Republic Services Inc
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
     
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 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
Commission file number: 1-14267
REPUBLIC SERVICES, INC.
(Exact name of Registrant as Specified in its Charter)
     
Delaware   65-0716904
(State of Incorporation)   (I.R.S. Employer Identification No.)
 
Republic Services, Inc.
110 S.E. 6th Street, 28th Floor
Fort Lauderdale, Florida
(Address of Principal Executive Offices)
  33301
(Zip Code)
Registrant’s telephone number, including area code:  (954) 769-2400
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class
  Name of Each Exchange on which Registered
     
Common Stock, par value $.01 per share   The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
      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 x          No o
      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x          No o
      As of June 30, 2004, the aggregate market value of the shares of the Common Stock held by non-affiliates of the registrant was approximately $4,395,636,476.
      As of February 18, 2005, the registrant had outstanding 149,670,988 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III Portions of the Registrant’s Proxy Statement relative to the 2005 Annual Meeting of Stockholders.
 
 


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 Subsidiaries of the Company
 Consent of Ernst & Young
 Sec 302 Chief Executive Officer Certification
 Sec 302 Chief Financial Officer Certification
 Sec 906 Chief Executive Officer Certification
 Sec 906 Chief Financial Officer Certification


Table of Contents

PART I
ITEM  1. BUSINESS
Company Overview
      We are a leading provider of services in the domestic non-hazardous solid waste industry. We provide non-hazardous solid waste collection services for commercial, industrial, municipal and residential customers through 140 collection companies in 22 states. We also own or operate 96 transfer stations, 58 solid waste landfills and 35 recycling facilities.
      As of December 31, 2004, our operations were organized into five regions whose boundaries may change from time to time: Eastern, Central, Southern, Southwestern and Western. Each region is organized into several operating areas and each area contains a group of operating locations. Each of our regions and substantially all our areas provide collection, transfer, recycling and disposal services. We believe that this organizational structure facilitates the integration of our operations within each region, which is a critical component of our operating strategy. See Note 10 of the Notes to Consolidated Financial Statements for further discussion of operating segments.
      We had revenue of $2,708.1 million and $2,517.8 million and operating income of $452.3 million and $412.7 million for the years ended December 31, 2004 and 2003, respectively. The $190.3 million, or 7.6%, increase in revenue from 2003 to 2004 is primarily attributable to the successful execution of our operating and growth strategies described below. The $39.6 million, or 9.6%, increase in operating income from 2003 to 2004 is partially due to higher self-insurance expense during 2003 related to existing claims and was attributable to the expansion of our operations and various changes in estimates as a result of continued negative trends through the 2003 policy year. The remaining increase in operating income is due to the successful execution of our operating and growth strategies described below.
      Our presence in high growth markets throughout the Sunbelt, including California, Florida, Georgia, Nevada, North Carolina, South Carolina and Texas, and in other domestic markets that have experienced higher than average population growth during the past several years, supports our internal growth strategy. We believe that our presence in these markets positions our company to experience growth at rates that are generally higher than the industry’s overall growth rate.
      We continue to focus on enhancing stockholder value by implementing our financial, operating and growth strategies as described below.
Industry Overview
      Based on analysts’ reports and industry trade publications, we believe that the United States non-hazardous solid waste services industry generates annual revenue of approximately $44.0 billion, of which approximately 50% is generated by publicly-owned waste companies, 21% is generated by privately-held waste companies, and 29% is generated by municipal and other local governmental authorities. Three companies generate the substantial majority of the publicly-owned companies’ total revenue. However, according to industry data, the domestic non-hazardous waste industry remains highly fragmented as privately-held companies and municipal and other local governmental authorities generate approximately 50% of total industry revenue. In general, growth in the solid waste industry is linked to growth in the overall economy, including the level of new household and business formation.
      The solid waste industry experienced a period of rapid consolidation in the late 1990’s. During that time we were able to grow significantly through acquisitions. However, acquisitions in the industry have slowed considerably since late 1999. Despite this, we believe that the opportunity to grow through acquisitions still exists, albeit at a slower pace than experienced in previous years, as a result of the following factors:
        Subtitle D Regulation. Subtitle D of the Resource Conservation and Recovery Act of 1976, as currently in effect, and similar state regulations have significantly increased the amount of capital, technical expertise, operating costs and financial assurance obligations required to own and operate a

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  landfill and other solid waste facilities. Many of the smaller participants in our industry have found these costs difficult, if not impossible, to bear. Large publicly-owned companies, like our company, have greater access to, and a lower cost of, the capital necessary to finance such increased capital expenditures and costs relative to many of the privately-owned companies in the industry. Additionally, the required permits for landfill development, expansion or construction have become more difficult, time-consuming and costly to acquire. Consequently, many smaller, independent operators have decided to either close their operations or sell them to larger operators that have greater access to capital.
 
        Integration of Solid Waste Businesses. By being able to control the waste stream in a market through the collection, transfer and disposal process, integrated solid waste companies gain a further competitive advantage over non-integrated operators. The ability of the integrated companies to both collect and dispose of solid waste, coupled with access to significant capital resources necessary for acquisitions, has created an environment in which large publicly-owned, integrated companies can operate more cost effectively and competitively than non-integrated operators.
 
        Municipal Privatization. The trend toward consolidation in the solid waste services industry is further supported by the increasing tendency of a number of municipalities to privatize their waste disposal operations. Privatization of municipal waste operations is often an attractive alternative to funding the changes required by Subtitle D.
      These developments, as well as the fact that there are a limited number of viable exit strategies for many of the owners and principals of numerous privately-held companies in the industry, have contributed to the overall consolidation trend in the solid waste industry.
Financial Strategy
      A key component of our financial strategy is our ability to generate free cash flow. Our definition of free cash flow, which is not a measure determined in accordance with generally accepted accounting principles, is cash provided by operating activities less purchases of property and equipment plus proceeds from the sale of property and equipment as presented in our consolidated statement of cash flows. We believe that free cash flow provides useful information regarding the recurring cash provided by our operating activities after expenditures for property and equipment. It also demonstrates our ability to execute our financial strategy. Consequently, we have developed incentive programs and we conduct monthly field operating reviews that help focus our entire company on the importance of increasing free cash flow.
      Free cash flow does not represent our cash flow available for discretionary expenditures because it excludes certain expenditures that are required or that we have committed to such as debt service requirements and dividend payments. Our definition of free cash flow may not be comparable to similarly titled measures presented by other companies.
      We manage our free cash flow primarily by ensuring that capital expenditures and operating asset levels are appropriate in light of our existing business and growth opportunities and by closely managing our working capital, which consists primarily of accounts receivable and accounts payable.
      We have used and will continue to use our cash flow to maximize stockholder value as well as our return on investment. This includes the following:
  •  Customer Service. We will continue to reinvest in our existing fleet of vehicles, equipment, landfills and facilities to ensure a high level of service to our customers.
 
  •  Internal Growth. Growth through increases in our customer base and services provided is the most capital efficient means for us to build our business. This includes not only expanding landfill and transfer capacity and investing in trucks and containers, but also includes investing in information tools and training needed to ensure high productivity and quality service throughout all functional areas of our business.
 
  •  Strategic Acquisitions. We have and will continue to pursue strategic acquisitions that augment our existing business platform.

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  •  Share Repurchases. If we are unable to identify opportunities that satisfy our growth strategy, we intend to continue to use our free cash flow to repurchase shares of our common stock at prices that provide value to our stockholders. As of December 31, 2004, we had repurchased a total of 35.2 million shares, or approximately 20% of our common stock outstanding at the commencement of our share repurchase program in 2000, for $750.4 million. In October 2004, our board of directors authorized the repurchase of up to an additional $275.0 million of our common stock, of which $274.6 million remained available at December 31, 2004. We believe that our share repurchase program will continue to enhance stockholder value.
 
  •  Dividends. In July 2003, our board of directors initiated a quarterly cash dividend of $.06 per share. Effective October 2004, our quarterly cash dividend was increased to $.12 per share. We may consider increasing our quarterly cash dividend if we believe it will enhance stockholder value.
 
  •  Minimize Borrowings. To the extent that the opportunities to enhance stockholder value mentioned above are not available, we also intend to continue to use our free cash flow to minimize our borrowings.
      Another key component of our financial strategy includes maintaining an investment grade rating on our senior debt. This has allowed us to secure favorable, long-term, fixed-rate financing that reduces our exposure to changing interest rates. This has also allowed us, and will continue to allow us, to readily access capital markets.
      For certain risks related to our financial strategy, see “Risk Factors.”
Operating Strategy
      We seek to leverage existing assets and revenue growth to increase operating margins and enhance stockholder value. Our operating strategy to accomplish this goal is to:
  •  utilize the extensive industry knowledge and experience of our executive management,
 
  •  utilize a decentralized management structure in overseeing day-to-day operations,
 
  •  integrate waste operations,
 
  •  improve operating margins through economies of scale, cost efficiencies and asset utilization,
 
  •  achieve high levels of customer satisfaction, and
 
  •  utilize systems to improve consistency in financial and operational performance.
      For certain risks related to our operating strategy, see “Risk Factors.”
  •  Experienced Executive Management Team. We believe that we have one of the most experienced executive management teams in the solid waste industry.
     James E. O’Connor, who has served as our Chief Executive Officer since December 1998, also became our Chairman in January 2003. He worked at Waste Management, Inc. from 1972 to 1978 and from 1982 to 1998. During that time, he served in various management positions, including Senior Vice President in 1997 and 1998, and Area President of Waste Management of Florida, Inc. from 1992 to 1997. Mr. O’Connor has over 30 years of experience in the solid waste industry.
 
     Michael J. Cordesman, who has served as our Chief Operating Officer since March 2002 and also as our President since February 2003, has over 24 years of experience in the solid waste industry. He joined us in June 2001 as our Eastern Region Vice President. From 1999 to 2001, Mr. Cordesman served as Vice President of the Central Region for Superior Services Inc. From 1980 to 1999, he served in various positions with Waste Management, including Vice President of the Mid-Atlantic Region from 1992 to 1999.

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     The other corporate officers with responsibility for our operations have an average of over 23 years of management experience in the solid waste industry. Our five regional vice presidents and our 23 area presidents have an average of 24 years of experience in the industry.
 
     In addition, Harris W. Hudson, who has served as our Vice Chairman since our initial public offering, has over 40 years of experience in the solid waste industry, including 11 years with Waste Management and 19 years with private waste collection companies.
  •  Decentralized Management Structure. We maintain a relatively small corporate headquarters staff, relying on a decentralized management structure to minimize administrative overhead costs and to manage our day-to-day operations more efficiently. Our local management has extensive industry experience in growing, operating and managing solid waste companies and has substantial experience in their local geographic markets. In early 2001, we added a sales, maintenance and operations manager to each of our regional management teams, which previously consisted of a regional vice president and a regional controller. We believe that strengthening our regional management teams allows us to more effectively and efficiently drive our company’s initiatives and helps ensure consistency throughout our organization. Our regional management teams and our area presidents have extensive authority, responsibility and autonomy for operations within their respective geographic markets. Compensation for regional and area management teams is primarily based on the improvement in operating income produced and the free cash flow and return on invested capital generated in each manager’s geographic area of responsibility. In addition, through long-term incentive programs, including stock options, we believe we have one of the lowest turnover levels in the industry for our local management teams. As a result of retaining experienced managers with extensive knowledge of and involvement in their local communities, we are proactive in anticipating our customers’ needs and adjusting to changes in our markets. We also seek to implement the best practices of our various regions and areas throughout our operations to improve operating margins.
 
  •  Integrated Operations. We seek to achieve a high rate of internalization by controlling waste streams from the point of collection through disposal. We expect that our fully integrated markets generally will have a lower cost of operations and more favorable cash flows than our non-integrated markets. Through acquisitions and other market development activities, we create market-specific, integrated operations typically consisting of one or more collection companies, transfer stations and landfills. We consider acquiring companies that own or operate landfills with significant permitted disposal capacity and appropriate levels of waste volume. We also seek to acquire solid waste collection companies in markets in which we own or operate landfills. In addition, we generate internal growth in our disposal operations by developing new landfills and expanding our existing landfills from time to time in markets in which we have significant collection operations or in markets that we determine lack sufficient disposal capacity. During the three months ended December 31, 2004, approximately 54% of the total volume of waste that we collected was disposed of at landfills we own or operate. In a number of our larger markets, we and our competitors are required to take waste to government-controlled disposal facilities. This provides us with an opportunity to effectively compete in these markets without investing in landfill capacity. Because we do not have landfill facilities or government-controlled disposal facilities for all markets in which we provide collection services, we believe that through landfill and transfer station acquisitions and development we have the opportunity to increase our waste internalization rate and further integrate our operations. By further integrating operations in existing markets through acquisitions and development of landfills and transfer stations, we may be able to reduce our disposal costs.
 
  •  Economies of Scale, Cost Efficiencies and Asset Utilization. To improve operating margins, our management focuses on achieving economies of scale and cost efficiencies. The consolidation of acquired businesses into existing operations reduces costs by decreasing capital and expenses used for routing, personnel, equipment and vehicle maintenance, inventories and back-office administration. Generally, we consolidate our acquired administrative centers to reduce our general and administrative costs. Our goal is to maintain our selling, general and administrative costs in the range of 10% of revenue, which we feel is appropriate given our existing business platform. In addition, our size allows

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  our company to negotiate volume discounts for certain purchases, including waste disposal rates at landfills operated by third parties. Furthermore, we have taken steps to increase utilization of our assets. For example, to reduce the number of collection vehicles and maximize the efficiency of our fleet, we have instituted a grid productivity program which allows us to benchmark the performance of all of our drivers. In our larger markets, we also use a route optimization program to minimize drive times and improve operating density. By using assets more efficiently, operating expenses can be significantly reduced.
 
  •  High Levels of Customer Satisfaction. Our goal of maintaining high levels of customer satisfaction complements our operating strategy. Our personalized sales process is oriented towards maintaining relationships and ensuring that service is being properly provided.
 
  •  Utilize Systems to Improve Consistency in Financial and Operational Reporting. We continue to focus on systems and training initiatives that complement our operating strategy. These initiatives include contact management, billing, productivity, maintenance and general ledger systems. These systems provide us with detailed information, prepared in a consistent manner, that will allow us to quickly analyze and act upon trends in our business.
      For certain risks related to our operating strategy, see “Risk Factors.”
Growth Strategy
      Our growth strategy focuses on increasing revenue, gaining market share and enhancing stockholder value through internal growth and acquisitions. For certain risks related to our growth strategy, see “Risk Factors.”
  •  Internal Growth. Our internal growth strategy focuses on retaining existing customers and obtaining commercial, municipal and industrial customers through our well-managed sales and marketing activities.
     Pricing Activities. We seek to secure price increases necessary to offset increased costs. During the fourth quarter of 2003, we implemented a broad-based pricing initiative across all lines of our business.
 
     Long-Term Contracts. We seek to obtain long-term contracts for collecting solid waste in high-growth markets. These include exclusive franchise agreements with municipalities as well as commercial and industrial contracts. By obtaining such long-term agreements, we have the opportunity to grow our contracted revenue base at the same rate as the underlying population growth in these markets. For example, we have secured exclusive, long-term franchise agreements in high-growth markets such as Los Angeles, Orange and Contra Costa Counties in California, Las Vegas, Nevada, Arlington, Texas, and many areas of Florida. We believe that this positions our company to experience internal growth rates that are generally higher than our industry’s overall growth rate. In addition, we believe that by securing a base of long-term recurring revenue in growth markets, we are better able to protect our market position from competition and our business may be less susceptible to downturns in economic conditions.
 
     Sales and Marketing Activities. We seek to manage our sales and marketing activities to enable our company to capitalize on our leading positions in many of the markets in which we operate. We currently have approximately 500 sales and marketing employees in the field, who are compensated using a commission structure that is focused on generating high levels of quality revenue. For the most part, these employees directly solicit business from existing and prospective commercial, industrial, municipal and residential customers. We emphasize our rate and cost structures when we train new and existing sales personnel. In addition, we utilize a contact management system that assists our sales people in tracking leads. It also tracks renewal periods for potential commercial, industrial and franchise contracts.
 
     Development Activities. We seek to identify opportunities to further our position as an integrated service provider in markets where we provide services for a portion of the waste stream. Where appropriate, we seek to obtain permits to build transfer stations and/or landfills that would provide

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  vertically integrated waste services or expand the service area for our existing disposal sites. Development projects, while generally less capital intensive, typically require extensive permitting efforts that can take years to complete with no assurance of success. We undertake development projects when we believe there is a reasonable probability of success and where reasonably priced acquisition opportunities are not available.
  •  Acquisition Growth. During the late 1990’s, the solid waste industry experienced a period of rapid consolidation. We were able to grow significantly through acquisitions during this period. However, the rate of consolidation in the industry has slowed considerably. Despite this, we continue to look to acquire businesses that complement our existing business platform. Our acquisition growth strategy focuses on privately-held solid waste companies and municipal and other local governmental authorities. We believe that our ability to acquire privately-held companies is enhanced by increasing competition in the solid waste industry, increasing capital requirements as a result of changes in solid waste regulatory requirements, and the limited number of exit strategies for these privately-held companies’ owners and principals. We also seek to acquire operations and facilities from municipalities that are privatizing, which occur for many of the same reasons that privately-held companies sell their solid waste businesses. In addition, we will continue to evaluate opportunities to acquire operations and facilities that may be divested by other publicly-owned waste companies. In sum, our acquisition growth strategy focuses on:
  •  acquiring businesses that position our company for growth in existing and new markets,
 
  •  acquiring well-managed companies and, when appropriate, retaining local management,
 
  •  acquiring operations and facilities from municipalities that are privatizing and publicly-owned companies that are divesting of assets.
     For certain risks involved with our acquisition growth strategy, see “Risk Factors — We may be unable to execute our acquisition growth strategy,” “— We may be unable to manage our growth effectively,” and “— Businesses we acquire may have undisclosed liabilities.”
 
     Acquire Businesses Positioning the Company for Growth. In making acquisitions, we principally target high quality businesses that will allow our company to be, or provide our company favorable prospects of becoming, a leading provider of integrated solid waste services in markets with favorable demographic growth. Generally, we have acquired, and will continue to seek to acquire, solid waste collection, transfer and disposal companies that:
  •  have strong operating margins,
 
  •  are in growth markets,
 
  •  are among the largest or have a significant presence in their local markets, and
 
  •  have long-term contracts or franchises with municipalities and other customers.
  Once we have a base of operations in a particular market, we focus on acquiring trucks and routes of smaller businesses that also operate in that market and surrounding markets, which are typically referred to as “tuck-in” acquisitions. We seek to consolidate the operations of such tuck-in businesses into our existing operations in that market. We also seek to acquire landfills, transfer stations and collection companies that operate in markets that we are already servicing in order to fully integrate our operations from collection to disposal. In addition, we have in the past and may continue in the future to exchange businesses with other solid waste companies if by doing so there is a net benefit to our business platform. These activities allow us to increase our revenue and market share, lower our cost of operations as a percentage of revenue, and consolidate duplicative facilities and functions to maximize cost efficiencies and economies of scale.
     Acquire Well-Managed Companies. We also seek to acquire businesses that have experienced management teams that are willing to join the management of our company. We generally seek to maintain continuity in management of larger acquired companies in order to capitalize on their local

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  market knowledge, community relations and name recognition, and to instill their entrepreneurial drive at all levels of our operations. By furnishing the local management of such acquired companies with our financial and marketing resources and technical expertise, we believe that the acquired companies are better able to secure additional municipal franchises and other contracts.
 
     Privatize Municipal Operations and Acquire Divested Operations. We also seek to acquire solid waste collection operations, transfer stations and landfills that municipalities and other governmental authorities are privatizing. Many municipalities are seeking to outsource or sell these types of solid waste operations, as they lack the capital, technical expertise and/or operational resources necessary to comply with increasingly stringent regulatory standards and/or to compete effectively with private-sector companies. In addition, we have acquired, and will continue to seek to acquire, operations and facilities that may be divested by other publicly-owned waste companies.
Operations
      Our operations primarily consist of the collection, transfer and disposal of non-hazardous solid waste.
      Collection Services. We provide solid waste collection services to commercial, industrial, municipal and residential customers in 22 states through 140 collection companies. In 2004, 74.3% of our revenue was derived from collection services consisting of approximately 32.5% from services provided to municipal and residential customers, 36.6% from services provided to commercial customers, and 30.9% from services provided to industrial and other customers.
      Our residential collection operations involve the curbside collection of refuse from small containers into collection vehicles for transport to transfer stations or directly to landfills. Residential solid waste collection services are typically performed under contracts with municipalities, which we generally secure by competitive bid and which give our company exclusive rights to service all or a portion of the homes in their respective jurisdictions. These contracts or franchises usually range in duration from one to five years, although some of our exclusive franchises are for significantly longer periods. Residential solid waste collection services may also be performed on a subscription basis, in which individual households contract directly with our company. The fees received for subscription residential collection are based primarily on market factors, frequency and type of service, the distance to the disposal facility and cost of disposal. In general, subscription residential collection fees are paid quarterly in advance by the residential customers receiving the service.
      In our commercial and industrial collection operations, we supply our customers with waste containers of varying sizes. We also rent compactors to large waste generators. Commercial collection services are generally performed under one- to three-year service agreements, and fees are determined by such considerations as:
  •  market factors,
 
  •  collection frequency,
 
  •  type of equipment furnished,
 
  •  the type and volume or weight of the waste collected,
 
  •  the distance to the disposal facility and
 
  •  the cost of disposal.
      We rent waste containers to construction sites and also provide waste collection services to industrial and construction facilities on a contractual basis with terms generally ranging from a single pickup to one year or longer. We collect the containers or compacted waste and transport the waste either to a landfill or a transfer station for disposal.
      Also, we currently provide recycling services in certain markets primarily to comply with local laws or obligations under our franchise agreements. These services include the curbside collection of residential recyclable waste and the provision of a variety of recycling services to commercial and industrial customers.

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      Transfer and Disposal Services. We own or operate 96 transfer stations. We deposit waste at these stations, as do other private haulers and municipal haulers, for compaction and transfer to trailers for transport to disposal sites or recycling facilities. As of December 31, 2004, we owned or operated 58 landfills, which had approximately 8,904 permitted acres and total available permitted and probable expansion disposal capacity of approximately 1.7 billion in-place cubic yards. The in-place capacity of our landfills is subject to change based on engineering factors, requirements of regulatory authorities and the ability to expand our sites successfully. Some of our landfills accept non-hazardous special waste, including utility ash, asbestos and contaminated soils. See “— Properties.”
      Most of our existing landfill sites have the potential for expanded disposal capacity beyond the currently permitted acreage. We monitor the availability of permitted disposal capacity at each of our landfills and evaluate whether to pursue expansion at a given landfill based on estimated future waste volumes and prices, market needs, remaining capacity and likelihood of obtaining an expansion. To satisfy future disposal demand, we are currently seeking to expand permitted capacity at certain of our landfills, although no assurances can be made that all future expansions will be permitted as designed.
      Other Services. We have 35 materials recovery facilities and other recycling operations, which are generally required to fulfill our obligations under long-term municipal contracts for residential collection services. These facilities sort recyclable paper, aluminum, glass and other materials. Most of these recyclable materials are internally collected by our residential collection operations. In some areas, we receive commercial and industrial solid waste that is sorted at our facilities into recyclable materials and non-recyclable waste. The recyclable materials are salvaged, repackaged and sold to third parties and the non-recyclable waste is disposed of at landfills or incinerators. Wherever possible, our strategy is to reduce our exposure to fluctuations in recyclable commodity prices by utilizing third party recycling facilities, thereby minimizing our recycling investment.
      We provide remediation and other heavy construction services primarily through our subsidiary located in Missouri.
      We also have a Texas-based compost, mulch and soil business at which yard, mill and other waste is processed, packaged and sold as various products.
Sales and Marketing
      We seek to provide quality services that will enable our company to maintain high levels of customer satisfaction. We derive our business from a broad customer base which we believe will enable our company to experience stable growth. We focus our marketing efforts on continuing and expanding business with existing customers, as well as attracting new customers.
      We employ approximately 500 sales and marketing employees. Our sales and marketing strategy is to provide high-quality, comprehensive solid waste collection, recycling, transfer and disposal services to our customers at competitive prices. We target potential customers of all sizes, from small quantity generators to large “Fortune 500” companies and municipalities.
      Most of our marketing activity is local in nature. However, in 2000 we initiated a national accounts program in response to our customers’ needs.
      We generally do not change the tradenames of the local businesses we acquire, and therefore we do not operate nationally under any one mark or tradename. Rather, we rely on the goodwill associated with the acquired companies’ local tradenames as used in each geographic market in which we operate.
Customers
      We provide services to commercial, industrial, municipal and residential customers. No one customer has individually accounted for more than 10% of our consolidated revenue or of our reportable segment revenue in any of the last three years.

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Competition
      We operate in a highly competitive industry. Entry into our business and the ability to operate profitably in the industry requires substantial amounts of capital and managerial experience.
      Competition in the non-hazardous solid waste industry comes from a few large, national publicly-owned companies, including Waste Management and Allied Waste Industries, several regional publicly- and privately-owned solid waste companies, and thousands of small privately-owned companies. Some of our competitors have significantly larger operations, and may have significantly greater financial resources, than we do. In addition to national and regional firms and numerous local companies, we compete with municipalities that maintain waste collection or disposal operations. These municipalities may have financial advantages due to the availability of tax revenues and tax-exempt financing.
      We compete for collection accounts primarily on the basis of price and the quality of our services. From time to time, our competitors may reduce the price of their services in an effort to expand market share or to win a competitively bid municipal contract. This may have an impact on our future revenue and profitability.
      In each market in which we own or operate a landfill, we compete for landfill business on the basis of disposal costs, geographical location and quality of operations. Our ability to obtain landfill business may be limited by the fact that some major collection companies also own or operate landfills to which they send their waste. There also has been an increasing trend at the state and local levels to mandate waste reduction at the source and to prohibit the disposal of certain types of waste, such as yard waste, at landfills. This may result in the volume of waste going to landfills being reduced in certain areas, which may affect our ability to operate our landfills at their full capacity and/or affect the prices that we can charge for landfill disposal services. In addition, most of the states in which we operate landfills have adopted plans or requirements that set goals for specified percentages of certain solid waste items to be recycled.
Regulation
      Our facilities and operations are subject to a variety of federal, state and local requirements that regulate the environment, public health, safety, zoning and land use. Operating and other permits, licenses and other approvals are generally required for landfills and transfer stations, certain solid waste collection vehicles, fuel storage tanks and other facilities that we own or operate, and these permits are subject to revocation, modification and renewal in certain circumstances. Federal, state and local laws and regulations vary, but generally govern wastewater or stormwater discharges, air emissions, the handling, transportation, treatment, storage and disposal of hazardous and non-hazardous waste, and the remediation of contamination associated with the release or threatened release of hazardous substances. These laws and regulations provide governmental authorities with strict powers of enforcement, which include the ability to obtain injunctions and/or impose fines or penalties in the case of violations, including criminal penalties. The U.S. Environmental Protection Agency and various other federal, state and local environmental, public and occupational health and safety agencies and authorities administer these regulations, including the Occupational Safety and Health Administration of the U.S. Department of Labor.
      We strive to conduct our operations in compliance with applicable laws and regulations. However, in the existing climate of heightened environmental concerns, from time to time, we have been issued citations or notices from governmental authorities that have resulted in the need to expend funds for remedial work and related activities at various landfills and other facilities. There is no assurance that citations and notices will not be issued in the future despite our regulatory compliance efforts. We have established remediation reserves that we believe, based on currently available information, will be adequate to cover our current estimates of regulatory costs. However, we cannot assure you that actual costs will not exceed our reserves.
      Federal Regulation. The following summarizes the primary environmental, public and occupational health and safety-related statutes of the United States that affect our facilities and operations:
        (1) The Solid Waste Disposal Act, as amended, including the Resource Conservation and Recovery Act. RCRA and its implementing regulations establish a framework for regulating the handling,

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  transportation, treatment, storage and disposal of hazardous and non-hazardous solid waste, and require states to develop programs to ensure the safe disposal of solid waste in sanitary landfills.
 
        Subtitle D of RCRA establishes a framework for regulating the disposal of municipal solid waste. Regulations under Subtitle D currently include minimum comprehensive solid waste management criteria and guidelines, including location restrictions, facility design and operating criteria, closure and post-closure requirements, financial assurance standards, groundwater monitoring requirements and corrective action standards, many of which had not commonly been in effect or enforced in the past in connection with municipal solid waste landfills. Each state was required to submit to the U.S. EPA a permit program designed to implement Subtitle D regulations by April 9, 1993. All of the states in which we operate have implemented permit programs pursuant to RCRA and Subtitle D. These state permit programs may include landfill requirements which are more stringent than those of Subtitle D.
 
        All of our planned landfill expansions or new landfill development projects have been engineered to meet or exceed Subtitle D requirements. Operating and design criteria for existing operations have been modified to comply with these new regulations. Compliance with Subtitle D regulations has resulted in increased costs and may in the future require substantial additional expenditures in addition to other costs normally associated with our waste management activities.
 
        (2) The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. CERCLA, among other things, provides for the cleanup of sites from which there is a release or threatened release of a hazardous substance into the environment. CERCLA may impose strict joint and several liability for the costs of cleanup and for damages to natural resources upon current owners and operators of the site, parties who were owners or operators of the site at the time the hazardous substances were disposed of, parties who transported the hazardous substances to the site and parties who arranged for the disposal of the hazardous substances at the site. Under the authority of CERCLA and its implementing regulations, detailed requirements apply to the manner and degree of investigation and remediation of facilities and sites where hazardous substances have been or are threatened to be released into the environment. Liability under CERCLA is not dependent upon the existence or disposal of only “hazardous wastes” but can also be based upon the existence of small quantities of more than 700 “substances” characterized by the U.S. EPA as “hazardous,” many of which may be found in common household waste.
 
        Among other things, CERCLA authorizes the federal government to investigate and remediate sites at which hazardous substances have been or are threatened to be released into the environment or to order (or offer an opportunity to) persons potentially liable for the cleanup of the hazardous substances to do so. In addition, the U.S. EPA has established a National Priorities List of sites at which hazardous substances have been or are threatened to be released and which require investigation or cleanup.
 
        Liability under CERCLA is not dependent upon the intentional disposal of hazardous waste or hazardous substances. It can be founded upon the release or threatened release, even as a result of unintentional, non-negligent or lawful action, of thousands of hazardous substances, including very small quantities of such substances. Thus, even if our landfills have never knowingly received hazardous waste as such, it is possible that one or more hazardous substances may have been deposited or “released” at our landfills or at other properties which we currently own or operate or may have owned or operated. Therefore, we could be liable under CERCLA for the cost of cleaning up such hazardous substances at such sites and for damages to natural resources, even if those substances were deposited at our facilities before we acquired or operated them. The costs of a CERCLA cleanup can be very expensive. Given the difficulty of obtaining insurance for environmental impairment liability, such liability could have a material impact on our business and financial condition. For a further discussion, see “— Liability Insurance and Bonding.”
 
        (3) The Federal Water Pollution Control Act of 1972, as amended. This Act regulates the discharge of pollutants from a variety of sources, including solid waste disposal sites, into streams, rivers and other waters of the United States. Point source runoff from our landfills and transfer stations that is discharged into surface waters must be covered by discharge permits that generally require us to conduct

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  sampling and monitoring, and under certain circumstances, reduce the quantity of pollutants in those discharges. Storm water discharge regulations under this Act require a permit for certain construction activities and discharges from industrial operations and facilities, which may affect our operations. If a landfill or transfer station discharges wastewater through a sewage system to a publicly-owned treatment works, the facility must comply with discharge limits imposed by that treatment works. In addition, states may adopt groundwater protection programs under this Act or the Safe Drinking Water Act that could affect solid waste landfills. Furthermore, development which alters or affects wetlands must generally be permitted prior to such development commencing, and certain mitigation requirements may be required by the permitting agencies.
 
        (4) The Clean Air Act, as amended. The Clean Air Act imposes limitations on emissions from various sources, including landfills. In March 1996, the U.S. EPA promulgated regulations that require large municipal solid waste landfills to install landfill gas monitoring systems. These regulations apply to landfills that commenced construction, reconstruction or modification on or after May 30, 1991, and, principally, to landfills that can accommodate 2.5 million cubic meters or more of municipal solid waste. The regulations apply whether the landfill is active or closed. The date by which each affected landfill is required to have a gas collection and control system installed and made operational varies depending upon calculated emission rates at the landfill. Many state regulatory agencies also currently require monitoring systems for the collection and control of certain landfill gas. We do not expect that compliance with any new state regulations will have a material effect on us.
 
        (5) The Occupational Safety and Health Act of 1970, as amended. This Act authorizes the Occupational Safety and Health Administration of the U.S. Department of Labor to promulgate occupational safety and health standards. A number of these standards, including standards for notices of hazardous chemicals and the handling of asbestos, apply to our facilities and operations.
      State Regulation. Each state in which we operate has its own laws and regulations governing solid waste disposal, water and air pollution, and, in most cases, releases and cleanup of hazardous substances and liability for such matters. States also have adopted regulations governing the design, operation, maintenance and closure of landfills and transfer stations. Our facilities and operations are likely to be subject to these types of requirements. In addition, our solid waste collection and landfill operations may be affected by the trend in many states toward requiring the development of solid waste reduction and recycling programs. For example, several states have enacted laws that require counties or municipalities to adopt comprehensive plans to reduce, through solid waste planning, composting, recycling or other programs, the volume of solid waste deposited in landfills. Additionally, laws and regulations restricting the disposal of certain waste in solid waste landfills, including yard waste, newspapers, beverage containers, unshredded tires, lead-acid batteries and household appliances, have been promulgated in several states and are being considered in others. Legislative and regulatory measures to mandate or encourage waste reduction at the source and waste recycling also are or have been under consideration by the U.S. Congress and the U.S. EPA, respectively.
      In order to construct, expand and operate a landfill, one or more construction or operating permits, as well as zoning and land use approvals, must be obtained. These are difficult and time-consuming to obtain, are often opposed by neighboring landowners and citizens’ groups, may be subject to periodic renewal and are subject to modification and revocation by the issuing agency. In connection with our acquisition of existing landfills, it may be and on occasion has been necessary for our company to expend considerable time, effort and money to bring the acquired facilities into compliance with applicable requirements and to obtain the permits and approvals necessary to increase their capacity.
      Many of our facilities own and operate underground storage tanks which are generally used to store petroleum-based products. These tanks are generally subject to federal, state and local laws and regulations that mandate their periodic testing, upgrading, closure and removal, and that, in the event of leaks, require that polluted groundwater and soils be remediated. We believe that all of our underground storage tanks currently meet, in all material respects, all applicable regulations. If underground storage tanks we own or operate leak, and the leakage migrates onto the property of others, we could be liable for response costs and other damages to third parties. We are unaware of facts indicating that issues of compliance with regulations

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related to underground storage tanks will have a material adverse effect on our financial condition, results of operations or cash flows.
      Finally, with regard to our solid waste transportation operations, we are subject to the jurisdiction of the Surface Transportation Board and are regulated by the Federal Highway Administration, Office of Motor Carriers, and by regulatory agencies in states that regulate such matters. Various states have enacted or promulgated, or are considering enacting or promulgating, laws and regulations that would restrict the interstate transportation and processing of solid waste. In 1978, the U.S. Supreme Court ruled that a law that restricts the importation of out-of-state solid waste was unconstitutional; however, states have attempted to distinguish proposed laws from that involved in and implicated by that ruling. In 1994, the Supreme Court ruled that a flow control law, which attempted to restrict solid waste from leaving its place of generation, imposed an impermissible burden upon interstate commerce, and, therefore, was unconstitutional; however, states have also attempted to distinguish proposed laws from that involved in and implicated by that ruling. In response to these Supreme Court rulings, the U.S. Congress has considered passing legislation authorizing states and local governments to restrict the free movement of solid waste in interstate commerce. If federal legislation authorizing state and local governments to restrict the free movement of solid waste in interstate commerce is enacted, such legislation could adversely affect our operations.
      We have established a reserve for landfill and environmental costs, which includes landfill site final capping, closure and post-closure costs. We periodically reassess such costs based on various methods and assumptions regarding landfill airspace and the technical requirements of Subtitle D of RCRA and adjust our rates used to expense final capping, closure and post-closure costs accordingly. Based on current information and regulatory requirements, we believe that our reserves for such landfill and environmental expenditures are adequate. However, environmental laws may change, and there can be no assurance that our reserves will be adequate to cover requirements under existing or new environmental laws and regulations, future changes or interpretations of existing laws and regulations, or the identification of adverse environmental conditions previously unknown to us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Landfill and Environmental Matters” and “Risk Factors — Compliance with environmental regulation may impede our growth.”
Liability Insurance and Bonding
      The nature of our business exposes our company to the risk of liabilities arising out of our operations, including possible damages to the environment. Such potential liabilities could involve, for example, claims for remediation costs, personal injury, property damage and damage to the environment in cases where we may be held responsible for the escape of harmful materials; claims of employees, customers or third parties for personal injury or property damage occurring in the course of our operations; or claims alleging negligence in the planning or performance of work. We could also be subject to fines and civil and criminal penalties in connection with alleged violations of regulatory requirements. Because of the nature and scope of the possible environmental damages, liabilities imposed in environmental litigation can be significant. Our solid waste operations have third party environmental liability insurance with limits in excess of those required by permit regulations, subject to certain limitations and exclusions. However, we cannot assure you that the limits of such environmental liability insurance would be adequate in the event of a major loss, nor can we assure you that we would continue to carry excess environmental liability insurance should market conditions in the insurance industry make such coverage costs prohibitive.
      We have general liability, vehicle liability, employment practices liability, pollution liability, directors and officers liability, worker’s compensation and employer’s liability coverage, as well as umbrella liability policies to provide excess coverage over the underlying limits contained in these primary policies. We also carry property insurance. Although we try to operate safely and prudently and while we have, subject to limitations and exclusions, substantial liability insurance, no assurance can be given that we will not be exposed to uninsured liabilities which could have a material adverse effect on our financial condition, results of operations or cash flows.

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      Our insurance programs for worker’s compensation, general liability, vehicle liability and employee-related health care benefits are effectively self-insured. Claims in excess of self-insurance levels are fully insured subject to policy limits. Accruals are based on claims filed and actuarial estimates of claims development and claims incurred but not reported. Due to the variable condition of the insurance market, we have experienced, and may continue to experience in the future, increased self-insurance retention levels and increased premiums. As we assume more risk for self-insurance through higher retention levels, we may experience more variability in our self-insurance reserves and expense.
      In the normal course of business, we may be required to post performance bonds, insurance policies, letters of credit and/or cash or marketable securities deposits in connection with municipal residential collection contracts, the operation, closure or post-closure of landfills, certain remediation contracts, certain environmental permits, and certain business licenses and permits. Bonds issued by surety companies operate as a financial guarantee of our performance. To date, we have satisfied financial responsibility requirements by making cash or marketable securities deposits or by obtaining bank letters of credit, insurance policies or surety bonds.
Employees
      As of December 31, 2004, we employed approximately 13,400 full-time employees, approximately 3,100 of whom were covered by collective bargaining agreements. Our management believes that we have good relations with our employees.
Compensation
      We believe that our compensation program effectively aligns our field and corporate management team with the company’s overall goal of generating increasing amounts of free cash flow while achieving targeted earnings and returns on invested capital. This is done by utilizing simple and measurable metrics on which incentive pay is based. At the field level, these metrics are based upon free cash flow, earnings and return on invested capital for each manager’s geographic area of responsibility. Great effort is taken to ensure that these individual goals agree to the overall goals of the company. Incentive compensation at the corporate level is based on the obtainment of our company’s overall goals. In addition, certain field and corporate employees also participate in a long-term incentive program. We believe this program aligns our company’s short- and long-term goals and helps ensure that the long-term success of our company is not sacrificed for the obtainment of short-term goals.
Corporate History
      We were incorporated as a Delaware corporation in 1996 by our former parent company, AutoNation, Inc. In 1998, AutoNation separated its non-hazardous solid waste services division from its other businesses and we completed an initial public offering of shares of our common stock. In 1999, AutoNation sold substantially all of its remaining interest in our company in a secondary public offering.
Availability of Reports and Other Information
      Our corporate website is http://www.republicservices.com. We make available on this website, free of charge, access to our Annual Report on Form  10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statement on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after we electronically submit such material to the Securities and Exchange Commission. Our corporate website also contains our Corporate Governance Guidelines, Code of Ethics and Charters of the Nominating and Corporate Governance Committee, Audit Committee and Compensation Committee of the Board of Directors. In addition, the Commission’s website is http://www.sec.gov. The Commission makes available on this website, free of charge, reports, proxy and information statements, and other information regarding issuers, such as us, that file electronically with the Commission. Information on our website or the Commission’s website is not part of this document.

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Risk Factors
      This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, certain statements about our plans, strategies and prospects. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that such plans, intentions or expectations will be achieved. Important factors that could cause our actual results to differ materially from our forward-looking statements include those set forth in this Risk Factors section. All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth below. Unless the context requires otherwise, all references to the “company,” “we,” “us” or “our” include Republic Services, Inc. and its subsidiaries.
      If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.
We operate in a highly competitive industry and may be unable to compete effectively.
      We operate in a highly competitive business environment. Some of our competitors have significantly larger operations and may have significantly greater financial resources than we do. In addition, the solid waste industry is constantly changing as a result of consolidation which may create additional competitive pressures in our business environment.
      We also compete with municipalities that maintain their own waste collection or disposal operations. These municipalities may have a financial advantage over us as a result of the availability of tax revenue and tax-exempt financing.
      We compete for collection accounts primarily on the basis of price and the quality of services. From time to time our competitors may reduce the price of their services in an effort to expand their market share or to win a competitively bid municipal contract.
      In each market in which we own or operate a landfill, we compete for solid waste volume on the basis of disposal or “tipping” fees, geographical location and quality of operations. Our ability to obtain solid waste volume for our landfills may be limited by the fact that some major collection companies also own or operate landfills to which they send their waste. In markets in which we do not own or operate a landfill, our collection operations may operate at a disadvantage to fully integrated competitors.
      As a result of these factors, we may have difficulty competing effectively from time to time.
Economic conditions could adversely affect our business, operations and internal growth.
      In the past, economic slowdowns have negatively impacted the portion of our collection business servicing the manufacturing sector and the non-residential construction industry. Landfill volumes attributable to manufacturing and construction activity were also impacted. A slowdown in the economy in any of the markets we service could adversely affect volumes, pricing and operating margins in our collection, transfer and disposal operations.
An increase in the price of fuel may adversely affect our business.
      Our operations are dependent upon fuel, which we generally purchase in the open market on a daily basis. During 2003 and 2004, we experienced increases in the cost of fuel. A portion of this increase was passed on to our customers. However, because of the competitive nature of the waste industry, there can be no assurances that we will be able to pass on current or any future increases in fuel prices to our customers. Due to political instability in oil-producing countries, fuel prices may continue to increase significantly in 2005. A significant increase in fuel costs could adversely affect our business.

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We may be unable to execute our financial strategy.
      Our ability to execute our financial strategy is dependent upon our ability to maintain an investment grade rating on our senior debt. The credit rating process is contingent upon a number of factors, many of which are beyond our control.
      Our financial strategy is also dependent upon our ability to generate sufficient cash flow to reinvest in our existing business, to fund our internal growth, to acquire other solid waste businesses, repurchase shares of our common stock, pay dividends, minimize our borrowings and take other actions to enhance stockholder value. We cannot assure you that we will be successful in executing our broad-based pricing program, that we will generate sufficient cash flow to execute our financial strategy, that we will continue to repurchase our common stock, or that we will be able to pay cash dividends or increase the amount of our dividends.
We may be unable to execute our acquisition growth strategy.
      Our ability to execute our growth strategy depends in part on our ability to identify and acquire desirable acquisition candidates as well as our ability to successfully consolidate acquired operations into our business. The consolidation of our operations with the operations of acquired companies, including the consolidation of systems, procedures, personnel and facilities, the relocation of staff, and the achievement of anticipated cost savings, economies of scale and other business efficiencies, presents significant challenges to our management, particularly if several acquisitions occur at the same time. In short, we cannot assure you that:
  •  desirable acquisition candidates exist or will be identified,
 
  •  we will be able to acquire any of the candidates identified,
 
  •  we will effectively consolidate companies which are acquired and fully or timely realize the expected cost savings, economies of scale or business efficiencies, or
 
  •  any acquisitions will be profitable or accretive to our earnings.
      Additional factors may negatively impact our acquisition growth strategy. Our acquisition strategy may require spending significant amounts of capital. If we are unable to obtain additional needed financing on acceptable terms, we may need to reduce the scope of our acquisition growth strategy, which could have a material adverse effect on our growth prospects. The intense competition among our competitors pursuing the same acquisition candidates may increase purchase prices for solid waste businesses and increase our capital requirements and/or prevent us from acquiring certain acquisition candidates. If any of the aforementioned factors force us to alter our growth strategy, our financial condition, results of operations and growth prospects could be adversely affected.
We may be unable to manage our growth effectively.
      Our growth strategy places significant demands on our financial, operational and management resources. In order to continue our growth, we will need to add administrative and other personnel, and make additional investments in operations and systems. We cannot assure you that we will be able to find and train qualified personnel, or do so on a timely basis, or expand our operations and systems to the extent, and in the time, required.
Businesses we acquire may have undisclosed liabilities.
      In pursuing our acquisition strategy, our investigations of the acquisition candidates may fail to discover certain undisclosed liabilities of the acquisition candidates. If we acquire a company having undisclosed liabilities, as a successor owner we may be responsible for such undisclosed liabilities. We typically try to minimize our exposure to such liabilities by obtaining indemnification from each seller of the acquired companies, by deferring payment of a portion of the purchase price as security for the indemnification and by acquiring only specified assets. However, we cannot assure you that we will be able to obtain indemnifications or that they will be enforceable, collectible or sufficient in amount, scope or duration to fully offset any undisclosed liabilities arising from our acquisitions.

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Our financial statements are based upon estimates and assumptions that may differ from actual results.
      Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles and necessarily include amounts based on estimates and assumptions made by us. Actual results could differ from these amounts. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets, the depletion and amortization of landfill development costs, accruals for final capping, closure and post-closure costs, valuation allowances for accounts receivable, liabilities for potential litigation, claims and assessments, and liabilities for environmental remediation, deferred taxes and self-insurance.
      We cannot assure you that our reserves for landfill and environmental costs will be adequate to cover the requirements of existing environmental regulations, future changes or interpretations of existing regulations, or the identification of adverse environmental conditions previously unknown to us.
Changes in insurance markets may impact our financial results.
      Due to the variable condition of the insurance market, we have experienced, and may continue to experience in the future, increased self-insurance retention levels and increased premiums. As we assume more risk for self-insurance through higher retention levels, we may experience more variability in our self-insurance reserves and expense.
We depend on key personnel.
      Our future success depends on the continued contributions of several key employees and officers. We do not maintain key man life insurance policies on any of our officers. The loss of the services of key employees and officers, whether such loss is through resignation or other causes, or the inability to attract additional qualified personnel, could have a material adverse effect on our financial condition, results of operations and growth prospects.
Compliance with environmental and other laws and regulations may impede our growth.
      We may need to spend considerable time, effort and capital to keep our facilities in compliance with federal, state and local requirements regulating health, safety, environment, zoning, land use and transportation. In addition, some of our waste operations that cross state boundaries could be adversely affected if the federal government, or the state or locality in which these waste operations are located, imposes fees on, or otherwise limits or prohibits, the transportation or disposal of solid waste. If environmental laws become more stringent, our environmental capital expenditures and costs for environmental compliance may increase in the future. In addition, due to the possibility of unanticipated events or regulatory developments, the amounts and timing of future environmental expenditures could vary substantially from those we currently anticipate. Because of the nature of our operations, we have in the past, currently are, and may in the future be named as a potentially responsible party in connection with the investigation or remediation of environmental conditions. We cannot assure you that the resolution of any such investigations will not have a material adverse effect on our financial condition, results of operations or cash flows. A significant judgment or fine against our company, or our loss of significant permits or licenses, could have a material adverse effect on our financial condition, results of operations, cash flows or prospects.
Regulatory approval to develop or expand our landfills and transfer stations may be delayed or denied.
      Our plans include developing new landfills and transfer stations, as well as expanding the disposal and transfer capacities of certain of our landfills and transfer stations, respectively. Various parties, including citizens’ groups and local politicians, sometimes challenge these projects. Responding to these challenges has, at times, increased our costs and extended the time associated with establishing new facilities and expanding existing facilities. In addition, failure to receive regulatory and zoning approval may prohibit us from establishing new facilities and expanding existing facilities.

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Seasonal changes may adversely affect our business and operations.
      Our operations may be adversely affected by periods of inclement weather which could increase the volume of waste collected under our existing contracts (without corresponding compensation), delay the collection and disposal of waste, reduce the volume of waste delivered to our disposal sites, or delay the construction or expansion of our landfill sites and other facilities.
We may be unable to extend the maturity of our revolving short-term credit facility.
      We have a revolving short-term credit facility in the principal amount of $300 million which expires in June 2005. We anticipate extending the maturity of this credit facility until at least June 2006. However, we cannot assure you that we will receive such extension and, if so, whether such extension will be on terms as favorable to us as those currently contained in the credit facility.
The outcome of audits by the Internal Revenue Service may adversely affect our company.
      Through the date of our initial public offering in July 1998, we filed consolidated federal income tax returns with AutoNation. In accordance with the tax sharing agreement we have with AutoNation, we may be liable for certain assessments imposed by the Internal Revenue Service for the periods through June 1998. The Internal Revenue Service is auditing our consolidated tax returns for fiscal years 1998 through 2003. No assurance can be given with respect to the outcome of the audits for these periods or the effect they may have on us, or that our reserves with respect thereto are adequate. A significant assessment against us could have a material adverse effect on our financial position, results of operations or cash flows.

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ITEM 2. PROPERTIES
      Our corporate headquarters is located in Ft. Lauderdale, Florida in leased premises. As of December 31, 2004, we operated approximately 6,100 collection vehicles. Certain of our property and equipment are subject to operating leases or liens securing payment of portions of our indebtedness. We also lease certain of our offices and equipment. We believe that our facilities are sufficient for our current needs.
      The following table provides certain information regarding the 58 landfills owned or operated by us as of December 31, 2004:
                                       
                    Unused
            Total   Permitted   Permitted
Landfill Name   Location   Region   Acreage(2)   Acreage(3)   Acreage(4)
                     
545 Landfill
    Winter Garden, Florida     Southern     80       58       3  
623 Landfill
    Richmond, Virginia     Eastern     184       138       84  
Apex
    Clark County, Nevada     Western     2,285       1,233       1,018  
Brent Run
    Montrose, Michigan     Central     544       106       43  
Broadhurst Landfill
    Jesup, Georgia     Southern     1,400       105       49  
Carleton Farms
    Detroit, Michigan     Central     640       388       192  
Cedar Trail
    Bartow, Florida     Southern     392       68       68  
Charter Waste
    Abilene, Texas     Southwestern     396       300       264  
Chiquita Canyon
    Valencia, California     Western     592       257       45  
Countywide
    East Sparta, Ohio     Eastern     815       258       170  
Dozit Landfill
    Morganfield, Kentucky     Central     231       47       23  
East Carolina Landfill
    Aulander, North Carolina     Southern     740       113       42  
Elk Run
    Onaway, Michigan     Central     99       40       25  
Epperson Landfill
    Williamstown, Kentucky     Central     899       100       31  
Foothills Landfill(1)
    Lenior, North Carolina     Southern     258       78       50  
Forest Lawn
    Three Oaks, Michigan     Central     281       165       9  
Front Range
    Denver, Colorado     Southwestern     602       195       133  
Greenville
    Greenville, South Carolina     Southern     21       7       4  
Highway 78
    Oconee, Georgia     Southern     379       118       108  
Honeygo Run
    Perry Hall, Maryland     Eastern     68       39       5  
Kestrel Hawk
    Racine, Wisconsin     Central     218       138       20  
Laughlin(1)
    Laughlin, Nevada     Western     40       40        
Mallard Ridge
    Delavan, Wisconsin     Central     746       42       2  
Modern
    York, Pennsylvania     Eastern     739       230       22  
National Serv-All
    Fort Wayne, Indiana     Central     587       204        
Nine Mile Road
    St. Augustine, Florida     Southern     354       57       25  
North County
    Houston, Texas     Southwestern     100       31       2  
Northwest Tennessee
    Union City, Tennessee     Central     600       120       72  
Oak Grove
    Winder, Georgia     Southern     329       72        
Ohio County Balefill(1)
    Beaver Dam, Kentucky     Central     908       178       121  
Pepperhill
    North Charleston, South Carolina     Southern     37       26        
Pine Grove
    Amanda, Ohio     Eastern     734       112       65  
Pine Ridge
    Griffin, Georgia     Southern     515       196       130  
Potrero
    Suisan, California     Western     1,423       190       68  
Presidio(1)
    Presidio, Texas     Southwestern     10       10       6  
Republic/ Alpine(1)
    Alpine, Texas     Southwestern     80       74       67  
Republic/ CSC
    Avalon, Texas     Southwestern     517       190       116  
Republic/ Maloy
    Campbell, Texas     Southwestern     455       195       110  
San Angelo(1)
    San Angelo, Texas     Southwestern     257       236       138  
Savannah Regional
    Savannah, Georgia     Southern     129       56       34  
Seabreeze Landfill
    Clute, Texas     Southwestern     896       386       240  
Seagull
    Avalon, California     Western     6       3        
Southern Illinois Regional
    DeSoto, Illinois     Central     351       238       143  
Spring Grove
    Charleston, South Carolina     Southern     246       174       139  
Swiftcreek Landfill
    Macon, Georgia     Southern     836       85       12  
Tay-Ban
    Birch Run, Michigan     Central     87       43       9  
Tri-K Landfill
    Stanford, Kentucky     Central     612       190       150  
Union County
    Cross Anchor, South Carolina     Southern     600       83       67  
United Refuse
    Fort Wayne, Indiana     Central     305       77       15  
Upper Piedmont Environmental
    Roxboro, North Carolina     Southern     860       70       29  
Uwharrie Landfill(1)
    Mt. Gilead, North Carolina     Southern     466       118       45  
Valley View Landfill
    Sulphur, Kentucky     Central     894       199       93  
Vasco Road
    Livermore, California     Western     548       246       68  
Victory Environmental
    Terre Haute, Indiana     Central     1,013       303       133  
Wabash Valley
    Wabash, Indiana     Central     390       137       60  
West Contra Costa County
    Contra Costa, California     Western     350       188        
Whitefeather
    Pinconning, Michigan     Central     639       57       26  
Worthington
    Worthington, Indiana     Central     420       97       28  
                                   
 
Total
                29,203       8,904       4,621  
                                   
 
(1)  Operated but not owned by us.
(2)  Total acreage includes permitted acreage, probable expansion acreage, other acreage available for future disposal that has not been permitted, buffer land and other contiguous land owned by our company.
(3)  Permitted acreage consists of all acreage at the landfill encompassed by an active permit to dispose of waste.
(4)  Unused permitted acreage consists of all acreage at the landfill encompassed by an active permit on which disposal operations have not commenced.

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ITEM 3. LEGAL PROCEEDINGS
      We are and will continue to be involved in various administrative and legal proceedings in the ordinary course of business. We can give you no assurance regarding the outcome of these proceedings or the effect their outcomes may have, or that our insurance coverages or reserves are adequate. A significant judgment against our company, the loss of significant permits or licenses, or the imposition of a significant fine could have a material adverse effect on our financial position, results of operations, cash flows or prospects.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
      No matters were submitted to our stockholders during the fourth quarter of 2004.

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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information, Holders and Dividends
      Our common stock began trading on the New York Stock Exchange on July 1, 1998.
      The following table sets forth the range of the high and low sales prices of our common stock and the cash dividends declared per share of common stock for the periods indicated:
                         
            Dividends
    High   Low   Declared
             
2004
                       
First Quarter
  $ 27.43     $ 24.50     $ .06  
Second Quarter
    30.27       27.05       .06  
Third Quarter
    30.10       26.50       .12  
Fourth Quarter
    33.98       28.95       .12  
 
2003
                       
First Quarter
  $ 21.29     $ 18.25     $  
Second Quarter
    24.41       19.50        
Third Quarter
    24.75       21.77       .06  
Fourth Quarter
    26.09       22.15       .06  
      On February 17, 2005 the last reported sales price of our common stock was $31.02.
      There were approximately 87 record holders of our common stock at February 16, 2005, which does not include beneficial owners for whom Cede & Co. or others act as nominees.
      In January 2005, our board of directors declared a regular quarterly dividend of $.12 per share for stockholders of record on April 1, 2005. We expect to continue to pay quarterly cash dividends, and our board of directors may consider increasing our quarterly cash dividends if we believe it will enhance stockholder value.
      From 2000 through 2004, our board of directors authorized the repurchase of up to $1,025.0 million of our common stock. As of December 31, 2004, we paid $750.4 million to repurchase approximately 35.2 million shares of our common stock, of which approximately 9.6 million shares were acquired during 2004 for $266.1 million. As of December 31, 2004, we had $274.6 million remaining under our share repurchase authorization.
      We have the ability under our loan covenants to pay dividends and repurchase our common stock under the condition that we are in compliance with the covenants. As of December 31, 2004, we were in compliance with the financial covenants of our loan agreements.
      The information required by Item 201(d) of Regulation S-K is included in Item 12 of Part III of this Form 10-K.

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Issuer Purchases of Equity Securities
                                   
                (d)
                Maximum Number
            (c)   (or Approximate
            Total Number of   Dollar Value) of
    (a)       Shares (or Units)   Shares (or Units)
    Total Number   (b)   Purchased as Part   that May Yet Be
    of Shares   Average Price   of Publicly   Purchased Under the
    (or Units)   Paid per Share   Announced Plans   Plans or Programs
Period   Purchased*   (or Unit)   or Programs   (in millions)
                 
Month #1 (October 1, —
October 31, 2004)
    95,105     $ 29.34       65,300     $ 296.0  
Month #2 (November 1, — November 30, 2004)
    504,900       31.23       504,900       280.2  
Month #3 (December 1, — December 31, 2004)
    170,200       33.27       170,200       274.6  
                                 
 
Total
    770,205     $ 31.45       740,400     $ 274.6  
                                 
 
Includes 29,805 shares purchased in the open market in connection with our 401(k) and deferred compensation programs.
      The share purchases reflected in the table above, except those purchased in connection with employee benefit plans, were made pursuant to our $200.0 million, $75.0 million and $275.0 million repurchase programs approved by our board of directors in October 2003, April 2004 and October 2004, respectively. These share repurchase programs do not have expiration dates. No share repurchase program approved by our board of directors has ever expired nor do we expect to terminate any program prior to completion. We intend to make additional share purchases under our existing repurchase program up to an aggregate of $274.6 million.

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ITEM 6. SELECTED FINANCIAL DATA (in millions, except per share data)
      The following Selected Financial Data should be read in conjunction with our Consolidated Financial Statements and notes thereto as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. The selected statement of income data and the other operating data for 2001 and 2000 and the selected balance sheet data at December 31, 2001 and 2000 were derived from our Consolidated Financial Statements, which have been audited by Arthur Andersen LLP, independent certified public accountants. Certain amounts in the historical Consolidated Financial Statements have been reclassified to conform to the 2004 presentation. See Notes 1, 4 and 7 of the Notes to our Consolidated Financial Statements for a discussion of basis of presentation, business combinations and stockholders’ equity and their effect on comparability of year-to-year data.
                                           
    Years Ended December 31,
     
    2004   2003   2002   2001   2000
                     
Statement of Income Data:
                                       
Revenue
  $ 2,708.1     $ 2,517.8     $ 2,365.1     $ 2,257.5     $ 2,103.3  
Expenses:
                                       
 
Cost of operations
    1,714.4       1,605.4       1,472.9       1,422.5       1,271.3  
 
Depreciation, amortization and depletion
    259.4       239.1       199.6       215.4       197.4  
 
Accretion
    13.7       12.7                    
 
Selling, general and administrative
    268.3       247.9       238.7       236.5       193.9  
 
Other charges (income)
                (5.6 )     99.6       6.7  
                                         
Operating income
    452.3       412.7       459.5       283.5       434.0  
Interest expense
    (76.7 )     (78.0 )     (77.0 )     (80.1 )     (81.6 )
Interest income
    6.9       9.5       4.3       4.4       1.7  
Other income (expense), net
    1.2       3.2       (.3 )     1.5       2.3  
                                         
Income before income taxes
    383.7       347.4       386.5       209.3       356.4  
Provision for income taxes
    145.8       132.0       146.9       83.8       135.4  
                                         
Income before cumulative effect of changes in accounting principles
    237.9       215.4       239.6       125.5       221.0  
Cumulative effect of changes in accounting principles
          (37.8 )                  
                                         
Net income
  $ 237.9     $ 177.6     $ 239.6     $ 125.5     $ 221.0  
                                         
Basic earnings per share:
                                       
 
Before cumulative effect of changes in accounting principles
  $ 1.56     $ 1.34     $ 1.45     $ .74     $ 1.26  
 
Cumulative effect of changes in accounting principles
          (.23 )                  
                                         
 
Basic earnings per share
  $ 1.56     $ 1.11     $ 1.45     $ .74     $ 1.26  
                                         
 
Weighted average common shares outstanding
    152.8       160.3       165.4       170.1       175.0  
                                         
Diluted earnings per share:
                                       
 
Before cumulative effect of changes in accounting principles
  $ 1.53     $ 1.33     $ 1.44     $ .73     $ 1.26  
 
Cumulative effect of changes in accounting principles
          (.23 )                  
                                         
 
Diluted earnings per share
  $ 1.53     $ 1.10     $ 1.44     $ .73     $ 1.26  
                                         
 
Weighted average common and common equivalent shares outstanding
    155.3       162.1       166.7       171.1       175.0  
                                         
Cash dividends per common share
  $ .36     $ .12     $     $     $  
                                         
                                         
    Years Ended December 31,
     
    2004   2003   2002   2001   2000
                     
Other Operating Data:
                                       
Cash flows from operating activities
  $ 666.3     $ 600.5     $ 569.7     $ 459.2     $ 461.8  
Capital expenditures(a)
    283.8       273.2       258.6       249.3       208.0  
Proceeds from the sale of property and equipment
    5.7       9.1       14.6       8.7       12.6  
                                         
    As of December 31,
     
    2004   2003   2002   2001   2000
                     
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 141.5     $ 119.2     $ 141.5     $ 16.1     $ 2.0  
Restricted cash and marketable securities
    275.7       397.4       175.0       142.3       84.3  
Total assets
    4,464.6       4,554.1       4,209.1       3,856.3       3,561.5  
Total debt
    1,354.3       1,520.3       1,442.1       1,367.7       1,256.7  
Total stockholders’ equity
    1,872.5       1,904.5       1,881.1       1,755.9       1,674.9  
 
(a)  During 2002, we also paid $72.6 million to purchase equipment originally placed into service pursuant to an operating lease.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
      You should read the following discussion in conjunction with our Consolidated Financial Statements and their Notes contained in this Annual Report on Form 10-K.
Overview of Our Business
      We are a leading provider of non-hazardous solid waste collection and disposal services in the United States. We provide solid waste collection services for commercial, industrial, municipal and residential customers through 140 collection companies in 22 states. We also own or operate 96 transfer stations, 58 solid waste landfills and 35 recycling facilities.
      We generate revenue primarily from our solid waste collection operations. Our remaining revenue is from other services including landfill disposal, recycling, compost, mulch and soil operations.
      The following table reflects our revenue by source for the years ended December 31, 2004, 2003 and 2002 (in millions):
                                                     
    Years Ended December 31,
     
    2004   2003   2002
             
Collection:
                                               
 
Residential
  $ 655.2       24.2 %   $ 601.2       23.9 %   $ 530.7       22.4 %
 
Commercial
    737.9       27.2       706.0       28.0       696.7       29.5  
 
Industrial
    558.1       20.6       523.0       20.8       501.6       21.2  
 
Other
    62.2       2.3       50.9       2.0       50.8       2.1  
                                                 
   
Total collection
    2,013.4       74.3       1,881.1       74.7       1,779.8       75.2  
                                           
Transfer and disposal
    1,031.0               967.5               854.1          
Less: Intercompany
    (519.8 )             (493.7 )             (428.5 )        
                                           
Transfer and disposal, net
    511.2       18.9       473.8       18.8       425.6       18.0  
Other
    183.5       6.8       162.9       6.5       159.7       6.8  
                                                 
   
Revenue
  $ 2,708.1       100.0 %   $ 2,517.8       100.0 %   $ 2,365.1       100.0 %
                                                 
      Our revenue from collection operations consists of fees we receive from commercial, industrial, municipal and residential customers. Our residential and commercial collection operations in some markets derive revenue from long-term contracts with municipalities. We generally provide industrial and commercial collection services to individual customers under contracts with terms up to three years. Our revenue from landfill services is from disposal or tipping fees charged to third parties. In general, we integrate our recycling operations with our collection operations and obtain revenue from the sale of recyclable materials. No one customer has individually accounted for more than 10% of our consolidated revenue or of our reportable segment revenue in any of the last three years.
      The cost of our collection operations is primarily variable and includes transfer, disposal, labor, self-insurance, fuel and equipment maintenance costs. We try to be more efficient by controlling the movement of waste streams from the point of collection through disposal. During the three months ended December 31, 2004, approximately 54% of the total volume of waste we collected was disposed of at landfills we own or operate.
      Our landfill costs include daily operating expenses, costs of capital for cell development, costs for final capping, closure and post-closure, and the legal and administrative costs of ongoing environmental compliance. Daily operating expenses include leachate treatment and disposal, methane gas and groundwater monitoring and system maintenance, interim cap maintenance and costs associated with the application of daily cover materials. We expense all indirect landfill development costs as they are incurred. We use life cycle accounting and the units-of-consumption method to recognize certain direct landfill costs related to cell development. In life cycle accounting, certain direct costs are capitalized, and charged to expense based upon

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the consumption of cubic yards of available airspace. These costs include all costs to acquire and construct a site including excavation, natural and synthetic liners, construction of leachate collection systems, installation of methane gas collection and monitoring systems, installation of groundwater monitoring wells, and other costs associated with the acquisition and development of the site. Obligations associated with final capping, closure and post-closure are capitalized, and amortized on a units-of-consumption basis as airspace is consumed.
      Cost and airspace estimates are developed annually by engineers. These estimates are used by our operating and accounting personnel to annually adjust our rates used to expense capitalized costs. Changes in these estimates primarily relate to changes in available airspace, inflation and applicable regulations. Changes in available airspace include changes in design and changes due to the addition of airspace lying in expansion areas that we believe have a probable likelihood of being permitted.
      Our operations are managed and reviewed through five regions which we designate as our reportable segments. From 2003 to 2004, operating income increased in our Eastern, Southern and Western regions due to an overall increase in revenue resulting from the successful execution of our growth strategy. In the Central region, increased revenue was offset by weak economic conditions and an increase in costs related to the long-haul transport of waste by third-party vendors. In the Southwestern region, revenue growth was impeded by the closure of a landfill and the completion of a special waste contract during 2003. The decrease in costs for Corporate Entities from 2003 to 2004 is primarily due to a decrease in self-insurance expense.
2004 Financial Objectives
      In January 2004, we publicly announced our objectives for the year. These objectives included the following:
  •  Generating free cash flow of approximately $340 million.
 
  •  Using our free cash flow to repurchase shares of our common stock under our $200.0 million share repurchase program approved by our board of directors in October 2003 and continuing to pay quarterly cash dividends.
 
  •  Generating diluted earnings per share of $1.50 to $1.55.
 
  •  Growing revenue from core operations by 3%, with approximately 2% attributable to price increases and 1% attributable to volume growth.
 
  •  Purchasing approximately $275 million of property and equipment.
2004 Business Performance
      During 2004, we achieved our earnings per share objective and exceeded our internal growth, free cash flow and share repurchase objectives.
      Our internal growth from core operations for 2004 was 5.9%, with 2.3% from price increases and 3.6% from volume growth. During 2004, our revenue growth from core pricing benefited from a broad-based pricing initiative which we started during the fourth quarter of 2003. We experienced core volume growth in all lines of our business, including our residential collection business resulting from the addition of several new municipal contracts, and our landfill and transfer station businesses resulting from newly opened sites and new contracts. Our core volume growth was also positively impacted by the hurricanes. In addition, our geographic mix of business, which is concentrated in high growth markets, positively impacted our operating results. As a result, during 2004 we were able to exceed the internal growth objectives we established at the beginning of the year.
      During 2004, our operating margins improved, primarily due to lower self-insurance expense. This benefit was partially offset by increased costs for fuel, labor and subcontracting costs associated with the long-haul transport of waste by third party vendors. The net expansion in our operating margin allowed us to achieve diluted earnings per share of $1.53 during the year ended December 31, 2004.

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      During 2004, we generated free cash flow of $388.2 million (consisting of cash provided by operating activities of $666.3 million, less purchases of property and equipment of $283.8 million, plus proceeds from the sale of property and equipment of $5.7 million), which substantially exceeded our objective. Our free cash flow was positively impacted by lower than expected cash taxes due to bonus depreciation and our change in tax method related to certain landfill costs.
      In April 2004, our board of directors increased our share repurchase authorization from $200.0 million to $275.0 million. During 2004, we used our free cash flow to repurchase approximately 9.6 million shares of our common stock for $266.1 million. Also, during the third quarter of 2004, our board of directors increased our quarterly dividend to $.12 per share.
2005 Financial Objectives
      Our financial objectives for 2005 assume no deterioration or improvement in the overall economy from that experienced during the fourth quarter 2004. Specific guidance is as follows:
  •  We expect to generate free cash flow in excess of $260 million.
 
  •  We anticipate using our free cash flow to continue to repurchase shares of our common stock under our $275.0 million share repurchase program approved by our board of directors in October 2004 and to continue to pay quarterly cash dividends.
 
  •  We anticipate diluted earnings per share of $1.65 to $1.70.
 
  •  We are targeting internal growth from core operations to be in the range of 4.0% to 4.5%, with 2.5% attributable to price increases and 1.5% to 2.0% attributable to volume growth.
 
  •  We anticipate purchasing approximately $300 million of property and equipment.
      We expect our free cash flow during 2005 to be lower than 2004 and 2003 because of higher tax payments due to the reversal of bonus depreciation, higher purchases of property and equipment and several one-time items that benefited previous periods, including utilization of a tax receivable and the collection of a note receivable during 2004, and an increase in self-insurance reserves during 2003.
2005 Business Initiatives
      Our business initiatives for 2005 are generally a continuation of those initiated in the prior three years and are dependent on further standardizing our business processes and improving our systems. Ensuring that our people understand our initiatives and processes and are trained on our new systems is essential to the overall success of our initiatives. Our business initiatives for 2005 are as follows:
  •  Pricing initiatives. During the fourth quarter of 2003, we implemented a broad-based pricing initiative across all lines of our business. The purpose of this initiative is to recover increasing costs and improve operating margins. We realized the benefit of this initiative during 2004 and expect a similar benefit during 2005.
 
  •  Improve the quality of our revenue. The first step in this process was completed in 2001 and included installing a standardized billing and operating system. This system enables us to, among other things, stratify our customers to determine how our rates compare to current market pricing. During 2002, we implemented the second generation of this software which we call RSI 1.0. RSI 1.0, our company’s core business system, provides a variety of functionalities including customer service, dispatch, billing, sales analysis, account retention and route productivity analysis. During 2005, we will begin to develop the next generation of our billing and operating system. This system will provide additional functionality to our operating locations and further standardize our billing and operating processes.
  We currently monitor our return on investment by market place and have instituted a return on investment pricing model. This model will eventually allow us to track our return on investment by customer.

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  During 2001, we also implemented a customer relationship management system. This system improves the productivity of our sales force by helping to establish marketing priorities and track sales leads. It also tracks renewal periods for potential commercial, industrial and franchise contracts. During 2005, we will continue to ensure our sales force is properly trained on this system and is using it as intended.
  •  Improve the productivity of our operations. We use a grid productivity program that enables us to benchmark the performance of our drivers. In addition, in our larger markets, we use a route optimization program to minimize drive times and improve operational density. During 2005, we will continue to update our disposal optimization metrics. These metrics identify which local disposal option maximizes our return on invested capital and cash flow.
 
  •  Improve fleet management and procurement. In February 2002, we selected Dossier as our fleet management and parts procurement system. During 2003, we implemented Dossier at all of our significant hauling and landfill operations. Among other features, this system tracks parts inventories, generates automatic quantity order points and logs all maintenance work. It allows us to capture and review information to ensure our preventive maintenance programs comply with manufacturers’ warranties and governmental regulations. In addition, the purchase order module within this system allows us to cross-reference purchasing information with our inventory. During 2005, we intend to further utilize this purchase order module to take advantage of volume discounts.
 
  •  Enhance operational and financial reporting systems. We have several initiatives aimed at improving our operational and financial reporting systems. The overall goal of these initiatives is to provide us with detailed information, prepared in a consistent manner, that will allow us to quickly analyze and act upon trends in our business.
  One of our most significant systems is our enterprise-wide general ledger package. We successfully converted all of our locations to Lawson general ledger software in 2002 and in 2003 successfully converted all of our locations to Lawson fixed asset software.
 
  All of the system initiatives mentioned above will provide us with more consistent and detailed information, thus allowing us to make quicker and more informed business decisions. In addition, during 2001, all of our significant software applications were standardized and centralized at our data center in Fort Lauderdale, Florida. This standardization and centralization provides us with consolidated information concerning our operations across a variety of operational and financial disciplines. It also significantly enhances our ability to execute our disaster recovery plan, if necessary.
  •  Expand our safety training programs. As part of our ongoing emphasis on safe work practices and in light of increasing insurance costs, we expanded our safety training programs in 2002. During 2004, we distributed to all of our locations a comprehensive training and safety manual. Safety will continue to be a key area of focus during 2005.
 
  •  Develop and implement performance strategies. Develop and implement strategies to improve the performance of locations and lines of business that are performing below the company’s average.

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Critical Accounting Policies and Disclosures
      Our Consolidated Financial Statements have been prepared using accounting principles generally accepted in the United States and necessarily include certain estimates and judgments made by management. The following is a list of accounting policies that we believe are the most critical in understanding our company’s financial position, results of operations and cash flows, and may require management to make subjective or complex judgments about matters that are inherently uncertain.
             
        Subjective or   Disclosure
Policy   Description   Complex Judgments   Reference
Landfill Accounting:
           
Life Cycle Accounting   We use life cycle accounting and the units-of-consumption method to recognize certain landfill costs over the life of the site. In life cycle accounting, all costs to acquire and construct a site are capitalized, and charged to expense based upon the consumption of cubic yards of available airspace. Obligations associated with final capping, closure and post-closure are capitalized, and amortized on a units- of-consumption basis as airspace is consumed.   Cost and airspace estimates are developed annually by engineers. Changes in these estimates could significantly affect our amortization, depletion, and accretion expense.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Landfill and Environmental Matters.

Note 3, Accrued Landfill and Environmental Costs in the Consolidated Financial Statements.
 
Probable Expansion Airspace   We include in our calculation of total available airspace expansion areas that we believe have a probable likelihood that the expansion area will ultimately be permitted.   We have developed six criteria that must be met before an expansion area is designated as probable expansion airspace. We believe that satisfying each of these criteria demonstrates a high likelihood that expansion airspace that is incorporated in our landfill costing will be permitted. However, because some of these criteria are judgmental, they may exclude expansion airspace that will eventually be permitted or include expansion airspace that will not be permitted. In either of these scenarios, our amortization, depletion, and accretion expense could change significantly.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Landfill and Environmental Matters.

Note 3, Accrued Landfill and Environmental Costs in the Consolidated Financial Statements.

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        Subjective or   Disclosure
Policy   Description   Complex Judgments   Reference
Final Capping, Closure and Post-Closure   Prior to January 1, 2003, costs for final closure of our landfills and costs for providing required post-closure monitoring and maintenance were charged to cost of operations based upon consumed airspace using the units-of- consumption method. These costs were not inflated or discounted to the present value of total estimated costs. On January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations.” Under SFAS 143, obligations associated with final capping activities that occur during the operating life of the landfill are recognized on a units-of- consumption basis as airspace is consumed within each discrete capping event. Obligations related to closure and post- closure activities that occur after the landfill has ceased operations are recognized on a units-of-consumption basis as airspace is consumed throughout the entire landfill life. Landfill retirement obligations are capitalized as the related liabilities are recognized and amortized using the units-of-consumption method over the airspace consumed within the capping event or the airspace consumed throughout the entire landfill, depending upon the nature of the obligation. All obligations are initially measured at estimated fair value. Fair value is calculated on a present value basis using an inflation rate and the company’s credit-adjusted, risk-free rate.   Total future costs for capping, closure and post- closure are developed annually by engineers. Changes in these estimates could affect our amortization of final capping, closure and post- closure costs and our accretion expense.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Landfill and Environmental Matters and — Selected Balance Sheet Accounts.

Note 3, Accrued Landfill and Environmental Costs in the Consolidated Financial Statements.

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        Subjective or   Disclosure
Policy   Description   Complex Judgments   Reference
Self-Insurance:            
    Our insurance programs for worker’s compensation, general liability, vehicle liability and employee-related health care benefits are effectively self-insured. Self-insurance accruals are based on claims reported and actuarial estimates of claims development and claims incurred but not reported.   Estimates of claims development and claims incurred but not reported are developed actuarially. If actual claims experience or development is significantly different than our estimates, our self- insurance expense would change.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Selected Balance Sheet Accounts.

Note 12, Commitments and Contingencies in the Consolidated Financial Statements.
 
Property and Equipment:            
Expenditures for Improvements, Repairs and Maintenance   Expenditures for major additions and improvements to facilities are capitalized. All expenditures for maintenance and repairs are expensed when incurred.   Whether certain expenditures improve an asset or lengthen its useful life is subject to our judgment. Accordingly, the actual useful lives of our assets could differ from our estimates.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Property and Equipment.

Note 2, Summary of Significant Accounting Policies in the Consolidated Financial Statements.
 
Useful Lives   Property and equipment are recorded at cost. Depreciation and amortization expense are provided over the estimated useful lives of the applicable assets using the straight-line method. The estimated useful lives are seven to forty years for buildings and improvements, five to twelve years for vehicles, seven to ten years for most landfill equipment, three to fifteen years for all other equipment, and five to twelve years for furniture and fixtures.   Our estimates regarding the useful lives of our depreciable assets are based on our judgment. Accordingly, actual useful lives could differ from our estimates.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Property and Equipment.

Note 2, Summary of Significant Accounting Policies in the Consolidated Financial Statements.

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        Subjective or   Disclosure
Policy   Description   Complex Judgments   Reference
Capitalized Interest   We capitalize interest on landfill cell construction and other construction projects in accordance with Statement of Financial Accounting Standards No. 34, “Capitalization of Interest Cost.”   Capitalizing too little or too much interest expense could lead to a misstatement of interest expense in the statement of income. In order to minimize this risk, construction projects must meet the following criteria before interest is capitalized:
1. Total construction costs are $50,000 or greater,
2. the construction phase is one month or longer, and
3. the assets have a useful life of one year or longer.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations — Property and Equipment.

Note 2, Summary of Significant Accounting Policies in the Consolidated Financial Statements.
 
Revenue and Accounts Receivable:            
    Revenue consists primarily of collection fees from various customer types and transfer and landfill disposal fees charged to third parties. Advance billings are recorded as deferred revenue. Revenue is recognized over the period in which services are provided. No one customer has individually accounted for more than 10% of our consolidated revenue or of our reportable segment revenue in any of the past three years. Reserves for accounts receivable are provided when a receivable is believed to be uncollectible or generally when a receivable is in excess of 90 days old.   Establishing reserves against specific accounts receivable and the overall adequacy of our accounts receivable reserve is a matter of judgment. If our judgment and estimates concerning the adequacy of our reserve for accounts receivable is incorrect, bad debt expense would change.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Selected Balance Sheet Accounts.

Note 2, Summary of Significant Accounting Policies in the Consolidated Financial Statements.

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        Subjective or   Disclosure
Policy   Description   Complex Judgments   Reference
Derivatives:            
    From time to time, we use derivatives to limit our exposure to fluctuations in interest rates and diesel fuel prices. These derivatives have been accounted for in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”   The hedging relationships we have entered into are expected to be either 100% effective or highly effective and have been determined to meet the criteria for hedge accounting. If, in the future, these relationships are no longer expected to be 100% or highly effective, or if they no longer meet the criteria for hedge accounting, our results of operations could change.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition and — Fuel Hedge.

Note 5, Debt, and Note 11, Fuel Hedge in the Consolidated Financial Statements.

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        Subjective or   Disclosure
Policy   Description   Complex Judgments   Reference
Long-Lived Asset Impairments:            
    Long-lived assets consist primarily of property, equipment, goodwill and other intangible assets. We periodically evaluate whether events and circumstances have occurred (as further described in Note 2 of the Consolidated Financial Statements) that may warrant revision of the estimated useful life of long-lived assets or whether the remaining balance of these assets should be evaluated for possible impairment. We use an estimate of the undiscounted cash flows over the remaining life of the assets in assessing their recoverability. In addition, goodwill is tested for impairment on an annual basis or more frequently if indicators of impairment arise. In testing for impairment, we estimate the fair value of each operating segment of our business and compare the fair values with the carrying values. If the fair value of an operating segment is greater than its carrying value, no impairment results. We measure impairment loss as the amount by which the carrying amount of the asset or operating segment exceeds its fair value.   Our estimates of future cash flows and fair values are based on our judgment. Accordingly, we could designate certain assets as impaired that are not and fail to identify certain impaired assets.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Property and Equipment.

Note 2, Summary of Significant Accounting Policies, and Note 4, Business Combinations in the Consolidated Financial Statements.

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        Subjective or   Disclosure
Policy   Description   Complex Judgments   Reference
Income Taxes:            
    We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Accordingly, deferred taxes have been provided to show the effect of temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the financial statements. After the initial recognition of a deferred tax asset, a valuation allowance is provided if it is determined that it is more likely than not that the asset will not be realized.   Valuation allowances for deferred tax assets and the realizability of net operating losses for tax purposes are based upon our judgment. If our judgment and estimates concerning valuation allowances and the realizability of net operating losses are incorrect, our provision for income taxes would change.   Note 2, Summary of Significant Accounting Policies, and Note 6, Income Taxes in the Consolidated Financial Statements.
Business Combinations
      We make decisions to acquire or invest in businesses based on financial and strategic considerations. Businesses acquired are accounted for under the purchase method of accounting and are included in our Consolidated Financial Statements from the date of acquisition.
      We acquired various solid waste businesses during the years ended December 31, 2004, 2003 and 2002. The aggregate purchase prices we paid for these transactions was $47.4 million, $51.5 million and $55.8 million, respectively.
      Cost in excess of fair value of net assets acquired (goodwill) for 2004 acquisitions totaled approximately $13.2 million. As of December 31, 2004 we had goodwill, net of accumulated amortization, of $1,562.7 million.
      During 2004, $28.2 million of the total purchase price paid for acquisitions and contingent payments to former owners was allocated to landfill airspace. As of December 31, 2004, we had $743.6 million of landfill development costs, net of accumulated depletion and amortization, which includes purchase price allocated to landfill airspace as well as other capitalized landfill costs. When a landfill is acquired as part of a group of assets, purchase price is allocated to airspace based upon the discounted expected future cash flows of the landfill relative to the other assets within the acquired group and is adjusted for other non-depletable landfill assets and liabilities acquired (primarily final capping, closure and post-closure liabilities). Landfill purchase price is amortized using the units-of-consumption method over total available airspace, which includes probable expansion airspace where appropriate.

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      Goodwill for 2003 acquisitions totaled approximately $21.2 million. As of December 31, 2003, we had goodwill, net of accumulated amortization, of $1,558.1 million. $27.7 million of the total purchase price paid for acquisitions and contingent payments to former owners was allocated to landfill airspace.
      Goodwill for 2002 acquisitions totaled approximately $40.1 million. As of December 31, 2002, we had goodwill, net of accumulated amortization, of $1,544.2 million.
Consolidated Results of Operations
Years Ended December 31, 2004, 2003 and 2002
      Our income before cumulative effect of changes in accounting principles was $237.9 million for the year ended December 31, 2004, as compared to $215.4 million in 2003 and $239.6 million in 2002. Net income was $237.9 million for year ended December 31, 2004, or $1.53 per diluted share, as compared to $177.6 million, or $1.10 per diluted share, in 2003 and $239.6 million, or $1.44 per diluted share, in 2002. Net income for the year ended December 31, 2003 includes an after-tax expense of $37.8 million (net of an income tax benefit of $23.1 million), or $.23 per share, as a cumulative effect of a change in accounting principle resulting from the adoption of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” and a change in accounting principle for our methane gas collection systems. See Note 1, Basis of Presentation, of the Notes to our Consolidated Financial Statements for further discussion of these changes in accounting principles. Our operating results for the year ended December 31, 2002 include other charges (income) described below.
      The following table summarizes our costs and expenses in millions of dollars and as a percentage of our revenue for 2002 through 2004:
                                                   
    2004   2003   2002
             
    $   %   $   %   $   %
                         
Revenue
  $ 2,708.1       100.0 %   $ 2,517.8       100.0 %   $ 2,365.1       100.0 %
Cost of operations
    1,714.4       63.3       1,605.4       63.8       1,472.9       62.3  
Depreciation, amortization and depletion of property and equipment
    252.4       9.3       233.8       9.3       193.5       8.2  
Amortization of intangible assets
    7.0       .3       5.3       .2       6.1       .2  
Accretion
    13.7       .5       12.7       .5              
Selling, general and administrative expenses
    268.3       9.9       247.9       9.8       238.7       10.1  
Other charges (income)
                            (5.6 )     (.2 )
                                                 
 
Operating income
  $ 452.3       16.7 %   $ 412.7       16.4 %   $ 459.5       19.4 %
                                                 
      Revenue. Revenue was $2,708.1 million, $2,517.8 million and $2,365.1 million for the years ended December 31, 2004, 2003 and 2002, respectively. Revenue increased by $190.3 million, or 7.6%, from 2003 to

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2004. Revenue increased by $152.7 million, or 6.5%, from 2002 to 2003. The following table reflects the components of our revenue growth for the years ended December 31, 2004, 2003 and 2002:
                           
    2004   2003   2002
             
Core price
    2.3 %     1.8 %     1.4 %
Fuel surcharges
    .2       .2        
Recycling commodities
    .5       .1       .4  
                         
 
Total price
    3.0       2.1       1.8  
                         
Core volume
    3.6       2.1       1.6  
Non-core volume
    .1             .4  
                         
 
Total volume
    3.7       2.1       2.0  
                         
 
Total internal growth
    6.7       4.2       3.8  
Acquisitions
    .9       1.8       .8  
Taxes(a)
          .5       .2  
                         
 
Total revenue growth
    7.6 %     6.5 %     4.8 %
                         
 
(a)  Represents new taxes levied on landfill volumes in certain states that are passed on to customers.
  •  2004: During the year ended December 31, 2004, our revenue growth from core pricing benefited from a broad-based pricing initiative which we started during the fourth quarter of 2003. During the year ended December 31, 2004, we experienced core volume growth in all lines of our business, including our residential collection business resulting from the addition of several new municipal contracts, and our landfill and transfer station businesses resulting from newly opened sites and new contracts. Our internal growth from our core operations was 5.9% in 2004.
  •  2003: During the first three quarters of 2003, we experienced moderate growth in revenue due to an increase in core pricing. During the fourth quarter of 2003, our revenue growth from core pricing increased at a more rapid pace due to our broad-based pricing initiative.
  During 2003, the economic slowdown which began during 2001 continued to negatively impact our business. However, during 2003, our revenue growth from core volume continued to be positively impacted by long-term franchise and municipal contracts that were secured during 2002. Our internal growth from core operations was 3.9% in 2003.
  •  2002: The economic slowdown which began in 2001 continued to negatively impact the portion of our business servicing the manufacturing sector and non-residential construction industry during 2002. Volumes attributable to manufacturing and construction activity continued to weaken during 2002.
  The weakness in our business attributable to the economic slowdown was partially offset by an increase in recycling commodity prices in the early part of 2002.
 
  Despite the weakness we experienced in the aspects of our business noted above, our internal growth from core operations for 2002 was 3.0%. During 2002, we secured several long-term franchise and municipal contracts. We also benefited from the geographic mix of our business which favors high- growth markets.
  •  2005 Outlook: We anticipate internal growth from core operations to be in the range of 4.0% to 4.5% during 2005 assuming no deterioration or improvement in the overall economy from that experienced during the fourth quarter of 2004. However, our price and volume growth may remain flat or may decline in 2005 depending upon economic conditions and our success in implementing pricing initiatives.
      Cost of Operations. Cost of operations was $1,714.4 million, $1,605.4 million and $1,472.9 million, or, as a percentage of revenue, 63.3%, 63.8% and 62.3%, for the years ended December 31, 2004, 2003 and 2002, respectively.

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      The increase in aggregate dollars in all periods presented is primarily a result of the expansion of our operations through internal growth and acquisitions.
      The increase in cost of operations as a percentage of revenue from 2002 to 2003 and the decrease in cost of operations as a percentage of revenue from 2003 to 2004 is primarily attributable to higher self-insurance expense in 2003. Self-insurance expense was $165.3 million, $189.5 million and $138.1 million for the years ended December 31, 2004, 2003 and 2002, respectively. The increase in self-insurance expense in 2003 related to existing claims and was attributable to the expansion of our operations and various changes in estimates as a result of continued negative trends through the 2003 policy year.
      Excluding self-insurance expense, cost of operations as a percentage of revenue increased during the year ended December 31, 2004 versus the comparable 2003 period. This increase is primarily attributable to increased fuel prices, labor costs and subcontracting costs associated with the long-haul transport of waste by third-party vendors. Excluding self-insurance expense, cost of operations as a percentage of revenue decreased in 2003 versus the comparable 2002 period due to the elimination of closure and post-closure expense as a component of cost of operations in accordance with SFAS 143 in 2003 and the termination of our operating lease facility in July 2002. This decrease was partially offset by increased fuel prices, an increase in waste taxes levied on landfill volumes in certain states, an increase in revenue generated by lines of business that produce lower operating margins and an increase in the long-haul transport of waste by third-party vendors.
      To date in 2005, we have experienced a significant increase in fuel prices. We believe that cost of operations as a percentage of revenue may continue to remain high depending upon the cost of fuel, health insurance, risk insurance and other key components of our cost structure and general economic conditions.
      Depreciation, Amortization and Depletion of Property and Equipment. Depreciation, amortization and depletion expenses for property and equipment were $252.4 million, $233.8 million and $193.5 million, or, as a percentage of revenue, 9.3%, 9.3% and 8.2%, for the years ended December 31, 2004, 2003 and 2002, respectively. The increase in aggregate dollars from 2003 to 2004 is primarily due to the expansion of our operations through internal growth and acquisitions. The increase in aggregate dollars and as a percentage of revenue from 2002 to 2003 is primarily due to an increase in landfill amortization associated with the adoption of SFAS 143. The remaining increase from 2002 to 2003 is due to increased depreciation expense resulting from capital expenditures, acquisitions and the purchase of equipment originally placed into service pursuant to an operating lease.
      Amortization of Intangible Assets. Intangible assets consist primarily of cost in excess of fair value of net assets acquired, but also includes values assigned to long-term contracts, covenants not to compete and customer relationships. Expenses for amortization of intangible assets were $7.0 million, $5.3 million and $6.1 million, or, as a percentage of revenue, .3%, .2% and .2%, for the years ended December 31, 2004, 2003 and 2002, respectively. The increase in such expenses in aggregate dollars and as a percentage of revenue from 2003 to 2004 is primarily due to amortization expense on amounts that were recorded in other intangible assets during the three months ended September 30, 2004 resulting from an extensive internal review of all recent acquisitions. The increase in amortization of intangible assets in aggregate dollars is also due to the amortization of intangible assets associated with businesses acquired during 2004.
      Accretion expense. Accretion expense was $13.7 million and $12.7 million or, as a percentage of revenue, .5% and .5%, for the years ended December 31, 2004 and 2003, respectively, versus $0 for 2002. Accretion expense resulted from the adoption of SFAS 143 as of January 1, 2003. The increase in such expenses in aggregate dollars in 2004 is primarily due to expansion of our landfill operations.
      Selling, General and Administrative Expenses. Selling, general and administrative expenses were $268.3 million, $247.9 million and $238.7 million, or, as a percentage of revenue, 9.9%, 9.8% and 10.1%, for the years ended December 31, 2004, 2003 and 2002, respectively. The increases in aggregate dollars are primarily a result of the expansion of our operations through internal growth and acquisitions. The increase in such expenses as a percentage of revenue from 2003 to 2004 is primarily due to higher compensation costs. The decrease in such expenses as a percentage of revenue from 2002 to 2003 is primarily due to leveraging our existing overhead structure over an expanding revenue base.

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      We believe that selling, general and administrative expenses in the range of 10% of revenue are appropriate for 2005 given our business platform.
      Other Charges (Income). During the fourth quarter of 2002, we recorded a $5.6 million gain on the sale of certain assets for amounts exceeding estimates originally made and recorded as other charges during the fourth quarter of 2001.
      Operating Income. Operating income was $452.3 million, $412.7 million and $459.5 million, or, as a percentage of revenue, 16.7%, 16.4% and 19.4%, for the years ended December 31, 2004, 2003 and 2002, respectively.
      Interest Expense. We incurred interest expense on our unsecured notes and tax-exempt bonds. Interest expense was $76.7 million, $78.0 million and $77.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. In May 2004, $225.0 million of our public notes matured and were repaid resulting in a reduction in interest expense, which was partially offset by increases in interest expense resulting from additional tax-exempt financing obtained during 2004. The increase in interest expense from 2002 to 2003 is due to higher debt balances resulting from additional tax-exempt financings partially offset by lower interest rates.
      Capitalized interest was $2.1 million, $3.3 million and $2.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.
      Interest Income and Other Income (Expense), Net. Interest income and other income, net of other expense, was $8.1 million, $12.7 million and $4.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. The variances during the periods are primarily due to fluctuations in cash, restricted cash and marketable securities balances and net gains on the disposition of assets during 2003. In May 2004, we used a portion of our outstanding cash and restricted cash and marketable securities balances to repay $225.0 million of public notes.
      Income Taxes. Our provision for income taxes was $145.8 million, $132.0 million and $146.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. Our effective income tax rate was 38.0% for the years ended December 31, 2004, 2003 and 2002.
      Cumulative Effect of Changes in Accounting Principles. During the first quarter of 2003, we adopted SFAS 143. SFAS 143 required us to change the methodology we used to record final capping, closure and post-closure costs related to our landfills. As of January 1, 2003, we recorded an after-tax expense of $20.8 million, or $33.6 million on a pre-tax basis, as a cumulative effect of a change in accounting principle resulting from the adoption of SFAS 143. In addition, we also recorded an after-tax expense of $17.0 million, or $27.4 million on a pre-tax basis, as a cumulative effect of a change in accounting principle for our methane gas collection systems. This change in accounting principle for methane gas collection systems was prompted by a thorough evaluation of our landfill accounting policy in connection with the adoption of SFAS 143 and is consistent with the methodology used by other participants in the waste industry.

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Landfill and Environmental Matters
Available Airspace
      The following tables reflect landfill airspace activity for landfills owned or operated by us for the years ended December 31, 2004, 2003 and 2002:
                                                                   
    Balance as of   New   Landfills   Permits       Changes in   Changes   Balance as of
    December 31,   Expansions   Acquired, Net   Granted, Net   Airspace   Engineering   in   December 31,
    2001   Undertaken   of Divestitures   of Closures   Consumed   Estimates   Design   2002
                                 
Permitted airspace:
                                                               
 
Cubic yards (in millions)
    1,329.0             4.9       45.1       (34.6 )     13.1       .4       1,357.9  
 
Number of sites
    54               1       1                               56  
Expansion airspace:
                                                               
 
Cubic yards (in millions)
    359.6       4.3             (35.7 )           (2.1 )     27.2       353.3  
 
Number of sites
    20       2             (2 )                             20  
                                                                 
Total available airspace:
                                                               
 
Cubic yards (in millions)
    1,688.6       4.3       4.9       9.4       (34.6 )     11.0       27.6       1,711.2  
                                                                 
Number of sites
    54               1       1                               56  
                                                         
                                                                   
    Balance as of   New   Landfills   Permits       Changes in   Changes   Balance as of
    December 31,   Expansions   Acquired, Net   Granted, Net   Airspace   Engineering   In   December 31,
    2002   Undertaken   of Divestitures   of Closures   Consumed   Estimates   Design   2003
                                 
Permitted airspace:
                                                               
 
Cubic yards (in millions)
    1,357.9             26.3       154.6       (39.3 )     (.9 )           1,498.6  
 
Number of sites
    56               2                                     58  
Expansion airspace:
                                                               
 
Cubic yards (in millions)
    353.3       61.6             (154.1 )           (3.5 )     11.4       268.7  
 
Number of sites
    20                   (5 )                             15  
                                                                 
Total available airspace:
                                                               
 
Cubic yards (in millions)
    1,711.2       61.6       26.3       .5       (39.3 )     (4.4 )     11.4       1,767.3  
                                                                 
Number of sites
    56               2                                     58  
                                                         
                                                           
    Balance as of   Landfills   Permits       Changes in   Changes   Balance as of
    December 31,   Acquired, Net   Granted, Net   Airspace   Engineering   In   December 31,
    2003   of Divestitures   of Closures   Consumed   Estimates   Design   2004
                             
Permitted airspace:
                                                       
 
Cubic yards (in millions)
    1,498.6       24.4       48.6       (42.1 )     .1             1,529.6  
 
Number of sites
    58       1       (1 )                             58  
Expansion airspace:
                                                       
 
Cubic yards (in millions)
    268.7             (48.6 )           .1       2.0       222.2  
 
Number of sites
    15             (3 )                             12  
                                                         
Total available airspace:
                                                       
 
Cubic yards (in millions)
    1,767.3       24.4             (42.1 )     .2       2.0       1,751.8  
                                                         
Number of sites
    58       1       (1 )                             58  
                                                   
      Changes in engineering estimates typically include minor modifications to the available disposal capacity of a landfill based on a refinement of the capacity calculations resulting from updated information. Changes in design typically include significant modifications to a landfill’s footprint or vertical slopes.
      During 2002, total available airspace increased by 22.6 million cubic yards primarily due to the opening of a greenfield site in South Carolina, changes in engineering estimates and changes in design partially offset by consumption. During 2003, total available airspace increased by 56.1 million cubic yards due to new expansions undertaken, two landfills that were acquired during the year and changes in design partially offset by airspace consumption and changes in engineering estimates. During 2004, total available airspace decreased by 15.5 million cubic yards primarily due to airspace consumption partially offset by the acquisition of a landfill.
      As of December 31, 2004, we owned or operated 58 solid waste landfills with total available disposal capacity estimated to be 1.7 billion in-place cubic yards. Total available disposal capacity represents the sum

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of estimated permitted airspace plus an estimate of probable expansion airspace. These estimates are developed annually by engineers utilizing information provided by annual aerial surveys. As of December 31, 2004, total available disposal capacity is estimated to be 1.5 billion in-place cubic yards of permitted airspace plus .2 billion in-place cubic yards of probable expansion airspace. Before airspace included in an expansion area is determined to be probable expansion airspace and, therefore, included in our calculation of total available disposal capacity, it must meet our expansion criteria. See Note 3, Accrued Landfill and Environmental Costs of the Notes to our Consolidated Financial Statements for further information.
      As of December 31, 2004, twelve of our landfills meet the criteria for including probable expansion airspace in their total available disposal capacity. At projected annual volumes, these twelve landfills have an estimated remaining average site life of 30 years, including probable expansion airspace. The average estimated remaining life of all of our landfills is 30 years.
      The following table reflects the estimated operating lives of our active landfill sites based on available disposal capacity using current annual volumes as of December 31, 2004:
                                 
    Number of Sites without   Number of Sites with   Total   Percent
    Expansion Airspace   Expansion Airspace   Sites   of Total
                 
0 to 5 years
    6       1       7       12 %
5+ to 10 years
    6       0       6       11  
10+ to 20 years
    11       2       13       22  
20+ to 40 years
    12       7       19       33  
40+ years
    11       2       13       22  
                                 
Total
    46       12       58       100 %
                                 
      Sites with expansion airspace include four landfills with less than five years of remaining permitted airspace.
Final Capping, Closure and Post-Closure Costs
      As of January 1, 2003, we adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations.” This statement required us to change the methodology we used to record final capping, closure and post-closure costs. See Note 3, Accrued Landfill and Environmental Costs, of the Notes to our Consolidated Financial Statements for further information.
      As of December 31, 2004, accrued final capping, closure and post-closure costs were $216.8 million. The current portion of these costs of $14.6 million is reflected in our Consolidated Balance Sheets in other current liabilities. The long-term portion of these costs of $202.2 million is reflected in our Consolidated Balance Sheets in accrued landfill and environmental costs.

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Investment in Landfills
      The following tables reflect changes in our investment in landfills for the years ended December 31, 2002, 2003 and 2004 and the future expected investment as of December 31, 2004 (in millions):
                                                 
    Balance as of           Transfers   Additions   Balance as of
    December 31,   Capital   Landfill   and   Charged to   December 31,
    2001   Additions   Acquisitions   Adjustments   Expense   2002
                         
Non-depletable landfill land
  $ 50.5     $ 3.3     $     $ .2     $     $ 54.0  
Landfill development costs
    958.8       18.1       5.1       44.3             1,026.3  
Construction in progress — landfill
    17.6       56.0             (41.3 )           32.3  
Accumulated depletion and amortization
    (237.0 )                 .3       (67.4 )     (304.1 )
                                                 
Net investment in landfill land and development costs
  $ 789.9     $ 77.4     $ 5.1     $ 3.5     $ (67.4 )   $ 808.5  
                                                 
                                                                 
        Cumulative               Non-Cash        
        Effect of               Additions        
    Balance as of   Changes in           Transfers   for Asset   Additions   Balance as of
    December 31,   Accounting   Capital   Landfill   and   Retirement   Charged to   December 31,
    2002   Principles   Additions   Acquisitions   Adjustments   Obligations   Expense   2003
                                 
Non-depletable landfill land
  $ 54.0     $     $ .1     $ .5     $ (5.1 )   $     $     $ 49.5  
Landfill development costs
    1,026.3       188.6       3.7       28.9       69.8       17.9             1,335.2  
Construction in progress — landfill
    32.3             78.7             (50.2 )                 60.8  
Accumulated depletion and amortization
    (304.1 )     (248.4 )                 .7             (92.8 )     (644.6 )
                                                                 
Net investment in landfill land and development costs
  $ 808.5     $ (59.8 )   $ 82.5     $ 29.4     $ 15.2     $ 17.9     $ (92.8 )   $ 800.9  
                                                                 
                                                                 
                        Non-Cash        
                        Additions        
    Balance as of               Transfers   for Asset   Additions   Balance as of
    December 31,   Capital       Landfill   and   Retirement   Charged to   December 31,
    2003   Additions   Retirements   Acquisitions   Adjustments   Obligations   Expense   2004
                                 
Non-depletable landfill land
  $ 49.5     $ 1.0     $     $ 1.5     $ 1.4     $     $     $ 53.4  
Landfill development costs
    1,335.2       6.6       (1.9 )     28.9       102.4       15.3             1,486.5  
Construction in progress — landfill
    60.8       78.9                   (100.6 )                 39.1  
Accumulated depletion and amortization
    (644.6 )           1.9       (1.0 )     (.8 )           (98.4 )     (742.9 )
                                                                 
Net investment in landfill land and development costs
  $ 800.9     $ 86.5     $     $ 29.4     $ 2.4     $ 15.3     $ (98.4 )   $ 836.1  
                                                                 
                         
    Balance as of   Expected   Total
    December 31,   Future   Expected
    2004   Investment   Investment
             
Non-depletable landfill land
  $ 53.4     $     $ 53.4  
Landfill development costs
    1,486.5       1,524.1       3,010.6  
Construction in progress — landfill
    39.1             39.1  
Accumulated depletion and amortization
    (742.9 )           (742.9 )
                         
Net investment in landfill land and development costs
  $ 836.1     $ 1,524.1     $ 2,360.2  
                         

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      The following table reflects our net investment in our landfills, excluding non-depletable land, and our depletion, amortization and accretion expense for the years ended December 31, 2004, 2003 and 2002. It also shows on a pro forma basis what our depletion, amortization and accretion expense would have been if SFAS 143 and the changes in accounting principles relating to our methane gas collection systems were effective on January 1, 2002:
                                 
    Years Ended December 31,
     
        Pro Forma    
    2004   2003   2002   2002
                 
Number of landfills owned or operated
    58       58       56       56  
Net investment, excluding non-depletable land (in millions)
  $ 782.7     $ 751.4     $ 694.7     $ 754.5  
Total estimated available disposal capacity (in millions of cubic yards)
    1,751.8       1,767.3       1,711.2       1,711.2  
                                 
Net investment per cubic yard
  $ .45     $ .43     $ .41     $ .44  
                                 
Landfill depletion and amortization expense (in millions)
  $ 98.4     $ 92.8     $ 86.9     $ 67.4  
Accretion expense (in millions)
    13.7       12.7       10.5        
Closure and post-closure expense (in millions)
                      26.1  
                                 
      112.1       105.5       97.4       93.5  
                                 
Airspace consumed (in millions of cubic yards)
    42.1       39.3       34.6       34.6  
                                 
Depletion, amortization, accretion, closure and post-closure expense per cubic yard of airspace consumed
  $ 2.66     $ 2.68     $ 2.82     $ 2.70  
                                 
      During the twelve months ended December 31, 2004 and 2003, our weighted average compaction rate was approximately 1,500 pounds per cubic yard.
      As of December 31, 2004, we expect to spend an estimated additional $1,524.1 million on existing landfills, primarily related to cell construction and environmental structures, over their expected remaining lives. Our total expected gross investment, excluding non-depletable land, estimated to be $2.3 billion, or $1.32 per cubic yard, is used in determining our depletion and amortization expense based upon airspace consumed using the units-of-consumption method.
      We accrue costs related to environmental remediation activities through a charge to income in the period such liabilities become probable and can be reasonably estimated. We also accrue costs related to environmental remediation activities associated with properties acquired through business combinations as a charge to cost in excess of fair value of net assets acquired or landfill purchase price allocated to airspace, as appropriate. No significant amounts were charged to expense during the years ended December 31, 2004, 2003 and 2002.
Financial Condition
      At December 31, 2004, we had $237.0 million of restricted cash deposits and $38.7 million of restricted marketable securities held as financial guarantees, including $119.0 million of restricted cash held for capital expenditures under certain debt facilities, and $34.3 million and $38.7 million of restricted cash and restricted marketable securities, respectively, pledged to various regulatory agencies and governmental entities as financial guarantees of our performance related to final capping, closure and post-closure obligations at our landfills. Restricted marketable securities consist of mutual funds invested in short-term investment grade securities, including mortgage-backed securities and U.S. Government obligations. These securities are available for sale and, as a result, are stated at fair value based upon quoted market prices. Unrealized gains and losses, net of tax, are recorded as a component of accumulated other comprehensive income (loss). We liquidated a portion of these marketable securities and used the proceeds to repay the $225.0 million of public notes, which matured in May 2004.
      In July 1998, we entered into a $1.0 billion unsecured revolving credit facility with a group of banks. $500.0 million of the credit facility was scheduled to expire in July 2002 and the remaining $500.0 million was scheduled to expire in July 2003. As a result of our strong financial position and liquidity, in February 2002 we

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reduced the short- and long-term portions of our credit facility to $300.0 million and $450.0 million, respectively. In July 2002, we renewed the long-and short-term portions of our credit facility respectively, on substantially the same terms and conditions with the long-term portion expiring in 2007 and the short-term portion expiring in 2003. The short-term portion of the facility was renewed again in July 2003 and 2004 and expires in June 2005. Borrowings under the credit facility bear interest at LIBOR-based rates. We use our operating cash flow and proceeds from our tax-exempt debt financings to finance our working capital, capital expenditures, acquisitions, share repurchases, dividends and other requirements. As of December 31, 2004, we had $373.4 million available under our credit facility.
      In May 1999, we sold $600.0 million of unsecured notes in the public market. $225.0 million of these notes bore interest at 65/8% per annum and matured in May 2004. The remaining $375.0 million bear interest at 71/8% per annum and mature in 2009. Interest on the outstanding notes is payable semi-annually in May and November. The $225.0 million and $375.0 million in notes were offered at a discount of $1.0 million and $.5 million, respectively.
      In December 1999, we entered into an operating lease facility established to finance the acquisition of operating equipment consisting primarily of revenue-producing vehicles. In July 2002, we exercised our right to purchase the equipment underlying this facility by paying $72.6 million using our excess cash, which was the balance outstanding under the facility at that time.
      In August 2001, we sold $450.0 million of unsecured notes in the public market. The notes bear interest at 63/4% and mature in 2011. Interest on these notes is payable semi-annually in February and August. The notes were offered at a discount of $2.6 million. Proceeds from the notes were used to repay our revolving credit facility.
      In order to manage risk associated with fluctuations in interest rates and to take advantage of favorable floating interest rates, we have entered into interest rate swap agreements with investment grade-rated financial institutions. The swap agreements have total notional values of $225.0 million and $210.0 million, respectively, and require our company to pay interest at floating rates based upon changes in LIBOR and receive interest at fixed rates of 65/8% and 63/4%, respectively. Swap agreements with a notional value of $225.0 million matured in May 2004, and agreements with a notional value of $210.0 million mature in August 2011.
      At December 31, 2004, we had $527.3 million of tax-exempt bonds and other tax-exempt financings outstanding of which approximately $65.5 million were obtained during fiscal 2004. Borrowings under these bonds and other financings bear interest based on fixed or floating interest rates at the prevailing market ranging from 2% to 51/4% at December 31, 2004 and have maturities ranging from 2005 to 2037. As of December 31, 2004, we had $119.0 million of restricted cash related to proceeds from tax-exempt bonds and other tax-exempt financings. This restricted cash will be used to fund capital expenditures under the terms of the agreements.
      On February 16, 2005, we commenced an offer to the holders of our 71/8% unsecured notes due 2009 to exchange up to $275.0 million aggregate principal amount of such notes for a like principal amount of new notes due 2035. This offering is conditioned upon receiving valid tenders of at least $175.0 million of the aggregate principal of existing notes. These new notes will bear interest at a rate equal to the sum of: (a) the bid side yield on the 5.375% U.S. Treasury Note due February 15, 2031, calculated on the second business day prior to the expiration date of our exchange offering, and (b) 130 basis points. The total exchange price for the old notes is intended to result in a yield to maturity on the settlement date equal to the sum of: (a) the bid-side yield on the 3.875% U.S. Treasury Note due May 15, 2009, calculated on the second business day prior to the expiration date, and (b) 35 basis points. The exchange offering is expected to close March 16, 2005, unless further extended by us. However, we cannot assure you that the conditions to the exchange offering will be met and the transaction will be consummated.
      We plan to extend the maturity of our revolving short-term credit facility prior to its expiration in June 2005 to June 2006 or later. We believe that these actions would provide us with sufficient financial resources to meet our anticipated capital requirements and obligations as they come due. We believe that we would be able

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to raise additional debt or equity financing, if necessary, to fund special corporate needs or to complete acquisitions. However, we cannot assure you that we would be able to obtain additional financing under favorable terms or to extend the existing short-term credit facility on the same terms.
Selected Balance Sheet Accounts
      The following tables reflect the activity in our allowance for doubtful accounts, final capping, closure, post-closure and remediation liabilities and accrued self-insurance during the years ended December 31, 2002, 2003 and 2004 (in millions):
                         
        Closure,    
        Post-Closure    
    Allowance for   and    
    Doubtful Accounts   Remediation   Self-Insurance
             
Balance, December 31, 2001
  $ 19.0     $ 239.5     $ 57.6  
Additions charged to expense
    11.2       26.1       138.1  
Additions due to acquisitions, net of divestitures
    .2       5.0        
Payments or usage
    (11.4 )     (14.8 )     (120.7 )
                         
Balance, December 31, 2002
    19.0       255.8       75.0  
Current portion
    19.0       22.1       33.9  
                         
Long-term portion
  $     $ 233.7     $ 41.1  
                         
                                   
        Final Capping,        
    Allowance for   Closure and        
    Doubtful Accounts   Post-Closure   Remediation   Self-Insurance
                 
Balance, December 31, 2002
  $ 19.0     $ 196.9     $ 58.9     $ 75.0  
Cumulative effect of change in accounting principle
          (14.5 )            
Non-cash asset additions
          17.9              
Accretion expense
          12.7              
Other additions charged to expense
    10.4                   189.5  
Payments or usage
    (10.4 )     (8.3 )     (4.2 )     (142.3 )
                                 
Balance, December 31, 2003
    19.0       204.7       54.7       122.2  
 
Current portion
    19.0       29.5       4.4       47.6  
                                 
 
Long-term portion
  $     $ 175.2     $ 50.3     $ 74.6  
                                 
                                   
        Final Capping,        
    Allowance for   Closure and        
    Doubtful Accounts   Post-Closure   Remediation   Self-Insurance
                 
Balance, December 31, 2003
  $ 19.0     $ 204.7     $ 54.7     $ 122.2  
Non-cash asset additions
          19.6              
Revisions in estimates of future cash flows recorded as non-cash asset additions
          (4.3 )            
Accretion expense
          13.7              
Other additions charged to expense
    8.0             1.7       165.3  
Additions due to acquisitions
          .6              
Payments or usage
    (9.0 )     (17.5 )     (2.4 )     (143.7 )
                                 
Balance, December 31, 2004
    18.0       216.8       54.0       143.8  
 
Current portion
    18.0       14.6       2.7       47.4  
                                 
 
Long-term portion
  $     $ 202.2     $ 51.3     $ 96.4  
                                 

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      Our expense related to doubtful accounts as a percentage of revenue for 2002, 2003 and 2004 was .5%, .4% and .3%, respectively.
      As of December 31, 2004, accounts receivable were $268.7 million, net of allowance for doubtful accounts of $18.0 million, resulting in days sales outstanding of 35 days, or 22 days net of deferred revenue. In addition, at December 31, 2004, our trade receivables in excess of 90 days old totaled $16.4 million, or 5.7% of gross receivables outstanding.
      Our expense for self-insurance as a percentage of revenue for 2002, 2003 and 2004 was 5.8%, 7.5% and 6.1%, respectively. The increase in self-insurance expense from 2002 to 2003 related to existing claims and was attributable to the expansion of our operations and various changes in estimates as a result of continued negative trends through our 2003 policy year, based on recent actuarial claims experience, expected claims development and medical cost inflation.
Property and Equipment
      The following tables reflect the activity in our property and equipment accounts for the years ended December 31, 2002, 2003 and 2004 (in millions):
                                                   
    Gross Property and Equipment
     
    Balance as of       Acquisitions,       Balance as of
    December 31,   Capital       Net of   Transfers and   December 31,
    2001   Additions   Retirements   Divestitures   Adjustments   2002
                         
Other land
  $ 94.3     $ 5.1     $ (2.5 )   $ (7.0 )   $ (.2 )   $ 89.7  
Non-depletable landfill land
    50.5       3.3                   .2       54.0  
Landfill development costs
    958.8       18.1             5.1       44.3       1,026.3  
Vehicles and equipment
    1,153.2       220.8       (47.8 )     15.1       15.5       1,356.8  
Buildings and improvements
    256.4       12.6       (2.3 )     (3.4 )     7.6       270.9  
Construction in progress — landfill
    17.6       56.0                   (41.3 )     32.3  
Construction in progress — other
    23.5       15.3                   (29.7 )     9.1  
                                                 
 
Total
  $ 2,554.3     $ 331.2     $ (52.6 )   $ 9.8     $ (3.6 )   $ 2,839.1  
                                                 
                                                   
    Accumulated Depreciation, Amortization and Depletion
     
    Balance as of   Additions       Acquisitions,       Balance as of
    December 31,   Charged to       Net of   Transfers and   December 31,
    2001   Expense   Retirements   Divestitures   Adjustments   2002
                         
Landfill development costs
  $ (237.0 )   $ (67.4 )   $     $  —     $ .3     $ (304.1 )
Vehicles and equipment
    (495.7 )     (116.5 )     36.9       1.8       3.4       (570.1 )
Buildings and improvements
    (46.7 )     (9.6 )     1.2       .3       (.1 )     (54.9 )
                                                 
 
Total
  $ (779.4 )   $ (193.5 )   $ 38.1     $ 2.1     $ 3.6     $ (929.1 )
                                                 

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    Gross Property and Equipment
     
        Cumulative       Non-Cash    
        Effect       Additions for    
    Balance as of   of Changes in       Acquisitions,   Asset       Balance as of
    December 31,   Accounting   Capital       Net of   Retirement   Transfers and   December 31,
    2002   Principles   Additions   Retirements   Divestitures   Obligations   Adjustments   2003
                                 
Other land
  $ 89.7     $     $ 6.4     $ (1.7 )   $     $     $     $ 94.4  
Non-depletable landfill land
    54.0             .1             .5             (5.1 )     49.5  
Landfill development costs
    1,026.3       188.6       3.7             28.9       17.9       69.8       1,335.2  
Vehicles and equipment
    1,356.8             163.4       (39.3 )     10.7             (1.0 )     1,490.6  
Buildings and improvements
    270.9       (11.7 )     3.9       (2.8 )     .9             6.2       267.4  
Construction in progress — landfill
    32.3             78.7                         (50.2 )     60.8  
Construction in progress — other
    9.1             17.0                         (19.7 )     6.4  
                                                                 
 
Total
  $ 2,839.1     $ 176.9     $ 273.2     $ (43.8 )   $ 41.0     $ 17.9     $     $ 3,304.3  
                                                                 
                                                           
    Accumulated Depreciation, Amortization and Depletion
     
        Cumulative    
        Effect    
    Balance as of   of Changes in   Additions       Acquisitions,       Balance as of
    December 31,   Accounting   Charged to       Net of   Transfers and   December 31,
    2002   Principles   Expense   Retirements   Divestitures   Adjustments   2003
                             
Landfill development costs
  $ (304.1 )   $ (248.4 )   $ (92.8 )   $     $  —     $ .7     $ (644.6 )
Vehicles and equipment
    (570.1 )           (131.6 )     34.1       .4       .8       (666.4 )
Buildings and improvements
    (54.9 )     3.0       (9.4 )     .5             (1.5 )     (62.3 )
                                                         
 
Total
  $ (929.1 )   $ (245.4 )   $ (233.8 )   $ 34.6     $ .4     $     $ (1,373.3 )
                                                         
                                                           
    Gross Property and Equipment
     
        Non-Cash    
        Additions for    
    Balance as of       Acquisitions,   Asset       Balance as of
    December 31,   Capital       Net of   Retirement   Transfers and   December 31,
    2003   Additions   Retirements   Divestitures   Obligations   Adjustments   2004
                             
Other land
  $ 94.4     $ 3.1     $ (0.7 )   $ .9     $     $ .2     $ 97.9  
Non-depletable landfill land
    49.5       1.0             1.5             1.4       53.4  
Landfill development costs
    1,335.2       6.6       (1.9 )     28.9       15.3       102.4       1,486.5  
Vehicles and equipment
    1,490.6       169.1       (48.2 )     5.3             .7       1,617.5  
Buildings and improvements
    267.4       11.4       (1.4 )     1.0             8.6       287.0  
Construction in progress — landfill
    60.8       78.9                         (100.6 )     39.1  
Construction in progress — other
    6.4       13.7                         (12.7 )     7.4  
                                                         
 
Total
  $ 3,304.3     $ 283.8     $ (52.2 )   $ 37.6     $ 15.3     $     $ 3,588.8  
                                                         
                                                   
    Accumulated Depreciation, Amortization and Depletion
     
    Balance as of   Additions       Acquisitions,       Balance as of
    December 31,   Charged to       Net of   Transfers and   December 31,
    2003   Expense   Retirements   Divestitures   Adjustments   2004
                         
Landfill development costs
  $ (644.6 )   $ (98.4 )   $ 1.9     $ (1.0 )   $ (.8 )   $ (742.9 )
Vehicles and equipment
    (666.4 )     (143.5 )     43.5             .1       (766.3 )
Buildings and improvements
    (62.3 )     (10.5 )     1.2             .8       (70.8 )
                                                 
 
Total
  $ (1,373.3 )   $ (252.4 )   $ 46.6     $ (1.0 )   $ .1     $ (1,580.0 )
                                                 

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      Capital additions for 2002 include $72.6 million used to purchase equipment consisting primarily of revenue-producing vehicles originally placed into service pursuant to an operating lease.
Liquidity and Capital Resources
      The major components of changes in cash flows for the years ended December 31, 2004, 2003 and 2002 are discussed below.
      Cash Flows From Operating Activities. Cash flows provided by operating activities were $666.3 million, $600.5 million and $569.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. The changes in cash provided by operating activities during the periods are due to the expansion of our business, the timing of payments received for accounts receivable, and the timing of payments for accounts payable and income taxes.
      In December 2003, we received written approval from the Internal Revenue Service to exclude probable expansion airspace from our calculation of landfill amortization, depletion, and final capping, closure and post-closure costs for tax purposes. As a result of this change, we recorded a tax receivable of approximately $48.0 million which was collected or used to offset taxes payable during the year ended December 31, 2004. Also during the year ended December 31, 2004, we collected a $23.0 million note receivable associated with a divested business.
      We expect our cash flow from operating activities during 2005 to be lower than 2004 and 2003 because of higher tax payments due to the reversal of bonus depreciation and several one-time items that benefited previous periods, including utilization of a tax receivable and the collection of a note receivable during 2004, and an increase in self-insurance reserves during 2003.
      We use cash flow from operations to fund capital expenditures, acquisitions, share repurchases, dividend payments and debt repayments.
      Cash Flows Used In Investing Activities. Cash used in investing activities was $206.7 million, $552.4 million and $316.3 million for the years ended December 31, 2004, 2003 and 2002, respectively, and consists primarily of cash used for capital additions and business acquisitions for all the periods presented and cash provided by restricted marketable securities in 2004. Capital additions were $283.8 million, $273.2 million and $258.6 million during the years ended December 31, 2004, 2003 and 2002, respectively. Cash used to acquire businesses, net of cash acquired, was $47.3 million, $51.5 million and $55.8 million during the years ended December 31, 2004, 2003 and 2002, respectively.
      The increase in restricted marketable securities during 2003 consists of amounts transferred from unrestricted cash for financial guarantees. In 2004, we liquidated a portion of these marketable securities and used the proceeds to repay the $225.0 million of public notes. We used letters of credit to replace financial guarantees secured by marketable securities that were liquidated.
      We intend to finance capital expenditures and acquisitions through cash on hand, cash flows from operations, our revolving credit facility, tax-exempt bonds and other financings. We expect to use primarily cash for future business acquisitions.
      Cash Flows Used In Financing Activities. Cash flows used in financing activities was $437.3 million, $70.4 million and $128.0 million for the years ended December 31, 2004, 2003 and 2002, respectively, and primarily include proceeds from issuances of tax-exempt bonds, repayments of debt and repurchases of common stock under our stock repurchase program. Dividends paid were $46.0 million and $19.0 million during 2004 and 2003, respectively. In 2004, repayments of debt include the liquidation of $225.0 million of public notes.
      From 2000 through 2004, our board of directors authorized the repurchase of up to $1,025.0 million of our common stock. As of December 31, 2004, we paid $750.4 million to repurchase approximately 35.2 million shares of our common stock, of which $266.1 million was paid during 2004 to repurchase approximately 9.6 million shares of our common stock.

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      In December 1999, we entered into an operating lease facility established to finance the acquisition of operating equipment consisting primarily of revenue-producing vehicles. In July 2002, we retired this facility using our excess cash.
      We used proceeds from our cash on hand, liquidation of marketable securities, cash flow from operations, and tax-exempt bonds to fund capital expenditures and acquisitions and to repay debt. We intend to finance future stock repurchases and dividend payments through cash on hand, cash flow from operations, our revolving credit facility and other financings.
Credit Rating
      Our company has received investment grade credit ratings. As of December 31, 2004, our senior debt was rated BBB+/positive by Standard & Poor’s, BBB+/positive by Fitch and Baa2 by Moody’s.
Operating Lease Facility
      In December 1999, we entered into a $100.0 million facility established to finance the acquisition of operating equipment consisting primarily of revenue-producing vehicles. In July 2002, we exercised our right to purchase the equipment underlying this facility by paying $72.6 million using our excess cash, which was the balance outstanding under the facility at that time.
Fuel Hedge
      During June 2001, we entered into option agreements for approximately 14.3 million gallons of heating oil. Under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, the options qualified for and were designated as effective hedges of changes in the prices of forecasted diesel fuel purchases. These option agreements settled each month in equal notional amounts expiring in December 2002. The option agreements were structured as zero-cost collars indexed to the price of heating oil. In accordance with SFAS 133, $1.6 million net of tax, representing the effective portion of the change in fair value has been recorded in stockholders’ equity as a component of accumulated other comprehensive income for the year ended December 31, 2002. The ineffective portion of the change in fair value of approximately $.1 million for the year ended December 31, 2002 has been included in other income, (expense) net in the accompanying Consolidated Statements of Income. Realized losses of $.8 million for the year ended December 31, 2002 related to these option agreements are included in cost of operations in our Consolidated Statements of Income.
Contractual Obligations
      The following table summarizes our contractual obligations as of December 31, 2004 (in millions):
                                                                   
            Maturities                    
            of Notes   Final                
            Payable and   Capping,       Amounts Due   Unconditional    
    Operating   Capital   Long-Term   Closure and       to Former   Purchase    
Year Ending December 31,   Leases   Leases   Debt   Post-Closure   Remediation   Owners   Commitments   Total
                                 
2005
  $ 4.1     $     $ 2.4     $ 14.6     $ 2.7     $ 4.3     $ 27.6     $ 55.7  
2006
    3.1             2.2       58.1       2.5             9.9       75.8  
2007
    2.8             1.6       49.5       2.5             2.0       58.4  
2008
    1.6             1.2       20.1       2.5             1.4       26.8  
2009
    1.3             376.1       31.9       2.5             1.4       413.2  
Thereafter
    5.6       25.0       947.0       457.7       41.3             11.8       1,488.4  
                                                                 
 
Total
  $ 18.5     $ 25.0     $ 1,330.5     $ 631.9     $ 54.0     $ 4.3     $ 54.1     $ 2,118.3  
                                                                 
      The estimated remaining final capping, closure and post-closure expenditures presented above are undiscounted and include both payments for liabilities incurred and recorded as of December 31, 2004 and estimated future liabilities expected to be incurred as the remaining landfill disposal capacities are consumed.

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      Unconditional purchase commitments consist primarily of long-term disposal agreements that require us to dispose of a minimum number of tons at third party facilities.
      We do not have or engage in any off-balance sheet arrangements.
Quantitative and Qualitative Disclosures About Market Risk
      The table below provides information about our market sensitive financial instruments and constitutes a “forward-looking statement.” Our major market risk exposure is changing interest rates in the United States and fluctuations in LIBOR. We intend to manage interest rate risk through the use of a combination of fixed and floating rate debt. All items described below are non-trading.
                                                                 
    Expected Maturity Date
     
        Fair Value
        (Asset)/Liability
        December 31,
    2005   2006   2007   2008   2009   Thereafter   Total   2004
                                 
VARIABLE RATE DEBT:
                                                               
Amount outstanding (in millions)
  $ .6     $ .3     $     $     $     $ 228.2     $ 229.1     $ 229.1  
Average interest rates
    2.2 %     2.2 %                       2.2 %     2.2 %        
INTEREST RATE SWAPS:
                                                               
Amount outstanding (in millions)
  $     $     $     $     $     $ 210.0     $ 210.0     $ (.5 )
Average interest rates
    %                             2.3 %     2.3 %        
      The fair value of variable rate debt approximates the carrying value since interest rates are variable and, thus, approximate current market rates.
Free Cash Flow
      We define free cash flow, which is not a measure determined in accordance with Generally Accepted Accounting Standards (GAAP), as cash provided by operating activities less purchases of property and equipment plus proceeds from the sale of property and equipment as presented in our consolidated statement of cash flows. Our free cash flow for the years ended December 31, 2004, 2003 and 2002 is calculated as follows (in millions):
                         
    2004   2003   2002
             
Cash provided by operating activities
  $ 666.3     $ 600.5     $ 569.7  
Purchases of property and equipment
    (283.8 )     (273.2 )     (258.6 )
Proceeds from the sale of property and equipment
    5.7       9.1       14.6  
                         
Free cash flow
  $ 388.2     $ 336.4     $ 325.7  
                         
      We expect our free cash flow during 2005 to be lower than 2004 and 2003 because of higher tax payments due to the reversal of bonus depreciation, higher purchases of property and equipment and several one-time items that benefited previous periods, including utilization of a tax receivable and the collection of a note receivable during 2004, and an increase in self-insurance reserves during 2003.
      We believe that the presentation of free cash flow provides useful information regarding our recurring cash provided by operating activities after expenditures for property and equipment, net of proceeds from the sale of property and equipment. It also demonstrates our ability to execute our financial strategy which includes reinvesting in existing capital assets to ensure a high level of customer service, investing in capital assets to facilitate growth in our customer base and services provided, pursuing strategic acquisitions that augment our existing business platform, repurchasing shares of common stock at prices that provide value to our shareholders, paying cash dividends, maintaining our investment grade rating and minimizing debt. In addition, free cash flow is a key metric used to determine compensation. Free cash flow does not represent our cash flow available for discretionary expenditures because it excludes certain expenditures that are required or

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that we have committed to such as debt service requirements and dividend payments. Our definition of free cash flow may not be comparable to similarly titled measures presented by other companies.
Seasonality
      Our operations can be adversely affected by periods of inclement weather which could increase the volume of waste collected under our existing contracts (without corresponding compensation), delay the collection and disposal of waste, reduce the volume of waste delivered to our disposal sites, or delay the construction or expansion of our landfill sites and other facilities.
New Accounting Pronouncements
      On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS 123, “Accounting for Stock-Based Compensation.” SFAS 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
      SFAS 123(R) must be adopted by public companies no later than July 1, 2005. Early adoption will be permitted in periods in which financial statements have not been issued. We expect to adopt SFAS 123(R) on July 1, 2005.
      SFAS 123(R) permits public companies to adopt its requirements using one of two methods:
        1. A “modified-prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
 
        2. A “modified-retrospective” method which includes the requirements of the modified-prospective method described above, but also permits entities to restate based on the amounts previously reflected in their SFAS 123 pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
      The Company plans to adopt SFAS 123(R) using the modified-prospective method.
      As permitted by SFAS 123, the company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method may have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. SFAS 123(R) requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $10.6 million, $6.7 million, and $4.0 million in 2004, 2003 and 2002, respectively.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
         
    Page
Report of Independent Registered Public Accounting Firm on the Financial Statements
    51  
 
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
    52  
 
Consolidated Balance Sheets as of December 31, 2004 and 2003
    53  
 
Consolidated Statements of Income for each of the Three Years Ended December 31, 2004
    54  
 
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the Three Years Ended December 31, 2004
    55  
 
Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 2004
    56  
 
Notes to Consolidated Financial Statements
    57  
 
Financial Statement Schedule II, Valuation and Qualifying Accounts and Reserves, for each of the Three Years Ended December 31, 2004
    94  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE FINANCIAL STATEMENTS
The Board of Directors and Stockholders of Republic Services, Inc.:
      We have audited the accompanying consolidated balance sheets of Republic Services, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Republic Services, Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
      As discussed in Note 1 to the financial statements, in 2003 Republic Services, Inc. changed its method of accounting for final capping, closure and post-closure costs relating to its landfills and for methane gas collection systems.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Republic Services, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2005, expressed an unqualified opinion thereon.
  /s/ Ernst & Young LLP
  Certified Public Accountants
Fort Lauderdale, Florida
February 24, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of Republic Services, Inc.:
      We have audited management’s assessment, included in the accompanying Report of Management on Republic Services, Inc.’s Internal Control Over Financial Reporting, that Republic Services, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Republic Services, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
      In our opinion, management’s assessment that Republic Services, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of Republic Services, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 of the Company and our report dated February 24, 2005, expressed an unqualified opinion thereon.
  /s/ Ernst & Young LLP
  Certified Public Accountants
Fort Lauderdale, Florida
February 24, 2005

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
                     
    December 31,
     
    2004   2003
         
ASSETS
CURRENT ASSETS:
               
 
Cash and cash equivalents
  $ 141.5     $ 119.2  
 
Accounts receivable, less allowance for doubtful accounts of $18.0 and $19.0 at December 31, 2004 and 2003, respectively
    268.7       248.9  
 
Prepaid expenses and other current assets
    76.4       182.1  
 
Deferred tax assets
    9.9       5.8  
                 
   
Total Current Assets
    496.5       556.0  
 
RESTRICTED CASH
    237.0       215.0  
 
RESTRICTED MARKETABLE SECURITIES
    38.7       182.4  
 
PROPERTY AND EQUIPMENT, NET
    2,008.8       1,931.0  
 
GOODWILL, NET
    1,562.7       1,558.1  
 
INTANGIBLE ASSETS, NET
    30.2       25.0  
 
OTHER ASSETS
    90.7       86.6  
                 
    $ 4,464.6     $ 4,554.1  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
               
 
Accounts payable
  $ 119.6     $ 129.1  
 
Accrued liabilities
    135.3       118.6  
 
Deferred revenue
    99.7       88.5  
 
Notes payable and current maturities of long-term debt
    2.4       231.1  
 
Other current liabilities
    89.6       104.7  
                 
   
Total Current Liabilities
    446.6       672.0  
LONG-TERM DEBT, NET OF CURRENT MATURITIES
    1,351.9       1,289.2  
ACCRUED LANDFILL AND ENVIRONMENTAL COSTS
    253.5       225.5  
DEFERRED INCOME TAXES
    406.5       353.5  
OTHER LIABILITIES
    133.6       109.4  
COMMITMENTS AND CONTINGENCIES
               
STOCKHOLDERS’ EQUITY:
               
 
Preferred stock, par value $.01 per share; 50,000,000 shares authorized; none issued
           
 
Common stock, par value $.01 per share; 750,000,000 shares authorized, 185,750,304 and 183,431,611 issued, including shares held in treasury, respectively
    1.9       1.8  
 
Additional paid-in capital
    1,399.4       1,347.8  
 
Deferred compensation
    (1.0 )      
 
Retained earnings
    1,222.6       1,039.3  
 
Treasury stock, at cost (35,168,400 and 25,604,100 shares, respectively)
    (750.4 )     (484.3 )
 
Accumulated other comprehensive loss, net of tax
          (.1 )
                 
   
Total Stockholders’ Equity
    1,872.5       1,904.5  
                 
    $ 4,464.6     $ 4,554.1  
                 
The accompanying notes are an integral part of these statements.

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except earnings per share data)
                           
    Years Ended December 31,
     
    2004   2003   2002
             
REVENUE
  $ 2,708.1     $ 2,517.8     $ 2,365.1  
EXPENSES:
                       
 
Cost of operations
    1,714.4       1,605.4       1,472.9  
 
Depreciation, amortization and depletion
    259.4       239.1       199.6  
 
Accretion
    13.7       12.7        
 
Selling, general and administrative
    268.3       247.9       238.7  
 
Other charges (income)
                (5.6 )
                         
OPERATING INCOME
    452.3       412.7       459.5  
INTEREST EXPENSE
    (76.7 )     (78.0 )     (77.0 )
INTEREST INCOME
    6.9       9.5       4.3  
OTHER INCOME (EXPENSE), NET
    1.2       3.2       (.3 )
                         
INCOME BEFORE INCOME TAXES
    383.7       347.4       386.5  
PROVISION FOR INCOME TAXES
    145.8       132.0       146.9  
                         
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
    237.9       215.4       239.6  
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX
          (37.8 )      
                         
NET INCOME
  $ 237.9     $ 177.6     $ 239.6  
                         
BASIC EARNINGS PER SHARE:
                       
 
Before cumulative effect of changes in accounting principles
  $ 1.56     $ 1.34     $ 1.45  
 
Cumulative effect of changes in accounting principles, net of tax
          (.23 )      
                         
 
Basic earnings per share
  $ 1.56     $ 1.11     $ 1.45  
                         
 
Weighted average common shares outstanding
    152.8       160.3       165.4  
                         
DILUTED EARNINGS PER SHARE:
                       
 
Before cumulative effect of changes in accounting principles
  $ 1.53     $ 1.33     $ 1.44  
 
Cumulative effect of changes in accounting principles, net of tax
          (.23 )      
                         
 
Diluted earnings per share
  $ 1.53     $ 1.10     $ 1.44  
                         
 
Weighted average common and common equivalent shares outstanding
    155.3       162.1       166.7  
                         
CASH DIVIDENDS PER COMMON SHARE
  $ .36     $ .12     $  
                         
PRO FORMA AMOUNTS ASSUMING THE CHANGES IN ACCOUNTING PRINCIPLES ARE APPLIED RETROACTIVELY:
                       
 
Net income
  $ 237.9     $ 215.4     $ 237.2  
 
Basic earnings per share
  $ 1.56     $ 1.34     $ 1.43  
 
Diluted earnings per share
  $ 1.53     $ 1.33     $ 1.42  
The accompanying notes are an integral part of these statements.

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(in millions)
                                                                   
    Common Stock                   Accumulated    
        Additional               Other    
    Shares,   Par   Paid-In   Deferred   Retained   Treasury   Comprehensive   Comprehensive
    Net   Value   Capital   Compensation   Earnings   Stock   Income (Loss)   Income
                                 
BALANCE AT DECEMBER 31, 2001
    169.6     $ 1.8     $ 1,264.7     $     $ 641.1     $ (150.1 )   $ (1.6 )        
 
Net income
                            239.6                 $ 239.6  
 
Issuances of common stock
    2.0             34.0                                
 
Purchases of common stock for treasury
    (8.0 )                             (150.0 )            
 
Change in value of derivative instruments, net of tax
                                        1.6       1.6  
                                                   
 
Total comprehensive income
                                            $ 241.2  
                                                                 
BALANCE AT DECEMBER 31, 2002
    163.6       1.8       1,298.7             880.7       (300.1 )              
 
Net income
                            177.6                 $ 177.6  
 
Cash dividends
                            (19.0 )                  
 
Issuances of common stock
    2.6             49.1                                  
 
Purchases of common stock for treasury
    (8.4 )                             (184.2 )              
 
Change in value of investments, net of tax
                                        (.1 )     (.1 )
                                                   
 
Total comprehensive income
                                            $ 177.5  
                                                                 
BALANCE AT DECEMBER 31, 2003
    157.8       1.8       1,347.8             1,039.3       (484.3 )     (.1 )        
 
Net income
                            237.9                 $ 237.9  
 
Cash dividends
                            (54.6 )                  
 
Issuances of common stock
    2.3       .1       48.8                                
 
Issuances of restricted stock and deferred stock units
    .1             2.8       (2.8 )                        
 
Amortization of deferred compensation
                      1.8                          
 
Purchases of common stock for treasury
    (9.6 )                             (266.1 )            
 
Change in value of investments, net of tax
                                        .1       .1  
                                                   
 
Total comprehensive income
                                            $ 238.0  
                                                                 
BALANCE AT DECEMBER 31, 2004
    150.6     $ 1.9     $ 1,399.4     $ (1.0 )   $ 1,222.6     $ (750.4 )   $          
                                                               
The accompanying notes are an integral part of these statements.

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
                               
    Years Ended December 31,
     
    2004   2003   2002
             
CASH PROVIDED BY OPERATING ACTIVITIES:
                       
 
Net income
  $ 237.9     $ 177.6     $ 239.6  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Depreciation and amortization of property and equipment
    154.0       141.0       126.1  
   
Landfill depletion and amortization
    98.4       92.8       67.4  
   
Amortization of intangible and other assets
    7.0       5.3       6.1  
   
Accretion
    13.7       12.7        
   
Deferred tax provision
    57.6       178.9       73.1  
   
Provision for doubtful accounts
    8.0       10.4       11.2  
   
Income tax benefit from stock option exercises
    10.6       6.7       4.0  
   
Other non-cash items
    2.1       (1.8 )     (4.8 )
   
Cumulative effect of changes in accounting principles, net of tax
          37.8        
   
Changes in assets and liabilities, net of effects from business acquisitions and dispositions:
                       
     
Accounts receivable
    (27.5 )     (21.8 )     (13.6 )
     
Prepaid expenses and other assets
    91.8       (109.4 )     (5.9 )
     
Accounts payable and accrued liabilities
    15.3       9.0       37.1  
     
Other liabilities
    (2.6 )     61.3       29.4  
                         
      666.3       600.5       569.7  
                         
CASH USED IN INVESTING ACTIVITIES:
                       
 
Purchases of property and equipment
    (283.8 )     (273.2 )     (258.6 )
 
Proceeds from sale of property and equipment
    5.7       9.1       14.6  
 
Cash used in business acquisitions, net of cash acquired
    (47.3 )     (51.5 )     (55.8 )
 
Cash proceeds from business dispositions
          3.2       18.9  
 
Amounts due and contingent payments to former owners
    (3.7 )     (17.6 )     (2.7 )
 
Change in restricted cash
    (21.4 )     (40.0 )     (32.7 )
 
Change in restricted marketable securities
    143.8       (182.4 )      
                         
      (206.7 )     (552.4 )     (316.3 )
                         
CASH USED IN FINANCING ACTIVITIES:
                       
 
Net payments on revolving credit facility
                (30.0 )
 
Proceeds from notes payable and long-term debt
    88.8       86.3       96.9  
 
Payments of notes payable and long-term debt
    (252.2 )     (2.6 )     (2.2 )
 
Issuances of common stock
    38.2       49.1       29.9  
 
Purchases of common stock for treasury
    (266.1 )     (184.2 )     (150.0 )
 
Cash dividends
    (46.0 )     (19.0 )      
 
Purchase of equipment under operating lease
                (72.6 )
                         
      (437.3 )     (70.4 )     (128.0 )
                         
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    22.3       (22.3 )     125.4  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    119.2       141.5       16.1  
                         
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 141.5     $ 119.2     $ 141.5  
                         
The accompanying notes are an integral part of these statements.

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data)
1. BASIS OF PRESENTATION
      The accompanying Consolidated Financial Statements include the accounts of Republic Services, Inc. (a Delaware corporation) and its subsidiaries (the “Company”). The Company provides non-hazardous solid waste collection and disposal services in the United States. All intercompany transactions have been eliminated in consolidation.
      As of January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 required the Company to change the methodology it used to record final capping, closure and post-closure costs relating to its landfills. As of January 1, 2003, the Company recorded an after-tax expense of $20.8 million, or $33.6 million on a pre-tax basis, as a cumulative effect of a change in accounting principle resulting from the adoption of SFAS 143. In addition, the Company also recorded an after-tax expense of $17.0 million, or $27.4 million on a pre-tax basis, as a cumulative effect of a change in accounting principle for its methane gas collection systems. This change in accounting for methane gas collection systems was prompted by a thorough evaluation of the Company’s landfill accounting policies in connection with the adoption of SFAS 143 and is consistent with the methodology used by other participants in the waste industry.
      The following table summarizes the adjustments to net income and earnings per share for the year ended December 31, 2002 as if SFAS 143 and the Company’s change in accounting principle relating to its methane gas collection systems were effective January 1, 2002:
                   
    Year Ended
    December 31, 2002
     
    Net   Diluted Earnings
    Income   Per Share
         
Reported
  $ 239.6     $ 1.44  
SFAS 143:
               
 
Reversal of closure and post-closure expense previously reported
    16.2       .10  
 
Reversal of landfill purchase price amortization previously reported
    .8        
 
Accretion expense
    (6.5 )     (.04 )
 
Landfill amortization
    (10.9 )     (.07 )
                 
Total adjustments for SFAS 143
    (.4 )     (.01 )
                 
Methane Gas Collection Systems:
               
 
Reversal of depreciation previously reported
    .3        
 
Depletion expense
    (2.3 )     (.01 )
                 
Total adjustment for methane gas collection systems
    (2.0 )     (.01 )
                 
Adjusted
  $ 237.2     $ 1.42  
                 

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
      The following table summarizes the balance sheet impact of adopting SFAS 143 and the Company’s change in accounting relating to methane gas collection systems:
                           
    December 31,       January 1,
    2002   Change   2003
             
Property and equipment:
                       
 
Landfill development costs
  $ 1,026.3     $ 188.6     $ 1,214.9  
 
Buildings and improvements
    270.9       (11.7 )     259.2  
 
Accumulated depletion and amortization
    (304.1 )     (245.4 )     (549.5 )
                         
    $ 993.1     $ (68.5 )   $ 924.6  
                         
Goodwill:
                       
 
Goodwill
  $ 1,687.7     $ (6.9 )   $ 1,680.8  
 
Accumulated amortization
    (143.5 )     (.1 )     (143.6 )
                         
    $ 1,544.2     $ (7.0 )   $ 1,537.2  
                         
Final capping, closure and post-closure liabilities:
                       
 
Current landfill liabilities
  $ 17.9     $     $ 17.9  
 
Long-term landfill liabilities
    179.0       (14.5 )     164.5  
                         
    $ 196.9     $ (14.5 )   $ 182.4  
                         
      In January 2003, the Financial Accounting Standards Board issued Interpretation 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 introduced a new consolidation model which determines control and consolidation based upon the primary beneficiary of the potential variability in gains and losses of the entity being evaluated. This interpretation was effective for all variable interest entities beginning March 31, 2004. The Company evaluated its organizational structure and concluded that FIN 46 has no impact on its consolidated financial position, results of operations or cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
      The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and necessarily include amounts based on estimates and assumptions made by management. Actual results could differ from these amounts. Significant items subject to such estimates and assumptions include the depletion and amortization of landfill development costs, liabilities for final capping, closure and post-closure costs, valuation allowances for accounts receivable, liabilities for potential litigation, claims and assessments, and liabilities for environmental remediation, deferred taxes and self-insurance.
Accounts Receivable
      Accounts receivable represent receivables from customers for collection, transfer, disposal and other services. Receivables are recorded when billed. Accounts receivable, net of the allowance for doubtful accounts, represents their estimated net realizable value. Provisions for doubtful accounts are recorded based on historical collection experience, the age of the receivables, specific customer information and economic conditions. In general, reserves are provided for accounts receivable in excess of ninety days old. Accounts receivable are written off when they are deemed uncollectible.

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
Prepaid Expenses and Other Current Assets
      A summary of prepaid expenses and other current assets is as follows:
                 
    December 31,
     
    2004   2003
         
Inventory
  $ 19.1     $ 17.7  
Prepaid expenses
    17.8       20.5  
Other non-trade receivables
    17.4       27.9  
Income taxes receivable
    19.7       87.6  
Note receivable
          23.0  
Other assets
    2.4       5.4  
                 
    $ 76.4     $ 182.1  
                 
      Inventories consist primarily of compost, mulch, and soil materials, equipment parts and fuel that are valued under a method that approximates the lower of cost (first-in, first-out) or market.
      The Company expenses substantially all advertising expenditures as incurred.
Property and Equipment
      Property and equipment are recorded at cost. Expenditures for major additions and improvements to facilities are capitalized, while maintenance and repairs are charged to expense as incurred. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the Consolidated Statements of Income.
      The Company revises the estimated useful lives of property and equipment acquired through business acquisitions to conform with its policies regarding property and equipment. Depreciation is provided over the estimated useful lives of the assets involved using the straight-line method. The estimated useful lives are seven to forty years for buildings and improvements, five to twelve years for vehicles, seven to ten years for most landfill equipment, three to fifteen years for all other equipment, and five to twelve years for furniture and fixtures.
      Landfills and landfill improvements are stated at cost and are amortized or depleted based on consumed airspace. Landfill improvements include direct costs incurred to obtain landfill permits and direct costs incurred to acquire, construct and develop sites. These costs are amortized or depleted based on consumed airspace. All indirect landfill development costs are expensed as incurred. (For further information, see Note 3, Accrued Landfill and Environmental Costs.)
      The Company capitalizes interest on landfill cell construction and other construction projects in accordance with Statement of Financial Accounting Standards No. 34, “Capitalization of Interest Cost.” Construction projects must meet the following criteria before interest is capitalized:
        1. Total construction costs are $50,000 or greater,
 
        2. The construction phase is one month or longer, and
 
        3. The assets have a useful life of one year or longer.
      Interest is capitalized on qualified assets while they undergo activities to ready them for their intended use. Capitalization of interest ceases once an asset is placed into service or if construction activity is suspended for more than a brief period of time. The interest capitalization rate is based upon the Company’s weighted

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
average cost of indebtedness. Interest capitalized was $2.1 million, $3.3 million and $2.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.
      A summary of property and equipment is as follows:
                   
    December 31,
     
    2004   2003
         
Other land
  $ 97.9     $ 94.4  
Non-depletable landfill land
    53.4       49.5  
Landfill development costs
    1,486.5       1,335.2  
Vehicles and equipment
    1,617.5       1,490.6  
Buildings and improvements
    287.0       267.4  
Construction-in-progress — landfill
    39.1       60.8  
Construction-in-progress — other
    7.4       6.4  
                 
      3,588.8       3,304.3  
                 
Less: Accumulated depreciation, depletion and amortization —
Landfill development costs
    (742.9 )     (644.6 )
 
Vehicles and equipment
    (766.3 )     (666.4 )
 
Building and improvements
    (70.8 )     (62.3 )
                 
      (1,580.0 )     (1,373.3 )
                 
Property and equipment, net
  $ 2,008.8     $ 1,931.0  
                 
      The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of property and equipment or whether the remaining balance of property and equipment should be evaluated for possible impairment. The following are examples of such events or changes in circumstances:
  •  A significant decrease in the market price of a long-lived asset or asset group,
 
  •  A significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition,
 
  •  A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an adverse action or assessment by a regulator,
 
  •  An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group,
 
  •  A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group, or
 
  •  A current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
      There are certain indicators listed above that require significant judgment and understanding of the waste industry when applied to landfill development or expansion. For example, a regulator may initially deny a landfill expansion permit application though the expansion permit is ultimately granted. In addition, management may periodically divert waste from one landfill to another to conserve remaining permitted

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
landfill airspace. Therefore, certain events could occur in the ordinary course of business and not necessarily be considered indicators of impairment due to the unique nature of the waste industry.
      The Company uses an estimate of the related undiscounted cash flows over the remaining life of the property and equipment in assessing their recoverability. The Company measures impairment loss as the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Intangible Assets
      Intangible assets consist of the cost of acquired businesses in excess of the fair value of net assets acquired and other intangible assets. Other intangible assets include values assigned to customer relationships, long-term contracts and covenants not to compete and are amortized generally over periods ranging from 3 to 25 years.
      The following table summarizes the activity in the intangible asset and related accumulated amortization accounts for the years ended December 31, 2003 and 2004:
                           
    Gross Intangible Assets
     
    Goodwill   Other   Total
             
Balance, December 31, 2002
  $ 1,687.7     $ 40.0     $ 1,727.7  
 
Cumulative effect of change in accounting principle
    (6.9 )           (6.9 )
 
Acquisitions
    21.2       3.1       24.3  
 
Other additions
          .1       .1  
 
Divestitures
    (.5 )           (.5 )
                         
Balance, December 31, 2003
  $ 1,701.5     $ 43.2     $ 1,744.7  
                         
                           
    Accumulated Amortization
     
    Goodwill   Other   Total
             
Balance, December 31, 2002
  $ (143.5 )   $ (14.3 )   $ (157.8 )
 
Cumulative effect of change in accounting principle
    (.1 )           (.1 )
 
Amortization expense
          (3.9 )     (3.9 )
 
Divestitures
    .2             .2  
                         
Balance, December 31, 2003
  $ (143.4 )   $ (18.2 )   $ (161.6 )
                         
                           
    Gross Intangible Assets
     
    Goodwill   Other   Total
             
Balance, December 31, 2003
  $ 1,701.5     $ 43.2     $ 1,744.7  
 
Acquisitions
    13.2       .9       14.1  
 
Other additions
          1.5       1.5  
 
Transfers
    (8.6 )     8.6        
                         
Balance, December 31, 2004
  $ 1,706.1     $ 54.2     $ 1,760.3  
                         

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
                           
    Accumulated Amortization
     
    Goodwill   Other   Total
             
Balance, December 31, 2003
  $ (143.4 )   $ (18.2 )   $ (161.6 )
 
Amortization expense
          (5.8 )     (5.8 )
                         
Balance, December 31, 2004
  $ (143.4 )   $ (24.0 )   $ (167.4 )
                         
      In general, goodwill is tested for impairment on an annual basis. In testing for impairment, the Company estimates the fair value of each operating segment and compares the fair values with the carrying values. If the fair value of an operating segment is greater than its carrying value, then no impairment results. If the fair value is less than its carrying value, then the Company would determine the fair value of the goodwill. The fair value of goodwill is determined by deducting the fair value of an operating segment’s identifiable assets and liabilities from the fair value of the operating segment as a whole, as if that operating segment had just been acquired and the purchase price were being initially allocated. If the fair value of the goodwill were less than its carrying value for a segment, an impairment charge would be recorded to earnings in the Company’s Consolidated Statement of Income.
      In addition, the Company would evaluate an operating segment for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events or circumstances include:
  •  A significant adverse change in legal factors or in the business climate,
 
  •  An adverse action or assessment by a regulator,
 
  •  A more likely than not expectation that a segment or a significant portion thereof will be sold, or
 
  •  The testing for recoverability under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets,” of a significant asset group within the segment.
      The Company incurred no impairment of goodwill as a result of its goodwill impairment test in 2004. However, there can be no assurance that goodwill will not be impaired at any time in the future.
Accrued Liabilities
      A summary of accrued liabilities is as follows:
                 
    December 31,
     
    2004   2003
         
Accrued payroll and benefits
  $ 51.3     $ 43.2  
Accrued fees and taxes
    31.4       29.6  
Accrued interest
    18.4       18.7  
Accrued dividends
    18.1       9.5  
Other
    16.1       17.6  
                 
    $ 135.3     $ 118.6  
                 

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
Other Current Liabilities
      A summary of other current liabilities is as follows:
                 
    December 31,
     
    2004   2003
         
Accrued landfill and environmental costs, current portion
  $ 21.0     $ 37.6  
Self-insurance reserves, current
    47.4       47.6  
Amounts due to former owners
    4.3       6.1  
Other
    16.9       13.4  
                 
    $ 89.6     $ 104.7  
                 
Stock Options
      The Company accounts for its stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. No stock-based employee compensation cost is reflected in net income for stock option grants, as all options granted under the 1998 Stock Incentive Plan for the periods presented had an exercise price equal to the market value of the underlying common stock at the date of grant. Compensation expense resulting from grants of restricted stock or stock units is calculated in accordance with APB 25 based on the market value of the underlying shares as of the grant date and is amortized ratably over the vesting period. Had compensation cost for stock option, restricted stock and stock unit grants under the Company’s 1998 Stock Incentive Plan been determined pursuant to Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), the Company’s net income would have decreased accordingly. Using the Black-Scholes option pricing model, the Company’s pro forma net income, earnings per share and weighted-average fair value of options, restricted stock and stock units granted during the period, with related assumptions, are as follows:
                             
    Years Ended December 31,
     
    2004   2003   2002
             
Net income, as reported
  $ 237.9     $ 177.6     $ 239.6  
 
Adjustment to net earnings for:
                       
   
Stock-based compensation expense included in net income, net of tax
    1.1              
   
Pro-forma stock-based employee compensation expense pursuant to SFAS No. 123, net of tax
    (9.7 )     (9.4 )     (10.7 )
                         
Net income, pro forma
  $ 229.3     $ 168.2     $ 228.9  
                         
Basic earnings per share —
                       
 
As reported
  $ 1.56     $ 1.11     $ 1.45  
                         
 
Pro forma
  $ 1.50     $ 1.05     $ 1.38  
                         
Diluted earnings per share —
                       
 
As reported
  $ 1.53     $ 1.10     $ 1.44  
                         
 
Pro forma
  $ 1.48     $ 1.04     $ 1.37  
                         

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
                           
    Years Ended December 31,
     
    2004   2003   2002
             
Weighted-average fair value of the Company’s stock options, restricted stock and stock units granted during the period
  $ 9.33     $ 7.64     $ 7.47  
Assumptions —
                       
 
Risk-free interest rates
    3.6 %     3.2 %     2.7 %
 
Expected lives
    5 years       5 years       5 years  
 
Expected volatility
    30.0 %     40.0 %     40.0 %
 
Dividend yield
    .9 %            
Revenue Recognition and Deferred Revenue
      The Company generally provides services under contracts with municipalities or individual customers. Revenue consists primarily of collection fees from commercial, industrial, residential and municipal customers and transfer and landfill disposal fees charged to third parties. Advance billings are recorded as deferred revenue, and the revenue is then recognized over the period services are provided. Collection, transfer and disposal, and other services accounted for approximately 74.3%, 18.9% and 6.8%, respectively, of consolidated revenue for the year ended December 31, 2004. No one customer has individually accounted for more than 10% of the Company’s consolidated revenues or of the Company’s reportable segment revenue in any of the past three years.
      The Company recognizes revenue when all four of the following criteria are met:
  •  Persuasive evidence of an arrangement exists such as a service agreement with a municipality, a hauling customer or a disposal customer,
 
  •  Services have been performed such as the collection and hauling of waste or the disposal of waste at a Company-owned disposal facility,
 
  •  The price of the services provided to the customer are fixed or determinable, and
 
  •  Collectability is reasonably assured.
Other Charges
      During the fourth quarter of 2002, the Company recorded a $5.6 million gain on the sale of certain assets for amounts exceeding estimates originally made and recorded as other charges during the fourth quarter of 2001.
Income Taxes
      The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Accordingly, deferred income taxes have been provided to show the effect of temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the financial statements.
Comprehensive Income
      During the year ended December 31, 2002, the Company recorded an unrealized gain of $2.8 million ($1.7 million, net of tax) relating to the change in fair value of its fuel hedge option agreements in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
Hedging Activities” (“SFAS 133”), as amended. (For further information, see Note 11, Fuel Hedge.) Of this amount, $1.6 million, net of tax, representing the effective portion of the change in fair value was recorded to other comprehensive income for the year ended December 31, 2002.
      At December 31, 2004, the Company had $38.7 million of restricted marketable securities held as financial guarantees. These securities consist of mutual funds invested in short-term investment grade securities, including mortgage-backed securities and U.S. Government obligations. These securities are available for sale and, as a result, are stated at fair value based on quoted market prices. During the years ended December 31, 2004 and 2003, the Company recorded a $.1 million and ($.1) million unrealized gain/(loss), net of tax, respectively, to other comprehensive income related to the change in fair value of these securities.
      The Company had no other components of other comprehensive income for the periods presented.
Statements of Cash Flows
      The Company considers all unrestricted highly liquid investments with purchased maturities of three months or less to be cash equivalents. The effect of non-cash transactions related to business combinations, as discussed in Note 4, Business Combinations, and other non-cash transactions are excluded from the accompanying Consolidated Statements of Cash Flows.
Fair Value of Financial Instruments
      The carrying amounts of cash and cash equivalents, restricted cash and marketable securities, receivables, accounts payable and accrued liabilities approximate fair value due to the short maturity of these instruments. The fair value of the Company’s fixed rate unsecured notes and tax-exempt financing using quoted market rates is $1,227.4 million at December 31, 2004. The carrying value of the unsecured notes and tax exempt financing is $1,123.3 million at December 31, 2004. The carrying amounts of the Company’s remaining notes payable and tax-exempt financing approximate fair value because interest rates are variable and, accordingly, approximate current market rates.
Concentration of Credit Risk
      The Company provides services to commercial, industrial, municipal and residential customers in the United States. Concentrations of credit risk with respect to trade receivables are limited due to the wide variety of customers and markets in which services are provided as well as their dispersion across many geographic areas in the United States. The Company performs ongoing credit evaluations of its customers, but does not require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based on various factors including the credit risk of specific customers, age of receivables outstanding, historical trends, economic conditions and other information.
New Accounting Pronouncement
      On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which is a revision of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
      SFAS 123(R) must be adopted no later than July 1, 2005. Early adoption will be permitted in periods in which financial statements have not been issued. The Company expects to adopt SFAS 123(R) on July 1, 2005.
      SFAS 123(R) permits public companies to adopt its requirements using one of two methods:
  1.  A “modified-prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
 
  2.  A “modified-retrospective” method which includes the requirements of the modified-prospective method described above, but also permits entities to restate based on the amounts previously reflected in their SFAS 123 pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
      The Company plans to adopt SFAS 123(R) using the modified-prospective method.
      As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)’s fair value method may have a significant impact on its result of operations, although it will have no impact on its overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $10.6 million, $6.7 million, and $4.0 million in 2004, 2003 and 2002, respectively.
3. ACCRUED LANDFILL AND ENVIRONMENTAL COSTS
Landfill and Environmental Costs
      A summary of landfill and environmental liabilities is as follows:
                 
    December 31,
     
    2004   2003
         
Landfill final capping, closure and post-closure liabilities
  $ 216.8     $ 204.7  
Remediation
    54.0       54.7  
Environmental and legal costs
    3.7       3.7  
                 
      274.5       263.1  
Less: Current portion (included in other current liabilities)
    (21.0 )     (37.6 )
                 
    $ 253.5     $ 225.5  
                 
Life Cycle Accounting
      The Company uses life cycle accounting and the units-of-consumption method to recognize certain landfill costs over the life of the site. In life cycle accounting, all costs to acquire and construct a site are capitalized and charged to expense based upon the consumption of cubic yards of available airspace. Costs and airspace estimates are developed annually by engineers. These estimates are used by the Company’s operating

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
and accounting personnel to annually adjust the Company’s rates used to expense capitalized costs. Changes in these estimates primarily relate to changes in available airspace, inflation and applicable regulations. Changes in available airspace include changes due to the addition of airspace lying in probable expansion areas.
Total Available Disposal Capacity
      As of December 31, 2004, the Company owned or operated 58 solid waste landfills with total available disposal capacity of approximately 1.7 billion in-place cubic yards. Total available disposal capacity represents the sum of estimated permitted airspace plus an estimate of expansion airspace that the Company believes has a probable likelihood of being permitted.
Probable Expansion Airspace
      Before airspace included in an expansion area is determined as probable expansion airspace and, therefore, included in the Company’s calculation of total available disposal capacity, the following criteria must be met:
  1.  The land associated with the expansion airspace is either owned by the Company or is controlled by the Company pursuant to an option agreement;
 
  2.  The Company is committed to supporting the expansion project financially and with appropriate resources;
 
  3.  There are no identified fatal flaws or impediments associated with the project, including political impediments;
 
  4.  Progress is being made on the project;
 
  5.  The expansion is attainable within a reasonable time frame; and
 
  6.  The Company believes it is likely the expansion permit will be received.
      Upon meeting the Company’s expansion criteria, the rates used at each applicable landfill to expense costs to acquire, construct, close and maintain a site during the post-closure period are adjusted to include probable expansion airspace and all additional costs to be capitalized or accrued associated with the expansion airspace.
      The Company has identified three sequential steps that landfills generally follow to obtain expansion permits. These steps are as follows:
  1.  Obtaining approval from local authorities;
 
  2.  Submitting a permit application to state authorities; and
 
  3.  Obtaining permit approval from state authorities.
      Once a landfill meets the Company’s expansion criteria, management continuously monitors each site’s progress in obtaining the expansion permit. If at any point it is determined that an expansion area no longer meets the required criteria, the probable expansion airspace is removed from the landfill’s total available capacity and the rates used at the landfill to expense costs to acquire, construct, cap, close and maintain a site during the post-closure period are adjusted accordingly.

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
Capitalized Landfill Costs
      Capitalized landfill costs include expenditures for land, permitting costs, cell construction costs and environmental structures. Capitalized permitting and cell construction costs are limited to direct costs relating to these activities, including legal, engineering and construction costs associated with excavation, natural and synthetic liners, construction of leachate collection systems, installation of methane gas collection and monitoring systems, installation of groundwater monitoring wells, and other costs associated with the development of the site. Interest is capitalized on landfill construction projects while the assets are undergoing activities to ready them for their intended use. Capitalized landfill costs also include final capping, closure and post-closure assets accrued in accordance with SFAS 143 as discussed below.
      Costs related to acquiring land, excluding the estimated residual value of unpermitted, non-buffer land, and costs related to permitting and cell construction are depleted as airspace is consumed using the units-of-consumption method.
      Capitalized landfill costs may also include an allocation of purchase price paid for landfills. For landfills purchased as part of a group of several assets, the purchase price assigned to the landfill is determined based upon the discounted expected future cash flows of the landfill relative to the other assets within the acquired group. If the landfill meets the Company’s expansion criteria, the purchase price is further allocated between permitted airspace and expansion airspace based upon the ratio of permitted versus probable expansion airspace to total available airspace. Landfill purchase price is amortized using the units-of-consumption method over the total available airspace including probable expansion airspace where appropriate.
Final Capping, Closure and Post-Closure Costs
      On January 1, 2003, the Company changed the methodology it used to record final capping, closure and post-closure expense in accordance with SFAS 143. SFAS 143 does not change the basic landfill accounting policies followed by the Company and others in the waste industry. Through December 31, 2002, the industry has generally amortized capitalized costs and accrued future final capping, closure and post-closure obligations using the units-of-consumption method as cubic yards of available airspace are consumed over the life of the related landfill. This practice is referred to as life cycle accounting and will continue to be followed except as modified by SFAS 143 as discussed below.
      The table below reflects significant changes between the Company’s historical methodology and the methodology the Company currently uses to account for final capping, closure and post-closure activities and for methane gas collection systems:
         
    Current Practice
Description   Historical Practice   (Effective January 1, 2003)
DEFINITIONS:        
Final Capping   Costs related to installation of the components that comprise the permanent final cover over areas of a landfill where airspace capacity has been consumed.   No change.
 
Closure   Includes routine maintenance costs incurred after a site ceases to accept waste, but prior to being certified closed.   No change, except that it includes the final portion of the methane gas collection system to be constructed.

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
         
    Current Practice
Description   Historical Practice   (Effective January 1, 2003)
 
Post-Closure   Includes routine monitoring and maintenance of a landfill after it has been certified as closed by the applicable state regulatory agency.   No change, except it includes methane gas collection systems in all cases where the need for such systems are considered probable.
 
DISCOUNT RATE:   Not applicable.   Credit-adjusted, risk-free rate of 6.5% and 6.75% for the years ending December 31, 2004 and 2003, respectively.
 
INFLATION:   Not applicable.   Inflation rate of 2.5%.
 
COST ESTIMATES:   Cost estimates generally assume work will be performed by third parties.   No change, except that the cost of any activities performed internally is increased to represent an estimate of the amount a third party would charge to perform such activity. This third party profit is taken in to income in the period the work is performed internally.
 
METHANE GAS COLLECTION SYSTEMS:   Capitalized when constructed and charged to expense through depreciation over the shorter of their useful life or the life of the landfill.   During the active life of a landfill, included in cell development costs when the need for such systems is considered probable; charged to expense through depletion as airspace is consumed using the units-of-consumption method. Systems associated with the last final capping event at a landfill are included in closure costs.
 
RECOGNITION OF LIABILITY:        
Final Capping   Accrued over the life of the landfill. Costs are charged to cost of operations and accrued liabilities as airspace is consumed using the units-of-consumption method. Costs are not discounted.   All final capping costs are recorded as a liability and asset at fair value as the obligation is incurred. The discounted cash flow associated with each final capping event is recorded to an accrued liability, with a corresponding increase to landfill assets as airspace is consumed related to the specific final capping event. Interest is accreted on the liability using the effective interest method until the liability is paid.
 
STATEMENT OF INCOME:        
Cost of Operations   Expense charged to cost of operations equal to amount of liability accrued.   Not applicable.

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
         
    Current Practice
Description   Historical Practice   (Effective January 1, 2003)
 
Landfill Asset Amortization   Not applicable.   The landfill asset is amortized as airspace is consumed over the life of a specific capping event for final capping or the life of a landfill for closure and post-closure.
 
Accretion   Not applicable.   Expense recognized as a component of operating expenses at credit-adjusted, risk-free rate using the effective interest method.
      The Company has future obligations for final capping, closure and post-closure costs with respect to the landfills it owns or operates as set forth in applicable landfill permits. Final capping, closure and post-closure costs include estimated costs to be incurred for final capping and closure of landfills and estimated costs for providing required post-closure monitoring and maintenance of landfills. The permit requirements are based on the Subtitle C and Subtitle D regulations of the Resource Conservation and Recovery Act (RCRA), as implemented and applied on a state-by-state basis. Obligations associated with monitoring and controlling methane gas migration and emissions are set forth in applicable landfill permits and these requirements are based upon the provisions of the Clean Air Act of 1970, as amended. Final capping typically includes installing flexible membrane and geosynthetic clay liners, drainage and compact soil layers, and topsoil, and is constructed over an area of the landfill where total airspace capacity has been consumed and waste disposal operations have ceased. These final capping activities occur throughout the operating life of a landfill. Other closure activities and post-closure activities occur after the entire landfill ceases to accept waste and closes. These activities involve methane gas control, leachate management and groundwater monitoring, surface water monitoring and control, and other operational and maintenance activities that occur after the site ceases to accept waste. The post-closure period generally runs for up to 30 years after final site closure for municipal solid waste landfills and a shorter period for construction and demolition landfills and inert landfills.
      Estimates of future expenditures for final capping, closure and post-closure are developed annually by engineers. These estimates are reviewed by management at least annually and are used by the Company’s operating and accounting personnel to adjust the rates used to capitalize and amortize these costs. These estimates involve projections of costs that will be incurred during the remaining life of the landfill for final capping activities, after the landfill ceases operations and during the legally required post-closure monitoring period. Additionally, the Company currently retains post-closure responsibility for several closed landfills.
      Under SFAS 143, a liability for an asset retirement obligation must be recognized in the period in which it is incurred and should be initially measured at fair value. Absent quoted market prices, the estimate of fair value should be based on the best available information, including the results of present value techniques in accordance with Statement of Financial Accounting Concepts No. 7, “Using Cash Flow and Present Value in Accounting Measurements” (“SFAC 7”). The offset to the liability must be capitalized as part of the carrying amount of the related long-lived asset. Changes in the liability due to the passage of time are recognized as operating items in the income statement and are referred to as accretion expense. Changes in the liability due to revisions to estimated future cash flows are recognized by increasing or decreasing the liability with the offset adjusting the carrying amount of the related long-lived asset.
      In applying the provisions of SFAS 143, the Company has concluded that a landfill’s asset retirement obligation includes estimates of all costs related to final capping, closure and post-closure. Costs associated with a landfill’s daily maintenance activities during the operating life of the landfill, such as leachate disposal, groundwater and gas monitoring, and other pollution control activities, continue to be charged to expense as

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
incurred. In addition, costs historically accounted for as capital expenditures during the operating life of a landfill, such as cell development costs, are capitalized when incurred, and charged to expense using life cycle accounting and the units-of-consumption method based on the consumption of cubic yards of available airspace.
      The Company defines final capping as activities required to permanently cover a portion of a landfill that has been completely filled with waste. Final capping occurs in phases throughout the life of a landfill as specific areas are filled to capacity and the final elevation for that specific area is reached in accordance with the provisions of the operating permit. The Company considers final capping events to be 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 waste actually placed under an area to be capped. As a result, the Company uses a separate rate per ton for recognizing the principal amount of the liability and related asset associated with each capping event. The Company amortizes the asset recorded pursuant to this approach as waste volume equivalent to the capacity covered by the capping event is placed into the landfill based upon the consumption of cubic yards of available airspace covered by the capping event.
      The Company recognizes asset retirement obligations and the related amortization expense for closure and post-closure (excluding obligations for final capping) using the units-of-consumption method over the total remaining capacity of the landfill. The total remaining capacity includes probable expansion airspace.
      In general, the Company engages third parties to perform most of its final capping, closure and post-closure activities. Accordingly, the fair market value of these obligations is based upon quoted and actual prices paid for similar work. The Company does intend to perform some of its final capping, closure and post-closure obligations using internal resources. Where internal resources are expected to be used to fulfill an asset retirement obligation, the Company has added a profit margin onto the estimated cost of such services to better reflect their fair market value as required by SFAS 143. These services primarily relate to managing construction activities during final capping, and maintenance activities during closure and post-closure. If the Company does perform these services internally, the added profit margin would be recognized as a component of operating income in the period the obligation is settled.
      SFAC 7 states that an estimate of fair value should include the price that marketplace participants are able to receive for bearing the uncertainties in cash flows. However, when utilizing discounted cash flow techniques, reliable estimates of market premiums may not be obtainable. In this situation, SFAC 7 indicates that it is not necessary to consider a market risk premium in the determination of expected cash flows. While the cost of asset retirement obligations associated with final capping, closure and post-closure can be quantified and estimated, there is not an active market that can be utilized to determine the fair value of these activities. In the case of the waste industry, no market exists for selling the responsibility for final capping, closure and post-closure independent of selling the landfill in its entirety. Accordingly, the Company believes that it is not possible to develop a methodology to reliably estimate a market risk premium and has excluded a market risk premium from its determination of expected cash flow for landfill asset retirement obligations in accordance with SFAC 7.
      Under SFAS 143, the primary modification to the Company’s historical methodology is to require that final capping, closure and post-closure costs be inflated and discounted to present value. The Company’s estimates of future final capping, closure and post-closure costs historically have not taken into account discounts for the present value of costs to be paid in the future. Consequently, the amount of expense (accretion expense plus amortization expense) will be higher in the later years of a landfill’s life than in earlier years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
      The Company’s estimates of costs to discharge asset retirement obligations for landfills are developed in today’s dollars. These costs are inflated each year to reflect a normal escalation of prices up to the year they are expected to be paid. The Company uses a 2.5% inflation rate, which is based upon the ten year average increase in the consumer price index and is the rate used by most waste industry participants.
      These estimated costs are then discounted to their present value using a credit-adjusted, risk-free rate. The Company’s credit-adjusted, risk-free rate was determined to be 6.50% and 6.75% for years ended December 31, 2004 and 2003, respectively, based upon the estimated all-in yield the Company believes it would need to offer to sell thirty-year debt in the public market. Changes in asset retirement obligations due to the passage of time are measured by recognizing accretion expense in a manner that results in a constant effective interest rate being applied to the average carrying amount of the liability. The effective interest rate used to calculate accretion expense is the Company’s credit-adjusted, risk-free rate.
      In accordance with SFAS 143, changes due to revision of the estimates of the amount or timing of the original undiscounted cash flows used to record a liability are recognized by increasing or decreasing the carrying amount of the asset retirement obligation liability and the carrying amount of the related asset. Upward revisions in the amount of undiscounted estimated cash flows used to record a liability must be discounted using the credit-adjusted, risk-free rate in effect at the time of the change. Downward revisions in the amount of undiscounted estimated cash flows used to record a liability must be discounted using the credit-adjusted, risk-free rate that existed when the original liability was recognized.
      The Company reviews its calculations with respect to landfill asset retirement obligations at least annually. If there is a significant change in the facts and circumstances related to a landfill during the year, the Company will review its calculations for the landfill as soon as practical after the significant change has occurred.
      The following table summarizes the actual activity in the Company’s asset retirement obligation liabilities for the years ended December 31, 2004 and 2003 and the pro forma activity for the years ended December 31, 2003 and 2002 assuming SFAS 143 were effective as of January 1, 2002:
                                   
    Years Ended December 31,
     
    2004   2003   2003   2002
    Actual   Actual   Pro Forma   Pro Forma
                 
Asset retirement obligation liability, beginning of year
  $ 204.7     $ 196.9     $ 182.4     $ 167.8  
Cumulative effect of change in accounting principle
          (14.5 )            
Non-cash asset additions
    19.6                    
Revisions in estimate of future cash flows
    (4.3 )                  
Acquisitions
    .6                    
Additions incurred during the period
          17.9       17.9       18.9  
Amounts settled during the period
    (17.5 )     (8.3 )     (8.3 )     (14.8 )
Accretion expense
    13.7       12.7       12.7       10.5  
                                 
Asset retirement obligation liability, end of year
    216.8       204.7       204.7       182.4  
 
Less: Current portion
    (14.6 )     (29.5 )     (29.5 )     (22.1 )
                                 
 
Long-term portion
  $ 202.2     $ 175.2     $ 175.2     $ 160.3  
                                 
      The fair value of assets that are legally restricted for purposes of settling final capping, closure and post-closure obligations was approximately $7.5 million at December 31, 2004 and are included as restricted cash in the Company’s Consolidated Balance Sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
      The expected future payments for final capping, closure and post-closure as of December 31, 2004 are as follows:
         
Years Ending    
December 31,    
     
2005
  $ 14.6  
2006
    58.1  
2007
    49.5  
2008
    20.1  
2009
    31.9  
Thereafter
    457.7  
         
    $ 631.9  
         
      The estimated remaining final capping, closure and post-closure expenditures presented above are undiscounted and include both payments for liabilities incurred and recorded as of December 31, 2004 and estimated future liabilities expected to be incurred as the remaining landfill disposal capacities are consumed.
Remediation
      The Company accrues for remediation costs when they become probable and reasonably estimatable. Substantially all of the Company’s recorded remediation costs are for incremental landfill post-closure care required under approved remediation action plans for acquired landfills. Remediation costs are estimated by engineers. These estimates do not take into account discounts for the present value of total estimated costs. Management believes that the amounts accrued for remediation costs are adequate. However, a significant increase in the estimated costs for remediation could have a material adverse effect on the Company’s financial position, results of operations or cash flows.
      The expected future payments for remediation costs as of December 31, 2004 are as follows:
         
Years Ending    
December 31,    
     
2005
  $ 2.7  
2006
    2.5  
2007
    2.5  
2008
    2.5  
2009
    2.5  
Thereafter
    41.3  
         
    $ 54.0  
         
Environmental Costs
      In the normal course of business, the Company is subject to ongoing environmental investigations by certain regulatory agencies, as well as other claims and disputes that could result in litigation. Environmental costs are accrued by the Company through a charge to income in the period such liabilities become probable and can be reasonably estimated. No significant amounts were charged to expense during the years ended December 31, 2004, 2003, and 2002.
4. BUSINESS COMBINATIONS
      The Company acquires businesses as part of its growth strategy. Businesses acquired are accounted for under the purchase method of accounting and are included in the Consolidated Financial Statements from the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
date of acquisition. The Company allocates the cost of the acquired business to the assets acquired and the liabilities assumed based on estimates of fair values thereof. These estimates are revised during the allocation period as necessary if, and when, information regarding contingencies becomes available to further define and quantify assets acquired and liabilities assumed. To the extent contingencies such as preacquisition environmental matters, litigation and related legal fees are resolved or settled during the allocation period, such items are included in the revised allocation of the purchase price. After the allocation period, the effect of changes in such contingencies is included in results of operations in the periods in which the adjustments are determined. The Company does not believe potential differences between its fair value estimates and actual fair values are material.
      The Company acquired various solid waste businesses during the years ended December 31, 2004, 2003 and 2002. The aggregate purchase price paid for these transactions was $47.4 million, $51.5 million and $55.8 million, respectively.
      During 2004, 2003 and 2002, $28.2 million, $27.7 million and $5.1 million, respectively, of the total purchase price paid for acquisitions and contingent payments to former owners was allocated to landfill airspace. For landfills purchased as part of a group of several assets, the allocations of purchase price were based on the discounted expected future cash flow of each landfill relative to other assets within the acquired group and were adjusted for other non-depletable landfill assets and liabilities acquired (primarily final capping, closure and post-closure liabilities). Landfill purchase price is amortized using the units-of-consumption method over total available airspace, which includes probable expansion airspace where appropriate, and is included in property and equipment, net in the accompanying Consolidated Balance Sheets.
      The following summarizes the preliminary purchase price allocations for business combinations accounted for under the purchase method of accounting:
                         
    Years Ended December 31,
     
    2004   2003   2002
             
Property and equipment
  $ 36.6     $ 41.3     $ 27.0  
Intangible assets
    14.1       24.3       43.0  
Restricted cash
    .6              
Working capital deficit
    (3.4 )     (14.9 )     (8.9 )
Other assets (liabilities), net
    (.6 )     .8       (5.3 )
                         
Cash used in acquisitions, net of cash acquired
  $ 47.3     $ 51.5     $ 55.8  
                         
      Substantially all of the intangible assets recorded for these acquisitions are deductible for tax purposes.
      The Company’s unaudited pro forma consolidated results of operations assuming all significant acquisitions during 2004 accounted for under the purchase method of accounting had occurred at the beginning of the periods presented are as follows:
                 
    Years Ended
    December 31,
     
    2004   2003
         
Revenue
  $ 2,715.1     $ 2,530.0  
Net income
  $ 238.1     $ 179.7  
Diluted earnings per share
  $ 1.53     $ 1.11  
Weighted-average common and common equivalent shares outstanding
    155.3       162.1  

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REPUBLIC SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
      The unaudited pro forma results of operations are presented for informational purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated these businesses as of the beginning of the periods presented.
5. DEBT
      Notes payable and long-term debt are as follows:
                 
    December 31,
     
    2004   2003
         
$225.0 million unsecured notes, net of unamortized discount $.1 million and including a $3.3 million adjustment to fair market value as of December 31, 2003; interest payable semi-annually in May and November at 65/8%; principal due at maturity in May 2004
  $     $ 228.2  
$375.0 million unsecured notes, net of unamortized discount of $.3 million and $.4 million as of December 31, 2004 and 2003, respectively; interest payable semi-annually in May and November at 71/8%; principal due at maturity in 2009
    374.7       374.6  
$450.0 million unsecured notes, net of unamortized discount of $1.9 million and $2.2 million, and including $.5 million and $0 million adjustments to fair value as of December 31, 2004 and 2003, respectively; interest payable semi-annually in February and August at 63/4%; principal due at maturity in 2011
    448.6       447.8  
$750.0 million unsecured revolving credit facility; interest payable using LIBOR based rates (2.4% at December 31, 2004); $300.0 million matures June 2005 and $450.0 million matures July 2007
           
Tax-exempt bonds and other tax-exempt financing; fixed and floating interest rates (ranging from 2% to 51/4% at December 31, 2004); maturities ranging from 2005 to 2037
    527.3       463.2  
Other notes including unsecured and secured by real property, equipment and other assets; fixed and floating interest rates ranging from 4% to 12%; maturing through 2010
    3.7       6.5  
                 
      1,354.3       1,520.3  
Less: Current portion
    2.4       231.1  
                 
Long-term portion
  $ 1,351.9     $ 1,289.2  
                 
      Aggregate maturities of notes payable, capital leases and other long-term debt as of December 31, 2004 (excluding discounts and adjustments to fair market value from hedging transactions) are as follows:
         
Years Ending December 31,    
     
2005
  $ 2.4  
2006
    2.2  
2007
    1.6  
2008
    1.2  
2009
    376.1  
Thereafter
    972.0  
         
    $ 1,355.5  
         
      As of December 31, 2004, the Company had approximately $373.4 million of availability under its revolving credit facility.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
      As of December 31, 2004, the Company had $237.0 million of restricted cash of which $119.0 million were proceeds from the issuance of tax-exempt bonds and other tax-exempt financing and will be used to fund capital expenditures. Restricted cash also includes amounts held in trust as a financial guarantee of the Company’s performance.
      The Company made interest payments on notes payable and long-term debt of approximately $77.0 million, $78.4 million and $75.9 million (net of capitalized interest of $2.1 million, $3.3 million and $2.5 million) for the years ended December 31, 2004, 2003 and 2002, respectively.
      The Company’s ability to obtain financing through the capital markets is a key component of its financial strategy. Historically, the Company has managed risk associated with executing this strategy, particularly as it relates to fluctuations in interest rates, by using a combination of fixed and floating rate debt. The Company also entered into interest rate swap agreements to manage risk associated with fluctuations in interest rates and to take advantage of favorable floating interest rates. The swap agreements have total notional values of $225.0 million and $210.0 million. Swap agreements with a notional value of $225.0 million matured in May 2004, and agreements with a notional value of $210.0 million mature in August 2011. These maturities are identical to the Company’s public notes that were sold in 1999 and 2001, respectively. Under the swap agreements, the Company pays interest at floating rates based on changes in LIBOR and receives interest at fixed rates of 65/8% and 63/4%, respectively. The Company has designated these agreements as hedges in changes in the fair value of the Company’s fixed-rate debt and accounts for them in accordance with SFAS 133. The Company has determined that these agreements qualify for the short-cut method under SFAS 133 and, therefore, changes in the fair value of the agreements are assumed to be perfectly effective in hedging changes in the fair value of the Company’s fixed rate debt due to changes in interest rates.
      As of December 31, 2004, interest rate swap agreements are reflected at fair market value of $.5 million and are included in other assets and as an adjustment to long-term debt in the accompanying Consolidated Balance Sheets. During the years ended December 31, 2004, 2003 and 2002, the Company recorded net interest income of $7.2 million, $10.0 million and $5.8 million, respectively, related to its interest rate swap agreements which is included in interest expense in the accompanying Consolidated Statements of Income.
      The unsecured revolving credit facility requires the Company to maintain certain financial ratios and comply with certain financial covenants. The Company has the ability under its loan covenants to pay dividends and repurchase its common stock under the condition that it is in compliance with the covenants. At December 31, 2004, the Company was in compliance with the financial covenants under these agreements.
6. INCOME TAXES
      The components of the provision for income taxes are as follows:
                           
    Years Ended December 31,
     
    2004   2003   2002
             
Current:
                       
 
Federal
  $ 81.2     $ (51.4 )   $ 62.0  
 
State
    7.0       4.5       11.8  
Federal and state deferred
    57.6       178.9       73.1  
                         
Provision for income taxes
  $ 145.8     $ 132.0     $ 146.9  
                         
      In December 2003, the Company received written approval from the Internal Revenue Service to exclude probable expansion airspace from its calculation of landfill amortization, depletion, and final capping, closure and post-closure costs for tax purposes. As a result of this change, the Company’s deferred income tax provision increased by approximately $82.0 million during 2003, and the Company recorded a tax receivable of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
approximately $48.0 million which was collected or used to offset taxes payable during the year ended December 31, 2004.
      A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is shown below:
                         
    Years Ended
    December 31,
     
    2004   2003   2002
             
Statutory federal income tax rate
    35.0 %     35.0 %     35.0 %
Non-deductible expenses
    1.3       1.9       .7  
State income taxes, net of federal benefit
    2.4       1.7       2.1  
Other, net
    (.7 )     (.6 )     .2  
                         
Effective income tax rate
    38.0 %     38.0 %     38.0 %
                         
      Components of the net deferred income tax asset and liability in the accompanying Consolidated Balance Sheets are as follows:
                       
    December 31,
     
    2004   2003
         
Deferred tax assets (liabilities):
               
 
Current portion —
               
   
Book basis in property over tax basis
  $ 1.8     $ 2.5  
   
Accruals not currently deductible
    8.1       3.3  
                 
     
Total
  $ 9.9     $ 5.8  
                 
 
Long-term portion —
               
   
Book basis in property over tax basis
  $ (434.4 )   $ (367.3 )
   
Accruals not currently deductible
    27.9       13.8  
                 
     
Total
  $ (406.5 )   $ (353.5 )
                 
      At December 31, 2004, the Company had available domestic federal and state net operating loss carryforwards of approximately $25.6 million ($16.6 million after tax), which begin to expire in 2023. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not some portion or all of the deferred tax assets will not be realized after the initial recognition of the deferred tax asset. The Company provides valuation allowances to offset portions of deferred tax assets due to uncertainty surrounding the future realization of such deferred tax assets. The Company adjusts the valuation allowance, if any, in the period management determines it is more likely than not that deferred tax assets will or will not be realized.
      The Company made income tax payments (net of refunds received) of approximately $12.9 million, $17.7 million and $69.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.
      Through the date of the Company’s initial public offering of common stock in July 1998, the Company filed consolidated federal income tax returns with AutoNation Inc. (“AutoNation”), its former parent company. In accordance with the Company’s tax sharing agreement with AutoNation, the Company may be liable for certain assessments imposed by the Internal Revenue Service for the periods through June 1998. The Internal Revenue Service is auditing the Company’s consolidated tax returns for fiscal years 1998 through 2003. Management believes that the tax liabilities recorded are adequate. However, a significant assessment in excess of liabilities recorded against the Company could have a material adverse effect on the Company’s financial position, results of operations or cash flows.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data) — (Continued)
7. STOCKHOLDERS’ EQUITY
      During 2000 through 2004, the Board of Directors authorized the repurchase of up to $1,025.0 million of the Company’s Common Stock. As of December 31, 2004, the Company had paid $750.4 million to repurchase 35.2 million shares of its common stock, of which 9.6 million shares were acquired during the year ended December 31, 2004 for $266.1 million.
    &n