S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission file number 333-77633
CAPITAL ENVIRONMENTAL RESOURCE INC.
(Exact name of registrant as specified in its charter)
Ontario, Canada Not Applicable
(Jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
1005 Skyview Drive
Burlington, Ontario, Canada L7P 5B1
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 319-1237
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _
As of October 31, 2000, there were 7,196,627 common shares outstanding.
- 1-
CAPITAL ENVIRONMENTAL RESOURCE INC.
INDEX TO FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as at September 30, 2000 and December
31, 1999 3
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the three month and/or nine month periods ended September
30, 2000 and 1999 5
Consolidated Statement of Stockholders' Equity for the nine month
period ended September 30, 2000 6
Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk 22
PART II OTHER INFORMATION
Item 1 Legal Proceedings 22
SIGNATURES 23
- 2 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
ASSETS (unaudited) (audited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 147 $ 1,398
Trade accounts receivable (net of allowance for
doubtful accounts of $253; December 31, 1999 - $331) 17,074 14,655
Inventory, prepaid expenses and other current assets 2,423 3,724
Employee loans 214 471
Total current assets 19,858 20,248
Property and equipment, net 53,406 40,692
Other assets
Goodwill (net of accumulated amortization of
$5,589; December 31, 1999 - $3,528) 93,200 95,654
Other intangibles and non-current assets 4,819 5,358
Deferred income taxes 4,212 4,175
Total assets $175,495 $166,127
</TABLE>
The accompanying notes are an integral part of these statements
- 3 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
LIABILITIES (unaudited) (audited)
<S> <C> <C>
Current liabilities
Accounts payable and accrued liabilities $ 12,729 $ 12,050
Accrued purchase liabilities 341 600
Current portion of long-term debt (Note 3) 98,556 13,145
Total current liabilities 111,626 25,795
Long-term debt (Note 3) 4,558 78,199
Deferred income taxes 3,538 3,813
119,722 107,807
Commitments and contingencies (Note 3 & 4)
STOCKHOLDERS' EQUITY
Common Stock; 7,196,627 issued and outstanding;
(December 31, 1999 - 7,196,627) (Note 5) 57,066 57,066
Accumulated other comprehensive loss (2,661) (890)
Retained earnings 1,368 2,144
Total stockholders' equity 55,773 58,320
Total liabilities and stockholders' equity $ 175,495 $ 166,127
</TABLE>
The accompanying notes are an integral part of these statements
- 4 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands of U.S. dollars, except share and per share data)
(unaudited)
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues $ 31,674 $ 28,716 $ 88,704 $ 69,519
Operating expenses:
Cost of operations 21,997 19,679 60,210 47,372
Selling, general and administrative expenses 5,373 3,421 14,924 8,705
Depreciation and amortization expense 2,833 2,320 7,999 5,611
Income from operations 1,471 3,296 5,571 7,831
Interest and financing expense 2,939 1,592 7,189 4,343
Income (loss) before income taxes (1,468) 1,704 (1,618) 3,488
Income tax provision (recovery) (764) 614 (842) 1,256
Net income (loss) for the period $ (704) $ 1,090 $ (776) $ 2,232
Basic net income (loss) per common share $ (0.10) $ 0.15 $ (0.11) $ 0.51
Diluted net income (loss) per common share $ (0.10) $ 0.15 $ (0.11) $ 0.40
Weighted average number of common
shares outstanding (Note 6)
Basic 7,196,627 7,155,538 7,196,627 4,360,605
Diluted 7,288,799 7,365,567 7,288,876 5,531,156
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss) for the period $ (776) $ 2,232
Other comprehensive income (loss) -
foreign currency translation adjustments (1,771) 159
Comprehensive income (loss) for the period $(2,547) $ 2,391
</TABLE>
The accompanying notes are an integral part of these statements
- 5 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands of U.S. dollars)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Common stock comprehensive Retained
Shares Amount loss earnings Total
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1999 7,196,627 $ 57,066 $ (890) $ 2,144 $ 58,320
Foreign currency translation adjustments - - (1,771) - (1,771)
Income for the period - - - (776) (776)
Balances at September 30, 2000 7,196,627 $ 57,066 $(2,661) $ 1,368 $55,773
</TABLE>
The accompanying notes are an integral part of these statements
- 6 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(unaudited)
Nine Months Ended
September 30
2000 1999
Cash flows from operating activities:
Net income (loss) for the period $ (776) $ 2,232
Adjustments to reconcile net income to net cash flows
from operating activities -
Depreciation and amortization 7,999 5,611
Deferred income taxes (421) 879
Net gain on disposal of property, plant and equipment (75) (134)
Restructuring and assets written down 1,784 -
Other 473 255
Changes in operating assets and liabilities, net of effect of
acquisitions and divestitures -
Trade accounts receivable (1,012) (4,756)
Prepaid expenses and other current assets (464) (377)
Accounts payable and accrued liabilities 780 432
Income and other taxes (2,188) (914)
6,100 3,228
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (7,847) (46,393)
Capital expenditures (13,651) (2,763)
Proceeds from sale/replacement of assets 1,671 374
Net loans and advances to employees 42 (272)
Other (1,173) (1,412)
(20,958) (50,466)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 25,495 62,732
Principal payments on long-term debt (11,003) (36,618)
Repayment of capital lease liability (765) (812)
Net proceeds from issuance of common stock - 30,875
Redemption of redeemable and convertible stock - (6,900)
Debt issuance costs (90) (1,824)
13,637 47,453
Effect of exchange rate changes on cash and cash
equivalents (30) 44
Increase (decrease) in cash and cash equivalents (1,251) 259
Cash and cash equivalents at beginning of period 1,398 1,060
Cash and cash equivalents at end of period $ 147 $ 1,319
SUPPLEMENTARY INFORMATION ON NON-CASH TRANSACTIONS:
Value of acquisitions partially or totally effected
by the issue of capital stock $ - $ 66
Other long-term liabilities assumed on acquisition $ 55 $ 709
Assets acquired under capital leases $ 53 $ 3,374
The accompanying notes are an integral part of these statements
- 7 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(In thousands of U.S. dollars)
1. Basis of Presentation
The accompanying interim consolidated financial statements of
Capital Environmental Resource Inc. and its subsidiaries (the "Company")
for the three and nine month periods ended September 30, 2000 and 1999
have been prepared in accordance with generally accepted accounting
principles in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. Operating results for the nine month period
ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
The Company's consolidated balance sheet as of September 30,
2000, and the interim consolidated statements of operations, comprehensive
income, stockholders' equity and cash flows for the three and/or nine
month periods ended September 30, 2000 and 1999 are unaudited. In the
opinion of management, such financial statements include all adjustments
necessary for a fair presentation of the Company's financial position,
results of operations, and cash flows for the periods presented. The
consolidated financial statements presented herein should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
2. Acquisitions
For the nine months ended September 30, 2000, the Company acquired
three solid waste collection businesses and one landfill that were accounted
for using the purchase method of accounting. The aggregate consideration for
these acquisitions was approximately $7.9 million. The purchase prices have
been allocated to the identified intangible and tangible assets acquired based
on fair values at the dates of acquisition, with any residual amounts allocated
to goodwill or landfill property as appropriate.
3. Long-term debt
The Company has pledged all of its assets, including the stock of its
subsidiaries, as collateral under the $110.0 million senior debt. A $85.0
million Credit Facility matures in November 2004 with a $25.0 million Term
Loan requiring principal repayments beginning in November 2002.
- 8 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(In thousands of U.S. dollars)
Long-term debt consists of the following:
September 30, December 31,
2000 1999
(unaudited) (audited)
Senior debt $ 96,885 $ 72,763
Subordinated promissory notes - 11,371
Capital lease obligations 4,239 4,995
Other 1,990 2,215
103,114 91,344
Less: current portion 98,556 13,145
$ 4,558 $ 78,199
As at June 30, 2000 and September 30, 2000, the Company was in breach
of certain financial covenants under its Senior Debt facilities. The Company
is in discussions with its bankers to obtain an amendment to its Senior Debt
facility and accordingly the senior debt is subject to demand. The Company has
received a proposed amendment from its banks, which will cure the covenant
breach and is currently negotiating the amendment. In the event the Company is
unsuccessful in its negotiations with the bank and should the lenders demand
payment on their Senior Debt facility, the Company would be required to raise
additional debt or equity to extinguish the Senior Debt facility. There is no
assurance the Company will be successful in obtaining additional debt or
capital on acceptable terms.
4. Commitments and Contingencies
(a) Environmental risks
The Company is subject to liability for environmental damage that its
solid waste facilities may cause, including damage to neighbouring landowners
or residents, particularly as a result of the contamination of soil,
groundwater or surface water, and especially drinking water, including damage
resulting from conditions existing prior to the acquisition of such facilities
by the Company. The Company may also be subject to liability for any
off-site environmental contamination caused by pollutants or hazardous
substances whose transportation; treatment or disposal was arranged by
the Company or its predecessors. Any substantial liability for environmental
damage incurred by the Company could have a material adverse effect on the
Company's financial condition, results of operations or cash flows. As at the
date of these financial statements, the Company is not aware of any such
environmental liabilities that would be material to the Company's operations
or financial condition.
- 9 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(In thousands of U.S. dollars)
(b) Legal proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company 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 the Company or to revoke or deny renewal
of an operating permit held by the Company. From time to time the Company may
also be subject to actions brought by citizens' groups or adjacent landowners
in connection with the permitting and licensing of landfills and transfer
stations, or alleging environmental damage or violations of the permits and
licenses pursuant to which the Company operates.
In addition, the Company may become party to various claims and suits
pending 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 the waste management business. However, other than as
described below, as at September 30, 2000, there was no current proceeding or
litigation involving the Company that the Company believes will have a material
adverse impact on the Company's business, financial condition, results of
operations or cash flows.
On October 12, 1999, Lynn Bishop and L&S Bishop Enterprises Inc.
(collectively "Bishop") commenced an action against the Company, Capital
Environmental Alberta Inc. and Tony Busseri, the former Chairman of the Company,
in which Bishop claims damages in the aggregate amount of approximately $7.4
million. The claim includes $2.1 million for alleged wrongful termination,
$5.3 million for misrepresentations allegedly made in connection with the Share
Purchase Agreement, dated as of November 1, 1997, among Lynn Bishop, L&S Bishop
Enterprises Inc., the Company and Western Waste Services Inc. (the "Share
Purchase Agreement"), as well as $0.3 million for punitive damages. The Company
believes that Bishop's claims are wholly without merit, and that Lynn Bishop's
employment was terminated for just cause and that it has no further obligation
to Bishop beyond the contingent payment described in Note 4 (c). The Company is
defending the claim and has issued a counterclaim against Bishop, and does not
believe the outcome will have a material adverse impact on the Company's
business, financial condition, results of operations or cash flows.
Accordingly, the Company has not made a provision for this claim in its
financial statements.
(c) Contingent payment related to acquisitions
In connection with the acquisition of Western Waste from L&S Bishop
Enterprises ("L&S"), the Company may have to make an additional payment to L&S.
L&S may elect to sell up to 112,323 shares in the future and if, at that time,
the price of the Common Stock is less than C$21.67 per share, the Company will
have to make up the shortfall. This agreement was subject to a 180-day lock-up
agreement, which expired on December 8, 1999. The Company has since been
advised that L&S has sold the aforementioned shares resulting in a shortfall
of approximately $1.0 million however, in view of the litigation referred to
in Note 4 (b) challenging the Shares Purchase Agreement, the obligation of the
Company, if any, will not be recorded until the litigation is settled.
- 10 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(In thousands of U.S. dollars)
5. Capital Stock
a) Changes in Capital Stock since Inception on May 23, 1997:
Common and preferred stock
The Company has an unlimited number of Preferred Shares, issuable in
series. As of September 30, 2000, there were no Preferred Shares authorized
or outstanding.
On April 27, 1999, the stockholders of the Company approved a split
of the Company's Common Stock whereby 1.3847 Common Shares were issued for
each previously outstanding Common Share. All Common Shares and per Common
Share data in the financial statements has been restated to give retroactive
effect to this 1.3847 for 1 stock split.
(i) On May 23, 1997, the Company issued 1,353,924 Common Shares for
nominal cash consideration.
(ii) On October 31, 1997, the Company issued 73,850 Common Shares with
a value of $789 in exchange for certain business assets and cash of
$89.
(iii) On April 1, 1998, in connection with the acquisition of Muskoka
Containerized Services Limited ("MCS"), the Company issued 6,923
Common Shares with a value of $71 as partial consideration for the
acquisition of MCS.
(iv) On June 15, 1998, the Company issued 553,869 Common Shares for net
proceeds of $6,595 cash in a private placement.
(v) On July 2, 1998, in connection with the acquisition of Johns Cartage
Waste Management Services Ltd., the Company issued 5,192 Common
Shares valued at $64 as part of the acquisition consideration.
(vi) On March 5, 1999, in connection with the acquisition of Ram-Pak
Compaction Services, the Company issued 4,784 Common shares valued
at C$100 as part of the acquisition consideration.
(vii) On June 8, 1999, the Company completed an Initial Public Offering
("IPO") of 3,258,725 Common Shares at a price of $11.00 per share.
Of the 3,258,725 Common Shares sold in the offering, 2,998,725 were
sold by the Company and 260,000 were sold by certain selling
stockholders. The Company received approximately $30 million in net
proceeds from the IPO.
(viii) On June 8, 1999, the Convertible Preference Shares were converted into
1,107,750 Common Shares; the Class "B" Special Stock was converted into
484,645 Common Shares and the Redeemable Common Shares were converted
into 280,240 Common Shares.
- 11 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(In thousands of U.S. dollars)
(ix) On June 8, 1999, in connection with the October 1, 1998 acquisition
of General Environmental Technical Services Inc. and J.V. Services of
Western New York, the Company issued 106,128 additional Common Shares
resulting in additional purchase consideration of $709.
(x) On July 1, 1999 the Company completed the sale of 189,825 Common
Shares to cover over-allotments in connection with the initial public
offering. The Company received approximately $1.9 million in net
proceeds from the exercise by the underwriters of their over-allotment
option.
b) Stock option and option grants
Under the 1997 Stock Option Plan, the Company may grant options to
acquire Common Shares up to a maximum of 10% of the then issued and outstanding
Common Shares on an as converted basis. All of the options issued under the
1997 plan vested on completion of the initial public offering of the Company's
securities. No option will remain exercisable later than five years
after the grant date, unless the Board of Directors determines otherwise.
Under the 1999 Stock Option Plan, the Company may grant options to
acquire Common Shares up to a maximum of 19% of the then issued and outstanding
shares of Common Stock and Common Stock equivalents, including stock options
issued under the 1997 Stock Option Plan. Options granted to non-employee
directors will generally vest one year from the date of grant. Options granted
to non-directors become exercisable only after the second anniversary of the
grant date unless otherwise determined by the Compensation Committee. No option
will remain exercisable later than five years after the grant date, unless the
Compensation Committee determines otherwise. Upon a change of control event,
options become immediately exercisable.
At September 30, 2000, December 31, 1999, and September 30, 1999, the
aggregate options outstanding entitled holders to purchase 1,110,648, 1,004,301
and 974,301 Common Shares, respectively, at prices ranging from C$7.22 - $18.05
and US$3.46 - $14.50. During the nine months ended September 30, 2000, no
Common Shares were issued under the plans.
As permitted by the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", the Company applies APB 25 in
accounting for options to acquire Common Shares. As a result, no compensation
cost has been recognized as options have been granted at market value.
c) Stock purchase warrants
In 1997, the Company issued 123,084 warrants to certain founding
stockholders. These warrants entitle the holder thereof to receive upon
exercise, one common share at C$0.007 per share. These warrants expire
July 15, 2002.
- 12 -
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(In thousands of U.S. dollars)
At September 30, 2000, December 31, 1999, and September 30, 1999,
the aggregate warrants outstanding entitled holders to purchase 92,312, 92,312
and 123,084 Common Shares, respectively. During the nine months ended
September 30, 2000, no Common Shares were issued on exercise of warrants.
d) Shareholder rights plan
On September 2, 1999, the Company adopted a Shareholder Rights Plan
(the "Plan"). Under the terms of the Plan, Common Share purchase rights (the
"Rights") were distributed at the rate of one Right for each Common Share
held. Each Right will entitle the holder to buy 1/100th of a Common Share of
the Company at an exercise price of $60.00. The Rights will be exercisable
and will trade separately from the Common Shares only if a person or group
acquires beneficial ownership of 20% or more of the Company's Common
Shares or commences a tender or exchange offer that would result in owning
20% or more of the Common Shares (unless the Board of Directors
determines that the acquisition is fair to all shareholders and amends the
Plan to permit the acquisition). If either of these events occurs, the Rights
will entitle each holder to receive, upon exercise, a number of Common
Shares (or, in certain circumstances, a number of Common Shares in
the acquiring company) having a Current Market Price (as
defined in the Plan) equal to approximately two times the exercise price of the
Right. The Rights will not be exercisable with respect to the share ownership
of Environmental Opportunities Fund I, Environmental Opportunities Fund II and
Sanders Morris Mundy Inc. and any affiliate or associate thereof, that already
own more than 20% of the Company's Common Shares as long as these persons,
along with their affiliates and associates, do not acquire beneficial ownership
of 30% or more. The number of Rights outstanding is subject to adjustment under
certain circumstances and all Rights expire on September 30, 2009.
6. Net Income (Loss) per Share Information
<TABLE>
The following table sets forth the computation of earnings (loss) per Common Share:
<CAPTION>
Nine Months Ended September 30 2000 1999
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Net income (loss) $ (776) $ (776) $ 2,232 $ 2,232
Weighted average Common Shares
outstanding - basic 7,196,627 7,196,627 4,360,605 4,360,605
Dilutive effect of stock options and
warrants outstanding - 92,249 - 243,106
Common Shares issuable upon conversion
of redeemable and convertible stock - - - 927,445
Weighted average common shares
outstanding - diluted 7,196,627 7,288,876 4,360,605 5,531,156
Diluted earnings (loss) per share $ (0.11) $ (0.11) $ 0.51 $ 0.40
</TABLE>
- 13 -
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 financial statements and notes thereto included elsewhere herein.
Forward Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Part 1, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934) that involve risks and uncertainties. Factors
set forth under the caption "Risk Factors" in the Company's Registration
Statement could affect the Company's actual results and could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company in this Report
on Form 10-Q.
Overview
Capital Environmental Resource Inc. ("Capital" or the "Company") is a
regional, integrated solid waste services company that provides collection,
transfer, disposal, landfill and recycling services. Capital was founded in
May 1997 in order to take advantage of consolidation opportunities in the solid
waste industry in secondary markets in Canada and the northern United States.
The Company began operations in June 1997 when it acquired selected solid waste
assets and operations in Canada from Canadian Waste Services Inc. and its
parent, USA Waste Services, Inc. Since commencing operations, the Company has
acquired 42 solid waste services businesses in Canada and the United States,
including 43 collection operations, 11 transfer stations, 7 recycling processing
facilities and a contract to operate 2 landfills. In addition, the Company
owns and operates a landfill located in Coronation, Alberta. The consolidated
operations presently serve over 658,000 residential, commercial and industrial
customers. Largely as a result of acquisitions, the Company believes that it has
become one of the largest solid waste services companies in Canada.
The Company's objective is to build a leading solid waste services
company in the markets of Canada and the northern United States in markets other
than major urban centers. The Company's strategy for achieving this objective
is to generate internal growth and to make selective acquisitions that
complement its existing business. The Company seeks to acquire businesses that
expand its existing market presence. The Company's internal growth strategy is
focused on increasing its services to existing customers, winning new customers,
implementing selective price increases and achieving operating efficiencies.
- 14 -
Results of Operations for the Three Months Ended September 30, 2000 and 1999
The following table sets forth items in the Consolidated Statement of
Operations as a percentage of revenues and the percentage changes in the dollar
amounts of these items compared to the same period in the previous year:
<TABLE>
<CAPTION>
Percentage of Percentage
($ thousands) Revenue Change
2000 Over
Three Months Ended September 30 2000 1999 2000 1999 1999
<S> <C> <C> <C> <C> <C>
Revenues $31,674 $28,716 100.0% 100.0% 10.3%
Cost of operations 21,997 19,679 69.4 68.5 11.8
Selling, general and administrative
expenses 5,373 3,421 17.0 11.9 57.1
Depreciation and amortization expense 2,833 2,320 9.0 8.1 22.1
Income from operations 1,471 3,296 4.6 11.5 (55.4)
Interest and financing expense 2,939 1,592 9.2 5.6 84.6
Income (loss) before income taxes (1,468) 1,704 (4.6) 5.9 n.a.
Income tax provision (recovery) (764) 614 (2.4) 2.1 n.a.
Net income (loss) $ (704) $1,090 (2.2)% 3.8% n.a.
EBITDA $4,304 $5,616 13.6% 19.6% (23.4)%
</TABLE>
Revenue
<TABLE>
The sources of revenue and growth rates are as follows: ($thousands)
<CAPTION>
Growth
Three Months Ended September 30 2000 1999 Rates
<S> <C> <C> <C>
Commercial and industrial collection $ 18,017 56.9% $ 16,841 58.6% 7.0%
Residential collection 7,153 22.6 5,695 19.8 25.6
Transfer station and landfill 2,505 7.9 2,517 8.8 (0.5)
Commercial and residential recycling 1,234 3.9 1,029 3.6 19.9
Contract management and other
specialized services 2,765 8.7 2,634 9.2 5.0
$ 31,674 100.0% $ 28,716 100.0% 10.3%
</TABLE>
- 15 -
<TABLE>
Management's estimates of the components of changes in the Company's
consolidated revenue are as follows:
<CAPTION>
Three Months Ended September 30 2000 1999
<S> <C> <C>
Price 1.0% 2.0%
Volume 2.1 3.0
Acquisitions, net of divestitures 7.0 62.4
Foreign currency translation 0.2 1.3
Total 10.3% 68.7%
</TABLE>
Total revenues in the quarter were $31.7 million compared to $28.7 million
in the same quarter last year. The 10.3% increase was primarily as a result of
acquisitions made over the past twelve months. The current period pricing
continues to be impacted by a disposal price reduction in a market place
located in the United States, which has been passed on to customers.
Excluding these price rollbacks, pricing growth was 1.8% in the quarter.
There were no acquisitions completed during the quarter ended September 30,
2000. In the same period of the prior year, three acquisitions were completed
with annualized revenue of approximately $13.0 million.
<TABLE>
Revenue and growth in revenue from geographic components are as follows:
($thousands)
<CAPTION>
Three Months Ended September 30 2000 1999 Growth Rates
<S> <C> <C> <C>
Eastern Canada $16,674 52.6% $15,651 54.5% 6.5%
Western Canada 7,785 24.6 6,204 21.6 25.5
United States 7,215 22.8 6,861 23.9 5.2
$ 31,674 100.0% $ 28,716 100.0% 10.3%
</TABLE>
The growth in revenue in both Eastern and Western Canada exceeded the
growth in revenue in the United States as significant acquisitions were
completed in Canada during the past twelve months. The United States growth
rate is lower due to the disposal price decreases incertain markets that
was required to be passed onto customers, as described in the previous
section, and the competitive environment in which the Company operates.
Cost of operations
Cost of operations include labor, fuel, equipment maintenance,
tipping fees paid to third-party disposal facilities, worker's compensation
and vehicle insurance, the cost of materials purchased to be recycled,
subcontractor expense and local, state or provincial taxes. The Company
owns and operates 11 transfer stations, which reduces costs by improving
utilization of collection personnel and equipment and by consolidating the
waste stream to gain access to remote landfills with lower disposal rates.
The Company obtained long-term disposal agreements in some of its markets,
which it believes, are at or below market disposal rates. There can be no
assurance that these contracts can be renewed on favorable terms. Cost of
operations for the three months ended September 30, 2000 was $22.0 million
compared to $19.7 million for the three months ended September 30, 1999.
The 11.8% increase in cost of operations was attributable primarily to
increases in the Company's revenues described above. Cost of operations
- 16 -
as a percentage of revenue for the three months ended September 30, 2000
was 69.4%, compared with 68.5% in 1999. In the three months ended September
30, 2000, cost of operations increased as a percentage of revenue primarily
as a result of increased disposal costs and additional costs associated with
certain national accounts.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses include
management, clerical, financial, accounting and administrative compensation
and overhead costs associated with marketing and the sales force,
professional services and community relations expense. SG&A expenses for
the three months ended September 30, 2000 were $5.4 million compared to $3.4
million for the period ended September 30, 1999. The $2.0 million or 57.1%
increase compared to the prior year primarily relates to infrastructure
changes to support business growth compared to the prior period and
additional costs related to restructuring the Company due to a strategic
decision to focus on improving current operations. Approximately $1.4
million of unusual items occurred in the quarter primarily relating to
severance costs, a contract renegotiation, and various associated
accruals. As a percentage of revenues, SG&A expenses increased to 17.0%
for the three months ended September 30, 2000 from 11.9% in the comparable
period last year.
Depreciation and amortization expense
Depreciation and amortization expense includes depreciation of fixed
assets over the estimated useful life of the assets using the straight-line
method, the amortization of goodwill over 40 years and the amortization of
other intangible assets over appropriate time periods. The Company has
accounted for all business acquisitions since inception using purchase
accounting which has resulted in significant amounts of goodwill being
included on the balance sheet. Depreciation and amortization expense for
the three months ended September 30, 2000 was $2.8 million compared to
$2.3 million for the three months ended September 30, 1999. The 22.1%
increase was primarily due to acquisition activity over the past 12 months.
As a percentage of revenues, depreciation and amortization expense increased
to 9.0% for the three months ended September 30, 2000 from 8.1% for the
period ended September 30, 1999. The increase primarily relates to
depreciation and amortization associated with the increased goodwill on
the balance sheet and capital expenditures incurred over the past 12 months.
Interest and financing expense
In the three months ended September 30, 2000, interest and
financing expense increased 84.6% to $2.9 million from $1.6 million for
the comparable period in 1999. The increase over the prior year was
primarily a result of an increase in the average level of outstanding debt
due to borrowings to finance acquisition activity over the past 12 months,
an increase in the weighted average rate of interest on the total debt from
7.4% in 1999 to 9.62% in 2000, an increase in amortization of deferred
financing costs related to the 1999 expansion of the Credit Facility and
anticipated costs associated with amending the Credit Facility.
Results of Operations for the Nine Months Ended September 30, 2000 and 1999
<TABLE>
The following table sets forth items in the Consolidated Statement
of Operations as a percentage of revenues and the percentage changes in the
dollar amounts of these items compared to the same period in the previous
year:
<CAPTION>
- 17 -
Percentage of Percentage
($thousands) Revenue Change
2000 Over
Nine Months Ended September 30 2000 1999 2000 1999 1999
<S> <C> <C> <C> <C> <C>
Revenues $88,704 $69,519 100.0% 100.0% 27.6%
Cost of operations 60,210 47,372 67.9 68.1 27.1
Selling, general and administrative expenses 14,924 8,705 16.8 12.5 71.4
Depreciation and amortization expense 7,999 5,611 9.0 8.1 42.6
Income from operations 5,571 7,831 6.3 11.3 (28.9)
Interest and financing expense 7,189 4,343 8.1 6.3 65.5
Income (loss) before income taxes (1,618) 3,488 (1.8) 5.0 n.a.
Income tax provision (recovery) (842) 1,256 (0.9) 1.8 n.a.
Net income $ (776) $ 2,232 (0.9)% 3.2% n.a.
EBITDA $13,570 $13,442 15.3% 19.3% 1.0%
</TABLE>
Revenue
<TABLE>
The sources of revenue and growth rates are as follows: ($thousands)
<CAPTION>
Growth
Nine Months Ended September 30 2000 1999 Rates
<S> <C> <C> <C>
Commercial and industrial collection $50,522 57.0% $40,012 57.6% 26.3%
Residential collection 19,946 22.5 15,188 21.8 31.3
Transfer station and landfill 7,276 8.2 5,669 8.1 28.3
Commercial and residential recycling 3,753 4.2 2,132 3.1 76.0
Contract management and other
specialized services 7,207 8.1 6,518 9.4 10.6
$88,704 100.0% $69,519 100.0% 27.6%
</TABLE>
<TABLE>
Management's estimates of the components of changes in the Company's
consolidated revenue are as follows:
<CAPTION>
Nine Months Ended September 30 2000 1999
<S> <C> <C>
Price 2.0% 2.4%
Volume 0.9 2.7
Acquisitions, net of divestitures 23.7 52.8
Foreign currency translation 1.0 (1.0)
Other - -
Total 27.6% 56.9%
</TABLE>
- 18 -
During the nine months ended September 30, 2000, four acquisitions
were completed with annualized revenue of approximately $7.2 million. In
the same period of the prior year, 19 acquisitions were completed (15 in
Canada and 4 in the United States) with annualized revenue of approximately
$34.0 million. Other represents the impact on revenues of the May 18, 1999
fire that destroyed one of the Company's material recycling and transfer
station facilities. The facility reopened in late June 2000.
<TABLE>
Revenue and growth in revenue from geographic components are as
follows: ($thousands)
<CAPTION>
Nine Months Ended September 30 2000 1999 Growth Rates
<S> <C> <C> <C>
Eastern Canada $46,239 52.1% $35,127 50.5% 31.6%
Western Canada 22,270 25.1 15,347 22.1 45.1
United States 20,195 22.8 19,045 27.4 6.0
$88,704 100.0% $69,519 100.0% 27.6%
</TABLE>
Cost of operations
Cost of operations for the nine months ended September 30, 2000 was
$60.2 million compared to $47.4 million for the nine months ended September
30, 1999. The 27.1% increase in cost of operations was attributable
primarily to increases in the Company's revenues described above. Cost of
operations as a percentage of revenue for the nine months ended September
30,2000 as 67.9%, compared with 68.1% in 1999. In the nine months ended
September 30, 2000, cost of operations decreased as a percentage of revenue
primarily as a result of the synergies achieved from integrating
acquisitions during the past 12 months and further internalization of waste
through the Company's transfer stations.
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months
ended September 30, 2000 were $14.9 million compared to $8.7 million for
the period ended September 30, 1999. The $6.2 million (71.4%) increase
primarily relates to additional management, consulting and related costs
to support the Company's level of growth and additional requirements related
to the change to a public company in June of 1999. In addition during the
period, the Company incurred additional costs in excess of $2.2 million
related to failed acquisitions, severance costs, a contract renegotiation
and legal fees. As a percentage of revenues, SG&A expenses increased to
16.8% for the nine months ended September 30, 2000 from 12.5% in the same
period last year.
Depreciation and amortization expense
Depreciation and amortization expense for the nine months ended
September 30, 2000 was $8.0 million compared to $5.6 million for the nine
months ended September 30, 1999. The 42.6% increase was primarily due to
acquisition activity over the past 12 months. As a percentage of revenues,
depreciation and amortization expense increased to 9.0% for the nine months
ended September 30, 2000 from 8.1% for the period ended September 30, 1999.
The increase primarily relates to depreciation and amortization associated
with the increased goodwill on the balance sheet and capital expenditures
incurred over the past 12 months.
- 19 -
Interest and financing expense
In the nine months ended September 30, 2000, interest and financing
expense increased 65.5% to $7.2 million from $4.3 million for the period
ended in 1999. The increase over the prior year was primarily a result of
an increase in the average level of outstanding debt due to borrowings to,
finance acquisition activity over the past 12 months, an increase in the
weighted average rate of interest on the total debt from 7.5% in 1999 to
8.4% in 2000, and an increase in amortization of deferred financing costs
related to the 1999 expansion of the Credit Facility.
Income taxes
The effective income tax rate during 2000 has increased to 52.0%
compared to 36.0% during the same period in 1999. The increase rate over
the prior year primarily relates to the higher proportion of business in
Canada, which has a higher tax rate than the United States, and the increase
in non-deductible goodwill amortization.
Financial Condition
<TABLE>
As of September 30, 2000 and December 31, 1999, the Company's
capital consisted of:($thousands)
<CAPTION>
September 30, 2000 December 31, 1999 Change
(unaudited) (audited)
<S> <C> <C> <C>
Long-term debt $103,114 63.5% $ 91,344 59.5% 12.9%
Deferred income taxes 3,538 2.2 3,813 2.5 (7.2)
Stockholders' equity 55,773 34.3 58,320 38.0 (4.4)
$162,425 100.0% $153,477 100.0% 5.8%
</TABLE>
The $11.8 million increase in long-term debt is primarily a result
of borrowing since year-end to finance acquisition activity and capital
expenditures, partly offset by repayments during the period.
Liquidity and Capital Resources
The Company's capital requirements include acquisitions, working
capital increases and fixed asset replacement. The Company plans to meet
capital needs through various financial sources, including internally
generated funds, debt and equity financing. As of September 30, 2000,
adjusted working capital was $6.8 million (December 31, 1999 - $7.6 million),
excluding the current portion of long-term debt. The Company generally
applies the cash generated from its operations that remains available after
satisfying working capital and capital expenditure requirements to reduce
indebtedness under the Credit Facility and to minimize cash balances.
Working capital requirements are financed from internally generated funds
and bank borrowings.
For the nine months ended September 30, 2000, net cash provided by
operations was $6.1 million, compared to $3.2 million for the nine months
ending September 30, 1999. This increase was primarily due to a reduction
in the usage of cash for working capital primarily through improved accounts
receivable. Days sales outstanding has significantly improved from 50 in
September of 1999 to 43 in September 2000. This was partly offset by
higher tax payments.
- 20 -
For the nine months ended September 30, 2000, net cash used in
investing activities was $21.0 million. Most of this was related to
spending on capital expenditures of $13.7 million and funding current year
acquisitions of approximately $7.9 million. Capital expenditures for 2000
are expected to be approximately $7.5 million primarily for vehicle and
equipment additions and replacements. The Company intends to continue to
fund capital expenditures principally through internally generated funds.
The net cash used in investing decreased $29.5 million from the $50.5 million
used in investing activities for the nine months ending September 30, 1999.
This is primarily due to the reduced acquisition activity partly offset by
the timing and increased level of capital expenditures in the current year.
For the nine months ended September 30, 2000, net cash provided by
financing activities was $13.6 million. This was provided primarily by net
borrowings of $25.5 million and was partly offset by cash used for other
financing payments. The $33.9 million decrease from the $47.5 million
provided by financing activities in the prior year was primarily due to
the reduction in acquisition activity.
The Company has a combined $110.0 million Credit and Term Loan
Agreement ("Loan Agreement") with a syndicate of banks led by Bank of
America N.A., as agent and United States agent, Bank of America Canada as
Canadian agent and Canadian Imperial Bank of Commerce as syndication agent.
As of September 30, 2000 approximately $96.9 million (December 31, 1999 -
$72.8 million) under the Loan Agreement was outstanding. The Loan Agreement
is secured by all of the Company's assets, including the interest in the
equity securities of the Company's subsidiaries. Of the $96.9 million
outstanding at September 30, 2000, $44.8 million consisted of U.S. dollar
loans bearing interest at approximately 10.8% and $52.1 million consisted
of Canadian dollar loans bearing interest at approximately 10.5%.
The Company believes that its cash flows from its operations
throughout the balance of fiscal 2000 and for fiscal 2001 will be sufficient
to service its ongoing business obligations and to repay debt service
obligations based on the existing arrangements under its senior debt
facility. As a result of the breach of a covenant under the Senior Credit
facility, the Senior Debt facility is subject to demand. There is no
assurance that the Company will be successful in its efforts to have
the covenant violation waived or to have the existing covenants amended.
In the event that the Company is unsuccessful in its negotiations with the
bank and should the lenders demand payment on their Senior Debt facility,
the Company would be required to raise additional debt or equity to
extinguish the Senior Debt facility. However, there is no assurance that
the Company would be successful in obtaining additional debt or capital
on acceptable terms.
The current Loan Agreement will terminate in November 2004. The
Loan Agreement requires the Company to maintain fixed financial ratios and
satisfy other predetermined requirements, such as a minimum net worth, a
minimum interest coverage ratio, a maximum debt to total capital ratio and
a maximum debt to proforma EBITDA ratio and imposes annual restrictions on
capital expenditures. The Loan Agreement also restricts the Company's
ability to incur or assume other debt or capital leases beyond a fixed
amount and does not permit the payment of cash dividends. In addition, it
requires the lenders' approval for certain acquisitions. As of September
30, 2000, an aggregate of $100.3 million was outstanding under the Loan
Agreement, after taking into account letters of credit of $3.4 million
subject to the restrictions noted above.
- 21 -
Seasonality
The Company's results of operations vary seasonally, with revenues
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 Company believes this seasonality can be attributed 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. Second,
some of the Company's 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.
Consequently, operating income is generally lower during the winter months.
Finally, during the summer months, there are more tourists and part-time
residents in some of the Company's service areas, resulting in more
residential and commercial collection business.
Other legal proceedings
See Note 4 (b) of Notes to Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in information that would be provided
in this section during the nine months ended September 30, 2000.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 (b) of Notes to Consolidated Financial Statements.
- 22 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITAL ENVIRONMENTAL RESOURCE INC.
November 14, 2000 /s/ Bruce Cummings
Bruce Cummings
Chairman of the Board
November 14, 2000 /s/ David Langille
David Langille
Executive Vice President,
Chief Financial Officer
- 23 -
