the operatingagreements for two MSW landfills, all of which are in Louisiana.

 

Additionally, in 2000, we acquired the assets of nineother solid waste management companies in a series of unrelatedtransactions.  The aggregate purchaseprice was approximately $11.4 million, consisting of cash and liabilitiesassumed.

 

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***Results of Operations***

 

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

 
|                                        |   | **2000** |   | **2001** |   | **2002** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                        |   | **$**    |   | **%**    |   | **$**    |   | **%** |   | **$** |   | **%** |   |
|                                        |   |     |   |     |   |     |   |   |   |   |   |   |   |
| South Region                                |   | 76,553   |   | 54.8     |   | 106,807  |   | 57.5 |   | 128,334 |   | 60.3 |   |
| Northeast Region                            |   | 63,081   |   | 45.2     |   | 78,883   |   | 42.5 |   | 84,607 |   | 39.7 |   |
| Services revenue                            |   | 139,634  |   | 100.0    |   | 185,690  |   | 100.0 |   | 212,941 |   | 100.0 |   |
| Operating expense                           |   | 90,560   |   | 64.9     |   | 119,816  |   | 64.5 |   | 139,641 |   | 65.6 |   |
| General and administrative                  |   | 18,543   |   | 13.3     |   | 24,063   |   | 13.0 |   | 25,537 |   | 12.0 |   |
| Depreciation, depletion and  amortization   |   | 20,087   |   | 14.4     |   | 25,722   |   | 13.9 |   | 27,849 |   | 13.1 |   |
| Income (loss) from operations               |   | 10,444   |   | 7.5      |   | 16,089   |   | 8.7 |   | 19,914 |   | 9.4 |   |
| Interest expense, net                       |   | (11,142  | )      | (8.0     | )      | (12,961  | )      | (7.0 | ) | (14,067 | ) | (6.6 | ) |
| Loss on termination of interest  rate swaps |   | —   |   | —   |   | —   |   | — |   | (826 | ) | (0.4 | ) |
| Loss on extinguishment of debt              |   | —   |   | —   |   | —   |   | — |   | (586 | ) | (0.3 | ) |
| Other income (expense), net                 |   | (186     | )      | (0.1     | )      | (178     | )      | (0.1 | ) | (103 | ) | (0.0 | ) |
| Income tax expense                          |   | (171     | )      | (0.1     | )      | (703     | )      | (0.4 | ) | (3,726 | ) | (1.7 | ) |
| Net income (loss)                           |   | (1,055   | )      | (0.8     | )      | 2,247    |   | 1.2 |   | 606 |   | 0.3 |   |

 

**2002 Compared With 2001**

* *

*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 our revenueincreased 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 ofnew collection revenue during 2001. Integration of newly-acquired businesses into our organizationalstructure typically takes three to six months. The labor, maintenance, fuel and disposal costs related to newly-acquiredbusinesses are generally higher during the integration period.  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.  Start-up and integration costsrelated to a municipal contract typically 

 

37

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areincurred in the one to two months prior to, and the one to two months after,the commencement of the contract. During this period, labor costs are generallyhigher due to delivery of containers, residential carts and recycling bins tothe new municipality and training of newly-hired employees. Operatingexpenses also increased during 2002 due to increases in our general and workerscompensation insurance premiums, increased labor costs related to a renewal ofa collective bargaining agreement covering some of our New York-based employeeswhich became effective on March 1, 2002 and an additional $4.00 per tondisposal fee enacted by Pennsylvania on July 9, 2002.  For more information on the additionalPennsylvania disposal fee, see “—General—Sources of Revenue.”

 

*General and Administrative. *Our general and administrative expenses increased$1.5 million, or 6.1%, to $25.5 million during 2002 from$24.1 million during 2001.  Ourgeneral and administrative expenses increased as a result of additionalpersonnel from companies acquired and additional corporate and regionaloverhead to accommodate our internal growth from our collectionoperations.  General and administrativeexpenses as a percentage of our revenue decreased to 12.0% during 2002 from13.0% during 2001.

 

*Depreciation, Depletion and Amortization. *Our depreciation,depletion and amortization expenses increased $2.1 million, or 8.3%, to$27.8 million during 2002, from $25.7 million during 2001.  This increase resulted primarily from theinclusion of depreciation, depletion, and amortization of businesses acquiredin 2002, the inclusion in 2002 of 12 months of depreciation, depletion, andamortization from businesses acquired in 2001 anddepreciation of capital assets purchased for internal growth.  In accordance with SFAS No. 142,goodwill is deemed to have an indefinite life and our amortization of goodwillceased on January 1, 2002. During  2001, goodwillamortization expense was $2.8 million.  Depreciation, depletion and amortization as a percentage of ourrevenue decreased to 13.1% in 2002 from 13.9% during 2001.

 

*Income from Operations. *Our income from operations increased$3.8 million, or 23.8%, to $19.9 million during 2002 from$16.1 million during 2001.  Theincrease was attributable to operating income recognized from acquisitionsclosed in 2002, the inclusion in 2002 of 12 months of operating income fromacquisitions closed in 2001, selective price increases, greater integration ofcollection volumes into the transfer stations and landfills we operate, andinternal growth.  Income from operationsas a percentage of our revenue increased to 9.4% in 2002 from 8.7% during 2001.

 

*Interest Expense, Net. *Our interest expense, net increased $1.1 million,or 8.5%, to $14.1 million during 2002, from $13.0 million during 2001.  Thisincrease was attributable to higher debt levels during 2002 as compared to 2001and by the relatively higher interest rate paid on our $150.0 million of101⁄4% senior subordinated notes due 1012 (our “Notes”) which constituted asubstantial portion 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 RateSwaps.*  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.*  Weincurred a non-cash loss on the extinguishment of debt of $586,000 during2002.  There was no such expense in2001.  In conjunction with the payoff ofthe $39.2 million term loan under our senior credit facility with theproceeds from the offering of our Notes, we wrote off loan transaction costsincurred in previous years related to the term loan.

 

38

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*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 $703,000 during2001.  Our effective income tax rate for the year ended December 31, 2002was 86.0%, which is above the federal statutory rate of 35.0%, due to stateincome taxes and an increase in the valuation allowance established against netoperating loss carryforward benefits. The increase in the valuation allowanceis due to a change in the estimated reversal of temporary differences relatedto tax deductible goodwill.  The changein the estimated reversal resulted from the adoption of SFAS No. 142.

* *

*Net Income. *Ournet income decreased $1.6 million to $606,000 during 2002, from$2.2 million during 2001.  Thedecrease was attributable to the loss on the termination of interest swaps, theloss on the extinguishment of debt, our additional income tax expense, partiallyoffset by the increase in income from our operations.  Net income as a percentage of our revenue decreased to 0.3% in2002, from 1.2% in 2001.

 

**2001 Compared With 2000**

* *

*Revenue. *Ourrevenue increased by $46.1 million, or 33.0%, to $185.7 millionduring 2001 from $139.6 million during 2000.  During 2001, acquisitions completed since January 2000accounted for using the purchase method of accounting, contributed$20 million, or 14.3%, to the increase in our revenue from 2001.  Excluding our incremental revenue fromacquisitions, our revenue increased by $26.1 million, or 18.7%.  During 2001, our new business, from both newmunicipal contracts and increased sales from existing operations, contributed15.3% of such increases, while selective price increases contributed 3.6%.  In our South Region, our revenue increasedby $30.2 million, or 39.5%, to $106.8 million during 2001 from$76.6 million during 2000.  In ourNortheast Region, our revenue increased by $15.8 million, or 25.1%, to $78.9 millionduring 2001 from $63.1 million during 2000.

* *

*Operating Expenses.*  Our operating expenses increased$29.2 million, or 32.3%, to $119.8 million during 2001 from$90.6 million during 2000.  Theincrease was primarily due to the substantial increase in our revenue during2001.  Operating expenses as a percentageof our revenue declined by 0.4% to 64.5% in 2001 from 64.9% in 2000.  The decline in operating expenses as apercentage of our revenue was primarily attributable to the effect of “tuck-in”acquisitions closed since the beginning of 2001, greater integration ofcollection volumes into landfills we operate and selective price increases.

* *

*General and Administrative. *Our general and administrative expenses increased$5.5 million, or 29.8%, to $24.1 million during 2001 from$18.5 million during 2000.  Our generaland administrative expenses increased as a result of additional personnel fromcompanies acquired and additional corporate and regional overhead toaccommodate our internal growth from our collection operations.  General and administrative expenses as apercentage of our revenue decreased to 13.0% during 2001 from 13.3% during2000.

* *

*Depreciation, Depletion and Amortization. *Our depreciation,depletion and amortization expenses increased $5.6 million, or 28.1%, to$25.7 million during 2001, from $20.1 million during 2000.  This increase resulted primarily from theinclusion of depreciation, depletion, and amortization of businesses acquiredin 2001, the inclusion in 2001 of 12 months of depreciation, depletion, andamortization from businesses acquired in 2000, the amortization of goodwill andother intangible assets associated with acquisitions accounted for using thepurchase method of accounting, a greater increase in volume into our landfillsand capital expenditures unrelated to acquisition.  Depreciation, depletion and amortization as a percentage of ourrevenue decreased to 13.9% in 2001 from 14.4% during 2000.

 

39

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*Income from Operations. *Our income from operations increased$5.7 million, or 54.1%, to $16.1 million during 2001 from$10.4 million during 2000.  Theincrease was attributable to operating income recognized from acquisitionsclosed in 2001, the inclusion in 2001 of 12 months of operating income fromacquisitions closed in 2000, selective price increases, greater integration ofcollection volumes into the transfer stations and landfills we operate, andinternal growth.  Income from operationsas a percentage of our revenue increased to 8.7% in 2001 from 7.5% during 2000.

* *

*Interest Expense, Net. *Our interest expense increased $1.9 million, or16.3%, to $13.0 million during 2001, from $11.1 million during2000.  This increase is attributable tohigher debt levels which were incurred to fund acquisitions and internal growthand were partially offset by lower interest rates on our senior credit facilityand the funding of our Series D convertible preferred stock privateplacement in September 2001, the net receipts of which were used to reduceamounts outstanding under our senior credit facility.

* *

*Other Expenses. *Ourother expenses decreased to $178,000 in 2001 from $186,000 in 2000.

* *

*Income Tax Expense. *Ourincome tax expense increased to $703,000 during 2001, from $171,000 during2000.  This increase is attributable tothe increase in our income before taxes, offset by a reduction in the valuationallowance established previously against net operating loss carryforwardbenefits.  The reduction in thevaluation allowance is due to the increase in income before income taxes andthe increase in deferred tax liabilities that are estimated to reverse infuture periods.  Our effective tax ratewas 23.8% in 2001 and 19.3% in 2000.

* *

*Net Income. *Ournet income increased $3.3 million to $2.2 million during 2001, from aloss of $1.1 million during 2000. The increase was attributable to the increase in income from operations,partially offset by the increases in interest expense and income taxexpense.  Net income as a percentage ofour revenue increased to 1.2% in 2001, from a loss of 0.8% in 2000.

** **

**Liquidityand Capital Resources**

*** ***

***CashFlow***

 

Net cash provided by operating activities increased by$200,000 from $30.4 million in 2001 to $30.6 million in 2002.  During 2002, net cash used by investingactivities was $88.1 million.  Ofthis amount, $44.4 million was used to fund the cash portion of thepurchase price of acquisitions.  Cashused for capital expenditures during 2002 was $41.3 million, which wasprincipally for investments in fixed assets, consisting primarily of trucks,containers, landfill and transfer station equipment, and landfill constructionprojects.  Net cash provided byfinancing activities 2002 was $57.9 million, which consisted of theproceeds from the offering of our Notes, offset by $7.5 million ofexpenses related to the issuance of our Notes and a net borrowing reductionunder our senior credit facility of $83.7 million.

 

The following table summarizes the components of ourcash flow deficit before acquisitions and the reconciliation of our beginning-of-periodto end-of-period total debt balances.  The following table and the analysis that follows it are providedto highlight and facilitate understanding of the elements of our cash flow butare not intended to be considered in lieu of, or independent of, ourconsolidated financial statements and the related notes included elsewhere inthis Annual Report on Form 10-K.  Freecash flow (deficit) before acquisitions in the table is not a measure ofoperating performance, liquidity or cash flow from operating activities underGAAP and, accordingly, should not be considered in isolation or as a substitutefor cash flow from operating activities (as determined in accordance with GAAP)or any other GAAP measures.

 

40

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|                                                            |   | **2001**           |    | **2002** |   |
|-----------------------------------------------------------------|--------|--------------------|---------|----------|--------|
|                                                            |   | **(in thousands)** |    |
| Free cash flow:                                                 |   |               |    |     |   |
| EBITDA(1)                                                       |   | $                  | 41,633  |     | $      | 47,660 |   |
| Other non-cash items:                                           |   |               |    |     |   |
| Write-off of costs associated with transactions in  process     |   | 1,570              |    | 980      |   |
| Doubtful accounts provisions                                    |   | 1,234              |    | 963      |   |
| Gain on the sale of waste management assets                     |   | (4                 | )       | —   |   |
| Less:                                                           |   |               |    |     |   |
| Cash interest                                                   |   | (11,517            | )       | (14,811  | )      |
| Cash paid for interest rate swap termination                    |   | —             |    | (826     | )      |
| Cash taxes                                                      |   | (61                | )       | (674     | )      |
| Capital expenditures, excluding acquisitions                    |   | (30,805            | )       | (41,331  | )      |
| Changes in working capital                                      |   | (2,348             | )       | (6,031   | )      |
| Remove change in accrued interest from working capital          |   | (1,502             | )       | 1,201    |   |
| Remove change in accrued taxes from working capital             |   | (234               | )       | 234      |   |
| Remove interest receivable from rate swap from working  capital |   | —             |    | 75       |   |
|                                                            |   |               |    |     |   |
| Free cash flow (deficit) before acquisitions                    |   | $                  | (2,034  | )        | $      | (12,560 | ) |
|                                                            |   |               |    |     |   |
| Roll-forward of debt balance:                                   |   |               |    |     |   |
| Debt balance at beginning of period                             |   | $                  | 161,849 |     | $      | 130,351 |   |
| Free cash flow before acquisitions                              |   | 2,034              |    | 12,560   |   |
| Acquisitions and divestitures, net                              |   | 15,628             |    | 44,370   |   |
| Acquisition-related and non-recurring expenditures              |   | 2,177              |    | 557      |   |
| Debt issue costs                                                |   | 2,827              |    | 7,525    |   |
| Debt increase due to interest rate swap termination             |   | —             |    | 826      |   |
| Net proceeds from issuance of preferred stock                   |   | (52,380            | )       | —   |   |
| Increase (decrease) in cash                                     |   | (2,901             | )       | 418      |   |
| Change in fair value of interest rate swap                      |   | —             |    | 1,964    |   |
| Debt issued to sellers in connection with market  development   |   | 1,117              |    | —   |   |
|                                                            |   |               |    |     |   |
| Debt balance at end of period                                   |   | $                  | 130,351 |     | $      | 198,571 |   |

 

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(1)                EBITDA representsearnings before interest (including a non-cash loss on extinguishment ofdebt and loss on termination of interest rate swaps), income taxes,depreciation, depletion and amortization. EBITDA is not a measure of operating income, operating performance orliquidity under GAAP.  We present EBITDAbecause we understand it is used by some investors to determine a company’shistorical ability to service and incur debt and to fund ongoing capitalexpenditures and because certain covenants in our senior credit facility aretied to a substantially similar measure (which permits us to add back certainadditional amounts to net income (loss)). Nevertheless, EBITDA should not be considered in isolation or as asubstitute for operating income (as determined in accordance with GAAP) as anindicator of our operating performance, or of cash flow from operatingactivities (as determined in accordance with GAAP), or as a measure ofliquidity.  In addition, because EBITDAis not calculated identically by all companies, our measurement of EBITDA maynot be comparable to similarly titled measures reported by othercompanies.  See our consolidatedfinancial statements and related notes included elsewhere in this Annual Reporton Form 10-K.

 

During 2002, we had freecash flow (deficit) before acquisitions and financing activities of$(12.6) million.  Free cash flow in2002 was offset by the payment of $2.5 million for insurance claims from2001, additional acquisition holdbacks related to acquisitions closed in 2002of $1.8 million, our

 

 

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investment of $9.8million in equipment to support new municipal contracts and our investment of$31.5 million in capital expenditures during the year for propertymaintenance, landfill development, cell construction and other newbusiness.  We believe that our level ofinvestment, among other things, resulted in our internal growth rate, excludingacquisitions and price increases, being 3.8% for 2002.

 

***Liquidity***

 

Our business is capitalintensive.  Our capital requirementsinclude acquisitions, new franchise agreements and fixed asset purchases forinternal growth, primarily for trucks, containers and equipment, and forlandfill cell construction, landfill development and landfill closureactivities.  We have historicallyfinanced, and plan to continue to finance, our capital needs with cash providedfrom operations, borrowings under our senior credit facility, debt or equityofferings, or some combination of the foregoing.

 

On June 12, 2002, wecompleted a private offering of our Notes at a price of 100.0%.  Our Notes mature on June 15, 2012.  In December 2002, we registered our Notesunder the Securities Act.  Interest onour Notes 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.  Our Notes are redeemable on or after June15, 2007 and we may redeem up to 35.0% of the aggregate principal amount of ourNotes on or before June 15, 2005 with the proceeds from qualified publicofferings of our equity securities.  Theindenture governing our Notes contains covenants which, among other things,limit our ability to incur additional debt, create liens, engage insale-leaseback transactions, pay dividends or make other equity distributions,purchase or redeem capital stock, make investments, sell assets, engage intransactions with affiliates and effect a consolidation or merger.  These limitations are subject to certainqualifications and exceptions.  As ofDecember 31, 2002, we were in compliance with all covenants contained in theindenture governing our Notes.

 

The net proceeds from theoffering of our Notes were approximately $144.0 million after deductingthe initial purchasers’ fees and other expenses of the offering.  We used $142.8 million of the netproceeds to prepay all of the debt then outstanding under the term loan andrevolving loan portions of our senior credit facility (other than approximately$4.7 million underlying then outstanding letters of credit), and theremainder of the net proceeds for general corporate purposes, including workingcapital, and to fund acquisitions.  Uponrepayment of the term loan portion of our senior credit facility, we expensedapproximately $586,000 of related debt issue costs.  In addition, we terminated three interest rate swap agreements inadvance of their respective contract termination dates.  We recorded a loss on the early terminationof the interest rate swap agreements of approximately $826,000.

 

Our senior creditfacility is provided by a syndicate of lenders led by Fleet National Bank, asadministrative agent (“Fleet”), and Credit Suisse First Boston and CiticorpNorth America, Inc., jointly as syndication agents, and included a$39.2 million senior secured term loan and includes a $222.5 millionsenior secured revolving loan, including a maximum of $30.0 millionunderlying letters of credit.  During 2002, we fully prepaid the term loanand, we are not permitted to reborrow any amounts thereunder. We amended oursenior credit facility during 2002 to, among other things, permit us to issueour Notes and to enter into certain of the covenants in the indenture governingour Notes.  Subject to certainconditions, we may request an increase in the revolving loan portion of oursenior credit facility of up to $13.3 million such that the totalrevolving loan portion would equal $235.8 million. As of December 31,2002, there was $46.4 million (excluding $8.9 million underlyingletters of credit) outstanding under the revolving loan portion of our seniorcredit facility and additional borrowings of $37.8 million were availableunder the revolving loan portion, plus a maximum of $21.1 millionunderlying letters of credit.  In orderto borrow

 

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underthe revolving loan portion of our senior credit facility, we must satisfycustomary conditions including maintaining certain financial ratios.  Our senior credit facility is secured by apledge of the stock of our direct and indirect subsidiaries and a lien onsubstantially all of our direct and indirect subsidiaries’ assets.

 

Our senior creditfacility permits borrowings at floating interest rates based on, at our option,the designated eurodollar interest rate, which generally approximates LIBOR, orthe Fleet prime rate, in each case, plus an applicable margin, and requirespayment of an annual commitment fee based on the unused portion of therevolving loan portion.  As ofDecember 31, 2002, the interest rate applicable to $39.7 millionoutstanding under the revolving loan portion of our senior credit facility wasLIBOR plus 275 basis points, or 4.4%, and the interest rate applicable to thebalance of $6.7 million outstanding thereunder was Fleet’s prime rate plus75 basis points, or 5.0%.  Oursenior credit facility expires on August 31, 2004.

 

The proceeds of the loansunder our senior credit facility may be used solely to refinance certain debt,fund certain acquisitions, capital expenditures, working capital and generalcorporate purposes.  The letters ofcredit under our senior credit facility may be used solely for working capitaland general corporate purposes.

 

Our senior creditfacility contains affirmative and negative covenants and other terms customaryto such financings, including requirements that we maintain specified financialratios, including the following:

** **

**•****                                          MaximumLeverage Ratio**—Our consolidated debt to consolidated EBITDA ratio for anyperiod of four consecutive 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 ratio forany period of four consecutive fiscal quarters may not be greater than 3.0 to1.0.

** **

**•****                                          MinimumInterest Coverage Ratio**—Our consolidated EBITDA to consolidated interestexpense ratio for any period of four consecutive fiscal quarters ending on thelast day of any fiscal quarter specified below may not be less than theapplicable ratio indicated below: 

 
| **Quarters  Ending**                   |   | **Consolidated EBITDA to  Consolidated Interest Expense  Ratio** |
|----------------------------------------|--------|------------------------------------------------------------------|
|                                   |   |                                                             |
| December  31, 2002                     |   | 3.10 to 1.0                                                      |
| March  31, 2003                        |   | 2.75 to 1.0                                                      |
| June  30, 2003—September 30, 2003 |   | 2.40 to 1.0                                                      |
| December  31, 2003                     |   | 2.50 to 1.0                                                      |
| March  31, 2004 and thereafter         |   | 2.75 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 $173.9 million, plus (a) theproceeds of any new equity offerings and (b) 50% of our positiveconsolidated net income for each fiscal quarter beginning with the firstquarter of 2003.

 

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**•****                                          MaximumCapital Expenditures**—Our annual capital expenditures less capital purchasedfor new municipal contracts may not be greater than the product of our annualdepreciation expense for any fiscal year and the applicable multiple specifiedbelow: 

 
| **Year Ending  December 31,** |   | **Multiple of Depreciation  Expense for Such Year** |   |
|-------------------------------|--------|-----------------------------------------------------|--------|
| 2002                          |   | 1.6 x                                               |
| Thereafter                    |   | 1.4 x                                               |

 

As of December 31, 2002,our consolidated debt to consolidated EBITDA ratio was 3.79:1, our consolidatedsenior debt to consolidated EBITDA ratio was 0.92:1, our consolidated EBITDA toconsolidated interest expense ratio was 3.32:1 and our consolidated net worthwas $177.1 million ($3.2 million in excess of the minimum requiredunder our senior credit facility).  Inaddition, our fiscal 2002 annual capital expenditures of $41.3 million lesscapital purchased for new municipal contracts of $9.8 million did notexceed 1.6 times our fiscal 2002 annual depreciation expense.  Our ability to comply in future periods withthe financial covenants in our senior credit facility will depend on our ongoingfinancial 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.

 

In August 2002, weentered into two interest rate swap agreements, which are effective throughJune 15, 2012, with two financial institutions.  Under each swap agreement, the fixed interest rate on$25.0 million of our Notes effectively was converted to an interest rateof 5.275% and 5.305%, respectively, plus an applicable floating rate marginthat is based on six month LIBOR which is readjusted semiannually onJune 15 and December 15 of each year.

 

Environmental laws andregulation, including Subtitle D, that apply to the non-hazardoussolid waste management industry have required us, as well as others in theindustry, to alter the way we conduct our operations and to modify or replacepre-Subtitle D landfills. 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 andobligate us to spend sums in addition to those presently reserved for suchpurposes.  These factors couldsubstantially increase our operating costs and adversely affect our results ofoperations, financial condition and cash flow.

 

We believe that cash flowfrom operations and borrowings under the revolving loan portion of our seniorcredit facility will provide adequate cash to fund our working capital, capitalexpenditure, debt service and other cash requirements for the foreseeablefuture.  Our ability to meet futureworking capital, capital expenditure and debt service requirements to providefinancial assurance, as requested or required, and to fund capital amountsrequired for the expansion of our existing business will depend on our futurefinancial performance, which will be affected by a range of economic,competitive and business factors, many of which are outside of our control.  See “—Risk Factors.” We cannot assure youthat our business will generate sufficient cash flow from operations, thatfuture financings will be available to us in amounts sufficient to enable us toservice our debt or to make necessary capital expenditures, or that anyrefinancing would be available on commercially reasonable terms, if atall.  Further, depending on the timing,amount and structure of any possible future acquisitions and the availabilityof funds under, and compliance with certain other covenants in, our senior creditfacility, we may need to raise additional capital.  We may raise such funds through public or private offerings ofour debt or equity securities.  Wecannot assure you that we will be able to secure such funding, if necessary, onfavorable terms, if at all.

 

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We have no off-balancesheet debt or similar obligations, other than as outlined in the “SignificantCommercial Commitments” table below. See also Item 1. “Business—Risk Management, Insurance and Performance orSurety Bonds.”  We have no transactionsor obligations with related parties that are not disclosed, consolidated intoor reflected in our reported results of operations or financial position.

 

***Obligations and Commitments***

 

The following tablesoutline what we regard as our significant contractual obligations andcommercial commitments as of December 31, 2002.  The tables do not represent all of our contractual obligationsand commercial commitments that we have entered into.  

 
|                                           |   | **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)                              |   | $                                          | 198,571 |   | $ | 185 |   | $ | 46,422 |   | $ | — |   | $ | 151,964 |   |
| Operating leases                               |   | 7,377                                      |    | 2,084 |   | 2,623 |   | 1,367 |   | 1,303 |   |
|                                           |   |                                       |    |   |   |   |   |   |   |   |   |
| Total significant contractual cash obligations |   | $                                          | 205,948 |   | $ | 2,269 |   | $ | 49,045 |   | $ | 1,367 |   | $ | 153,267 |   |

 

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(1)                Long-termdebt obligations include $150.0 million aggregate principal amount of ourNotes and $46.4 million outstanding under the revolving loan portion ofour senior credit facility due August 31, 2004.  The revolving loan portion of our senior credit facility providesfor borrowings of up to $222.5 million, of which $37.8 million wasavailable for borrowing as of December 31, 2002.  The term loan portion of our senior credit facility has beenfully repaid and may not be reborrowed.

 
|                                     |   | **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                        |   | $                                                              | 8,889  |   | $ | 8,889 |   | $ | — |   | $ | — |   | $ | — |   |
| Performance and other bonds              |   | 28,898                                                         |   | 28,898 |   | — |   | — |   | — |   |
| Landfill closure bonds                   |   | 32,985                                                         |   | 32,985 |   | — |   | — |   | — |   |
|                                     |   |                                                           |   |   |   |   |   |   |   |   |   |
| Total significant commercial commitments |   | $                                                              | 70,772 |   | $ | 70,772 |   | $ | — |   | $ | — |   | $ | — |   |

 

The tables above do notinclude expenditures that we will likely be required to make in connection withthe construction of our existing or anticipated landfills, replacement of trucksand other equipment or otherwise in the ordinary course of our business.  As of December 31, 2002, we estimatedthat we would spend approximately $394.6 million on our then operatedlandfills over their then estimated remaining operating lives, primarily forcell construction and environmental structures.  This amount includes approximately $100.9 million related tofuture landfill capping events which, under SFAS No. 143, effective as ofJanuary 1, 2003, will be accounted for as asset retirement obligations.  We cannot accurately predict the timing andultimate amount of these expenditures as they will vary depending on thevolumes of waste disposed of at such landfills, future permitting requirements,acquisition of additional landfills or collection operations and other factorsmany of which are beyond our control. None of these expenditures represent contractual commitments.

 

We had a non-recurringenvironmental cost accrual on our balance sheet of $1.7 million as ofDecember 31, 2002 and $2.2 million as of December 31, 2001,consisting of a liability related to a

 

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consent decree requiringcertain waste to be relocated which we assumed in connection with theacquisition of our Blue Ridge landfill. Cash paid against this accrual was approximately $525,000 during 2002,approximately $921,000 during 2001 and approximately $676,000 during 2000.

 

We had an obligation onour balance sheet of $213.4 million as of December 31, 2002 and$195.3 million as of December 31, 2001, representing the carryingvalue of our preferred stock as of such dates. In accordance with EITF Topic No. D-98, Classification and Measurementof Redeemable Securities, we have classified our preferred stock outside ofpermanent equity because, pursuant to the terms of such preferred stock, suchpreferred stock is redeemable upon the occurrence of certain transactionsdeemed to be liquidation events.  Suchredemption is not deemed to be solely within our control because holders of ourpreferred stock currently control a majority of the votes of our board ofdirectors.  See our consolidatedfinancial statements and the related notes included elsewhere in this AnnualReport on Form 10-K.

 

***Capital Expenditures***

 

We made capitalexpenditures of $41.3 million during 2002. We expect to make capital expenditures of approximately $33.5 to$35.5 million during 2003 in connection with our existing business.  We intend to fund our planned 2003 capitalexpenditures principally through existing cash, internally generated funds andborrowings under our senior credit facility.

 

In addition, we may makesubstantial additional capital expenditures in acquiring solid waste managementbusinesses.  If we acquire additionallandfill disposal facilities, we may also have to make significant expendituresto bring them into compliance with applicable regulatory requirements, obtainpermits or expand our available disposal capacity.  In addition we may need to make additional capital expendituresif we bid and are awarded new municipal contracts.  We cannot currently determine the amount of these expendituresbecause they will depend on the number, nature, condition and permitted statusof any acquired landfill disposal facilities or new municipal contracts.

 

From time to time weevaluate our existing operations and their strategic importance to us.  If we determine that a given operating unitdoes not have future strategic importance, we may sell or otherwise dispose ofthose operations.  Although we believeour operations would not be impaired by such dispositions, we could incurlosses on them.

 

**Recent Accounting Pronouncements**

 

In June 2001, theFASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142, which was effectiveJanuary 1, 2002, addresses the method of identifying and measuringgoodwill and other intangible assets acquired in a business combination,eliminates further amortization of goodwill and other intangible assets deemedto have indefinite lives and requires periodic evaluation of impairment ofgoodwill balances.  Other intangibleassets, including those meeting new recognition criteria under SFASNo. 142, will continue to be amortized over their estimated useful lives.

 

We adopted the new ruleson accounting for goodwill and other intangible assets as of January 1,2002.  As provided for under SFASNo. 142, goodwill and indefinite-lived intangible assets resultingfrom acquisitions completed after June 30, 2001 have not been amortizedand amortization of goodwill incurred prior to June 30, 2001 ceasedeffective January 1, 2002.  In2001, we recognized $2.5 million of tax deductible goodwill amortizationexpense and $373,400 of non-tax deductible goodwill amortization.  Application of the non-amortizationprovisions of SFAS No. 142 resulted in an increase in pre-tax netincome of approximately $2.8 million in 2002 based on goodwill amortizedin 2001 that was not

 

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amortized in 2002.  We test goodwill for impairment using the two-stepprocess prescribed in SFAS No. 142. The first step is a screen for potential impairment, while the secondstep measures the amount of the impairment, if any.  We performed the first of the required impairment tests ofgoodwill and indefinite-lived intangible assets based on the carryingvalues of January 1, 2002 and incurred no impairment of goodwill upon ourinitial adoption of SFAS No. 142.  Wealso performed our annual impairment test during 2002 and incurred noimpairment.

 

In June 2001, the FASBissued 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 such obligations.  SFAS No. 143 requires amounts initiallyrecognized as an asset retirement obligation to be measured at fair value.  The recognized asset retirement cost iscapitalized as part of the cost of the asset and is depreciated over the usefullife of the asset.

 

SFAS No. 143, which willprimarily impact the accounting for our landfill operations, does not changethe basic landfill accounting followed historically by us along with others inthe waste industry.  In general, thewaste industry has recognized expenses associated with both amortization ofcapitalized costs and future closure and post-closure obligations on aunits-of-consumption basis as airspace is consumed over the life of the relatedlandfill.  This practice, referred to aslife cycle accounting within the waste industry, will continue to be followedupon adoption of SFAS No. 143, except as discussed below.

 

Under the new rules,costs associated with future final capping activities that occur during theoperating life of a landfill, which are currently recognized on an undiscountedbasis over the operating life of the landfill as airspace is consumed, will beaccounted for as an asset retirement obligation, on a discounted basis.  We expect to recognize landfill retirementobligations that relate to closure and post-closure activities over theoperating life of a landfill as landfill airspace is consumed and theobligation is incurred.  We expect torecognize our final capping obligations on a discrete basis for each expectedfuture final capping event over the number of tons of waste that each finalcapping event is expected to cover. These obligations will be initially measured at estimated fairvalue.  Fair value will be measured on apresent value basis, using a credit-adjusted, risk-free rate, initially10.25%.  Interest will be accreted onall landfill retirement obligations using the effective interest method.  Landfill retirement costs arising from closureand post-closure obligations, which will be capitalized as part of the landfillasset, will be amortized using our existing landfill accounting practices.  Landfill retirement costs arising from finalcapping obligations, which will also be capitalized as part of the landfillasset, will be amortized on a units-of-consumption basis over the number oftons of waste that each final capping event covers.

 

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The tables below setforth certain definitions related to our landfill accounting practices (priorto and upon our adoption of SFAS No. 143) and the significant changes betweenour current landfill accounting practices and the requirements of SFAS No. 143:

 
| **Description**  |   | **Current  Definition**                                                                                                                                                                                                                    |   | **Definition  Upon Adoption of SFAS No. 143** |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|
|             |   |                                                                                                                                                                                                                                       |   |                                          |
| **Definitions:** |   |                                                                                                                                                                                                                                       |   |                                          |
| Final  Capping   |   | Includes 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          |   | Includes 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     |   | Includes 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**               |   | **Current  Practice**                                                                                                                                       |   | **Practice  Upon Adoption of  SFAS No. 143**                                                                                                                                                                                                                                                                      |
|-------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |   |                                                                                                                                                        |   |                                                                                                                                                                                                                                                                                                              |
| **Discount Rate**:            |   | None.                                                                                                                                                       |   | Credit-adjusted,  risk-free rate (currently at 10.25%).                                                                                                                                                                                                                                                           |
| **Cost Estimates:**           |   | Cost are 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% effective January  1, 2003, based on the prior 10 year average.                                                                                                                                                                                                                                              |
| **Recognition of Liability**: |   |                                                                                                                                                        |   |                                                                                                                                                                                                                                                                                                              |
| Final  Capping                |   | Costs are capitalized  as spent, except for the last final capping event that occurs after the  landfill closes, which is accounted for as part of closure. |   | All final capping will  be 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. |

 

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| **Description**                       |   | **Current Practice**                                                                                                                                                                                                 |   | **Practice  Upon Adoption of  SFAS No. 143**                                                                                                                                                                            |
|---------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Closure  and post-closure             |   | Accrued over the life  of the landfill, the undiscounted cash flow associated with such liabilities  is recorded to accrued liabilities, with a corresponding charge to cost of  operations as airspace is 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 (currently  at 10.25%) under the effective interest method.                                                                     |

 

We have adopted SFAS No.143 as of January 1, 2003 and, based on current estimates, we expect to recordan after-tax expense ranging from $900,000 to $1.2 million as a cumulativeeffect of a change in accounting principle. We expect that the impact of adopting SFAS No. 143 in 2003 will decreaseearnings from our previous method by an amount ranging from $500,000 to$750,000.  The adoption of SFAS No. 143will have no impact on our cash flow.

 

In August 2001, the FASBissued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” effective for fiscal years beginning after December 15, 2001.  This statement addresses financialaccounting and reporting for the impairment or disposal of long-livedassets.  We adopted SFAS No. 144 onJanuary 1, 2002 and it did not have an effect on our consolidatedfinancial statements.

 

In April 2002, the FASBissued SFAS No. 145, “Recission of FASB Statements Nos. 4, 44 and 64,Amendment of FASB Statement No. 13, and Technical Corrections.” SFASNo. 145 requires that gains and losses from extinguishment of debt beclassified as extraordinary items only if they meet the criteria in AccountingPrinciples Board Opinion No. 30 (“Opinion No. 30”).  Applying the provision of OpinionNo. 30 will distinguish transactions that are part of an entity’srecurring operations from those that are unusual and infrequent and meetcriteria for classification as an extraordinary item.  As allowed under the provisions of SFAS No. 145, we haveadopted SFAS No. 145 as of April 1, 2002. In accordance with SFAS No. 145, we have included the loss on theextinguishment of debt in income before taxes.

 

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In July 2002, the FASBissued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.” SFAS No. 146 addresses financial accounting andreporting for costs associated with exit or disposal activities, such asrestructurings, involuntarily terminating employees and consolidatingfacilities. SFAS No. 146 excludes from its scope exit and disposalactivities conducted in connection with a business combination and thoseactivities 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.  We do not expect the adoption of thisstatement to have a material effect on our consolidated financial position orresults of operations.

 

In November 2002, theFASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”).  FIN 45elaborates on the disclosures that a guarantor should make in its interim andannual financial statements regarding its obligations relating to the issuanceof certain guarantees.  It also requiresa guarantor to recognize, at the time it issues a guarantee, a liability forthe fair value of the obligation undertaken in issuing the guarantee.  FIN 45 provides specific guidanceidentifying the characteristics of contracts that are subject to its guidanceand it also provides for scope exceptions from the guidance in its entirety orfrom only the initial recognition and measurement provisions.  The recognition and measurement provisionsof FIN 45 apply on a prospective basis to guarantees issued or modifiedafter December 31, 2002, regardless of the guarantor’s fiscal yearend.  The disclosure requirements ofFIN 45 are effective for interim and annual period financial statementsending after December 15, 2002. Our adoption of FIN 45 did not have a material impact on our financialposition, results of operations or disclosure requirements.

 

**Risk Factors**

 

The following riskfactors, among others, could adversely affect our operations and futureperformance and cause actual results to differ materially from those indicatedby forward-looking statements made in this Annual Report on Form 10-K andsubsequently presented (in writing or orally) by us or persons acting on our 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, 2002 (dollars in thousands):

 
| Total  indebtedness         |   | $       | 198,571 |   |
|-----------------------------|--------|---------|---------|--------|
| Redeemable  preferred stock |   | 213,350 |    |
| Stockholders’  deficit |   | (36,224 | )       |

 

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

 

•                                          makeit more difficult for us to satisfy our obligations with respect to our debt;

 

•                                          makeus more vulnerable to unfavorable economic conditions and competitive pressuresin our industry;

 

•                                          limitour ability to borrow additional funds, whether for working capital,acquisitions, purchases of machinery, equipment or other assets, or otherwise;

 

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•                                          requireus to dedicate 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;

 

•                                          limitour ability to plan for, or react to, changes in our business or the industryin which we operate; and

 

•                                          placeus at a disadvantage compared to our competitors that have less debt inrelation to cash flow.

 

***Additional Borrowings Available—Despite our currentindebtedness levels, we and our subsidiaries may be able to incur substantiallymore debt.  This could exacerbate therisk described above.***

 

We and our subsidiariesmay be able to incur substantial additional indebtedness in the future.  The indenture governing our Notes restricts,but does not prohibit, our ability to incur additional indebtedness.  There are a number of qualifications andexceptions to these restrictions that could allow us to incur substantialindebtedness, including under our senior credit facility.  The revolving loan portion of our seniorcredit facility currently permits us to borrow up to an aggregate amount of $222.5million, including up to $30.0 million underlying letters of credit, subject tosatisfying certain financial ratios.  Asof December 31, 2002, we had $167.2 million undrawn, including up to $8.9million underlying letters of credit, under our senior credit facility.  Subject to certain conditions, we mayrequest an increase in the revolving loan portion of our senior credit facilityof up to $13.3 million such that the total revolving loan portion would equal$235.8 million.  If new debt is added toour and our subsidiaries’ current debt levels, the related risks that we andthey now face could increase.  See Item6. “Selected Financial Data.”

 

***Ability To Service Debt—We will require a significant amountof cash to service our debt.  Ourability to generate cash depends on many factors, some of which are beyond ourcontrol.***

 

Our ability to makepayments on our debt will depend on our ability to generate cash.  Our success in doing so will depend on theresults of our operations, which in turn depend on many factors, includingthose described in this “Risk Factors” section and elsewhere in this AnnualReport on Form 10-K.  Our ability togenerate adequate cash is also subject to general economic, financial,competitive, legislative, regulatory and other factors that are beyond ourcontrol.  Also, if we consummateacquisitions 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—Our failure to comply with the covenantscontained in our senior credit facility or the indenture governing our Notes,including as a result of events beyond our control, could result in an event ofdefault, which could materially and adversely affect our operating results andfinancial condition.***

 

If a default under theindenture governing our Notes or our senior credit facility should occur, theholders of our Notes or the lenders under our senior credit facility couldelect to declare all amounts borrowed to be immediately due and payable.  Furthermore, this could result in allamounts borrowed under other instruments, including the indenture governing ourNotes or our senior credit facility, that contain cross-acceleration orcross-default provisions being declared immediately due and payable and thelenders could terminate all commitments thereunder.  In such event, we may not be able to pay the accelerated amountsor borrow funds sufficient to make any such payment.  Even if additional financing could be obtained, it may not be onterms that are favorable or acceptable to us. Further, if we are unable to repay, refinance or restructure our debtunder our senior credit facility, the lenders under our senior

 

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credit facility couldproceed against the collateral securing that indebtedness.  In such event, any proceeds received upon arealization of the collateral would be applied first to amounts due under oursenior credit facility before any proceeds would be available to make paymentson our Notes.

 

***Covenant Restrictions—Covenant restrictions in our seniorcredit facility and the indenture governing our Notes may limit our ability tooperate our business.***

 

Our senior creditfacility and the indenture governing our Notes contain covenants that restrictour ability to operate our business. The indenture governing our Notes restricts our ability to, among otherthings, incur additional debt, sell assets, create liens or other encumbrances,make certain guarantees of debt, make specified payments, including dividends,engage in transactions with affiliates and enter into a merger orconsolidation.  Our senior creditfacility contains similar restrictions and also requires us to comply withcertain financial covenants and ratios, including a leverage ratio, a seniorleverage ratio, an interest coverage ratio, a minimum consolidated net worthand a limit on capital expenditures. These restrictions, covenants and ratios may limit our ability tooperate our business, finance future operations, respond to changing business andeconomic conditions, secure additional financing, if needed, and take advantageof potential business opportunities as they arise.  Furthermore, our ability to comply with these restrictions,covenants and ratios may be affected by changes in economic or businessconditions, other events beyond our control or significant asset impairmentsresulting from a failure to obtain extensions that we are currently seekingwith 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.

 

***Controlling Stockholders—The interests of our controllingstockholders could conflict with those of other holders of our securities.***

 

Thayer Equity InvestorsIV, LP and its affiliates, TC Carting LLC and TC Carting II LLC, control amajority of our capital stock.  As aresult, Thayer and its affiliates effectively control the outcome of mostmatters submitted to a vote of our stockholders.  In addition, pursuant to our Amended and Restated Stockholders’Agreement, Thayer and TC Carting are entitled to designate up to four of eightmembers of our board of directors.  OurAmended and Restated Stockholders’ Agreement also requires us to obtain theconsent of the directors designated by Thayer and TC Carting for certainmaterial corporate actions, including the issuance of additional debt and thedeclaration of dividends.  See Item 13.“Certain Relationships and Related Transactions—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.**

 

Our ability to remaincompetitive, sustain our growth and operations, and expand our operationslargely depends on our cash flow from operations and our access tocapital.  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 

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preferred stock.  We may require additional equity or debtfinancing to fund our growth and debt repayment obligations.

 

Our capital expenditures,including closure expenditures related to our landfill operations, were$41.3 million during 2002.  If weundertake acquisitions or expand our operations, our capital expenditures,including closure, final closure and post-closure and remediation expenditures,may increase.  The increase inexpenditures may result in low levels of working capital or require us tofinance working capital deficits.

 

In addition, if we mustclose a landfill sooner than we currently anticipate, or if we reduce ourestimate of a landfill’s remaining available volume, we may be required toincur such costs earlier or accrue liabilities for them at a higher rate.

 

Our cash needs willincrease if the expenditures for closure, final closure and post-closuremonitoring increase above the current reserves taken for these costs.  Expenditures for these costs may increase asa result of any federal, state or local government regulatory action taken toaccelerate such expenditures.  Thesefactors, together with those discussed above, could substantially increase ouroperating costs and therefore impair our ability to invest in our existing ornew facilities.

 

We may need to refinanceour senior credit facility, our Notes or other debt to pay the principalamounts due at maturity.  In addition,we may need additional capital to fund future acquisitions and the integrationof solid waste management businesses. Our business may not generate sufficient cash flow, we may not be ableto obtain sufficient funds to enable us to pay our debt obligations and capitalexpenditures or we may not be able to refinance on commercially reasonableterms, if at all.

 

***Constraints to Growth—Our growth strategy depends, in part,on our acquiring other solid waste management or related businesses andexpanding our existing landfills and other operations, which we may be unableto do.***

 

Our growth strategy isbased, in part, on our ability to acquire other solid waste managementbusinesses, particularly transfer stations and landfill operations.  The success of this acquisition strategywill depend, in part, on our ability to accomplish the following:

 

•                                          identifysuitable businesses to buy;

 

•                                          completethe purchase of those businesses on terms acceptable to us;

 

•                                          completethe acquisition in the time frame we expect;

 

•                                          improvethe results of operations of the businesses that we buy and successfullyintegrate their operations into our own; and

 

•                                          avoidor overcome any concerns expressed by regulators, including antitrust concerns.

 

There can be no assurancethat we will be successful in pursuing any or all of these steps.  Our failure to implement our acquisitionstrategy could have an adverse effect on other aspects of our business strategyand our business in general.  Forexample, our ability to continue to successfully implement our verticalintegration strategy will depend on our ability to identify and acquire or developadditional suitable landfills, collection operations and transfer stations andobtain necessary permits.  We may not be

 

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able to find appropriateacquisition candidates, acquire those candidates that we find, obtain necessarypermits or integrate acquired businesses effectively or profitably.

 

Many of our competitorsare also seeking to acquire collection operations, transfer stations andlandfills, including many competitors that have greater financial resourcesthan we do.  Increased competition mayreduce the number of acquisition targets available to us and may lead tounfavorable terms as part of any acquisition, including high purchaseprices.  If acquisition candidates areunavailable or too costly, we may need to change our business strategy.

 

We also cannot be certainthat we will have enough capital or be able to raise enough capital by issuingstock or debt instruments or through other financing methods on reasonableterms, if at all, to complete the purchases of the businesses that we want tobuy.  Acquisitions may increase ourcapital requirements, and thereby exacerbate the risks mentioned under“—Capital Requirements—Our business is capital intensive and may consume cashin excess of cash flow from our operations and borrowings” above.

 

Our senior creditfacility requires us to obtain the consent of certain lenders under our seniorcredit facility before engaging in any acquisition that involves cashconsideration in excess of $12.5 million. Acquisitions must also be approved by the directors designated bycertain of our key stockholders.  Theindenture governing our Notes also restricts our ability to consummateacquisitions.

 

Our acquisitions alsoinvolve the potential risk that we fail to accurately assess all of the pre-existingliabilities of the operations acquired, including liabilities of the typedescribed under “ —Environmental Contamination—We may have liability forenvironmental contamination” below.

 

Our growth strategy alsocalls for expanding the total capacity and increasing the daily volume limitsof a number of our facilities, including our MSW landfill in Bethlehem, PA, oneof the two landfills in our Northeast Region, which currently has an estimatedremaining operating life, based on current volumes, of three and one-halfmonths.  Failure to expand capacitycould have a material adverse effect on our operations or financial condition.

 

We do not know whetherour growth strategy will continue to be effective.  Our integration plan for acquisitions contemplates certain costsavings, including from the elimination of duplicative personnel andfacilities.  Unforeseen factors mayoffset the estimated cost savings or other components of our integration planin whole or in part and, as a result, we may not realize any cost savings orother benefits from future acquisitions. Also, our increased size means that federal and state governmentregulators, such as antitrust regulators, may examine our acquisitions moreclosely.  They may object to certainpurchases or place conditions on them that would limit their benefit to us.

 

If we are unsuccessful inimplementing our acquisition strategy or expanding our existing landfills andother operations for the reasons discussed above or otherwise, our business,financial condition and results of operations could be materially adverselyaffected.

 

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

 

Our growth strategyplaces significant demands on our financial, operational and managementresources.  In order to continue ourgrowth, we will need to add administrative, management and other personnel, andmake 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 and systemsto the extent, and in the time, required.

 

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***Competition—Competition could reduce our profitability orlimit our ability to grow.***

 

The non-hazardous solidwaste management industry is very competitive and we expect that increasedconsolidation in the industry will increase competitive pressures.  Competition may require us to discount ourprices, which could reduce our revenue and have a material adverse effect onour business, financial condition and results of operations.

 

We face competition fromseveral larger and better capitalized competitors and a large number of localand regional competitors.  Becausecompanies can enter the collection and transportation segments of the solid wastemanagement industry with very little capital or technical know-how, there are alarge number of regional and local companies in the industry.  We face competition from these businesses inthe markets we currently serve.  Similarcompetition may exist in each location into which we try to expand in thefuture.  Our competitors could also takeactions that would hurt our growth strategy, including the support ofregulations that could delay or prevent us from obtaining or keepingpermits.  They may also give financialsupport to citizen groups that oppose our plans to locate a disposal ortransfer facility at a particular location.

 

In each market in whichwe operate a landfill, we compete for solid waste volume on the basis ofdisposal or “tipping” fees, geographical location and quality ofoperations.  Our ability to obtain solidwaste volume for our landfills may be limited by the fact that some majorcollection companies also operate landfills to which they send their waste.  In markets in which we do not operate a landfill,our collection operations may operate at a disadvantage to fully integratedcompetitors.

 

***State and Municipal Landfill Alternatives—State andmunicipal requirements to reduce landfill disposal by encouraging variousalternatives may adversely affect our ability to operate our landfills at fullcapacity.***

 

States and localitiesincreasingly have supported the following alternatives to or restrictions oncurrent landfill disposal:

 

•                                          recycling;

 

•                                          incinerating;

 

•                                          composting;

 

•                                          reducingwaste at the source;

 

•                                          prohibitingdisposal of certain types of waste at landfills; and

 

•                                          limitinglandfill capacity.

 

Many states have enacted,or are currently considering or have considered enacting, laws regarding wastedisposal, including:

 

•                                          requiringcounties to use waste planning, composting, recycling or other programs toreduce the amount of waste deposited in landfills; and

•                                          prohibitingthe disposal of yard waste, tires and other items in landfills.

 

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These trends may reducethe volume of waste destined for landfills in certain areas, which could leadto our landfills operating at a reduced capacity or force us to charge lowerprices for landfill disposal services. These results could have a material adverse effect on our business,financial condition and results of operations.

 

***Loss of Contracts—We may lose contracts through competitivebidding or early termination, which would cause our revenue to decline.***

 

We derive a substantialportion of our revenue from services provided under municipal contracts andexclusive franchise agreements.  Many ofthese may be subject to competitive bidding at some time in the future.  We also intend to bid on additionalmunicipal contracts and franchise agreements. Whether we are the successful bidder for any particular municipalcontract is subject to significant uncertainty.  In addition, some of our customers may terminate their contractswith us before the end of the contract term. If we are not able to replace revenue from contracts lost throughcompetitive bidding, early termination or from the renegotiation of existingcontracts with other revenue within a reasonable time period, our revenue woulddecline.

 

***Geographic Concentration—We are geographically concentratedin the northeastern and southern United States and susceptible to thoseregions’ local economies and regulations.***

 

We operate in thefollowing nine states: Texas, Arkansas, Missouri, Oklahoma, Louisiana, NewYork, New Jersey, Pennsylvania and Maryland. We estimate that more than 42% of our revenue during 2002 was derivedfrom services provided in Texas and more than 29% of our revenue during 2002was derived from services provided in New York.  Accordingly, our business and financial results would be harmedby downturns in the economies of Texas or New York and other factors affectingsuch states, such as state regulations affecting the solid waste managementindustry and severe weather conditions. In addition, the costs and time involved in obtaining permits for, andthe scarcity of, available landfills in the northeastern United States couldmake it difficult for us to expand vertically in our Northeast Region.

 

Our C&D wasteservices constitute a substantial portion of our business in our South Region.  The C&D waste market is more cyclicalthan the MSW market because it is based on the volume of constructionprojects.  If our South Region suffers arecession or other economic downturn, we would likely experience reducedrevenue from our C&D operations in that region.

 

***Customer Concentration—The loss of the City of New York as acustomer could have a significant adverse effect on our business andoperations.***

 

14% of our revenue in2002 was attributable to our contracts with the City of New York to dispose ofresidential waste collected by the City in Brooklyn, New York.  These contracts expire on September 10,2003 and may be renewed by the City for two additional one-yearterms.  The City recently completed asolicitation of bids for the disposal of up to 4,000 tons of MSW per day thatthe City collects in Brooklyn which includes the waste currently covered by ourexisting contracts with the City.  Wesubmitted bids to transfer and dispose up to 1,500 tons of the waste covered bythe solicitation of bids.  See Item 7.“Management’s Discussion and Analysis of Financial Condition and Results ofOperations—General—Sources of Revenue.” We cannot predict whether we will be successful in all or any portion ofour bids, or what effect the bids submitted by us and our competitors will haveon our existing contracts or the City’s options to renew those contracts.

 

New York City recentlyannounced changes to update its Solid Waste Management Plan, in which it plansto utilize and upgrade its existing marine transfer station system instead ofprivate transfer

 

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stations to process andtransfer its residential waste stream of approximately 12,000 tons of MSW perday.  New York City intends to implementthese changes by retrofitting and repermitting these marine transfer stationsby 2008 so that the stations can containerize the City’s residential MSW onsite and then transport the loaded containers to ultimate disposal sites byalternative transportation methods, such as barge, rail and truck.  Our contracts with the City of New Yorkcould be terminated or not renewed or extended upon the expiration of theirinitial terms if these changes are implemented as presently proposed or for anyother reason.  If these contracts areterminated 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 areunable to obtain performance or surety bonds, letters of credit or insurance,we may not be able to enter into additional MSW collection contracts or retainnecessary landfill operating permits.***

 

MSW collection contractsand landfill closure obligations may require performance or surety bonds,letters of credit or other financial assurance to secure contractualperformance or comply with state or local law. We typically satisfy these requirements by posting bonds and, as ofDecember 31, 2002, we had $61.9 million of such bonds in place.  Alternatively, we may use letters of credit,for which we have a $30.0 million sublimit available under our seniorcredit facility.  Closure bonds may becomemore difficult or costly to obtain in the future.  If we were to draw fully upon our senior credit facilitycommitments or were unable to obtain performance or surety bonds or additionalletters of credit in sufficient amounts or at acceptable rates, we could beprecluded from entering into additional MSW collection contracts or obtainingor retaining landfill operating permits. Any future difficulty in obtaining insurance also could impair ourability to secure future contracts that are conditioned upon the contractorhaving adequate insurance coverage. Accordingly, our failure to obtain performance or surety bonds, lettersof credit or other financial assurances or to maintain adequate insurancecoverage could limit our operations or violate state or local requirements.

 

***Key Executives—We depend heavily on our senior management.***

 

We depend heavily on alimited number of senior executives. Our future success will depend on, among other things, our ability tokeep the services of these executives and to hire other highly qualifiedemployees at all levels.  We competewith other potential employers for employees, and we may not be successful inhiring and keeping the services of executives and other employees that weneed.  The loss of the services of, orour inability to hire, executives or key employees could hinder our businessoperations and growth.

 

***Labor Unions—Efforts by labor unions to organize ouremployees could divert management attention and increase our operatingexpenses.***

 

Labor unions may makeattempts to organize our non-unionized employees.  Some groups of our employees have chosen to be represented byunions, and we have negotiated collective bargaining agreements with them.  We cannot predict which, if any, groups ofemployees may seek union representation in the future or the outcome of anycollective bargaining.  The negotiationof these agreements could divert management attention and the terms of anyagreements could result in increased operating expenses and lower operatingmargins.  If we are unable to negotiateacceptable collective bargaining agreements, we may have to wait through“cooling off” periods, which are often followed by union-initiated workstoppages, including strikes.  Althoughwe have never experienced a work stoppage, we may in the future.  Depending on the type and duration of anywork stoppage, our operating expenses

 

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could increasesignificantly, which could have a material adverse effect on our business,results of operations and financial condition.

 

***Legislation and Governmental Regulation—We are subject toextensive legislation and governmental regulation that may restrict ouroperations or increase our costs of operations.***

 

Our equipment, facilitiesand operations are subject to extensive and changing federal, state and locallaws and regulations relating to environmental protection, health, safety, landuse, transportation and related matters. These include, among others, laws and regulations governing the use,treatment, storage and disposal of solid and hazardous wastes and materials,air quality, water quality, permissible or mandatory methods of processingwaste and the remediation of contamination associated with the release ofhazardous substances.  Environmentallaws and regulations have been enforced more stringently in recent years becauseof greater public interest in protecting the environment.

 

Our compliance withregulatory requirements is costly.  Weare often required to enhance or replace our equipment and to modify landfilloperations and, in some cases, we could be required to close landfills.  We may not be able to offset the cost ofcomplying with these standards.  Inaddition, environmental regulatory changes or an inability to obtain extensionsto the life of a landfill could accelerate or increase accruals or expendituresfor closure, final closure and post-closure monitoring at solid wastefacilities and obligate us to spend sums in addition to those presently accruedfor such purposes.

 

Extensive regulationsgovern 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.

 

Certain of our wastedisposal 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.

 

Our collection, transferand landfill operations may also be affected by “flow control”legislation.  Some states and localgovernments may enact laws or ordinances directing waste generated within theirjurisdiction 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.

 

In 1996, the New YorkCity Council enacted Local Law 42, which prohibits the collection, disposal ortransfer of commercial and industrial waste without a license issued by the NewYork City Trade Waste Commission and requires Trade Waste Commission approvalof all acquisitions or other business combinations in New York City proposed byall licensees.  See Item 1. “Business—

 

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Regulation—State andLocal Regulations—New York.”  The needfor review by the New York City Trade Waste 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.

 

From time to time, statesand local authorities consider and sometimes adopt laws or regulations imposingfees or other charges on waste disposed of at landfills located in thosestates.  If any significant fees areimposed in states in which we operate and we are not able to pass the feesthrough to our customers, our operations and profitability could be negativelyaffected.

 

The operational andfinancial effects discussed above associated with compliance with the laws andregulations to which we are subject could require us to make materialexpenditures or otherwise materially adversely affect the way we operate ourbusiness, as well as have a material adverse effect on our results ofoperations and financial condition.

 

***Operating Permits—We may not be able to obtain permits werequire to operate our business.***

 

Permits, licenses andapprovals to operate or expand non-hazardous solid waste landfills have becomeincreasingly difficult, time consuming and expensive to obtain.  Obtaining permits often takes years as a resultof numerous hearings and the time needed to comply with land use, environmentaland other regulatory requirements. Granting of these permits is also often subject to resistance fromcitizen or other groups.  Our ability tocontinue to sustain our current vertical integration strategy will depend onour ability to establish new landfills and transfer stations, expand ourlandfills 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 three and one-half month estimated remaining operating life, based oncurrent volumes, of our Bethlehem landfill. More specifically, if we fail to obtain such permits, we may have todispose collected waste at landfills operated by our competitors or haul thewaste long distances at a higher cost to another of our landfills, or we mayincur closure costs 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.

 

***Environmental Litigation—We may be subject to legal actionrelating to compliance with environmental laws.***

 

Solid waste managementcompanies like us are often subject to close scrutiny by federal, state andlocal regulators, as well as private citizens, and may be subject to judicialand administrative proceedings relating to their compliance with environmentaland local land use laws.

 

In general, environmentallaws authorize federal or state environmental regulatory agencies and attorneysgeneral to bring administrative or judicial actions for violations ofenvironmental laws.  Potential penaltiesfor such violations may include, among other things, civil and criminalmonetary penalties, imprisonment, permit suspension or revocation, andinjunctive relief.  These agencies andattorneys general may also attempt to revoke or deny renewal of our operatingpermits, franchises or licenses for violations or alleged violations ofenvironmental laws or regulations. Under certain 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.

 

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From time to time, wehave received, and we expect in the future to receive, citations or noticesfrom governmental authorities alleging that our operations are not incompliance with our permits or certain applicable environmental or land uselaws or regulations.  We generally seekto work with the relevant authorities to resolve the issues raised by thesecitations or notices.  However, we maynot always be successful in resolving these types of issues without resortingto litigation or other formal proceedings. Any adverse outcome in these proceedings, whether formal or informal,could result in negative publicity, and reduce the demand for our services andour revenue.  A significant judgmentagainst us, the loss of a significant permit or license or the imposition of asignificant fine could also have a material negative effect on our financialcondition.

 

***Environmental Contamination—We may have liability forenvironmental contamination.***

 

We could be liable tofederal or state governments or other parties if hazardous substancescontaminate or have contaminated our properties, including soil or water underour properties, or if hazardous substances from our properties contaminate orhave contaminated the properties of others. We could be liable for this type of contamination even if thecontamination did not result from our activities or occurred before we owned oroperated the properties.  We also couldbe liable for environmental contamination at properties to which we transportedhazardous substances or arranged to have hazardous substances transported,treated or disposed.  Certainenvironmental laws such as the federal Comprehensive Environmental Response,Compensation and Liability Act of 1980, as amended, or CERCLA, and similarstate laws, impose joint and several and strict liability in connection withenvironmental contamination, which means that we could have to pay allrecoverable damages, even if we were only partially responsible or notresponsible at all for the injury giving rise to the damages.  While we may seek contribution for theseexpenses from others, we may not be able to identify who the other responsibleparties are and we may not be able to compel them to contribute to theseexpenses or they may be insolvent or unable to afford to contribute.  If we do incur liability under CERCLA orsimilar state laws and if we cannot identify other parties who we can compel tocontribute to our expenses and who are financially able to do so, it could havea material adverse effect on our business, financial condition and results ofoperations.  See Item 1.“Business—Regulation.”

 

In addition, we havepreviously acquired, and may in the future acquire, businesses that may havehandled and stored hazardous substances, including petroleum products, at theirfacilities.  These businesses may havereleased hazardous substances into soil or groundwater.  They also may have transported or disposedof hazardous substances or arranged to have transported, disposed of or treatedhazardous substances to or at other properties where hazardous substances werereleased into soil or groundwater. Depending on the nature of our acquisition of these businesses and otherfactors, we could be liable for the cost of cleaning up any contamination, andother damages, for which the businesses we acquired or acquire are liable.  Any indemnities or warranties we obtained orobtain in connection with the purchases of these businesses may not suffice tocover these liabilities, due to limited scope, amount or duration, thefinancial limitations of the party who gave or gives the indemnity or warrantyor other reasons.

 

Accordingly, we could besubject to legal actions brought by governmental or private parties inconnection with environmental contamination. Any substantial liability associated with environmental contamination,whether to federal or state environmental authorities or other parties, couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

We may also besusceptible to negative publicity if we are identified as the source ofpotential environmental contamination. If an accident occurred with one of our transportation trucks, with the

 

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potential risk of evenminor environmental contamination, the resulting media coverage could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***Environmental and Other Liabilities—We will always face therisk of liability, and insurance may not always be available or sufficient.***

 

Our industry presentsrisks of liability under statutes, regulations, contracts and tort law.  If we fail to comply with any duty imposedby these laws and contracts, liability for environmental contamination, personalinjury or property damage may result. We maintain pollution liability, general liability and workers’compensation insurance which we believe is adequate to protect our business andemployees.  If a claim is made againstus for which we are uninsured, or for which we are underinsured, it could havea material adverse effect on our business, financial condition and results ofoperations.

 

Because we believe thatthe cost for environmental liability insurance is high relative to the coverageit would provide, we generally maintain our coverage at statutorily requiredlevels.  Due to the limited nature ofour insurance coverage for environmental liability, any substantial liabilityfor environmental damage that we may incur could have a material adverse effecton our business, financial condition and results of operations.

 

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

 

In the normal course ofbusiness, we are exposed to market risk, including changes in interest ratesand certain commodity prices.  We usehedge agreements to manage a portion of our risks related to interestrates.  While we are exposed to creditrisk 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.

 

We have performedsensitivity analyses to determine how market rate changes will affect the fairvalue of our market risk sensitive hedge positions and all other debt.  Such an analysis is inherently limited inthat it represents a singular, hypothetical set of assumptions.  Actual market movements may varysignificantly from our assumptions. Fair value sensitivity is not necessarily indicative of the ultimatecash flow or earnings effect we would recognize from the assumed market rate movements.  We are exposed to cash flow and earningsrisk due to changes in interest rates with respect to the entire$46.4 million outstanding balance under our senior credit facility and$50.0 million of our Notes.  A onepercentage point increase in interest rates on our variable rate debt as ofDecember 31, 2002 would decrease our annual pre-tax income byapproximately $964,000.  Because all ofour remaining debt is at fixed rates, changes in market interest rates wouldnot significantly impact our cash flows or results of operations.

 

In August 2002, weentered into two interest rate swap agreements, which are effective throughJune 15, 2012, with two financial institutions.  Under each swap agreement, the fixed interest rate on$25.0 million of our Notes effectively was converted to an interest rateof 5.275% and 5.305%, respectively, plus an applicable floating rate marginthat is based on six month LIBOR which is readjusted semiannually onJune 15 and December 15 of each year.

 

We market a variety of recyclablematerials, including cardboard, office paper, plastic containers, glass bottlesand ferrous and aluminum metals.  Weoperate seven recycling facilities and sell other collected recyclablematerials to third parties for processing before resale.  In a few markets, we share the

 

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profits from our resaleof recycled materials with other parties to our recycling contracts.  To reduce our exposure to commodity pricerisk with respect to recycled materials, we have adopted a pricing strategy ofcharging collection and processing fees for recycling volume collected fromthird parties.  Although there can be noassurance of market recoveries in the event of a decline, because of theprovisions within certain of our contracts which pass commodity risk along tothe customers, we believe, given historical trends and fluctuations within therecycling commodities market, that a 10% increase in average recycled commodityprices from the prices that were in effect at December 31, 2002 would not havea material impact on our cash flows or pre-tax income.

 

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

 

Our consolidatedfinancial statements and the report of independent auditors thereon set forthon pages F-1 through F**-**33 herein are incorporated herein byreference.

 

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

 

Not applicable.

 

**PART III**

 

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

 

The table below setsforth certain information regarding our directors and executive officers andcertain significant employees: 

 
| **Name**                  |   | **Age** |   | **Positions**                                                                      |
|---------------------------|--------|---------|--------|------------------------------------------------------------------------------------|
| Jeffrey  J. Keenan        |   | 45      |   | Chairman  of the Board                                                             |
| Charles  F. Flood         |   | 56      |   | President,  Chief Executive Officer and Director                                   |
| Thomas  J. Cowee          |   | 46      |   | Senior  Vice President, Chief Financial Officer, Treasurer and Assistant Secretary |
|                      |   |    |   |                                                                               |
| P.  Lawrence McGee        |   | 52      |   | Senior  Vice President and Chief Development Officer                               |
| Thomas  L. Brown          |   | 49      |   | Senior  Vice President and Chief Operating Officer                                 |
| Thomas  J. Fowler         |   | 52      |   | Vice  President, General Counsel and Secretary                                     |
| Stephen  T. Moody         |   | 34      |   | Vice  President, Assistant Secretary and Corporate Controller                      |
|                      |   |    |   |                                                                               |
| Gordon  D. Peckham        |   | 57      |   | Vice  President, Operations-South Region                                           |
| Charles  R. Cummings(1)   |   | 66      |   | Director                                                                           |
| Thierry  X. de Vergnes(2) |   | 43      |   | Director                                                                           |
| Daniel  M. Dickinson      |   | 41      |   | Director                                                                           |
| Bruce  R. McMaken(1)(2)   |   | 43      |   | Director                                                                           |
| Robert  E. Michalik(1)(2) |   | 34      |   | Director                                                                           |

 

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(1)                Member of theaudit committee of our board of directors.

(2)                Member of thecompensation committee of our board of directors.

 

***Directors***

 

All of the members of ourboard of directors have been elected pursuant to our Amended and RestatedStockholders’ Agreement.  See Item 13.“Certain Relationships and Related Transactions—Amended and RestatedStockholders’ Agreement.”

 

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**Jeffrey J. Keenan**isone of our founders and has been Chairman of our board of directors since1997.  From 1997 to 1999, he was alsoour Vice President.  Mr. Keenan iscurrently the President of The United Company, a diversified private holdingcompany with operations in oil and gas, real estate, golf course ownership andmanagement, private equity and financial services.  From 1985 to 1996, Mr. Keenan served as a Managing Director atthree large private equity funds, including AEA Investors, Inc. and AcadiaPartners where he had senior responsibility for 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 and IESICapital V LLC (collectively, “IESI Capital”), each of which owns shares of ourcommon and/or preferred stock.  He hasserved as a member of the board of directors of more than 18 private andpublicly-traded companies.  He hasa B.A., M.B.A. and J.D. from the University of Chicago.

 

**Charles F. Flood**isone of our founders and has been our President, Chief Executive Officer and amember of our board of directors since our inception.  From 1989 to 1995, he was employed with Waste Management, asGroup President from 1993 to 1995 in the northeastern United States, RegionalVice President from 1991 to 1993 in the south central United States and as VicePresident of Operations in Texas from 1989 to 1991.  He was President of Laidlaw Waste Services’ U.S. solid wasteoperations from 1986 to 1987.  He wasPresident of the North American solid waste operations for GSX Corporation from1984 to 1986.  He was the Region VicePresident of the Southern Region of SCA Services, Inc., from 1976 to 1984.  He has over 35 years of experience in thesolid waste management industry.  He hasa B.S. in education from the University of Miami.

 

**Charles R. Cummings**isone of our founders and has been a member of our board of directors since1997.  From 1990 to July 2002, he wasinvolved with AEA Investors, Inc., as a Managing Director from 1990 to 1994 andas a consultant from 1994 to July 2002. From 1982 to 1990, he was the President and Chief Executive Officer offour companies: Coke Enterprises, Inc.; Global Transportation Services;Republic Supply Company; and Vision Hardware Group.  Prior to that, he was a partner with Arthur Young &Company.  Mr. Cummings is currentlyChairman and Chief Executive Officer of Ophthalmic Innovations International,Inc., a designer, manufacturer and distributor of intraocular lenses.  In addition, he is currently the presidentof three equipment rental companies.  Hehas a B.B.A. in accounting from Texas Tech University.

 

**Thierry X. de Vergnes**hasbeen a member of our board of directors since 1999.  He is a Managing Director and Co-Head of Indosuez Capital,the U.S.-based merchant banking division of Credit AgricoleIndosuez.  Prior to that, he was withCompagnie de Suez, where he led the Corporate Finance Group advising on mergersand acquisitions and equity issues.  Priorto that, he was with Credit Agricole Indosuez working on merger and acquisitiontransactions.  Mr. de Vergnes is agraduate of l’Ecole Nationale Superieure des Mines de Nancy and l’EcoleNationale Superieure des Ptroles et Moteurs.

 

**Daniel M. Dickinson**hasbeen a member of our board of directors since 2001.  He has been employed since 2001 by, and is currently a ManagingPartner of, Thayer Capital.  Prior toThayer Capital, he spent more than fourteen years in mergers &acquisitions, most recently as Co-Head of Global M&A at MerrillLynch.  His roles at Merrill Lynch alsoincluded leading the European M&A Group and, prior to that, the GlobalManufacturing and Services M&A effort. Mr. Dickinson has a J.D. and M.B.A. from The University of Chicago and aB.S. in Mechanical Engineering and Materials Science, magna cum laude, fromDuke University.

 

**Bruce R. McMaken**hasbeen a member of our board of directors since 1997.  He has been employed since 1992 by, and is currently a SeniorVice President and Managing Director of Corporate

 

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Finance for, SandersMorris Harris Inc., an investment banking firm.  Mr. McMaken serves as one of the managers of EnvironmentalOpportunities Fund, Ltd. and Environmental Opportunities Fund II, L.P., twoprivate equity funds managed by affiliates of Sanders Morris Harris Inc.  He is also a director of Knight TradingGroup, Inc.  He has a B.A. from CornellUniversity.

 

**Robert E. Michalik**hasbeen a member of our board of directors since 1998.  He has been employed since 1996 by, and is currently a ManagingDirector of, Thayer Capital, a private investment firm located in Washington,D.C. that focuses on middle market investments.  Prior to joining Thayer Capital, he was an associate at UBSCapital Corporation.  Prior to that, heworked in the mergers and acquisitions department at Morgan Stanley &Company, Inc.  Mr. Michalik is adirector of Raleigh Cycle Limited and Iconixx Corporation.  He has a B.A. in economics from Yale Universityand an M.B.A. degree from Harvard Business School.

 

***Executive Officers and Significant Employees***

 

Additional informationregarding our executive officers and certain significant employees who are notalso directors is provided below.

 

**Thomas J. Cowee**hasbeen our Chief Financial Officer, Senior Vice President, Treasurer and AssistantSecretary since 2000.  From 1997 to2000, he was our Chief Financial Officer, Vice President, Treasurer andSecretary.  From 1995 to 1997, he wasAssistant Corporate Controller of USA Waste Services, Inc.  Prior to that, beginning in 1979, he heldvarious positions with Waste Management: from 1994 to 1995, he was DivisionVice President and Controller of its Texas operations; and from 1993 to 1994,he was Vice President and Regional Controller of its Pennsylvania HaulingRegion—East Group.  He has over 20 yearsof financial management experience in the solid waste management industry.  He has a B.S. in accounting from Ohio StateUniversity.

 

**P. Lawrence McGee**hasbeen our Senior Vice President and Chief Development Officer since January2000.  Prior to that, he was our VicePresident of Development since 1999. Prior to that, in 1998, he provided acquisition consulting services tous.  From 1995 to 1998, he was employedwith Browning Ferris Industries, Inc. as Vice President and Assistant CorporateController.  Prior to that, beginning in1981, he held various positions with Waste Management and from 1990 to 1995 hewas Vice President and Regional Controller of the Texas operations of WasteManagement.  He has a B.S. in accountingfrom the University of Tennessee.

 

**Thomas L. Brown**hasbeen our Senior Vice President and Chief Operating Officer since January2000.  Prior to that, he was our VicePresident, Operations—South Region since 1997. Prior to that, he was employed with Waste Management as Regional Presidentbeginning in 1996 and as Division President from 1993 to 1996.  He has over 23 years experience in the solidwaste management industry.  He has anA.S. in accounting from Missouri Southern College.

 

**Thomas J. Fowler**hasbeen our Vice President, General Counsel and Secretary since February2003.  From 1994 to February 2003, hewas Vice President and General Counsel of Unity Hunt, Inc.  Prior to that, he had his own law practicefrom 1992 to 1994 and was Corporate Secretary and Legal Counsel for LaidlawWaste Systems, Inc. from 1987 to 1992. He has a J.D. and B.S. in accounting from St. Mary’s University of SanAntonio and a B.A. in biology from the University of Texas.

 

**Stephen T. Moody**hasbeen our Vice President and Corporate Controller since 2000.  Prior to that, beginning in 1997, he was ourCorporate Controller.  Prior to that, heworked for five years with

 

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Coopers & Lybrand inboth litigation services and audit.  Hehas a B.B.A. in accounting from Texas A&M University.

 

**Gordon D. Peckham**hasbeen our Vice President—South Region since January 2000.  Prior to that, he was our VicePresident—Operations—Southeast Region since 1999.  We divested the operations constituting our former Southeast Regionat year-end 1999.  Prior to that,he spent 24 years in various different managerial capacities with fourdifferent waste services companies. Most recently, he spent six years as a Division President with WasteManagement.

 

**Committeesof Our Board of Directors**

 

Our by-laws provide thatour board of directors may establish committees to exercise certain powersdelegated by our board of directors. Our board of directors has established an audit committee, the membersof which are Messrs. Cummings, McMaken and Michalik, and a compensationcommittee, the members of which are Messrs. de Vergnes, McMaken andMichalik.  Both committees are made upof directors who are not employees of the Company but who may, collectively, bedeemed to beneficially own a majority of the shares of our capital stock.  See Item 12. “Security Ownership of CertainBeneficial Owners and Management.” The audit committee oversees actions takenby our independent auditors and reviews our internal controls andprocedures.  The compensation committeereviews and approves the compensation of our officers and management personneland administers our 1999 stock option plan and annual bonus plans formanagement employees.

 

**Compensation of Directors**

 

None of the members ofour board of directors receive compensation for service on our board ofdirectors or any committee of our board of directors.  Each of our directors is entitled to be reimbursed for reasonableout-of-pocket expenses incurred in connection with attendance atour board of directors’ meetings or of any committee thereof.

 

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**Item 11****.*  *ExecutiveCompensation.**

 

The following table setsforth information about the cash and other compensation paid by us during 2002,2001 and 2000 to our Chief Executive Officer and our other four most highlycompensated executive officers serving at the end of 2002 (collectively, the“named executive officers”):

 

**SummaryCompensation Table**

 
|                                                  |   |     |                    | **Long—Term   Compensation   Awards** |                                        |
|-------------------------------------------------------|--------|----------|-------------------------|--------------------------------------------|---------------------------------------------|
|                                                  |   |     | **Annual Compensation** |                                       | **Securities  Underlying  Options/SARs(2)** |   | **All Other  Compensation(3)** |
| **Name and Principal Position**                       |   | **Year** |                    | **Salary**                                 |                                        | **Bonus** |   | **Other Annual  Compensation(1)** |
| Charles F. Flood                                      |   | 2002     |                    | $                                          |  300,000                               |   | $ |   72,500 |   | — |   | 55,000 |   | $ |   8,338 |   |
| President and Chief Executive                         |   | 2001     |                    | 290,000                                    |                                        | 68,750 |   | — |   | — |   | 4,834 |   |
| Officer                                               |   | 2000     |                    | 275,000                                    |                                        | 37,500 |   | — |   | — |   | 3,507 |   |
|                                                  |   |     |                    |                                       |                                        |   |   |   |   |   |   |   |   |
| Thomas J. Cowee                                       |   | 2002     |                    | 210,000                                    |                                        | 50,000 |   | — |   | 23,000 |   | 5,310 |   |
| Senior Vice President, Chief                          |   | 2001     |                    | 200,000                                    |                                        | 47,500 |   | — |   | — |   | 3,142 |   |
| Financial Officer, Treasurer  and Assistant Secretary |   | 2000     |                    | 190,000                                    |                                        | 26,250 |   | — |   | — |   | 5,496 |   |
|                                                  |   |     |                    |                                       |                                        |   |   |   |   |   |   |   |   |
| Thomas L. Brown                                       |   | 2002     |                    | 200,000                                    |                                        | 47,500 |   | — |   | 12,000 |   | 4,784 |   |
| Senior Vice President and Chief                       |   | 2001     |                    | 190,000                                    |                                        | 40,000 |   | — |   | — |   | 3,106 |   |
| Operating Officer                                     |   | 2000     |                    | 150,000                                    |                                        | 7,500 |   | — |   | — |   | 4,459 |   |
|                                                  |   |     |                    |                                       |                                        |   |   |   |   |   |   |   |   |
| Christopher V. Della Pietra(4)                        |   | 2002     |                    | 190,000                                    |                                        | 43,750 |   | — |   | 4,500 |   | 5,531 |   |
| Vice President, General Counsel  and                  |   | 2001     |                    | 175,000                                    |                                        | 32,500 |   | — |   | — |   | 2,797 |   |
| Secretary                                             |   | 2000     |                    | 130,214                                    |                                        | 60,132 |   | — |   | — |   | 176 |   |
|                                                  |   |     |                    |                                       |                                        |   |   |   |   |   |   |   |   |
| P. Lawrence McGee                                     |   | 2002     |                    | 175,000                                    |                                        | 40,000 |   | — |   | 6,000 |   | 2,847 |   |
| Senior Vice President and Chief                       |   | 2001     |                    | 160,000                                    |                                        | 36,250 |   | — |   | — |   | 3,664 |   |
| Development Officer                                   |   | 2000     |                    | 175,050                                    |                                        | 10,000 |   | — |   | — |   | 3,788 |   |
|                                                       |        |          |                         |                                            |                                             |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                For the yearspresented, perquisites and other personal benefits did not exceed the lesser of$50,000 or 10% of total annual salary and bonus for any of our named executiveofficers.

 

(2)                Includes thefollowing options that were granted on August 1, 2002 under the terms of ouroption exchange program in exchange for options cancelled on December 20,2001:  Mr. Flood, 50,000; Mr. Cowee,20,000; Mr. Brown, 6,000; Mr. Della Pietra, 3,000; and Mr. McGee, 4,500.  See “—1999 Stock Option Plan—Option ExchangeProgram.”

 

(3)                For the yearspresented, “All Other Compensation” consists of the matching contributions wemade under our 401(k) plan, and the life insurance premiums we paid, on behalfof our named executive officers. During 2002, we made the following matching contributionsunder our 401(k) plan: Mr. Flood, $5,500; Mr. Cowee, $4,644;Mr. Brown, $4,154; Mr. Della Pietra, $5,177; and Mr. McGee,$2,019.  During the same period, we alsopaid the following life insurance premiums: Mr. Flood, $2,838;Mr. Cowee, $666; Mr. Brown, $630; Mr. Della Pietra, $354; andMr. McGee, $828.

 

(4)                Mr. Della Pietra’sterm as Vice President, General Counsel and Secretary ended effective as ofJanuary 2003.

OptionGrants in 2002

 

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The following tableprovides information with respect to stock options granted to our namedexecutive officers during 2002: 

 

 
|                         |   | **Individual Grants** |   | **Potential Realizable** |    |
|------------------------------|--------|-----------------------|--------|--------------------------|---------|
|                         |   | **Number of**         |   | **% of Total**           |    |   |   |   |   |   | **Value At Assumed** |   |
|                         |   | **Securities**        |   | **Options**              |    |   |   |   |   |   | **Annual Rates of Stock** |   |
|                         |   | **Underlying**        |   | **Granted to**           |    | **Exercise or** |   |   |   | **Price Appreciation for** |   |
|                         |   | **Options/SARs**      |   | **Employees in**         |    | **Base Price per****Share** |   | **Expiration** |   | **Option Term(2)** |   |
| **Name**                     |   | **Granted(1)**        |   | **2002**                 |    |   | **Date** |   | **5%** |   | **10%** |   |
| Charles F. Flood             |   | 50,000                | a      | 48.7 %                   | $ 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 5,000                 |   | 11.1                     |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   |                  |   |                     |    |   |   |   |   |   |   |   |   |
| Thomas J. Cowee              |   | 20,000                | a      | 19.5                     |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 3,000                 |   | 6.7                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   |                  |   |                     |    |   |   |   |   |   |   |   |   |
| Thomas L. Brown              |   | 3,000                 | a      | 2.9                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 500                   | b      | 4.7                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 2,500                 | b      | 11.3                     |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 6,000                 |   | 13.4                     |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   |                  |   |                     |    |   |   |   |   |   |   |   |   |
| Christopher V. Della Pietra. |   | 1,000                 | a      | 1.0                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 250                   | b      | 2.3                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 1,750                 | c      | 7.9                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 1,500                 |   | 3.3                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   |                  |   |                     |    |   |   |   |   |   |   |   |   |
| P. Lawrence McGee            |   | 3,000                 | a      | 2.9                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 500                   | b      | 4.7                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 1,000                 | c      | 4.5                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |
|                         |   | 1,500                 |   | 3.3                      |    | 80.00 |   | 7/31/12 |   | N/A |   | N/A |   |

 

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(1)          All of the stock optionsshown are exercisable for shares of our Class A voting common stock, weregranted on August 1, 2002 and have a maximum term of ten years, subject toearlier termination in the event of the optionee’s cessation of service with us.  Each of the options will become exercisableon the eighth anniversary of the date of grant (or, in the case of any optiongranted under the terms of our option exchange program, the eighth anniversaryof the date of grant of the related cancelled option), subject to accelerationupon an initial public offering of shares of our common stock or if weexperience specific kinds of changes in control.  Options noted with an “a,” “b” or “c” were granted under theterms of our option exchange program in exchange for options cancelled onDecember 20, 2001.  Each such optionwill continue to vest and become exercisable for the underlying shares inaccordance with the same vesting schedule that was in effect for the relatedcancelled option.  Accordingly, each optionnoted with an “a” will become exercisable on January 1, 2007, each option notedwith a “b” will become exercisable on January 1, 2008 and each option markedwith a “c” will become exercisable on January 1, 2009, in each case subject toacceleration as noted above.  See “—1999Stock Option Plan—Option Exchange Program.”

 

(2)          There is no tradingmarket for any class of our equity securities.

 

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**Aggregated Option Exercises in LastFiscal Yearand Fiscal Year-End Option Values**

 

The following tableprovides information with respect to the unexercised options held by our namedexecutive officers as of the end of 2002:

 
|                         |   | **Number of  Securities  Underlying Unexercised   ptions 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             |   | —                                                               |   | 12,000                                                        |   | — |   | N/A |   |
| Christopher  V. Della Pietra |   | —                                                               |   |   4,500                                                  |   | — |   | N/A |   |
| P.  Lawrence McGee           |   | —                                                               |   |   6,000                                                  |   | — |   | N/A |   |

 

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(1)             There is no trading market for anyclass of our equity securities.

 

**EmploymentContracts, Termination of Employment and Change-in-Control Arrangements**

 

We entered intoemployment agreements, effective as of December 1, 2001, with each ofMr. Flood and Mr. Cowee. These agreements expire on December 31, 2004, unless earlier terminatedby the executive or us.  On December 31of each year, the terms of the agreements will extend for an additional yearfrom the then current expiration date unless we advise the executive, inwriting, to the contrary.

 

Pursuant to hisemployment agreement, Mr. Flood serves as our President and Chief ExecutiveOfficer at a minimum base salary of $300,000 per annum which is subject toannual review and increase in the sole discretion of our board of directors.

 

Pursuant to hisemployment agreement, Mr. Cowee serves as our Chief Financial Officer, VicePresident, Treasurer and Assistant Secretary at a minimum base salary of$210,000 per annum which is subject to annual review and increase in the solediscretion of our board of directors.

 

Under each of theseemployment agreements, the executive may receive, in the sole discretion of ourboard of directors, an annual performance-based bonus of up to 100% ofhis salary in any given year in accordance with the bonus plan in effect atsuch time.  Each executive is entitledto receive all benefits made available to our executives generally, a monthly carallowance ($1,000 in the case of Mr. Flood and $750 in the case ofMr. Cowee) and reimbursement of reasonably documented expenses incurred inthe performance of the executive’s duties, including up to $2,500 in annualcountry club dues.  Mr. Flood isentitled to four weeks, and Mr. Cowee is entitled to three weeks, of paidvacation time per year.

 

If we terminate theexecutive’s employment for “cause” or the executive terminates his employmentwithout “good reason,” as such terms are defined in the respective employmentagreements, the executive will be entitled to receive all salary and benefitsaccrued up to and including the date of termination.  In addition, we will have the option, exercisable during the 90-dayperiod following such termination, to purchase all of our stock then owned by theexecutive, exclusive of unexercised options, at

 

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fair market value, asdetermined in good faith by our board of directors.  We will be entitled to pay the purchase price for such stockeither in cash or by issuing a promissory note with an interest rate of 10% perannum and the principal payable in no more than three annual installments.  If we terminate the executive’s employmentwithout “cause” or the executive terminates his employment for “good reason,”the executive will be entitled to receive his base salary then in effect andcertain benefits for the remainder of the then applicable employment term.  In addition, the executive will have theoption, exercisable during the 90-day period following such termination,to require 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 principalpayable in no more than three equal annual installments.  A representative or executor may alsoexercise the executive’s put option within 90 days of the executive’s death orpermanent disability.

 

In the event of a “changeof control,” as defined in the respective employment agreements, followingwhich the executive terminates his employment other than for “good reason,” theexecutive will be entitled to receive all salary and benefits accrued up to andincluding the date of such termination. In the event of a “change of control” following which we terminate theexecutive’s employment without “cause,” the executive will be entitled toreceive his base salary then in effect and certain benefits for the remainderof the employment term, but in any event for the greater of 18 months or theremainder of the term.

 

Messrs. Flood and Coweeare also bound in their employment agreements by non-interference, non-solicitationand non-competition covenants for a period of one year following thetermination of their employment (other than a termination without “cause” orfor “good reason”).  The geographicscope of these covenants extends to any jurisdiction in North America wherecompetition may arise where our customers have operations, provided that suchcustomers had a relationship with us within 90 days prior to the alleged breachof the covenant.  Each executive issubject to a confidentiality obligation to us for all our confidentialinformation and trade secrets learned during the course of his employment withus.

 

Messrs. Brown and DellaPietra have severance agreements with us that entitle them to receive one yearof their respective then current salaries plus 100% of their respective thenmost recent annual cash bonuses in the event of a “change of control,” asdefined in the respective severance agreements, as a result of which, withinsix months following such “change of control,” any of the following occurs: (a)the executive’s employment is terminated, (b) there is a material reduction ofthe level of the executive’s compensation, prerequisites, responsibility,authority, title or scope of duties or (c) the location of the executive’semployment is moved by more than 50 miles.

 

Mr. McGee has a severanceagreement with us that entitles him to one year of his then current base salaryin the event that he is terminated by us for any reason except for “cause,” asdefined in the severance agreement.

 

**1999Stock Option Plan**

 

In January 1999, weadopted our 1999 stock option plan which permits us to make grants of non-qualifiedstock options exercisable for shares of our Class A voting common stock tocertain of our key employees, consultants, advisors and directors.  The plan authorizes the issuance of optionsto acquire up to 200,000 shares of our Class A voting common stock.  In January, 2003, our board of directorsapproved an amendment to our 1999 stock option plan increasing the number ofauthorized shares thereunder by 50,000 to a total of 250,000 shares, subject toshareholder approval.  We are in theprocess of obtaining such shareholder approval.  We may not grant to any individual optionee an option or

 

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options to purchase, inthe aggregate, more than 100,000 shares of our Class A voting commonstock.  The compensation committee ofour board of directors administers the plan. Subject to the provisions of the plan, the compensation committee may(a) select those employees and individuals to be granted options, (b) determinethe size, type and terms of options granted, (c) accelerate the exercisabilityof options and (d) generally administer and interpret the plan.  The exercise price per share for an optionwhen granted is to be determined by the compensation committee of our board ofdirectors and may be equal to or greater than the then fair market value pershare of our Class A voting common stock. Until such time as our stock is publicly traded, our compensationcommittee in its discretion will determine the fair market value of ourClass A voting common stock.

 

Options granted under theplan are subject to certain vesting schedules determined by the compensationcommittee in its discretion, terminate up to ten years from the date of grantand may be exercised for specified periods after termination of the optionee’semployment or service relationship with us. Upon exercise of an option, the exercise price must be paid in full,either in cash, or, in the discretion of the compensation committee, bydelivery of shares of our Class A voting common stock that have been owned bythe optionee for at least six months, or by any combination of the two.  The exercise price may also be paid, in thediscretion of the compensation committee, by a broker under irrevocableinstructions to deliver to us the amount of sale or loan proceeds sufficient topay the exercise price.  Thecompensation committee is authorized to allow any other method of payment thatis consistent with applicable law and the purpose of the plan, includingpayment by means of a cashless exercise.

 

In the event of (a) theconsummation of a tender offer for ownership of 50% or more of our outstandingvoting stock, (b) the merger, reorganization or consolidation or (c) the saleof all or substantially all of our assets or 50% or more of our outstandingvoting stock, each option outstanding on the date of such change of controlshall become fully vested and exercisable, subject to certain further terms andconditions in the discretion of the compensation committee.

 

Our board of directorsmay amend or suspend all or any part of the plan, provided that, without priorstockholder approval, no amendment may increase the number of shares that maybe 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.

 

***Option Exchange Program***

 

In December 2001, weimplemented an option exchange program to more closely align the exerciseprices of stock options previously granted under our 1999 stock option plan toour directors, executive officers and other employees with the fair marketvalue of the underlying shares and thereby address the inability of thoseoptions to serve as a meaningful incentive for optionees to remain in ouremploy or as directors.  Under thisprogram, each optionee then providing services as an employee or director whoheld an outstanding option under our 1999 stock option plan was given theopportunity to exchange that option for a new option under our 1999 stockoption plan for the same number of shares of Class A voting common stock to begranted at least six months and one day after the date of cancellation of theold option.  On or about December 20,2001, we accepted for exchange and cancellation options to purchase anaggregate of 135,416 shares of our Class A voting common stock, representingmore than 94% of our then outstanding options. Each of our named executive officers tendered all of his optionspursuant to the exchange program.  OnAugust 1, 2002, we granted new options under our 1999 stock option plan topurchase an aggregate of 135,416 shares of our Class A voting common stock tooptionees who tendered options pursuant to the option exchange program inexchange for the optionees’ related cancelled options.  The exercise price per share for such newoptions is $80.00, the fair market value per share of our Class A voting commonstock on the grant date.  Each such newoption will continue to vest

 

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and become exercisable inaccordance with the same vesting schedule that was in effect for the relatedcancelled option.

 

**401(k)Plan**

 

We maintain a 401(k)Savings Plan, a plan established pursuant to Sections 401(a) and 401(k) of theInternal Revenue Code, for the benefit of our non- union employees.  All of our non-union employees areeligible to participate on the first day of the month following theiremployment.  Subject to various limits,eligible employees may defer up to 25% of their annual cash compensation on apre-tax basis.  We have thediscretion 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.

 

**AnnualBonus Plans**

 

The compensationcommittee of our board of directors annually adopts a new bonus plan for ourmanagement employees.  Under the plans,bonuses for our corporate management are based on our annual EBITDA margins andbonuses for our regional, district and division management and employees are basedon the EBITDA margins for their respective regions, districts or divisions.

 

Each of our ChiefExecutive Officer and Chief Financial Officer is eligible for a base bonusequal to 25% of his base salary if we attain the budgeted annual EBITDA marginfor our entire corporation.  If weexceed our budgeted annual EBITDA margin, each of our Chief Executive Officerand Chief Financial Officer will be eligible for an additional bonus of up to75% of his base salary.  If we do notattain our budgeted annual EBITDA margin, bonuses for the Chief ExecutiveOfficer and the Chief Financial Officer are discretionary and subject toapproval of the compensation committee of our board of directors.

 

Each of our Senior VicePresidents and our South Region Vice President are eligible for a base bonusequal to 25% of their respective base salary if the annual regional budgetedEBITDA margin is attained.  If ourbudgeted annual EBITDA margin is exceeded or if budgeted annual EBITDA marginis not attained, additional bonus amounts for our managers are discretionaryand subject to our Chief Executive Officer’s approval.

 

**CompensationCommittee Interlocks and Insider Participation**

 

Mr. de Vergnes is amember of the compensation committee of our board of directors.  Mr. de Vergnes is a member of SEICapital, LLC, the general partner of Suez Equity Investors, L.P. (“SuezEquity”), and Mr. de Vergnes is also a partner of SEI Associates.  Each of Suez Equity and SEI Associates hasentered into certain agreements with us as described under Item 13.  “Certain Relationships and RelatedTransactions” and owns shares of our capital stock.  See Item 12. “Security Ownership of Certain Beneficial Owners andManagement.”

 

Mr. McMaken is amember of the compensation committee of our board of directors.Mr. McMaken is one of the managers of Environmental Opportunities Fund,L.P. (“EOF”), Environmental Opportunities Fund II, L.P. (“EOF2”) andEnvironmental Opportunities Fund II (Institutional), L.P. (“EOF2(I)”) and isalso a member of the investment committees of Environmental OpportunitiesManagement Company, L.L.C., the general partner of EOF, and Fund II Mgt. Co.,LLC, the general partner of EOF2 and EOF2(I). Each of EOF, EOF2 andEOF2(I) has entered into certain

 

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agreements with us asdescribed under Item 13. “Certain Relationships and Related Transactions” andowns shares of our capital stock.  SeeItem 12. “Security Ownership of Certain Beneficial Owners and Management.”

 

Mr. Michalik is a memberof the compensation committee of our board of directors.  Mr. Michalik is a Managing Director ofTC Equity Partners IV, L.L.C., the general partner of Thayer Equity InvestorsIV, L.P. (“Thayer Equity”), and is also a Managing Director of TC ManagementPartners IV, L.L.C., the managing member of TC Co-Investors IV, L.L.C., whichis the managing member of TC Carting II LLC (“TC Carting II”).  Mr. Michalik is also a ManagingDirector of TC Equity Partners, L.L.C., the general partner of Thayer EquityInvestors III, L.P., which is the managing member of TC Carting LLC (“TCCarting”).  Each of Thayer Equity, TCCarting and TC Carting II has entered into certain agreements with us asdescribed under Item 13. “Certain Relationships and Related Transactions” andowns shares of our capital stock.  SeeItem 12. “Security Ownership of Certain Beneficial Owners and Management.”

 

**Item 12****.  Security Ownership of Certain BeneficialOwners and Management.**

 

As of March 15, 2003, thefollowing shares of our capital stock were issued and outstanding:  142,000 shares of our Class A votingcommon Stock, 112,980.18 of our Class B non-voting common stock, 32,000shares of our Series A convertible preferred stock, 20,100 shares of ourSeries B convertible preferred stock, 55,000 shares of our Series Cconvertible preferred stock and 55,000 shares of our Series D convertiblepreferred stock.

 

Subject to applicablelaw, holders of shares of our Class B non-voting common stock are entitledat any time to convert each share of our Class B non-voting common stockinto one share of our Class A voting common stock, subject toadjustment.  Holders of shares of ourpreferred stock are entitled at any time to convert all or any portion of theirshares of preferred stock into shares of our Class A voting common stockor, if required by applicable law, our Class B non-voting common stock, atthe conversion rates described under “Description of Capital Stock—Conversion.”

 

The principal recordowners of our shares of capital stock are as follows:

 

**•****                                         **Class A voting common stock: IESICapital LLC, 53.5%; EOF, 28.9%; and Jim Sowell Construction Co., 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, 13.8%;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%; and EOF2 and its affiliate, EOF2(I), an aggregate of 11.9%;

 

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

 

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•                                          Series Dconvertible preferred stock: Thayer Equity and its affiliate, TC Carting II, anaggregate of 72.7%; IESI Capital V LLC, 11.8%; Indosuez Capital Partners 2001,L.P. (“Indosuez”), 11.8%; and EOF2 and its affiliate, EOF2(I), an aggregate of3.6%.

 

Our stockholders includecertain investment funds and their affiliates. As of March 15, 2003, these stockholders had the interests in shares ofour Class A voting common stock set forth in the table below, assumingconversion of all shares of our Class B non-voting common stock and allshares of all series of our preferred stock into shares of our Class Avoting common stock.  In addition, certainmembers of our management hold, in addition to their direct investments in us,interests in one or more of the IESI Capital entities.

 
| **Investment Fund**               |   |   | **Percent of  Total Voting****Shares** |   |
|-----------------------------------|--------|--------|----------------------------------------|--------|
| Thayer Equity Investors Funds     |   | 58.9   |                                   |
| IESI Capital                      |   | 14.1   |                                   |
| Suez                              |   | 8.4    |                                   |
| Indosuez                          |   | 4.4    |                                   |
| Environmental Opportunities Funds |   | 7.1    |                                   |
| BancBoston Investments            |   | 2.2    |                                   |

 

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The following table setsforth certain information as of March 15, 2003 regarding the beneficialownership of our capital stock by:

 

•                                          eachperson known to us to be the beneficial owner of more than 5% of theoutstanding shares of any class of our voting securities;

 

•                                          eachof our directors;

 

•                                          eachof our executive officers named in the Summary Compensation Table; and

 

•                                          allof our directors and executive officers as a group.

 

We believe that eachindividual or entity named has sole investment and voting power with respect tothe capital stock indicated as beneficially owned by them, except as otherwisenoted.  Unless otherwise noted below,the address of each beneficial owner listed in the table below is c/o IESICorporation, 6125 Airport Freeway, Suite 202, Haltom City, Texas 76117.

 
| **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** |   | **Percent  of Total  Voting  Shares(2)** |   |
|-------------------------------------------------------------------|--------|---------------------------------------|--------|-----------------------|--------|---------------------------------------------|--------|-----------------------|--------|---------------------------------------------|--------|-----------------------|--------|---------------------------------------------|--------|-----------------------|--------|---------------------------------------------|--------|-----------------------|--------|------------------------------------------|--------|
|                                                              |   |                                  |   |                  |   |                                        |   |                  |   |                                        |   |                  |   |                                        |   |                  |   |                                        |   |                  |   |                                     |   |
| Charles F. Flood(3)                                               |   | 5,050                                 |   | 3.5                   | %      | —                                      |   | —                |   | 100                                         |   | *                     |   | —                                      |   | —                |   | —                                      |   | —                |   | *                                        |   |
| Thomas L. Brown(4)                                                |   | —                                |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                   |   |
| Charles R. Cummings                                               |   | 3,000                                 |   | 2.1                   | %      | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | *                                        |   |
| Thomas J. Cowee(5)                                                |   | —                                |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                   |   |
| Christopher V. Della  Pietra(6)                                   |   | —                                |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                   |   |
| Jeffrey J. Keenan(7)                                              |   | 258,273                               |   | 79.6                  | %      | 4,400                                       |   | 13.8                  | %      | 1,200                                       |   | 6.0                   | %      | 6,750                                       |   | 12.3                  | %      | 6,500                                       |   | 11.8                  | %      | 14.1                                     | %      |
| Thierry X. de Vergnes(11)                                         |   | 153,355                               |   | 51.9                  | %      | 4,000                                       |   | 12.5                  | %      | 2,000                                       |   | 10.0                  | %      | 6,500                                       |   | 11.8                  | %      | —                                      |   | —                |   | 8.4                                      | %      |
| P. Lawrence McGee(8)                                              |   | —                                |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | —                                   |   |
| Bruce R. McMaken(9)                                               |   | 130,000                               |   | 56.3                  | %      | 4,000                                       |   | 12.5                  | %      | 2,400                                       |   | 11.9                  | %      | —                                      |   | —                |   | 2,000                                       |   | 3.6                   | %      | 7.1                                      | %      |
| Robert E. Michalik(10)                                            |   | 1,078,473                             |   | 88.4                  | %      | 16,000                                      |   | 50.0                  | %      | 14,000                                      |   | 69.7                  | %      | 41,750                                      |   | 75.9                  | %      | 40,000                                      |   | 72.7                  | %      | 58.9                                     | %      |
| Daniel M. Dickinson(10)                                           |   | 1,078,473                             |   | 88.4                  | %      | 16,000                                      |   | 50.0                  | %      | 14,000                                      |   | 69.7                  | %      | 41,750                                      |   | 75.9                  | %      | 40,000                                      |   | 72.7                  | %      | 58.9                                     | %      |
| TC Carting LLC(10)                                                |   | 1,078,473                             |   | 88.4                  | %      | 16,000                                      |   | 50.0                  | %      | 14,000                                      |   | 69.7                  | %      | 41,750                                      |   | 75.9                  | %      | 40,000                                      |   | 72.7                  | %      | 58.9                                     | %      |
| Thayer Equity Investors IV,  L.P.(10)                             |   | 1,078,473                             |   | 88.4                  | %      | 16,000                                      |   | 50.0                  | %      | 14,000                                      |   | 69.7                  | %      | 41,750                                      |   | 75.9                  | %      | 40,000                                      |   | 72.7                  | %      | 58.9                                     | %      |
| IESI Capital LLC(7)                                               |   | 258,273                               |   | 79.6                  | %      | 4,400                                       |   | 13.8                  | %      | 1,200                                       |   | 6.0                   | %      | 6,750                                       |   | 12.3                  | %      | 6,500                                       |   | 11.8                  | %      | 14.1                                     | %      |
| IESI Capital II LLC(7)                                            |   | 258,273                               |   | 79.6                  | %      | 4,400                                       |   | 13.8                  | %      | 1,200                                       |   | 6.0                   | %      | 6,750                                       |   | 12.3                  | %      | 6,500                                       |   | 11.8                  | %      | 14.1                                     | %      |
| IESI Capital III LLC(7)                                           |   | 258,273                               |   | 79.6                  | %      | 4,400                                       |   | 13.8                  | %      | 1,200                                       |   | 6.0                   | %      | 6,750                                       |   | 12.3                  | %      | 6,500                                       |   | 11.8                  | %      | 14.1                                     | %      |
| IESI Capital IV LLC(7)                                            |   | 258,273                               |   | 79.6                  | %      | 4,400                                       |   | 13.8                  | %      | 1,200                                       |   | 6.0                   | %      | 6,750                                       |   | 12.3                  | %      | 6,500                                       |   | 11.8                  | %      | 14.1                                     | %      |
| IESI Capital V LLC(7)                                             |   | 258,273                               |   | 79.6                  | %      | 4,400                                       |   | 13.8                  | %      | 1,200                                       |   | 6.0                   | %      | 6,750                                       |   | 12.3                  | %      | 6,500                                       |   | 11.8                  | %      | 14.1                                     | %      |
| Suez Equity Investors,  L.P.(11)                                  |   | 153,355                               |   | 51.9                  | %      | 4,000                                       |   | 12.5                  | %      | 2,000                                       |   | 10.0                  | %      | 6,500                                       |   | 11.8                  | %      | —                                      |   | —                |   | 8.4                                      | %      |
| Indosuez Capital Partners  2001, L.P.(12)                         |   | 81,250                                |   | 36.4                  | %      | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | 6,500                                       |   | 11.8                  | %      | 4.4                                      | %      |
| Environmental Opportunities  Fund, L.P.(9)                        |   | 130,000                               |   | 56.3                  | %      | 4,000                                       |   | 12.5                  | %      | 2,400                                       |   | 11.9                  | %      | —                                      |   | —                |   | 2,000                                       |   | 3.6                   | %      | 7.1                                      | %      |
| Environmental Opportunities  Fund II (Institutional), L.P.(9)     |   | 130,000                               |   | 56.3                  | %      | 4,000                                       |   | 12.5                  | %      | 2,400                                       |   | 11.9                  | %      | —                                      |   | —                |   | 2,000                                       |   | 3.6                   | %      | 7.1                                      | %      |
| BancBoston Investments  Inc.(13)                                  |   | 40,000                                |   | 24.7                  | %      | 1,600                                       |   | 5.0                   | %      | 400                                         |   | 2.0                   | %      | —                                      |   | —                |   | —                                      |   | —                |   | 2.2                                      | %      |
| Jim Sowell Construction Co.,  Inc.(14)                            |   | 35,500                                |   | 21.5                  | %      | 2,000                                       |   | 6.3                   | %      | —                                      |   | —                |   | —                                      |   | —                |   | —                                      |   | —                |   | 2.2                                      | %      |
| All directors and executive  officers as a group (13 persons)(15) |   | 1,474,796                             |   | 98.8                  | %      | 24,400                                      |   | 76.3                  | %      | 17,700                                      |   | 88.1                  | %      | 48,500                                      |   | 88.2                  | %      | 48,500                                      |   | 88.2                  | %      | 80.6                                     | %      |

 

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*                                         Lessthan 1%

 

(1)                                  Inaccordance with Rule 13d-3 under the Exchange Act, for purposes of thistable, a person is deemed to be the beneficial owner of any shares of capitalstock if such person has or shares voting power or investment power withrespect to such capital stock, or has the right to acquire beneficial ownershipat any time within 60 days of the date of the table.  Any shares of capital

 

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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.

 

Forpurposes of determining the number of shares of Class A voting commonstock held by a person, the information in the table assumes the conversion bysuch person of:

 

•                                          sharesof our Class B non-voting common stock into shares of our Class Avoting common stock on a 1 for 1 basis;

 

•                                          sharesof our Series A convertible preferred stock and Series B convertiblepreferred stock into shares of our Class A voting common stock on a 10 for1 basis;

 

•                                          sharesof our Series C convertible preferred stock into shares of ourClass A voting common stock on a 6.67 for 1 basis; and

 

•                                          sharesof our Series D convertible preferred stock into shares of ourClass A voting common stock on a 12.5 for 1 basis.

 

(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)                                  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. Flood owns a 4.4% 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. Flood owns a 3.8% membershipinterest.

 

(4)                                  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 0.4% membershipinterest.

 

(5)                                  Does not include 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.

 

(6)                                  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. Della Pietra owns a 0.8% membership interest or(b) any portion of the 6,500 shares of our Series D convertiblepreferred stock owned by IESI Capital V LLC of which Mr. Della Pietra ownsa 0.6% membership interest.

 

(7)                                  The IESI Capital entities may be deemed to beaffiliates.  See Item 13. “CertainRelationships and Related Transactions.” Consists of (a) 76,000 shares of our Class A voting commonstock owned by IESI Capital LLC, (b) 4,400 shares of our Series Aconvertible preferred stock owned by IESI Capital II LLC, (c) 1,200 sharesof our Series B convertible preferred stock owned by IESI Capital III LLC,(d) 6,750 shares of our Series C convertible preferred stock owned byIESI Capital IV LLC and (e) 6,500 shares of our Series D convertiblepreferred stock owned by IESI Capital V LLC. Mr. Keenan is a beneficial owner of the shares owned by IESICapital.  The address for suchbeneficial owners is c/o IESI Capital LLC, 11201 Brookwood Street, Leawood,Kansas, 66211.

 

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(8)                                  Does not include 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.

 

(9)                                  EOF and EOF2(I) may be deemed to beaffiliates.  See Item 13. “CertainRelationships and Related Transactions.” Consists of (a) 41,000 shares of our Class A voting commonstock and 1,600 shares of our Series A convertible preferred stock ownedby EOF, (b) 1,875 shares of our Series A convertible preferred stock,1,887 shares of our Series B convertible preferred stock and 1,570 sharesof our Series D convertible preferred stock owned by EOF2(I) and (c) 525shares of our Series A convertible preferred stock, 513 shares of ourSeries B convertible preferred stock and 430 shares of our Series Dconvertible preferred stock owned by EOF2, which may be deemed to be anaffiliate of EOF and EOF2(I). Mr. McMaken may be deemed to be the beneficial owner of the sharesowned by EOF, EOF2 and EOF2(I).  SeeItem 13. “Certain Relationships and Related Transactions.”  Messrs. Kenneth Ch’uan-K’ai Leung andJohn Quirk, members of the investment committee of Environmental OpportunitiesManagement Company, L.L.C., the general partner of EOF, may also be deemed tobe the beneficial owners of the shares owned by EOF.  Messrs. Ch’uan-K’ai Leung and Bruce Cummings, members ofthe investment committee of Fund II Mgt. Co., LLC, the general partner of EOF2and EOF2(I), may also be deemed to be the beneficial owners of the shares ownedby EOF2 and EOF2(I).  Each ofMessrs. McMaken, Ch’uan-K’ai Leung, Quirk and Cummings disclaimssuch beneficial ownership.  The addressfor such beneficial owners is c/o Environmental Opportunities Fund, SandersMorris Harris, 3100 Chase Tower, 600 Travis Street, Suite 3100, Houston, Texas,77002.

 

(10)                            TC Carting and Thayer Equity may be deemed to be affiliates.  See Item 13. “Certain Relationships andRelated Transactions.”  Consists of(a) 16,000 shares of our Series A convertible preferred stock and14,000 shares of our Series B convertible preferred stock owned by TCCarting, (b) 41,750 shares of our Series C convertible preferredstock and 39,967.677 shares of our Series D convertible preferred stockowned by Thayer Equity and (c) 32.323 shares of our Series Dconvertible preferred stock owned by TC Carting II, which may be deemed to bean affiliate of TC Carting and Thayer Equity. Each of Messrs. Dickinson and Michalik may be deemed to be thebeneficial owner of the shares owned by Thayer Equity and TC Carting II, andMr. Michalik may also be deemed to be the beneficial owner of the sharesowned by TC Carting.  See Item 13. “CertainRelationships and Related Transactions.”  Messrs. Frederick V. Malek, Carl J. Rickertsen and Jeffrey W.Gottman, Managing Partners of TC Equity Partners IV, L.L.C., the generalpartner of Thayer Equity, may also be deemed to be the beneficial owners of theshares owned by Thayer Equity.  Messrs. Malekand Rickertsen and Dr. Paul G. Stern, the managing members of TC EquityPartners, L.L.C., the general partner of Thayer Equity Investors III, L.P.,which is the managing member of TC Carting, may also be deemed to be thebeneficial owners of the shares owned by TC Carting.  Each of Messrs. Dickinson, Michalik, Malek, Rickertsen andGottman and Dr. Stern disclaims such beneficial ownership.  The address for such beneficial owners isc/o Thayer Equity Investors IV, L.P., 1455 Pennsylvania Avenue, N.W., Suite350, Washington, D.C. 20004.

 

(11)                            Consists of (a) 45,930 shares of our Class B non-voting commonstock, 3,674.4 shares of our Series A convertible preferred stock, 1,837.2shares of our Series B convertible preferred stock and 6,274.15 shares ofour Series 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, which may bedeemed to be an affiliate of Suez Equity. Mr. de Vergnes may be deemed to be the beneficial owner of theshares owned by Suez Equity and SEI Associates.  See Item 13. “Certain Relationships and RelatedTransactions.”  Mr. Les Lieberman, themanaging member of SEI Capital, LLC, the general partner of Suez Equity,

 

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mayalso be deemed to be the beneficial owner of the shares owned by SuezEquity.  Each of Messrs. de Vergnes andLieberman disclaims such beneficial ownership. The address for such beneficial owners is 712 Fifth Avenue, 24th Floor,New York, New York 10019.

 

(12)                            The general partner of Indosuez Capital Partners 2001, L.P. is IndosuezCM II, Inc., a wholly-owned subsidiary of Indosuez North AmericaHoldings, Inc., which, in turn, is a wholly-owned subsidiary of CreditAgricole Indosuez, a French socíete anonyme, which, in turn, is a wholly-owned subsidiary of Credit AgricoleSA, a French socíete anonyme whose securities are listed on the Paris StockExchange.  The address for IndosuezCapital Partners 2001, L.P. is 666 Third Avenue, 9th Floor, New York, NewYork 10017.

 

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

 

(14)                            Consists of (a) 12,000 shares of our Class A voting commonstock, (b) 2,000 shares of our Series A convertible preferred stockand (c) a warrant to purchase 3,500 shares of our Class A votingcommon stock.  Mr. Jim Sowell maybe deemed to be the beneficial owner of the shares owned by SowellConstruction.  The address for such beneficialowners is 1601 Elm Street, Suite 300, Dallas, Texas, 75201.

 

(15)                            Consists of shares held by members of management and certainstockholders that may be deemed to be beneficially owned by certain members ofour board of directors.  Certain of suchmembers of our board of directors disclaim such beneficial ownership.

 

**EquityCompensation Plan Information**

 

Thefollowing table summarizes information about securities authorized for issuanceunder our equity compensation plans as of December 31, 2002:

 
| **Plan Category**                                                                             |                                                                            |                                                                  |       |          |       | **(c)  Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected in  Column (a))** |       |
|-----------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|-----------------------------------------------------------------------|------------|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                          |                                                                            |
|                                                                                          | **(b)  Weighted-Average  Exercise Price of Outstanding  Options and  Warrants** |
| **(a)  Number of Securities to be Issued Upon Exercise of Outstanding Options and  Warrants** |
|                                                                                          |                                                                            |                                                                  | ** ** |          | ** ** |                                                                                                                                                       | ** ** |
| Equity  compensation plans approved by security holders                                       |                                                                            | 185,561.7                                                             |       |  $80.88  |       | 14,438.3                                                                                                                                                   |       |
| Equity  compensation plans not approved by security holders                                   |                                                                            |            750.0(1) |       | $100.00       |       | —                                                                                                                                                     |       |
| Total                                                                                         |                                                                            | 186,311.7                                                             |       |   $80.95 |       | 14,438.3                                                                                                                                                   |       |

 

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(1)                                  Representsshares issuable upon exercise of an outstanding, fully vested warrant issued in1998 as consideration for services rendered to us.  The warrant has an exercise price of $100.00 and expires onDecember 31, 2006.

 

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**Item 13****.  Certain Relationships and Related Transactions*.***

 

During 2002, we paid Mr.Keenan approximately $250,000 for his advisory services and expenses related tothe offering of our Notes.  Mr. Keenanis our Chairman and a managing member of, and equity holder in, IESI CapitalLLC, IESI Capital II LLC, IESI Capital III LLC, IESI Capital IV, LLC and IESICapital V LLC, each of own which shares of our capital stock.  See Item 12. “Security Ownership of CertainBeneficial Owners and Management.”

 

We have agreed topurchase an airplane from Mr. Keenan for its fair value as determined bytwo independent appraisals.  We havepaid Mr. Keenan $1.0 million as an advance towards the purchase priceof the airplane and will pay him the balance after our receipt of the appraisalreports.  Mr. Keenan purchased theairplane in July 2001 for $1.2 million and subsequently invested an additional$75,000 for various improvements to the airplane.  We expect to consummate the acquisition in April 2003 and that thetotal purchase price will be approximately $1.2 million.

 

Mr. Dickinson, amember of our board of directors, is a Managing Partner of, andMr. Michalik, also a member of our board of directors as well as the auditand compensation committees of our board of directors, is a Managing Directorof, TC Equity Partners IV, L.L.C., the general partner of Thayer Equity, whichowns shares of our capital stock.  Inaddition, Mr. Dickinson is a Managing Partner of, and Mr. Michalik isa Managing Director of, TC Management Partners IV, L.L.C., the managing memberof TC Co-Investors IV, L.L.C., which is the managing member of TC Carting IIwhich also owns shares of our capital stock. Mr. Michalik is also a Managing Director of TC Equity Partners,L.L.C., the general partner of Thayer Equity Investors III, L.P., which is themanaging member of TC Carting which owns shares of our capital stock.  See Item 12. “Security Ownership of CertainBeneficial Owners and Management.”

 

Mr. McMaken, amember 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 EnvironmentalOpportunities Management Company, L.L.C., the general partner of EOF, and FundII Mgt. Co., LLC, the general partner of EOF2 and EOF2(I).  EOF, EOF2 and EOF2(I) own shares of ourcapital stock.  See Item 12. “SecurityOwnership of Certain Beneficial Owners and Management.”

 

Mr. de Vergnes, amember of our board of directors as well as the compensation committee of ourboard of directors, is a member of SEI Capital, LLC, the general partner ofSuez Equity, which owns shares of our capital stock.  See Item 12. “Security Ownership of Certain Beneficial Owners andManagement.”  Mr. de Vergnes alsoserves as Suez Equity’s current director designee pursuant to our Amended andRestated Stockholders’ Agreement.  Inaddition, Mr. de Vergnes is a partner of SEI Associates, which owns sharesof our capital stock.  See Item 12. “SecurityOwnership of Certain Beneficial Owners and Management.”

 

During 2002, we paidto Fleet, the administrative agent under our senior credit facility, anaggregate amount of $252,500 in fees and expenses related to the amendment toour senior credit facility adopted in connection with the offering of ourNotes.  Fleet is an affiliate ofBancBoston, which owns shares of our capital stock.  See Item 12. “Securities Ownership of Certain Beneficial Ownersand Management.”

 

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**Amendedand Restated Stockholders’ Agreement**

 

We entered into anAmended and Restated Stockholders’ Agreement, dated as of September 10,2001, with all our stockholders and warrant holders.  The terms of our Amended and Restated Stockholders’ Agreement areas follows:

 

***Board of Directors***

 

Our board of directorscurrently consists of seven members designated as follows:

 

•                                          IESICapital is entitled to designate one director, with Mr. Keenan serving asits current designee;

 

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

 

•                                          EOFis entitled to designate one director, with Mr. McMaken serving as thecurrent designee;

 

•                                          TCCarting is entitled to designate two directors, with Messrs. Michalik andDickinson serving as its current designees;

 

•                                          ThayerEquity is entitled to designate two directors, but, to date, has onlydesignated one director, with Mr. Cummings currently serving as suchdesignee; and

 

•                                          SuezEquity is entitled, subject to certain regulatory requirements, to designateone director, with Mr. de Vergnes serving as its current designee.

 

In the event of a tie inany vote of our board of directors, the TC Carting director nominee who hasbeen designated by TC Carting as the tie-breaker has the right to cast thetie-breaking vote.  In addition, JamesE. Sowell is entitled to designate a representative to attend and observe allof our board of directors’ meetings and receive all information and consentsdistributed to directors.  In the eventthat Suez Equity fails or is unable to designate a director based on certainregulatory requirements, our board of directors will consist of not more thanseven members and Suez Equity will be entitled to designate a representative toobserve all of our board of directors’ meetings and receive all information andconsents distributed to directors.

 

Any committee that ourboard of directors may constitute shall include representatives designated by:

 

•              IESI Capital;

 

•              EOF;

 

•              TC Carting;

 

•              Thayer Equity; and

 

•              Suez Equity;

 

in the same proportionsas they are represented on our board of directors.

 

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***Restrictions on Transfer***

 

There are certainrestrictions with respect to the sale, transfer or other disposition of ourcapital stock, including the following:

 

•                                          ifany stockholder proposes to transfer shares of our capital stock, we have a10-day period to elect to purchase such shares;

 

•                                          ifany stockholder or group of stockholders proposes to transfer shares constitutingat least 5% of the outstanding shares of our capital stock, calculated on anas-converted basis into shares of our Class A voting common stock, all ofour other stockholders will be entitled to sell a pro rata portion of theirstock in the sale at the same price and on the same terms and conditions as areapplicable to the shares proposed to be transferred by such stockholder orgroup of stockholders;

 

•                                          ifTC Carting, TC Carting II or Thayer Equity propose to transfer a majority ofthe 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

 

•                                          allof our stockholders have certain preemptive rights with respect to issuances ofour equity securities, other than (i) issuances of our securities to ouremployees, officers and directors under our benefit plans and (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.

 

Upon exercise of theirwarrants, holders of our warrants will have the same rights as stockholdersunder, and will be subject to the terms of, our Amended and RestatedStockholders’ Agreement with respect to those shares.

 

***Approval by TC Carting and Thayer Equity***

 

We must obtain theconsent of the directors designated by Thayer Equity and TC Carting before wemay, among other things:

 

•                                          substantiallychange our business or financial plan;

 

•                                          makeany expenditure for fixed or capital assets greater than 10% of the limit setforth in our business or financial plan (which limit is set by our board ofdirectors annually and is approximately $28.0 million for 2002);

 

•                                          sellcontrol of all or substantially all of our assets or any of our capital stock;

 

•                                          acquireall or substantially all the ownership interests or assets, or any division, ofanother company;

 

•                                          modifyour senior credit facility or incur certain other debt;

 

•                                          enterinto any material transaction with an affiliate;

 

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•                                          lendfunds;

 

•                                          declarea dividend; or

 

•                                          changeour Chairman, Chief Executive Officer, Chief Operating Officer or ChiefFinancial Officer.

 

***Amendment***

 

Amendments to our Amendedand Restated Stockholders’ Agreement require our consent and the writtenconsent of holders of not less than 70% of the shares of our capital stock,calculated on an as-converted basis into shares of our Class A votingcommon stock.

 

***Termination***

 

With the exception of theprovision relating to composition of our board of directors, all provisions ofour Amended and Restated Stockholders’ Agreement will terminate upon(a) the effective date of an initial public offering of at least$20 million of our common stock or (b) any merger, sale or othertransaction involving the transfer of ownership of more than 50% of our thenoutstanding voting stock.

 

***Registration Rights***

 

***Amended and Restated Registration Rights Agreement***

 

We entered into anAmended and Restated Registration Rights Agreement, dated as of June 30,1999, with all our then existing stockholders and our warrant holders.

 

Our Amended and RestatedRegistration Rights Agreement provides that the holders of at least 15% of theshares of our capital stock, calculated on an as-converted basis into shares ofour Class A voting common stock, may request, on any of three occasions onor after the earlier of the effective date of an initial public offering of ourcapital stock and June 25, 2002, that we register our capital stock;however, less than 15% may demand registration if the anticipated aggregateprice of the capital stock to be registered would exceed $5 million,subject to certain exceptions.  Inaddition, whenever we propose to register a public offering of common stock,upon any request by the stockholders, we are required to use our best effortsto include their shares in the offering.

 

Pursuant to our Amendedand Restated Registration Rights Agreement, our stockholders have agreed withus that they will not effect any public sale or distribution of our equity securitiesduring the seven-day period prior to, and the 90-day period following, theeffective date of any registration statement.

 

We will bear allregistration expenses, except underwriting discounts and selling commissions,incurred in connection with the registrations described above.  We have agreed with the stockholders toindemnify each other against certain liabilities, including liabilities underfederal and state securities laws.

 

***Subordinate Registration Rights Agreement***

 

In connection with the issuanceof our Series D convertible preferred stock, we were not able to obtainall signatures necessary to amend and restate the June 1999 Amended andRestated Registration Rights Agreement. Accordingly, we entered into a Subordinate Registration Rights Agreementand we

 

81

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 intend to enter into a side letter with ourstockholders, as described below.  If atany time we are able to obtain all necessary signatures to a new amended andrestated registration rights agreement, our Subordinate Registration RightsAgreement and our June 1999 Amended and Restated Registration RightsAgreement will be terminated and superseded by such new amended and restatedregistration rights agreement.

 

Pursuant to our SubordinateRegistration Rights Agreement, holders of at least 15% of the shares of ourcapital stock, calculated on an as-converted basis into shares of ourClass A voting common stock, may request on any of three occasions on orafter the earlier of the effective date of an initial public offering of ourcapital stock and June 25, 2004, that we register our capital stock;however, less than 15% may demand registration if the anticipated aggregateprice of the capital stock to be registered would exceed $5 million,subject to certain exceptions.  Inaddition, whenever we propose to register a public offering of common stock,upon any request by the stockholders, we are required to use our best effortsto include their shares in the offering.

 

Pursuant to our SubordinateRegistration Rights Agreement, we agreed along with our stockholders not toeffect any public sale or distribution of our equity securities during theseven-day period prior to, and the 90-day period following, the effective dateof any registration statement.

 

We will bear allregistration expenses, except underwriting discounts and selling commissions,incurred in connection with the registrations described above.  We have agreed with the stockholders toindemnify each other against certain liabilities, including liabilities underfederal and state securities laws.

 

***Side Letter Regarding Registration Rights of CertainStockholders***

 

We also intend to enterinto a side letter with certain of our stockholders.  The side letter will provide that the rights of the stockholdersunder the June 1999 Amended and Restated Registration Rights Agreementwill be subordinated to the rights which would have been granted if a newamended and restated rights agreement had become effective in connection withthe issuance of our Series D convertible preferred stock.  The right of the parties, pursuant to theJune 1999 Amended and Restated Registration Rights Agreement, to requestregistration would also be extended until the earlier of an IPO andJune 25, 2004.  Any provision ofthe side letter may be waived with our consent along with 70% of ouroutstanding capital stock.

 

**Item 14****.*  *Controlsand Procedures.**

 

Our Chief ExecutiveOfficer and Chief Financial Officer have concluded, based on their evaluationwithin 90 days of the filing date of this Annual Report on Form 10-K, that ourdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules andforms.  There have been no significantchanges in our internal controls or in other factors that could significantlyaffect these controls subsequent to the date of the previously mentionedevaluation.

 

82

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**PART IV**

 

**Item 15****.  Exhibits, Financial Statement Schedules, and Reports on Form8-K.**

 

(a)         Thefollowing documents are filed as part of this Annual Report on Form 10-K: 

 
| (1)    |   | Financial Statements: 

(i)            Report of Independent Auditors.

(ii)           Consolidated Balance Sheets as of  December 31, 2002 and 2001.

(iii)          Consolidated Statements of  Operations for the Years Ended December 31, 2002, 2001 and 2000.

(iv)         Consolidated Statements of  Stockholders’ Equity (Deficit) for the Years Ended December 31, 2002, 2001  and 2000.

(v)           Consolidated Statements of Cash  Flows for the Years Ended December 31, 2002, 2001 and  2000.

(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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

(b)         Reportson Form 8-K: None.

 

(c)         Exhibits:

 

The exhibits that arefiled as part of this Annual Report on Form 10-K or incorporated by referenceherein are set forth in the accompanying Exhibit Index.

 

83

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this Annual Report on Form 10-K to be signed on itsbehalf by the undersigned, thereunto duly authorized.

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

 

 

Date:  March 25**,** 2003

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Annual Report on Form10-K has been signed by the following persons on behalf of the Registrant andin the capacities and on the dates indicated. 

 
| **Signature**             |   | **Title**                                                                           |   | **Date**        |
|---------------------------|--------|-------------------------------------------------------------------------------------|--------|-----------------|
|                      |   |                                                                                |   |            |
| /s/ JEFFREY J. KEENAN     |   | Chairman  of the Board of Directors                                                 |   | March  25, 2003 |
| Jeffrey J. Keenan         |   |                                                                                |   |            |
|                      |   |                                                                                |   |            |
| /s/ CHARLES F. FLOOD      |   | President,  Chief Executive Officer and Director                                    |   | March  25, 2003 |
| Charles F. Flood          |   | (Principal  Executive Officer)                                                      |   |            |
|                      |   |                                                                                |   |            |
| /s/ THOMAS J. COWEE       |   | Vice  President, Chief Financial Officer, Treasurer and                             |   | March  25, 2003 |
| Thomas J. Cowee           |   | Assistant  Secretary (Principal Financial Officer and Principal Accounting Officer) |   |            |
|                      |   |                                                                                |   |            |
| /s/ CHARLES R. CUMMINGS   |   | Director                                                                            |   | March  25, 2003 |
| Charles R. Cummings       |   |                                                                                |   |            |
|                      |   |                                                                                |   |            |
| /s/ THIERRY X. DE VERGNES |   | Director                                                                            |   | March  25, 2003 |
| Thierry X. de Vergnes     |   |                                                                                |   |            |
|                      |   |                                                                                |   |            |
| /s/ DANIEL M. DICKINSON   |   | Director                                                                            |   | March  25, 2003 |
| Daniel M. Dickinson       |   |                                                                                |   |            |
|                      |   |                                                                                |   |            |
| /s/ BRUCE R. MCMAKEN      |   | Director                                                                            |   | March  25, 2003 |
| Bruce R. McMaken          |   |                                                                                |   |            |
|                      |   |                                                                                |   |            |
| /s/ ROBERT E. MICHALIK    |   | Director                                                                            |   | March  25, 2003 |
| Robert E. Michalik        |   |                                                                                |   |            |

 

84

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**CERTIFICATIONS**

** **

I, Charles F. Flood,President and Chief Executive Officer of IESI Corporation, certify that:

 

1.                Ihave reviewed this annual report on Form 10-K of IESI Corporation (the“registrant”);

 

2.                Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)              evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)               presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  March  25, 2003       |
|----------------------------------------|
|                                   |
|                                   |
| /s/ Charles F. Flood                   |   |
| President and Chief  Executive Officer |
| (Principal Executive  Officer)         |

 

85

----

 

**CERTIFICATIONS**

** **

I, Thomas J. Cowee, VicePresident, Chief Financial Officer, Treasurer and Assistant Secretary of IESICorporation, certify that:

 

1.                Ihave reviewed this annual report on Form 10-K of IESI Corporation (the“registrant”);

 

2.                Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(b)              evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

(c)               presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)               allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)              anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  March  25, 2003         |
|------------------------------------------|
|                                     |
|                                     |
| /s/ Thomas J. Cowee                      |   |
| Vice President, Chief  Financial         |
| Officer, Treasurer and  Assistant        |
| Secretary (Principal  Financial Officer) |

 

86

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** **

**SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILEDPURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTEREDSECURITIES PURSUANT TO SECTION 12 OF THE ACT.**

No annual report to security holders covering theregistrant’s last fiscal year has been sent to security holders.  No proxy statement, form of proxy or otherproxy soliciting material has been sent to more than 10 of the registrant’ssecurity holders with respect to any annual or other meeting of securityholders.

 

87

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**IESICORPORATION**

 

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

** **
| Report  of Independent Auditors                                                                                       |
|-----------------------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheets as of  December 31, 2002 and 2001                                                         |
| Consolidated Statements of  Operations for the Years Ended December 2002,  2001 and 2000                         |
| Consolidated  Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31,  2002, 2001 and 2000 |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2002,  2001 and 2000                     |
| Notes  to Consolidated Financial Statements                                                                           |

 

F-1

----

 

**Report****of Independent Auditors**

 

TheBoard of Directors

IESICorporation

 

We have audited the accompanying consolidated balancesheets of IESI Corporation and subsidiaries as of December 31, 2002 and2001, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the three years in the period endedDecember 31, 2002.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States.  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of IESI Corporation and subsidiaries at December 31, 2002 and2001, and the consolidated results of their operations and their cash flows foreach of the three years in the period ended December 31, 2002, inconformity with accounting principles generally accepted in the United States.

 

As discussed in Note 2 to the consolidated financialstatements, effective January 1, 2002, the Company adopted Statement ofFinancial Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS No. 142).

 
|                | /s/ Ernst & Young  LLP |
|---------------------|----------------------------|
|                |
|                |
| March 7,  2003 |
| Fort  Worth, Texas  |

 

F-2

----

 

**IESICORPORATION AND SUBSIDIARIES**

 

**CONSOLIDATED BAL****ANCE SHEETS**

 
|                                                                                                                                                                                                                                                                                                                                         |   | **December  31,** |        |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                                                                                                                                                                                                                                                                                         |   | **2002**          |        | **2001** |   |
| Current assets:                                                                                                                                                                                                                                                                                                                              |   |              |        |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                    |   | $                 | 2,589,726   |   | $ | 2,171,384 |   |
| Accounts receivable-trade, less allowance of $941,000  and $939,000 at December 31, 2002 and 2001, respectively                                                                                                                                                                                                                              |   | 27,516,534        |        | 24,725,532 |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                        |   | 849,649           |        | 356,807 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                    |   | 3,949,590         |        | 3,151,215 |   |
| Total current assets                                                                                                                                                                                                                                                                                                                         |   | 34,905,499        |        | 30,404,938 |   |
| Property and equipment, net of accumulated depreciation  of $73,475,000 and $50,697,000 at December 31, 2002 and 2001, respectively                                                                                                                                                                                                          |   | 241,869,538       |        | 198,520,614 |   |
| Goodwill, net                                                                                                                                                                                                                                                                                                                                |   | 128,409,308       |        | 107,656,183 |   |
| Other intangible assets, net                                                                                                                                                                                                                                                                                                                 |   | 22,666,277        |        | 15,575,760 |   |
| Other assets                                                                                                                                                                                                                                                                                                                                 |   | 3,001,394         |        | 2,150,581 |   |
| Total assets                                                                                                                                                                                                                                                                                                                                 |   | $                 | 430,852,016 |   | $ | 354,308,076 |   |
| **Liabilities and Stockholders’ Equity (Deficit)**                                                                                                                                                                                                                                                                                      |   |              | ** **  |   | ** ** |
| Current liabilities:                                                                                                                                                                                                                                                                                                                         |   |              |        |   |   |
| Accounts payable—trade                                                                                                                                                                                                                                                                                                                  |   | $                 | 17,086,458  |   | $ | 15,948,738 |   |
| Accrued expenses and other current liabilities                                                                                                                                                                                                                                                                                               |   | 13,387,878        |        | 11,434,663 |   |
| Deferred revenue                                                                                                                                                                                                                                                                                                                             |   | 3,777,101         |        | 2,650,238 |   |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                            |   | 184,825           |        | 529,573 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                    |   | 34,436,262        |        | 30,563,212 |   |
| Long-term debt                                                                                                                                                                                                                                                                                                                               |   | 198,386,401       |        | 129,821,089 |   |
| Accrued environmental and landfill costs                                                                                                                                                                                                                                                                                                     |   | 12,539,318        |        | 12,600,157 |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                        |   | 6,770,058         |        | 2,589,279 |   |
| Other liabilities                                                                                                                                                                                                                                                                                                                            |   | 1,593,534         |        | 1,814,927 |   |
| Total liabilities                                                                                                                                                                                                                                                                                                                            |   | 253,725,573       |        | 177,388,664 |   |
| 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, 2002 and 2001                                                                                                                                                                |   | 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, 2002 and 2001                                                                                                                                                                |   | 24,808,636        |        | 24,808,636 |   |
| Redeemable Series C Convertible Preferred Stock, 55,000  shares authorized, issued and outstanding, liquidation preference of  $91,247,703 and $78,959,613 at December 31, 2002 and 2001, respectively                                                                                                                                  |   | 89,205,242        |        | 76,917,152 |   |
| Redeemable Series D Convertible Preferred Stock,  145,000 shares authorized, 55,000 shares issued and outstanding, liquidation  preference of $62,272,416 and $56,482,917 at December 31, 2002 and 2001,  respectively                                                                                                                  |   | 59,652,539        |        | 53,863,040 |   |
| Total redeemable preferred stock                                                                                                                                                                                                                                                                                                             |   | 213,350,054       |        | 195,272,465 |   |
| Stockholders’ equity (deficit):                                                                                                                                                                                                                                                                                                         |   |              |        |   |   |
| Common stock, par value $.01 at December 31, 2002  and 2001, respectively: Authorized shares: Class A—3,600,000, Class B  Convertible—450,000, at December 31, 2002 and 2001; issued and outstanding  shares: Class A—142,000, Class B Convertible—112,980, at  December 31, 2002 and 2001 |   | 2,550             |        | 2,550 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                   |   | —            |        | — |   |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                          |   | (36,226,161       | )           | (18,754,079 | ) |
| Cumulative other comprehensive income                                                                                                                                                                                                                                                                                                        |   | —            |        | 398,476 |   |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                                    |   | (36,223,611       | )           | (18,353,053 | ) |
| Total liabilities and stockholders’ equity (deficit)                                                                                                                                                                                                                                                                                    |   | $                 | 430,852,016 |   | $ | 354,308,076 |   |

 

See accompanying notes.

 

F-3

----

 

**IESI CORPORATIONAND SUBSIDIARIES**

**CONSOLIDATED STATE****MENTS OF OPERATIONS**

 

 
|                                       |   | **Year ended December 31** |        |
|--------------------------------------------|--------|---------------------------------|-------------|
|                                       |   | **2002**                        |        | **2001** |   | **2000** |   |
|                                       |   |                            |        |   |   |   |   |
| Services revenue                           |   | $                               | 212,940,552 |   | $ | 185,690,309 |   | $ | 139,633,535 |   |
| Costs and expenses:                        |   |                            |        |   |   |   |   |
| Operating                                  |   | 139,640,790                     |        | 119,816,245 |   | 90,560,274 |   |
| General and administrative                 |   | 25,536,654                      |        | 24,062,826 |   | 18,542,639 |   |
| Depreciation, depletion and amortization   |   | 27,848,910                      |        | 25,721,970 |   | 20,086,215 |   |
|                                       |   | 193,026,354                     |        | 169,601,041 |   | 129,189,128 |   |
| Income from operations                     |   | 19,914,198                      |        | 16,089,268 |   | 10,444,407 |   |
| Interest expense, net                      |   | (14,067,694                     | )           | (12,960,630 | ) | (11,142,491 | ) |
| Loss on termination of interest rate swaps |   | (825,665                        | )           | — |   | — |   |
| Loss on extinguishment of debt             |   | (585,591                        | )           | — |   | — |   |
| Other expense, net                         |   | (103,487                        | )           | (178,238 | ) | (186,214 | ) |
| Income (loss) before income taxes          |   | 4,331,761                       |        | 2,950,400 |   | (884,298 | ) |
| Income tax expense                         |   | (3,726,254                      | )           | (703,501 | ) | (170,880 | ) |
| Net income (loss)                          |   | $                               | 605,507     |   | $ | 2,246,899 |   | $ | (1,055,178 | ) |

 

See accompanying notes.

 

F-4

----

 

**IESI CORPORATIONAND SUBSIDIARIES**

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

 
|                                                                                    |   | **Common Stock** |   | **Additional****Paid-InCapital** |   | **Accumulated****Deficit** |   | **Cumulative  Other****ComprehensiveIncome** |   | **Total** |        |
|-----------------------------------------------------------------------------------------|--------|------------------|--------|----------------------------------|--------|----------------------------|--------|----------------------------------------------|--------|-----------|-------------|
| **Shares**                                                                              |   | **Par  Amount**  |
| Balance at December 31, 1999                                                            |   | 2,713,893        |   | $                                | 27,139 |                       | $      | 19,398,627                                   |   | $         | (16,406,356 | ) | $ | — |   | $ | 3,019,410 |   |
| Accretion of dividends on redeemable preferred stock                                    |   | —           |   | —                           |   | (9,820,349                 | )      | —                                       |   | —    |        | (9,820,349 | ) |
| Common stock issued, net                                                                |   | —           |   | —                           |   | (4,218                     | )      | —                                       |   | —    |        | (4,218 | ) |
| Net loss                                                                                |   | —           |   | —                           |   | —                     |   | (1,055,178                                   | )      | —    |        | (1,055,178 | ) |
| 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 | ) |

 

See accompanying notes.

 

F-5

----

 

**IESI CORPORATIONAND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                                                        |   | **Year ended December 31,** |       |
|-----------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
|                                                                                                                        |   | **2002**                    |       | **2001** |   | **2000** |   |
| **Operating Activities**                                                                                                    |   |                        |       |   |   |   |   |
| Net income (loss)                                                                                                           |   | $                           | 605,507    |   | $ | 2,246,899 |   | $ | (1,055,178 | ) |
| Adjustments to reconcile net income (loss) to net cash  provided by operating activities:                                   |   |                        |       |   |   |   |   |
| Depreciation, depletion and amortization                                                                                    |   | 27,848,910                  |       | 25,721,970 |   | 20,086,215 |   |
| Amortization of deferred financing costs                                                                                    |   | 2,386,222                   |       | 1,543,023 |   | 1,203,375 |   |
| Provision for doubtful accounts                                                                                             |   | 962,512                     |       | 1,233,554 |   | 1,835,692 |   |
| Write off of costs associated with transactions in  process                                                                 |   | 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                                                                                                 |   | 3,286,331                   |       | 408,892 |   | 139,370 |   |
| Changes in operating assets and liabilities, net of  effects of acquired waste management operating assets and liabilities: |   |                        |       |   |   |   |   |
| Accounts receivable, net                                                                                                    |   | (2,031,598                  | )          | (7,052,394 | ) | (3,767,802 | ) |
| Prepaid expenses and other current assets                                                                                   |   | 184,703                     |       | 1,472,401 |   | 2,354,352 |   |
| Accounts payable                                                                                                            |   | 480,228                     |       | 3,541,518 |   | 4,027,152 |   |
| Accrued expenses and other liabilities                                                                                      |   | (4,664,351                  | )          | (309,514 | ) | (235,350 | ) |
| Net cash provided by operating activities                                                                                   |   | 30,624,055                  |       | 30,372,808 |   | 24,587,826 |   |
| **Investing Activities**                                                                                                    |   |                        |       |   |   |   |   |
| Purchases of property and equipment                                                                                         |   | (41,330,847                 | )          | (30,804,989 | ) | (25,034,344 | ) |
| Acquisitions of waste management operations                                                                                 |   | (44,369,763                 | )          | (15,628,394 | ) | (48,735,097 | ) |
| Capitalized interest                                                                                                        |   | (1,852,980                  | )          | (1,601,635 | ) | (1,882,867 | ) |
| Deferred costs associated with transactions in process                                                                      |   | (557,265                    | )          | (2,177,060 | ) | (382,496 | ) |
| Net cash used in investing activities                                                                                       |   | (88,110,855                 | )          | (50,212,078 | ) | (76,034,804 | ) |
| **Financing Activities**                                                                                                    |   |                        |       |   |   |   |   |
| Borrowings under long-term debt                                                                                             |   | 217,800,000                 |       | 23,800,000 |   | 54,800,000 |   |
| Payments on long-term debt                                                                                                  |   | (151,543,866                | )          | (56,415,262 | ) | (469,495 | ) |
| Net proceeds from issuance of preferred stock                                                                               |   | —                      |       | 52,380,123 |   | 185,782 |   |
| Debt issue costs                                                                                                            |   | (7,525,327                  | )          | (2,826,853 | ) | (45,000 | ) |
| Payments on interest rate swap termination                                                                                  |   | (825,665                    | )          | — |   | — |   |
| Net cash provided by financing activities                                                                                   |   | 57,905,142                  |       | 16,938,008 |   | 54,471,287 |   |
| Net increase (decrease) in cash and cash equivalents                                                                        |   | 418,342                     |       | (2,901,262 | ) | 3,024,309 |   |
| Cash and cash equivalents at beginning of year                                                                              |   | 2,171,384                   |       | 5,072,646 |   | 2,048,337 |   |
| Cash and cash equivalents at end of year                                                                                    |   | $                           | 2,589,726  |   | $ | 2,171,384 |   | $ | 5,072,646 |   |
|                                                                                                                        |   |                        |       |   |   |   |   |
| **Supplemental Disclosure**                                                                                                 |   |                        |       |   |   |   |   |
| Cash paid for interest                                                                                                      |   | $                           | 14,810,992 |   | $ | 11,516,830 |   | $ | 11,971,475 |   |
| Cash paid for income taxes                                                                                                  |   | $                           | 674,027    |   | $ | 60,505 |   | $ | 31,510 |   |
| **Noncash Investing and Financing Activities**                                                                              |   |                        |       |   |   |   |   |
| Liability assumed in connection with acquisition of  business                                                               |   | $                           | —     |   | $ | 1,200,000 |   | $ | — |   |

 

See accompanying notes.

 

F-6

----

 

**IESI CORPORATIONAND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31,2002, 2001 AND 2000**

 

**1. Business and Organization**

 

IESI Corporation (IESI) is aDelaware holding company incorporated in March 1997. IESI and itssubsidiaries (together, the Company), is a regional, integrated non-hazardoussolid waste management company that provides collection, transfer, disposal,and recycling services to commercial, industrial and residential customers. TheCompany was formed in order to participate in the consolidation of thefragmented solid waste industry. The Company is executing this strategy throughan acquisition program, which targets businesses in two principal geographicregions, the Northeast and the South United States. The Company is currentlyoperating in nine states: Arkansas, Louisiana, Maryland, Missouri, New Jersey,New York, Oklahoma, Pennsylvania, and Texas.

 

**2. Summary of Significant Accounting Policies**

 

**Basis of Presentation**

 

The accompanying consolidatedfinancial statements include the accounts of IESI and its subsidiaries. Allsignificant inter-company accounts and transactions have been eliminated.Certain amounts in the prior year’s financial statements have been reclassifiedto conform to the current year presentation.

 

**Airspace Amortization and Final Closure/ Post-Closure Rate Per Unit**

 

The Company expenses amounts forlandfill airspace usage and landfill final closure and post-closure costs foreach unit of waste accepted for disposal at its landfills. In determining theamount to expense for each unit of waste accepted, the Company estimates thetotal cost to develop each landfill site to its final capacity and the totalfinal closure and post-closure costs for each landfill site. The Company’sengineers also estimate the capacity of the landfill. The expense for each unitis then calculated based on the total costs remaining to be provided and thetotal remaining capacity. Estimates for projected landfill site costs and forfinal 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.

 

**Use of Estimates**

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and related notes. Actual results could differ fromthese estimates and assumptions.

 

As it relates to estimates andassumptions in rates per ton, significant engineering and accounting input isrequired. The Company reviews these estimates and assumptions not less thanannually. In many circumstances, the ultimate outcome of the estimates and assumptionsmay not be known for decades into the future. Actual results could differmaterially from these estimates and assumptions due to changes in environmental-relatedregulations, changes in future operational plans, and inherent imprecisionassociated with estimating environmental matters so far into the future.

 

F-7

----

 

**New Accounting Pronouncements**

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations.” SFAS No. 143 applies to all legally enforceable obligations associatedwith the retirement of tangible long-lived assets and provides the accountingand reporting requirements for such obligations.  SFAS No. 143 requires amounts initially recognized as an assetretirement obligation to be measured at fair value.  The recognized asset retirement cost is capitalized as part ofthe cost of the asset and is depreciated over the useful life of the asset.

 

SFAS No. 143, which will primarily impact theaccounting for our landfill operations, does not change the basic landfillaccounting followed historically by us along with others in the wasteindustry.  In general, the wasteindustry has recognized expenses associated with both amortization ofcapitalized costs and future closure and post-closure obligations on aunits-of-consumption basis as airspace is consumed over the life of the relatedlandfill.  This practice, referred to aslife cycle accounting within the waste industry, will continue to be followedupon adoption of SFAS No. 143, except as discussed below.

 

Under the new rules, costs associated with futurefinal capping activities that occur during the operating life of a landfill,which are currently recognized on an undiscounted basis over the operating lifeof the landfill as airspace is consumed, will be accounted for as an assetretirement obligation, on a discounted basis. We expect to recognize landfill retirement obligations that relate toclosure and post-closure activities over the operating life of a landfill aslandfill airspace is consumed and the obligation is incurred.  We expect to recognize our final cappingobligations on a discrete basis for each expected future final capping eventover the number of tons of waste that each final capping event is expected tocover.  These obligations will beinitially measured at estimated fair value. Fair value will be measured on a present value basis, using acredit-adjusted, risk-free rate, initially 10.25%.  Interest will be accreted on all landfill retirement obligationsusing the effective interest method. Landfill retirement costs arising from closure and post-closureobligations, which will be capitalized as part of the landfill asset, will beamortized using our existing landfill accounting practices.  Landfill retirement costs arising from finalcapping obligations, which will also be capitalized as part of the landfillasset, will be amortized on a units-of-consumption basis over the number oftons of waste that each final capping event covers.

 

The tables below set forth certain definitions relatedto our landfill accounting practices (prior to and upon our adoption of SFASNo. 143) and the significant changes between our current landfill accountingpractices and the requirements of SFAS No. 143:

 
| **Description**  |   | **Current  Definition**                                                                                                                                                                                                                    |   | **Definition  Upon Adoption of  SFAS No. 143** |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|
| **Definitions:** |   |                                                                                                                                                                                                                                       |   |                                           |
| Final  Capping   |   | Includes 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          |   | Includes 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     |   | Includes 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.                                     |

 

F-8

----

 
| **Description**               |   | **Current  Practice**                                                                                                                                                                                                |   | **Practice  Upon Adoption of  SFAS No. 143**                                                                                                                                                                                                                                                                      |
|-------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Discount Rate**:            |   | None.                                                                                                                                                                                                                |   | Credit-adjusted,  risk-free rate (currently at 10.25%).                                                                                                                                                                                                                                                           |
|                          |   |                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                              |
| **Cost Estimates:**           |   | Cost are 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% effective January  1, 2003, based on the prior 10 year average.                                                                                                                                                                                                                                              |
|                          |   |                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                              |
| **Recognition of Liability**: |   |                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                              |
|                          |   |                                                                                                                                                                                                                 |   |                                                                                                                                                                                                                                                                                                              |
| Final Capping                 |   | Costs are capitalized  as spent, except for the last final capping event that occurs after the  landfill closes, which is accounted for as part of closure.                                                          |   | All final capping will  be 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  is recorded to accrued liabilities, with a corresponding charge to cost of  operations as airspace is 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.                                                                                           |

 

F-9

----

 
| **Description**                      |   | **Current  Practice**                                                       |   | **Practice  Upon Adoption of  SFAS No. 143**                                                                                                                                                               |
|--------------------------------------|--------|-----------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **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 (currently  at 10.25%) under the effective interest method.                                                        |

 

We have adopted SFAS No. 143 as of January 1, 2003and, based on current estimates, we expect to record an after-tax expenseranging from $900,000 to $1,200,000 as a cumulative effect of a change inaccounting principle.  We expect thatthe impact of adopting SFAS No. 143 in 2003 will decrease earnings from ourprevious method by an amount ranging from $500,000 to $750,000.  The adoption of SFAS No. 143 will have noimpact on our cash flow.

 

In April 2002, the FinancialAccounting Standards Board issued SFAS No. 145, Recission of FASB StatementsNo. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.  SFAS No. 145 requires thatgains and losses from extinguishment of debt be classified as extraordinaryitems only if they meet the criteria in Accounting Principles Board Opinion No.30 (“Opinion No. 30”).  Applying theprovision of Opinion No. 30 will distinguish transactions that are part of anentity’s recurring operations from those that are unusual and infrequent thatmeet criteria for classification as an extraordinary item.  As allowed under the provisions of SFAS No.145, the Company has adopted the provisions of SFAS No. 145 as of April 1,2002.  In accordance with SFAS No. 145,the Company has included the loss on extinguishment of debt (see Note 5) inincome before income taxes.

 

In July 2002, the FinancialAccounting Standards Board issued SFAS No. 146, Accounting for Costs Associatedwith Exit or Disposal Activities.  SFASNo. 146 addresses financial accounting and reporting for costs associated withexit or disposal activities, such as restructurings, involuntarily terminatingemployees and consolidating facilities. SFAS No. 146 excludes from its scope exit and disposal activitiesconducted in connection with a business combination and those activities towhich SFAS Nos. 143 and 144 are applicable. SFAS No. 146 is effective for exit and disposal activities that areinitiated after December 31, 2002.  TheCompany does not expect the adoption of this statement to have a materialeffect on its consolidated financial position or results of operations.

 

In November 2002, the FASB issued Interpretation No.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect 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 

 

F-10

----

 

requires a guarantor to recognize, at the time it issues a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  FIN 45 providesspecific guidance identifying the characteristics of contracts that are subjectto its guidance and it also provides for scope exceptions from the guidance inits entirety and from only the initial recognition and measurementprovisions.  The recognition andmeasurement provisions of FIN 45 apply on a prospective basis toguarantees issued or modified after December 31, 2002, regardless of theguarantor’s fiscal year end.  Thedisclosure requirements of FIN 45 are effective for interim and annualperiod financial statements ending after December 15, 2002.  The Company’s adoption of FIN 45 did nothave a material impact on its financial position, results of operations ordisclosure requirements.

 

**Cash and Cash Equivalents**

 

Cash and cash equivalents include cash on deposit andhighly liquid investments with original maturities of three months or less.

 

**Property and Equipment**

 

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

 

The Company revises the estimateduseful lives of property and equipment acquired through business acquisitionsto conform with its’ policies regarding property and equipment. Depreciation iscalculated on the straight-line method over the estimated useful lives of therelated assets which generally range from three to five years for furniture andfixtures and computer equipment, five to 10 years for containers,compactors, trucks and collection equipment, and 10 to 40 years forbuildings and improvements. The Company assumes no salvage value for itsdepreciable property and equipment. Depreciation expense on property andequipment was approximately $16,550,000, $13,443,000 and $10,775,000 during2002, 2001 and 2000, respectively.

 

Landfills and landfillimprovements are stated at cost and are depleted based on consumed airspace.Landfill improvements include direct costs incurred to obtain landfill permitsand direct costs incurred to construct and develop the site. All indirectlandfill development costs are expensed as incurred. Depletion expense wasapproximately $8,085,000, $6,988,000 and $4,931,000 during 2002, 2001 and 2000,respectively.

 

Interest is capitalized oncertain projects under development including landfill projects and probablelandfill expansion projects, and on certain assets under construction,including operating landfills. The capitalization of interest for operatinglandfills is based on the costs incurred on discrete cell constructionprojects. Interest capitalized was approximately $1,853,000, $1,602,000 and$1,883,000 during 2002, 2001 and 2000, respectively.

 

F-11

----

 

Property and equipment consistedof the following at December 31:

 

|                                        |   | **2002**    |        | **2001**    |   |
|---------------------------------------------|--------|-------------|-------------|-------------|--------|
| Land and landfills                          |   | $           | 157,495,877 |        | $      | 130,453,284 |   |
| Vehicles                                    |   | 72,693,739  |        | 52,164,834  |   |
| Containers and compactors                   |   | 45,021,821  |        | 33,438,128  |   |
| Machinery and equipment                     |   | 20,199,485  |        | 15,600,878  |   |
| Buildings and improvements                  |   | 15,535,880  |        | 13,755,113  |   |
| Furniture and office equipment              |   | 4,397,468   |        | 3,805,232   |   |
|                                        |   | 315,344,270 |        | 249,217,469 |   |
| Less accumulated depreciation and depletion |   | 73,474,732  |        | 50,696,855  |   |
|                                        |   | $           | 241,869,538 |        | $      | 198,520,614 |   |

 

**Goodwill and Other Intangible Assets**

 

Intangible assets consist primarily of the cost ofacquired businesses in excess of the fair value of net assets acquired(Goodwill). In accordance with SFAS No. 142, Accounting for Goodwill and OtherIntangible Assets (SFAS No. 142), the Company did not amortize goodwill thatarose from purchases of businesses after June 30, 2001. The Company continued,through December 31, 2001, the amortization of goodwill that was recorded priorto July 1, 2001.  Amortization ofgoodwill ceased on January 1, 2002.

 

The following table presents the effect on net income(loss), as reported, of the non-amortization provisions of SFAS No. 142had such provisions been in effect as of the beginning of each yearpresented.  The amortization expense andadjusted net income (loss) for the three years ended December 31, 2002 isas follows: 

 

|                          |   | **Year Ended December 31,** |    |
|-------------------------------|--------|-----------------------------|---------|
|                          |   | **2002**                    |    | **2001** |   | **2000** |   |
| Net income (loss) as reported |   | $                           | 605,507 |   | $ | 2,246,899 |   | $ | (1,055,178 | ) |
| Amortization, net of tax      |   | —                      |    | 2,153,065 |   | 2,346,216 |   |
| Adjusted net income (loss)    |   | $                           | 605,507 |   | $ | 4,399,964 |   | $ | 1,291,038 |   |

 

During 2001, Goodwill was reducedapproximately $1,600,000 due to the receipt of common stock from escrow thatwas previously issued in conjunction with the acquisition of a business. Otherintangibles consist of values assigned to customer lists and covenantsnot-to-compete, costs incurred to obtain debt financing and other separatelyidentifiable intangible assets.  Otherintangibles are recorded at cost and, except for debt issue costs, amortizedover periods ranging from five to seven years, computed on the straight-linemethod. Amortization expense was approximately $3,214,000, $5,291,000 and$4,380,000 during 2002, 2001 and 2000, respectively. The Company defers costsincurred in obtaining debt and amortizes, as additional interest expense, thesecosts over the term of the related debt using the effective interest method.

 

F-12

----

 

Other intangible assets consistedof the following at December 31:

 

|                          |   | **2002**   |       | **2001**   |   |
|-------------------------------|--------|------------|------------|------------|--------|
| Customer lists                |   | $          | 14,033,330 |       | $      | 11,126,538 |   |
| Noncompetition agreements     |   | 7,195,483  |       | 5,294,695  |   |
| Debt issue costs              |   | 15,900,865 |       | 8,646,479  |   |
| Other                         |   | 1,033,983  |       | 483,303    |   |
|                          |   | 38,163,661 |       | 25,551,015 |   |
| Less accumulated amortization |   | 15,497,384 |       | 9,975,255  |   |
|                          |   | $          | 22,666,277 |       | $      | 15,575,760 |   |

 

The Company assesses whethergoodwill is impaired on an annual basis. Upon determining the existence of goodwill impairment, the Companymeasures that impairment based on the amount by which the book value of goodwillexceeds its implied fair value.  Theimplied fair value of goodwill is determined by deducting the fair value of areporting unit’s identifiable assets and liabilities from the fair value of thereporting unit as a whole, as if that reporting unit had just been acquired andthe purchase price were being initially allocated.  Additional impairment assessments may be performed on an interimbasis if the Company encounters events or changes in circumstances that wouldindicate, more likely than not, the book value of goodwill has been impaired.The Company incurred no impairment of goodwill upon its initial adoption ofSFAS No. 142, or as a result of its annual goodwill impairment test.

 

On an ongoing basis, managementreviews the valuation and amortization of other intangible assets withconsideration toward recovery through future operating results.  The Company periodically evaluates the valueand future benefits of its other intangible assets.  The Company assesses recoverability from future operations usingcash flows and income from operations 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 assets. There have been noadjustments to the carrying amount of intangible assets resulting from theseevaluations as of December 31, 2002 and 2001.

 

Scheduled estimated amortization of other intangibleassets is as follows: 

 
| 2003       |   | $         | 6,098,000  |   |
|------------|--------|-----------|------------|--------|
| 2004       |   | 4,829,000 |       |
| 2005       |   | 2,960,000 |       |
| 2006       |   | 2,257,000 |       |
| 2007       |   | 1,794,000 |       |
| Thereafter |   | 4,728,000 |       |
|       |   | $         | 22,666,000 |   |

 

F-13

----

 

**Accrued Expenses and Other CurrentLiabilities**

 

The following is a summary ofaccrued expenses and other current liabilities at December 31:

 

|                                                   |   | **2002**  |       | **2001**  |   |
|--------------------------------------------------------|--------|-----------|------------|-----------|--------|
| Acquisition related accrued liabilities                |   | $         | 2,740,190  |      | $      | 512,223 |   |
| Interest                                               |   | 1,169,589 |       | 2,370,474 |   |
| Accrued payroll and other employee related liabilities |   | 2,663,757 |       | 2,069,597 |   |
| Accrued insurance liabilities                          |   | 2,874,036 |       | 2,203,507 |   |
| Other                                                  |   | 3,940,306 |       | 4,278,862 |   |
|                                                   |   | $         | 13,387,878 |      | $      | 11,434,663 |   |

 

**Revenue Recognition**

 

Revenue is recognized as servicesare provided to customers. Certain customers are billed in advance and,accordingly, recognition of the related revenue is deferred until the servicesare provided.

 

The Company reviews its revenueproducing contracts in the ordinary course of business to determine if thedirect costs to service the contractual arrangements exceed the revenues to beproduced by the contract. Any resulting loss (excess direct costs) over thelife of the contract is expensed at the time of such determination.

 

**Advertising Costs**

 

All advertising costs areexpensed when paid. Advertising costs were $512,000, $381,000 and $274,000 in2002, 2001 and 2000, respectively.

 

**Income Taxes**

 

Deferred income taxes are determined based on the differencebetween the financial reporting and tax bases of assets and liabilities.Deferred income tax provision represents the change during the reporting periodin the deferred 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 grants stock optionsfor a fixed number of shares to employees with stock option exercise pricesequal to the fair value of the shares on the date of the grant. The Companyaccounts for stock option grants to employees using the intrinsic value methodin accordance with the Accounting Principles Board Opinion No. 25 (APBNo. 25), Accounting for Stock Issued to Employees, and relatedinterpretations. The Company grants stock options for a fixed number of sharesto employees with stock option exercise prices equal to the fair value of theshares on the date of grant and, accordingly, recognizes no compensationexpense for the stock option grants.

 

F-14

----

 

The following schedule reflects the impact on netincome if the Company had applied the fair value recognition provisions of SFASNo. 123 to stock based employee compensation:

 

|                                                    |   | **2002** |    | **2001** |   | **2000**  |   |
|---------------------------------------------------------|--------|----------|---------|----------|--------|-----------|--------|
| Net income (loss):                                      |   |     |    |     |   |      |   |
| As reported                                             |   | $        | 605,507 |     | $      | 2,246,899 |   | $ | (1,055,178 | ) |
| Less: compensation expense per SFAS No. 123, net of tax |   | (58,970  | )       | (134,766 | )      | (244,851  | )      |
| Pro forma net income (loss) for SFAS No. 123            |   | $        | 546,537 |     | $      | 2,112,133 |   | $ | (1,300,029 | ) |

 

The effects of applying SFASNo. 123 in the pro forma disclosure may not be indicative of futureamounts as additional option grants in future years are anticipated.

 

**Risks and Uncertainties**

 

The Company’s business could beimpacted by federal and state legislative changes in the area of environmentalpolicy. As of December 31, 2002, management believes that the Company hasno significant risk of a near-term severe impact resulting from such changes.

 

**Fair Values of Financial Instruments**

 

The Company’s financialinstruments consist primarily of cash, trade receivables, trade payables, debt instruments,and interest rate swaps. The carrying values of cash, trade receivables, andtrade payables are considered to be representative of their respective fairvalues.  At December 31, 2002, thecarrying amount of the Company’s Senior Subordinated Notes due 2012, issued inJune 2002 (Senior Subordinated Notes), excluding $1,964,000 related to the fairvalue of the Company’s interest rate swaps, was $150,000,000.  The fair value of such debt was estimated at$143,438,000.  The fair value is basedon quoted market prices.  The carryingvalues of the Company’s revolving credit loan and other debt instrumentsapproximate their fair values as of December 31, 2002 and 2001, based oncurrent incremental borrowing rates for similar types of borrowing arrangements.The Company’s interest rate swaps are recorded at their fair values based onestimated cash flows calculated using interest rate yield curves as ofDecember 31, 2002.

 

**Concentrations of Credit Risk**

 

The Company provides services to commercial, industrial,municipal, and residential customers. Financial instruments that potentiallysubject the Company to concentrations of credit risks consist primarily ofaccounts receivable from these customers. The Company’s accounts receivable arerecorded when billed or accrued and represent claims against third parties thatwill be settled in cash.  Credit risk onaccounts receivable is minimized as a result of the large and diverse nature ofthe Company’s customer base. The Company performs ongoing credit evaluations ofits customers, but does not require collateral to support customer receivables.The carrying value of the Company’s receivables, net of the allowance fordoubtful accounts, represents their estimated net realizable value.  The Company estimates, and adjusts asnecessary, its allowance for doubtful accounts based on various factorsincluding the credit risk of specific customers, type of customer such asmunicipal or non-municipal, age of outstanding receivables, historicalcollection trends, existing economic conditions and other information. Past-due

 

F-15

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receivable balances are written-off when the Company’s internalcollection efforts have been unsuccessful in collecting the amount due.  Credit losses have been within management’sexpectations.

 

Following is a summary of the Company’s allowance fordoubtful accounts for fiscal 2002, 2001 and 2000:

 
|                                    |   | **Year Ended December 31,** |    |
|-----------------------------------------|--------|-----------------------------|---------|
|                                    |   | **2002**                    |    | **2001** |   | **2000** |   |
| Allowance for doubtful accounts         |   |                        |    |   |   |   |   |
| Balance at beginning of year            |   | $                           | 939,000 |   | $ | 1,293,000 |   | $ | 3,340,000 |   |
| Additions charged to income             |   | 962,000                     |    | 1,234,000 |   | 1,836,000 |   |
| Additions from acquisitions             |   | 225,000                     |    | 50,000 |   | 100,000 |   |
| Balances written off, net of recoveries |   | (1,185,000                  | )       | (1,638,000 | ) | (3,983,000 | ) |
| Balance at end of year                  |   | $                           | 941,000 |   | $ | 939,000 |   | $ | 1,293,000 |   |

 

One customer accounted for approximately 14%, 15% and6% of the Company’s services revenue for the periods ending December 31,2002, 2001 and 2000, respectively. At December 31, 2002 and 2001, thissame customer accounted for approximately 27% and 33%, respectively, ofaccounts receivable.

 

**Derivative Financial Instruments**

 

From time to time, the Companyuses derivatives to manage interest rate risk. The Company’s policy is to usederivatives for risk management purposes only, which includes maintaining theratio between the Company’s fixed and floating rate debt obligations thatmanagement deems appropriate, and prohibits entering into such contracts fortrading purposes. To minimize credit risk, the Company enters into derivativesonly with counterparties (primarily financial institutions) which havesubstantial financial resources. The amount of gains or losses from the use ofderivative financial instruments has not been, and is not expected to be,material to the Company’s financial statements.

 

In June 1998, the FASBissued SFAS No. 133, Accounting for Derivatives and Hedging Activities,which was amended by SFAS No. 138, Accounting for Certain DerivativeInstruments and Certain Hedging Activities (an Amendment of FASB Statement133), (collectively SFAS No. 133). SFAS No. 133 establishesaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in other contracts, and for hedgingactivities.

 

SFAS No. 133 requires theCompany to recognize all derivatives on the balance sheet at fair value.Derivatives that are not hedges must be adjusted to fair value through income.If the derivative is a hedge, depending on the nature of the hedge, changes inthe fair value of derivatives will either be offset against the change in fairvalue of the hedged assets, liabilities, or firm commitments through earningsor recognized in other comprehensive income until the hedged item is recognizedin earnings. The ineffective portion of a derivative’s change in fair value isimmediately recognized in earnings.

 

The Company adopted SFASNo. 133 effective January 1, 2001. The Company has evaluated itsderivative instruments, consisting solely of two interest rate swaps as ofDecember 31, 2002 effective through June 2012 and believes these instrumentsqualify for hedge accounting pursuant to SFAS No. 133.  Because the relevant terms of the interestrate swaps and the specific cash flows related to the debts they have beendesignated to hedge are virtually identical, there was no materialineffectiveness required to be 

 

F-16

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recognized in earnings. In addition, there are nocomponents of the derivative instruments’ gain or loss that have been excludedfrom the assessment of hedge effectiveness. The fair value of the Company’sinterest rate swaps was approximately $1,964,000 at December 31, 2002 and hasbeen included in the carrying amount of the Senior Subordinated Notes and otherassets in the consolidated balance sheet.

 

**Reclassifications**

 

Certain reclassifications havebeen made in prior years’ financial statements to conform to the 2002presentation.

 

**3. Acquisitions**

 

All acquisitions were accountedfor as purchases and, accordingly, only the operations of the acquiredcompanies since the acquisition dates are included in the accompanyingconsolidated financial statements.

 

**2002**

 

During the year, the Company acquired the hauling anddisposal assets of 17 waste management companies and real estate associatedwith planned landfill development and expansions.  The total purchase price of the 17 waste management companies andreal estate was approximately $47,336,000 consisting of cash and liabilitiesassumed.  The Company recordedapproximately $20,753,000 of goodwill, of which approximately $5,291,000 isexpected to be deductible for tax purposes, and approximately $5,359,000 ofamortizing intangible assets related to the acquisition of the 17 wastemanagement companies.  The amortizingintangible assets consist of $2,907,000****of customer lists with a three to eightyear amortization period, $1,901,000 of non-compete agreements with a two tofive year 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 contain items withthe potential for the Company to pay contingent purchase price upon theachievement of specific criteria, including specific monthly revenue levels forhauling assets and specific average daily volume levels at the landfills.  At December 31, 2002, the Company hasaccrued $2,370,000 of additional contingent purchase price payments as paymentof such amounts is considered probable. These payments are expected to be made during 2003.  An additional $11,000,000 of contingentpurchase price payments have not been accrued as of December 31, 2002 as theoccurrence of the specific criteria which would give rise to such payments isnot considered probable.  These paymentsrelate to volume levels at specific landfills and could occur anytime duringthe remaining operating life of the specific landfills.

 

The allocation of the purchase price for certainacquisitions closed during the current period are preliminary and will befinalized upon completion of valuations of certain assets and liabilities,which the Company expects to occur by March 31, 2003.  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.

 

F-17

----

 

 

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, 2002:

 
|             |   | **For the year  ended****December 31,** |        |
|------------------|--------|-----------------------------------------|-------------|
|             |   | **2002**                                |        | **2001** |   |
| Services revenue |   | $                                       | 224,934,000 |   | $ | 207,141,000 |   |
| Net income       |   | $                                       | 109,000     |   | $ | 414,000 |   |

 

Theunaudited pro forma results do not purport to be indicative of the results ofoperations which actually would have resulted had the acquisition occurred onJanuary 1, 2001, nor are they necessarily indicative of future operatingresults.

 

**2001**

 

InJune 2001, the Company acquired the assets of Capital CityRoll-Offs, Inc. (Capital). The approximate total purchase price of Capitalwas $1,644,000 consisting of cash and liabilities assumed.

 

Thefollowing unaudited pro forma results of operations assume that the Company’sacquisition of Capital, accounted for using the purchase method of accounting,occurred as of January 1, 2000:

 
|              |   | **Year ended December 31** |        |
|-------------------|--------|---------------------------------|-------------|
|              |   | **2001**                        |        | **2000** |   |
| Services revenue  |   | $                               | 186,402,079 |   | $ | 141,054,972 |   |
| Net income (loss) |   | $                               | 2,300,564   |   | $ | (965,449 | ) |

 

Theunaudited pro forma results do not purport to be indicative of the results ofoperations which actually would have resulted had the acquisition occurred onJanuary 1, 2000, nor are they necessarily indicative of future operatingresults.

 

Duringthe year, the Company acquired the assets of 15 other waste managementcompanies. The approximate total purchase price of the 15 waste managementcompanies was $10,451,000, consisting of cash and liabilities assumed.

 

**2000**

 

In November, the Company simultaneously purchased theassets of Omega One Company, Omega One Waste, LLC (together, Omega) and certainassets from Waste Management, Inc. (WMI). The total purchase price of thecombined transaction consisted of approximately $38,575,000 in cash andliabilities assumed. Assets acquired from Omega included three haulingoperations in Louisiana. Assets acquired from WMI included one haulingoperation, one transfer station and the operating agreements for two municipalsolid waste (MSW) landfills, all of which are in Louisiana.

 

F-18

----

 

 

Thefollowing unaudited pro forma results of operations assume that the Company’sacquisitions of certain assets from Omega and WMI, accounted for using thepurchase method of accounting, occurred as of January 1, 2000:

 
|             |   | **Year ended December 31,** |        |
|------------------|--------|----------------------------------|-------------|
|             |   | **2000**                         |        |
| Services revenue |   | $                                | 155,983,750 |   |
| Net loss         |   | $                                | (3,862,890  | ) |

 

The unaudited pro forma results do not purport to beindicative of the results of operations which actually would have resulted hadthe acquisitions occurred on January 1, 2000, nor are they necessarilyindicative of future operating results.

 

Additionally,in 2000, the Company acquired the assets of nine other waste managementcompanies. The approximate total purchase price of the nine waste managementcompanies was $11,418,000, consisting of cash and liabilities assumed.

 

**4.  Landfill and Accrued Environmental Costs**

 

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

 
|                                      |   | **Final Closure/ Post-Closure   Costs** |       | **Environmental  Costs** |   | **Total** |   |
|-------------------------------------------|--------|-----------------------------------------|------------|--------------------------|--------|-----------|--------|
| Balance at December 31, 1999         |   | $                                       | 6,238,527  |                     | $      | 3,808,135 |   | $ | 10,046,662 |   |
| Additions charged to income               |   | 364,869                                 |       | —                   |   | 364,869   |   |
| Additions from acquisitions               |   | 2,835,958                               |       | —                   |   | 2,835,958 |   |
| Final closure/post-closure costs incurred |   | —                                  |       | —                   |   | —    |   |
| Waste relocation costs incurred           |   | —                                  |       | (675,969                 | )      | (675,969  | )      |
|                                      |   |                                    |       |                     |   |      |   |
| Balance at December 31, 2000         |   | $                                       | 9,439,354  |                     | $      | 3,132,166 |   | $ | 12,571,520 |   |
| Additions charged to income               |   | 465,779                                 |       | —                   |   | 465,779   |   |
| Additions from acquisitions               |   | 565,092                                 |       | —                   |   | 565,092   |   |
| Final closure/post-closure costs incurred |   | (80,987                                 | )          | —                   |   | (80,987   | )      |
| Waste relocation costs incurred           |   | —                                  |       | (921,247                 | )      | (921,247  | )      |
|                                      |   |                                    |       |                     |   |      |   |
| Balance at December 31, 2001         |   | $                                       | 10,389,238 |                     | $      | 2,210,919 |   | $ | 12,600,157 |   |
| Additions charged to income               |   | 358,487                                 |       | —                   |   | 358,487   |   |
| Additions from acquisitions               |   | 147,177                                 |       | —                   |   | 147,177   |   |
| Final closure/post-closure costs incurred |   | (41,760                                 | )          | —                   |   | (41,760   | )      |
| Waste relocation costs incurred           |   | —                                  |       | (524,743                 | )      | (524,743  | )      |
|                                      |   |                                    |       |                     |   |      |   |
| Balance at December 31, 2002         |   | $                                       | 10,853,142 |                     | $      | 1,686,176 |   | $ | 12,539,318 |   |

 

F-19

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**Life Cycle Accounting**

 

TheCompany uses life cycle accounting and the units-of-consumption method torecognize certain landfill costs. In life cycle accounting, all costs toacquire, construct, close and maintain a site during the post-closure periodare capitalized or accrued and charged to expense based upon the consumption ofcubic yards or tons of available airspace. Costs and airspace estimates aredeveloped annually by independent engineers together with the Company’s engineer.These estimates are used by the Company’s operating and accounting personnel toannually adjust the Company’s rates used to expense capitalized costs andaccrue closure and post-closure costs. Changes in these estimates primarilyrelate to changes in available airspace, inflation rates and applicableregulations. Changes in available airspace primarily include changes due to theaddition of airspace lying in expansion areas deemed probable to be permitted.

 

**Total Available Disposal Capacity**

 

Asof December 31, 2002, the Company owned or operated 12 MSW landfills andthree C&D landfills. Based on engineering estimates, the total availabledisposal capacity of 14 of such landfills is approximately 178,244,000 in-placecubic yards, which consists of approximately 100,859,000 in-place cubicyards of estimated permitted airspace and approximately 77,385,000 in-placecubic yards of estimated additional airspace deemed probable to bepermitted.  Additionally, the Companyoperates one landfill at which, pursuant to the terms of the operatingcontract, the Company is not responsible for construction, closure andpost-closure costs and, as a result, for which the Company prepares noengineering estimates.

 

**Probable to be Permitted Expansion Airspace**

 

Beforeairspace included in an expansion area is determined as probable to bepermitted and, therefore, included in the Company’s calculation of totalavailable disposal capacity, generally the following criteria must be met:

 

1.             The land associatedwith the expansion airspace is either owned by the Company or controlled by theCompany  pursuant to an option agreement;

 

2.             The Company iscommitted to supporting the expansion project financially and with appropriateresources;

 

3.             There are noidentified fatal flaws or impediments associated with the project, includingpolitical impediments;

 

4.             The expansion isattainable within a three to five year time frame;

 

5.             Progress is beingmade on the project

 

F-20

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Uponmeeting the Company’s expansion criteria, the rates used for each applicablelandfill to expense costs to acquire, construct, close and maintain a siteduring the post-closure period are adjusted to include probable to be permittedairspace and all additional costs to be capitalized or accrued associated withthe expansion airspace. Once a landfill meets the Company’s expansion criteria,management continuously monitors each site’s progress in obtaining theexpansion permit. If at any point it is determined that an expansion area nolonger meets the required criteria, the probable to be permitted airspace isremoved from the landfill’s total available capacity and the rates used at thelandfill to expense costs to acquire, construct, close and maintain a siteduring the post-closure period are adjusted accordingly. Additionally, thelandfill’s future operations will typically reflect lower profitability due tohigher amortization rates, final closure and post-closure rates, and expensesrelated to the removal of previously included expansion airspace. The landfillmay also become subject to impairment, which could be material to the resultsof operations of any individual reporting period.

 

**CapitalizedLandfill Costs**

 

Capitalizedlandfill costs include expenditures for land, operating agreements, permittingcosts, cell construction costs and environmental structures. Capitalizedpermitting and cell construction costs are limited to direct costs relating tothese activities, including legal, engineering and construction associated withexcavation, liners and site berms. Interest is capitalized on landfillconstruction projects while the assets are undergoing activities to ready themfor their intended use.  Capitalizedlandfill costs, excluding the estimated residual value of unpermitted land, aredepleted as airspace is consumed using the units-of-consumption method.      As of December 31, 2002, the Companyexpected to spend an estimated additional $394,577,000 on existing landfills,primarily related to cell construction and environmental structures, over theirexpected remaining lives.  This amountincludes approximately $100,900,000 related to future landfill capping eventswhich, under SFAS No. 143, effective as of January 1, 2003, will be accountedfor as asset retirement obligations.

 

**Closure andPost-Closure Costs**

 

Landfillsite closure and post-closure costs include estimated costs to be incurred forfinal closure of the landfills and estimated costs for providing requiredpost-closure monitoring and maintenance of landfills. These costs are accruedand charged to operations based upon consumed airspace in relation to totalavailable disposal capacity using the units-of-consumption method ofamortization. The Company estimates future cost requirements for final closureand post-closure monitoring and maintenance for its solid waste facilitiesbased on the technical standards of the Environmental Protection Agency’sSubtitle D regulations and applicable state and local regulations. Reviews ofthe future requirements for closure and post-closure monitoring and maintenancecosts for the Company’s operating landfills are performed by the Company’sengineer and independent engineers at least annually. These estimates do nottake into account discounts for the present value of total estimated costs. Thetotal estimated future payments related to final closure and post-closuremonitoring and maintenance was estimated to be approximately $40,144,000 as ofDecember 31, 2002.  The amount doesnot include approximately $100,900,000 related to future landfill cappingevents which, under SFAS No. 143, effective as of January 1, 2003, will beaccounted for as asset retirement obligations.

 

Anumber of the Company’s landfills were previously operated by other entities.Accordingly, the Company assessed and recorded a final closure and post-closureliability as of the date of the landfill acquisition based upon the estimatedtotal final closure and post-closure costs and the percentage of totalavailable disposal capacity utilized as of such date. Thereafter, thedifference between the final closure and

 

F-21

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post-closure costs accrued andthe total estimated final closure and post-closure costs to be incurred areaccrued and 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.

 

TheCompany pays annual premiums to obtain performance bonds underwritten by alarge insurance carrier, which support the Company’s financial assuranceobligations for its facilities’ closure and post-closure costs. These premiumsare expensed as incurred.

 

**5.  Long-TermDebt**

 

Long-termdebt consisted of the following at December 31:

 
|                                        |   | **2002**    |        | **2001**    |   |
|---------------------------------------------|--------|-------------|-------------|-------------|--------|
| Revolving credit loan                       |   | $           | 46,400,000  |        | $      | 90,850,000 |   |
| Term loan maturing August 31, 2006          |   | —      |        | 39,200,000  |   |
| Senior subordinated notes due June 15, 2012 |   | 151,964,430 |        | —      |   |
| Other                                       |   | 206,796     |        | 300,662     |   |
| Total long-term debt                        |   | 198,571,226 |        | 130,350,662 |   |
| Less current portion                        |   | 184,825     |        | 529,573     |   |
|                                        |   | $           | 198,386,401 |        | $      | 129,821,089 |   |

 

Scheduledmaturities of long-term debt are as follows:

 
| 2003       |   | $           | 184,825     |   |
|------------|--------|-------------|-------------|--------|
| 2004       |   | 46,421,971  |        |
| 2005       |   | —      |        |
| 2006       |   | —      |        |
| 2007       |   | —      |        |
| Thereafter |   | 151,964,430 |        |
|       |   | $           | 198,571,226 |   |

 

On June 12, 2002, the Company issued $150,000,000 of10.25% Senior Subordinated Notes due 2012 (Original Notes) in a privateplacement.  Interest is payablesemi-annually on June 15th and December 15th.  Under the terms of a registration rightsagreement entered into in connection with the offering of the Original Notes,the Company was required to file with the Securities and Exchange Commission(SEC), within 75 days after the date of issuance of the Original Notes, aregistration statement under the Securities Act of 1933, as amended, toregister new 10.25% Senior Subordinated Notes due 2012 (Exchange Notes) and tooffer to exchange the Exchange Notes for the Original Notes.  The net proceeds from the offering of theOriginal Notes were approximately $144,000,000, after deducting the initialpurchasers’ fees and other expenses of the offering.  The Company used $142,800,000 of these proceeds to repay amountsOriginal under the term loan and revolving credit loan portions of its seniorcredit facility.  Upon repayment of theterm loan portion of its senior credit facility, the Company expensedapproximately $586,000 of debt issue costs related to the term loan portion ofits senior 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.

 

F-22

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The Original 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.

 

The Company’s senior credit facility is provided by asyndicate of lenders led by Fleet National Bank, as administrative agent(“Fleet”) and Credit Suisse First Boston and Citicorp North America, Inc.,jointly as syndication agents, and included a $39,200,000 senior secured termloan and includes a $225,500,000 senior secured revolving loan, including amaximum of $30,000,000 underlying letters of credit.  During 2002, the Company fully prepaid theterm loan and is not permitted to reborrow any amounts thereunder. The Companyamended its senior credit facility during 2002 to, among other things, permitit to issue the Senior Subordinated Notes and to enter into certain of thecovenants in the indenture governing the Senior Subordinated Notes.  Subject to certain conditions, the Companymay request an increase in the revolving loan portion of the senior creditfacility of up to $13,300,000 such that the total revolving loan portion wouldequal $235,800,000. As of December 31, 2002, there was $46,400,000(excluding $8,889,000 underlying letters of credit) outstanding under therevolving loan portion of the senior credit facility and additional borrowingsof $37,820,000 were available under the revolving loan portion, plus a maximumof $21,111,000 underlying letters of credit. In order to borrow under the revolving loan portion of the senior creditfacility, the Company must satisfy customary conditions including maintainingcertain financial ratios.  If adefault under the indenture governing the Senior Subordinated Notes or theCompany's senior credit facility should occur, the holders of the SeniorSubordinated Notes or the lenders under the senior credit facility could electto declare all amounts borrowed to be immediately due and payable.  Furthermore, this could result in allamounts borrowed under other instruments, including the indenture governing theSenior Subordinated Notes or the senior credit facility, that contain cross-accelerationor cross-default provisions being declared immediately due and payable and thelenders could terminate all commitments thereunder.  The senior credit facility issecured by a pledge of the stock of the Company’s direct and indirectsubsidiaries and a lien on substantially all of the Company’s direct andindirect subsidiaries’ assets.

 

The senior credit facility permits borrowings atfloating interest rates based, at the Company’s option, on the designatedeurodollar interest rate, which generally approximates LIBOR, or the Fleet primerate, in each case, plus an applicable margin, and requires payment of anannual commitment fee based on the unused portion of the revolving loanportion.  As of December 31, 2002,the interest rate applicable to $39,700,000 outstanding under the revolvingloan portion of our senior credit facility was LIBOR plus 275 basis points, or4.4%, and the interest rate applicable to the balance of $6,700,000 outstandingthereunder was Fleet’s prime rate plus 75 basis points, or 5.0%.  The senior credit facility expires onAugust 31, 2004.

 

In August 2002, the Company entered into twointerest rate swap agreements, which are effective through June 15, 2012, withtwo financial institutions.  Under eachswap agreement, the fixed interest rate on $25,0000,000 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**

 

Theprovision for income taxes for each of the last three years consists of:

 
|     |   | **2002**  |      | **2001** |   | **2000** |   |
|----------|--------|-----------|-----------|----------|--------|----------|--------|
| Federal: |   |      |      |     |   |     |   |
| Current  |   | $         | —    |     | $      | —   |   | $ | — |   |
| Deferred |   | 3,026,884 |      | 376,611  |   | 128,367  |   |
| State:   |   |      |      |     |   |     |   |
| Current  |   | 439,923   |      | 294,609  |   | 31,510   |   |
| Deferred |   | 259,447   |      | 32,281   |   | 11,003   |   |
|     |   | $         | 3,726,254 |     | $      | 703,501  |   | $ | 170,880 |   |

 

AtDecember 31, 2002, the Company had a net operating loss carryforward ofapproximately $37,000,000, which is available to reduce future taxable incomeand will begin to expire in 2012.

 

TheCompany’s net operating loss carryforwards expire at specific future dates andutilization of certain carryforwards is limited to specific amounts each year.Due to the uncertain nature of their ultimate realization, the Company hasestablished a valuation allowance against these carryforward benefits and willrecognize benefits only as reassessment demonstrates they are more likely thannot to be realized. Realization is dependent upon future taxable earnings inspecific tax jurisdictions.  During 2002the valuation allowance increased due to a change in the estimated reversal oftemporary differences related to tax deductible goodwill.  The change in the estimated reversalresulted from the adoption of SFAS No. 142.  Also during 2002, the valuation was increased due to theCompany’s taxable loss during the fiscal year. During 2002, the valuation allowance was reduced by approximately$2,900,000 as a result of the recognition of deferred tax liabilities resultingfrom certain purchase business combinations.

 

Significantcomponents of the Company’s deferred income tax liabilities and assets as ofDecember 31 are as follows:

 
|                                  |   | **2002**   |       | **2001**   |   |
|---------------------------------------|--------|------------|------------|------------|--------|
|                                  |   |       |       |       |   |
| Deferred income tax liabilities:      |   |       |       |       |   |
| Depreciation and amortization         |   | $          | 21,255,764 |       | $      | 13,642,760 |   |
| Other                                 |   | —     |       | 266,456    |   |
| Total deferred income tax liabilities |   | 21,255,764 |       | 13,909,216 |   |
| Deferred income tax assets:           |   |       |       |       |   |
| Allowance for doubtful accounts       |   | 357,580    |       | 356,807    |   |
| Amortization                          |   | 362,213    |       | 338,346    |   |
| Other                                 |   | 634,624    |       | 55,220     |   |
| Net operating loss carryforward       |   | 14,087,575 |       | 12,468,743 |   |
| Valuation allowance                   |   | (106,637   | )          | (1,542,372 | )      |
| Total deferred income tax assets      |   | 15,335,355 |       | 11,676,744 |   |
| Net deferred income tax liability     |   | $          | 5,920,409  |       | $      | 2,232,472 |   |

 

F-24

----

 

 

Thefollowing is a reconciliation from the federal statutory income tax rate to theeffective income tax rate for 2001, 2000 and 1999:

 
|                                        |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Federal statutory income tax rate (benefit) |   | 34.0     | %      | 34.0     | %      | (34.0    | )%     |
| State income taxes, net of federal benefit  |   | 13.6     | %      | 10.0     | %      | 30.5     | %      |
| Change in valuation allowance               |   | 35.3     | %      | (25.6    | )%     | 2.4      | %      |
| Non-deductible amortization                 |   | —   |   | 4.4      | %      | 13.5     | %      |
| Other                                       |   | 3.1      | %      | 1.0      | %      | 6.9      | %      |
|                                        |   | 86.0     | %      | 23.8     | %      | 19.3     | %      |

 

**7.  Commitments and Contingencies**

 

TheCompany has operating lease agreements for service facilities, office space andequipment. Some of these lease agreements contain renewal clauses that allowthe Company, at its option, to extend the term of the leases for additionalperiods. At December 31, 2002, total future minimum payments under thenoncancelable operating leases with terms of one year or more consisted of:

 
|                         |   | **Operating  Leases** |      |
|------------------------------|--------|-----------------------|-----------|
| 2003                         |   | $                     | 2,084,000 |   |
| 2004                         |   | 1,535,000             |      |
| 2005                         |   | 1,088,000             |      |
| 2006                         |   | 728,000               |      |
| 2007                         |   | 639,000               |      |
| Thereafter                   |   | 1,303,000             |      |
| Total minimum lease payments |   | $                     | 7,377,000 |   |

 

Rentalexpense was $3,164,000, $2,989,000 and $2,466,000 during 2002, 2001 and 2000,respectively.

 

Incertain business combinations, the Company agrees to pay additional amounts tosellers contingent upon achievement by the acquired businesses of certainnegotiated goals, such as targeted revenue levels or targeted disposalvolumes.  Contingent payments, whenincurred, are recorded as purchase price adjustments or expense, asappropriate, based on the nature of each contingent payment.

 

TheCompany’s business activities are conducted in the context of a developing andchanging statutory and regulatory framework. Governmental regulation of thewaste management industry requires the Company to obtain and retain numerousgovernmental permits to conduct various aspects of its operations. Thesepermits are subject to revocation, modification or denial. The costs and othercapital expenditures, which may be required to obtain or retain the applicablepermits or comply with applicable regulations, could be significant. Anyrevocation, modification or denial of permits could have a material adverseeffect on the Company.

 

F-25

----

 

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,groundwater or surface water, and especiallydrinking water, including damage resulting from conditions existing prior tothe acquisition of such facilities by the Company. The Company may also besubject to liability for any off-site environmental contamination caused bypollutants or hazardous substances whose transportation, treatment or disposalwas arranged by the Company or its predecessors.

 

Anysubstantial liability for environmental damage incurred by the Company couldhave a material adverse effect on the Company’s financial condition, results ofoperations or cash flows. As of December 31, 2002, the Company was notaware of any such environmental liabilities.

 

Inthe normal course of its business and as a result of the extensive governmentalregulation of the solid waste industry, the Company is subject to variousjudicial and administrative proceedings involving federal, state or localagencies. In these proceedings, an agency may seek to impose fines on theCompany or to revoke or deny renewal of an operating permit held by theCompany. From time to time the Company may also be subject to actions broughtby citizens’ groups or adjacent landowners or residents in connection with thepermitting and licensing of landfills and transfer stations, or allegingenvironmental damage or violations of the permits and licenses pursuant towhich the Company operates.

 

Inaddition, the Company may become party to various claims and suits pending foralleged damages to persons and property, alleged violations of certain laws andalleged liabilities arising out of matters occurring during the normaloperation of the waste management business. However, as of December 31,2002, there were no proceedings or litigation involving the Company that theCompany believed would have a material adverse impact on its business,financial condition, results of operations or cash flows.

 

**8.  Redeemable Preferred Stock**

 

In2001, the Company issued 55,000 shares of Series D Convertible PreferredStock (Series D Preferred) at $1,000 per share. At the issuance, theCompany paid the holders of the Series D Preferred a 3% fee, which wasaccounted for as a reduction of the carrying value of the Series DPreferred. The Series D Preferred was issued with a beneficial conversionfeature. The amount of the beneficial conversion feature was $1,650,000, whichrepresents the excess of fair value of common stock that the holder wouldreceive at conversion over the proceeds received. As the Series DPreferred is convertible at any time at the option of the holder into CommonStock of the Company, the discount related to the beneficial conversion featurewas amortized upon issuance. The difference between the redemption value andcarrying value as of December 31, 2002, of $2,619,877 will be recognizedupon the determination that redemption is probable. As of December 31,2002, redemption was considered uncertain as redemption is contingent upon theoccurrence of a Liquidation, Sale Transaction or Asset Sale (LSA Event).

 

Theholders of the Series D Preferred, subject to certain regulatoryrequirements applicable to such holders, along with the Series A, B and CPreferred holders are entitled to vote separately as a class (PreferredHolders) on each matter required to be submitted to a vote of holders of CommonStock. In 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

 

F-26

----

 

additionalshares of preferred stock or authorizing and issuing capital stock, must obtainthe approval of not less than 75% of the Preferred Holders.

 

TheSeries D Preferred shall be entitled to receive, when and if declared bythe Board of Directors, a dividend at a rate of 10% per annum, or $100 pershare. Such dividends accrue and compound semiannually on a cumulative basiswhether or not they have been declared. During 2002 and 2001, the carryingamount of the Series D Preferred was increased for accumulated and unpaiddividends of $5,789,499 and $1,482,917 in the aggregate, or $105.26 and $26.96per share, respectively.

 

TheSeries D Preferred ranks senior to all other classes of stock with respectto the 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 dividends willbe redeemed into cash. The Series D Preferred shares are convertible intothe 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%. TheSeries D Preferred is convertible at any time into Common Stock of theCompany at $80 per Common Share at the option of the holder.

 

In1999, the Company issued 55,000 shares of Series C Convertible PreferredStock (Series C Preferred) at $1,000 per share. At the issuance, theCompany paid the holders of the Series C Preferred a 3% fee, which wasaccounted for as a reduction of the carrying value of the Series CPreferred. The difference between the redemption value and carrying value as ofDecember 31, 2002, of $2,042,461 will be recognized upon the determinationthat redemption is probable. As of December 31, 2002, redemption isconsidered uncertain as redemption is contingent upon the occurrence of an LSAEvent.

 

TheSeries C Preferred shall be entitled to receive, when and if declared by theBoard of Directors, a dividend at a rate of 15% per annum, or $150 per share.Such dividends accrue and compound semiannually on a cumulative basis whetheror not they have been declared. During 2002, 2001 and 2000 the carrying amountof the Series C Preferred was increased for accumulated and unpaiddividends of $12,288,090, $10,014,264 and $9,820,349 in the aggregate, or$223.42, $182.08 and $178.55 per share, respectively.

 

TheSeries C Preferred ranks junior to the Series D Preferred and seniorto all other classes of stock with respect to the payment of dividends anddistributions of the applicable liquidation preferences. Upon the occurrence ofan LSA Event, the holders of the Series C Preferred are entitled to aLiquidation Preference equal to $1,000 per share plus all accrued and unpaiddividends for each share of the Series C Preferred, if any, before anydistribution of assets made to the holders of Series A and B PreferredStock and Common Stock of the Company. In the specific event of a Sales Transaction,it is the right of each holder of the Series C preferred to redeem intocash its Series C

 

F-27

----

 

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 IPO (as defined in the Company’s Certificate ofIncorporation) only if the Series C Preferred calculated annual return isat least 25% annually. The Series C Preferred is convertible at any timealong with all accrued and unpaid dividends into Common Stock of the Company at$150 per Common Share at the option of the holder.

 

TheCompany has 32,000 shares of Series A Convertible Preferred Stock(Series A Preferred) and 20,100 shares of Series B ConvertiblePreferred Stock (Series B Preferred), both issued at $1,250 per share.Upon the occurrence of an LSA Event of the Company, the holders of theSeries A and B Preferred are entitled to a Liquidation Preference equal tothe $1,250 per share plus all declared and unpaid dividends, if any, on eachshare before any distribution of assets made to the holders of Common Stock ofthe Company. So long as shares of Series D Preferred or Series CPreferred are outstanding, the Company may not declare or pay any dividends onshares of Series A Preferred or Series B Preferred. Additionally,holders of Series A and B Preferred are entitled to receive dividends onlyas dividends are declared and paid on the common stock. The difference betweenthe redemption value and carrying value as of December 31, 2002 of$507,727 will be recognized upon the determination that redemption is probable.As of December 31, 2002, redemption is considered uncertain as redemptionis contingent upon the occurrence of an LSA Event.

 

TheSeries A and B Preferred rank junior to the Series D and C Preferred,equally as to each other and senior to all other classes of stock with respectto the payment of dividends and distributions of the applicable liquidationpreferences. In the event of a Sales Transaction, Asset Sale or IPO (aTriggering Event) and the calculated internal rate of return, calculated inaccordance with the formula provided in our Certificate of Incorporation, withrespect to the Series A and B Preferred is less than 25%, thethen-applicable conversion price per share will be reduced, effective as of thedate of such triggering event, to the higher of (a) $80 per share (subjectto adjustment in certain circumstances) or (b) a price per share that,after giving effect to such reduction, will yield an internal rate of return(calculated in accordance with the same formula) of 25%. In the specific eventof a Sales Transaction, it is the right of the each holder of the Series Aand B Preferred to redeem into cash its shares of Series A and BPreferred, along with all accrued and unpaid dividends. In the specific eventof an Asset Sale of the Company, the Series A and B Preferred shares alongwith all accrued and unpaid dividends will be redeemed into cash. The sharesare convertible into shares of Common Stock of the Company at the Company’soption upon an IPO. The shares are convertible at any time into Common Stock ofthe Company at $125 per Common Share at the option of the holder.

 

TheCompany’s Series A, B, C and D Preferred is considered redeemable due tocertain terms of the Preferred Shares and due to a majority of members of theBoard of Directors being holders of Preferred Shares. Certain events, asdefined, can trigger redemption and the occurrence of such events iseffectively controlled by the holders of the Preferred Shares.

 

**9.  Stockholders’ Equity**

 

In September 2001,the Company completed a 1-for-10 reverse stock applicable to all authorized andoutstanding shares of common stock.

 

F-28

----

 

TheCompany’s Certificate of Incorporation authorizes 4,050,000 shares of commonstock consisting of 3,600,000 shares of Class A voting common stock and450,000 shares of Class B convertible non-voting common stock. Holders ofClass A common stock are entitled to one vote per share for each shareheld of record on all matters submitted to a vote of stockholders. Except asrequired by law, holders of Class B common stock are not entitled to vote.At any time, holders of the Class B common stock can convert, on a 1-for-1basis, such stock into shares of Class A common stock.

 

InJanuary 1999, the Company adopted the 1999 Stock Option Plan (the Plan).Options granted under the Plan are nonqualified stock options (options). ThePlan provides for the granting of options to key employees, certain consultantsand advisors who perform services for the Company, and members of the Board ofDirectors of the Company. Under the Plan, the Company is authorized to issue upto 200,000 shares of the Company’s Class A common stock.

 

Optionsissued under the Plan expire 10 years from date of grant and become fullyvested and exercisable five to eight years from date of grant. All grantedoptions become fully vested and exercisable upon a change in control of theCompany.  In addition, upon theoccurrence of an initial public offering of the Company’s common stock, theoptions vest on an accelerated basis from immediately to on a pro-rata basis upto four years from the date of grant.

 

Thefollowing table, adjusted for all periods to reflect the 1-for-10 reverse stocksplit, summarizes activity of the Company’s stock options:

 
| ** **                                                                                    |   | **Shares**         |   | **Weighted****AverageExercise Price** |   | **Weighted******

**Average****Fair Value at theDate of Grant** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------------|--------|---------------------------------------|--------|-----------------------------------------------------------------|--------|
| Options outstanding at December 31, 1999                                                 |   | 120,962            |   | $                                     | 100.00 |                                                            |   |   |
| Granted                                                                                       |   | 12,050             |   | $                                     | 125.00 |                                                            | $      | 17.70 |   |
| Canceled                                                                                      |   | (4,850             | )      | $                                     | 104.40 |                                                            |   |   |
| 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  |                                                            |   |   |
|                                                                                          |   |               |   |                                  |   |                                                            |   |
| Weighted average remaining contractual life of options  outstanding at December 31, 2002 |   | 9.3 years          |   |                                  |   |                                                            |   |
| The range of exercise prices of options outstanding at  December 31, 2002                |   | $80.00  to $100.00 |   |                                  |
|                                                                                               |        |                    |        |                                       |        |                                                                 |        |  |  |  |  |

 

Noshares were exercisable at December 31, 2002, 2001 or 2000.

 

F-29

----

 

Thefair value of each option is estimated on the date of grant using the Black-Scholesoption-pricing model with the following assumption:

 
|                            |   | **2002**   |   | **2001**   |   |
|---------------------------------|--------|------------|--------|------------|--------|
| Expected dividend yield         |   | 0          | %      | 0          | %      |
| Expected stock price volatility |   | 1          | %      | 1          | %      |
| Risk free interest rate         |   | 1.61       | %      | 4.50       | %      |
| Expected life of options        |   | 2.42 years |   | 3.00 years |   |

 

Ofthe 3,795,020 shares of Common Stock authorized but unissued as ofDecember 31, 2002, the following shares were reserved for issuance:

 
| Conversion of Series A |   | 500,000   |   |
|------------------------|--------|-----------|--------|
| Conversion of Series B |   | 314,063   |   |
| Conversion of Series C |   | 608,318   |   |
| Conversion of Series D |   | 778,405   |   |
| Common stock options   |   | 189,812   |   |
|                   |   | 2,390,598 |   |

 

Upon termination, a certain employee of the Companycan require the Company to purchase that employee’s outstanding stock at fairvalue as determined in good faith by the Board of Directors of the Company.

 

F-30

----

 

**10.  Segment Reporting**

 

The Company’s two geographic regions are the Company’sreportable segments. The segments provide integrated waste management servicesconsisting of collection, transfer, disposal, and recycling services tocommercial, industrial, municipal, and residential customers. Summarizedfinancial information concerning the Company’s reportable segments for the respective years ended December 31 isshown in the following table:

 
|                                     |   | **South****Region** |        | **Northeast****Region** |   | **Corporate****Functions** |   | **Total**   |   |
|------------------------------------------|--------|---------------------|-------------|-------------------------|--------|----------------------------|--------|-------------|--------|
| **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, net                            |   | 80,781,112          |        | 47,628,196              |   | —                     |   | 128,409,308 |   |
| Total assets                             |   | 262,673,930         |        | 151,673,046             |   | 16,505,040                 |   | 430,852,016 |   |
| **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, net                            |   | 60,027,987          |        | 47,628,196              |   | —                     |   | 107,656,183 |   |
| Total assets                             |   | 196,373,949         |        | 149,838,183             |   | 8,095,944                  |   | 354,308,076 |   |

 

F-31

----

 
|                                     |   | **South****Region** |       | **Northeast****Region** |   | **Corporate****Functions** |   | **Total**   |   |
|------------------------------------------|--------|---------------------|------------|-------------------------|--------|----------------------------|--------|-------------|--------|
|                                     |   |                |       |                    |   |                       |   |        |   |
| **Year ended December 31, 2000**    |   |                |       |                    |   |                       |   |        |   |
| Outside revenues                         |   |                |       |                    |   |                       |   |        |   |
| Collection                               |   | $                   | 69,439,543 |                    | $      | 28,079,093                 |   | $           | — |   | $ | 97,518,636 |   |
| Transfer                                 |   | 686,613             |       | 23,860,135              |   | —                     |   | 24,546,748  |   |
| Disposal                                 |   | 3,306,140           |       | 6,141,699               |   | —                     |   | 9,447,839   |   |
| Recycling                                |   | 1,594,466           |       | 4,967,562               |   | —                     |   | 6,562,028   |   |
| Other                                    |   | 1,526,136           |       | 32,148                  |   | —                     |   | 1,558,284   |   |
| Total outside revenues                   |   | 76,552,898          |       | 63,080,637              |   | —                     |   | 139,633,535 |   |
| Income (loss) from operations            |   | 9,861,352           |       | 4,967,314               |   | (4,384,259                 | )      | 10,444,407  |   |
| Depreciation, depletion and amortization |   | 11,466,888          |       | 8,302,689               |   | 316,638                    |   | 20,086,215  |   |
| Purchases of property and equipment      |   | 14,993,131          |       | 11,066,980              |   | 857,100                    |   | 26,917,211  |   |
| Acquisitions of waste operations         |   | 48,653,365          |       | 81,732                  |   | —                     |   | 48,735,097  |   |
| Goodwill acquired                        |   | 24,672,495          |       | —                  |   | —                     |   | 24,672,495  |   |
| Goodwill, net                            |   | 55,392,730          |       | 50,831,234              |   | —                     |   | 106,223,964 |   |
| Total assets                             |   | 169,376,059         |       | 147,867,945             |   | 6,995,342                  |   | 324,239,346 |   |
|                                          |        |                     |            |                         |        |                            |        |             |        |  |  |  |  |

 

**11.  Employee Benefit Plans**

 

TheCompany has a defined contribution 401(k) savings plan that coverssubstantially all non-union employees meeting certain minimum eligibilityrequirements. Participating employees can elect to defer a portion of theircompensation and contribute it to the plan on a pretax basis. The Company alsomatches certain amounts, as defined.

 

Contributionsmade by the Company under the plan were $483,000, $390,000 and $231,000 for theyears ended December 31, 2002, 2001 and 2000, respectively.

 

**12.  Related Parties**

 

IESIpaid a company affiliated with a director of the Company approximately $250,000during both 2002 and 2001 for expenses related to financing transactions.

 

During 2002, IESI paid a company affiliated with adirector of the Company $1,000,000 as a deposit for the purchase of anairplane.  The transaction is expectedto be finalized in April 2003 for a total purchase price of approximately$1,200,000.

 

F-32

----

 

**13.  Quarterly Financial Data (Unaudited)**

 

Historically,the Company’s quarterly operating results have fluctuated.  The fluctuations may be caused by manyfactors, including revenue mix and general economic conditions.  The Company’s revenues and income fromoperations typically reflect seasonal patterns.  The Company’s operating revenues tend to be somewhat lower in thewinter months, primarily due to the lower volume of construction and demolitionwaste.  The volumes of industrial andresidential waste in certain regions where the Company operates also tend todecrease during the winter months.  TheCompany’s first and fourth quarter results of operations typically reflect thisseasonality.

 

Thefollowing table summarizes the unaudited quarterly results of operations for2002 and 2001:

 
|                   |   | **First****Quarter** |       | **Second****Quarter** |   | **Third****Quarter (b)** |   | **Fourth****Quarter** |       |
|------------------------|--------|----------------------|------------|-----------------------|--------|--------------------------|--------|-----------------------|------------|
| **2002 (a)**           |   |                 |       |                  |   |                     |   |                  |       |
| 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 | ) |

 
|                   |   | **First****Quarter** |       | **Second****Quarter** |   | **Third****Quarter (c)** |   | **Fourth****Quarter** |       |
|------------------------|--------|----------------------|------------|-----------------------|--------|--------------------------|--------|-----------------------|------------|
| **2001**               |   |                 |       |                  |   |                     |   |                  |       |
| Services revenues      |   | $                    | 42,520,140 |                  | $      | 46,611,288               |   | $                     | 48,403,250 |   | $ | 48,155,631 |   |
| Income from operations |   | 2,899,826            |       | 4,923,243             |   | 4,597,396                |   | 3,668,803             |       |
| Net income (loss)      |   | $                    | (943,841   | )                     | $      | 1,210,791                |   | $                     | 1,397,397  |   | $ | 582,552 |   |

 

----

(a)   SFAS No. 142 required that amortization ofall goodwill cease on January 1, 2002. See Note 2 for further discussion.

 

(b)   Included in the third quarter of 2002 incomefrom operations are pre-tax charges totaling $980,000, of which $828,000related to the write-off of certain landfill and transfer station developmentprojects and $152,000 related to the write-off of legal, engineering and otherprofessional fees incurred in connection with aborted acquisitions.

 

(c)   Included in the third quarter of 2001 incomefrom operations are pre-tax charges totaling $1,570,000, of which $1,200,000related to the write-off of certain landfill and transfer station developmentprojects and $370,000 related to the write-off of legal and accounting feesincurred in connection with aborted financing transactions.

 

F-33

----

 

 

**Exhibit Index**

 
| **Exhibit****Number** |   | **Document Name**                                                                                                                                                                                                                                                                                                                                             |
|-----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |   |                                                                                                                                                                                                                                                                                                                                                          |
| 3.1                   |   | Fourth  Amended and Restated Certificate of Incorporation of IESI Corporation (the  “Company”), as amended.  (Incorporated  by reference to Exhibit 3.1 to our Registration Statement on Form S-4 (File  No. 333-98657).)                                                                                                                      |
| 3.2                   |   | Third  Amended and Restated By-Laws of the Company.   (Incorporated by reference to Exhibit 3.2 to our Registration  Statement on Form S-4 (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                   |   | Registration  Rights 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 4.3  to our Registration Statement on Form S-4 (File No. 333-98657).) |
| 4.4                   |   | 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).)                  |
| 4.5                   |   | 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).)             |
| 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 September 10, 2001, among the Company and the  purchasers named on the signature pages thereto.  (Incorporated by reference to Exhibit 10.2 to our Registration  Statement on Form S-4 (File No. 333-98657).)                                                                                                     |
| 10.3                  |   | Stock  Purchase Agreement, dated as of December 24, 2001, between the Company and  Indosuez Capital Partners 2001, L.P.   (Incorporated by reference to Exhibit 10.3 to our Registration  Statement on Form S-4 (File No. 333-98657).)                                                                                                                   |
| 10.4                  |   | 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).)                                                                                    |
| 10.5                  |   | Subordinate  Registration Rights Agreement, dated September 10, 2001, among the Company  and the stockholders named on the signature pages thereto.  (Incorporated by reference to Exhibit 10.5  to our Registration Statement on Form S-4 (File No. 333-98657).)                                                                                        |
| 10.6                  |   | Amended  and Restated Stockholders’ Agreement, dated September 10, 2001, among the  Company, the stockholders named on the signature pages thereto, the warrant  holder named therein and certain other parties.  (Incorporated by reference to Exhibit 10.6 to our Registration  Statement on Form S-4 (File No. 333-98657).)                      |
| 10.7                  |   | Fourth  Amended and Restated Revolving Credit and Term Loan Agreement, dated as of                                                                                                                                                                                                                                                                            |

 

 

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| **Exhibit****Number** |   | **Document Name**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                  |   | September  14, 2001, 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 documentation  agent, Credit Suisse First Boston and Citicorp North America, Inc., as  syndication agents, and with Fleet Securities, Inc. as arranger (the “Credit  Agreement”).  (Incorporated by  reference to Exhibit 10.7 to our Registration Statement on Form S-4 (File No.  333-98657).) |
| 10.8                  |   | First  Amendment to the Credit Agreement, dated as of May 22, 2002, among the  Company, the subsidiaries thereof named therein, Fleet National Bank, as  administrative agent, LaSalle Bank National Association, as documentation  agent, and Credit Suisse First Boston and Citicorp North America, Inc., as  syndication agents.  (Incorporated by  reference to Exhibit 10.8 to our Registration Statement on Form S-4 (File No.  333-98657).)                                                                                        |
| 10.9                  |   | 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).)                                                                                                                                                               |
| 10.10                 |   | Department  of Sanitation, City of New York, Service and Supply Agreements, each dated  July 31, 2001, 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 August 4, 2000.  (Incorporated by reference to Exhibit  10.10 to our Registration Statement on Form S-4 (File No. 333-98657).)                                                                                                                |
| 10.11                 |   | Employment  Agreement, dated as of December 1, 2001, by and between the Company and  Charles F. Flood.  (Incorporated by  reference to Exhibit 10.11 to our Registration Statement on Form S-4 (File  No. 333-98657).)+                                                                                                                                                                                                                                                                                                                   |
| 10.12                 |   | Employment  Agreement, dated as of December 1, 2001, by and between the Company and  Thomas J. Cowee.  (Incorporated by reference  to Exhibit 10.12 to our Registration Statement on Form S-4 (File No.  333-98657).)+                                                                                                                                                                                                                                                                                                                    |
| 10.13                 |   | Severance  Agreement, dated as of March 7, 2001, by and between the Company and Thomas  Brown.  (Incorporated by reference to  Exhibit 10.13 to our Registration Statement on Form S-4 (File No.  333-98657).)+                                                                                                                                                                                                                                                                                                                           |
| 10.14                 |   | Severance  Agreement, dated as of June 29, 2001, by and between the Company and  Christopher V. Della Pietra.   (Incorporated by reference to Exhibit 10.14 to our Registration  Statement on Form S-4 (File No. 333-98657).)+                                                                                                                                                                                                                                                                                                            |
| 10.15                 |   | Severance  Agreement, dated as of January 13, 1999, by and between the Company and Larry  McGee.  (Incorporated by reference to  Exhibit 10.15 to our Registration Statement on Form S-4 (File No.  333-98657).)+                                                                                                                                                                                                                                                                                                                         |
| 10.16                 |   | Severance  Agreement, dated as of March 7, 2001, by and between the Company and Jeffrey  Peckham.  (Incorporated by reference  to Exhibit 10.16 to our Registration Statement on Form S-4 (File No.  333-98657).)+                                                                                                                                                                                                                                                                                                                        |
| 10.17                 |   | 1999  Stock Option Plan.+*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.18                 |   | Form  of Stock Option Agreement under the 1999 Stock Option Plan.  (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.  (Incorporated by  reference to Exhibit 21.1 to our Registration Statement on Form S-4 (File No.  333-98657).)                                                                                                                                                                                                                                                                                                                                                                                              |
| 99.1                  |   | Certification  of Charles F. Flood, Chief Executive Officer, pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                                                                                                                       |

 

 

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| **Exhibit****Number** |   | **Document Name**                                                                                                                                                       |
|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 99.2                  |   | Certification  of Thomas J. Cowee, Chief Financial Officer, pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* |

 

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*  Filed herewith.

+  Management contract or compensatory plan orarrangement.

 

 

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