WASTE SERVICES, INC.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the Quarterly Period Ended September 30, 2005


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

For the transition period from to

Commission File Number: 000-25955

Waste Services, Inc.

(Successor registrant of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
(Exact name of registrant as specified in its charter)


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

1122 International Blvd., Suite 601, Burlington, Ontario, Canada L7L 6Z8
(Address of principal executive offices and zip code)

(905) 319-1237
(Registrant’s telephone number, including area code)

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

Yes þ No o

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

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

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at October 25, 2005 was 100,015,916 (assuming exchange of all exchangeable shares not held by Waste Services, Inc.).

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)


	September 30,			December 31,
	2005			2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,512		$	8,507
Accounts receivable (net of allowance for doubtful accounts of $836 and $1,264 as of September 30, 2005 and December 31, 2004, respectively)		54,174			47,856
Prepaid expenses and other current assets		8,219			10,940


Total current assets		64,905			67,303

Property and equipment, net		134,683			130,467
Landfill sites, net		172,459			169,616
Goodwill and other intangible assets, net		334,736			327,756
Other assets		23,561			25,441


Total assets	$	730,344		$	720,583


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	25,066		$	25,949
Accrued expenses and other current liabilities		48,133			42,533
Short-term financing and current portion of long-term debt		1,174			1,166


Total current liabilities		74,373			69,648

Long-term debt		279,333			276,214
Accrued closure, post-closure and other obligations		20,268			10,974
Cumulative mandatorily redeemable Preferred Stock (net of discount of $3,980 and $8,426 as of September 30, 2005 and December 31, 2004, respectively)		79,599			64,971


Total liabilities		453,573			421,807


Commitments and contingencies

Shareholders’ equity:
Common stock $0.01 par value; 500,000,000 shares authorized; 93,523,322 and 90,358,196 shares issued and outstanding as of September 30, 2005 and December 31, 2004, respectively		935			904
Additional paid-in capital		353,898			345,904
Treasury stock at cost; 500,000 shares as of September 30, 2005 and December 31, 2004		(1,235	)		(1,235	)
Options, warrants and deferred stock-based compensation		29,741			28,282
Accumulated other comprehensive income		35,836			29,133
Accumulated deficit		(142,404	)		(104,212	)


Total shareholders’ equity		276,771			298,776


Total liabilities and shareholders’ equity	$	730,344		$	720,583

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

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Revenue	$	101,751		$	94,615		$	286,120		$	217,558

Operating and other expenses:
Cost of operations (exclusive of depreciation, depletion and amortization)		73,507			69,462			208,090			155,752
Selling, general and administrative expense		13,613			18,395			42,985			41,064
Settlement with sellers of Florida Recycling		(4,120	)		(8,635	)		(4,120	)		(8,635	)
Depreciation, depletion and amortization		11,400			9,712			31,548			22,993
Foreign exchange gain and other		844			21			607			(352	)


Income from operations		6,507			5,660			7,010			6,736
Interest expense		7,274			5,681			21,272			24,263
Changes in fair value of warrants		—			(532	)		—			(111	)
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs		5,392			4,535			15,348			12,844


Loss before income taxes		(6,159	)		(4,024	)		(29,610	)		(30,260	)
Income tax provision		3,252			1,695			8,582			5,033


Loss before cumulative effect of change in accounting principle		(9,411	)		(5,719	)		(38,192	)		(35,293	)
Cumulative effect of change in accounting principle, net of provision for income taxes of nil and $132 for the nine months ended September 30, 2005 and 2004, respectively		—			—			—			225


Net loss	$	(9,411	)	$	(5,719	)	$	(38,192	)	$	(35,068	)


Basic and diluted loss per share:
Basic and diluted loss per share before cumulative effect of change in accounting principle	$	(0.10	)	$	(0.06	)	$	(0.39	)	$	(0.41	)
Cumulative effect of change in accounting principle		—			—			—			—

Loss per share — basic and diluted	$	(0.10	)	$	(0.06	)	$	(0.39	)	$	(0.41	)

Weighted average common shares outstanding — basic and diluted		99,413			96,854			98,345			85,484

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

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2005

(In thousands)


														Accumulated
											Options, Warrants			Other
								Treasury			and Deferred			Comprehensive					Total
	Common Stock				Additional			Stock			Stock-Based			Income		Accumulated			Shareholders’
	Shares		Amount		Paid-in Capital			at Cost			Compensation			(Loss)		Deficit			Equity
Balance, December 31, 2004		90,358	$	904	$	345,904		$	(1,235	)	$	28,282		$	29,133	$	(104,212	)	$	298,776

Common shares and warrants issued		2,926		28		7,252			—			630			—		—			7,910
Exercise of options and warrants		161		2		769			—			(250	)		—		—			521
Deferred stock-based compensation		—		—		—			—			1,079			—		—			1,079
Conversion of exchangeable shares		78		1		(1	)		—			—			—		—			—
Other paid-in capital		—		—		(26	)		—			—			—		—			(26	)
Foreign currency translation adjustment		—		—		—			—			—			6,703		—			6,703
Net loss		—		—		—			—			—			—		(38,192	)		(38,192	)


Balance, September 30, 2005		93,523	$	935	$	353,898		$	(1,235	)	$	29,741		$	35,836	$	(142,404	)	$	276,771

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

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Nine Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net loss	$	(38,192	)	$	(35,068	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation, depletion, and amortization		31,548			22,993
Non-cash component of settlement with sellers of Florida Recycling		(4,120	)		(1,235	)
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs		15,348			12,844
Amortization of debt issue costs		1,057			9,930
Deferred income tax provision		8,582			5,033
Non-cash stock-based compensation (benefit)		1,079			(648	)
Cumulative effect of change in accounting principle, net of tax		—			(225	)
Foreign exchange loss (gain)		630			(72	)
Other non-cash items		884			(159	)
Changes in operating assets and liabilities (excluding the effects of acquisitions):
Accounts receivable		(5,322	)		(11,045	)
Prepaid expenses and other current assets		2,473			(8,443	)
Accounts payable		(1,537	)		10,665
Accrued expenses and other current liabilities		4,171			6,122


		16,601			10,692


Cash flows from investing activities:
Cash used in business combinations and significant asset acquisitions, net of cash acquired		(6,595	)		(164,319	)
Capital expenditures		(27,399	)		(33,593	)
Proceeds from asset sales and business divestitures		1,735			9,939
Deposits for business acquisitions and other		(793	)		(1,203	)


		(33,052	)		(189,176	)


Cash flows from financing activities:
Proceeds from issuance of debt		4,000			280,000
Principal repayments of debt and capital lease obligations		(1,263	)		(184,706	)
Sale of common shares and warrants		7,125			53,600
Proceeds from release of restricted cash and release of collateral supporting letters of credit		—			24,101
Proceeds from the exercise of options and warrants		521			1,041
Fees paid for financing transactions		—			(13,472	)

		10,383			160,564


Effect of exchange rate changes on cash and cash equivalents		73			262


Decrease in cash and cash equivalents		(5,995	)		(17,658	)
Cash and cash equivalents, beginning of period		8,507			21,062

Cash and cash equivalents, end of period	$	2,512		$	3,404

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

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization of Business and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Waste Services, Inc. (“Waste Services”), successor to Capital Environmental Resource Inc. now known as Waste Services (CA) Inc. (“Capital”, “Waste Services (CA)” or the “Canadian operations”) and its wholly owned subsidiaries (collectively, “we,” “us” or “our”). We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers. Our operating strategy is disposal-based whereby we enter geographic markets with attractive growth or positive competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. Our operations are domiciled in the United States and Canada. Our Canadian operations are located in two regions, Eastern and Western Canada and our U.S. operations are located in Florida, Texas and Arizona. As part of our business strategy to expand into the U.S., we entered into a migration transaction, which was completed effective July 31, 2004. Under the migration transaction, our corporate structure was reorganized so that Waste Services, a Delaware company, became the ultimate parent company of our corporate group. Prior to the migration transaction, Waste Services was a subsidiary of Capital. After the migration transaction, Capital became Waste Services’ subsidiary. Effective with the completion of the migration transaction, the historical equity balances of Capital were reclassified into the equity of Waste Services.

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany transactions and accounts have been eliminated. All figures are presented in thousands of U.S. dollars, except share and per share data, or except where expressly stated as being in Canadian dollars (“C$”) or in millions. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2004, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2004. Income taxes during these interim periods have been provided for based upon our anticipated annual effective income tax rate. Certain reclassifications have been made to the prior period financial statement amounts to conform to the current presentation. Due to the seasonal nature of our business, operating results for interim periods are not necessarily indicative of the results for full years.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, depletion of landfill development costs, intangible assets, goodwill, liabilities for landfill capping, closure and post-closure obligations, insurance reserves, potential liabilities in connection with outstanding litigation and deferred taxes.

A portion of our operations is domiciled in Canada, for each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar, revenue is favorably

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

affected and conversely expenses are unfavorably affected. Assets and liabilities of Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income. Separately, monetary assets and liabilities denominated in U.S. dollars held by our Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates.

Basic earnings (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period including the effect of currently outstanding exchangeable shares of Waste Services (CA) (not held by Waste Services) that are the functional and economic equivalent of our outstanding common shares. Diluted earnings (loss) per share is calculated based on the weighted average number of common shares outstanding during the period plus the dilutive effect of common stock purchase warrants and stock options using the treasury stock method. Due to the net losses for the three and nine months ended September 30, 2005 and 2004, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive. Potentially dilutive securities not included in the diluted loss per share calculation, due to net losses, are as follows (unaudited) (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Options to purchase common shares		70		67		52		915
Warrants to purchase common shares		2,453		2,636		2,261		5,194


Dilutive securities		2,523		2,703		2,313		6,109

For purposes of computing net income (loss) per common share — basic and diluted, for the three and nine months ended September 30, 2005, the weighted average number of shares of common stock outstanding includes the effect of 6,492,594 and 6,513,857 exchangeable shares of Waste Services (CA), respectively, as if they were shares of our outstanding common stock from July 31, 2004, the date our migration transaction was completed. For the three and nine months ended September 30, 2004, the weighted average number of shares of common stock outstanding includes the effect of 8,935,995 and 9,131,068 exchangeable shares of Waste Services (CA), respectively, as if they were shares of our common stock outstanding from July 31, 2004.

2. New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”), which amends SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123(R) requires compensation expense to be recognized for all share-based payments made to employees based on the fair value of the award at the date of grant, eliminating the intrinsic value alternative allowed by SFAS 123. Generally, the approach to determining fair value under the original pronouncement has not changed. However, there are revisions to the accounting guidelines, such as accounting for forfeitures, that will change our accounting for stock-based awards in the future.

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The original effective date of SFAS 123(R) was the first interim or annual reporting period beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission amended Rule 4-01(a) of Regulation S-X in order to delay the effective date of SFAS 123(R). The amendment requires that public entities apply the provisions of SFAS 123(R) beginning with the first annual reporting period of the registrant’s first fiscal year beginning on or after June 15, 2005. As a result of the amendment, SFAS 123(R) will be effective for us at the beginning of the first quarter of 2006. We expect to adopt the provisions of SFAS 123(R) using the prospective method, which results in the recognition of compensation expense for all awards granted after the effective date, and using the SFAS 123 note disclosure for all previously granted share-based awards that remain unvested at the effective date. We have not yet determined the financial impact that the new standard is expected to have on our financial statements.

3. Property and Equipment

Property and equipment consist of the following:


	September 30,		December 31,
	2005		2004
	(Unaudited)
Land and buildings	$	27,799	$	18,872
Vehicles		101,363		101,215
Containers, compactors, landfill and recycling equipment		69,804		61,550
Furniture, fixtures, other office equipment and leasehold improvements		10,365		8,562


Total property and equipment		209,331		190,199
Less: accumulated depreciation		74,648		59,732


Property and equipment, net	$	134,683	$	130,467

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

Landfill Sites

Landfill sites consist of the following:


	September 30,		December 31,
	2005		2004
	(Unaudited)
Landfill sites	$	201,793	$	188,616
Less: accumulated depletion		29,334		19,000


Landfill sites, net	$	172,459	$	169,616

The changes in landfill sites for the nine months ended September 30, 2005 and 2004 are as follows (unaudited):

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	2005			2004
Balance, beginning of period	$	169,616		$	117,541
Landfill purchase price		3,000			41,982
Landfill site construction		7,833			11,555
Additional asset retirement obligations		1,270			534
Depletion		(9,564	)		(5,166	)
Divestitures		—			(154	)
Capitalized interest		—			178
Purchase price allocation adjustments for prior acquisitions		—			5,905
Effect of foreign exchange rate fluctuations		304			377
Change in accounting principle		—			(2,474	)


Balance, end of period	$	172,459		$	170,278

By the terms of the purchase agreement entered into with the sellers of Cactus Waste Systems, LLC, additional purchase consideration is payable to the sellers based upon the Cactus Landfill achieving certain average tons per day thresholds in any quarter. Pursuant to this provision, we have incurred $3.0 million of additional landfill purchase price, of which $1.5 million was paid in the third quarter of 2005. Up to an additional $15.0 million in purchase consideration may be payable to the sellers.

Accrued Closure, Post-Closure and Other Obligations

Accrued closure, post-closure and other obligations consist of the following:


	September 30,		December 31,
	2005		2004
	(Unaudited)
Accrued closure and post-closure obligations	$	8,413	$	6,390
Deferred income tax liability		11,360		3,984
Other obligations		495		600


	$	20,268	$	10,974

Accrued closure and post-closure obligations include costs associated with obligations for closure and post-closure of our landfills. The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill as well as the duration of the post-closure monitoring period. The changes to accrued closure and post-closure obligations for the nine months ended September 30, 2005 and 2004 are as follows (unaudited):

WASTE SERVICES, INC.

(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	2005		2004
Balance, beginning of period	$	6,390	$	7,737
Acquisitions		—		52
Accretion		540		342
Additional asset retirement obligations		1,270		534
Divestitures		—		(146	)
Purchase price allocation adjustments for prior acquisitions		—		(92	)
Effect of foreign exchange rate fluctuations		213		132
Change in accounting principle		—		(2,831	)


Balance, end of period	$	8,413	$	5,728

5. Goodwill and Other Intangible Assets

Goodwill and other intangible assets consist of the following:


	September 30,			December 31,
	2005			2004
	(Unaudited)
Other intangible assets subject to amortization:
Customer relationships and contracts	$	35,441		$	50,495
Non-competition agreements and other		3,152			4,126


		38,593			54,621

Less: accumulated amortization:
Customer relationships and contracts		(10,747	)		(5,913	)
Non-compete agreements and other		(1,757	)		(1,782	)


Other intangible assets subject to amortization, net		26,089			46,926
Goodwill		308,647			280,830


Goodwill and other intangible assets, net	$	334,736		$	327,756

The changes in goodwill for the nine months ended September 30, 2005 and 2004 are as follows (unaudited):


	2005						2004
	U.S.		Canada		Total		Total
Balance, beginning of period	$	195,575	$	85,255	$	280,830	$	144,544
Acquisitions		9		162		171		143,075
Divestitures		—		—		—		(8,599	)
Effect of foreign exchange rate fluctuations		—		2,898		2,898		2,190
Purchase price allocation adjustments for prior acquisitions		24,748		—		24,748		(6,108	)


Balance, end of period	$	220,332	$	88,315	$	308,647	$	275,102

During the first six months of 2005, we revised our estimate of the fair value of customer relationships, non-compete arrangements and certain vehicles and containers acquired as part of the acquisition of Florida Recycling Services, Inc. (“Florida Recycling”).

WASTE SERVICES, INC.

(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pursuant to the agreement entered into in September, 2004 with the sellers of Florida Recycling by which we adjusted the purchase price paid for the shares of Florida Recycling, in the third quarter of 2005, we received title to the Sanford Recycling and Transfer Station in Sanford, Florida. The facility is valued at the cost incurred to acquire the property and construct the facility to its percentage of completion at such date. The gain recognized on the settlement approximated $4.1 million.

6. Other Assets

Other assets consist of the following:


	September 30,		December 31,
	2005		2004
	(Unaudited)
Debt and redeemable Preferred Stock issue costs, net of accumulated amortization of $4,119 as of September 30, 2005 and $2,271 as of December 31, 2004	$	9,132	$	10,833
Acquisition deposits and deferred acquisition costs		13,707		12,576
Deferred income taxes		—		1,202
Other assets		722		830


	$	23,561	$	25,441

7. Debt

Debt consists of the following:


	September 30,			December 31,
	2005			2004
	(Unaudited)
Senior Secured Credit Facilities:
Revolving credit facility due April 2009, floating interest rate at 8.31% as of September 30, 2005 and 6.71% as of December 31, 2004	$	19,000		$	15,000
Term loan facility due April 2011, floating interest rate at 8.26% as of September 30, 2005 and 6.78% as of December 31, 2004		98,500			99,250
Senior Subordinated Notes due 2014, fixed interest rate at 9.5% as of September 30, 2005 and December 31, 2004		160,000			160,000
Other subordinated promissory notes payable due 2017, fixed interest rate at 6.67% as of September 30, 2005 and December 31, 2004		3,007			3,130


		280,507			277,380
Less: current portion		(1,174	)		(1,166	)


Long-term portion	$	279,333		$	276,214

Senior Secured Credit Facilities

On April 30, 2004, we entered into new Senior Secured Credit Facilities (the “Credit Facilities”) with a syndicate of lenders. The Credit Facilities consist of a five-year revolving credit facility in the amount of $60.0 million, up to $15.0 million of which is available to our Canadian operations, and a seven-year term loan facility in the amount of $100.0 million. The term loan requires quarterly installments of $0.25 million due each March 31, June 30,

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30 and December 31 through March 31, 2010 and quarterly installments of $23.5 million due thereafter through March 31, 2011. The Credit Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined, at our option. The Credit Facilities are collateralized by substantially all of the assets of our U.S. restricted subsidiaries. Our Canadian restricted subsidiaries guarantee and pledge all of their assets only in support of the portion of the revolving credit facility available to them. Additionally, 65% of the common shares of Waste Services’ first tier foreign subsidiaries are pledged to secure obligations under the Credit Facilities.

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

On October 4, 2004, we entered into an amendment to the Credit Facilities with the administrative agent for the lenders. The amendment included changes to certain of the financial and other covenants contained in the Credit Facilities and increased the current interest rates payable on amounts outstanding by 125 basis points to 450 basis points over Eurodollar loans. Until we met certain target leverage ratios, as defined, availability under the amended revolving credit facility was reduced to $50.0 million, up to $12.5 million of which was available to our Canadian operations. In connection with the amendment, we paid a fee of approximately $0.5 million to our lenders. As of September 30, 2005, $11.9 million of capacity was available under the revolving credit facility. Currently, we are in compliance with the financial covenants, as amended, and we expect to continue to be in compliance in future periods. The amendment also required us to receive an equity investment of at least $7.5 million prior to March 28, 2005. On March 28, 2005, we issued 2,640,845 shares of common stock and 264,085 warrants to Mr. Michael G. DeGroote for net proceeds of approximately $6.8 million. The warrants to purchase 264,085 shares of common stock are at an exercise price of $2.84 per share and are exercisable until March 28, 2010.

On October 26, 2005, we entered into an amendment to the Credit Facilities with the administrative agent for the lenders. The amended Credit Facilities, among other items, decreases the current interest rate on our term loan by 125 basis points to 325 basis points over Eurodollar loans. In addition, the amendment restores access under the revolving credit facility to $60.0 million, up to $15.0 million of which is available to our Canadian operations.

Senior Subordinated Notes

On April 30, 2004, we completed a private offering of 9 1/2% Senior Subordinated Notes (“Subordinated Notes”) due 2014 for gross proceeds of $160.0 million. The Senior Subordinated Notes mature on April 15, 2014. Interest on the Senior Subordinated Notes is payable semi annually on October 15 and April 15. The Senior Subordinated Notes are redeemable, in whole or in part, at our option, on or after April 15, 2009, at a redemption price of 104.75% of the principal amount, declining ratably in annual increments to par on or after April 15, 2012, together with accrued interest to the redemption date. In addition, prior to April 15, 2007, we may redeem up to 35.0% of the aggregate principal amount of the Senior Subordinated Notes with the proceeds of certain equity offerings, at a redemption price equal to 109.5% of the principal amount. Upon a change of control, as such term is defined in the Indenture, we are required to offer to repurchase all the Senior Subordinated Notes at 101.0% of the principal amount, together with accrued interest and liquidated damages, if any, and obtain the consent of our senior lenders to such payment or repay our indebtedness of our Credit Facilities.

The Senior Subordinated Notes are unsecured and are subordinate to our existing and future senior secured indebtedness, including our Credit Facilities, structurally subordinated to existing and future indebtedness of our non-guarantor subsidiaries, rank equally with any unsecured senior subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our obligations with respect to the Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any, are fully and unconditionally guaranteed on an

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

unsecured, senior subordinated basis by all of our existing and future domestic restricted subsidiaries. Our Canadian operations are not guarantors under the Subordinated Notes.

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

In April 2004, we also entered into a Registration Rights Agreement with the initial purchaser of the Senior Subordinated Notes in which we agreed to (i) file a registration statement with respect to the Senior Subordinated Notes within 120 days of the closing date of the issuance of the notes (August 28, 2004), pursuant to which we offer to exchange the Senior Subordinated Notes for registered notes with terms identical to the Subordinated Notes; (ii) have such registration statement declared effective within 210 days of the issuance date; and (iii) commence and consummate an exchange offer within 30 days of the registration statement being declared effective.

Prior to the third quarter of 2005, we had not complied with (i), (ii) and (iii) of the requirements of the Registration Rights Agreement described previously, and accordingly, we were required to pay liquidated damages to the holders of the notes. These liquidated damages were expensed as incurred and were payable, in cash, at the same time as interest payments due under the Subordinated Notes. During the third quarter, the registration statement was filed and declared effective, and the exchange offer was commenced and consummated. As of September 28, 2005 we were no longer required to pay liquidated damages.

8. Cumulative Mandatorily Redeemable Preferred Stock

In May 2003, we issued 55,000 shares of cumulative mandatorily redeemable Preferred Stock (the “Preferred Stock”) to Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively “Kelso”), pursuant to the terms of an agreement dated as of May 6, 2003, as amended in February and June 2004 at a price of $1,000 per share. We also issued to Kelso warrants to purchase 7,150,000 shares of common stock for $3.00 per share. The warrants are exercisable at any time until May 6, 2010. The issuance of the Preferred Stock resulted in proceeds of approximately $49.5 million, net of fees of approximately $5.5 million. The shares of Preferred Stock are non-voting.

The Preferred Stock entitles the holders to cash dividends of 17.75% per annum compounding and accruing quarterly in arrears and to a liquidation preference of $1,000 per share, adjusted for any stock dividend, stock split, reclassification, recapitalization, consolidation or similar event affecting the Preferred Stock, plus the amount of any accrued but unpaid dividends on such shares as of any date of determination. The liquidation preference approximated $83.6 million as of September 30, 2005.

As we are not permitted to declare and pay cash dividends pursuant to the terms of our Credit Facilities, the dividend payments will accrue. The Preferred Stock, including all accrued and unpaid dividends, must be redeemed in full by no later than May 6, 2015. Until May 6, 2006, we may redeem all or any part of the Preferred Stock on payment of the sum of $1,000 per share plus accrued and unpaid dividends calculated as if the Preferred Stock were redeemed on May 6, 2006, or approximately $92.7 million. If we do not exercise our option to redeem all of the Preferred Stock by May 6, 2009, Kelso may require us to initiate a sale of our assets on terms acceptable to our board consistent with the exercise of their fiduciary duties. Pursuant to an amendment to the Certificate of Designations dated April 30, 2004, if we determine, after conducting a sale process, that any such sale would not yield sufficient proceeds to repay in full the indebtedness then outstanding under our Credit Facilities and the redemption amount of our Senior Subordinated Notes issued on April 30, 2004, or at least $320.0 million, then we may elect to delay such sale. The sale date may be delayed until the earliest to occur of (i) the final maturity date of

WASTE SERVICES, INC.

(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the Senior Subordinated Notes (April 15, 2014); (ii) the date on which our Credit Facilities and the Senior Subordinated Notes are fully repaid or otherwise satisfied; or (iii) a sale of our assets to a third party. We refer to this date as the delayed sale date. If we do not initiate and complete a sale of our assets within 20 months of initiation of the sale process by the holders of the Preferred Stock, then on notice from the holders of the Preferred Stock, all outstanding Preferred Stock will become due and payable on the first anniversary of the date on which the holders of the Preferred Stock gave notice requiring the initiation of a sale process, for a liquidation amount of 1.20 times the liquidation preference of $1,000 per share. If the sale date has been delayed, then we are not required to pay this increased liquidation amount until the delayed sale date.

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

9. Commitments and Contingencies

Environmental Risks

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

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

Legal Proceedings

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

WASTE SERVICES, INC.

(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In addition, we may become party to various claims and suits for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of a waste management business.

In the third quarter of 2005, we settled the action commenced against us by Waste Management of Canada Corporation (formerly Canadian Waste Services Inc.) in the Court of Queen’s Bench of Alberta in February of 2003 in which Waste Management alleged that we had breached a landfill tipping agreement with them and sought damages of approximately C$1.3 million. By the terms of the settlement, Waste Management’s claim and our counterclaim were dismissed without costs.

Our President and Chief Operating Officer, Charles A. Wilcox, is a defendant in a breach of contract suit filed by Waste Management, Inc. which is more fully described in our annual report for the year ended December 31, 2004 as filed on Form 10-K. Mr. Wilcox is subject to a temporary order restraining him from engaging in certain activities adverse to the interests of Waste Management. In April 2005, Waste Management filed an amended petition and application for injunction naming us as a defendant to the suit, claiming, among other things, tortious interference with contractual relations and seeking compensatory damages from us. We intend to vigorously defend this claim both with respect to liability and damages.

In March 2005, we filed a Complaint against Waste Management, Inc. in the U.S. District Court in the Middle District of Florida (Orlando). The Complaint alleges that Waste Management sought to prevent us from establishing ourselves as an effective competitor to Waste Management in the State of Florida, by tortiously interfering with our business relationships and committing antitrust violations under both federal and Florida law. We are seeking in excess of $25.0 million in damages against Waste Management. If we are successful in our suit under antitrust laws, Waste Management could be liable for treble damages, or in excess of $75.0 million.

No provision has been made in these financial statements for the above matters. We do not currently believe that the possible losses in respect of all or any of these matters would have a material adverse impact on our business, financial condition, results of operations or cash flows.

Surety Bonds, Letters of Credit and Insurance

Municipal solid waste service contracts and permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of September 30, 2005 and December 31, 2004, we had provided customers and various regulatory authorities with such bonds and letters of credit amounting to approximately $73.4 million and $67.7 million, respectively, to collateralize our obligations.

Our U.S.-based automobile, general liability and workers’ compensation insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. As of September 30, 2005 and included in the $73.4 million of bonds and letters of credit previously discussed, we have posted a letter of credit with our U.S. insurer of approximately $8.4 million to secure the liability for losses within the deductible limit.

WASTE SERVICES, INC.

(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Contractual Arrangements

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

From time to time and in the ordinary course of business we may enter into certain acquisitions whereby we will also enter into a royalty agreement. These agreements are usually based upon the amount of waste deposited at our landfill sites or in certain instances our transfer stations. Royalties are expensed as incurred and recognized as a cost of operations.

10. Authorized Capital Stock and Migration Transaction

Total Shares

We are authorized to issue a total of 505,000,000 shares of capital stock consisting of:

	•		500,000,000 shares of common stock, par value 0.01 per share; and

	•		5,000,000 shares of preferred stock, par value 0.01 per share, of which 100,000 shares have been designated as Series A Preferred Stock and one share has been designated as Special Voting Preferred Stock.

Preferred Stock

The Series A Preferred Stock with a par value of $0.01 per share and a liquidation preference of $1,000.00 per share, have the powers, preferences and other special rights and the qualifications, limitations and restrictions that are set forth in the Certificate of Designations of Series A Preferred Stock as amended. 55,000 shares of Series A Preferred Stock are currently outstanding. The Special Voting Preferred Stock have the rights, preference, and limitations set forth in the Certificate of Designation of Special Voting Preferred Stock. One share of Special Voting Preferred Stock is presently outstanding.

Migration Transaction

As part of our business strategy to expand into the United States, we entered into a migration transaction effective July 31, 2004. Under the migration transaction, our corporate structure was reorganized so that Waste Services, a Delaware company, is the ultimate parent company of our corporate group. Prior to the migration transaction, Waste Services was a subsidiary of Capital. After the migration transaction, Capital, now Waste Services (CA), became our subsidiary.

The migration transaction occurred by way of a plan of arrangement under Section 182 of the Business Corporations Act (Ontario) and consisted primarily of: (i) the exchange of 87,657,035 common shares of Capital for 87,657,035 shares of common stock of Waste Services; and (ii) the conversion of the remaining 9,229,676 common shares of Capital held by non-U.S. residents who elected to receive exchangeable shares into 9,229,676 exchangeable shares of Waste Services (CA). The transaction was approved by the Ontario Superior Court of Justice on July 30, 2004 and by our shareholders at a special meeting held on July 27, 2004.

The terms of the exchangeable shares of Waste Services (CA) are the economic and functional equivalent of our common stock. Holders of exchangeable shares: (i) will receive the same dividends as holders of shares of common

WASTE SERVICES, INC.

(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

stock; and (ii) will be entitled to vote on the same matters as holders of shares of our common stock. Such voting is accomplished through the one share of Special Voting Preferred Stock held by Computershare Trust Company of Canada as trustee, which will vote on the instructions of the holders of the exchangeable shares (one vote for each exchangeable share). As such, the exchangeable shares are included as additional paid-in capital.

Upon the occurrence of certain events, such as the liquidation of Waste Services (CA), or after the redemption date, our Canadian holding company, Capital Holdings will have the right to purchase each exchangeable share for a share of our common stock, plus all declared and unpaid dividends on the exchangeable share. Unless certain events occur, such redemption date will not be earlier than December 31, 2016. Holders of exchangeable shares also have the right at any time at their option, to exchange their exchangeable shares for shares of our common stock.

11. Employee and Director Stock Option Plans and Option Grants

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net loss attributable to Common Shareholders as reported	$	(9,411	)	$	(5,719	)	$	(38,192	)	$	(35,068	)
Stock-based employee compensation expense pursuant to SFAS No. 123		(2,381	)		(2,853	)		(7,217	)		(7,561	)

Pro forma net loss attributable to Common Shareholders	$	(11,792	)	$	(8,572	)	$	(45,409	)	$	(42,629	)


Basic and diluted loss per share:
As reported	$	(0.10	)	$	(0.06	)	$	(0.39	)	$	(0.41	)

Pro forma	$	(0.12	)	$	(0.09	)	$	(0.46	)	$	(0.50	)

The fair value of options granted is estimated using the Black-Scholes option pricing model using the following assumptions:

Three Months Ended September 30,

Nine Months Ended September 30,

2005

2004

2005

2004

Annual dividend yield

—

Weighted-average expected life (years)

N/A

3.0 years

2.8 years

3.0 years

Risk-free interest rate

N/A

2.57% to 4.62%

Volatility

N/A

71%

74%

53%

Our 1997 and 1999 Stock Option Plans are described in our consolidated financial statements for the year ended December 31, 2004 filed on Form 10-K. Our options are denominated in U.S. and Canadian dollars. During the nine months ended September 30, 2005, 815,000 options to purchase shares of our common stock were granted at exercise prices equal to the fair value on the date of grant. As of September 30, 2005, the weighted average exercise price for options outstanding was $4.47 and C$6.37 for U.S. and Canadian dollar denominated options, respectively. During the nine months ended September 30, 2005, 15,000 options were exercised and 656,964 options expired or

WASTE SERVICES, INC.

(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

were forfeited. As of September 30, 2005, the aggregate number of options outstanding entitled holders to purchase 12,796,000 shares of common stock at prices ranging from $2.70 to $6.25 and C$4.05 to C$18.05 for U.S. and Canadian dollar denominated options, respectively.

12. Comprehensive Gain (Loss)

Comprehensive gain (loss) includes the effects of foreign currency translation. Comprehensive gain (loss) for the three and nine months ended September 30, 2005 and 2004 are as follows (unaudited):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net loss	$	(9,411	)	$	(5,719	)	$	(38,192	)	$	(35,068	)
Foreign currency translation adjustment		10,314			9,761			6,703			4,346



Comprehensive gain (loss)	$	903		$	4,042		$	(31,489	)	$	(30,722	)

13. Segment Information

We have determined our operating and reporting segments pursuant to the requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”). In making this determination, we considered our organizational reporting structure and the information used by our chief operating decision makers to make decisions about resource allocation and performance assessment. We are organized along geographic locations or regions within the U.S. and Canada. Our Canadian operations are organized between two regions, Eastern and Western Canada while the U.S. is organized into Florida (North, Central and Gulf), Texas and Arizona. We believe our domestic U.S. and our Canadian geographic segments meet the “Aggregation Criteria” set forth in SFAS 131 for the following reasons: (i) the nature of the service, waste collection and disposal is economically the same and transferable across locations; (ii) the type and class of customer is consistent among regions/districts; (iii) the methods used to deliver services are essentially the same (e.g. containers collect waste at market locations and trucks collect and transfer waste to landfills); and (iv) the regulatory environment is consistent within Canada and the U.S., respectively. For further information regarding our segments see Note 14.

14. Condensed Consolidating Financial Statements

Waste Services is the primary obligor under the Subordinated Notes, however Waste Services has no independent assets or operations, and the guarantees of our domestic restricted subsidiaries are full and unconditional and joint and several with respect to the Senior Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any. Our Canadian operations are not guarantors under the Senior Subordinated Notes. Presented below are our Condensed Consolidating Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004 and the related Unaudited Condensed Consolidating Statements of Operations for the three and nine months ended September 30, 2005 and 2004 and the Unaudited Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 of our guarantor subsidiaries, our U.S. operating and reporting segment, (“Guarantors”) and the subsidiaries which are not guarantors, our Canadian operating and reporting segment (“Non-guarantors”):

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	September 30, 2005
	Guarantors		Non-Guarantors		Eliminations			Consolidated
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	766	$	1,746	$	—		$	2,512
Accounts receivable, net		25,965		28,209		—			54,174
Prepaid expenses and other current assets		4,519		3,700		—			8,219


Total current assets		31,250		33,655		—			64,905

Property and equipment, net		68,417		66,266		—			134,683
Landfill sites, net		161,394		11,065		—			172,459
Goodwill and other intangible assets, net		244,871		89,865		—			334,736
Other assets		10,243		13,318		—			23,561
Investment in subsidiaries		202,660		—		(202,660	)		—
Due from affiliate		—		21,032		(21,032	)		—


Total assets	$	718,835	$	235,201	$	(223,692	)	$	730,344


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	12,522	$	12,544	$	—		$	25,066
Accrued expenses and other current liabilities		37,625		10,508		—			48,133
Short-term financing and current portion of long-term debt		1,174		—		—			1,174


Total current liabilities		51,321		23,052		—			74,373

Long-term debt		279,333		—		—			279,333
Accrued closure, post-closure and other obligations		10,779		9,489		—			20,268
Due to affiliate		21,032		—		(21,032	)		—
Cumulative Mandatorily Redeemable Preferred Stock, net		79,599		—		—			79,599


Total liabilities		442,064		32,541		(21,032	)		453,573


Shareholders’ equity:
Common stock of Waste Services, Inc		935		—		—			935
Other equity		275,836		202,660		(202,660	)		275,836


Total shareholders’ equity		276,771		202,660		(202,660	)		276,771


Total liabilities and shareholders’ equity	$	718,835	$	235,201	$	(223,692	)	$	730,344

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	December 31, 2004
	Guarantors		Non-Guarantors		Eliminations			Consolidated
ASSETS

Current assets:
Cash and cash equivalents	$	6,223	$	2,284	$	—		$	8,507
Accounts receivable, net		24,509		23,347		—			47,856
Prepaid expenses and other current assets		6,440		4,500		—			10,940


Total current assets		37,172		30,131		—			67,303

Property and equipment, net		64,805		65,662		—			130,467
Landfill sites, net		155,710		13,906		—			169,616
Goodwill and other intangible assets, net		240,578		87,178		—			327,756
Other assets		12,105		13,336		—			25,441
Investment in subsidiaries		192,115		—		(192,115	)		—
Due from affiliate		—		8,869		(8,869	)		—


Total assets	$	702,485	$	219,082	$	(200,984	)	$	720,583


LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	15,757	$	10,192	$	—		$	25,949
Accrued expenses and other current liabilities		31,104		11,429		—			42,533
Short-term financing and current portion of long-term debt		1,166		—		—			1,166


Total current liabilities		48,027		21,621		—			69,648

Long-term debt		276,214		—		—			276,214
Accrued closure, post-closure and other obligations		5,628		5,346		—			10,974
Due to affiliate		8,869		—		(8,869	)		—
Cumulative Mandatorily Redeemable Preferred Stock, net		64,971		—		—			64,971


Total liabilities		403,709		26,967		(8,869	)		421,807


Shareholders’ equity:
Common stock of Waste Services, Inc.		904		—		—			904
Other equity		297,872		192,115		(192,115	)		297,872


Total shareholders’ equity		298,776		192,115		(192,115	)		298,776


Total liabilities and shareholders’ equity	$	702,485	$	219,082	$	(200,984	)	$	720,583

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Three Months Ended September 30, 2005
	Guarantors			Non-Guarantors		Eliminations			Consolidated
	(Unaudited)
Revenue	$	55,985		$	45,766	$	—		$	101,751

Operating and other expenses:
Cost of operations (exclusive of depreciation, depletion and amortization)		43,501			30,006		—			73,507
Selling, general and administrative expense		8,038			5,575		—			13,613
Settlement with sellers of Florida Recycling		(4,120	)		—		—			(4,120	)
Depreciation, depletion and amortization		6,101			5,299		—			11,400
Foreign exchange gain and other		35			809		—			844


Income from operations		2,430			4,077		—			6,507
Equity earnings in investees		(2,152	)		—		2,152			—
Interest expense		7,238			36		—			7,274
Cumulative Mandatorily Redeemable Preferred Stock dividends and amortization of issue costs		5,392			—		—			5,392


Loss before income taxes		(8,048	)		4,041		(2,152	)		(6,159	)
Income taxes		1,363			1,889		—			3,252


Loss before cumulative effect of change in accounting principle		(9,411	)		2,152		(2,152	)		(9,411	)

Cumulative effect of change in accounting principle, net of provision for income taxes of nil		—			—		—			—


Net loss	$	(9,411	)	$	2,152	$	(2,152	)	$	(9,411	)

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Three Months Ended September 30, 2004
	Guarantors			Non-Guarantors			Eliminations			Consolidated
	(Unaudited)
Revenue	$	55,926		$	38,689		$	—		$	94,615

Operating and other expenses:
Cost of operations (exclusive of depreciation, depletion and amortization)		43,683			25,779			—			69,462
Selling, general and administrative expense		12,577			5,818			—			18,395
Settlement with sellers of Florida Recycling		(8,635	)		—						(8,635	)
Depreciation, depletion and amortization		5,314			4,398			—			9,712
Foreign exchange gain and other		—			21			—			21


Income from operations		2,987			2,673			—			5,660
Equity loss of investees		74			8,413			(8,487	)		—
Interest expense		3,936			1,745			—			5,681
Changes in fair value of warrants		—			(532	)		—			(532	)
Cumulative Mandatorily Redeemable Preferred Stock dividends and amortization of issue costs		4,535			—			—			4,535


Loss before income taxes		(5,558	)		(6,953	)		8,487			(4,024	)
Income taxes		1,278			417			—			1,695


Loss before cumulative effect of change in accounting principle		(6,836	)		(7,370	)		8,487			(5,719	)
Cumulative effect of change in accounting principle, net of provision for income taxes of nil		—			—			—			—


Net loss	$	(6,836	)	$	(7,370	)	$	8,487		$	(5,719	)

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Nine Months Ended September 30, 2005
	Guarantors			Non-Guarantors		Eliminations			Consolidated
	(Unaudited)
Revenue	$	163,076		$	123,044	$	—		$	286,120

Operating and other expenses:
Cost of operations (exclusive of depreciation, depletion and amortization)		125,570			82,520		—			208,090
Selling, general and administrative expense		25,859			17,126		—			42,985
Settlement with sellers of Florida Recycling		(4,120	)		—		—			(4,120	)
Depreciation, depletion and amortization		17,302			14,246		—			31,548
Foreign exchange gain and other		(18	)		625		—			607


Income (loss) from operations		(1,517	)		8,527		—			7,010
Equity earnings in investees		(3,844	)		—		3,844			—
Interest expense		21,082			190		—			21,272
Cumulative Mandatorily Redeemable Preferred Stock dividends and amortization of issue costs		15,348			—		—			15,348


Loss before income taxes		(34,103	)		8,337		(3,844	)		(29,610	)
Income taxes		4,089			4,493		—			8,582


Loss before cumulative effect of change in accounting principle		(38,192	)		3,844		(3,844	)		(38,192	)
Cumulative effect of change in accounting principle, net of provision for income taxes of nil		—			—		—			—


Net loss	$	(38,192	)	$	3,844	$	(3,844	)	$	(38,192	)

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Nine Months Ended September 30, 2004
	Guarantors			Non-Guarantors			Eliminations			Consolidated
	(Unaudited)
Revenue	$	114,157		$	103,401		$	—		$	217,558

Operating and other expenses:
Cost of operations (exclusive of depreciation, depletion and amortization)		85,765			69,987			—			155,752
Selling, general and administrative expense		24,899			16,165			—			41,064
Settlement with sellers of Florida Recycling		(8,635	)		—			—			(8,635	)
Depreciation, depletion and amortization		11,473			11,520			—			22,993
Foreign exchange gain and other		—			(352	)		—			(352	)


Income from operations		655			6,081			—			6,736
Equity loss of investees		74			41,804			(41,878	)		—
Interest expense (income)		25,110			(847	)		—			24,263
Changes in fair value of warrants		—			(111	)		—			(111	)
Cumulative Mandatorily Redeemable Preferred Stock dividends and amortization of issue costs		12,844			—			—			12,844


Loss before income taxes		(37,373	)		(34,765	)		41,878			(30,260	)
Income taxes		2,854			2,179			—			5,033


Loss before cumulative effect of change in accounting principle		(40,227	)		(36,944	)		41,878			(35,293	)
Cumulative effect of change in accounting principle, net of provision for income taxes $132		—			225			—			225


Net loss	$	(40,227	)	$	(36,719	)	$	41,878		$	(35,068	)

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Nine months ended September 30, 2005
	Guarantors			Non-Guarantors			Eliminations			Consolidated
	(Unaudited)
Cash flows from operating activities:	$	(7,726	)	$	24,327		$	—		$	16,601


Cash flows from investing activities:
Cash used in business combinations and significant asset acquisitions, net of cash acquired		(6,112	)		(483	)		—			(6,595	)
Capital expenditures		(19,034	)		(8,365	)		—			(27,399	)
Proceeds from business divestitures		1,382			353			—			1,735
Deposits for business acquisitions and other		(58	)		(735	)		—			(793	)
Intercompany		—			(15,318	)		15,318			—


		(23,822	)		(24,548	)		15,318			(33,052	)

Cash flows from financing activities:
Proceeds from issuance of debt		4,000			—			—			4,000
Principal repayments of debt and capital lease obligations		(873	)		(390	)		—			(1,263	)
Sale of common shares and warrants		7,125			—			—			7,125
Proceeds from the exercise of options and warrants		521			—			—			521
Intercompany		15,318			—			(15,318	)		—


		26,091			(390	)		(15,318	)		10,383


Effect of exchange rate changes on cash and cash equivalents		—			73			—			73


Decrease in cash and cash equivalents		(5,457	)		(538	)		—			(5,995	)
Cash and cash equivalents, beginning of period		6,223			2,284			—			8,507


Cash and cash equivalents, end of period	$	766		$	1,746		$	—		$	2,512

WASTE SERVICES, INC.
(Successor of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Nine months ended September 30, 2004
	Guarantors			Non-Guarantors			Eliminations			Consolidated
	(Unaudited)
Cash flows from operating activities:	$	(4,915	)	$	15,607		$	—		$	10,692


Cash flows from investing activities:
Cash used in business combinations and significant asset acquisitions, net of cash acquired		(163,195	)		(1,124	)		—			(164,319	)
Capital expenditures		(22,294	)		(11,299	)		—			(33,593	)
Proceeds from business divestitures		9,939			—			—			9,939
Deposits for business acquisitions and other		1,440			(2,643	)		—			(1,203	)
Intercompany		—			(70,232	)		70,232			—


		(174,110	)		(85,298	)		70,232			(189,176	)

Cash flows from financing activities:
Proceeds from issuance of debt		280,000			—			—			280,000
Principal repayments of debt and capital lease obligations		(183,741	)		(965	)		—			(184,706	)
Sale of common shares and warrants		—			53,600			—			53,600
Proceeds from release of restricted cash and release of collateral supporting letters of credit		14,433			9,668			—			24,101
Proceeds from the exercise of options and warrants		—			1,041			—			1,041
Fees paid for financing transactions		(10,549	)		(2,923	)		—			(13,472	)
Intercompany		70,232			—			(70,232	)		—


		170,375			60,421			(70,232	)		160,564


Effect of exchange rate changes on cash and cash equivalents		—			262			—			262


Decrease in cash and cash equivalents		(8,650	)		(9,008	)		—			(17,658	)
Cash and cash equivalents, beginning of period		8,843			12,219			—			21,062


Cash and cash equivalents, end of period	$	193		$	3,211		$	—		$	3,404

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

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein as well as our annual report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission, including the factors set forth in the section titled “Disclosure Regarding Forward-Looking Statements” and factors affecting future results as well as our other filings made with the Securities and Exchange Commission.

Overview

We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers. Our operating strategy is disposal-based, whereby we enter geographic markets with attractive growth or positive competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. Our operations are primarily domiciled in the United States and Canada. Our Canadian operations are located in two regions, Eastern and Western Canada and our U.S. operations are located in Florida, Texas and Arizona.

Sources of Revenue

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

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

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

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

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

Material recovery facilities generate revenue from the sale of recyclable commodities. In an effort to reduce our exposure to commodity price fluctuations on recycled materials, where competitive pressures permit, we charge collection or processing fees for recycling volume collected from our customers. Additionally, we may manage exposure to commodity price fluctuations through the use of commodity brokers who will accept materials and arrange for delivery to third party customers.

Expense Structure

Our cost of operations primarily includes tipping fees and related disposal costs, labor and related benefit costs, equipment maintenance, fuel, vehicle and workers compensation insurance and landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated operations where possible, using transfer stations to link collection operations with our landfills to increase internalization of our waste volume. Internalization lowers our disposal costs by allowing us to eliminate tipping fees otherwise paid to an independent landfill or transfer station operator. We believe that internalization provides us with a competitive advantage by allowing us to be a low cost provider in our markets. We expect that our internalization will gradually increase over time as we develop our network of transfer stations and maximize delivery of collection volumes to our landfill sites.

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

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

Selling, general and administrative expenses include managerial costs, information systems, sales force, administrative expenses and professional fees.

Depreciation, depletion and amortization includes depreciation of fixed assets over their estimated useful lives using the straight-line method, depletion of landfill costs, including capping, closure and post-closure obligations using the units-of-consumption method, and amortization of intangible assets including customer relationships and contracts and covenants not-to-compete, which are amortized over the expected life of the benefit to be received from such intangibles.

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

Results of Operations for the Three and Nine Months Ended September 30, 2005 and 2004

Certain of our operations are domiciled in Canada; as such, we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as

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

Our consolidated results of operations for the three and nine months ended September 30, 2005 and 2004 by geographic segment are as follows (in thousands):


	Three Months Ended September 30, 2005
	U.S.					Canada					Total
Revenue	$	55,985		100.0	%	$	45,766		100.0	%	$	101,751		100.0	%
Operating expenses:
Cost of operations		43,501		77.7	%		30,006		65.6	%		73,507		72.2	%
Selling, general and administrative expense		8,038		14.4	%		5,643		12.3	%		13,681		13.4	%
Stock-based compensation expense		—		0.0	%		(68	)	-0.1	%		(68	)	-0.1	%
Settlement with sellers of Florida Recycling		(4,120	)	-7.4	%		—		0.0	%		(4,120	)	-4.0	%
Depreciation, depletion and amortization		6,101		10.9	%		5,299		11.6	%		11,400		11.2	%
Foreign exchange loss and other		35		0.1	%		809		1.7	%		844		0.9	%


Income from operations	$	2,430		4.3	%	$	4,077		8.9	%	$	6,507		6.4	%


	Three Months Ended September 30, 2004
	U.S.					Canada				Total
Revenue	$	55,926		100.0	%	$	38,689	100.0	%	$	94,615		100.0	%
Operating expenses:
Cost of operations		43,683		78.1	%		25,779	66.6	%		69,462		73.4	%
Selling, general and administrative expense		12,577		22.5	%		5,432	14.0	%		18,009		19.0	%
Stock-based compensation expense		—		0.0	%		386	1.0	%		386		0.4	%
Settlement with sellers of Florida Recycling		(8,635	)	-15.4	%		—	0.0	%		(8,635	)	-9.1	%
Depreciation, depletion and amortization		5,314		9.5	%		4,398	11.5	%		9,712		10.3	%
Foreign exchange loss and other		—		0.0	%		21	0.1	%		21		0.0	%


Income from operations	$	2,987		5.3	%	$	2,673	6.9	%	$	5,660		6.0	%


	Nine Months Ended September 30, 2005
	U.S.					Canada				Total
Revenue	$	163,076		100.0	%	$	123,044	100.0	%	$	286,120		100.0	%
Operating expenses:
Cost of operations		125,570		77.0	%		82,520	67.1	%		208,090		72.7	%
Selling, general and administrative expense		25,859		15.9	%		16,047	13.0	%		41,906		14.6	%
Stock-based compensation expense		—		0.0	%		1,079	0.9	%		1,079		0.4	%
Settlement with sellers of Florida Recycling		(4,120	)	-2.5	%		—	0.0	%		(4,120	)	-1.4	%
Depreciation, depletion and amortization		17,302		10.6	%		14,246	11.6	%		31,548		11.0	%
Foreign exchange loss and other		(18	)	0.0	%		625	0.6	%		607		0.2	%

Income (loss) from operations	$	(1,517	)	-1.0	%	$	8,527	6.8	%	$	7,010		2.5	%


		Nine Months Ended September 30, 2004
		U.S.					Canada					Total
Revenue		$	114,157		100.0	%	$	103,401		100.0	%	$	217,558		100.0	%
Operating expenses:
	Cost of operations		85,765		75.1	%		69,987		67.7	%		155,752		71.6	%
	Selling, general and administrative expense		24,873		21.8	%		16,839		16.3	%		41,712		19.2	%
	Stock-based compensation expense (benefit)		26		0.0	%		(674	)	-0.7	%		(648	)	-0.3	%
	Settlement with sellers of Florida Recycling		(8,635	)	-7.6	%		—		0.0	%		(8,635	)	-4.0	%
	Depreciation, depletion and amortization		11,473		10.1	%		11,520		11.1	%		22,993		10.6	%
	Foreign exchange loss and other		—		0.0	%		(352	)	-0.3	%		(352	)	-0.2	%

Income from operations		$	655		0.6	%	$	6,081		5.9	%	$	6,736		3.1	%

Revenue

A summary of our revenue is as follows (in thousands):


	Three Months Ended September 30,										Nine Months Ended September 30,
	2005					2004					2005					2004
Collection	$	83,841		75.6	%	$	81,135		80.4	%	$	238,977		77.2	%	$	182,622		78.9	%
Landfill disposal		13,081		11.8			7,453		7.4			31,211		10.1			16,481		7.1
Transfer stations		10,345		9.3			8,200		8.1			28,791		9.3			19,375		8.4
Material recovery facilities		2,563		2.3			3,007		3.0			8,200		2.6			7,820		3.4
Other specialized services		1,055		1.0			1,137		1.1			2,876		0.8			5,378		2.2

		110,885		100.0	%		100,932		100.0	%		310,055		100.0	%		231,676		100.0	%

Intercompany elimination		(9,134	)				(6,317	)				(23,935	)				(14,118	)

	$	101,751				$	94,615				$	286,120				$	217,558

Revenue was $101.8 million and $94.6 million for the three months ended September 30, 2005 and 2004, respectively, an increase of $7.2 million or 7.6%. Revenue for our U.S. operations is flat for the three months ended September 30, 2005, with a slight increase of $0.1 million or 0.2%, driven by price increases of $3.3 million, of which $1.4 million relates to fuel surcharges, increased volume at our landfill sites of $1.8 million and other organic

volume growth of $2.0 million. These increases were offset by divestitures of previously acquired operations of $1.2 million and other decreases of $5.8 million, primarily relating to hurricane related volumes in Florida during 2004. Revenue for our Canadian operations increased $7.1 million or 18.3%, due to price increases of $2.4 million, of which $1.1 million related to fuel surcharges, increased volume at our landfill sites primarily of $1.2 million, and the favorable effects of foreign exchange movements of $3.6 million, offset by a slight volume decrease of $0.1 million.

Revenue was $286.1 million and $217.6 million for the nine months ended September 30, 2005 and 2004, respectively, an increase of $68.5 million or 31.5%. The increase in revenue for the nine months ended September 30, 2005 for our U.S. operations of $48.9 million or 42.8% was driven by price increases of $7.3 million, of which $2.8 million related to fuel surcharges, increased volume at our landfill sites of $5.5 million, other organic volume growth of $6.9 million, acquisitions of $33.0 million and other increases of approximately $2.0 million, offset by other decreases of approximately $5.8 million, primarily related to 2004 hurricane related volumes in Florida during 2004. The increase in revenue for our Canadian operations of $19.6 million or 19.0% was due to price increases of $5.7 million, of which $2.5 million related to fuel surcharges, increased volume at our landfill sites, primarily due to special waste projects, of $3.5 million, other organic volume growth of $1.0 million and the favorable effects of foreign exchange movements of $9.5 million, offset by decreases of $0.1 million.

At the end of the third quarter, we ceased collection services on certain domestic lower margin residential contracts with annualized revenue of approximately $20.0 million.

Cost of Operations

Cost of operations was $73.5 million and $69.5 million for the three months ended September 30, 2005 and 2004, respectively, an increase of $4.0 million or 5.8%. As a percentage of revenue, cost of operations was 72.2% and 73.4% for the three months ended September 30, 2005 and 2004, respectively.

The decrease in cost of operations for our U.S. operations of $0.2 million or 0.5% was primarily driven by decreased subcontracted labor costs offset by increased fuel and insurance costs. The decline in subcontracted labor costs was due to hurricane related work in 2004 that was not recurring in 2005. As a percentage of revenue, cost of operations in our domestic operations was 77.7% and 78.1% for the three months ended September 30, 2005 and 2004, respectively. This increase in our domestic gross margin is primarily due to low margin hurricane related work in the third quarter of 2004 not recurring in 2005, offset by higher fuel and operating support costs. As compared to Canada, our lower margins in the United States are primarily driven by a higher mix of lower margin collection revenue in the United States. We expect that our domestic operating margins will improve as we increase internal and external volumes at our landfills and recently opened transfer station facility, implement operational improvements and cease collection services on certain domestic lower margin residential contracts.

The increase in cost of operations for our Canadian operations of $4.2 million or 16.3% was due to increased fuel costs of $0.6 million or 2.3%, increased equipment and building repair and maintenance costs of $0.5 million or 2.0%, increased insurance costs of $0.2 million or 0.8%, increased labor, disposal and other costs of $0.6 million or 2.3% and the unfavorable effects of foreign exchange movements of $2.3 million or 8.9%. Cost of operations as a percentage of revenue improved to 65.6% from 66.6% for the three months ended September 30, 2005 as compared to the same period in the previous year. This increase in gross margin is due to an increased contribution from higher margin landfill business, primarily due to special waste projects, offset by increased fuel costs and other operating costs.

Cost of operations was $208.1 million and $155.8 million for the nine months ended September 30, 2005 and 2004, respectively, an increase of $52.3 million or 33.6%. As a percentage of revenue, cost of operations was 72.7% and 71.6% for the nine months ended September 30, 2005 and 2004, respectively.

The increase in cost of operations for our U.S. operations of $39.8 million or 46.4% was primarily driven by a full period of cost related to acquisitions made during the second quarter of 2004, the opening of our domestic

transfer stations and landfill operations, as well as increased fuel costs. As a percentage of revenue, cost of operations in our domestic operations was 77.0% and 75.1% for the nine months ended September 30, 2005 and 2004, respectively. This decline in our domestic gross margin is primarily due to the acquisition of lower margin collection operations. As compared to Canada, our lower margins in the United States are primarily driven by a higher mix of lower-margin residential collection revenue in the United States.

The increase in cost of operations for our Canadian operations of $12.5 million or 17.9% was due to increased fuel costs of $1.5 million or 2.1%, increased disposal volumes and sub-contractor costs of $1.4 million or 2.0%, increased equipment and building repair and maintenance costs of $1.2 million or 1.8%, increased labor, insurance and other costs of $2.0 million or 2.9% and the unfavorable effects of foreign exchange movements of $6.4 million or 9.1%. Cost of operations as a percentage of revenue improved to 67.1% from 67.7% for the nine months ended September 30, 2005 as compared to the same period in the previous year. The increase in gross margin is due to an increased percentage of higher margin landfill business, offset by increased fuel costs.

Selling, general and administrative expense

Selling, general and administrative expenses, excluding stock-based compensation expense, were $13.7 million and $18.0 million for the three months ended September 30, 2005 and 2004, respectively, a decrease of $4.3 million or 23.9%. As a percentage of revenue, selling, general and administrative expense was 13.4% and 19.0% for the three months ended September 30, 2005 and 2004, respectively. The overall decrease in selling, general and administrative expense is primarily due to severance related charges of $2.7 million, professional fees related to our banking amendments, migration transaction and legal actions of $1.0 million, lower provisions for doubtful accounts of $0.8 million and reductions in other overhead costs of $0.2 million. The unfavorable effects of foreign exchange movements increased selling, general and administrative expense by $0.4 million. We expect to continue to review our overhead in order to optimize cost saving opportunities.

Selling, general and administrative expenses, excluding stock-based compensation expense, was $41.9 million and $41.7 million for the nine months ended September 30, 2005 and 2004, respectively, an increase of $0.2 million or 0.5%. As a percentage of revenue, selling, general and administrative expense was 14.6% and 19.2% for the nine months ended September 30, 2005 and 2004, respectively. The increase in selling, general and administrative expense is primarily due to a full period of costs related to acquisitions made in the second quarter of 2004 coupled with increased legal and professional costs of $0.2 million. Offsetting these increases are decreases in severance related costs of $2.3 million and lower provisions for doubtful accounts of $0.8 million. Selling, general and administrative expense at our Canadian operations declined primarily due to cost saving initiatives coupled with overhead costs being shifted to the domestic corporate office. The unfavorable effects of foreign exchange movements increased selling, general and administrative expenses by $1.2 million.

Stock-based compensation expense (benefit)

Stock-based compensation expense (benefit) relates to options and warrants issued to certain employees and consultants for which variable accounting applies. Stock-based compensation expense (benefit), which is partially based on changes in our stock price, was $(0.1) million and $0.4 million for the three months ended September 30, 2005 and 2004, respectively, and was $1.1 million and $(0.6) million for the nine months ended September 30, 2005 and 2004, respectively.

Settlement with sellers of Florida Recycling

In April 2004, we completed the acquisition of the issued and outstanding shares of Florida Recycling Services, Inc. (“Florida Recycling”). Shortly after its acquisition, the performance of the operations of Florida Recycling was below our expectations and we engaged an independent third party to conduct a review of Florida Recycling’s business. Based on the results of this review, the 2003 financial statements of Florida Recycling, provided by the sellers, contained misstatements and could not be relied upon. During the first half of 2005 these financial

statements were re-audited by our independent auditors. On September 24, 2004, we reached an agreement with the selling shareholders of Florida Recycling to adjust the purchase price paid for the shares of Florida Recycling whereby, in October 2004, the selling shareholders paid us $7.5 million in cash and returned 500,000 shares of our common stock. The cash and the shares received (valued at the quoted market price as of September 24, 2004) with a total value of approximately $8.6 million, are recorded as income in accordance with SFAS No. 141. In the third quarter of 2005 and as part of the September 2004 settlement, we received title to the Sanford Recycling and Transfer Station in Sanford, Florida. The facility is valued at the cost incurred to acquire the property and construct the facility to its percentage of completion at such date. The gain recognized on the settlement approximated $4.1 million.

Depreciation, depletion and amortization

Depreciation, depletion and amortization was $11.4 million and $9.7 million for the three months ended September 30, 2005 and 2004, respectively, an increase of $1.7 million or 17.5%. As a percentage of revenue, depreciation, depletion and amortization was 11.2% and 10.3% for the three months ended September 30, 2005 and 2004, respectively. The overall increase in depreciation, depletion and amortization for the three months ended September 30, 2005, as compared to the same period in the prior year, is primarily due to increases in landfill disposal volumes coupled with overall higher average depletion rates per ton. Landfill depletion rates ranged from $1.07 to $8.10 and $1.14 to $7.73 per ton for our operating U.S. landfills during the three months ended September 30, 2005 and 2004, respectively. Landfill depletion rates ranged from C$2.57 to C$17.80 and C$3.31 to C$15.88 per tonne for our operating Canadian landfills during the three months ended September 30, 2005 and 2004, respectively. The change in depletion rates both domestically and in Canada is primarily due to changes in engineering estimates.

Depreciation, depletion and amortization was $31.5 million and $23.0 million for the nine months ended September 30, 2005 and 2004, respectively, an increase of $8.5 million or 37.0%. As a percentage of revenue, depreciation, depletion and amortization remained relatively flat at 11.0% and 10.6% for the nine months ended September 30, 2005 and 2004, respectively. The overall increase in depreciation, depletion and amortization for the nine months ended September 30, 2005, as compared to the same period in the prior year, is primarily attributable to increases in landfill disposal volumes due to the opening of our landfill and transfer station sites and the inclusion for a full period of our 2004 acquisitions, coupled with overall higher average depletion rates per ton. Landfill depletion rates ranged from $1.07 to $8.10 and $1.14 to $7.73 per ton for our operating U.S. landfills during the nine months ended September 30, 2005 and 2004, respectively. The change in the depletion rate per ton was primarily due to the opening of our Arizona and Texas landfills as well as changes in engineering estimates. Landfill depletion rates ranged from C$2.57 to C$17.80 and C$3.31 to C$15.88 per tonne for our operating Canadian landfills during the nine months ended September 30, 2005 and 2004, respectively. The change in depletion per tonne was primarily due to changes in engineering estimates.

Foreign exchange loss and other

Foreign exchange loss and other was $0.8 million and nil for the three months ended September 30, 2005 and 2004, respectively, and $0.6 million and $(0.4) million for the nine months ended September 30, 2005 and 2004, respectively. The foreign exchange loss and other relates to the re-measuring of U.S. dollar denominated monetary accounts into Canadian dollars. Other items primarily relate to gains on sales of equipment.

Interest expense, preferred stock dividends and amortization of issue costs

The components of interest expense, including cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs, for the three and nine months ended September 30, 2005 and 2004 are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Preferred Stock dividends and amortization of issue costs	$	5,392	$	4,535	$	15,348	$	12,844
Credit facility and Senior Subordinated Note interest		6,566		5,192		19,083		13,955
Amortization of debt issue costs		351		314		1,056		9,930
Capitalized interest		—		—		—		(178	)
Other interest expense		357		175		1,133		556

	$	12,666	$	10,216	$	36,620	$	37,107

Interest expense was $12.7 million and $10.2 million for the three months ended September 30, 2005 and 2004, respectively, an increase of $2.5 million or 24.5%. Interest expense was $36.6 million and $37.1 million for the nine months ended September 30, 2005 and 2004, respectively, a decrease of $0.5 million or 1.3%. The increase in cash interest expense for the three and nine month periods in 2005 is due to higher amended rates on our Credit Facilities coupled with penalty interest on our senior subordinated notes. Amortization of debt issue costs decreased for the year to date period due to the full amortization in 2004 of the bridge financing fees of $9.9 million offset by amortization on our Credit Facilities and our senior subordinated notes. The increase in the Preferred Stock dividends is primarily due to compounding and accretion. The weighted average interest rate on secured credit facility borrowings was 8.2% and 5.0% for the three months ended September 30, 2005 and 2004, respectively and 7.7% and 7.2% for the nine months ended September 30, 2005 and 2004, respectively. As is discussed further in Liquidity and Capital Resources, through the third quarter of 2005 we incurred liquidated damages due to the delay of the registration of our Senior Subordinated Notes. During the third quarter, the registration statement was filed and declared effective and the exchange offer was commenced and consummated. The liquidated damages were $0.5 million and $1.1 million for the three and nine month ended September 30, 2005 and were $0.1 million and $0.2 million for the three and nine month ended September 30, 2004. As of September 28, 2005, we were no longer required to pay liquidated damages.

Income tax provision

The provision for income taxes was $3.3 million and $1.7 million for the three months ended September 30, 2005 and 2004, respectively, and $8.6 million and $5.0 million for the nine months ended September 30, 2005 and 2004, respectively. We recognize a provision for income taxes despite our pre-tax loss due to the tax effect of the non-deductible dividends on our cumulative mandatorily redeemable preferred stock and provisions for foreign taxes. Additionally, due to the lack of operating history relative to our U.S. operations, we have provided a valuation allowance for our net operating loss carry-forwards generated in the U.S.

Liquidity and Capital Resources

Our principal capital requirements are to fund capital expenditures, and to fund business debt service and asset acquisitions. Significant sources of liquidity are cash on hand, working capital, borrowings from our Credit Facilities, and proceeds from debt and/or equity issuances. The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein.

Senior Secured Credit Facilities

$100.0 million. The Credit Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined, at our option. The Credit Facilities are collateralized by substantially all of the assets of our U.S. restricted subsidiaries. Our Canadian restricted subsidiaries guarantee and pledge all of their assets only in support of the portion of the revolving credit facility available to them. Additionally, 65% of the common shares of our first tier foreign subsidiaries are pledged to secure obligations under the Credit Facilities.

On October 26, 2005, we entered into an amendment to the Credit Facilities with the administrative agent for the lenders. The amended Credit Facilities, among other items, decreases the current interest rate on our term loan by 125 basis points to 325 basis points over Eurodollar loans. In addition, the amendment restores access under the revolving credit facility to $60.0 million, up $15.0 million of which is available to our Canadian operations.

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


		Maximum Consolidated
	Maximum Consolidated	Senior	Minimum Consolidated
Fiscal Quarter	Leverage Ratio	Secured Leverage Ratio	Interest Coverage Ratio
FQ3 2005	5.75:1.00	2.50:1.00	1.75:1.00
FQ4 2005	5.25:1.00	2.50:1.00	2.00:1.00
FQ1 2006	5.25:1.00	2.25:1.00	2.00:1.00
FQ2 2006	5.25:1.00	2.25:1.00	2.00:1.00
FQ3 2006	5.00:1.00	2.25:1.00	2.00:1.00

Senior Subordinated Notes

On April 30, 2004, we completed a private offering of 9 1/2% Senior Subordinated Notes due 2014 for gross proceeds of $160.0 million. The Senior Subordinated Notes mature on April 15, 2014. Interest on the Senior Subordinated Notes is payable semiannually on October 15 and April 15.

statement was filed and, declared effective, and the exchange offer was commenced and consummated. As of September 28, 2005 we were no longer required to pay liquidated damages.

Equity Placement

As previously discussed, during the first quarter of 2005, we issued 2,640,845 shares of our common stock and 264,085 common stock purchase warrants for net proceeds of approximately $6.8 million. In the second quarter of 2005, a warrant holder exercised 146,250 warrants for proceeds of approximately $0.5 million.

Cumulative Mandatory Redeemable Preferred Stock

In May 2003, we issued 55,000 shares of cumulative mandatorily redeemable Preferred Stock (the “Preferred Stock”) to Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively “Kelso”), pursuant to the terms of an agreement dated as of May 6, 2003, as amended in February and June 2004 at a price of $1,000 per share. We also issued to Kelso warrants to purchase 7,150,000 shares of our common stock for $3.00 per share. The warrants are exercisable at any time until May 6, 2010. The issuance of the Preferred Stock resulted in proceeds of approximately $49.5 million, net of fees of approximately $5.5 million. The shares of Preferred Stock are non-voting.

The Preferred Stock entitles the holders to cash dividends of 17.75% per annum compounding and accruing quarterly in arrears, and to a liquidation preference of $1,000 per share, adjusted for any stock dividend, stock split, reclassification, recapitalization, consolidation or similar event affecting the Preferred Stock, plus the amount of any accrued but unpaid dividends on such shares as of any date of determination. The liquidation preference approximated $83.6 million as of September 30, 2005.

Migration Transaction

As part of our business strategy to expand into the United States, we entered into a migration transaction that became effective July 31, 2004. Under the migration transaction, our corporate structure was reorganized so that Waste Services, Inc., a Delaware company, became the ultimate parent company of our corporate group. Prior to the migration transaction, we were a subsidiary of Capital. After the migration transaction, Capital, now Waste Services (CA), became our subsidiary.

The migration transaction occurred by way of a plan of arrangement under the Business Corporations Act (Ontario) and consisted primarily of: (i) the exchange of 87,657,035 common shares of Capital for 87,657,035 shares our of common stock and (ii) the conversion of the remaining 9,229,676 common shares of Capital held by non-US residents who elected to receive exchangeable shares into 9,229,676 exchangeable shares of Waste Services (CA). The transaction was approved by the Ontario Superior Court of Justice on July 30, 2004 and by our shareholders at a special meeting held on July 27, 2004.

Surety Bonds, Letters of Credit and Insurance

Municipal solid waste services contracts and permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of September 30, 2005, we had provided customers and various regulatory authorities with such bonds and letters of credit amounting to approximately $73.4 million to collateralize our obligations. The majority of these obligations are renewed on an annual basis.

history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. In the second quarter of 2005, we received an insurance premium refund of approximately $0.4 million which served to reduce our cost of operations. As of September 30, 2005 and included in the $73.4 million of bonds and letters of credit discussed previously, we have posted a letter of credit with our U.S. insurer of approximately $8.4 million to secure the liability for losses within the deductible limit.

Cash Flows

The following discussion relates to the major components of the changes in cash flows for the nine months ended September 30, 2005 and 2004.

Cash Flows from Operating Activities

Cash provided by operating activities was $16.6 million and $10.7 million for the nine months ended September 30, 2005 and 2004, respectively. The increase in cash provided by operating activities is primarily due to cash generated from our operations and improvements in working capital.

Cash Flows used in Investing Activities

Cash used in investing activities was $33.1 million and $189.2 million for the nine months ended September 30, 2005 and 2004, respectively. The decrease in cash used in investing activities is primarily due to the various business acquisitions we completed during the first half of 2004 coupled with lower capital expenditures as compared to the same period in the prior year, offset by minor asset acquisitions and contingent purchase price payments in 2005. We intend to finance capital expenditures and business acquisitions through operating cash flow, borrowings under our Credit Facilities, subject to the limitations on our investing activities set out in the Credit Facilities Agreement, and the issuance of additional debt and/or equity securities. We expect our capital expenditures to range from $37.0 to $38.0 million for all of 2005. Cash used in deposits for business acquisitions primarily relates to ongoing negotiations with Lucien Rémillard, one of our directors, concerning the potential acquisition of the solid waste collection and disposal business assets owned by a company controlled by Mr. Rémillard in Quebec, Canada. In connection with these negotiations, we have reimbursed Mr. Rémillard’s company for services provided by third parties in connection with preparing audited financial statements of the businesses to be acquired and with ongoing efforts to expand the capacity of a solid waste landfill.

Cash Flows from Financing Activities

Cash provided by financing activities was $10.4 million and $160.6 million for the nine months ended September 30, 2005 and 2004, respectively. The decrease in cash flows from financing activities is due to our debt offering and private placement financing transaction that were completed during the second quarter of 2004, offset by the proceeds from the sale of our common stock and common stock purchase warrants during 2005. In the first nine months of 2004, we received $24.1 million from the release of restricted cash for the acquisition of certain Allied assets and the release of collateral for letters of credit.

Off-Balance Sheet Financing

We have no off-balance sheet debt or similar obligations, other than our letters of credit and performance and surety bonds discussed previously, which are not debt. We have no transactions or obligations with related parties that are not disclosed, consolidated or reflected in our reported results of operations or financial position. We do not guarantee any third party debt. We have entered into a put or pay disposal agreement with RCI Environnement Inc., Centres de Transbordement et de Valorisation Nord Sud Inc., RCM Environnement Inc. (collectively the “RCI Companies”) and Intersan Inc. pursuant to which we have posted a letter of credit for C$4.0 million to secure our

obligations and those of the RCI Companies to Intersan Inc. Concurrently with the put or pay disposal agreement with the RCI Companies, we entered into a three year agreement with Waste Management of Canada Corporation (formerly Canadian Waste Services Inc.) to allow us to deliver non-hazardous solid waste to their landfill in Michigan. Details of these agreements are further described in our annual financial statements for the year ended December 31, 2004, as filed on Form 10-K.

Landfill Sites

The following table summarizes the changes in our operating landfill capacity for the nine months ended September 30, 2005 (in thousands of cubic yards):


	Balance,		Changes in						Balance,
	Beginning		Engineering			Airspace			End
	of Period		Estimates			Consumed			of Period
United States
Permitted capacity		268,883		(414	)		(1,320	)		267,149
Probable expansion capacity		18,300		—			—			18,300

Total available airspace		287,183		(414	)		(1,320	)		285,449

Number of landfill sites		4								4


Canada
Permitted capacity		11,642		1,115			(662	)		12,095

Total available airspace		11,642		1,115			(662	)		12,095

Number of landfill sites		3								3


Total
Permitted capacity		280,525		701			(1,982	)		279,244
Probable expansion capacity		18,300		—			—			18,300

Total available airspace		298,825		701			(1,982	)		297,544

Number of landfill sites		7								7

Trend Information

Seasonality

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

New Accounting Pronouncements

Refer to the Notes to the Unaudited Condensed Consolidated Financial Statements for a discussion of new accounting pronouncements.

Disclosure Regarding Forward-Looking Statements and Factors Affecting Future Results

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

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

	•		the implementation of our business strategy;

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

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

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

	•		significant restrictive covenants in our various credit facilities and our ability to finance acquisitions with cash on hand, debt or equity offerings;

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

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

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

	•		our ability to negotiate renewals of existing service agreements at favorable rates;

	•		our ability to enhance profitability of certain aspects of our operations in markets where we are not internalized through either divestiture or asset swaps;

	•		costs and risks associated with litigation;

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

	•		changes in accounting standards or pronouncements; and

	•		construction, equipment delivery or permitting delays for our transfer stations or landfills.

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

A portion of our operations are domiciled in Canada; as such, we translate the results of our operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar our revenue is favorably affected and conversely our expenses are unfavorably affected. Assets and liabilities of Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet date, and revenue and expenses of Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income (loss). Separately, monetary assets and liabilities denominated in U.S. dollars held by our Canadian operation are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates. For the three and nine months ended September 30, 2005, we estimate that a 5.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar would increase or decrease operating profit from our Canadian operations by less than $0.2 million and $0.3 million, respectively.

As of September 30, 2005, we were exposed to variable interest rates under our Credit Facilities, as amended. The interest rates payable on our revolving and term facilities are based on a spread over base rate or Eurodollar loans as defined. A 25 basis point increase in base interest rates would increase cash interest expense by approximately $0.1 million and $0.2 million for the three and nine months ended September 30, 2005, respectively.

Item 4. Controls and Procedures

Disclosure Controls and Procedures/Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission’s rules and forms. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon this evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective. The conclusions of the CEO and CFO from this evaluation were communicated to the Audit Committee.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that would have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding our legal proceedings may be found under the “Legal Proceedings” section of Note 9, “Commitments and Contingencies” to our Unaudited Condensed Consolidated Financial Statements contained herein.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

None

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

None

Item 5. Other Information

Mr. Sutherland-Yoest has been employed as our Chairman and Chief Executive Officer since September 7, 2001. On October 26, 2005, we amended Mr. Sutherland-Yoest’s employment agreement to reflect terms and conditions substantially similar to those in agreements with our other senior executives. The employment agreement is for an indefinite term. Mr. Sutherland-Yoest is entitled to a base salary of $500,000, plus an annual bonus of up to 100% of his base salary, subject to satisfaction of annual performance objectives. His employment agreement provides for the following termination benefits: upon Mr. Sutherland-Yoest’s death or if we terminate Mr. Sutherland-Yoest’s employment by reason of his total disability, or upon termination of the agreement by us without cause or by Mr. Sutherland-Yoest for good reason, Mr. Sutherland-Yoest (or his beneficiaries) is entitled to continue to receive his base salary for three years and is entitled to payment of his average bonus paid in the prior three years in monthly installments over thirty-six months and all of his options then outstanding vest and continue to be exercisable for the balance of their term. If Mr. Sutherland-Yoest’s employment is terminated by us without cause, or by him for good reason and a change of control has occurred within the two years preceding or the one year after the effective date of his termination, or his employment is terminated by him and a change of control has occurred within the six months preceding the effective date of his termination, then Mr. Sutherland-Yoest is entitled to receive a lump sum payment of three times both his base salary and his average bonus. If Mr. Sutherland-Yoest terminates his employment voluntarily or if his employment is terminated for cause, Mr. Sutherland-Yeost is entitled to receive any accrued but unpaid base salary, expenses and unearned benefits to the effective date of termination. Mr. Sutherland-Yoest’s employment agreement also provides for other customary benefits and perquisites, some of which will continue after his termination, and prohibits Mr. Sutherland-Yoest from competing against us during the term of his employment and for a specified period following his termination.

Item 6. Exhibits


Exhibit 10.1 —		Employment Agreement dated as of October 26, 2005 between us and David Sutherland-Yoest

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

Exhibit 31.2 —		Section 302 Certification of Mark A. Pytosh, Chief Financial Officer

Exhibit 32.1 —		Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer


	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		2
Condensed Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004		2
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004		3
Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2005		4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
Item 4. Controls and Procedures		40

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 3. Defaults upon Senior Securities		41
Item 4. Submission of Matters to a Vote of Security Holders		41
Item 5. Other Information		41
Item 6. Exhibits		41
Signatures		42
EX-10.1 EMPLOYMENT AGREEMENT, DAVID SUTHERLAND-YOEST
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO AND CFO



	By:	/s/ DAVID SUTHERLAND-YOEST
		David Sutherland-Yoest
		Chairman of the Board, Chief Executive Officer, and Director



	By:	/s/ MARK A. PYTOSH
		Mark A. Pytosh
		Executive Vice President and Chief Financial Officer


Exhibit No		Description

Exhibit 10.1	—	Employment Agreement dated as of October 26, 2005 between us and David Sutherland-Yoest

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

Exhibit 31.2	—	Section 302 Certification of Mark A. Pytosh, Chief Financial Officer

Exhibit 32.1	—	Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer