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.
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
<TABLE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
<CAPTION>
September 30,
December 31,
2000
1999
(unaudited)
(audited)
ASSETS
<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
<TABLE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
<CAPTION>
September 30,
December 31,
2000
1999
(unaudited)
(audited)
LIABILITIES
<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
<TABLE>
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)
<CAPTION>
STATEMENTS OF OPERATIONS
Three Months Ended
September 30
Nine Months Ended
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
The accompanying notes are an integral part of these statements
</TABLE>
<TABLE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands of U.S. dollars)
(unaudited)
<CAPTION>
Common stock
Accumulated other comprehensive
Retained earnings
Shares
Amount
loss
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
<TABLE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(unaudited)
<CAPTION>
Nine Months Ended
September 30
2000
1999
<C>
<C>
<C>
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
</TABLE>
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.
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(In thousands of U.S. dollars)
<TABLE>
Long-term debt consists of the following:
<CAPTION>
September 30,
December 31,
2000
1999
(unaudited)
(audited)
<C>
<C>
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
</TABLE>
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.
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.
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.
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.
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
<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>
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.
Results of Operations for the Three 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>
($ thousands)
Percentage of Revenue
PercentageChange
Three Months Ended September 30
2000
1999
2000
1999
2000 Over 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>
<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>
<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>
<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 in certain 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 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 $1.6 million
for the comparable period in 1999. The increase over the prior year was
primarily a result of an increase in the average level of outstanding debt
due to borrowings to finance acquisition activity over the past 12 months,
an increase in the weighted average rate of interest on the total debt from
7.4% in 1999 to 9.62% in 2000, an increase in amortization of deferred
financing costs related to the 1999 expansion of the Credit Facility and
anticipated costs associated with amending the Credit Facility.
Results of Operations for the Nine Months Ended September 30, 2000 and 1999
<TABLE>
The following table sets forth items in the Consolidated
Statement of Operations as a percentage of revenues and the percentage
changes in the dollar amounts of these items compared to the same
period in the previous year:
<CAPTION>
($ thousands)
Percentage of Revenue
Percentage
Change
Nine Months Ended September 30
2000
1999
2000
1999
2000 Over 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>
<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>
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>
<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.
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>
<C>
<C>
Long-term debt
Deferred income taxes
Stockholders' equity
$103,114
3,538
55,773
63.5%
2.2
34.3
$ 91,344
3,813
58,320
59.5%
2.5
38.0
12.9%
(7.2)
(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.
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.
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.
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
- 1 -
- 16 -
