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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

(Mark One)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). o

The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing price of the common stock on June 30, 2002, on the NASDAQ National Market System was approximately $33,319,274 as of such date. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status may not be conclusive for other purposes.

As of March 28, 2003 the registrant had outstanding 13,438,657 shares of common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated herein by reference into Part III.

Index to Financial Statements

NOTE RELATING TO FORWARD-LOOKING STATEMENTS

Statements in this Annual Report on Form 10-K that are not descriptions of historical facts are forward-looking statements that are subject to risks and uncertainties. These statements and other statements made elsewhere by us or our representatives, which are identified or qualified by words such as “likely,” “will,” “suggests,” “expects,” “may,” “believe,” “could,” “should,” “would,” “anticipates,” “plans” or similar expressions, are based on a number of assumptions. Actual events or results could differ materially from those currently anticipated due to a number of factors, including those set forth herein and in our other SEC filings and including, in particular: our ability to manage growth; the availability and integration of acquisition targets; weather conditions; competition; geographic concentration; and government regulation. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this report and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

PART I

INTRODUCTION

          Our website address is www.waste-ind.com.  We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

          Waste Industries USA, Inc. is a regional, vertically integrated solid waste services company.  We provide solid waste collection, transfer, disposal and recycling services to commercial, industrial and residential customer locations in North Carolina, South Carolina, Virginia, Tennessee, Mississippi, Alabama, Georgia and Florida.  Our principal operations as of December 31, 2002 consisted of 40 collection operations, 26 transfer stations, approximately 100 county convenience drop-off centers, eight recycling facilities and 11 landfills, serving more than 500,000 municipal, residential, commercial and industrial service locations.

          Members of the senior management team founded our company in 1970 and are recognized for their leadership roles throughout the solid waste management industry and trade organizations.  Our management team collectively has over 204 years of experience in the solid waste industry and over 115 years with our company.

          In May 2002, we changed our name to Waste Industries USA, Inc. from Waste Holdings, Inc.  Waste Holdings was formed in September 2000 as part of our company’s holding company reorganization, which was completed on March 31, 2001.

Industry Overview

          In recent years, the solid waste collection and disposal industry has undergone a period of significant consolidation and integration.  We believe that this consolidation and integration has been caused primarily by:

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          Despite the considerable consolidation and integration that has occurred in the solid waste industry in recent years, we believe, based on our experience in the industry, that the industry remains primarily regional in nature due to the localized nature of collecting and disposing of waste and highly fragmented due to the many small competitors in many markets.

          The increasingly stringent industry regulations, such as the Subtitle D regulations, have resulted in rising operating and capital costs and have caused consolidation and acquisition activities to accelerate in the solid waste collection and disposal industry. Many of the smaller industry participants have found these costs difficult to bear and have decided to either close their operations or sell them to larger operators. In addition, Subtitle D requires more stringent engineering of solid waste landfills including liners, leachate collection and monitoring and gas collection and monitoring. These ongoing costs are coupled with increased financial reserves from solid waste landfill operators for closure and post-closure monitoring. As a result, we believe, based on our market research, the number of solid waste landfills is declining while the size of solid waste landfills is increasing.

          In many markets in which we operate or intend to expand, competitive pressures are forcing operators to become more efficient by establishing an integrated network of solid waste collection operations and transfer stations, through which we secure solid waste streams for disposal. Operators have adopted a variety of disposal strategies, including owning landfills, establishing strategic relationships to secure access to landfills, or by otherwise capturing significant waste stream volumes to gain leverage in negotiating lower landfill fees and securing long-term contracts with high capacity landfills on most favored pricing status terms.

          In the Southeastern U.S. solid waste market, which is our market, city and county governments have historically provided a variety of solid waste services using their own personnel. Over time, many municipalities have opted to privatize or contract out their collection and disposal services to the private sector. Landfills, transfer stations and incinerators located in our market area are predominantly municipally owned. The Southeastern market is currently undergoing significant economic and population growth. Certain states in the Southeastern U.S. exceed the national average in terms of economic growth as measured by gains in jobs, personal income and population.

          There is an increasing trend at the state and local levels to encourage waste reduction at the source and to prohibit the disposal of certain types of wastes, such as yard wastes and recyclable materials, at landfills. For example, North Carolina, South Carolina and Virginia have each established quantifiable goals and time frames to reduce the solid waste disposed of in their respective landfills.  We believe, based on our experience in the industry, that these trends and laws have created significant opportunities for solid waste services companies to provide additional recycling services to generators of solid waste who are not otherwise able to dispose of such waste.

Strategy

          Our objective is to build the premier solid waste services company in the Southeastern U.S. by expanding our operations and capitalizing on our strong market presence.  Our strategy for achieving this objective is:

          We intend to implement this strategy primarily through internal growth supplemented by tuck-in acquisitions in our existing markets. We expect acquisitions in new markets to be more limited than in the prior three years. We continue to examine opportunities to expand our presence in new and existing markets in the Southeastern U.S. There can be no assurance that we will be able to identify suitable acquisition candidates or, if identified, successfully negotiate their acquisition. If we fail to implement successfully our acquisition strategy, our growth potential will be limited.

Internal Growth

          In order to continue to achieve internal growth, we will focus on increasing sales penetration in current and adjacent market areas, marketing upgraded or additional services (such as on-site solid waste compaction) to existing customers and implementing selective price increases.  We are the first or second largest provider, in terms of market share, of waste services in the majority of the markets

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in which we operate. Current levels of population growth and economic development in the Southeastern U.S. and our strong market presence should provide an opportunity for us to increase revenues and market share in our region. As customers are added in existing markets, our density is improved, which should increase our collection efficiencies and profitability. At December 31, 2002, we had an approximately 57-person sales force dedicated to maintaining and increasing our sales to new and existing commercial, industrial, municipal and residential customers.

          An important part of our internal growth strategy is to operate transfer stations strategically located throughout our geographic area to improve our consolidation of collected solid waste and permit us to deliver the collected solid waste to landfills where we have negotiated favorable volume rates with landfill operators or to dispose of it at sites we own.  At December 31, 2002, we operated 26 transfer stations, seven of which we own. By operating transfer stations, we engage in direct communication with municipalities that own the transfer stations regarding waste disposal services, better positioning us to gain additional business in our markets in the event any of these municipalities privatize their solid waste operations. To the extent we are unable to operate existing transfer stations owned by municipalities, we would consider constructing our own transfer station.

Expansion Through Acquisitions

          Our strategy for growth includes:

          We seek to acquire companies with a significant market presence, high service standards and an experienced management team willing to remain with our company.

          Based on our market research, we believe that numerous “tuck-in” acquisition opportunities exist within our current market area. A “tuck-in” acquisition refers to an acquisition in which we acquire a solid waste collection company, a division of a company or customers of a company located in our existing market area, and integrate the acquired operations or customers into the operations of one of our existing branch facilities. These acquisitions have become an integral part of the industry competitive model due to the efficiencies involved. Such acquisitions, if consummated, provide us with opportunities to improve market share and route density.

          As we enter new markets through acquisitions, we intend to continue to implement a regional expansion strategy. The regional expansion strategy provides us with a base of operations to grow internally through price increases, providing additional services to existing customers, adding new private and public customers as well as tuck-in acquisitions. We can then expand our presence in the targeted region by adding solid waste collection and transfer operations in regional markets adjacent to or contiguous with the new location. Because our goal is to increase the scale of our operations through internal growth and through the acquisition of other solid waste businesses, we might experience periods of rapid growth with significantly increased staffing requirements. Such growth, if it were to occur, could place a significant strain on our management and on our operational, financial and other resources. Our ability to maintain and manage our growth effectively will require us to expand our management information systems capabilities and improve our operational and financial systems and controls. Moreover, we will need to attract, train, motivate, retain and manage our senior managers, technical professionals and other employees. Any failure to expand our management information systems capabilities and our operational and financial systems and controls or to recruit appropriate additional personnel in an efficient manner at a pace consistent with any business growth we may experience would have a material adverse effect on our operations.

          The consolidation and integration activity in the solid waste industry, which peaked in the 1990’s, as well as the difficulties, uncertainties and expenses relating to the development and permitting of solid waste landfills and transfer stations, has increased competition for the acquisition of existing solid waste collection, transfer and disposal operations. Increased competition for acquisition candidates as well as less advantageous acquisition terms, including increased purchase prices might result in fewer acquisition opportunities being made available to us. These circumstances might increase acquisition costs to levels beyond our financial capability or pricing parameters. Such circumstances might have an adverse effect on our results of operations. Many of our competitors for acquisitions are larger, better known companies that possess significantly greater resources than we have. We also believe, based on our experience, that a significant factor in our ability to consummate acquisitions will be the relative attractiveness of shares of our common stock as an investment instrument to potential acquisition candidates. This attractiveness will, in large part, be dependent upon the relative market price and capital appreciation prospects of our common stock compared to the equity securities of our competitors.

          In the past several years, we have been and expect to continue to be actively engaged in identifying solid waste landfill acquisition candidates in the Southeastern U.S., although the number of candidates is limited in our current market area. Based on our experience in the industry, we believe that the successful acquisition of landfills will provide us with opportunities to integrate

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vertically our collection, transfer and disposal operations while improving operating margins. Generally, we will evaluate a landfill target by determining, among other things, whether access to the landfill is economically feasible from our existing market areas either directly or through strategically located transfer stations, expected landfill life, the potential for landfill expansion, and current disposal costs compared with the cost to acquire the landfill. In addition, where the acquisition of a landfill site is either not available or not economically feasible, we seek to enter into long-term disposal contracts with facilities that are located in proximity to our market areas.

Acquisition Program

          From 1990 through December 31, 2002, we acquired, either by merger or asset purchase, 69 solid waste collection or disposal operations, with eight being acquired in 2002, three being acquired in 2001, and seven being acquired in 2000. We have developed a set of financial, geographic and management criteria designed to assist management in the evaluation of acquisition candidates engaged in solid waste collection and disposal. These criteria evaluate a variety of factors, including, but not limited to:

          We have an established integration procedure for newly acquired companies designed to effect a prompt and efficient integration of the acquired business while minimizing disruption to our ongoing business and that of the acquired business. Once a solid waste collection operation is acquired, programs designed to improve collection and disposal routing, equipment maintenance and utilization, employee productivity, operating efficiencies and overall profitability are implemented. To improve an acquired business’ operational productivity, administrative efficiency and profitability, we apply the same benchmarking programs and systems to the acquired business as are employed at our existing operations. We also solicit new commercial, industrial and residential customers in areas within and surrounding the markets served by the acquired collection operations as a means of further improving operating efficiencies and increasing the volumes of solid waste collected by the acquired operation. We typically attempt to retain the acquired company’s management and key employees and to decentralize operations, while consolidating administrative and management information systems through our corporate offices.

          Prior to completing an acquisition, we perform extensive environmental, operational, engineering, legal, human resource and financial due diligence. All acquisitions are subject to initial evaluation and approval by our management before being recommended to our Board of Directors.

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   2002 Acquisitions and Disposition

               On April 1, 2002, we acquired commercial routes and related assets from Hudgins Disposal, Inc. for approximately $400,000 in cash.  This tuck-in acquisition further expands our existing operations in the Nashville, Tennessee market.

          On April 16, 2002, we acquired the assets of Georgia Waste and Recycling Service, LLC and GWS Waste Services, Inc. for approximately $2.4 million in cash.  This tuck-in acquisition to our existing Atlanta operations provides residential curbside and recycling service to the east and northeast counties of the metro Atlanta area.

          On April 17, 2002, we acquired the assets of American Disposal Service, LLC related to its roll-off construction business located in the Memphis, Tennessee area, for approximately $300,000 in cash.  This acquisition of hauling services is a tuck-in to existing operations in the Memphis, Tennessee market.

          On May 1, 2002, we acquired the assets of North and South Sanitation for approximately $100,000 in cash.  This tuck-in acquisition provides rural residential routes to our existing Raleigh and Wilson, North Carolina operations.

          On June 19, 2002, we acquired the assets of Pelican Container Service, LLC for approximately $100,000 in cash.  This tuck-in acquisition, which provides industrial hauling service in the southern coastal counties of North Carolina, expands our customer base in our existing operations in the Wilmington, North Carolina market.

          On October 31, 2002, we acquired the assets of Hammock Sanitation for approximately $100,000 in cash.  This acquisition of residential and commercial routes is a tuck-in to our existing Crossville, Tennessee operations.

          On December 1, 2002, we acquired the assets of S & W Sanitation, located in eastern North Carolina, for approximately $50,000 in cash.  This tuck-in of residential routes will add density to our existing operations in Wilson, North Carolina.

          On December 3, 2002, we acquired the assets of Kellett’s Garbage, Inc., located in the Greenville, South Carolina area, for approximately $2.7 million in cash.  This acquisition of residential, recycling and commercial services expands existing services in our Easley, South Carolina operations.

          We primarily used cash from operations to fund acquisitions during 2002.

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Operating Enhancements

          We have implemented advanced management information systems, financial controls, shared support services and benchmarking systems designed to improve the productivity, efficiency and profitability of our existing and acquired operations. Each branch facility has on-line real time access to our financial, operating, cost and customer information. This access enables our managers to evaluate continuously our performance record and to establish benchmarks in all phases of our operations. Management utilizes these systems to:

          Through the utilization of our systems and controls, we will continue to manage our landfill disposal costs and to negotiate long-term disposal contracts with Subtitle D landfill operators. In addition, we have developed an extensive network of transfer stations that we use to consolidate waste streams to gain greater leverage in negotiating landfill disposal fees. As of December 31, 2002, approximately 36% of our waste volume was directed through transfer stations owned or operated by us.

Contracts Program

          We currently have approximately 244 municipal contracts. We believe that opportunities for gaining new contracts are increasing due to shrinking state and local government coffers resulting from the economic downturn. In most cases, only larger disposal services companies such as us are financially acceptable to the municipality. Historically, in the Southeastern U.S., city and county governments have provided a variety of solid waste services using their own personnel. Over time, many municipalities have opted to privatize or contract out their collection and disposal services to the private sector. Typically, these contracts are competitively bid and have initial terms of one to five years. In bidding for large contracts, our management team draws on its experience in the waste industry and its knowledge of local service areas in existing and target markets. We engage in extensive due diligence using our advanced management information systems and productivity and cost modeling analyses to respond to requests for proposals to provide services. Our regional managers are responsible for managing the relationships with local governmental officials within their respective service area and sales representatives may be assigned specific municipalities for coverage. We may be required to bid for renewal of a contract previously awarded to us, or in certain cases to renegotiate the contract as a result of changed market conditions. During 2002, we retained approximately 78.0% of our municipal contracts that were up for bid or renewal.

Services

          Commercial, Industrial and Residential Waste Services

We provide commercial and industrial collection and disposal services under one-year to five-year service agreements. Fees are determined by such factors as collection frequency, level of service, route density, the type, volume and weight of the waste collected, the type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged in our markets for similar service. Collection of larger volumes associated with commercial and industrial waste streams generally helps improve our operating efficiencies and, through consolidation of these volumes, we can negotiate more favorable disposal prices. Our commercial and industrial customers utilize portable containers for storage thereby enabling us to service many customers with fewer collection vehicles. Commercial and industrial collection vehicles normally require one operator. We provide two to eight cubic yard containers to commercial customers and 10 to 42 cubic yard containers to industrial customers. As a part of the services provided by Waste Industries and for an additional fee under our waste services contract, we install stationary compactors that compact waste prior to collection on the premises of a substantial number of large volume customers. No single commercial or industrial contract is individually material to our results of operations.

          Our residential solid waste collection and disposal services are performed either on a subscription basis with individual households, or under contracts with municipalities, homeowners associations, apartment owners or mobile home park operators.

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Municipal contracts grant us the right to service all or a portion of the residences in a specified community or to provide a central repository for residential waste drop-off. We had approximately 244 municipal contracts in place as of December 31, 2002. No single municipal or other residential contract is individually material to our results of operations. Municipal contracts in our market areas are typically awarded on a competitive bid basis and thereafter on a bid or negotiated basis and usually range in duration from one to five years. Residential contract fees are based primarily on route density, the frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged in its markets for similar service. Municipal collection fees are paid either by the municipalities from tax revenues or through direct service charges to the residents receiving the service.

          At December 31, 2002, we operated 11 solid waste landfills in Florida, Georgia, Mississippi, North Carolina and Tennessee. Our landfill facilities are designed and operated to meet federal, state and local regulations in all material respects and we believe each of our landfill sites are in compliance with current applicable state and federal Subtitle D regulations in all material respects. None of our landfills are permitted to accept hazardous waste.

          Transfer Station Services

          The 26 transfer stations we operated at December 31, 2002 receive, compact and transfer solid waste to larger vehicles for transport to landfills. We believe that transfer stations benefit us by:

          Depending on the location, size and local regulatory environment, transfer stations can be constructed for as little as $150,000 for a small rural facility or as much as $1.0 million for larger sites. We believe that we have obtained all permits and authorizations necessary to operate our existing transfer stations and that each of our existing transfer stations has been operated in compliance in all material respects with applicable environmental regulations.

          In 2002, we outsourced the majority of our transportation services related to transfer station operations. We believe outsourcing these operations will reduce capital expenditures, improve maintenance capacity for other core services, reduce ownership costs, such as insurance, fuel, labor and maintenance costs, and improve the aging of our remaining transfer fleet.           

          At December 31, 2002, we owned seven of the transfer stations we operate, and operate the remaining 19 transfer stations pursuant to operating agreements. These operating agreements have terms ranging from annual one-year renewals to an indefinite period. We generally receive a fixed monthly operating fee for our services under these agreements, together with a variable fee based upon the number of hauls made by us from the station. At December 31, 2002, approximately 61% of waste directed to the transfer stations we operated was delivered by third parties, who pay us a fee based on the tonnage delivered. Control of these third-party waste streams coupled with our waste stream adds to our bargaining power in our negotiations for favorable solid waste disposal rates with landfill operators.

          Recycling Services

          Recycling involves the removal of reusable materials from the waste stream for processing and sale in various applications. Based on our experience in the industry, we believe that recycling will continue to be an important component of local and state solid waste management plans as a result of the public’s increasing environmental awareness and expanding regulations mandating or encouraging waste recycling. We offer commercial, industrial and residential customers recycling for office paper, cardboard, newspaper, aluminum and steel cans, plastic, glass, pallets and yard waste. At December 31, 2002, we operated approximately 100 convenience sites where residents can dispose of recyclables. These commodities are delivered either to third-party processing facilities in exchange for a fee or to one of eight facilities operated by us for processing prior to resale.

          At December 31, 2002, less than 3% of our waste stream was recycled. Through a centralized effort, we resell recycled waste products using commercially reasonable practices and seek to manage commodity-pricing risk by spreading the risk among our customers. The resale prices of, and demand for, recyclable commodities, particularly wastepaper, can be volatile and subject to changing market conditions. Accordingly, our results of operations will be affected, and might be affected materially, by changing resale prices or demand for certain recyclable commodities, particularly wastepaper. These changes might also contribute to significant variability in our period-to-period results of operations.

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          Convenience Sites and Other Specialized Services

          In 1982, we developed the concept of a convenience site in response to increasing volumes of waste dumped randomly in rural areas. Each site typically consists of a ramp for easy disposal access, a trash compactor and trash and recycling containers. Most sites have posted operating hours during which our personnel assist residents with the deposit of waste and recyclables while monitoring the types of waste deposited at the sites. Because these convenience sites reduce the amount of trash dumped along roads and adjacent to recreational areas, we believe that county and local governments will contract for these sites to be strategically located. At December 31, 2002, we operated approximately 100 convenience sites located in 14 counties in our market area.

          In addition, we have increased our efforts to secure additional contracts to manage comprehensive disposal services for large corporations and municipalities. For example, after thorough review and evaluation, we might provide a lump sum quote for handling all the waste in a company’s facility. This would include source separating various wastes into commodities for resale and non-recyclables for disposal. The process of sorting at the source, processing through a compaction system and scheduling waste and recyclable removals only when the containers are full reduces our cost and increases our operating efficiency. Furthermore, confidential documents can be controlled throughout the process and destroyed to the customer’s satisfaction.

Operations

          Branch Facility Structure

          Based on our experience in the industry, we believe that a branch facilities structure retains decision-making authority close to the customer, which enables us to identify customers’ needs quickly and implement cost-effective solutions. Furthermore, we believe that it provides a low-overhead, highly efficient operational structure that allows us to branch into geographically contiguous markets and operate in small communities which larger competitors might not find attractive. Based on our experience in the industry, we believe that branch facilities and decentralized management of operations provide us with a strategic competitive advantage given the relatively rural nature of the Southeastern U.S.

          We deliver our waste services from branch locations in contiguous service areas, which permit our branch facilities to provide back-up services and support to one another. Each manager of a branch facility has autonomous service and decision-making authority for the local market area. Each designated division is overseen by a division manager and a division controller, who is typically located at one of our branch facilities. Effective January 1, 2002, the branch network was divided into six divisions set forth below:

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          Our managerial philosophy centers on the principle that customers’ needs can best be served at the local level by a staff of well-trained personnel led by a branch manager. Each branch manager is responsible for implementing sales programs, maintaining service quality, promoting safety in the branch’s operations and overseeing the day-to-day operations for the branch, including contract administration. Branch managers also assist division managers in identifying potential acquisition candidates. Frequently, the branch manager is also the branch facility’s sales manager; but in larger market areas, branch facilities will have one or more sales persons. Branch managers are compensated based on the performance of their branch. Each branch manager reports to a division manager, who reports directly to our President.

          In addition to delivering our services, branch staff responsibilities include setting up customer accounts, answering customer questions, processing accounts payable and maintaining payroll and personnel information. Maintenance support for collection equipment is also provided at the branch facility. The facility size, number of maintenance personnel and capabilities are determined by the number of vehicles operated and the type of services provided within the branch facility’s market area.

          On a monthly basis, the corporate and/or division officers meet with each branch manager to discuss and evaluate the branch operations. This evaluation is conducted through the use of flash reports on a weekly basis at the branch and division levels.  Flash reports highlight key operating data such as employee-hours, overtime hours, truck hours, revenues and extraordinary costs. These meetings are oriented to identifying trends, opportunities and strategies in the branch facility’s proximate geographic area. Using a decentralized approach, but with strong division and corporate monitoring and strict budgetary and operating guidelines and quality control standards, each branch manager has the authority to exercise discretion in business decisions. Our management information systems provide corporate management timely oversight of branch performance.

          Information Technologies

          A cornerstone of our desire to deliver responsive and cost-effective waste services is our management information systems network. Many of our information systems, controls and services are designed to assist branch facilities’ personnel in making decisions based upon centralized information. Financial control is maintained through personnel, fiscal and accounting policies that are established at the corporate level for implementation at the branch locations. Our systems allow for centralized billing and collection through a lock-box system, thus enhancing cash management. An internal audit program monitors compliance with our policies and the benchmarks are monitored continuously using an advanced management information system. This information system links our IBM AS/400 computer to each branch using satellite technology which allows each branch on-line, real-time financial, productivity, maintenance and customer information.

          Support Services

          In order to ensure focus at the branch facility level and to support branch operations, we established our Support Services Team in 1995. Support services include:

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          The Support Services Team provides significant assistance to the branch facilities in the integration of newly acquired operations and in securing new and retaining existing customers. Successful integration of an acquired business is critical to achieving operational and administrative efficiencies and improved profitability of the incremental business.

          Support services include a comprehensive safety and risk management program that has strong management support and includes strict safety rules and policies, accident investigations, tracking and statistical analysis, employee safety awards, branch safety committees and random facility inspections by both corporate staff and an outside loss control specialist.

          We believe that our safety program has resulted in reduced accident rates and insurance loss ratios.

          Landfill and Other Disposal Alternatives

          At December 31, 2002, we used more than 150 landfill disposal sites in the markets we serve, and we owned 10 and operated 1 of these landfill sites. We have historically opted to contract for landfill services due to the availability of disposal space at favorable tipping fees in close proximity to our current markets. In some markets, we have been able to control disposal costs by negotiating long-term disposal contracts with Subtitle D landfill operators. In addition, we operate an extensive network of transfer stations to consolidate waste streams and receive volume discounts on disposal costs.

          Based on our market research, we believe that many landfills not in compliance with Subtitle D Regulations will close in our market area in the next few years. Despite this, the absolute volume of disposal capacity is increasing due both to the expansion of capacity at existing landfills and the opening of new landfills. Landfill operators are aggressively soliciting solid waste volumes to ensure cash flows sufficient to support the expansion costs and other capital expenditures made to achieve compliance with the provisions of Subtitle D. Based on our market research, we believe there will continue to be a significant supply of low-cost disposal capacity in our current markets and that by controlling a large volume of the waste stream we will be able to continue to negotiate favorable disposal costs. We plan to continue to secure long-term disposal contracts with Subtitle D landfill operators and to continue expansion of transfer stations. Transfer stations allow us access to additional disposal sites and are substantially less expensive to develop than landfills. Based on our experience in the industry, we believe that landfills that have been targeted for closure might provide prime sites to develop transfer stations.

          We might acquire existing landfills or we might develop landfills or partner with an experienced landfill operator for the acquisition, development or assumption of the operation of additional landfills. In our current markets, such action would be pursued if we believed that ownership or operation of a landfill in a particular market would provide significant cost benefits compared to our traditional system of consolidating waste and negotiating favorable disposal rates. In a new market, we might become a landfill owner or operator if that market lacks the amount of disposal capacity that we have experienced in our current markets.

          Alternatives to landfill disposal, such as recycling and composting, are increasingly being used. In addition, incineration is an alternative to landfill disposal in certain of our markets. There also has been an increasing trend at the state and local levels to mandate recycling and waste reduction at the source and to prohibit the disposal of certain types of waste, such as yard wastes, at landfills. These developments may result in the volume of waste being reduced in certain areas. North Carolina, South Carolina and Virginia have each adopted plans or requirements that set goals for specified percentages of certain solid waste items to be recycled. These recycling goals are being phased in over the next few years. These alternatives, if and when adopted and implemented, might have a material adverse effect on our business, financial condition and results of operations. 

Landfill Closure and Post-Closure Costs

          We have financial obligations relating to closure and post-closure, remediation costs and long-term care, for the landfill sites we own and operate. Our obligations for these costs will increase if we decide to develop or acquire additional landfill sites in the future.

          Landfill closure and post-closure costs include estimated costs to be incurred for final closure of landfills and estimated costs for providing required post-closure monitoring and maintenance of landfills. We estimate these future cost requirements based on our interpretation of the technical standards of the Environmental Protection Agency’s Subtitle D Regulations. While the precise amounts of these future obligations cannot be determined, at December 31, 2002, we estimate the total costs to range from approximately $70.0 million to approximately $71.9 million for remediation, final closure of our operating facilities and post-closure monitoring costs. Our estimate of these costs is expressed in current dollars and is not discounted to reflect anticipated timing of future expenditures. We had accrued approximately $3.8 million and $4.9 million for such projected costs at December 31, 2001 and 2002, respectively. At December 31, 2002, we had not paid any amounts out of these accruals. We provide accruals for these future costs (generally for a term of 30 years after final closure of any landfill), and will provide additional accruals for these and other landfills we might acquire or develop in the future, based on engineering estimates of consumption of airspace over the useful lives of such facilities. There can

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be no assurance that our ultimate financial obligations for actual closure or post-closure costs will not exceed the amount accrued and reserved or amounts otherwise receivable pursuant to insurance policies or trust funds. Such a circumstance could have a material adverse effect on our financial condition and results of operation.

Marketing and Sales

          We market our services locally through our regional and branch managers and approximately 57 direct sales representatives who focus on commercial, industrial and residential customers. In addition to traditional method of obtaining customers through cold calls, referrals, yellow page advertising and overall market reputation, we focus on new account sales through an integrated prospect data base system which targets new account development. We also obtain new customers from referral sources, our general reputation and local market print advertising. Some branch locations have dedicated sales representatives that market residential services. We engage in direct mail campaigns and door-to-door marketing and work with real estate agents and developers to sell services to new developments. Additionally, we attend and make presentations at municipal and state conferences and advertise in governmental associations’ membership publications.

          Our sales representatives visit customers on a regular basis and make sales calls to potential new customers. These sales representatives receive a significant portion of their compensation based upon certain incentive formulas. We emphasize providing quality services, customer satisfaction and retention, and believe that this focus on quality service will help retain existing customers as well as attract additional customers. Maintenance of a local presence and identity is an important aspect of our marketing plan. In order to accomplish these objectives, many of our managers are involved in local governmental, civic and business organizations.

          No single customer of ours accounted for more than 4% our revenues in 2002. We do not believe that the loss of any single customer would have a material adverse effect on our results of operations.

Competition

          The solid waste management industry is highly competitive, very fragmented and requires substantial labor and capital resources. Intense competition exists within the industry not only for collection, transportation and disposal volume, but also for acquisition candidates. The industry includes three large national waste companies: Waste Management, Inc.; Allied Waste Industries, Inc.; and Republic Services, Inc. There are several other public companies in the industry with annual revenue in excess of $100 million, including Casella Waste Systems, Inc. and Waste Connections, Inc. We compete with a number of these and other regional and local companies, including publicly or privately owned providers of incineration services.

          We also compete with certain municipalities that operate their own solid waste collection and disposal facilities. These municipalities may have certain advantages over us due to the availability of tax revenues and tax-exempt financing.

          We compete for collection and recycling accounts primarily on the basis of price and quality of our services. From time to time, competitors may reduce the price of their services in an effort to expand market share or to win a competitively bid municipal contract. These practices may also lead to reduced pricing for our services or the loss of business.

Competitive Bid Contracts

          We provide a substantial portion of our residential collection services under municipal contracts and, at December 31, 2002, approximately 34% of our revenues came from municipal contracts. As is generally the case in the industry, municipal contracts are subject to periodic competitive bidding. The balance of our residential services are provided on a subscription basis. However, no single customer of any type accounted for more than 4% of our revenues in 2002. At December 31, 2002, we had not lost, nor do we reasonably expect to lose, a contract that would have a material adverse effect on our financial condition or results of operations because the contract either was or is not material. Our inability to compete with larger and better capitalized companies, or to replace a significant number of municipal contracts lost through the competitive bidding process with comparable contracts or other revenue sources within a reasonable time period, could have a material adverse effect on our results of operations. 

Employees

          At December 31, 2002, we employed approximately 1,700 full-time employees.  None of our employees are represented by unions and we believe that our employee relations are good. We are highly dependent upon the services of the members of our management team, the loss of any of whom might have an adverse effect on our operations.

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Index to Financial Statements

Risk Management, Insurance and Performance Bonds

          We actively maintain environmental and other risk management programs appropriate for our business. Our environmental risk management program includes evaluating both existing facilities, as well as potential acquisitions, for environmental law compliance and operating procedures. We also maintain a worker safety program that encourages safe practices in the workplace. Operating practices at all of our existing operations stress minimizing the possibility of environmental contamination and litigation.

          We carry a range of insurance intended to protect our assets and operations, including a commercial general liability policy and a property damage policy. If a partially or completely uninsured claim were made against us (including liabilities associated with cleanup or remediation at our own facilities) and it was successful and of sufficient magnitude, it could have a material adverse effect on our results of operations or financial condition. Any future difficulty in obtaining insurance could also impair our ability to secure future contracts, which might be conditioned upon the availability of adequate insurance coverage.

          Municipal solid waste collection contracts may require performance bonds or other means of financial assurance to secure contractual performance. We have not experienced difficulty in obtaining performance bonds or letters of credit for our current operations. At December 31, 2002, we had provided customers and various regulatory authorities with bonds and letters of credit of approximately $28.3 million to secure our obligations. If we were unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, we may be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits.

Regulation

          Introduction

          We are subject to extensive and evolving federal, state and local environmental laws and regulations that have been enacted in response to technological advances and increased concern over environmental issues. These regulations not only strictly regulate the conduct of our operations but also are related directly to the demand for many of the services we offer.

          The regulations affecting us are administered by the EPA and various other federal, state and local environmental, zoning, health and safety agencies. We believe that we are currently in substantial compliance with applicable federal, state and local laws, permits, orders and regulations, and we do not currently anticipate any material environmental costs (although there can be no assurance in this regard). We anticipate there will continue to be increased regulation, legislation and regulatory enforcement actions related to the solid waste services industry. As a result, we attempt to anticipate future regulatory requirements and to plan accordingly to remain in compliance with the regulatory framework.

          In order to transport waste, we must have one or more permits from state or local agencies. These permits also must be periodically renewed and are subject to modification and revocation by the issuing agency. None of our permits has ever been revoked.

          In order to develop, own or operate a landfill, a transfer station or other solid waste facilities, we are required to go through several governmental review processes and obtain one or more permits and often zoning or other land use approvals. Obtaining these permits and zoning or land use approvals is difficult, time consuming and expensive. In addition, this process is often opposed by various local elected officials and citizens’ groups. Once obtained, operating permits generally must be periodically renewed and are subject to modification and revocation by the issuing agency.

          Our facilities are subject to a variety of operational, monitoring, site maintenance, closure, post-closure and financial assurance obligations which change from time to time and which could give rise to increased capital expenditures and operating costs. We do not expect to make material capital expenditures for environmental control facilities in 2003. In connection with any such landfills, it is often necessary to expend considerable time, effort and money in complying with the governmental review and permitting process necessary to maintain or increase the capacity of these landfills. Governmental authorities have broad power to enforce compliance with these laws and regulations and to obtain injunctions or impose civil or criminal penalties in the case of violations.

          The principal federal, state and local statutes and regulations applicable to our various operations are as follows:

          The Resource Conservation and Recovery Act of 1976

          RCRA regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to ensure the safe disposal of solid waste. RCRA divides solid waste into two groups, hazardous and non-hazardous. Wastes are generally classified as hazardous if they either are specifically included on a list of hazardous wastes or exhibit certain

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Index to Financial Statements

hazardous characteristics and are not specifically designated as non-hazardous. Wastes classified as hazardous under RCRA are subject to much stricter regulation than wastes classified as non-hazardous.

          Among the wastes that are specifically designated as non-hazardous waste are household waste and “special” waste, including items such as petroleum contaminated soils, asbestos, foundry sand, shredder fluff and most non-hazardous industrial waste products.

          Although we currently are not involved with transportation or disposal of hazardous substances, we transported hazardous substances in the past and might become involved with hazardous substance transportation and disposal in the future. The EPA regulations issued under Subtitle C of RCRA impose a comprehensive “cradle to grave” system for tracking the generation, transportation, treatment, storage and disposal of hazardous wastes. The Subtitle C Regulations provide standards for generators, transporters and disposers of hazardous wastes, and for the issuance of permits for sites where such material is treated, stored or disposed. Subtitle C imposes detailed operating, inspection, training and emergency preparedness and response standards, as well as requirements for manifesting, record keeping and reporting, facility closure, post-closure and financial responsibilities.

          In October 1991, the EPA adopted the Subtitle D Regulations governing solid waste landfills. Because we own and operate landfills, we must comply with these regulations.

          The Subtitle D Regulations, which generally became effective in October 1993, include location restrictions, facility design standards, operating criteria, closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, groundwater remediation standards and corrective action requirements. In addition, the Subtitle D Regulations require that new landfill sites meet more stringent liner design criteria (typically, composite soil and synthetic liners or two or more synthetic liners) designed to keep leachate out of groundwater and have extensive collection systems to carry away leachate for treatment prior to disposal. Groundwater monitoring wells must also be installed at virtually all landfills to monitor groundwater quality and, indirectly, the leachate collection system operation. The Subtitle D Regulations also require, where threshold test levels are present, that methane gas generated at landfills be controlled in a manner that protects human health and the environment. We are not aware of any problem with methane gas at any of our facilities. Each state is required to revise its landfill regulations to meet these requirements or such requirements will be automatically imposed upon it by the EPA. Each state is also required to adopt and implement a permit program or other appropriate system to ensure that landfills within the state comply with the Subtitle D Regulations criteria. Various states in which we operate now or might in the future have adopted regulations or programs as stringent as, or more stringent than, the Subtitle D Regulations. Failure to comply with these regulations could require us to undertake investigatory or remedial activities, to curtail operations or to close a landfill temporarily or permanently. Future changes in these regulations might require us to modify, supplement or replace equipment or facilities at costs that might be substantial. The failure of regulatory agencies to enforce these regulations vigorously or consistently might give an advantage to our competitors whose facilities do not comply with the Subtitle D Regulations or its state counterparts. Our ultimate financial obligations related to any failure to comply with these regulations could have a material adverse effect on our operations and financial condition.

          The Federal Water Pollution Control Act of 1972

          The Federal Water Pollution Control Act of 1972, known as the Clean Water Act, establishes rules regulating the discharge of pollutants from a variety of sources, including solid waste disposal sites and transfer stations, into waters of the U.S. Because we own and operate landfills and transfer stations, we must comply with this Act. For example, if run-off or collected leachate from our transfer stations or from our owned or operated landfills is discharged into streams, rivers or other surface waters, the Clean Water Act would require us to apply for and obtain a discharge permit, conduct sampling and monitoring and possibly reduce the quantity of pollutants in such discharge. Also, virtually all landfills are required to comply with the EPA’s storm water regulations issued in November 1990.  Such regulations are designed to prevent possibly contaminated landfill storm water runoff from flowing into surface waters. We believe that our facilities are in compliance in all material respects with Clean Water Act requirements. Various states in which we operate now or might in the future have delegated authority to implement the Clean Water Act permitting requirements, and some of these states have adopted regulations that are more stringent than the federal requirements.

          The Comprehensive Environmental Response, Compensation and Liability Act of 1980

          The Comprehensive Environmental Response, Compensation and Liability Act of 1980, also known as CERCLA, established a regulatory and remedial program intended to provide for the investigation and cleanup of facilities from which there has been, or is threatened, a release of any hazardous substance into the environment. CERCLA’s primary mechanism for remedying such problems is to impose strict joint and several liability for cleanup of facilities on current owners and operators of the site, former owners and operators of the site at the time of the disposal of the hazardous substances, as well as the generators of the hazardous substances and the transporters who arranged for disposal or transportation of the hazardous substances. The costs of CERCLA investigation and cleanup can be very substantial. Liability under CERCLA does not depend upon the existence or disposal of “hazardous waste” as

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Index to Financial Statements

defined by RCRA, but can also be founded upon the existence of even very small amounts of the more than 700 “hazardous substances” listed by the EPA, many of which can be found in household waste.

          We currently do not handle hazardous waste, but because we own and operate landfills and transfer stations, we might be subject to CERCLA. If we were to be found to be a responsible party for a CERCLA cleanup, the enforcing agency could hold us, or any other generator, transporter or the owner or operator of the facility, completely responsible for all investigative and remedial costs even if others might also be liable. CERCLA also authorizes the imposition of a lien in favor of the U.S. upon all real property subject to, or affected by, a remedial action for all costs for which a party is liable. CERCLA provides a responsible party with the right to bring legal action against other responsible parties for their allocable share of investigative and remedial costs. Our ability to get others to reimburse us for their allocable share of such costs would be limited by our ability to find other responsible parties and prove the extent of their responsibility and by the financial resources of such other parties.

          The Clean Air Act

          The Clean Air Act provides for regulation, through state implementation of federal requirements, of the emission of air pollutants from certain landfills based upon the date of the landfill construction and volume per year of emissions of regulated pollutants. Because we own and operate landfills, we must comply with this Act. We believe we are in compliance with this Act. The EPA has proposed new source performance standards regulating air emissions of certain regulated pollutants (methane and non-methane organic compounds) from municipal solid waste landfills. Landfills located in areas with air pollution problems might be subject to even more extensive air pollution controls and emission limitations. In addition, the EPA has issued standards regulating the disposal of asbestos-containing materials. Some of the federal statutes described above contain provisions authorizing the institution of lawsuits by private citizens to enforce the provisions of the statutes.

          The Occupational Safety and Health Act of 1970

          OSHA establishes employer responsibilities and authorizes the promulgation by the Occupational Safety and Health Administration of occupational health and safety standards, including the obligation to maintain a workplace free of recognized hazards likely to cause death or serious injury, to comply with worker protection standards established by OSHA, to maintain records, to provide workers with required disclosures and to implement health and safety training programs. Various of those promulgated standards might apply to our operations, including those standards concerning notices of hazards, safety in excavation and demolition work, the handling of asbestos and asbestos-containing materials, and worker training and emergency response programs. Our employees are trained to respond appropriately in the event there is an accidental spill or release of packaged asbestos-containing materials or other regulated substances during transportation or landfill disposal.

          State and Local Regulations

          Each state in which we now operate or might operate in the future has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid waste, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure and post-closure maintenance of landfills and transfer stations. Because of our business, we must comply with these laws and regulations. In addition, many states have adopted Superfund statutes comparable to, and in some cases more stringent than, CERCLA. These statutes impose requirements for investigation and cleanup of contaminated sites and liability for costs and damages associated with such sites, and some provide for the imposition of liens on property owned by responsible parties. Furthermore, many municipalities also have ordinances, local laws and regulations affecting our operations. These include zoning and health measures that limit solid waste management activities to specified sites or activities, flow control provisions that direct the delivery of solid wastes to specific facilities, laws that grant the right to establish franchises for collection services and then put out for bid the right to provide collection services, and bans or other restrictions on the movement of solid wastes into a municipality.

          Permits and approvals may limit the types of waste that may be accepted at a landfill or the quantity of waste that may be accepted at a landfill during a given time period. In addition, permits and approvals, as well as some state and local regulations, might limit a landfill to accepting waste that originates from specified geographic areas or seek to restrict the importation of out-of-state waste or otherwise discriminate against out-of-state waste. Generally, restrictions on the importation of out-of-state waste have not withstood judicial challenge. However, from time to time federal legislation is proposed which would allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that could be imported for disposal and would require states to reduce the amounts of waste exported to other states. Although Congress has not yet passed such legislation, if this or similar legislation is enacted, states in which we operate landfills could act to limit or prohibit the importation of out-of-state waste. Such state actions could materially adversely affect landfills within those states that receive a significant portion of waste originating from out-of-state.

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Index to Financial Statements

          In addition, some states and localities may for economic or other reasons restrict the exportation of waste from their jurisdiction or require that a specified amount of waste be disposed of at facilities within their jurisdiction. In 1994, the U.S. Supreme Court held unconstitutional, and therefore invalid, a local ordinance that sought to impose flow controls on taking waste out of the locality. However, some state and local jurisdictions continue to seek to enforce such restrictions and, in certain cases, we might elect not to challenge such restrictions based upon various considerations. In addition, the aforementioned proposed federal legislation would allow states and localities to impose certain flow control restrictions.

          These restrictions could result in the volume of waste going to landfills being reduced in some areas, which might materially adversely affect our ability to operate our landfills at their full capacity and/or affect the prices that can be charged for landfill disposal services. These restrictions might also result in higher disposal costs for our collection operations. If we were unable to pass such higher costs through to our customers, our business, financial condition and results of operations could be materially adversely affected.

          There has been an increasing trend at the state and local level to mandate and encourage waste reduction at the source and waste recycling, and to prohibit or restrict the disposal of some types of solid wastes, such as yard wastes, leaves and tires, in landfills. The enactment of regulations reducing the volume and types of wastes available for transport to and disposal in landfills could affect our ability to operate our facilities at their full capacity.

          Our principal executive offices are located at 3301 Benson Drive, Raleigh, North Carolina, where we currently lease approximately 25,000 square feet of office space. Our principal property and equipment consists of land (primarily transfer stations, bases for collection operations and landfill sites), buildings, and vehicles and equipment. Our land and buildings are located in North Carolina, South Carolina, Virginia, Tennessee, Mississippi, Alabama, Georgia and Florida. We also lease real property in the states in which we do business. At December 31, 2002, we operated 40 collection operations, 26 transfer stations, eight recycling facilities and 11 landfills aggregating approximately 2,450 acres. All our property and equipment are used in our one industry segment, which includes collection, transfer, recycling, processing and disposal of municipal solid and industrial waste.

          Containers

          Some type of container is used in almost every service we provide, and we therefore have an extensive inventory on-hand or on-site at customers’ locations throughout North Carolina, South Carolina, Virginia, Tennessee, Mississippi, Alabama, Georgia and Florida. We own all of our containers and centrally manage our inventory located at the branch facility level. We also own a significant number of on-site compaction containers, which provide efficiency for high-volume solid waste generators. Container life is dependent on the location of the container, the type of waste that is deposited into the container and how the container is maintained. Proper maintenance of commercial and industrial front loader and roll-off containers consists of regular repainting, scheduled repairs and switch-outs, quality cleaning, sanding and priming and monitoring of the container by our employees to check for needed repairs. Residential collection containers require minor maintenance.

          Collection Vehicles

          We use a fleet of specialized collection vehicles to collect and transport waste and to provide recycling and convenience site services. At December 31, 2002, we owned approximately 95% of our transportation fleet and leased the remainder. We have implemented an aggressive and reliable maintenance program to extend the useful lives of our equipment. Preventative and long-term maintenance is performed on regularly scheduled cycles that are more frequent than most manufacturers’ suggested schedules. Preventative maintenance is performed on collection vehicles after every 150 to 250 hours of operation depending on their class, and long-term maintenance (reconstruction of engines, transmissions, etc.) is performed every four to six years. Additionally, cosmetic repairs (painting, interior upholstery repairs) are performed as needed. The majority of the maintenance program is done by our personnel located in branch facilities.

          We are not a party to any material pending legal proceedings. In the normal course of our business and as a result of the extensive governmental regulation of the waste industry, we might periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency might seek to impose fines on us or to revoke, or to deny renewal of, an operating permit held by us. In addition, we might become party to various claims and suits pending for

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Index to Financial Statements

alleged damages to persons and property, alleged violation of certain laws and for alleged liabilities arising out of matters occurring during the normal operation of the waste management business.

          No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2002.

EXECUTIVE OFFICERS

          As of December 31, 2002, our executive officers were as follows:

          JIM W. PERRY joined Waste Industries 1971 and was named Chief Executive Officer in 2002 and has served as President since 1987 and as a director since 1974. Prior to that, Mr. Perry served as Chief Operating Officer since 1987. Mr. Perry holds a B.S. in Agricultural and Biological Engineering from North Carolina State University and an M.S. in Systems Management from the University of Southern California. Mr. Perry has more than 32 years experience in the solid waste industry and has received the Distinguished Service Award from the NSWMA. In addition, Mr. Perry has served in the Carolinas Chapter of NSWMA as Chairman and on the Membership Committee. Mr. Perry was inducted into the EIA Hall of Fame in 1997.

          HARRY M. HABETS joined Waste Industries in 2002 as Vice President and Chief Operating Officer.  From 1985 to 1999, Mr. Habets held various management positions with Waste Management, including VP of International Operations and Regional VP/Manager for collection, recycling and landfill disposal services in the Southeast.  Mr. Habets holds a B.S. in Business Administration from Rochester Institute of Technology.

          D. STEPHEN GRISSOM joined Waste Industries in 2001 as Chief Financial Officer and Vice President of Finance.  Prior to that, Mr. Grissom was Chief Financial Officer for Austin Quality Foods from 1982 to 2000 and has more than 24 years of controllership and CFO experience.  He is a certified public accountant and holds a B.A. in accounting from North Carolina State University.

          WILLIAM J. HANLEY joined Waste Industries in 2001 as Vice President of Sales and Marketing.  Prior to that, Mr. Hanley served as Sales Manager, General Sales Manager and Regional Sales Manager with Waste Management, Inc. from 1995 to 2001.  He holds a B.S. in Business Administration from Clarion University.  Mr. Hanley has nine years of experience in the solid waste industry.

          LONNIE C. POOLE, III was named Vice President of Corporate Development in 2002.  Prior to that, Mr. Poole served as our Vice President, Director of Support Services since 1995. From 1990 to 1995, he served as our Risk Management Director. Mr. Poole holds a B.S. in Aerospace Engineering from North Carolina State University. Mr. Poole is the son of Lonnie C. Poole, Jr., Chairman of the Board.  Mr. Poole has more than 12 years experience in the solid waste industry.

OTHER KEY EMPLOYEES

          The following table sets forth certain information concerning our other key employees as of December 31, 2002:

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Index to Financial Statements

          HARRELL J. AUTEN has served as Vice President of Waste Industries since 1998 and has served as our South Division Manager since 1993.  Prior to that, Mr. Auten owned and operated his own company.  Mr. Auten holds a B.S. in Business Administration from the University of North Carolina at Chapel Hill and has more than 32 years experience in the solid waste industry.

          E. FRANKLIN LORICK was named Vice President of Waste Industries in 2002.  Mr. Lorick joined Waste Industries in 1989 and has held various positions including Operations Manager and Branch Manager.  He attended Midlands Community College in Columbia, South Carolina and has over 14 years experience in the solid waste industry

          JAMES J. BECHER has served as a Vice President of Waste Industries since 1998. He joined Waste Industries in 1986 as a Branch Manager. Mr. Becher holds a B.A. in History from Guilford College in North Carolina. He has 17 years experience in the solid waste industry.

          JIM W. WATERS joined Waste Industries as Vice President in 2002.  Mr. Waters most recently served as President of Earth Resource Management, Inc.  Prior to that, he was with Waste Management from 1973 to 1998, having held various management positions including Region VP for South Florida and VP of Operations for North Florida and Georgia.  Mr. Wastes is a graduate of the University of South Florida and has over 30 years experience in the solid waste industry.

          THOMAS A. WINSTEAD has served as a Vice President of Waste Industries since March 1998.  He joined us 1985 as a Branch Manager and has also served as East Regional Operations Manager from 1990 to 1997.  He is a graduate of Atlantic Christian College with a B.S. in Health and Physical Education.  Mr. Winstead has more than 18 years of experience in the solid waste industry.

          None of our executive officers, directors or other key employees is related to any other executive officer, director or other key employee, except that Lonnie C. Poole, Jr. and Lonnie C. Poole, III are father and son.

PART II

          Our common stock trades on the Nasdaq National Market under the symbol “WWIN”. After the holding company reorganization, the common stock of Waste Industries continues to trade on the Nasdaq National Market under the symbol “WWIN”. The following sets forth the quarterly high and low bid prices for the years indicated as reported by Nasdaq. These prices are based on quotations between dealers, which do not reflect retail mark-up, mark-down or commissions and might not reflect actual transactions.

          As of December 31, 2002, the number of record holders of our common stock was 109 and we believe that the number of beneficial owners was more than 1,500.

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Index to Financial Statements

          Since our conversion from S corporation to C corporation status in connection with and prior to our initial public offering in June 1997, we have never paid a cash dividend on our common stock and we anticipate that for the foreseeable future any earnings will be retained for use in our business. Our credit facilities contain covenants that prohibit the payment of cash dividends.

          We did not sell any equity securities during the quarter ended December 31, 2002.

          The following selected financial data should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report.  The consolidated statement of operations data set forth below with respect to the years ended December 31, 2000, 2001 and 2002 and the consolidated balance sheet data as of December 31, 2001 and 2002 are derived from, and are referenced to, our audited consolidated financial statements included elsewhere in this report.  The consolidated statement of operations data set forth below with respect to the years ended December 31, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1998, 1999 and 2000 are derived from financial statements not included in this report.

19

Index to Financial Statements

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Index to Financial Statements

          The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in this report for the years ended December 31, 2001 and 2002. Some matters discussed in this Management’s Discussion and Analysis are “forward-looking statements”. These forward-looking statements can generally be identified as such because the context of the statement will include words such as we “believe”, “anticipate,” “expect” or words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated including our ability to manage growth, the availability and integration of acquisition targets, competition, weather conditions, geographic concentration and government regulation. You should consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.

Overview

          Waste Industries is a regional, vertically integrated provider of solid waste services.  We were founded by members of the current senior management team in 1970. We operate primarily in North Carolina, South Carolina, Virginia, Tennessee, Mississippi, Alabama, Georgia and Florida, providing solid waste collection, transfer, recycling, processing and disposal services for commercial, industrial, municipal and residential customers. At December 31, 2002, we operated 40 collection operations, 26 transfer stations, approximately 100 county convenience drop-off centers, eight recycling facilities and 11 landfills in the southeastern U.S. We had revenues of $249.3 million and operating income of $24.3 million in the year ended December 31, 2001, and revenues of $251.8 million and operating income of $27.7 million in the year ended December 31, 2002.

          Our presence in high-growth markets in the southeastern U.S., including North Carolina, Georgia and Virginia, has supported our internal growth.  From 1990 through 2002, we acquired, either by merger or asset purchase, 69 solid waste collection or disposal operations.  Sixty-five of these acquisitions were accounted for as purchases.  Accordingly, the results of operations of these acquired businesses have been included in our financial statements only from the respective dates of acquisition and have affected period-to-period comparisons of our operating results.  During the year ended December 31, 2002, we did not have any significant acquisitions requiring historical or pro forma financial statements to be presented.  We anticipate that a significant part of our future growth will come from acquiring additional solid waste collection, transfer and disposal businesses and, therefore, we expect that additional acquisitions could continue to affect period-to-period comparisons of our operating results.  Current levels of population growth and economic development in the southeastern U.S. and our strong market presence in the region should provide an opportunity to increase our revenues and market share.  As we add customers in existing markets, our density should improve, which we expect will increase our collection efficiencies and profitability.

Results of Operations

General

          Our branch waste collection operations generate revenues from fees collected from commercial, industrial and residential collection and transfer station customers.  We derive a substantial portion of our collection revenues from commercial and industrial services that are performed under one-year to five-year service agreements.  Our residential collection services are performed either on a subscription basis with individual households, or under contracts with municipalities, apartment owners, homeowners associations or mobile home park operators.  Residential customers on a subscription basis are billed quarterly in advance and provide us with a stable source of revenues.  A liability for future service is recorded upon billing and revenues are recognized at the end of each month in

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Index to Financial Statements

which services are actually provided.  Municipal contracts in our existing markets are typically awarded, at least initially, on a competitive bid basis and thereafter on a bid or negotiated basis and usually range in duration from one to five years.  Municipal contracts generally provide consistent cash flow during the terms of the contracts.

          Our prices for our solid waste services are typically determined by the collection frequency and level of service, route density, volume, weight and type of waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing, and prices charged in our markets for similar services.

          Our ability to pass on price increases is sometimes limited by the terms of our contracts.  Long-term solid waste collection contracts typically contain a formula, generally based on a predetermined published price index, for automatic adjustment of fees to cover increases in some, but not all, operating costs.

          At December 31, 2002, we operated approximately 100 convenience sites under contract with 14 counties in order to consolidate waste in rural areas.  These contracts, which are usually competitively bid, generally have terms of one to five years and provide consistent cash flow during the term of the contract since we are paid regularly by the local government.  At December 31, 2002, we also operated eight recycling processing facilities as part of our collection and transfer operations where we collect, process, sort and recycle paper products, aluminum and steel cans, pallets, plastics, glass and other items.  Our recycling facilities generate revenues from the collection, processing and resale of recycled commodities, particularly recycled wastepaper.  Through a centralized effort, we resell recycled commodities using commercially reasonable practices and seek to manage commodity-pricing risk by spreading the risk among our customers.  We also operate curbside residential recycling programs in connection with our residential collection operations in most of the communities we serve.

          Operating expenses for our collection operations include labor, fuel, equipment maintenance and tipping fees paid to landfills.  At December 31, 2002, we owned, operated or transferred from 26 transfer stations that reduce our costs by improving our utilization of collection personnel and equipment and by consolidating the waste stream to gain more favorable disposal rates.  At December 31, 2002, we owned and operated 11 landfills.  Operating expenses for these landfill operations include labor, equipment, legal and administrative, ongoing environmental compliance, host community fees, site maintenance and accruals for closure and post-closure maintenance.  Cost of equipment sales primarily consists of our cost to purchase the equipment that we resell.

          We capitalize certain expenditures related to pending acquisitions or development projects.  Indirect acquisition and project development costs, such as executive and corporate overhead, public relations and other corporate services, are expensed as incurred.  Our policy is to charge against net income any unamortized capitalized expenditures and advances (net of any portion thereof that we estimate to be recoverable, through sale or otherwise) relating to any operation that is permanently shut down, any pending acquisition that is not consummated and any landfill development project that is not expected to be successfully completed.  Engineering, legal, permitting, construction and other costs directly associated with the acquisition or development of a landfill, together with associated interest, are capitalized.

          Selling, general and administrative, or SG&A, expenses include management salaries, clerical and administrative overhead, professional services, costs associated with our marketing and sales force and community relations expense.

          Property and equipment is depreciated over the estimated useful life of the assets using the straight-line method.

          Other income has not historically been material to our results of operations.

          To date, inflation has not had a significant impact on our operations.

Critical Accounting Policies

          We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements.  Our significant accounting policies are described in Note 1 to the consolidated financial statements.  We consider our critical accounting policies to be those accounting policies that require us to make significant estimates and assumptions that have a material impact on the carrying value of our assets and liabilities.  The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances.  Actual results could differ significantly from these estimates and assumptions that could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.           

          We believe the following are critical accounting policies that require the most significant estimates and assumptions that are particularly susceptible to a significant change in the future:

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Index to Financial Statements

Allowance For Doubtful Accounts

          We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Landfill Accounting

          Landfill permitting, acquisition and preparation costs are amortized using a units-of-production method as permitted airspace of the landfill is consumed.  Landfill permitting and preparation costs represent only direct costs related to these activities, including legal, engineering and construction.  Landfill preparation costs include the costs of construction associated with excavation, liners, site berms and the installation of leak detection and leachate collection systems.  In determining the amortization rate for a landfill, preparation costs include the total estimated costs to complete construction of the landfill’s permitted and permittable capacity.  Units-of-production amortization rates are determined annually.  We determine the rates based on estimates provided by our internal and third party engineers, and consider the information provided by surveys that are performed at least annually.  Significant changes in our estimates could result in material increases to our landfill depletion rates, which could have a material adverse impact on our financial condition and results of operations.

          We routinely review our investment in operating landfills to determine whether the costs of these investments are realizable.  Judgments regarding the existence of impairment indicators are based on regulatory factors, market conditions and operational performance of our landfills.  Future events could cause us to conclude that impairment indicators exist and that our landfill carrying costs are impaired.  Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Disposal Site Closure and Long-term Care

          Landfill closure and post-closure costs represent an estimate of the current value of the future obligations associated with closure and post-closure monitoring of non-hazardous solid waste landfills currently owned by us. Closure and post-closure monitoring and maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. In determining accruals for closure and post-closure monitoring and maintenance requirements, we consider final capping of the site, site inspection, groundwater monitoring, leachate management, methane gas control and recovery, and operating and maintenance costs to be incurred during the period after the facility closes.  Some of these environmental costs, principally capping and methane gas control costs, are also incurred during the operating life of the site in accordance with the landfill operation requirements of the Subtitle D Regulations and the air emissions standards.  Our accounting personnel and consultants review at least annually the future cost requirements for closure and post-closure monitoring and maintenance for our operating landfills.  The impact of changes determined to be changes in estimates, based on the annual update, are accounted for on a prospective basis.

          While the precise amounts of these future obligations cannot be determined, at December 31, 2002, we estimate our total landfill closure and post-closure costs to range from $70.0 million to $71.9 million.  We provide accruals for these estimated costs as the remaining permitted airspace of landfills is consumed.  These costs are expressed in current dollars and are not discounted to reflect anticipated timing of future expenditures.  At December 31, 2001 and 2002, we had accrued approximately $3.8 million and $4.9 million for such costs.  Significant revisions in the estimated lives of our landfills or significant increases in our estimates of landfill closure and post closure costs could have a material adverse impact on our financial condition and results of operations.

Derivative Financial Instruments

          We formally document our hedge relationships, including identifying the hedge instruments and hedged items, as well as our risk management objectives and strategies for entering into the hedge transaction.  Our derivative instruments qualify for hedge accounting treatment under SFAS No. 133.  In order to qualify for hedge accounting, criteria must be met, including a requirement that both at inception of the hedge, and on an ongoing basis, the hedging relationship is expected to be highly effective in offsetting cash flows attributable to the hedged risk during the term of the hedge.  When it is determined that a derivative ceases to be a highly effective hedge, we discontinue hedge accounting, and any gains or losses on the derivative instrument are recognized in earnings.

Long-lived Assets

          In accordance with Statement of Financial Accounting Standards, or SFAS, No. 144, Accounting For The Impairment of Long-lived Assets, we review long-lived assets for impairment on a market-by-market basis whenever events or changes in the

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Index to Financial Statements

circumstances indicate that the carrying amount of an asset might not be recoverable.  If an evaluation is required, the projected future net cash flows on an undiscounted basis attributable to each market would be compared to the carrying value of the long-lived assets (including an allocation of goodwill, if appropriate) of that market.  If an impairment is indicated, the amount of the impairment is measured based on the fair value of the asset.  We also evaluate the remaining useful lives to determine whether events and circumstances warrant revised estimates of such lives.  Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

          The following table sets forth for the periods indicated the percentage of revenues represented by the individual line items reflected in our statements of operations (some items have been reclassified for presentation purposes only):

Year Ended December 31, 2002 Compared To Year Ended December 31, 2001

          Revenues. Total revenues increased $2.5 million, or 1.0%, to $251.8 million in 2002, from $249.3 million in 2001. This increase was attributable primarily to the effect of three businesses acquired during the year ended December 31, 2001 and eight businesses and contracts acquired during the year ended December 31, 2002, resulting in an $2.8 million increase, offset by the decrease in revenues associated with collection operations and hauling assets sold of $1.1 million and the effect of prices and collection volumes resulting from new municipal and commercial contracts and residential subscriptions, resulting in an increase of $0.8 million.

          Total Cost of Operations. Total cost of operations increased $3.4 million, or 2.2%, to $162.0 million in 2002 from $158.6 million in 2001. This increase was attributable primarily to increased casualty and worker compensation insurance of approximately $2.3 million, increased fleet maintenance costs of approximately $1.2 million, increased labor costs and associated expenses of approximately $1.1 million, increased landfill maintenance expense of approximately $0.9 million, offset by decreased landfill and disposal fees of approximately $2.1 million due to increased internalization.  Total cost of operations as a percentage of revenues increased from 63.6% to 64.3% for 2001 and 2002, respectively. These increases in operations are primarily the result of the pervasive increase in insurance costs facing all industries, including the waste industry, coupled with the expansion of our existing operations through acquisitions.

          SG&A. SG&A decreased $2.7 million, or 7.4%, to $33.8 million in 2002 from $36.6 million in 2001. This decrease was attributable primarily to enhanced productivity and cost containment strategies employed during the year. These initiatives resulted in decreased labor costs and related expenses of approximately $1.8 million, lower bad debt provisions of approximately $0.6 million and decreased postage fees of $300,000. SG&A as a percentage of revenues decreased to 13.4% in 2002 from 14.6% in 2001 as a result of synergies achieved through acquisitions and enhanced productivity.

          Depreciation and Amortization. Depreciation and amortization decreased $1.1 million, or 3.7%, to $27.9 million in 2002 from $28.9 million in 2001.  Depreciation and amortization, as a percentage of revenues decreased to 11.1% in 2002 from 11.6% in 2001.  The primary component of this decrease was the adoption of SFAS No. 142, Goodwill and Other Intangible Assets.  In accordance with SFAS No. 142, we ceased amortizing goodwill effective January 1, 2002.

          Organizational Costs.  We incurred organizational costs of approximately $570,000 for 2001, which were primarily related to our holding company reorganization.  The reorganization enabled us to simplify our organizational structure, segregate for operational and liability purposes our distinct business activities and those of our subsidiaries, allow greater autonomy to companies currently owned or to be acquired by us in the future, and make it easier to implement future secured credit facilities at reduced costs of implementation.  We did not incur these costs in 2002.

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Index to Financial Statements

          Loss on Disposal of Collection and Hauling Assets. We recognized a loss on sale of business units totaling approximately $400,000 and $100,000 at December 31, 2001 and 2002, respectively. These sales were a divestiture of assets in certain markets to better align us for enhanced profitability.

          Interest Expense (net of interest income).  Interest expense (net of interest income) decreased $1.9 million, or 14.8%, to $11.0 million in 2002 from $12.9 million in 2001. This decrease was primarily attributable to lower average debt levels of $152.6 million, compared to $170.3 million in 2002 and 2001, respectively.

          Income Tax Expense. Income tax expense increased $2.1 million, or 48.8%, to $6.3 million in 2002 from $4.2 million in 2001. This increase was attributable to an increase in income before taxes.

          Net Income. Net income increased $3.6 million, or 48.5%, to $11.0 million in 2002 from $7.4 million in 2001. This increase was primarily attributable to increased total revenues, decreased SG&A costs, depreciation and amortization expense and interest expense (net of interest income), offset by increased total operating costs and income tax expense.

Year Ended December 31, 2001 Compared To Year Ended December 31, 2000

          Revenues. Total revenues increased $6.9 million, or 2.8%, to $249.3 million in 2001, from $242.4 million in 2000. This increase was attributable primarily to the following factors:  the effect of seven businesses acquired during the year ended December 31, 2000 and three businesses and contracts acquired during the year ended December 31, 2001, resulting in an $8.6 million increase, offset by the decrease in revenues associated with collection operations sold of $5.4 million and the effect of prices and collection volumes resulting from new municipal and commercial contracts and residential subscriptions and annexation fees, resulting in an increase of $3.7 million.

          Total Cost of Operations. Total cost of operations increased $8.5 million, or 5.6%, to $158.6 million in 2001 from $150.1 million in 2000. This increase was attributable primarily to increased insurance expense of approximately $3.7 million, increased labor costs and associated expenses of approximately $3.5 million, increased landfill expense of approximately $1.3 million offset by a decrease of disposal fees of approximately $5.1 million, increased fleet maintenance costs of approximately $1.7 million, as well as a $3.4 million increase due to general costs associated with the acquisition of seven businesses in 2000 and three businesses in 2001.  Total cost of operations as a percentage of revenues increased from 62.0% in 2000 to 63.6% in 2001.

          SG&A. SG&A decreased $2.0 million, or 5.2%, to $36.6 million in 2001 from $38.6 million in 2000. This decrease was attributable primarily to a decrease in labor costs and associated expenses of approximately $2.0 million.  SG&A as a percentage of revenues decreased to 14.6% in 2001 from 15.9% in 2000.

          Depreciation and Amortization. Depreciation and amortization increased $2.5 million, or 9.6%, to $28.9 million in 2001 from $26.4 million in 2000.  The primary components of this increase were the effect of additional depreciation related to the seven businesses acquired during the year ended December 31, 2000 and the three businesses acquired during the year ended December 31, 2001 of $1.0 million and $0.5 million resulting from equipment acquired for the operation at the landfills.  The remaining $1.0 million related to increased property, equipment and landfill site and cell costs due to higher collection volumes.  Depreciation and amortization as a percentage of revenues increased to 11.6% in 2001 from 10.9% in 2000.

          Organizational Costs.  We incurred organizational costs of approximately $567,000 and $570,000 for 2000 and 2001, respectively, which were primarily related to our holding company reorganization.  The reorganization enabled us to simplify our organizational structure, segregate for operational and liability purposes our distinct business activities and those of our subsidiaries, allow greater autonomy to companies currently owned or to be acquired by us in the future, and make it easier to implement future secured credit facilities at reduced costs of implementation.

          Loss on Disposal of Collection and Hauling Assets. We recognized a loss on sale of business units totaling approximately $1.0 million and $0.4 million at December 31, 2000 and 2001, respectively. These sales were a divestiture of assets in certain markets to better align us for enhanced profitability.

          Interest Expense (net of interest income).  Interest expense (net of interest income) decreased approximately $100,000, or 0.7%, to $12.9 million in 2001 from $13.0 million in 2000. This decrease was primarily due to the lower average interest rate on borrowings of 7.2% for 2001 compared to 8.9% for 2000 and lower average borrowings ($192.8 million for 2001 compared to $201.6 million in 2000).

          Income Tax Expense. Income tax expense decreased approximately $900,000, or 17.0%, to $4.2 million in 2001 from $5.1 million in 2000. This decrease was attributable to a decline in income before income taxes and a decrease in the effective tax rate of approximately 3.5% (from 40.0% to 36.5%) as a result of our holding company reorganization completed in 2001.

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Index to Financial Statements

          Net Income. Net income decreased approximately $300,000 million, or 3.6%, to $7.4 million in 2001 from $7.7 million in 2000. This decrease was primarily attributable to an increase in total cost of operations, insurance expense and depreciation and amortization expense offset by a decrease in income tax expense in 2001.

Liquidity and Capital Resources

          Our working capital at December 31, 2002 was $3.8 million and $5.8 million at December 31, 2001.  Our strategy in managing our working capital has been to apply the cash generated from operations that remains available after satisfying our working capital and capital expenditure requirements to reduce indebtedness under our bank revolving credit facility and to minimize our cash balances. We generally finance our working capital requirements from internally generated funds and bank borrowings. In addition to internally generated funds, we have in place financing arrangements to satisfy our currently anticipated working capital needs in 2002. Prior to 2000, we had fully drawn our three $25 million term facilities with Prudential Insurance Company of America. In 2000, we began principal repayments on the first $25 million term facility.  The Prudential facilities require us to maintain financial ratios, such as minimum net worth, net income, and limits on capital expenditures and indebtedness. Also, the facility prohibits the payments of cash dividends. In addition, it requires the lenders’ approval of acquisitions in some circumstances. Interest on the three Prudential facilities is paid quarterly, based on fixed rates for the three facilities of 7.28%, 6.96% and 6.84%, respectively, and the facilities mature as follows: $10.7 million in April 2006, $25 million in June 2008 and $25 million in February 2009, subject to renewal.

          We maintain a revolving credit agreement with a syndicate of lending institutions for which Fleet National Bank, formerly known as BankBoston, N.A., acts as agent. This credit facility provides up to $200 million through November 2004. Virtually all of our assets, and those of our subsidiaries, including our interest in the equity securities of our subsidiaries, secure our obligations under the Fleet credit facility. Pursuant to an intercreditor agreement with Fleet, Prudential shares in the collateral pledged under the Fleet credit facility. In addition, our subsidiaries have guaranteed our obligations under the Prudential term loan facilities. The Fleet credit facility bears interest at a rate per annum equal to, at our option, either a Fleet base rate or at the Eurodollar rate (based on Eurodollar interbank market rates) plus, in each case, a percentage rate that fluctuates, based on the ratio of our funded debt to EBITDA (income before income taxes plus interest expense and depreciation and amortization), from 0% to 0.5% for base rate borrowings and 1.5% to 2.5% for Eurodollar rate borrowings. The Fleet facility requires us to maintain financial ratios and satisfy other requirements, such as minimum net worth, net income, and limits on capital expenditures and indebtedness.  Also, the facility prohibits the payments of cash dividends.  In addition, it requires the lenders’ approval of acquisitions in some circumstances.  As of December 31, 2002, $60 million was outstanding under the Fleet credit facility, and the average interest rate on outstanding borrowings was approximately 5.60%.

          On April 5, 2001, we closed on a variable rate development bond with Sampson County (“Sampson facility”).  This bond provides up to $33.7 million of income tax exempt funding. As of December 31, 2002, an aggregate of approximately $30.9 million was outstanding under the Sampson facility.  These funds were drawn to repay funds borrowed from the Fleet syndication used to finance the original Sampson County Landfill acquisition. The bonds are backed by a letter of credit issued by Wachovia Bank & Trust as a participating lender under our Fleet syndication.  The average interest rate on outstanding borrowings under the Sampson facility was approximately 3.8% at December 31, 2002.

         As of December 31, 2002, we were in compliance with all covenants and restrictions related to all outstanding borrowings.

         As of December 31, 2002, we had the following contractual obligations and commercial commitments (in thousands):

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Index to Financial Statements

PAYMENTS DUE BY PERIOD

          (1)     As of December 31, 2002, our Fleet credit facility allows us to borrow up to $200 million provided we are in compliance with loan covenants.

          (2)     Environmental liabilities are based on current costs and include final closure, post closure and environmental remediation costs.

AMOUNT OF COMMITMENT EXPIRATION PER PERIOD

          Net cash provided by operating activities totaled $40.9 million for the year ended December 31, 2002 that consisted primarily of net income of $11.0 million plus non-cash adjustments (e.g. depreciation and amortization, etc.) of $32.5 million, offset by a reduction in working capital.

          For the year ended December 31, 2002, net cash used in investing activities was $22.3 million.  Of this, $6.9 million was used to fund the cash portion of acquisitions and $18.2 million was used to fund capital expenditures, which was primarily for investments in property and equipment, consisting primarily of trucks, containers and other equipment.  Cash inflows from investing activities included $1.9 million received from the sale of property and equipment.

          Capital expenditures were $18.2 million for 2002 compared to $25.0 million in 2001.  In 2003, we expect to spend approximately $33.4 million on capital expenditures, including $8.7 million for vehicle and equipment additions and replacements, approximately $14.2 million for landfill site and cell development, approximately $7.1 million for support equipment and approximately $3.4 million for facilities, additions and improvements. We expect to fund our planned 2003 capital expenditures principally through internally generated funds and borrowings under existing credit facilities. As an owner and potential acquirer of additional new landfill disposal facilities, we might also be required to make significant expenditures to bring newly acquired disposal facilities into compliance with regulatory requirements.  We might also be required to make significant expenditures to obtain permits for newly acquired disposal facilities or expand the available disposal capacity at any newly acquired disposal facilities. We cannot currently determine the amount of these expenditures because they will depend on the nature and extent of any acquired landfill disposal facilities, the condition of any facilities acquired and the permitting status of any acquired sites. We expect we would fund any capital expenditures to acquire solid waste collection and disposal businesses and any regulatory expenses for newly acquired disposal facilities, to the extent we could not fund such acquisitions with our common stock, through borrowings under our existing credit facilities.

          We have financial obligations relating to closure and post-closure costs, or long-term care, or remediation of disposal facilities we operate or for which we are or might become responsible. Landfill closure and post-closure costs include estimated costs to be

27

Index to Financial Statements

incurred for final closure of landfills and estimated costs for providing required post-closure monitoring and maintenance of landfills. We estimate, these future cost requirements based on our interpretation of the technical standards of the EPA’s Subtitle D regulations.

          While we cannot determine the precise amounts of these future obligations, at December 31, 2002, we estimate the total costs to be approximately $70.2 million to approximately $71.9 million for remediation, final closure of our operating facilities and post-closure monitoring costs. Our estimate of these costs is expressed in current dollars and is not discounted to reflect anticipated timing of future expenditures. We provide accruals for these future costs (generally for a term of 30 years after final closure of any landfill), and will provide additional accruals for these and other landfills we might acquire or develop in the future, based on engineering estimates of consumption of airspace over the useful lives of such facilities. There can be no assurance that our ultimate financial obligations for actual closure or post-closure costs will not exceed the amount accrued and reserved or amounts otherwise receivable pursuant to insurance policies or trust funds. Such a circumstance could have a material adverse effect on our financial condition and results of operations. Due to the inherent uncertainties related to the total costs for remediation, final closure of our operating facilities and post-closure monitoring costs.

          For the year ended December 31, 2002, net cash used in financing activities was $18.7 million, which included net repayments under long-term debt (including capital leases) of $18.5 million.

          At December 31, 2002, we had approximately $153.2 million of long-term and short-term borrowings outstanding (including capital leases) and approximately $28.3 million in letters of credit including performance bonds. At December 31, 2002, the ratio of our total debt (including capital leases) to total capitalization was 66.2%, compared to 61.2% at December 31, 2001.

New Accounting Pronouncements

          In June 2001, the FASB issued SFAS No. 141, Business Combinations.  Under SFAS 141, the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001 is prohibited.  This statement also changes the criteria for the recognition of acquired intangible assets.  The provisions of SFAS 141 apply to all business combinations accounted for using the purchase method of accounting completed after June 30, 2001.  The adoption of SFAS 141 had no impact on our consolidated financial position and results of operations.

         In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 eliminates amortization of goodwill and other intangible assets that are determined to have an indefinite useful life and instead requires an impairment only approach. At adoption, any goodwill impairment loss is recognized as the cumulative effect of a change in accounting principle. Subsequently, any impairment losses are recognized as a component of income from operations.

         As required, we adopted SFAS No. 142 effective January 1, 2002, which has resulted in the discontinuance of goodwill amortization. We determined we operate in one reporting unit based on the current reporting structure and, accordingly, have assigned goodwill at the enterprise level. We completed the transitional goodwill impairment test by comparing the enterprise fair value to its carrying value and have determined that no impairment exists at the adoption date.

         A reconciliation of previously reported net income and per share amounts adjusted for the exclusion of goodwill net of the related income tax effect is as follows (in thousands, except per share amounts):