Republic Services, Inc. 12/31/2003
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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, 2003

OR

[  ] 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, 2003, the aggregate market value of the shares of the Common Stock held by non-affiliates of the registrant was approximately $3,642,358,046.

      As of March 5, 2004, the registrant had outstanding 155,847,232 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Part III Portions of the Registrant’s Proxy Statement relative to the 2004 Annual Meeting of Stockholders. Part IV Portions of previously filed reports and registration statements.




INDEX

TO FORM 10-K
             
Page Number

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      48  
      86  
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        91  
 EX-10.9 Executive Incentive Plan
 EX-21.1 Subsidiaries
 EX-23.1 Consent of Ernst & Young LLP
 EX-31.1 Sec. 302 Certification of CEO
 EX-31.2 Sec. 302 Certification of CFO
 EX-32.1 Sec. 906 Certification of CEO
 EX-32.2 Sec. 906 Certification of CFO


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 142 collection companies in 22 states. We also own or operate 93 transfer stations, 58 solid waste landfills and 35 recycling facilities.

      As of December 31, 2003, 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 $2,517.8 million and $2,365.1 million and operating income of $412.7 million and $459.5 million for the years ended December 31, 2003 and 2002, respectively. The $152.7 million, or 6.5%, increase in revenue from 2002 to 2003 is primarily attributable to the successful execution of our operating and growth strategies described below. The $46.8 million, or 10.2%, decrease in operating income from 2002 to 2003 is primarily attributable to additional self-insurance expense.

      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.

      While we believe that we are well positioned to continue to increase our revenue and operating income in the longer term, the economic slowdown has had a negative impact on certain aspects of our business. However, the aspects of our business that we believe are “recession resilient” have continued to perform well. These include our residential and commercial collection operations which are flat-rate businesses and are not subject to the volatility we experience in our industrial collection and disposal businesses. 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 $43.0 billion, of which approximately 59% is generated by publicly-owned waste companies, 28% is generated by privately-held waste companies, and 13% 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 41% 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 has experienced a period of rapid consolidation. During this time we were able to grow significantly through acquisitions. However, acquisitions in the industry have slowed considerably since

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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 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 standards, 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

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  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.
 
  •  Share Repurchase. If we are unable to identify opportunities that satisfy our growth strategy, we intend 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, 2003, we repurchased a total of 25.6 million shares, or approximately 14% of our common stock outstanding at the commencement of our share repurchase program in 2000, for $484.3 million. In October 2003, our board of directors authorized the repurchase of up to an additional $200.0 million of our common stock, of which $190.7 million remained available at December 31, 2003. 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. 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. During 2004, we intend to repay $225.0 million in public notes using cash and proceeds from the liquidation of restricted marketable securities.

      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 also 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 29 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 23 years of experience in the solid waste industry. He joined

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  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.
 
        The other corporate officers with responsibility for our operations have an average of over 20 years of management experience in the solid waste industry. Our five regional vice presidents and our 24 area presidents have an average of 23 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 39 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, 2003, 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

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  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 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. It also focuses on securing 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. 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.

        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.

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  •  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 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.

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        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 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 142 collection companies. In 2003, 75% of our revenue was derived from collection services consisting of approximately 32% from services provided to municipal and residential customers, 38% from services provided to commercial customers and 30% 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.

      We own or operate 93 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.

      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.

      Disposal Services. As of December 31, 2003, we owned or operated 58 landfills, which had approximately 8,607 permitted acres and total available permitted and probable expansion disposal capacity of approximately 1.8 billion in-place cubic yards. The in-place capacity of our landfills is subject to change based

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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 primarily 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 facilities, thereby minimizing our recycling investment.

      We provide remediation and other heavy construction services primarily through our subsidiary located in Missouri. During 2002, our subsidiary was awarded a contract to assist on the Riverside Levy Project in Missouri. Revenue from this project, which is scheduled to be completed in 2004, is expected to be approximately $50.0 million of which approximately $41.0 million has already been recorded.

      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 wastes, such as yard wastes, 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 wastes, 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 a reserve that we believe, based on currently available information, will be adequate to cover any potential regulatory costs. However, we cannot assure you that actual costs will not exceed our reserve.

      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 wastes, 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 wastes 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 wastes 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 wastes 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

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other damages to third parties. We are unaware of facts indicating that issues of compliance with regulations related to underground storage tanks will have a material adverse effect on our business or financial condition.

      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 regulated 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 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 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 deposits or by obtaining bank letters of credit, insurance policies or surety bonds.

Employees

      As of December 31, 2003, we employed approximately 12,900 full-time employees, approximately 3,200 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 Charter 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 may continue to adversely affect our business, operations and internal growth.

      During 2001, the economic slowdown reduced recycling commodity prices which negatively impacted our operating margins. The economic slowdown also negatively impacted the portion of our business servicing the manufacturing sector and the non-residential construction industry. Landfill volumes attributable to manufacturing and construction activity began to weaken. Furthermore, the portion of our business that services the residential construction industry was negatively impacted toward the latter part of 2001. During 2002, landfill volumes attributable to manufacturing and construction activity continued to weaken. A continued slowdown in the economy could further 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 purchase in the open market on a daily basis. During 2003, we experienced an increase in the cost of fuel. A portion of this increase was passed on to our customers. To date in 2004, we have experienced an additional increase in the cost of fuel. However, because of the competitive nature of the waste industry, there can be no assurances that we will be able to pass on the recent or any future increases in fuel prices to our customers. Due to political instability in oil-producing countries,

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fuel prices may continue to increase significantly in 2004. A significant increase in fuel costs could adversely affect our business.

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 new 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 still 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 requires 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

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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.

Our financial statements are based upon estimates and assumptions that may differ from actual results.

      Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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, income 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,

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at times, increased our costs and extended the time associated with establishing new facilities and expanding existing facilities. In addition, failure to receive regulatory approval may prohibit us from establishing new facilities and expanding existing facilities.

Seasonal changes may adversely affect our business and operations.

      Our operations may be adversely affected by periods of inclement weather which could delay the collection and disposal of waste, reduce the volume of waste generated, 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 July 2004. We anticipate extending the maturity of this credit facility until July 2005. 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. The Internal Revenue Service is auditing AutoNation’s consolidated tax returns for fiscal years 1997 through 1998. 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 resulting from this audit. In addition, the Internal Revenue Service is auditing our consolidated tax returns for fiscal years 1998 through 2000. No assurance can be given with respect to the outcome of these audits 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 are located in Ft. Lauderdale, Florida in leased premises. As of December 31, 2003, we operated approximately 5,600 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, 2003:

                                           
Unused
Total Permitted Permitted
Landfill Name Location Region Acreage(2) Acreage(3) Acreage(4)






545 Landfill
    Winter Garden, Florida       Southern       80       58       3  
Apex
    Clark County, Nevada       Western       2,285       1,233       1,051  
Brent Run
    Montrose, Michigan       Central       544       106       56  
Broadhurst Landfill
    Jesup, Georgia       Southern       900       105       60  
C&T Regional
    Linn, Texas       Southwestern       200       77       5  
Carleton Farms
    Detroit, Michigan       Central       640       388       231  
Charter Waste
    Abilene, Texas       Southwestern       396       300       268  
Cedar Trail
    Bartow, Florida       Southern       392       53       0  
Chiquita Canyon
    Valencia, California       Western       592       257       81  
Countywide
    East Sparta, Ohio       Eastern       816       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       29  
Epperson Landfill
    Williamstown, Kentucky       Central       899       100       40  
Foothills Landfill(1)
    Lenior, North Carolina       Southern       231       78       50  
Forest Lawn
    Three Oaks, Michigan       Central       261       165       15  
Front Range
    Denver, Colorado       Southwestern       602       195       15  
Greenville
    Greenville, South Carolina       Southern       21       7       4  
Highway 78
    Oconee, Georgia       Southern       385       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       0  
Mallard Ridge
    Delavan, Wisconsin       Central       659       42       2  
Modern
    York, Pennsylvania       Eastern       716       230       22  
National Serv-All
    Fort Wayne, Indiana       Central       563       204       12  
Nine Mile Road
    St. Augustine, Florida       Southern       354       57       28  
North County
    Houston, Texas       Southwestern       100       31       6  
Northwest Tennessee
    Union City, Tennessee       Central       600       120       72  
Oak Grove
    Winder, Georgia       Southern       324       72       10  
Ohio County Balefill(1)
    Beaver Dam, Kentucky       Central       908       178       121  
Pepperhill
    North Charleston, South Carolina       Southern       37       26       0  
Pine Grove
    Amanda, Ohio       Eastern       734       112       65  
Pine Ridge
    Griffin, Georgia       Southern       515       196       130  
Potrero
    Suisan, California       Western       1,400       190       82  
Presidio(1)
    Presidio, Texas       Southwestern       10       10       6  
Republic/ Alpine(1)
    Alpine, Texas       Southwestern       80       74       67  
Republic/ CSC
    Avalon, Texas       Southwestern       467       190       116  
Republic/ Maloy
    Campbell, Texas       Southwestern       455       195       117  
San Angelo(1)
    San Angelo, Texas       Southwestern       257       236       117  
Savannah Regional
    Savannah, Georgia       Southern       129       56       34  
Seabreeze Landfill
    Clute, Texas       Southwestern       896       386       240  
Seagull
    Avalon, California       Western       6       3       0  
Southern Illinois Regional
    DeSoto, Illinois       Central       349       95       0  
Spring Grove
    Charleston, South Carolina       Southern       246       174       139  
Swiftcreek Landfill
    Macon, Georgia       Southern       836       85       18  
Tay-Ban
    Birch Run, Michigan       Central       90       43       9  
Tri-K Landfill
    Stanford, Kentucky       Central       612       190       33  
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       614       70       39  
Uwharrie Landfill(1)
    Mt. Gilead, North Carolina       Southern       466       118       56  
Valley View Landfill
    Sulphur, Kentucky       Central       894       121       16  
Vasco Road
    Livermore, California       Western       548       246       89  
Victory Environmental
    Terre Haute, Indiana       Central       1,013       303       133  
Wabash Valley
    Wabash, Indiana       Central       390       137       73  
West Contra Costa County
    Contra Costa, California       Western       350       188       0  
Whitefeather
    Pinconning, Michigan       Central       639       57       26  
Worthington
    Worthington, Indiana       Central       420       97       28  
                     
     
     
 
 
Total
                    28,222       8,607       4,264  
                     
     
     
 

(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 2003.

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PART II

 
ITEM  5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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 for the periods indicated:

                 
High Low


2003
               
First Quarter
  $ 21.29     $ 18.25  
Second Quarter
    24.41       19.50  
Third Quarter
    24.75       21.77  
Fourth Quarter
    26.09       22.15  
 
2002
               
First Quarter
  $ 20.00     $ 16.45  
Second Quarter
    21.77       18.60  
Third Quarter
    21.15       16.26  
Fourth Quarter
    22.26       18.76  

      On March 5, 2004 the last reported sales price of our common stock was $26.77.

      There were approximately 88 record holders of our common stock at March 5, 2004.

      In July 2003, our board of directors initiated a quarterly cash dividend of $.06 per share. In October 2003, we paid a dividend of $9.6 million to shareholders of record as of September 30, 2003. As of December 31, 2003, we recorded a dividend payable of approximately $9.4 million to shareholders of record at the close of business on January 2, 2004 which has been paid. In January 2004, our board of directors declared a regular quarterly dividend of $.06 per share for shareholders of record on April 1, 2004.

      During 2000 through 2003, our board of directors authorized the repurchase of up to $675.0 million of our common stock. As of December 31, 2003, we paid $484.3 million to repurchase approximately 25.6 million shares of our stock, of which approximately 8.4 million shares were acquired during 2003 for $184.2 million. As of December 31, 2003, we had $190.7 million remaining under our share repurchase authorizations.

      As of December 31, 2003, we have the ability under our loan covenants to pay dividends and repurchase our common stock in the aggregate amount of up to $124.4 million, plus 50% of future net income.

      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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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, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 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 2000 and 1999 and the selected balance sheet data at December 31, 2001, 2000 and 1999 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 2003 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,

2003 2002 2001 2000 1999





Statement of Income Data:
                                       
Revenue
  $ 2,517.8     $ 2,365.1     $ 2,257.5     $ 2,103.3     $ 1,869.3  
Expenses:
                                       
 
Cost of operations
    1,605.4       1,472.9       1,422.5       1,271.3       1,131.9  
 
Depreciation, amortization and depletion
    239.1       199.6       215.4       197.4       163.2  
 
Accretion
    12.7                          
 
Selling, general and administrative
    247.9       238.7       236.5       193.9       176.7  
 
Other charges (income)
          (5.6 )     99.6       6.7       6.9  
     
     
     
     
     
 
Operating income
    412.7       459.5       283.5       434.0       390.6  
Interest expense
    (78.0 )     (77.0 )     (80.1 )     (81.6 )     (64.2 )
Interest income
    9.5       4.3       4.4       1.7       3.5  
Other income (expense), net
    3.2       (.3 )     1.5       2.3       (3.4 )
     
     
     
     
     
 
Income before income taxes
    347.4       386.5       209.3       356.4       326.5  
Provision for income taxes
    132.0       146.9       83.8       135.4       125.7  
     
     
     
     
     
 
Income before cumulative effect of changes in accounting principles
    215.4       239.6       125.5       221.0       200.8  
Cumulative effect of changes in accounting principles
    (37.8 )                        
     
     
     
     
     
 
Net income
  $ 177.6     $ 239.6     $ 125.5     $ 221.0     $ 200.8  
     
     
     
     
     
 
Basic earnings per share:
                                       
 
Before cumulative effect of changes in accounting principles
  $ 1.34     $ 1.45     $ .74     $ 1.26     $ 1.14  
 
Cumulative effect of changes in accounting principles
    (.23 )                        
     
     
     
     
     
 
 
Basic earnings per share
  $ 1.11     $ 1.45     $ .74     $ 1.26     $ 1.14  
     
     
     
     
     
 
 
Weighted average common shares outstanding
    160.3       165.4       170.1       175.0       175.7  
     
     
     
     
     
 
Diluted earnings per share:
                                       
 
Before cumulative effect of changes in accounting principles
  $ 1.33     $ 1.44     $ .73     $ 1.26     $ 1.14  
 
Cumulative effect of changes in accounting principles
    (.23 )                        
     
     
     
     
     
 
 
Diluted earnings per share
  $ 1.10     $ 1.44     $ .73     $ 1.26     $ 1.14  
     
     
     
     
     
 
 
Weighted average common and common equivalent shares outstanding
    162.1       166.7       171.1       175.0       175.7  
     
     
     
     
     
 
Cash dividend per share
  $ .12     $     $  —     $     $  
     
     
     
     
     
 
                                         
Years Ended December 31,

2003 2002 2001 2000 1999





Other Operating Data:
                                       
Cash flows from operating activities
  $ 600.5     $ 569.7     $ 459.2     $ 461.8     $ 323.8  
Capital expenditures(a)
    273.2       258.6       249.3       208.0       294.5  
Proceeds from the sale of property and equipment
    9.1       14.6       8.7       12.6       4.9  
                                         
Years Ended December 31,

2003 2002 2001 2000 1999





Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 119.2     $ 141.5     $ 16.1     $ 2.0     $ 13.1  
Restricted cash and marketable securities
    397.4       175.0       142.3       84.3       10.3  
Total assets
    4,554.1       4,209.1       3,856.3       3,561.5       3,288.3  
Total debt
    1,520.3       1,442.1       1,367.7       1,256.7       1,209.3  
Total stockholders’ equity
    1,904.5       1,881.1       1,755.9       1,674.9       1,502.7  


(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 142 collection companies in 22 states. We also own or operate 93 transfer stations, 58 solid waste landfills and 35 recycling facilities.

      We generate revenue primarily from our solid waste collection operations, and our remaining revenue is from landfill disposal services and other services, including recycling and compost, mulch and soil operations.

      The following table reflects our total revenue by source for the years ended December 31, 2003, 2002 and 2001 (in millions):

                                                     
2003 2002 2001



Collection:
                                               
 
Residential
  $ 601.2       23.9 %   $ 530.7       22.4 %   $ 479.7       21.2 %
 
Commercial
    706.0       28.0       696.7       29.5       686.0       30.4  
 
Industrial
    523.0       20.8       501.6       21.2       509.6       22.6  
 
Other
    50.9       2.0       50.8       2.1       47.5       2.1  
     
     
     
     
     
     
 
   
Total collection
    1,881.1       74.7       1,779.8       75.2       1,722.8       76.3  
     
             
             
         
Transfer and disposal
    967.5               854.1               780.8          
Less: Intercompany
    (493.7 )             (428.5 )             (405.0 )        
     
             
             
         
Transfer and disposal, net
    473.8       18.8       425.6       18.0       375.8       16.7  
Other
    162.9       6.5       159.7       6.8       158.9       7.0  
     
     
     
     
     
     
 
   
Total revenue
  $ 2,517.8       100.0 %   $ 2,365.1       100.0 %   $ 2,257.5       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 are based on long-term contracts with municipalities. We generally provide industrial and commercial collection operations to individual customers under contracts with terms up to three years. Our revenue from landfill operations 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 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, 2003, 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. 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. In life cycle accounting, certain direct costs are capitalized, and charged to expense based upon the consumption of cubic yards of available airspace. These costs include all costs to acquire and construct a site. Obligations associated with final capping, closure and post-closure are capitalized, and amortized on a units-of-consumption basis as airspace is consumed.

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      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 has a probable likelihood of being permitted.

      Our operations are managed and reviewed through five regions which we designate as our reportable segments. From 2002 to 2003, operating income increased in our Central, Southwestern and Western regions due to an overall increase in revenue resulting from the successful execution of our growth strategy. In the Eastern and Southern regions, increased revenue was offset by negative local economic conditions and an increase in costs associated with the long-haul transport of waste by third-party vendors.

2003 Financial Objectives

      In January 2003, we publicly announced our objectives for the year. These objectives included the following:

  •  Generating free cash flow equal to 90% of net income.
 
  •  Growing revenue by 2.0% to 3.0%, with 1.0% to 1.5% from price increases and 1.0% to 1.5% from volume growth.
 
  •  Generating earnings per share before cumulative effect of changes in accounting principles of $1.46 to $1.48.
 
  •  Using free cash flow to enhance shareholder value by completing strategic acquisitions and repurchasing up to $150.0 million of our stock.

2003 Business Performance

      Despite a weak economy and a significant increase in insurance expense, we were able to exceed our free cash flow, internal growth and share repurchase objectives during 2003.

      The economic slowdown which began in 2001 continued to negatively impact the portion of our business servicing the manufacturing sector and non-residential construction activity during 2003.

      Despite the weakness we experienced in the aspects of our business noted above, our internal growth from core operations for 2003 was 3.9% with 1.8% from price increases and 2.1% from volume growth. During 2003, we continued to benefit from several long-term franchise and municipal contracts that were secured during 2002. In addition, our geographic mix of business, which is concentrated in high growth markets, positively impacted our operating results. As a result, during 2003 we were able to exceed the internal growth objectives we established at the beginning of the year.

      During 2003 our operating margins were negatively impacted by increased costs for self-insurance expense. This increase in self-insurance expense relates to existing claims and is attributable to the expansion of our operations and various changes in estimates as a result of continued negative trends through our current policy year, based on recent actuarial claims experience, expected claims development and medical cost inflation. In addition to the economic slowdown and increased costs for self-insurance, during 2003 our operating margins were also negatively impacted by increased fuel costs, increased depreciation expense primarily associated with capital additions, increased state landfill taxes and increased revenue from municipal contracts and transfer stations which have lower margins than our other lines of business.

      This decrease in operating margins was partially offset by a decrease in costs associated with the termination of our operating lease facility and a decrease in selling, general and administrative expense as a percent of revenue. During 2001, we began a number of initiatives designed to increase efficiencies and reduce costs including the implementation of a number of management information systems such as route optimization, customer relationship tracking and equipment maintenance software. We continued to realize benefits from these initiatives in 2003.

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      Notwithstanding the impact of the economic slowdown and the increase in self-insurance and other expenses, our earnings per share before cumulative effect of changes in accounting principles for the year ended December 31, 2003 was $1.33. However we were able to generate free cash flow of $336.4 million (consisting of cash provided by operating activities of $600.5 million, less purchases of property and equipment of $273.2 million, plus proceeds from the sale of property and equipment of $9.1 million) which substantially exceeded our objective.

      During October 2003, our board of directors increased our previously authorized share repurchase program from $150.0 million to $175.0 million and also authorized an additional $200.0 million share repurchase program. We used our free cash flow during 2003 to repurchase 8.4 million shares of our common stock for $184.2 million. Also during July 2003, our board of directors initiated a quarterly dividend of $.06 per share.

2004 Financial Objectives

      Our financial objectives for 2004 assume no deterioration or improvement in the overall economy from that experienced during the fourth quarter 2003. Specific guidance is as follows:

  •  We expect to generate free cash flow of approximately $340 million.
 
  •  We anticipate 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 to continue to pay quarterly cash dividends.
 
  •  We anticipate earnings per share of $1.50 to $1.55 per share.
 
  •  We expect internal growth from core operations to be 3%, with approximately 2% attributable to price increases and 1% attributable to volume growth.

Business Initiatives

      Our business initiatives for 2004 are generally a continuation of those initiated in the prior two years and are dependent on 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 2004 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. We began to realize the benefit of this initiative during the fourth quarter of 2003 and our anticipated internal revenue growth in 2004 includes the benefit we expect to realize from this initiative during the next year.
 
    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.

  We currently monitor our return on investment by market place and are in the process of instituting a return on investment pricing model. This model will eventually allow us to track our return on investment by customer.
 
  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. Our focus during 2004 will be to continue to ensure our sales force is properly trained on this system and using it as intended.

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    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 2004, we will continue to update our disposal optimization reviews. These reviews determine 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.
 
    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.

  The most significant of these 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. We have signed a multi-year agreement with DuPont Safety Resources to assist in successfully completing this initiative.

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

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company’s financial condition, 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, Environmental and Legal 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, final capping, closure and post-closure expense could change significantly.   Management’s Discussion and Analysis of Financial Condition and Results of Operations — Landfill and Environmental Matters.

Note 3, Accrued Landfill, Environmental and Legal 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 expenses relating to final capping, closure and post- closure.   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, Environmental and Legal 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 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 is 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 10.0% 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 flow 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, then 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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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, 2003, 2002 and 2001. The aggregate purchase prices we paid for these transactions was $51.5 million, $55.8 million and $287.7 million, respectively. The aggregate purchase price paid for businesses acquired during 2001, less cash and restricted cash acquired plus debt assumed, was $247.5 million.

      Cost in excess of fair value of net assets acquired for 2003 acquisitions totaled approximately $21.2 million. As of December 31, 2003 we had intangible assets, net of accumulated amortization, of $1,583.1 million, which consist primarily of the cost in excess of fair value of net assets acquired.

      During 2003, $27.7 million of the total purchase price paid for acquisitions and contingent payments to former owners was allocated to landfill airspace. As of December 31, 2003, we had $690.6 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.

      Cost in excess of fair value of net assets acquired for 2002 acquisitions totaled approximately $40.1 million. As of December 31, 2002 we had intangible assets, net of accumulated amortization, of $1,569.9 million, which consist primarily of the cost in excess of fair value of net assets acquired.

      Cost in excess of fair value of net assets acquired for 2001 acquisitions totaled approximately $223.3 million. As of December 31, 2001, we had intangible assets, net of accumulated amortization, of $1,551.6 million, which consist primarily of the cost in excess of fair value of net assets acquired. In addition, during 2001, $62.6 million of the total purchase price for acquisitions and contingent payments to former owners was allocated to landfill airspace.

Consolidated Results of Operations

 
Years Ended December 31, 2003, 2002 and 2001

      Our income before cumulative effect of changes in accounting principles was $215.4 million for the year ended December 31, 2003, as compared to $239.6 million in 2002 and $125.5 million in 2001. 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 Unaudited Condensed Consolidated Financial Statements for further discussion of these changes in accounting principles. Our operating results for the years ended December 31, 2002 and 2001 include other charges (income) described below.

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      The following table summarizes our costs and expenses in millions of dollars and as a percentage of our revenue for 2001 through 2003:

                                                   
2003 2002 2001



$ % $ % $ %






Revenue
  $ 2,517.8       100.0 %   $ 2,365.1       100.0 %   $ 2,257.5       100.0 %
Cost of operations
    1,605.4       63.8       1,472.9       62.3       1,422.5       63.0  
Depreciation, amortization and depletion of property and equipment
    233.8       9.3       193.5       8.2       168.3       7.4  
Amortization of intangible assets
    5.3       .2       6.1       .2       47.1       2.1  
Accretion
    12.7       .5                          
Selling, general and administrative expenses
    247.9       9.8       238.7       10.1       236.5       10.5  
Other charges (income)
                (5.6 )     (.2 )     99.6       4.4  
     
     
     
     
     
     
 
 
Operating income
  $ 412.7       16.4 %   $ 459.5       19.4 %   $ 283.5       12.6 %
     
     
     
     
     
     
 

      Revenue. Revenue was $2,517.8 million, $2,365.1 million and $2,257.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. Revenue increased by $152.7 million, or 6.5%, from 2002 to 2003. Revenue increased by $107.6 million, or 4.8%, from 2001 to 2002. The following table reflects the components of our revenue growth for the years ended December 31, 2003, 2002 and 2001:

                           
2003 2002 2001



Core price
    1.8 %     1.4 %     1.9 %
Fuel surcharges
    .2              
Recycling commodities
    .1       .4       (1.1)  
     
     
     
 
 
Total price
    2.1       1.8       .8  
     
     
     
 
Core volume
    2.1       1.6       1.5  
Non-core volume
          .4       .8  
     
     
     
 
 
Total volume
    2.1       2.0       2.3  
     
     
     
 
 
Total internal growth
    4.2       3.8       3.1  
Acquisitions
    1.8       .8       4.2  
Taxes(a)
    .5       .2        
     
     
     
 
 
Total revenue growth
    6.5 %     4.8 %     7.3 %
     
     
     
 

(a)  Represents new taxes levied on landfill volumes in certain states that are passed on to customers.

  •  2003: We experienced moderate growth in revenue due to core pricing during the first three quarters of 2003. During the fourth quarter of 2003 our revenue growth from core pricing increased due to our broad-based pricing initiative. We anticipate that we will continue to realize the benefit from this pricing initiative during 2004.

  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. As we entered into fewer new franchise and municipal contracts during 2003 versus 2002, we anticipate that we will experience less revenue growth from core volume in 2004.

  •  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.

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  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.

  •  2001: During the first and second quarters of 2001, our revenue was negatively impacted by weakness in recycling commodity prices. In addition, during the second quarter of 2001, we began to see a slowdown in revenue from the manufacturing sector, particularly in the Midwestern and Mid-Atlantic states.

  During the third quarter of 2001, the economic slowdown began to impact our industrial business servicing the non-residential construction industry. Landfill volumes attributable to manufacturing and construction activity began to weaken. In addition, the slowdown we began to experience in the second quarter in the manufacturing sector became more acute as we experienced significant shift reductions and plant closings in the Southeastern United States, particularly in the textile and home furnishing industries in the Carolinas. These conditions were reflected in our internal growth numbers, which were approximately half of what we experienced in prior quarters.
 
  During the fourth quarter of 2001, we continued to see a weakening in waste volumes from the manufacturing sector. We also continued to see a slowdown in commercial construction and special waste activity which resulted in both volume reductions and price sensitivity for these services. Furthermore, we began to see a softening in residential construction activity.

  •  2004 Outlook: We anticipate internal growth from core operations to be 3% during 2004 assuming no deterioration or improvement in the overall economy from that experienced during the fourth quarter of 2003. However, our price and volume growth may remain flat or may decline in 2004 depending upon economic conditions and our success in implementing our pricing initiative.

      Cost of Operations. Cost of operations was $1,605.4 million, $1,472.9 million and $1,422.5 million, or, as a percentage of revenue, 63.8%, 62.3% and 63.0%, for the years ended December 31, 2003, 2002 and 2001, respectively.

      The increase in aggregate dollars in all periods presented is primarily a result of the expansion of our operations through acquisitions and internal growth.

      The increase in cost of operations as a percentage of revenue from 2002 to 2003 is primarily attributable to self-insurance expense. This increase in self-insurance expense relates to existing claims and is attributable to the expansion of our operations and various changes in estimates as a result of continued negative trends through our current policy year, based on recent actuarial claims experience, expected claims development and medical cost inflation. The increase in cost of operations as a percentage of revenue is also due to 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. These increases in costs were partially offset by the elimination of closure and post-closure expense as a component of cost of operations in accordance with SFAS 143 and the termination of our operating lease facility.

      During the fourth quarter of 2001, we recorded a charge of $86.1 million on an after-tax basis, or $132.0 million on a pre-tax basis. Of this pre-tax amount, $24.2 million was recorded to cost of operations which relates primarily to the downsizing of our compost, mulch and soil business and related inventory adjustments and an increase in self-insurance reserves.

      Excluding the impact of this charge, cost of operations for 2001 was $1,398.3 million, or 61.9% as a percent of revenue. The increase in adjusted cost of operations as a percentage of revenue from 2001 to 2002 is primarily the result of the economic slowdown, higher costs for self-insurance, and increased revenue from municipal contracts and transfer stations which have higher operating costs. These increases in cost of operations were partially offset by improved operating efficiencies, higher recycling commodity prices, lower fuel costs and the termination of our operating lease facility.

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      To date in 2004, 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 the severity and duration of the economic slowdown.

      Depreciation, Amortization and Depletion of Property and Equipment. Depreciation, amortization and depletion expenses for property and equipment were $233.8 million, $193.5 million and $168.3 million, or, as a percentage of revenue, 9.3%, 8.2% and 7.4%, for the years ended December 31, 2003, 2002 and 2001, respectively. 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 and the increase in aggregate dollars and as a percentage of revenue from 2001 to 2002 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 $5.3 million, $6.1 million and $47.1 million, or, as a percentage of revenue, .2%, .2% and 2.1%, for the years ended December 31, 2003, 2002 and 2001, respectively. The decrease in aggregate dollars and as a percent of revenue from 2001 to 2002 is due to the adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002 under which most of our intangible assets are no longer subject to amortization.

      Accretion Expense. Accretion expense was $12.7 million or, as a percentage of revenue, .5%, for the year ended December 31, 2003 versus $0 for 2002 and 2001. Accretion expense resulted from the adoption of SFAS 143 as of January 1, 2003.

      Selling, General and Administrative Expenses. Selling, general and administrative expenses were $247.9 million, $238.7 million and $236.5 million, or, as a percentage of revenue, 9.8%, 10.1% and 10.5%, for the years ended December 31, 2003, 2002 and 2001, respectively. The increases in aggregate dollars are primarily a result of the expansion of our operations through acquisitions and internal growth. The decrease as a percentage of revenue from 2002 to 2003 is primarily due to leveraging our existing overhead structure over an expanding revenue base.

      During the fourth quarter of 2001, we recorded a charge of $86.1 million on an after-tax basis, or $132.0 million on a pre-tax basis. Of this pre-tax amount, $8.2 million was recorded to selling, general and administrative expenses. Excluding the impact of this charge, selling, general and administrative expenses for 2001 were $228.3 million, or 10.1% as a percent of revenue, which is consistent with 2002.

      We believe that selling, general and administrative expenses in the range of 10% of revenue are appropriate for 2004 given our business platform.

      Other Charges. 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 during the fourth quarter of 2001.

      During the fourth quarter of 2001, we recorded a charge of $86.1 million on an after-tax basis, or $132.0 million on a pre-tax basis. Of this pre-tax amount, $99.6 million was recorded to other charges which relates primarily to completed and planned divestitures and closings of certain core and non-core businesses and asset impairments.

      Operating Income. Operating income was $412.7 million, $459.5 million and $283.5 million, or, as a percentage of revenue, 16.4%, 19.4% and 12.6%, for the years ended December 31, 2003, 2002 and 2001, respectively. Excluding the impact of the other charges (income) we recorded in the fourth quarters of 2002 and 2001, our operating income was $453.9 million, or 19.2%, and $415.5 million, or 18.4%, for the years ended December 31, 2002 and 2001, respectively.

      Interest Expense. We incurred interest expense on our revolving credit facility, unsecured notes and tax-exempt bonds. Interest expense was $78.0 million, $77.0 million and $80.1 million for the years ended

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December 31, 2003, 2002 and 2001, respectively. 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. The decrease in interest expense from 2001 to 2002 is due to a general market decrease in interest rates and an increase in tax-exempt financings, which generally bear interest at lower rates than our unsecured notes. The decrease in interest expense is also due to interest rate swap agreements that we entered into during 2001 and 2002.

      Capitalized interest was $3.3 million, $2.5 million and $3.3 million for the years ended December 31, 2003, 2002 and 2001, respectively.

      Interest and Other Income (Expense), Net. Interest and other income, net of other expense, was $12.7 million, $4.0 million and $5.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. The variances during the periods are primarily due to fluctuations in cash and restricted cash balances and net gains on the disposition of assets during 2003 and 2001.

      Income Taxes. Our provision for income taxes was $132.0 million, $146.9 million and $83.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. Our effective income tax rate was 38.0%, 38.0% and 40.0% for the years ended December 31, 2003, 2002 and 2001, respectively. Our effective tax rate for 2001 included certain non-tax-deductible items related to the charge we recorded during the fourth quarter of 2001. Excluding the impact of this charge, our effective tax rate for 2001 was 38.0%.

      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 account principle for our methane gas collection systems. This change in accounting 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.

Landfill and Environmental Matters

      Among our most significant investments and most valuable assets are our landfills. The additional disclosures included in this section provide the users of our financial statements with a clearer understanding of our investment in our landfills and various accounting principles that are unique to landfill operations.

 
Available Airspace

      The following tables reflect landfill airspace activity for landfills owned or operated by us for the years ended December 31, 2001, 2002 and 2003:

                                                                   
Balance as of New Landfills Changes in Changes Balance as of
December 31, Expansions Acquired, Net Permits Airspace Engineering In December 31,
2000 Undertaken of Divestitures Granted Consumed Estimates Design 2001








Permitted airspace:
                                                               
 
Cubic yards (in millions)
    1,355.1             7.5       .7       (32.5 )     (1.8 )           1,329.0  
 
Number of sites
    53               1                                     54  
Expansion airspace:
                                                               
 
Cubic yards (in millions)
    299.4       34.7       (26.5 )                 .9       51.1       359.6  
 
Number of sites
    17       4       (1 )                                   20  
     
     
     
     
     
     
     
     
 
Total available airspace:
                                                               
 
Cubic yards (in millions)
    1,654.5       34.7       (19.0 )     .7       (32.5 )     (.9 )     51.1       1,688.6  
     
     
     
     
     
     
     
     
 
Number of sites
    53               1                                     54  
     
             
     
                             
 

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Balance as of New Landfills Changes in Changes Balance as of
December 31, Expansions Acquired, Net Permits Airspace Engineering In December 31,
2001 Undertaken of Divestitures Granted 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 Changes in Changes Balance as of
December 31, Expansions Acquired, Net Permits Airspace Engineering In December 31,
2002 Undertaken of Divestitures Granted 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  
     
             
     
                             
 

      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 2001, total available airspace increased by 34.1 million cubic yards primarily due to new expansions undertaken and changes in design partially offset by consumption and divestitures. 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.

      As of December 31, 2003, we owned or operated 58 solid waste landfills with total available disposal capacity estimated to be 1.8 billion in-place cubic yards. Total available disposal capacity represents the sum 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, 2003, total available disposal capacity is estimated to be 1.5 billion in-place cubic yards of permitted airspace plus .3 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, Environmental and Legal Costs of the Notes to our Consolidated Financial Statements for further information.

      As of December 31, 2003, fifteen of our landfills meet the criteria for including probable expansion airspace in their total available disposal capacity. At projected annual volumes, these fifteen 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.

      As of December 31, 2003, four of our landfills that meet the criteria for including expansion airspace had obtained approval from local authorities and are proceeding into the state permitting process. Also, as of December 31, 2003, six of our fifteen landfills that meet the criteria for including expansion airspace had submitted permit applications to state authorities. The remaining five landfills that meet the criteria for

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including expansion airspace are in the process of obtaining approval from local authorities and have not identified any fatal flaws or impediments associated with the expansions at either the local or state level.
 
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, Environmental and Legal Costs, of the Notes to our Unaudited Condensed Consolidated Financial Statements for further information.

      As of December 31, 2003, accrued final capping, closure and post-closure costs were $204.7 million. The current portion of these costs of $29.5 million is reflected in our Consolidated Balance Sheets in other current liabilities. The long-term portion of these costs of $175.2 million is reflected in our Consolidated Balance Sheets in accrued landfill, environmental and legal costs.

 
Investment in Landfills

      The following tables reflect changes in our investment in landfills for the years ended December 31, 2001, 2002 and 2003 and the future expected investment as of December 31, 2003 (in millions):

                                                                 
Landfills
Balance as of Acquired, Transfers Impaired Additions Balance as of
December 31, Capital Net of and Asset Charged to December 31,
2000 Additions Retirements Divestitures Adjustments Write-Down Expense 2001








Non-depletable landfill land
  $ 47.2     $ 5.1     $ (.9 )   $ 2.3     $ (2.2 )   $ (1.0 )   $     $ 50.5  
Landfill development costs
    865.5       5.0             30.7       86.8       (29.2 )           958.8  
Construction in progress — landfill
    46.6       58.4             (.4 )     (87.0 )                 17.6  
Accumulated depletion and amortization
    (179.5 )                 3.9       .3       (.2 )     (61.5 )     (237.0 )
     
     
     
     
     
     
     
     
 
Net investment in landfill land and development costs
  $ 779.8     $ 68.5     $ (.9 )   $ 36.5     $ (2.1 )   $ (30.4 )   $ (61.5 )   $ 789.9  
     
     
     
     
     
     
     
     
 
                                                 
Landfills
Balance as of Acquired, Transfers Additions Balance as of
December 31, Capital Net of and Charged to December 31,
2001 Additions Divestitures 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 Landfills Additions
Balance as of Changes in Acquired, Transfers for Asset Additions Balance as of
December 31, Accounting Capital Net of and Retirement Charged to December 31,
2002 Principles Additions Divestitures 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  
     
     
     
     
     
     
     
     
 

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Balance as of Expected Total
December 31, Future Expected
2003 Investment Investment



Non-depletable landfill land
  $ 49.5     $     $ 49.5  
Landfill development costs
    1,335.2       1,542.2       2,877.4  
Construction in progress — landfill
    60.8             60.8  
Accumulated depletion and amortization
    (644.6 )           (644.6 )
     
     
     
 
Net investment in landfill land and development costs
  $ 800.9     $ 1,542.2     $ 2,343.1  
     
     
     
 

      The following table reflects our net investment in our landfills, excluding non-depletable land, and our depletion and amortization expense for the years ended December 31, 2003, 2002 and 2001. 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, 2001:

                                         
Pro Forma Pro Forma
2003 2002 2001 2002 2001





Number of landfills owned or operated
    58       56       54       56       54  
Net investment, excluding non-depletable land (in millions)
  $ 751.4     $ 754.5     $ 739.4     $ 694.7     $ 679.6  
Total estimated available disposal capacity (in millions of cubic yards)
    1,767.3       1,711.2       1,688.6       1,711.2       1,688.6  
     
     
     
     
     
 
Net investment per cubic yard
  $ .43     $ .44     $ .44     $ .41     $ .40  
     
     
     
     
     
 
Landfill depletion and amortization expense (in millions)
  $ 92.8     $ 67.4     $ 61.5     $ 86.9     $ 81.2  
Accretion expense (in millions)
    12.7                   10.5       9.0  
Closure and post-closure expense (in millions)
          26.1       22.9              
     
     
     
     
     
 
      105.5       93.5       84.4       97.4       90.2  
Airspace consumed (in millions of cubic yards)
    39.3       34.6       32.5       34.6       32.5  
     
     
     
     
     
 
Depletion, amortization, accretion, closure and post-closure expense per cubic yard of airspace consumed
  $ 2.68     $ 2.70     $ 2.60     $ 2.82     $ 2.78  
     
     
     
     
     
 

      During 2003, our weighted average compaction rate for converting cubic yards to tons was approximately 1,500 pounds per cubic yard.

      As of December 31, 2003, we expect to spend an estimated additional $1,542.2 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 $1.30 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 material amounts were charged to expense during the years ended December 31, 2003, 2002 and 2001.

Financial Condition

      One of our key financial objectives is to maintain a simple, cost-effective and transparent capital structure.

      At December 31, 2003, we had $215.0 million of restricted cash deposits and $182.4 million of restricted marketable securities held as financial guarantees, including $104.6 million of restricted cash held for capital expenditures under certain debt facilities, and $40.5 million and $182.4 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

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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. We intend to liquidate a portion of these marketable securities and use the proceeds to repay the $225.0 million of public notes, which mature in May 2004. We also intend to use letters of credit to replace the financial guarantees secured by marketable securities to be liquidated.

      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 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 expires in July 2004. Borrowings under the credit facility bear interest at LIBOR-based rates. We use our operating cash flow and proceeds from our credit facilities to finance our working capital, capital expenditures, acquisitions, share repurchases, dividends and other requirements. As of December 31, 2003, we had $326.3 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 bear interest at 6 5/8% per annum and mature in May 2004. The remaining $375.0 million bear interest at 7 1/8% per annum and mature in 2009. Interest on these 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. Proceeds from the notes were used to repay our revolving credit facility.

      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 6 3/4% 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 $105.0 million, respectively, and require our company to pay interest at floating rates based upon changes in LIBOR and receive interest at fixed rates of 6 5/8% and 6 3/4%, respectively. The swap agreements terminate in May 2004 and August 2011, respectively.

      At December 31, 2003, we had $463.2 million of tax-exempt bonds and other tax-exempt financings outstanding of which approximately $86.0 million were obtained during fiscal 2003. Borrowings under these bonds and other financings bear interest based on fixed or floating interest rates at the prevailing market ranging from 1.15% to 5.63% at December 31, 2003 and have maturities ranging from 2004 to 2033. As of December 31, 2003, we had $104.6 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.

      We intend to repay the $225.0 million of public notes that mature in May 2004 using proceeds from the liquidation of our restricted marketable securities, our excess cash, proceeds from our revolving credit facility, or a combination thereof. In addition, we plan to extend the maturity of our revolving short-term credit facility prior to its expiration in July 2004 to July 2005. 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

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that we would be able 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, 2001, 2002 and 2003 (in millions):

                         
Closure,
Post-Closure
Allowance for and
Doubtful Accounts Remediation Self-Insurance



Balance, December 31, 2000
  $ 13.2     $ 167.6     $ 41.1  
Additions charged to expense
    22.8       22.9       130.2  
Additions due to acquisitions, net of divestitures
    1.5       69.3        
Payments or usage
    (18.5 )     (20.3 )     (113.7 )
     
     
     
 
Balance, December 31, 2001
    19.0       239.5       57.6  
Current portion
    19.0       21.1       38.4  
     
     
     
 
Long-term portion
  $     $ 218.4     $ 19.2  
     
     
     
 
                         
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,
Closure
Allowance for 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 )            
Asset additions
          17.9              
Accretion
          12.7              
Other additions charged to expense
    10.4                   189.5  
Additions due to acquisitions, net of divestitures
                       
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  
     
     
     
     
 

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      Our expense related to doubtful accounts as a percentage of revenue for 2001, 2002 and 2003 was 1.0%, .5% and .4%, respectively.

      As of December 31, 2003, accounts receivable were $248.9 million, net of allowance for doubtful accounts of $19.0 million, resulting in days sales outstanding of 35 days, or 23 days net of deferred revenue. In addition, at December 31, 2003, our trade receivables in excess of 90 days old totaled $14.5 million, or 5.4% of gross receivables outstanding.

      Our expense for self-insurance as a percentage of revenue for 2001, 2002 and 2003 was 5.8%, 5.8% and 7.5%, respectively. The increase in self-insurance expense from 2002 to 2003 relates to existing claims and is attributable to the expansion of our operations and various changes in estimates as a result of continued negative trends through our current 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, 2001, 2002 and 2003 (in millions):

                                                           
Gross Property and Equipment

Balance as of Acquisitions, Impaired Balance as of
December 31, Capital Net of Transfers and Asset December 31,
2000 Additions Retirements Divestitures Adjustments Write-Down 2001







Other land
  $ 91.5     $ 1.3     $ (1.6 )   $ 5.4     $     $ (2.3 )   $ 94.3  
Non-depletable landfill land
    47.2       5.1       (.9 )     2.3       (2.2 )     (1.0 )     50.5  
Landfill development costs
    865.5       5.0             30.7       86.8       (29.2 )     958.8  
Vehicles and equipment
    1,018.9       113.4       (31.0 )     17.8       37.0       (2.9 )     1,153.2  
Buildings and improvements
    227.1       9.1       (2.2 )     7.6       15.3       (.5 )     256.4  
Construction in progress — landfill
    46.6       58.4             (.4 )     (87.0 )           17.6  
Construction in progress — other
    18.0       57.0                   (51.5 )           23.5  
     
     
     
     
     
     
     
 
 
Total
  $ 2,314.8     $ 249.3     $ (35.7 )   $ 63.4     $ (1.6 )   $ (35.9 )   $ 2,554.3  
     
     
     
     
     
     
     
 
                                                           
Accumulated Depreciation, Amortization and Depletion

Balance as of Additions Impaired Balance as of
December 31, Charged to Transfers and Asset December 31,
2000 Expense Retirements Divestitures Adjustments Write-Down 2001







Landfill development costs
  $ (179.5 )   $ (61.5 )   $     $ 3.9     $ .3     $ (.2 )   $ (237.0 )
Vehicles and equipment
    (428.9 )     (98.2 )     26.6       3.0       1.2       .6       (495.7 )
Buildings and improvements
    (38.6 )     (8.6 )     .6                   (.1 )     (46.7 )
     
     
     
     
     
     
     
 
 
Total
  $ (647.0 )   $ (168.3 )   $ 27.2     $ 6.9     $ 1.5     $ .3     $ (779.4 )
     
     
     
     
     
     
     
 

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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 Balance as of
December 31, Charged to 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 )
     
     
     
     
     
     
 
                                                                   
Gross Property and Equipment

Cumulative Non-Cash
Effect Additions to
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 Transfers Balance as of
December 31, Accounting Charged to 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 )
     
     
     
     
     
     
     
 

      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, 2003, 2002 and 2001 are discussed below.

      Cash Flows From Operating Activities. Cash flows provided by operating activities were $600.5 million, $569.7 million and $459.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. The changes in cash provided by operating activities during the periods are due to the expansion of our business,

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deferred taxes and timing of receipts and payments from accounts receivable and accounts payable, respectively.

      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, our deferred income tax provision increased by approximately $82.0 million during 2003 and we recorded a tax receivable of approximately $48.0 million.

      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 flows used in investing activities consist primarily of cash used for capital additions and business acquisitions. Cash used to acquire businesses, net of cash acquired, was $51.5 million, $55.8 million and $261.2 million during the years ended December 31, 2003, 2002 and 2001, respectively. Capital additions were $273.2 million, $258.6 million and $249.3 million during the years ended December 31, 2003, 2002 and 2001, respectively.

      The increase in restricted marketable securities during 2003 consists of amounts transferred from unrestricted cash for financial guarantees. We intend to liquidate a portion of these marketable securities and use the proceeds to repay the $225.0 million of public notes, which mature in May 2004. We also intend to use letters of credit to replace financial guarantees secured by marketable securities to be 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 From (Used In) Financing Activities. Cash flows provided by (used in) financing activities during the years ended December 31, 2003, 2002 and 2001 included commercial bank borrowings and repayments of debt in all three years, proceeds from our sale of unsecured notes in 2001, and proceeds from issuances of tax-exempt bonds in 2003, 2002 and 2001. In August 2001, we sold unsecured notes with a face value of $450.0 million at a discounted price of $447.4 million. Proceeds from the notes were used to repay our revolving credit facility.

      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.

      During 2000 through 2003, our board of directors authorized the repurchase of up to $675.0 million of our common stock. As of December 31, 2003, we paid $484.3 million to repurchase approximately 25.6 million shares of our stock, of which we paid $184.2 million during 2003 to repurchase approximately 8.4 million shares of our stock.

      In July 2003, our board of directors initiated a quarterly cash dividend of $.06 per share. In October 2003, we paid a dividend of $9.6 million to shareholders of record as of September 30, 2003. As of December 31, 2003, we recorded a dividend payable of approximately $9.4 million to shareholders of record at the close of business on January 2, 2004 which has been paid. In January 2004, our board of directors declared a regular quarterly dividend of $.06 per share for shareholders of record on April 1, 2004.

      We used proceeds from our revolving credit facility, unsecured notes 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, 2003, our senior debt was rated, BBB+ by Standard & Poor’s, BBB+ by Fitch and Baa2 by Moody’s.

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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 through December 2002. The option agreements were structured as zero-cost collars indexed to the price of heating oil. These options expired in December 2002. In accordance with SFAS 133, $1.6 million and $(1.6) million, net of tax, representing the effective portion of the change in fair value during the periods have been recorded in stockholders’ equity as a component of accumulated other comprehensive income (loss) for the years ended December 31, 2002 and 2001, respectively. The ineffective portions of the changes in fair value of approximately $.1 million and $(.1) million for the years ended December 31, 2002 and 2001, respectively, have been included in other income (expense), net in the accompanying Consolidated Statements of Income. Realized losses of $.8 million and $.6 million for the years ended December 31, 2002 and 2001, respectively, 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, 2003:

                                                                   
Maturities of Notes Final Capping, Amounts Due Unconditional
Operating Capital Payable and Closure and to Former Purchase
Year Ending December 31, Leases Leases Long-Term Debt Post-Closure Remediation Owners Commitments Total









2004
  $ 4.3     $     $ 227.8     $ 29.5     $ 4.4     $ 6.1     $ 29.9     $ 302.0  
2005
    3.4             2.7       30.0       1.0             12.4       49.5  
2006
    3.0             2.5       19.8       1.0             11.6       37.9  
2007
    2.7             2.0       20.5       1.0             3.6       29.8  
2008
    1.7             1.3       24.9       1.0             2.7       31.6  
Thereafter
    7.2       25.0       1,257.5       783.9       46.3             17.0       2,136.9  
     
     
     
     
     
     
     
     
 
 
Total
  $ 22.3     $ 25.0     $ 1,493.8     $ 908.6     $ 54.7     $ 6.1     $ 77.2     $ 2,587.7  
     
     
     
     
     
     
     
     
 

      Unconditional purchase commitments consist primarily of long-term disposal agreements that require us to dispose of a minimal 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

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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,
2004 2005 2006 2007 2008 Thereafter Total 2003








VARIABLE RATE DEBT:
                                                               
Amount outstanding (in millions)
  $ .6     $ .6     $ .3     $     $     $ 343.9     $ 345.4     $ 345.4  
Average interest rates
    1.6 %     1.6 %     1.6 %                 2.01 %     2.01 %        
INTEREST RATE SWAPS:
                                                               
Amount outstanding (in millions)
  $ 225.0     $     $     $     $     $ 105.0     $ 330.0     $ (3.3 )
Average interest rates
    2.4 %                             2.4 %     2.4 %        

      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, 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, 2003, 2002 and 2001 is calculated as follows (in millions):

                         
2003 2002 2001



Cash provided by operating activities
  $ 600.5     $ 569.7     $ 459.2  
Purchases of property and equipment
    (273.2 )     (258.6 )     (249.3 )
Proceeds from the sale of property and equipment
    9.1       14.6       8.7  
     
     
     
 
Free cash flow
  $ 336.4     $ 325.7     $ 218.6  
     
     
     
 

      We believe that the presentation of free cash flow, which is a non-GAAP financial measure, provides useful information regarding our recurring cash provided by operating activities after expenditures for property and equipment, net of proceeds from the sale of 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 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 delay the collection and disposal of waste, reduce the volume of waste generated or delay the construction or expansion of our landfill sites and other facilities.

New Accounting Pronouncements

      In January 2003, the Financial Accounting Standards Board issued Interpretation 46, “Consolidation of Variable Interest Entities.” FIN 46 introduces a new consolidation model which determines control and consolidation based upon the majority beneficiary of the potential variability in gains and losses of the entity being evaluated. In December 2003, the FASB revised the initial application and certain terms and exemptions in FIN 46. FIN 46 is currently effective for all variable interest entities created or modified after

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January 31, 2003 and special purpose entities created on or before January 31, 2003. The interpretation is effective for all other variable interest entities beginning March 31, 2004.

      We have evaluated our organizational structure and have concluded that the portion of FIN 46 that is currently effective has no impact on our consolidated financial position, results of operations or cash flows. In addition, we do not expect the portion of FIN 46 that is effective on March 31, 2004 to have a material effect on our consolidated financial position, results of operations or cash flows.

      There are no other new accounting pronouncements that pertain to our company.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

         
Page
Report of Independent Certified Public Accountants
    49  
Report of Independent Certified Public Accountants
    52  
Consolidated Balance Sheets as of December 31, 2003 and 2002
    53  
Consolidated Statements of Income for each of the Three Years Ended December 31, 2003
    54  
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the Three Years Ended December 31, 2003
    55  
Consolidated Statements of Cash Flows for each of the Three Years Ended December 31, 2003
    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, 2003
    92  

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Republic Services, Inc.:

      We have audited the accompanying consolidated balance sheets of Republic Services, Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years then ended. Our audits also included the financial statement schedule for the years ended December 31, 2003 and 2002 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. The consolidated financial statements and schedule of the Company for the year ended December 31, 2001 listed in Item 15(a) of this Form 10-K were audited by other auditors who have ceased operations and whose report dated January 30, 2002 expressed an unqualified opinion on those statements and schedule before the restatement adjustments and disclosures described below and in Notes 1, 2 and 10.

      We conducted our audits in accordance with auditing standards generally accepted in the 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 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Republic Services, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule for the years ended December 31, 2003 and 2002, 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 of the consolidated financial statements, effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”) and changed its method of accounting for methane gas collection systems. As discussed in Note 2 of the consolidated financial statements, effective January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).

      As discussed above, the consolidated financial statements of the Company for the year ended December 31, 2001, were audited by other auditors who have ceased operations. The Company has made certain adjustments to and provided additional disclosures in the 2001 financial statements to conform with the current year’s presentation or to comply with adoption requirements of new accounting pronouncements, as follows:

        (i) As discussed in Note 1, the 2001 consolidated financial statements have been revised to include the pro forma disclosures required by the Company’s adoption of SFAS 143 and its change in method of accounting for methane gas collection systems. Our procedures with respect to the disclosures in Note 1 regarding 2001 included (a) agreeing the previously reported net income (in total and the related earnings per share amount) to the previously issued consolidated financial statements and agreeing the adjustments, which arose from the Company’s prior accounting policies, to the Company’s underlying records obtained from management, (b) agreeing the pro forma effect of applying SFAS 143 and changing the Company’s method of accounting for methane gas systems to analyses prepared by management and (c) testing the mathematical accuracy of the reconciliation of adjusted net income to previously reported net income and the related earnings per share amounts.
 
        (ii) As described in Note 2, the 2001 consolidated financial statements have been revised to include the transitional and other disclosures required by SFAS 142, which the Company adopted as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 2 with respect to 2001

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  included (a) agreeing the previously reported net income (in total and the related earnings per share amounts) to the previously issued consolidated financial statements and the adjustments to net income representing amortization expense (including any related tax effects) recognized in those periods related to goodwill as a result of initially applying SFAS 142 to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net income to previously reported net income and the related earnings per share amounts. Additionally, our procedures with respect to the disclosures in Note 2 regarding 2001 included (a) agreeing the cost basis and accumulated amortization of goodwill and other intangibles to the Company’s underlying records obtained from management, and (b) agreeing the total of goodwill and other intangible assets, net of accumulated amortization, to the 2001 consolidated balance sheet.
 
        (iii) As described in Note 2, the 2001 consolidated financial statements have been revised to include the disclosures required by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which were adopted by the Company as of December 31, 2002. Our audit procedures with respect to the disclosures in Note 2 regarding 2001 included (a) agreeing the previously reported net income (in total and the related earnings per share amounts) to the previously issued consolidated financial statements, (b) agreeing the adjustments to reported net income representing pro forma compensation expense, net of any tax effect, related to those periods to the Company’s underlying records obtained from management, and (c) testing the mathematical accuracy of the reconciliation of pro forma net income to reported net income and related earnings per share amounts.
 
        (iv) In the table presented under “Stock Options” in Note 2, the Company changed the calculation of the pro forma weighted-average fair value of stock options granted in 2002. The amounts in the 2001 consolidated financial statements have been restated to conform to the 2003 and 2002 calculation of the pro forma weighted-average fair value of stock options granted. We audited the adjustments that were applied to restate the disclosures for the weighted-average fair value of stock options granted reflected in the 2001 consolidated financial statements. Our procedures included (a) agreeing the adjusted weighted-average fair value of stock options granted during the period to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the calculations of the weighted average fair value of stock options granted during the period.
 
        (v) As described in Note 10, the Company changed the composition of its reportable segments in 2002, and the amounts in the 2001 consolidated financial statements relating to reportable segments have been restated to conform to the 2003 and 2002 composition of reportable segments. In addition, the Company provided additional disclosure, not provided in prior years, of consolidated revenue by source. We audited the 2001 disclosures for reportable segments included in Note 10 to conform to the 2003 and 2002 composition of reportable segments and the 2001 disclosure of revenue by source. Our procedures with regard to the disclosure of the 2001 reportable segments included (a) agreeing the amounts of segment gross operating revenue, intercompany operating revenue, net operating revenue, depreciation, amortization and depletion, other charges (income), operating income, capital expenditures and total assets to the Company’s underlying records obtained from management, (b) testing the mathematical accuracy of the reconciliations of segment amounts to the 2001 consolidated financial statements, (c) agreeing the amount of charges included in 2001 operating income from Corporate Entities to the Company’s underlying records obtained from management, and (d) agreeing the 2001 balance of goodwill, net of accumulated amortization, for each reportable segment to the Company’s underlying records obtained from management. With regard to the disclosure of 2001 revenue by source, our procedures included (a) agreeing the amounts of 2001 revenue by source to the Company’s underlying records provided by management, (b) testing the mathematical accuracy of the 2001 revenue by source table, and (c) agreeing the total revenue for 2001 to the amount reported in the 2001 statement of income.

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        (vi) The Company changed its presentation of basic and diluted earnings per share in the accompanying 2001 consolidated statements of income to conform to the 2003 and 2002 presentation by separately disclosing the basic and diluted weighted average common shares outstanding and related basic and diluted earnings per share amounts. Our procedures with respect to the 2001 weighted average common shares outstanding and related basic and diluted earnings per share amounts included (a) agreeing the basic and diluted weighted average common shares outstanding to analyses prepared by management and (b) testing the mathematical accuracy of the computation of basic and diluted earnings per share from the corresponding reported net income and weighted average common shares outstanding amounts.

      In our opinion, the adjustments and disclosures described in (i), (ii), (iii), (iv), (v) and (vi) above are appropriate and have been properly applied. However, we were not engaged to audit, review or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such adjustments and disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.

  /s/ ERNST & YOUNG LLP

Fort Lauderdale, Florida

February 3, 2004

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To Republic Services, Inc.:

      We have audited the accompanying consolidated balance sheets of Republic Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and other comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2001. These financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the 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 financial position of Republic Services, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

      Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Fort Lauderdale, Florida,

     January 30, 2002.

THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH REPUBLIC SERVICES, INC.’S FILING ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM 10-K AND ARTHUR ANDERSEN LLP HAS NOT CONSENTED TO THE INCLUSION OF THIS AUDIT REPORT IN THIS FORM 10-K.

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REPUBLIC SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)
                     
December 31,

2003 2002


ASSETS
CURRENT ASSETS:
               
 
Cash and cash equivalents
  $ 119.2     $ 141.5  
 
Accounts receivable, less allowance for doubtful accounts of $19.0 at December 31, 2003 and 2002
    248.9       238.6  
 
Prepaid expenses and other current assets
    182.1       63.0  
 
Deferred tax assets
    5.8       9.2  
     
     
 
   
Total Current Assets
    556.0       452.3  
 
RESTRICTED CASH
    215.0       175.0  
 
RESTRICTED MARKETABLE SECURITIES
    182.4        
 
PROPERTY AND EQUIPMENT, NET
    1,931.0       1,910.0  
 
GOODWILL, NET
    1,558.1       1,544.2  
 
INTANGIBLE ASSETS, NET
    25.0       25.7  
 
OTHER ASSETS
    86.6       101.9  
     
     
 
    $ 4,554.1     $ 4,209.1  
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
               
 
Accounts payable
  $ 129.1     $ 123.5  
 
Accrued liabilities
    118.6       109.3  
 
Deferred revenue
    88.5       82.9  
 
Notes payable and current maturities of long-term debt
    231.1       2.8  
 
Other current liabilities
    104.7       73.7  
     
     
 
   
Total Current Liabilities
    672.0       392.2  
LONG-TERM DEBT, NET OF CURRENT MATURITIES
    1,289.2       1,439.3  
ACCRUED LANDFILL, ENVIRONMENTAL AND LEGAL COSTS
    225.5       234.7  
DEFERRED INCOME TAXES
    353.5       195.0  
OTHER LIABILITIES
    109.4       66.8  
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; 183,431,611 and 180,825,749 issued, including shares held in treasury, respectively
    1.8       1.8  
 
Additional paid-in capital
    1,347.8       1,298.7  
 
Retained earnings
    1,039.3       880.7  
 
Treasury stock, at cost (25,604,100 and 17,167,600 shares, respectively)
    (484.3 )     (300.1 )
 
Accumulated other comprehensive loss, net of tax
    (.1 )      
     
     
 
   
Total Stockholders’ Equity
    1,904.5       1,881.1  
     
     
 
    $ 4,554.1     $ 4,209.1  
     
     
 

The accompanying notes are an integral part of these statements.

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REPUBLIC SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in millions, except earnings per share data)
                           
Years Ended December 31,

2003 2002 2001



REVENUE
  $ 2,517.8     $ 2,365.1     $ 2,257.5  
EXPENSES:
                       
 
Cost of operations
    1,605.4       1,472.9       1,422.5  
 
Depreciation, amortization and depletion
    239.1       199.6       215.4  
 
Accretion
    12.7              
 
Selling, general and administrative
    247.9       238.7       236.5  
 
Other charges (income)
          (5.6 )     99.6  
     
     
     
 
OPERATING INCOME
    412.7       459.5       283.5  
INTEREST EXPENSE
    (78.0 )     (77.0 )     (80.1 )
INTEREST INCOME
    9.5       4.3       4.4  
OTHER INCOME (EXPENSE), NET
    3.2       (.3 )     1.5  
     
     
     
 
INCOME BEFORE INCOME TAXES
    347.4       386.5       209.3  
PROVISION FOR INCOME TAXES
    132.0       146.9       83.8  
     
     
     
 
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
    215.4       239.6       125.5  
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX
    (37.8 )            
     
     
     
 
NET INCOME
  $ 177.6     $ 239.6     $ 125.5  
     
     
     
 
BASIC EARNINGS PER SHARE:
                       
 
Before cumulative effect of changes in accounting principles
  $ 1.34     $ 1.45     $ .74  
 
Cumulative effect of changes in accounting principles, net of tax
    (.23 )            
     
     
     
 
 
Basic earnings per share
  $ 1.11     $ 1.45     $ .74  
     
     
     
 
 
Weighted average common shares outstanding
    160.3       165.4       170.1  
     
     
     
 
DILUTED EARNINGS PER SHARE:
                       
 
Before cumulative effect of changes in accounting principles
  $ 1.33     $ 1.44     $ .73  
 
Cumulative effect of changes in accounting principles, net of tax
    (0.23 )            
     
     
     
 
 
Diluted earnings per share
  $ 1.10     $ 1.44     $ .73  
     
     
     
 
 
Weighted average common and common equivalent shares outstanding
    162.1       166.7       171.1  
     
     
     
 
CASH DIVIDENDS PER COMMON SHARE
  $ .12     $     $  
     
     
     
 
PRO FORMA AMOUNTS ASSUMING THE CHANGES IN ACCOUNTING PRINCIPLES ARE APPLIED RETROACTIVELY:
                       
 
Net income
  $ 215.4     $ 237.2     $ 122.0  
 
Basic earnings per share
  $ 1.34     $ 1.43     $ .72  
 
Diluted earnings per share
  $ 1.33     $ 1.42     $ .71  

The accompanying notes are an integral part of these statements.

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REPUBLIC SERVICES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME
(in millions)
                                                           
Accumulated
Common Stock Other Comprehensive

Additional Comprehensive Income
Shares, Par Paid-In Retained Treasury Income (Loss)
Net Value Capital Earnings Stock (Loss) For the Period







BALANCE AT DECEMBER 31, 2000
    172.0     $ 1.8     $ 1,208.4     $ 515.6     $ (50.9 )   $          
 
Net income
                      125.5                 $ 125.5  
 
Issuances of common stock
    3.2             56.3                          
 
Purchases of common stock for treasury
    (5.6 )                       (99.2 )            
 
Change in value of derivative instruments, net of tax
                                  (1.6 )     (1.6 )
                                                     
 
 
Total comprehensive income
                                      $ 123.9  
     
     
     
     
     
     
     
 
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 )        
     
     
     
     
     
     
         

The accompanying notes are an integral part of these statements.

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REPUBLIC SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)
                               
Years Ended December 31,

2003 2002 2001



CASH PROVIDED BY OPERATING ACTIVITIES:
                       
 
Net income
  $ 177.6     $ 239.6     $ 125.5  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Depreciation and amortization of property and equipment
    141.0       126.1       106.8  
   
Landfill depletion and amortization
    92.8       67.4       61.5  
   
Amortization of intangible and other assets
    5.3       6.1       47.1  
   
Accretion
    12.7              
   
Deferred tax provision (benefit)
    178.9       73.1       (10.7 )
   
Provision for doubtful accounts
    10.4       11.2       17.2  
   
Income tax benefit from stock option exercises
    6.7       4.0       3.3  
   
Other non-cash charges
    (1.8 )     (4.8 )     132.3  
   
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
    (21.8 )     (13.6 )     (3.8 )
     
Prepaid expenses and other assets
    (109.4 )     (5.9 )     (9.2 )
     
Accounts payable and accrued liabilities
    9.0       37.1       (29.8 )
     
Other liabilities
    61.3       29.4       19.0  
     
     
     
 
      600.5       569.7       459.2  
     
     
     
 
CASH USED IN INVESTING ACTIVITIES:
                       
 
Purchases of property and equipment
    (273.2 )     (258.6 )     (249.3 )
 
Proceeds from sale of property and equipment
    9.1       14.6       8.7  
 
Cash used in business acquisitions, net of cash acquired
    (51.5 )     (55.8 )     (261.2 )
 
Cash proceeds from business dispositions
    3.2       18.9       44.3  
 
Amounts due to former owners
    (17.6 )     (2.7 )     (28.1 )
 
Restricted cash
    (40.0 )     (32.7 )     3.8  
 
Restricted marketable securities
    (182.4 )            
     
     
     
 
      (552.4 )     (316.3 )     (481.8 )
     
     
     
 
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
                       
 
Net payments on revolving credit facility
          (30.0 )     (489.0 )
 
Proceeds from issuance of unsecured notes, net of discount
                447.4  
 
Proceeds from notes payable and long-term debt
    86.3       96.9       131.1  
 
Payments of notes payable and long-term debt
    (2.6 )     (2.2 )     (6.6 )
 
Purchase of equipment under operating lease
          (72.6 )      
 
Issuances of common stock
    49.1       29.9       53.0  
 
Purchases of common stock for treasury
    (184.2 )     (150.0 )     (99.2 )
 
Dividends
    (19.0 )            
     
     
     
 
      (70.4 )     (128.0 )     36.7  
     
     
     
 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (22.3 )     125.4       14.1  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    141.5       16.1       2.0  
     
     
     
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 119.2     $ 141.5     $ 16.1  
     
     
     
 

The accompanying notes are an integral part of these statements.

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REPUBLIC SERVICES, INC.

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 years ended December 31, 2002 and 2001 as if SFAS 143 and the Company’s change in accounting principle relating to its methane gas collection systems were effective January 1, 2001:

                                   
Years Ended December 31,

2002 2001


Net Diluted Earnings Net Diluted Earnings
Income Per Share Income Per Share




Reported
  $ 239.6     $ 1.44     $ 125.5     $ .73  
SFAS 143:
                               
 
Reversal of closure and post-closure expense previously reported
    16.2       .10       13.7       .08  
 
Reversal of landfill purchase price amortization previously reported
    .8             .7        
 
Accretion expense
    (6.5 )     (.04 )     (5.4 )     (.03 )
 
Landfill amortization
    (10.9 )     (.07 )     (10.8 )     (.06 )
     
     
     
     
 
Total adjustments for SFAS 143
    (.4 )     (.01 )     (1.8 )     (.01 )
     
     
     
     
 
Methane Gas Collection Systems:
                               
 
Reversal of depreciation previously reported
    .3             .3        
 
Depletion expense
    (2.3 )     (.01 )     (2.0 )     (.01 )
     
     
     
     
 
Total adjustment for methane gas collection systems
    (2.0 )     (.01 )     (1.7 )     (.01 )
     
     
     
     
 
Adjusted
  $ 237.2     $ 1.42     $ 122.0     $ .71  
     
     
     
     
 

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REPUBLIC SERVICES, INC.

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  
     
     
     
 

      Certain amounts in the 2002 and 2001 Consolidated Financial Statements have been reclassified to conform to the 2003 presentation.

 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

      The financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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, 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, income 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 90 days old. Accounts receivable are written off when they are deemed uncollectible.

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REPUBLIC SERVICES, INC.

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,

2003 2002


Inventory
  $ 17.7     $ 16.6  
Prepaid expenses
    20.5       19.3  
Other non-trade receivables
    27.9       14.2  
Income taxes receivable
    87.6       10.4  
Note receivable
    23.0        
Other assets
    5.4       2.5  
     
     
 
    $ 182.1     $ 63.0  
     
     
 

      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. All expenditures for 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, Environmental and Legal 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All tables in millions, except per share data) — (Continued)

average cost of indebtedness. Interest capitalized was $3.3 million, $2.5 million and $3.3 million for the years ended December 31, 2003, 2002 and 2001, respectively.

      A summary of property and equipment is as follows:

                   
December 31,

2003 2002


Other land
  $ 94.4     $ 89.7  
Non-depletable landfill land
    49.5       54.0  
Landfill development costs
    1,335.2       1,026.3  
Vehicles and equipment
    1,490.6       1,356.8  
Buildings and improvements
    267.4       270.9  
Construction-in-progress — landfill
    60.8       32.3  
Construction-in-progress — other
    6.4       9.1  
     
     
 
      3,304.3       2,839.1  
     
     
 
Less: Accumulated depreciation, depletion and amortization —
Landfill development costs
    (644.6 )     (304.1 )
 
Vehicles and equipment
    (666.4 )     (570.1 )
 
Building and improvements
    (62.3 )     (54.9 )
     
     
 
      (1,373.3 )     (929.1 )
     
     
 
Property and equipment, net
  $ 1,931.0     $ 1,910.0  
     
     
 

      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.

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.

      Included in other charges of $99.6 million for the year ended December 31, 2001 in the accompanying Consolidated Financial Statements are write-downs to fixed assets of $35.6 million for completed and planned divestitures and closings of certain core and non-core businesses, and asset impairments.

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 long-term contracts, covenants not to compete and customer relationships 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, 2002 and 2003:

                           
Gross Intangible Assets

Goodwill Other Total



Balance, December 31, 2001
  $ 1,669.6     $ 49.2     $ 1,718.8  
 
Acquisitions
    42.5       .5       43.0  
 
Other additions
          .7       .7  
 
Divestitures
    (30.0 )           (30.0 )
 
Retirements
          (10.4 )     (10.4 )
 
Reversal of 2001 charge
    5.6             5.6  
     
     
     
 
Balance, December 31, 2002
  $ 1,687.7     $ 40.0     $ 1,727.7  
     
     
     
 
                           
Accumulated Amortization

Goodwill Other Total



Balance, December 31, 2001
  $ (147.1 )   $ (20.1 )   $ (167.2 )
 
Amortization expense
          (4.6 )     (4.6 )
 
Divestitures
    3.6             3.6  
 
Retirements
          10.4       10.4  
     
     
     
 
Balance, December 31, 2002
  $ (143.5 )   $ (14.3 )   $ (157.8 )
     
     
     
 

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REPUBLIC SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All tables in millions, except per share data) — (Continued)
                           
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 )