WASTE SERVICES, INC. - 10-Q Quarterly Report

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. Yes þ No o

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

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at August 2, 2004 was 96,886,711 (assuming conversion of all exchangeable shares).

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements include the accounts of Waste Services, Inc. (“Waste Services”), successor to Capital Environmental Resource Inc. now known as Waste Services (CA) Inc. (“Capital” or the “Canadian operations”) and its wholly owned subsidiaries (collectively, “we,” “us” or “our”). We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers in the United States and Canada. In 2003, we initiated a disposal-based growth strategy to enter the United States solid waste market and establish leading, vertically integrated market positions. Under this strategy, we enter geographic markets with attractive growth or competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. As part of our business strategy to expand into the United States, we entered into a migration transaction, which was completed effective July 31, 2004. Under the migration transaction, our corporate structure was reorganized so that Waste Services, a Delaware company, is the ultimate parent company of our corporate group. Prior to the migration transaction, Waste Services was a subsidiary of Capital. After the migration transaction, Capital became Waste Services’ subsidiary.

As further described in Note 8, we failed to meet certain of the financial covenants contained in the Credit Facilities. We are currently in discussion with lenders to obtain a waiver of our failure to comply, as well as provide access to capacity under our revolving credit facility. We cannot provide any assurance that we will be able to maintain existing capacity or obtain short-term liquidity on acceptable terms or at all. If our lenders accelerate repayment of our debt, it would cause substantial doubt about our ability to continue as a going concern.

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany transactions and accounts have been eliminated. All figures are presented in thousands of U.S. dollars, except share and per share data, or except where expressly stated as being in Canadian dollars (“C$”) or in millions. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. Except as disclosed in Note 2, the accounting policies followed in the preparation of these interim condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2003, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2003. Income taxes during these interim periods have been provided for based upon our anticipated annual effective income tax rate. Certain reclassifications have been made to the prior period financial statement amounts to conform to the current presentation. Due to the seasonal nature of our business, operating results for interim periods are not necessarily indicative of the results for full years. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto appearing in our annual report on Form 10-K for the year ended December 31, 2003.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, depletion of landfill

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development costs, liabilities for capping, closure and post-closure obligations, insurance reserves, liabilities for potential litigation and deferred taxes.

A portion of our operations are domiciled in Canada; as such, for each reporting period, we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, reported results of operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of Canadian operations have been translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of Canadian operations have been translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income (loss). Separately, monetary assets and liabilities denominated in U.S. dollars held by our Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates.

Basic earnings (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated based on the weighted average shares of common stock outstanding during the period plus the dilutive effect of common stock purchase warrants and stock options using the treasury stock method and the dilutive effects of convertible instruments using the if-converted method. Contingently issuable shares are included in the computation of basic earnings (loss) per share when issuance of the shares is no longer contingent. Due to the net losses attributable to common shareholders for the three months and six months ended June 30, 2004 and 2003, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive. Dilutive securities not included in the diluted loss per share calculation are as follows (unaudited):

On January 1, 2003, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 143 “Accounting for Asset Retirement Obligations.” SFAS No. 143 required us to change our methodology used to record liabilities related to capping, closure and post-closure of our landfill operations. Under SFAS No. 143, we are required to recognize as an asset, the fair value of the liability for an asset retirement obligation. The asset is then depleted, consistently with other capitalized landfill costs, over the remaining useful life of the site based upon units of consumption as airspace in the landfill is consumed. Upon adoption, the liability we recognized represented the present value of the total estimated future asset retirement obligation. The methodology we used to define the cost pool related to an obligating event included

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total capping, closure and post-closure costs to be incurred, on a discounted basis, over the remaining life of the site.

In connection with the opening of our JED Landfill in Florida in the first quarter of 2004, we re-evaluated and changed the methodology used to define an obligating event, and we segregated the cost pool for the obligation into closure and post-closure obligations and landfill capping obligations. Effective January 1, 2004, we recognize the fair value of the liability for the closure and post-closure obligation over the life of the landfill as waste is placed in the site as opposed to the time at which the landfill commences operations. Additionally, under our new method, we view landfill capping events, which occur in phases throughout the life of a landfill, as discrete activities that are recognized as asset retirement obligations separately from other closure and post-closure obligations. These capping events occur generally during the operating life of a landfill and can be associated with specific waste placed under an area to be capped. As a result, we use a separate capping rate per ton to recognize the principal amount of the retirement obligation and related asset associated with each capping event. We deplete the asset recorded pursuant to this approach as waste volume covered by the capping event is placed into the landfill.

We believe this method is preferable as it (i) provides a better measure of the fair value of the asset retirement obligation by more precisely matching the landfill obligating events with the recognition of the fair value of the asset retirement obligation; (ii) is more consistent with our policies for the allocation of purchase price in landfill acquisitions and the related valuation of assumed retirement obligations; (iii) reflects a more accurate rate of accretion thereby creating a more accurate value of our current and future retirement obligations and (iv) is the predominant method used in our industry.

The effect of the change in methodology, had it been adopted January 1, 2003, would have been to increase net loss before cumulative effect of change in accounting principle for the three and six months ended June 30, 2003 by approximately $0.1 million and $0.2 million, respectively. The effect of this change on basic or diluted loss per share for the three and six months ended June 30, 2003 would have been de minimus.

The following table summarizes the balance sheet impact of adopting the accounting change on January 1, 2004:

In November 2003, we entered into an agreement to acquire the assets of Allied Waste Industries, Inc.’s (“Allied”) northern and central Florida operations (the “Allied Assets”) for a purchase price of approximately $120.0 million subject to an adjustment for working capital. The primary metropolitan areas served by the Allied Assets are Tampa, Sarasota and Jacksonville, Florida. On December 31, 2003, we completed the first phase of the Allied Assets acquisition. During the first six months of 2004, we completed the acquisition of the remaining Allied Assets.

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In April 2004, we completed an exchange of the Nassau Landfill and related assets, which were acquired from Allied in December 2003, for a collection operation in the metropolitan Orlando area and cash proceeds of $10.0 million. As part of this exchange, the new owner of the Nassau Landfill assumed responsibility for the closure and post closure obligations related to the landfill. Proceeds in excess of net assets exchanged reduced goodwill from the original Allied Assets acquisition by $8.6 million.

In February 2004, we acquired a permitted undeveloped municipal solid waste landfill in Fort Bend County, Texas (the “Fort Bend Regional Landfill”). We expect the landfill to begin operations during the third quarter of 2004. The purchase price was comprised of $5.1 million in cash, a seller financed promissory note of $5.0 million and the issuance of 4,375,000 Common Shares valued at approximately $25.0 million. The landfill site, which will serve the metropolitan Houston area, is approximately 2,600 acres and has an initial permitted capacity of 47.6 million cubic yards. In addition to the landfill, we acquired a leasehold interest in a fully permitted transfer station site near Houston. In connection with the acquisition of the Fort Bend Regional Landfill, we entered into a royalty agreement, under which we will be required to pay a royalty of $0.25 per ton of eligible waste, as defined in the agreement, after we commence operations at the site and for the first five years subsequent to the date of the royalty agreement and $0.35 per ton of eligible waste thereafter.

During the first quarter of 2004, we acquired the assets of three collection businesses in the metropolitan Phoenix area for aggregate cash consideration of approximately $8.4 million plus the current and future issuance of 949,800 Common Shares valued at approximately $5.5 million. Separately, in January 2004, we acquired an industrial-permitted waste landfill site in Saskatchewan, Canada. The purchase price was comprised of $1.1 million in cash and the issuance of 12,000 Common Shares valued at approximately $0.1 million.

During July 2003, we purchased Cactus Waste Systems, LLC for $0.6 million in cash and a $1.2 million option that we exercised in September 2003 to purchase an 800-acre site in Pinal County, Arizona, which has been zoned to permit the development of a landfill. During May 2004, we received the permits and authorizations necessary for the operation of the landfill (the Southeast Regional Landfill) and, as a condition of the purchase, we issued 1,250,000 Common Shares valued at $5.5 million to the sellers during the second quarter of 2004 which has been capitalized as a cost of the landfill. The landfill began operations in July 2004. The sellers are entitled to contingent payments based upon the landfill achieving certain defined average tons of waste per day. Should the landfill achieve a maximum 5,000 tons per day, the total contingent payments would not exceed $18.0 million. Additionally, we entered into a royalty agreement whereby we will pay the sellers a royalty of $0.50 per ton on all waste deposited at the Southeast Regional Landfill after the earlier to occur of July 2006 or the receipt of 1,250 tons of waste per day at the landfill.

The following unaudited condensed consolidated pro forma statement of operations data shows the results of our operations for the three and six months ended June 30, 2004 and 2003 as if recently completed business

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combinations had occurred at the beginning of each period presented (in thousands except per share amounts):

These unaudited condensed consolidated pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place as of the beginning of the respective periods or the results of our future operations. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the acquisitions.

The operating results of acquired businesses are included in the consolidated statements of operations from the dates of acquisition. The assets acquired and liabilities assumed are recorded under the purchase

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method of accounting. Details of the net assets acquired and cash used in business and significant asset acquisitions during the first six months of 2004 are as follows (unaudited):

The above table includes cash deposits and acquisition related costs of $4.0 million and one million shares and warrants valued at $5.7 million, which relate to the Florida Recycling acquisition that were paid or deposited during 2003 and have been capitalized to the cost of the acquisition during 2004.

We allocate the purchase price of an acquired business, on a preliminary basis, to the identified assets acquired based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill. The purchase price allocations are considered preliminary until we have obtained all required information to complete the allocation. Although the time required to obtain the necessary information will vary with circumstances specific to an individual acquisition, the allocation period for finalizing purchase price allocations generally does not exceed one year from the date of consummation of an acquisition. Adjustments to the allocation of purchase price may decrease those amounts allocated to goodwill and, as such, may

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increase those amounts allocated to other tangible or intangible assets, which may result in higher depreciation or amortization expense in future periods.

The changes in landfill sites for the six months ended June 30, 2004 and 2003 are as follows (unaudited):

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Additional landfill site costs include $2.8 million of capital expenditures incurred but not paid as of June 30, 2004.

Accrued closure and post-closure obligations include costs associated with obligations for closure and post-closure of our landfills. The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill as well as the duration of the post-closure monitoring period. The changes to accrued closure and post-closure obligations for the six months ended June 30, 2004 and 2003 are as follows (unaudited):

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The changes in goodwill for the six months ended June 30, 2004 and 2003 are as follows:

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On April 30, 2004, we entered into new Senior Secured Credit Facilities (the “Credit Facilities”) with a syndicate of lenders. The Credit Facilities consist of a five-year revolving credit facility in the amount of $60.0 million, up to $15.0 million of which is available for our Canadian operations, and a seven-year term loan facility in the amount of $100.0 million. The Credit Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined, at our option. The Credit Facilities are secured by substantially all of the assets of our U.S. restricted subsidiaries. Our Canadian operations guarantee and pledge all of their assets only in support of the portion of the revolving credit facility available to them. Separately, 65% of the common shares of Waste Services’ first tier foreign subsidiaries, including Capital, are pledged to secure obligations under the Credit Facilities. As of June 30, 2004, no amounts were drawn under the facility, and $9.7 million was used to support outstanding letters of credit.

Our Credit Facilities contain certain financial and other covenants that restrict our ability to, among other things, make capital expenditures, incur indebtedness, incur liens, dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions. Our financial covenants include (i) minimum consolidated interest coverage; (ii) maximum total leverage and (iii) maximum senior secured leverage.

As of June 30, 2004 we failed to meet certain of the financial covenants contained in the Credit Facilities which constitutes an event of default. As such, we are not able to draw amounts under our revolving credit facilities. We are currently in discussion with lenders to obtain a waiver of our failure to comply, as well as provide access to capacity under our revolving credit facility. Additionally, we will seek to negotiate new financial covenants for the remaining term of the Credit Facilities. We cannot provide any assurance that we will be able to maintain existing capacity or obtain short-term liquidity on acceptable terms or at all, or at what interest rate or collateral requirements. As our lenders continue to review their loans with us, there is no assurance that all amounts outstanding under existing loans will not be accelerated or adversely modified.

If our lenders do not grant a waiver or amend our Credit Facilities, they have the right to seek remedies including acceleration of all outstanding amounts under the Credit Facilities. If the lenders seek acceleration of amounts outstanding under the Credit Facilities this would cause a cross default to occur under the senior subordinated notes and certain other subordinated notes, thus giving each the right to demand accelerated

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repayment. We can provide no assurance that we would be successful in obtaining alternative sources of funding to repay these obligations should these events occur. If the lenders accelerate repayment of our debt, it would cause substantial doubt about our ability to continue as a going concern. The accompanying financial statements have been prepared on a basis assuming we are a going concern.

Although we believe we will be successful in obtaining a waiver and/or an amendment, there can be no assurance we will be successful in our efforts and accordingly, as of June 30, 2004 we have reclassified all of our outstanding debt as current.

On April 30, 2004, we completed a private offering of 9 1/2% Senior Subordinated Notes (“Subordinated Notes”) due 2014 for gross proceeds of $160.0 million. The Subordinated Notes mature on April 15, 2014. Interest on the Subordinated Notes is payable semi annually commencing October 15, 2004. The Subordinated Notes are redeemable, in whole or in part, at our option, on or after April 15, 2009, at a redemption price of 104.75% of the principal amount, declining rateably in annual increments to par on or after April 15, 2012, together with accrued interest to the redemption date. In addition, prior to April 15, 2007, we may redeem up to 35.0% of the aggregate principal amount of the Subordinated Notes with the proceeds of certain equity offerings, at a redemption price equal to 109.5% of the principal amount. Upon a change of control, as such term is defined in the Indenture, we are required to offer to repurchase all the Subordinated Notes at 100.0% of the principal amount, together with accrued interest and liquidated damages, if any, and obtain the consent of our senior lenders to such payment or repay our indebtedness under our Credit Facilities.

The Subordinated Notes are unsecured and are subordinate to our existing and future senior secured indebtedness, including our Credit Facilities, structurally subordinated to existing and future indebtedness of our non-guarantor subsidiaries, rank equally with any unsecured senior subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our obligations with respect to the Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by all of our existing and future domestic restricted subsidiaries. Our Canadian operations are not guarantors under the Subordinated Notes.

The Subordinated Notes contain certain covenants that, in certain circumstances and subject to certain limitations and qualifications, restrict, among other things (i) the incurrence of additional debt; (ii) the payment of dividends and repurchases of stock; (iii) the issuance of preferred stock and the issuance of stock of our subsidiaries; (iv) certain investments; (v) the repurchase of our Preferred Stock; (vi) transactions with affiliates and (vii) certain sales of assets.

We also entered into a Registration Rights Agreement with the initial purchasers of the Subordinated Notes in which we agreed to (i) file a registration statement with respect to the Subordinated Notes within 120 days of the closing date of the issuance of the notes (August 28, 2004), pursuant to which we will exchange the Subordinated Notes for registered notes of Waste Services with terms identical to the Subordinated Notes; (ii) have such registration statement declared effective within 210 days of the issuance date; (iii) maintain the effectiveness of such registration statement for minimum periods specified in the agreement and (iv) file a shelf registration statement in the circumstances and within the time periods specified in the agreement. If we do not comply with these obligations, we will be required to pay liquidated damages, in cash, in an amount equal to $0.05 per week per $1,000 in principal amount, of the unregistered Subordinated Notes, for each week that the default continues for the first 90-days following default. Thereafter, the amount of liquidated damages increases by an additional $0.05 per week per $1,000 in principal amount of unregistered Subordinated Notes for each subsequent 90-day period until all defaults have been cured, to a maximum of $0.50 per week per $1,000 in principal amount of unregistered Subordinated

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Notes outstanding. Liquidated damages, if any, are payable at the same time as interest payments due under the Subordinated Notes.

On December 31, 2003, we entered into a $220.0 million 364-day Senior Secured Credit Facility (the “364-day Facility”) comprised of a $195.0 million term loan and a $25.0 million revolving credit facility, which was secured by substantially all of our current and future acquired assets. Initial borrowings under the 364-day Facility were used to finance the acquisition of certain of the Allied Assets and to repay our prior senior credit facility in full. The 364-day Facility bore interest at 9.0% per annum and was repaid with the proceeds of the Credit Facilities, Subordinated Notes and an equity private placement.

In May 2003, Waste Services issued 55,000 shares of redeemable Preferred Stock (the “Waste Services Preferred Stock”) to Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively “Kelso”), pursuant to the terms of an agreement dated as of May 6, 2003, as amended in February 2004, (the “Waste Services Subscription Agreement”), at a price of $1,000 per share. Waste Services also issued to Kelso 7,150,000 warrants to purchase shares of Common Stock (on a one-for-one basis) of Waste Services for $3.00 per share. The warrants are exercisable at any time until May 6, 2010. The issuance of the Waste Services Preferred Stock resulted in proceeds of approximately $49.5 million, net of fees of approximately $5.5 million. The shares of Waste Services Preferred stock are non-voting. The Waste Services Preferred Stock entitles the holders to cash dividends of 17.75% per annum compounding and accruing quarterly in arrears. The liquidation preference approximated $67.2 million as of June 30, 2004. The Waste Services Preferred Stock entitles the holders to a liquidation preference of $1,000 per share, adjusted for any stock dividend, stock split, reclassification, recapitalization, consolidation or similar event affecting the Waste Services Preferred Stock, plus the amount of any accrued but unpaid dividends on such share as of any date of determination.

As we are not permitted to declare and pay cash dividends pursuant to the terms of our Credit Facilities, the dividend payments will accrue. The Waste Services Preferred Stock, including all accrued and unpaid dividends, must be redeemed in full by no later than May 6, 2015. Until May 6, 2006, we may redeem all or any part of the Waste Services Preferred Stock on payment of the sum of $1,000 per share plus accrued and unpaid dividends calculated as if the Waste Services Preferred Stock were redeemed on May 6, 2006, or approximately $92.7 million. If we do not exercise our option to redeem all of the Waste Services Preferred Stock by May 6, 2009, Kelso may require us to initiate a sale of Waste Services or of its assets on terms acceptable to our board consistent with the exercise of their fiduciary duties. Pursuant to an amendment to the Certificate of Designations of Waste Services dated April 30, 2004, if Waste Services determines, after conducting a sale process, that any such sale would not yield sufficient proceeds to repay in full the indebtedness then outstanding under our Credit Facilities and the redemption amount of our Subordinated Notes issued on April 30, 2004, or at least $320.0 million, then Waste Services may elect to delay such sale. The sale date may be delayed until the earliest to occur of (i) the final maturity date of the Subordinated Notes (April 15, 2014); (ii) the date on which our Credit Facilities and the Subordinated Notes are fully repaid or otherwise satisfied or (iii) a sale of Waste Services. We refer to this date as the delayed sale date. If we do not initiate and complete a sale of Waste Services or its assets within 20 months of initiation of the sale process by the holders of Waste Services Preferred Stock, then on notice from the holders of the Waste Services Preferred Stock, all outstanding Waste Services Preferred Stock will become due and payable on the first anniversary of the date on which the holders of Waste Services Preferred Stock gave notice requiring the initiation of a sale process, for a liquidation amount of 1.20 times the liquidation preference of $1,000 per

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share. If the sale day has been delayed, then Waste Services is not required to pay this increased liquidation amount until the delayed sale date.

Also pursuant to the Amended Certificate of Designations, if Waste Services becomes subject to a liquidation or insolvency event (as such terms are defined in our Amended and Restated Credit Agreement dated April 30, 2004) or in the event of a change of control of Waste Services (as such term is defined in the Amended Certificate of Designations), all payments and other distributions to holders of Waste Services Preferred Stock will be subordinate to the repayment in full of our Credit Facilities. This provision does not prohibit any accrual or increase in the dividend rate or in the liquidation preference of the Waste Services Preferred Stock as provided for in the Amended Certificate of Designations, or the distribution of additional shares or other equity securities to the holders of Waste Services Preferred Stock, so long as such additional shares or other equity securities are subject to at least equivalent subordination provisions. In addition, the Amended Certificate of Designations prohibits us from making any payment or distribution to the holders of Waste Services Preferred Stock in the event of a sale of Waste Services or its assets, or the exercise by the holders of Waste Services Preferred Stock of their right to require payment of the liquidation amount of their shares as a result of the failure to consummate a sale of Waste Services as described in the preceding paragraph, unless such payment or distribution is expressly permitted pursuant to the terms of the agreement then governing our Credit Facilities.

Separately, we paid Kelso and Company, L.P., an affiliate of Kelso, an advisory services fee of $1.65 million in connection with the issuance of the Waste Services Preferred Stock to Kelso. In February 2004, we also paid Kelso and Company, L.P. a $0.5 million fee in connection with services related to the arrangement of our previous credit facilities that were entered into on December 31, 2003. Two of our directors, George E. Matelich and Michael B. Lazar, are Managing Directors of Kelso and Company, L.P.

We are subject to liability for environmental damage that our solid waste facilities may cause, including damage to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, including damage resulting from conditions existing prior to our acquisition of such facilities. Pollutants or hazardous substances whose transportation, treatment, or disposal was arranged by us or our predecessors, may also subject us to liability for any off-site environmental contamination caused by these pollutants or hazardous substances.

Any substantial liability for environmental damage incurred by us could have a material adverse effect on our financial condition, results of operations or cash flows. As of the date of these condensed consolidated financial statements, we estimate the range of reasonably possible losses related to environmental matters to be insignificant and we are not aware of any such environmental liabilities that would be material to our operations or financial condition.

In our normal course of business and as a result of the extensive governmental regulation of the solid waste industry, we may periodically become subject to various judicial and administrative proceedings involving federal, provincial, state or local agencies. In these proceedings, an agency may seek to impose fines on us or revoke or deny renewal of an operating permit or license held by us. From time to time, we may also be subject to actions brought by citizens’ groups, adjacent landowners or residents in connection with the

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permitting and licensing of transfer stations and landfills or allegations related to environmental damage or violations of the permits and licenses pursuant to which we operate.

In addition, we may become party to various claims and suits for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of a waste management business. We are currently involved in pending litigation with Waste Management of Canada Corporation (formerly Canadian Waste Services Inc.), one of our competitors, which is more fully described in our financial statements for the year ended December 31, 2003, as filed on Form 10-K with the Securities and Exchange Commission. The status of these actions, as well as the facts and circumstances related to the suits, remain substantially unchanged from those disclosed in our Form 10-K. To date, no statements of defense have been filed, and documents have not been exchanged. We intend to vigorously defend the actions with respect to both liability and damages. As of the date of this report, we do not believe that the reasonably possible losses in respect to all or any of these matters would have a material adverse impact on our business, financial condition, results of operations or cash flows and accordingly, we have not established a provision in the financial statements for these matters.

In July 2004, Waste Management, Inc. filed a suit against our President and Chief Operating Officer, Charles A. Wilcox, for breach of contract, including breach of a non-competition agreement, and for a temporary and a permanent injunction. Mr. Wilcox is presently subject to a temporary order restraining him from engaging in certain activities adverse to the interests of Waste Management, Inc. Mr. Wilcox intends to vigorously defend this action.

Municipal solid waste services contracts, permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of June 30, 2004 and December 31, 2003, we had provided customers and various regulatory authorities with such bonds and letters of credit amounting to approximately $63.5 million and $19.6 million, respectively, to collateralize our obligations.

Our U.S.-based automobile, general liability and workers’ compensation insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payment of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. As of June 30, 2004 we have posted a letter of credit with our U.S. insurer of approximately $2.3 million to cover the liability for losses within the deductible limit.

During December 2003, we issued 600,000 Common Shares as part of the purchase price of an acquisition. In connection with this acquisition, we entered into a reimbursement agreement whereby for a period of one year after the second anniversary of the closing date, we will reimburse the seller for the loss on sale of shares below $4.75 per share.

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During the first six months of 2004, we issued 14,798,370 Common Shares in connection with acquisitions and 311,083 Common Shares upon exercise of options and warrants for proceeds of $1.0 million.

On April 30, 2004, we raised approximately $50.7 million, after deducting expenses of approximately $2.9 million, from the sale of 13,400,000 Common Shares and warrants to purchase 1,340,000 Common Shares in private placement transactions to certain investors. The net proceeds were allocated to the Common Shares and warrants to purchase Common Shares, based on the relative fair value of each security at the time of issuance. Sanders Morris Harris Inc. acted as the placement agent for the issuance and was paid a placement agent fee of approximately $2.7 million. Don A. Sanders, a director of ours at the time of issuance, is a principal of Sanders Morris Harris Inc. We also entered into an agreement with the investors in the private placement in which we agreed to file a registration statement for the 13,400,000 Common Shares and the 1,340,000 Common Shares issuable upon exercise of the warrants and have that registration statement declared effective within 120 days from April 30, 2004. Due to the nature of certain financial penalties within the registration rights agreement, the Common Shares, warrants and related proceeds from the offering are classified outside of shareholders’ equity at June 30, 2004, as the shares were not registered at such date. However, such amounts will be reclassified to permanent equity during the third quarter of 2004, as the shares became fully registered in August 2004. The warrants, which had an initial carrying value of $2.6 million and are classified as a liability, have been remeasured to their fair value as of June 30, 2004, resulting in a $0.4 million charge to earnings.

We have stock-based compensation plans accounted for under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25 “Accounting for Stock Issued to Employees,” and related interpretations. Pro forma information regarding the impact of stock-based compensation on net income and earnings per share is required by SFAS No. 123 “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Such unaudited pro forma information, determined as if we had accounted for our employee stock options under the fair value recognition provisions of SFAS No. 123, is illustrated in the following table (unaudited):

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of options granted to June 30, 2004, was estimated using the Black-Scholes option pricing model using the following assumptions:

Compensation expense recognized for stock options subject to variable accounting is based on the intrinsic value (the difference between the exercise price and quoted market price) of the options at the end of each reporting period. Changes in the intrinsic value are recognized until such options are exercised, forfeited or expire.

Details of our 1997 and 1999 Stock Option Plans are described in our consolidated financial statements for the year ended December 31, 2003 filed on Form 10-K. There are no options outstanding under the 1997 Stock Option Plan. Our options are denominated in U.S. and Canadian dollars. During the six months ended June 30, 2004, options to purchase 5,259,000 Common Shares were granted. As of June 30, 2004, the weighted average exercise price for options outstanding was $4.62 and C$6.47 for U.S. and Canadian dollar denominated options, respectively. During the six months ended June 30, 2004, 215,000 options were exercised and 128,735 options expired or were terminated. As of June 30, 2004, the aggregate number of options outstanding entitled holders to purchase 12,744,964 Common Shares at prices ranging from $3.12 to $12.00 and C$4.05 to C$18.05 for U.S. and Canadian dollar denominated options, respectively.

Comprehensive income (loss) includes the effects of foreign currency translation. Comprehensive income (loss) for the three months and six months ended June 30, 2004 and 2003 are as follows (unaudited):

We have determined our operating and reporting segments pursuant to the requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. In making this determination, we considered our organization/reporting structure and the information used by our chief operating decision makers to make decisions about resource allocation and performance assessment. We are organized along geographic locations or regions. The Canadian operations are organized between two regions:

Eastern and Western Canada while the U.S. operations are in Florida and the Southwest (primarily Arizona and Texas). We believe our Canadian and United States geographic segments meet the “Aggregation Criteria” set forth in SFAS No. 131 for the following reasons: (i) the nature of the service, waste collection

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and disposal, is economically the same and transferable across locations; (ii) the type and class of customer is consistent among regions/districts; (iii) the methods used to deliver services are essentially the same (e.g. containers collect waste at market locations and trucks collect and transfer waste to landfills) and (iv) the regulatory environment is consistent within Canada and the United States.

The tables below present certain segment information on our geographic segments as of, and for the three months and six months ended June 30, 2004 and 2003 (unaudited):

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein as well as our annual report on Form 10-K, under the name of Capital Environmental Resource Inc., (now known as Waste Services (CA) Inc.) for the year ended December 31, 2003, as filed with the Securities and Exchange Commission, including the factors set forth in the section titled “Forward Looking Statements” under the heading “Risk Factors” as well as our other filings made with the Securities and Exchange Commission.

We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers in the United States and Canada. In 2003, we initiated a disposal-based growth strategy to enter the United States solid waste market and establish leading, vertically integrated market positions. Under this strategy, we enter geographic markets with attractive growth or competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. As part of our business strategy to expand into the United States, we entered into a migration transaction. Under the migration transaction, our corporate structure was reorganized so that Waste Services, a Delaware company, is the ultimate parent company of our corporate group. Prior to the migration transaction, Waste Services was a subsidiary of Capital. After the migration transaction, Capital became our subsidiary.

In July 2004, we appointed Charles A. Wilcox as President and Chief Operating Officer. Prior to joining us, Mr. Wilcox held the positions of Senior Vice President, Market Planning and Development, and prior to that, Senior Vice President Eastern Group for Waste Management, Inc. In the third quarter, we expect to recognize a severance charge of approximately $1.7 million pursuant to the terms of our former Chief Operating Officer’s employment agreement.

As further described in our discussion under the heading “Liquidity and Capital Resources,” we failed to meet certain of the financial covenants contained in the Credit Facilities. We are currently in discussion with lenders to obtain a waiver of our failure to comply, as well as provide access to capacity under our revolving credit facility. We cannot provide any assurance that we will be able to maintain existing capacity or obtain short-term liquidity on acceptable terms or at all. If our lenders accelerate repayment of our debt, it would cause substantial doubt about our ability to continue as a going concern.

Our revenue consists primarily of fees charged to customers for solid waste collection, landfill disposal, transfer and recycling services.

We derive a substantial portion of our collection revenue from services provided to commercial, industrial and residential customers that are generally performed under service agreements or pursuant to contracts with municipalities. We recognize revenue when services are rendered. Amounts billed to customers prior to providing the related services are reflected as deferred revenue and reported as revenue in the periods in which the services are rendered.

We provide collection services for commercial and industrial customers generally under one to three year service agreements. We determine the fees we charge our customers based on a variety of factors, including collection frequency, level of service, route density, the type, volume and weight of the waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged by competitors for similar services. Our contracts with commercial and industrial customers typically allow us to pass on increased costs resulting from variable items such as disposal and fuel costs and surcharges. Our ability to pass on cost increases is sometimes limited by the terms of our contracts.

We provide residential waste collection services through a variety of contractual arrangements, including contracts with municipalities, landlords and homeowners associations or subscription arrangements with

homeowners. Our contracts with municipalities are typically for a term of up to five years and contain a formula, generally based on a predetermined published price index, for automatic adjustments to fees to cover increases in some, but not all, of our operating costs. Certain of our contracts with municipalities contain renewal provisions. The fees we charge for residential solid waste collection services provided on a subscription basis are based primarily on route density, the frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing and prices we charge in the market for similar services.

We charge our landfill and transfer station customers a tipping fee on a per ton basis for disposing of their solid waste at our transfer stations and landfills. We generally base our landfill tipping fees on market factors and the type and weight of, or volume of the waste deposited. We generally base our transfer station tipping fees on market factors and the cost of processing the waste deposited at the transfer station, the cost of transporting the waste to a disposal facility and the cost of disposal.

Material recovery facilities generate revenue from the sale of recyclable commodities. In an effort to reduce our exposure to commodity price fluctuations on recycled materials, where competitive pressures permit, we charge collection or processing fees for recycling volume collected from our customers.

Our cost of operations primarily includes tipping fees and related disposal costs, labor and related benefit costs, equipment maintenance, fuel, vehicle insurance and landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated operations in each of our markets which will allow us to internalize our own collection volume into our landfills and transfer stations. Internalization lowers our disposal costs by allowing us to eliminate tipping fees otherwise paid to an independent landfill operator. We believe internalization provides us with a competitive advantage by allowing us to be a low cost provider in our markets. Historically our internalization has been relatively low, but as a result of the recent opening of our landfills in Florida and Arizona, we expect our internalization will gradually increase over time as we develop our network of transfer stations and maximize delivery of our collection volumes to these landfill sites.

In markets where we do not have our own landfills, we seek to secure long-term disposal arrangements with municipalities or private owners of landfills or transfer stations. In these markets, our ability to maintain competitive prices for our collection services is generally dependent upon our ability to secure low cost disposal pricing. If owners of third party disposal sites discontinue our arrangements, we would have to seek alternative disposal sites which could impact our profitability and cash flow. In addition, if third party disposal sites increase their tipping fees and we are unable to pass these increases on to our collection customers, our profitability and cash flow would be negatively impacted.

We believe the age and condition of a fleet has a significant impact on operating costs including, but not limited to, repairs and maintenance, insurance and driver training and retention costs. Through capital investment, we seek to maintain an average fleet age of five to six years. We believe this enables us to minimize our repair and maintenance costs, safety and insurance costs and employee turnover related costs.

Selling, general and administrative expense includes managerial costs, information systems, sales force, administrative expenses and professional fees. We have made a significant investment in information systems and in assembling our management team to support our growth strategy. As such, our selling, general and administrative expense for the year-to-date period as a percentage of our revenue has increased over the same period last year. We expect selling, general and administrative expense to decline as a percentage of revenue as we complete and integrate acquisitions and increase volume at our new landfill sites.

Depreciation, depletion and amortization expense includes depreciation of fixed assets over their estimated useful lives using the straight-line method, depletion of landfill costs, including capping, closure and post-closure obligations using the units-of-consumption method, and amortization of intangible assets including customer relationships and contracts and covenants not-to-compete which are amortized over the expected life of the benefit to be received by such intangibles. As further discussed in Note 2 to the unaudited condensed consolidated financial statements, effective January 1, 2004, we changed our method of accounting for asset retirement obligations.

We capitalize certain third party costs related to pending acquisitions or development projects. These costs remain deferred until we cease to be engaged on a regular and ongoing basis with completion of the proposed acquisition, at which point they are charged currently in earnings. In the event that the target is acquired, these costs are incorporated in the cost of the acquired business. We currently expense indirect and internal costs including executive salaries, overhead and travel costs related to acquisitions.

In April 2004, we completed the acquisition of the issued and outstanding shares of Florida Recycling Services, Inc. (“Florida Recycling”) for an aggregate purchase price of approximately $99.0 million in cash, working capital of approximately $2.2 million, subject to further adjustment and the issuance of 9,250,000 Common Shares valued at approximately $51.4 million. Florida Recycling’s operations are based in central Florida, primarily serving the Orlando, Daytona, Fort Myers, and Tampa markets. The performance of the operations of Florida Recycling has been below our expectations and we are in the process of conducting a thorough review of all aspects of Florida Recycling’s business in an effort to identify the factors contributing to this level of performance.

In February 2004, we acquired a permitted undeveloped municipal solid waste landfill in Fort Bend County, Texas (the “Fort Bend Regional Landfill”). We expect the landfill to being operations during the third quarter of 2004. The purchase price was comprised of $5.1 million in cash, a seller financed promissory note of $5.0 million and the issuance of 4,375,000 Common Shares valued at approximately $25.0 million. The landfill site, which will serve the metropolitan Houston area, is approximately 2,600 acres and has an initial permitted capacity of 47.6 million cubic yards. In addition to the landfill, we acquired a leasehold interest in a fully permitted transfer station site near Houston. In connection with the acquisition of the Fort Bend Regional Landfill, we entered into a royalty agreement, under which we will be required to pay a royalty of $0.25 per ton of eligible waste, as defined in the agreement, after we commence operations at the site and for the first five years subsequent to the date of the royalty agreement and $0.35 per ton of eligible waste thereafter.

day. Should the landfill achieve a maximum 5,000 tons per day, the total contingent payments would not exceed $18.0 million. Additionally, we entered into a royalty agreement whereby we will pay the sellers a royalty of $0.50 per ton on all waste deposited at the Southeast Regional Landfill after the earlier to occur of July 2006 or the receipt of 1,250 tons of waste per day at the landfill.

We expect to continue to make strategic acquisitions which we intend to finance through cash on hand, our Senior Secured Credit Facilities, and/or the issuance of other debt and equity financings.

We have recently acquired and commenced operations at three large municipal solid waste landfill sites in the United States that we believe will materially affect our revenue, profitability and cash flow going forward. These landfills do not have historical operations, and accordingly, our condensed consolidated operating results will not be comparable to financial information for future periods.


	•	JED Landfill — a municipal solid waste landfill with 24 million cubic yards of permitted capacity, located in Osceola County, Florida. The landfill is located approximately 20 miles south of metropolitan Orlando and is well positioned to serve the Orlando metropolitan area and the surrounding counties. The facility opened for operation in the first quarter of 2004. Part of our strategy is to maximize the internalization of waste volumes to our JED Landfill. The execution of this strategy is dependent partly upon the opening of three transfer stations in central Florida. Operations at these transfer station sites were all expected to be operational by the fourth quarter of 2004. However, due to construction delays we now expect them to begin operations in the second and third quarters of 2005.

	•	Southeast Regional Landfill — a municipal solid waste landfill development with 224 million cubic yards of permitted capacity, located in Pinal County, Arizona. The landfill is located between Phoenix and Tucson, Arizona and is well-positioned to serve both markets. The facility opened for operation in the third quarter of 2004. In the third quarter of 2004, we began operations at two of our newly constructed transfer stations in the Phoenix market area.

	•	Fort Bend Regional Landfill — a municipal solid waste landfill development with 48 million cubic yards of permitted capacity, located in Fort Bend County, Texas. The landfill is located approximately 15 miles southwest of metropolitan Houston and is well-positioned to serve the Houston metropolitan area, including Fort Bend County. We expect the landfill facility to open for operations in the third quarter of 2004. We are currently working though construction permitting issues which may delay the opening of our Houston transfer station. We previously expected the transfer station to begin operations in the fourth quarter of 2004.

Results of Operations for the Three Months and Six Months Ended June 30, 2004 and 2003

A portion of our operations are domiciled in Canada; as such, we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, reported results of operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of Canadian operations have been translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of Canadian operations have been translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income (loss). Separately, monetary assets and liabilities denominated in U.S. dollars held by our Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates.

Our consolidated results of operations for the three and six months ended June 30, 2004 and 2003 by geographic segment is as follows (in thousands):

A summary of our revenue for the six months ended June 30, 2004 and 2003 is as follows (in thousands):

Revenue was $72.6 million and $31.3 million for the three months ended June 30, 2004 and 2003, respectively, an increase of $41.3 million or in excess of 100%. The increase in revenue for the three months ended June 30, 2004, as compared to the same period in the prior year, is due to the following (in thousands):

Revenue was $122.9 million and $56.6 million for the six months ended June 30, 2004 and 2003, respectively, an increase of $66.3 million or in excess of 100%. The increase in revenue for the six months ended June 30, 2004, as compared to the same period in the prior year, is due to the following (in thousands):

Cost of operations was $49.9 million and $20.4 million for the three months ended June 30, 2004 and 2003, respectively, an increase of $29.5 million or in excess of 100%. As a percentage of revenue, cost of operations was 68.7% and 65.3% for the three months ended June 30, 2004 and 2003, respectively. The increase in cost of operations as a percentage of revenue is due to lower margins on our newly acquired U.S. operations as compared to our Canadian operations. The increase in disposal, subcontractor, and labor costs in aggregate dollars and as a percent of revenue is due to increased disposal rates and volumes as well as higher transportation costs at our Canadian operations. The increase in cost of operations for the three months ended June 30, 2004, as compared to the same period in the prior year, is due to the following (in thousands):

Cost of operations was $84.1 million and $37.0 million for the six months ended June 30, 2004 and 2003, respectively, an increase of $47.1 million or in excess of 100%. As a percentage of revenue, cost of operations was 68.4% and 65.5% for the six months ended June 30, 2004 and 2003, respectively. The increase in cost of operations as a percentage of revenue is due to lower margins on our newly acquired U.S. operations as compared to our Canadian operations as well as higher costs of labor on certain residential hauling contracts in our Canadian operations. The increase in disposal, subcontractor, and labor costs in aggregate dollars and as a percent of revenue is due to increased disposal rates and volumes as well as higher transportation costs at our

Canadian operations. The increase in cost of operations for the six months ended June 30, 2004, as compared to the same period in the prior year, is due to the following (in thousands):

Selling, general and administrative expense, excluding stock-based compensation expense, was $14.0 million and $6.8 million for the three months ended June 30, 2004 and 2003, respectively, an increase of $7.2 million or in excess of 100%. As a percentage of revenue, selling, general and administrative expense was 19.2% and 21.7% for the three months ended June 30, 2004 and 2003, respectively. Selling, general and administrative expense was $25.9 million and $11.5 million for the six months ended June 30, 2004 and 2003, respectively, an increase of $14.4 million or in excess of 100%. As a percentage of revenue, selling, general and administrative expense was 21.0% and 20.4% for the six months ended June 30, 2004 and 2003, respectively. The overall increase in selling, general and administrative expense is primarily due to acquisitions in the U.S., increased salaries, systems and other overhead costs incurred in connection with our expansion into the U.S. Overhead at our corporate offices was $5.1 million and $4.0 million for the three months ended June 30, 2004 and 2003, respectively and $11.0 million and $5.8 million for the six months ended June 30, 2004 and 2003, respectively. Due to the failure to meet our internal expectations, we reversed $1.4 million of excess bonus accrual, $0.7 million of which was accrued in the first quarter of 2004. In connection with our previously defined migration transaction we incurred legal and professional fees of $0.6 million and $0.7 million for the three and six months ended June 30, 2004. The unfavorable effects of foreign exchange movements increased selling, general and administrative expense $0.1 million and $0.8 million for the three and six months ended June 30, 2004, respectively. We expect selling, general and administrative expense as a percentage of revenue to decline in future periods in 2004, primarily due to spreading our overhead costs over a larger revenue base resulting from our recent acquisitions and landfill openings in the U.S.

Stock-based compensation expense (benefit) relates to warrants issued to an executive officer in 2001 for which variable accounting applies and options or warrants issued to non-employees for services to be rendered. Stock-based compensation expense (benefit), which is partially based on changes in our stock price, was $0.4 million and $0.1 million for the three months ended June 30, 2004 and 2003, respectively, and $(1.0) million and $(0.2) million for the six months ended June 30, 2004 and 2003, respectively.

Depreciation, depletion and amortization was $7.8 million and $3.6 million for the three months ended June 30, 2004 and 2003, respectively, an increase of $4.2 million or in excess of 100.0%. As a percentage of revenue depreciation, depletion and amortization was 10.8% and 11.4% for the three months ended June 30, 2004 and 2003, respectively. The overall increase in depreciation, depletion and amortization for the three

Depreciation, depletion and amortization was $13.3 million and $6.8 million for the six months ended June 30, 2004 and 2003, respectively, an increase of $6.5 million or 95.6%. As a percentage of revenue depreciation, depletion and amortization was 10.8% and 12.0% for the six months ended June 30, 2004 and 2003, respectively. The overall increase in depreciation, depletion and amortization for the six months ended June 30, 2004 as compared to the same period in the prior year is due to the following (in thousands):

The overall increase in depreciation, depletion and amortization is primarily due to our U.S. acquisitions and the opening of our JED Landfill. The decline in depreciation, depletion, and amortization as a percentage of revenue is primarily due to the relative mix of landfill disposal revenue to total revenue. In addition, depletion decreased primarily due to lower volumes at one of our Canadian landfills that was part of our operations in both 2004 and 2003. The weighted average landfill depletion rate for our operating Canadian landfills during the six months ended June 30, 2004 and 2003 was C$10.18 and C$11.16 per tonne, respectively. The weighted average landfill depletion rate for our operating U.S. landfills during the six months ended June 30, 2004 was $6.58 per ton.

Foreign exchange loss (gain) and other was $(0.3) million and $0.4 for the three months ended June 30, 2004 and 2003, respectively and $(0.4) and $0.4 million for the six months ended June 30, 2004 and 2003, respectively. The foreign exchange loss and other relates primarily to the re-measuring of U.S. dollar denominated cash balances into Canadian dollars.

The components of interest expense, including cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs, for the six months ended June 30, 2004 and 2003 are as follows:

Interest expense was $16.6 million and $3.9 million for the three months ended June 30, 2004 and 2003, respectively, an increase of $12.7 million or in excess of 100%. Interest expense was $26.9 million and $5.2 million for the six months ended June 30, 2004 and 2003, respectively, an increase of $21.7 million or in excess of 100%. The increase is due primarily to (i) increased amortization of debt issue costs of $7.2 million and $9.1 million for the three and six months ended June 30, 2004, which includes a $6.5 million charge for the remaining unamortized debt issue costs associated with the repayment of our 364-day Credit Facility in April 2004, (ii) increased interest expense relative to our senior credit facilities and 9 1/2% Subordinated Notes of $3.7 million and $6.7 million for the three and six months ended June 30, 2004, respectively and (iii) increased non-cash dividends and amortization of issue costs relative to our cumulative mandatorily redeemable preferred shares of $2.1 million and $6.1 million for the three and six months ended June 30, 2004. The weighted average interest rate on credit facility borrowings was 6.7% and 7.1%, for the three months ended June 30, 2004 and 2003, respectively, and 7.8% and 6.7% for the six months ended June 30, 2004 and 2003, respectively. We expect cash interest expense to increase in future periods in 2004 due to increased debt balances coupled with overall higher interest rates.

Due to the nature of certain financial penalties within the registration rights agreement in our April 2004 private placement, the Common Shares, warrants and related proceeds from the offering are classified outside of shareholders’ equity until the registration is declared effective. However, such amounts will be reclassified to permanent equity during the third quarter of 2004, as the shares became fully registered in August 2004. The warrants, which are classified as a liability, have been remeasured to their fair value as of June 30, 2004, resulting in a $0.4 million charge to earnings.

The provision (benefit) for income taxes was $2.5 million and $(0.4) million for the three months ended June 30, 2004 and 2003, respectively. The provision (benefit) for income taxes was $3.3 million and $(0.3) million for the six months ended June 30, 2004 and 2003, respectively. In 2004, we have recognized a provision for income taxes despite our pre-tax loss due to the tax effect of the non-deductible dividends on the cumulative mandatorily redeemable preferred shares, including the corresponding amortization of discounts and debt issue costs, and the Canadian Large Corporations tax. Additionally, due to the lack of operating history relative to our U.S. operations, we have provided a valuation allowance for our net operating loss carryforwards generated in the U.S.

Our principal capital requirements are to fund capital expenditures, fund business and asset acquisitions and for debt service. Significant sources of liquidity are cash on hand, working capital, borrowings from our Credit Facilities, our ability to issue performance bonds and letters of credit and proceeds from debt and equity issuances.

On April 30, 2004, we entered into new Senior Secured Credit Facilities (the “Credit Facilities”) with a syndicate of lenders. The Credit Facilities consist of a five-year revolving credit facility in the amount of $60.0 million, up to $15 million of which is available to our Canadian operations, and a seven-year term loan facility in the amount of $100.0 million. The Credit Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined, at our option. The Credit Facilities are secured by substantially all of our assets and the assets of our U.S. restricted subsidiaries as well as the shares of capital stock of the U.S. restricted subsidiaries held by us. Our Canadian operations guarantee and pledge all of their assets only in support of the portion of the revolving credit facility available to them. Separately, 65% of the common shares of our first tier foreign subsidiaries are pledged to secure obligations under the Credit Facilities. As of June 30, 2004, no amounts were drawn under the facility and $9.7 million was used to support outstanding letters of credit. As of

As of June 30, 2004 we failed to meet certain of the financial covenants contained in the Credit Facilities, which constitutes an event of default. As such, we are not able to draw amounts under our revolving credit facilities. We are currently in discussion with lenders to obtain a waiver of our failure to comply, as well as provide access to capacity under our revolving credit facility. Additionally, we will seek to negotiate new financial covenants for the remaining term of the Credit Facilities. We cannot provide any assurance that we will be able to maintain existing capacity or obtain short-term liquidity on acceptable terms or at all, or at what interest or collateral requirements. As our lenders continue to review their loans with us, there is no assurance that all amounts outstanding under existing loans will not be accelerated or adversely modified.

If our lenders do not grant a waiver or amend our Credit Facilities, they have the right to seek remedies including acceleration of all outstanding amounts due under the Credit Facilities. If the lenders seek acceleration of amounts outstanding under the Credit Facilities, this would cause a cross default to occur under the senior subordinated notes and certain other subordinated notes, thus giving each the right to demand accelerated repayment. We can provide no assurance that we would be successful in obtaining alternative sources of funding to repay these obligations should these events occur. If the lenders accelerate repayment of our debt, it would cause substantial doubt about our ability to continue as a going concern.

Our Credit Facilities contain certain financial and other covenants that restrict our ability to, among other things, make capital expenditures, incur indebtedness, incur liens, dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions. Our financial covenants include: (i) minimum consolidated interest coverage, (ii) maximum total leverage and (iii) maximum senior secured leverage. The covenants and restrictions limit the manner in which we conduct our operations and could adversely affect our ability to raise additional capital.

The following table sets forth our financial covenant levels for the current and each of the next four quarters:

On April 30, 2004, we completed a private offering of 9 1/2% Senior Subordinated Notes (“Subordinated Notes”) due 2014 for gross proceeds of $160.0 million. The Subordinated Notes mature on April 15, 2014. Interest on the Subordinated Notes is payable semiannually commencing October 15, 2004. The Subordinated Notes are redeemable, in whole or in part, at our option, on or after April 15, 2009, at a redemption price of 104.75% of the principal amount, declining ratably in annual increments to par on or after April 15, 2012, together with accrued interest to the redemption date. In addition, prior to April 15, 2007, we may redeem up to 35.0% of the aggregate principal amount of the Subordinated Notes with the proceeds of certain equity offerings, at a redemption price equal to 109.5% of the principal amount. Upon a change of control, as such term is defined in the Indenture, we are is required to offer to repurchase all the Subordinated Notes at 100.0% of the principal amount, together with accrued interest and liquidated damages, if any, and obtain the consent of our senior lenders to such payment or repay our indebtedness under our Credit Facilities.

The Subordinated Notes are unsecured and are subordinate to our existing and future senior secured indebtedness, including our Credit Facilities structurally subordinated to existing and future indebtedness of our non-guarantor subsidiaries, rank equally with any unsecured senior subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our obligations with respect to the Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by all of our existing and future domestic restricted subsidiaries. The Canadian operations are not guarantors under the Subordinated Notes.

We also entered into a Registration Rights Agreement with the initial purchasers of the Subordinated Notes in which we agreed to (i) file a registration statement with respect to the Subordinated Notes within 120 days of the closing date of the issuance of the notes (August 28, 2004), pursuant to which we will exchange the Subordinated Notes for registered notes of Waste Services with terms identical to the Subordinated Notes; (ii) have such registration statement declared effective within 210 days of the issuance date; (iii) maintain the effectiveness of such registration statement for minimum periods specified in the agreement and (iv) file a shelf registration statement in the circumstances and within the time periods specified in the agreement. If we do not comply with these obligations, we will be required to pay liquidated damages, in cash, in an amount equal to $0.05 per week per $1,000 in principal amount of the unregistered Subordinated Notes, for each week that the default continues for the first 90-days following default. Thereafter, the amount of liquidated damages increases by an additional $0.05 per week per $1,000 in principal amount of unregistered Subordinated Notes for each subsequent 90-day period until all defaults have been cured, to a maximum of $0.50 per week per $1,000 in principal amount of unregistered Subordinated Notes outstanding. Liquidated damages, if any, are payable at the same time as interest payments due under the Subordinated Notes.

dividend, stock split, reclassification, recapitalization, consolidation or similar event affecting the Waste Services Preferred Stock, plus the amount of any accrued but unpaid dividends on such share as of any date of determination.

The following table summarizes common share issuances during the six months ended June 30, 2004:

Municipal solid waste services contracts, permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of March, 31, 2004 and December 31, 2003, we had provided customers and various regulatory authorities with such bonds and letters of credit amounting to approximately $63.5 million and $19.6 million, respectively, to collateralize our obligations.

The following discussion relates to the major components of the changes in cash flows for the six months ended June 30, 2004 and 2003.

Cash flows provided by operating activities was $8.1 million and $5.4 million for the six months ended June 30, 2004 and 2003, respectively. The increase in cash provided by operating activities is primarily due to cash generated from our domestic acquisitions as well as improvements in working capital.

Cash flows used in investing activities was $174.6 million and $82.2 million for the six months ended June 30, 2004 and 2003, respectively. The increase in cash used in investing activities is primarily due to the various business acquisitions we completed during the first six months of 2004 and increased capital expenditures. We intend to finance capital expenditures and business acquisitions through operating cash flow, borrowings under our Credit Facilities, subject to the limitations on our investing activities set out in the Credit Facilities Agreement, and the issuance of additional debt and/or equity securities.

Cash flows provided by financing activities was $148.6 million and $91.0 million for the six months ended June 30, 2004 and 2003, respectively. The increase in cash flows from financing activities is due to our debt offering and private placement financing transaction previously discussed.

We have no off-balance sheet debt or similar obligations, other than our letters of credit and performance and surety bonds discussed previously, which are not debt. We have no transactions or obligations with related parties that are not disclosed, consolidated into or reflected in our reported results of operations or financial position. We do not guarantee any third party debt. Capital has entered into a put or pay disposal agreement with RCI Environment Inc., Centres de Transbordement et de Valorisation Nord Sud Inc., RCM Environnement Inc. (collectively the “RCI Companies”) and Intersan Inc. pursuant to which we have posted a letter of credit for C$4.0 million to secure our obligations and those of the RCI Companies to Intersan Inc. Concurrently with the put or pay disposal agreement with the RCI Companies, Capital entered into a three year agreement with Waste Management of Canada Corporation (formerly Canadian Waste Services Inc.) to allow us to deliver non-hazardous solid waste to their landfill in Michigan. Details of these agreement are further described in our annual financial statements for the year ended December 31, 2003, as filed on Form 10-K with the Securities and Exchange Commission.

The following table summarizes the changes in our operating landfill capacity for the six months ended June 30, 2004 (in thousands of cubic yards):


(1)	Excludes our Southeast Regional Landfill in Arizona (opened during July 2004) and Fort Bend Regional Landfill in Texas (expected to open during the third quarter of 2004) which have initial permitted capacities of 224 million and 48 million cubic yards, respectively.

We expect the results of our Canadian operations to vary seasonally, with revenue typically lowest in the first quarter of the year, higher in the second and third quarters, and lower in the fourth quarter than in the third quarter. The seasonality is attributable to a number of factors. First, less solid waste is generated during the late fall, winter and early spring because of decreased construction and demolition activity. Second, certain operating costs are higher in the winter months because winter weather conditions slow waste collection activities, resulting in higher labor costs, and rain and snow increase the weight of collected waste, resulting in higher disposal costs, which are calculated on a per ton basis. Also, during the summer months, there are more tourists and part-time residents in some of our service areas, resulting in more residential and commercial collection. Consequently, we expect operating income to be generally lower during the winter. We believe that the effect of seasonality on our results of operations from our U.S. operations, which are located in warmer climates than our Canadian operations, will be less significant than that of our Canadian operations.

This Form 10-Q contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Some of these forward-looking statements include forward-looking phrases such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “foresees,” “intends,” “may,” “should” or “will continue,” or similar expressions or the negatives thereof or other variations on these expressions, or similar terminology, or discussions of strategy, plans or intentions. These statements also include descriptions in connection with, among other things:


	•	our anticipated revenues, capital expenditures, future cash flows and financing requirements, and those of companies or assets we acquire;

	•	the implementation of our business strategy;

	•	descriptions of the expected effects of our competitive strategies; and

	•	the impact of actions taken by our competitors and other third parties, including courts and other governmental authorities.

Such statements reflect our current views regarding future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements to be materially different from any future results, performance or achievements that forward-looking statements may express or imply, including, among others:


	•	changes in inflation;

	•	changes in regulations affecting our business and costs of compliance;

	•	revocation of existing permits and licenses or the refusal to renew or grant new permits and licenses, which are required to enable us to operate our business or implement our growth strategy;

	•	our ability to successfully implement our corporate strategy and integrate any acquisitions we undertake;

	•	the outcome of pending legal claims against us;

	•	changes in general business and economic conditions and in the financial markets; and

	•	changes in accounting standards or pronouncements.

Some of these factors are discussed in more detail in our annual report on Form 10-K, as filed with the Securities and Exchange Commission for the year ended December 31, 2003, included under Item 1. of the annual report, “Business — Risk Factors” as well as set forth in our Form S-3/A as filed on August 3, 2004. If one or more of these risks or uncertainties affects future events and circumstances, or if underlying assumptions do not materialize, actual results may vary materially from those described in this Form 10-Q and

our annual report as anticipated, believed, estimated or expected, and this could have a material adverse effect on our business, financial condition and the results of our operations. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

You should also carefully consider the following factor and other information in this Form 10-Q when considering our company and its common stock:

As of June 30, 2004, we failed to meet certain of the financial covenants contained in the Credit Facilities. We are currently in discussion with lenders to obtain a waiver of our failure to comply, as well as provide access to capacity under our revolving credit facility. We cannot provide any assurance that we will be able to maintain existing capacity or obtain short-term liquidity on acceptable terms or at all. If our lenders accelerate repayment of our debt, it would cause substantial doubt about our ability to continue as a going concern. Additionally, if our ongoing viability is seriously threatened, we may be forced to evaluate a number of strategic alternatives, including a debt restructuring or other reorganization, the closure of certain operating locations or the sale of certain of our assets in order to continue to fund our operations. If we attempted to sell assets in order to continue to fund our operations, there can be no assurance that the proceeds of any such sales would be sufficient to satisfy our liabilities.

A portion of our operations are domiciled in Canada; as such, we translate the results of our operations and financial condition of our Canadian operations into U.S. dollars. Therefore, our reported results of operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar our revenue is favorably affected and conversely our expenses are unfavorably affected. Assets and liabilities of Canadian operations have been translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet date, and revenue and expenses of Canadian operations have been translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income (loss). Separately, monetary assets and liabilities denominated in U.S. dollars held by our Canadian operation are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates. For the three and six months ended June 30, 2004 and 2003 we estimate that a 5.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar would increase or decrease loss from Canadian operations by less than $0.1 million.

As of June 30, 2004, we were exposed to variable interest rates under our new Credit Facilities. The interest rates payable on our revolving and term facilities are based on a spread over base rate and Eurodollar loans as defined at our option. A 25 basis point increase in base interest rates would increase cash interest expense by approximately $0.3 million.

As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, or the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to us (including our consolidated subsidiaries) required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the required time periods.

During the period covered by this filing, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Information regarding our legal proceedings may be found under the “Legal Proceedings” section of Note 10, “Commitments and Contingencies” to our unaudited condensed consolidated financial statements contained herein.

On April 29, 2004, we issued a total of 8,250,000 Common Shares in partial consideration for the acquisition of the shares of Florida Recycling Services, Inc. The exemption from registration was pursuant to Section 4 (2) of the Securities Act and the rules and regulations promulgated under the Securities Act on the basis that the transaction did not involve a public offering.

On April 30, 2004, we issued a total of 13,400,000 Common Shares and warrants to purchase 1,340,000 Common Shares for aggregate consideration of $53,600,000 in a private placement transaction to accredited investors pursuant to Rule 506 of Regulation D under the Securities Act. The warrants have an exercise price of $4.00 per share and expire on April 30, 2009.

On June 16, 2004, we issued a total of 1,250,000 Common Shares in a private placement transaction as consideration for the deferred purchase price for Cactus Waste Systems LLC. The exemption from registration was pursuant to Section 4 (2) of the Securities Act and the rules and regulations promulgated under the Securities Act on the basis that the transaction did not involve a public offering.

Information regarding our Default of the Credit Facilities may be found under “Senior Secured Credit Facilities” section of Note 8, “Debt” to our unaudited condensed consolidated financial statements contained herein.

Exhibit 31.1 — Section 302 Certification of David Sutherland — Yoest, Chairman and Chief Executive Officer

Exhibit 31.2 — Section 302 Certification of Ronald L. Rubin, Executive Vice President and Chief Financial Officer

Exhibit 32.1 — Section 1350 Certification of David Sutherland — Yoest, Chairman and Chief Executive Officer

Exhibit 32.2 — Section 1350 Certification of Ronald L. Rubin, Executive Vice President and Chief Financial Officer

On April 2, 2004, we filed a current report on Form 8-K to furnish a copy of a press release issued on March 31, 2004 announcing our results of operations for the year ended December 31, 2004 and the filing of our Annual Report on Form 20-F.

On April 15, 2004, we filed a current report on Form 8-K to furnish a copy of a press release issued on April 14, 2004 announcing commencement of the private placement of $160.0 million aggregate principal amount of Senior Subordinated Notes due 2014 and to file information included in the confidential preliminary offering memorandum dated April 14, 2004, relating to the offering of the Senior Subordinated Notes.

On April 15, 2004, we filed a current report on Form 8-K disclosing information included in the confidential preliminary offering memorandum dated April 14, 2004, relating to the offering of the Senior Subordinated Notes as well as other information.

On May 3, 2004, we filed a current report on Form 8-K to furnish a copy of a press release issued on May 3, 2004 announcing the completion of a new $160 million Credit Facility, an offering of $160 million of Senior Subordinated Notes, a private placement of 13,400,000 Common Shares with 1,340,000 warrants to purchase Common Shares and the closing of the previously announced acquisition of Florida Recycling Services, Inc.

On May 10, 2004, we filed a current report on Form 8-K to announce the acquisition of Florida Recycling, to announce the completion of certain phases of an asset acquisition from Allied Waste Industries, Inc., to discuss our recently completed financing transactions and to file the relevant pro forma financial information relative to these transactions.

On May 13, 2004, we filed a current report on Form 8-K to furnish a copy of a press release issued on May 13, 2004 announcing our results of operations for the quarter ended March 31, 2004.

On June 9, 2004, we filed a current report on Form 8-K to announce the acquisition of Florida Recycling, to announce the completion of the acquisition of certain assets from Allied Waste Industries, Inc., to discuss our recently completed financing transactions and to bring current the relevant pro forma information relative to these transactions.

Pursuant to the requirements of the Securities Exchange Act of 1934, Waste Services, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ DAVID SUTHERLAND-YOEST



	David Sutherland-Yoest
	Chairman of the Board,
	Chief Executive Officer, and Director


	By:	/s/ RONALD L. RUBIN



	Ronald L. Rubin
	Executive Vice President and
	Chief Financial Officer


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the Quarterly Period Ended June 30, 2004

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to


Delaware		01-0780204
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		2
	Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003		2
	Unaudited Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2004 and 2003		3
	Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2004		4
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		40
Item 4.	Controls and Procedures		40

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		II-1
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		II-1
Item 3.	Defaults upon Senior Securities		II-1
Item 4.	Submission of Matters to a Vote of Security Holders		II-1
Item 5.	Other Information		II-1
Item 6.	Exhibits and Reports on Form 8-K		II-1
Signatures			II-3


			June 30,			December 31,
			2004			2003

			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	2,955		$	21,062
	Restricted cash			—			14,433
	Accounts receivable (net of allowance for doubtful accounts of $2,094 and $620 as of June 30, 2004 and December 31, 2003, respectively)			41,084			26,999
	Prepaid expenses and other current assets			12,662			29,649

		Total current assets		56,701			92,143
Property and equipment, net				116,767			74,521
Landfill sites, net				168,065			117,541
Deferred income taxes, net				2,596			1,135
Goodwill and other intangible assets, net				322,914			163,380
Other assets				21,786			22,278

		Total assets	$	688,829		$	470,998


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	27,232		$	12,074
	Accrued expenses and other current liabilities			32,922			25,401
	Short-term financing and current portion of long-term debt			265,457			172,280

		Total current liabilities		325,611			209,755
Long-term debt				—			3,130
Accrued closure, post-closure and other obligations				10,550			8,791
Cumulative mandatorily redeemable Preferred Shares (net of discount of $11,112 and $13,558 as of June 30, 2004 and December 31, 2003, respectively)				56,132			48,205

		Total liabilities		392,293			269,881

Commitments and contingencies
Mezzanine financing (13,400,000 common shares pending registration)				49,132			—

Shareholders’ equity:
	Common stock, no par value; unlimited shares authorized; 83,448,281 and 68,338,828 shares issued as of June 30, 2004 and December 31, 2003, respectively			297,263			215,395
	Options, warrants and deferred stock-based compensation			25,011			25,828
	Accumulated other comprehensive income			10,537			15,952
	Accumulated deficit			(85,407	)		(56,058	)

		Total shareholders’ equity		247,404			201,117

		Total liabilities, mezzanine financing and shareholders’ equity	$	688,829		$	470,998



		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2004			2003			2004			2003

Revenue		$	72,626		$	31,282		$	122,943		$	56,562
Operating and other expenses:
	Cost of operations		49,913			20,430			84,084			37,024
	Selling, general and administrative expense exclusive of stock-based compensation		13,959			6,792			25,909			11,521
	Stock-based compensation expense (benefit)		357			120			(1,034	)		(177	)
	Depreciation, depletion and amortization		7,809			3,566			13,281			6,791
	Foreign exchange gain and other		(283	)		392			(373	)		357

Income (loss) from operations			871			(18	)		1,076			1,046
Interest expense			12,266			1,667			18,582			2,987
Changes in fair value of warrants pending registration			421			—			421			—
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs			4,290			2,198			8,309			2,198

Loss before income taxes			(16,106	)		(3,883	)		(26,236	)		(4,139	)
Income tax provision (benefit)			2,509			(377	)		3,338			(334	)

Loss before cumulative effect of change in accounting principle			(18,615	)		(3,506	)		(29,574	)		(3,805	)
Cumulative effect of change in accounting principle, net of provision for income taxes of $134 and $256 for the six months ended June 30, 2004 and 2003, respectively			—			—			225			518

Net loss			(18,615	)		(3,506	)		(29,349	)		(3,287	)
Deemed dividend on Series 1 Preferred Shares			—			(12,489	)		—			(21,021	)

Net loss attributable to Common Shareholders		$	(18,615	)	$	(15,995	)	$	(29,349	)	$	(24,308	)

Basic and diluted loss per share:
	Basic and diluted loss per share attributable to Common Shareholders before cumulative effect of change in accounting principle	$	(0.21	)	$	(0.42	)	$	(0.37	)	$	(0.68	)
	Cumulative effect of change in accounting principle		—			—			—			0.01

	Loss per share — basic and diluted	$	(0.21	)	$	(0.42	)	$	(0.37	)	$	(0.67	)

	Weighted average Common Shares outstanding — basic and diluted		88,855			37,865			79,736			36,537


					Options,			Accumulated
					Warrants and			Other
	Common Stock				Deferred			Comprehensive						Total
					Stock-Based			Income			Accumulated			Shareholders’
	Shares		Amount		Compensation			(Loss)			Deficit			Equity

Balance, December 31, 2003		68,339	$	215,395	$	25,828		$	15,952		$	(56,058	)	$	201,117
Common Shares issued in acquisitions		14,798		80,615		—			—			—			80,615
Common Shares to be issued in acquisitions (38 shares)		—		—		241			—			—			241
Exercise of options and warrants		311		1,253		(212	)		—			—			1,041
Deferred stock-based compensation		—		—		(846	)		—			—			(846	)
Foreign currency translation adjustment		—		—		—			(5,415	)		—			(5,415	)
Net loss		—		—		—			—			(29,349	)		(29,349	)

Balance, June 30, 2004		83,448	$	297,263	$	25,011		$	10,537		$	(85,407	)	$	247,404



	Three Months				Six Months
	Ended June 30,				Ended June 30,

	2004		2003		2004		2003

Series 1 Preferred Shares		—		10,000		—		5,109
Options to purchase Common Shares		999		519		1,378		446
Warrants to purchase Common Shares		5,285		1,835		6,064		1,294

Dilutive securities		6,284		12,354		7,442		6,849


				Adjustment for
				Change in
	December 31, 2003			Accounting			January 1, 2004

Landfill sites	$	128,044		$	(3,191	)	$	124,853
Accumulated depletion		(10,503	)		717			(9,786	)

Landfill sites, net	$	117,541		$	(2,474	)	$	115,067

Accrued closure and post-closure obligations	$	7,737		$	(2,831	)	$	4,906

Deferred income tax asset (liability)	$	3,727		$	(132	)	$	3,595


3.	Business Combinations and Significant Asset Acquisitions


			Allied			Florida			All
			Assets			Recycling			Others			Total

Purchase price:
	Cash		$	45,793		$	103,638		$	16,050		$	165,481
	Seller financed note payable			—			—			5,000			5,000
	Common stock issued and to be issued and warrants			—			51,357			36,267			87,624

Total purchase price				45,793			154,995			57,317			258,105

Allocated as follows:
	Working capital assumed:
		Accounts receivable		3,755			7,426			889			12,070
		Prepaid expenses and other current assets		258			1,114			56			1,428
		Accounts payable		—			(8,444	)		(835	)		(9,279	)
		Accrued expenses and other current liabilities		(804	)		(4,246	)		(20	)		(5,070	)

		Net working capital		3,209			(4,150	)		90			(851	)
	Property and equipment			10,312			23,911			4,016			38,239
	Landfill sites			—			—			41,982			41,982
	Other assets			—			278			—			278
	Deferred taxes			—			—			(334	)		(334	)
	Accrued closures, post-closure and other obligations assumed			—			—			(52	)		(52	)

Net book value of assets acquired and liabilities assumed				13,521			20,039			45,702			79,262

Excess purchase price to be allocated			$	32,272		$	134,956		$	11,615		$	178,843

Allocated as follows:
	Goodwill		$	23,280		$	107,800		$	11,591		$	142,671
	Other intangible assets			8,992			27,156			24			36,172

Total allocated			$	32,272		$	134,956		$	11,615		$	178,843


5.	Landfill Sites, Accrued Closure, Post-Closure and Other Obligations



		Six Months Ended June 30,


		2004									2003

		U.S.			Canada			Total			Total

Balance, beginning of period		$	65,822		$	78,722		$	144,544		$	64,365
	Acquisitions		142,337			334			142,671			818
	Divestitures		(8,645	)		—			(8,645	)		—
	Effect of foreign exchange rate fluctuations		—			(2,207	)		(2,207	)		11,007
	Purchase price allocation adjustments for prior acquisitions		(6,108	)		—			(6,108	)		(449	)

Balance, end of period		$	193,406		$	76,849		$	270,255		$	75,741


	*364-day Senior Secured Credit Facility (Repaid in full on April 30, 2004)*


	*Employee and Director Stock Option Plans and Option Grants*


Three Months Ended June 30, 2004	Canada		U.S.			Elimination			Total

Revenue	$	34,395	$	38,231		$	—		$	72,626
Operating and other expenses		32,119		39,636			—			71,755
Income (loss) from operations		2,276		(1,405	)		—			871
Depreciation, depletion and amortization		3,676		4,133			—			7,809
Interest expense (income)		38		14,402			(2,174	)		12,266
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs		—		4,290			—			4,290
Total assets		375,943		493,637			(180,751	)		688,829
Long-lived assets		345,261		465,022			(180,751	)		629,532


Item 1.	*Financial Statements*


1.	Organization of Business and Basis of Presentation


	*Landfill Sites*


7.	Other Assets


Three Months Ended June 30, 2003	Canada		U.S.			Elimination			Total

Revenue	$	31,282	$	—		$	—		$	31,282
Operating and other expenses		31,038		262			—			31,300
Income (loss) from operations		244		(262	)		—			(18	)
Depreciation, depletion and amortization		3,566		—			—			3,566
Interest expense		1,621		418			(372	)		1,667
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs		—		2,198			—			2,198


Six Months Ended June 30, 2004	Canada		U.S.			Elimination			Total

Revenue	$	64,712	$	58,231		$	—		$	122,943
Operating and other expenses		61,304		60,563			—			121,867
Income (loss) from operations		3,408		(2,332	)		—			1,076
Depreciation, depletion and amortization		7,122		6,159			—			13,281
Interest expense (income)		117		21,174			(2,709	)		18,582
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs		—		8,309			—			8,309


Six Months Ended June 30, 2003	Canada		U.S.			Elimination			Total

Revenue	$	56,562	$	—		$	—		$	56,562
Operating and other expenses		55,254		262			—			55,516
Income from operations		1,308		(262	)		—			1,046
Depreciation, depletion and amortization		6,791		—			—			6,791
Interest expense		2,928		418			(359	)		2,987
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs		—		2,198			—			2,198


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



	Three Months Ended June 30,										Six Months Ended June 30,


	2004					2003					2004					2003


Collection	$	60,688		78.7	%	$	26,013		75.2	%		101,079		77.4	%	$	46,715		75.1	%
Landfill disposal		5,290		6.9			2,834		8.2			9,436		7.2			5,535		8.9
Transfer station		6,266		8.1			4,420		12.8			11,175		8.5			7,534		12.1
Material recovery facilities		2,510		3.3			1,085		3.1			4,813		3.7			2,045		3.3
Other specialized services		2,314		3.0			245		0.7			4,241		3.2			386		0.6

		77,068		100.0	%		34,597		100.0	%		130,744		100.0	%		62,215		100.0	%

Intercompany elimination		(4,442	)				(3,315	)				(7,801	)				(5,653	)

	$	72,626				$	31,282					122,943					56,562


Acquisitions in the United States	$	38,231	122.2	%
Internal revenue growth due to volume increases		1,273	4.1
Internal revenue growth due to price increases		575	1.8
Acquisitions in Canada		118	0.4
Favorable effects of foreign exchange fluctuations		1,147	3.7

Increase in revenue	$	41,344	132.2	%


Acquisitions in the United States	$	58,231	103.1	%
Internal revenue growth due to volume increases		1,545	2.7
Internal revenue growth due to price increases		1,137	2.0
Acquisitions in Canada		480	0.8
Favorable effects of foreign exchange fluctuations		4,988	8.8

Increase in revenue	$	66,381	117.4	%


Acquisitions in the United States	$	26,703	130.7	%
Disposal and subcontractor cost increases		1,004	4.9
Labor cost increases		679	3.3
Acquisitions in Canada		48	0.2
Other increases		218	1.1
Unfavorable effects of foreign exchange fluctuations		831	4.1

Increase in cost of operations	$	29,483	144.3	%


Acquisitions in the United States	$	39,974	108.0	%
Disposal and subcontractor cost increases		1,312	3.5
Labor cost increases		1,805	4.9
Acquisitions in Canada		286	0.8
Other increases		212	0.6
Unfavorable effects of foreign exchange fluctuations		3,471	9.3

Increase in cost of operations	$	47,060	127.1	%


Acquisitions in the United States	$	4,133		115.9	%
Increase in depreciation		388		10.8
Decrease in depletion at our Canadian landfill operations		(382	)	(10.7	)
Unfavorable effects of foreign exchange fluctuations		104		3.0

Increase in depreciation, depletion and amortization	$	4,243		119.0	%


Acquisitions in the United States	$	6,159		90.7	%
Increase in depreciation		666		9.8
Decrease in depletion at our Canadian landfill operations		(885	)	(13.0	)
Unfavorable effects of foreign exchange fluctuations		550		8.1

Increase in depreciation, depletion and amortization	$	6,490		95.6	%


	*Changes in fair value of warrants pending registration*


		Number of
		Common Shares

Acquisitions:
	Florida Recycling		8,250,000
	Fort Bend Regional Landfill		4,375,000
	Southeast Regional Landfill (shares issued upon obtaining the landfill permit)		1,250,000
	Collection operations in Arizona		911,370
	Landfill acquisition in Saskatchewan		12,000

Total Common Shares issued in connection with acquisitions			14,798,370
Private placement (classified as mezzanine financing pending the registration of the shares)			13,400,000
Common Shares issued upon exercise of options and warrants			311,083

Common Shares issued during the six months ended June 30, 2004			28,509,453


		Balance,										Balance,
		Beginning		Landfills		Landfills			Airspace			End of
		of Period		Acquired		Divested			Consumed			Period

Canada
	Permitted capacity		10,871		1,430		—			(223	)		12,078
	Probable expansion capacity		—		—		—			—			—

	Total available airspace		10,871		1,430		—			(223	)		12,078

	Number of sites		2		1		—						3

United States(1)
	Permitted capacity		26,084		—		(83	)		(249	)		25,752
	Probable expansion capacity		18,300		—		—			—			18,300

	Total available airspace		44,384		—		(83	)		(249	)		44,052

	Number of sites		3		—		(1	)					2

Total
	Permitted capacity		36,955		1,430		(83	)		(472	)		37,830
	Probable expansion capacity		18,300		—		—			—			18,300

	Total available airspace		55,255		1,430		(83	)		(472	)		56,130

	Number of sites		5		1		(1	)					5


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*


	*Disclosure Controls and Procedures/ Evaluation of Disclosure Controls and Procedures*


Item 2.	*Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities*


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


Exhibit No.			Description

	Exhibit 31.1	—	Section 302 Certification of David Sutherland-Yoest, Chairman and Chief Executive Officer
	Exhibit 31.2	—	Section 302 Certification of Ronald L. Rubin, Executive Vice President and Chief Financial Officer
	Exhibit 32.1	—	Section 1350 Certification of David Sutherland-Yoest, Chairman and Chief Executive Officer
	Exhibit 32.2	—	Section 1350 Certification of Ronald L. Rubin, Executive Vice President and Chief Financial Officer