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-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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
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Securities registered pursuant to Section 12(b) of the Act:
Common Shares (no par value per share)
Securities registered pursuant to Section 12(g) of the Act: None
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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 _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant at March 20, 2000 was $29.7 million (based on
the closing sale price on the NASDAQ Exchange on March 20, 2000). At March 20,
2000 there were 7,196,627 shares of the registrant's Common Stock issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement to be used by the Company in connection with its 2000
Annual Meeting of Shareholders is incorporated by reference into Part III of
this Form 10-K.
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CAPITAL ENVIRONMENTAL RESOURCE INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
PART 1
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Item 1 Business....................................................................... 3
Item 2 Properties..................................................................... 23
Item 3 Legal Proceedings.............................................................. 24
Item 4 Submission of Matters to a Vote of Security Holders............................ 25
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters........................................................................ 25
Item 6 Selected Financial Data........................................................ 25
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operation (including item 7A)....................................... 27
Item 8 Financial Statements and Supplementary Data.................................... 39
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... 82
PART III ............................................................................... 82
PART IV
Item 14 Exhibits, Financial Statements, and Reports on Form 8-K........................ 82
SIGNATURES................................................................................... 83
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PART I
NOTE RELATING TO FORWARD-LOOKING STATEMENTS
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT DESCRIPTIONS OF
HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND
UNCERTAINTIES. THESE STATEMENTS AND OTHER STATEMENTS MADE ELSEWHERE BY THE
COMPANY OR ITS REPRESENTATIVES, WHICH ARE IDENTIFIED OR QUALIFIED BY WORDS SUCH
AS "LIKELY," "WILL," "SUGGESTS," "EXPECTS," "MAY," "BELIEVE," "COULD," "SHOULD,"
"WOULD," "ANTICIPATES," "PLANS" OR SIMILAR EXPRESSIONS, ARE BASED ON A NUMBER OF
ASSUMPTIONS. ACTUAL EVENTS OR RESULTS COULD DIFFER MATERIALLY FROM THOSE
CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH
HEREIN AND IN THE COMPANY'S OTHER SEC FILINGS AND INCLUDING, IN PARTICULAR;
ABILITY TO MANAGE GROWTH; THE AVAILABILITY AND INTEGRATION OF ACQUISITION
TARGETS; COMPETITION; GEOGRAPHIC CONCENTRATION; AND GOVERNMENT REGULATION.
SHAREHOLDERS, POTENTIAL INVESTORS AND OTHER READERS ARE URGED TO CONSIDER THESE
FACTORS CAREFULLY IN EVALUATING THE FORWARD-LOOKING STATEMENTS AND ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS MADE HEREIN ARE ONLY MADE AS OF THE DATE OF THIS
REPORT AND THE COMANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE SUCH
FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT EVENTS OR CIRCUMSTANCES.
ITEM 1. BUSINESS
General
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 Environmental 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 39 solid waste services businesses in Canada and the United
States, including 40 collection operations, 11 transfer stations, 7 recycling
processing facilities and a contract to operate 2 landfills. The consolidated
operations presently serve over 584,000 residential, commercial and industrial
customers. For the year ended December 31, 1999, 73.8% of the Company's revenue
was derived in Canada. Largely as a result of acquisitions, the Company believes
that it has become one of the largest solid waste services companies in Canada,
and that it has significant opportunities for further growth in both Canada and
the northern United States.
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The Company has seven service areas through which it currently serves
25 markets in Canada and four markets in the United States. The Company believes
that these 29 market areas provide significant opportunities for growth because:
o there are a large number of private solid waste services companies
suitable for acquisition in these markets;
o there are generally fewer competing national solid waste services
companies in these markets;
o some of these markets have strong projected economic and population growth
rates;
o there is adequate disposal capacity available in these markets; and
o the Company's senior management team has substantial knowledge of these
markets.
In addition, the Company believes that the Canadian market is particularly
attractive. The Company is the only Canadian headquartered, publicly traded
acquirer of Canadian solid waste companies, and the only publicly held company
that has the Canadian solid waste market as a focus of its strategy. Combined
with the Company's senior management knowledge of the Canadian market, the
Company believes it will be an attractive acquirer when owners of Canadian firms
consider selling their businesses, and a viable alternative to the large
U.S.-based solid waste companies.
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
make acquisitions that complement its existing business and to generate internal
growth. The Company seeks to acquire businesses that either establish its market
presence in new target markets or 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.
In the markets in which the Company operates, it seeks to secure
arrangements for the disposal of the solid waste collected in order to maintain
competitive prices for collection services. As a result of this strategy, for
the month ended December 31, 1999, the Company disposed of approximately 18% of
the waste collected at privately owned landfills and transfer stations pursuant
to long-term disposal agreements which the Company believes are at or below
market rates. Additionally, the Company disposed of approximately 38% of the
solid waste collected at municipally owned landfills which generally charge the
same disposal rates to all customers. The Company disposed of approximately 29%
of the waste collected at the Company's transfer stations, from which the waste
was transported to remote disposal sites where the Company has favorable
disposal contracts. Collectively, these three options accounted for
approximately 85% of the solid waste the Company collected. The Company disposed
of the remaining 15% at other third-party disposal sites.
Industry Overview
According to Waste Age, the United States solid waste services industry
generated $36.9 billion in revenues during 1997. Based on the fact that Canada's
population is one-tenth the size of the population of the United States and has
similar economic and demographic characteristics, the Company believes that the
Canadian solid waste services industry generated revenues of approximately
one-tenth of those of the United States solid waste services industry, or $3.7
billion, in 1997. In both the United States and Canada, the solid waste industry
is comprised of a small number of large national competitors, a substantial
number of small private operators and
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municipal governments that own waste collection and disposal operations. In
Canada, municipalities provide waste collection services to approximately 43% of
Canadian residents and own a substantial majority of the nation's solid waste
landfills. In the United States, approximately 27% of the total revenue of the
solid waste industry is accounted for by more than 5,000 private, predominantly
small, collection and disposal businesses, approximately 41% by publicly traded
solid waste services companies and approximately 32% by municipal governments
that provide collection and disposal services.
We believe that the solid waste industry in secondary markets of Canada
and the northern United States is characterized by the following:
o a large number of private solid waste services companies suitable for
acquisition in these markets;
o generally fewer competing national solid waste services companies in these
markets; and
o some of these markets have strong projected economic and population growth
rates
The Company believes that the Canadian market for solid waste services has
the following specific attributes:
o pricing structures for collection and disposal services are generally
higher than in the United States;
o a large portion of the residential solid waste collection and disposal
market is municipally controlled, creating privatization opportunities;
and
o exclusive municipal contracts and franchise agreements are frequently
granted to a single operator.
The solid waste services industry in both Canada and the United States has
undergone significant consolidation and integration since 1990. The Company
believes that this consolidation and integration in both Canada and the United
States has been caused primarily by:
o the ability of larger operators to achieve certain economies of scale;
o in the United States, the trend for companies to selectively integrate
collection and disposal capabilities where publicly available disposal is
not readily available at competitive rates;
o the continued privatization of solid waste collection and disposal
services by municipalities and other governmental bodies and authorities;
and
o stringent environmental regulation and enforcement in the United States
and in certain Canadian provinces, resulting in increased capital
requirements for collection companies and landfill operators in those
areas.
Economies of Scale. Larger operators achieve economies of scale by
expanding the breadth of services and density in their market areas, and through
vertical integration where such integration provides these operators with an
economic advantage. Control of the waste stream in their market areas, combined
with access to significant financial resources to make acquisitions, has allowed
larger solid waste collection and disposal companies to be more cost-effective
and competitive.
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Selective Integration of Collection and Disposal Operations. In the United
States, the Company believes operators frequently seek to become more efficient
by establishing an integrated network of solid waste collection operations,
transfer stations and disposal options where this integration provides an
economic advantage over its competitors. In Canada, operators also seek to
establish integrated solid waste service networks, where doing so provides an
economic advantage. However, since landfills in Canada are predominantly
municipally owned, and the strict regulatory framework in certain Canadian
provinces makes it difficult for private companies to obtain permits to build
landfills, the Company believes owning landfills has not been a significant
component of the disposal strategy for operators in Canada.
Privatization of Collection and Disposal Services. In the provinces and
states in which the Company operates, city or municipal governments have
historically provided a variety of solid waste services using their own
personnel. Over time, many municipalities have opted to contract out their solid
waste collection and disposal services to the private sector. Privatization is
often an attractive alternative for municipalities due, among other reasons, to
the ability of integrated operators to leverage their economies of scale to
provide the community with a broader range of services while enabling the
municipality to reduce its own capital asset requirements. The Company believes
that these factors have caused municipalities throughout Canada and the northern
United States to consider privatization and have created significant growth
opportunities for solid waste services companies in Canada and the northern
United States.
Increased Regulatory Impact. Stringent industry regulations such as the
Environmental Protection Act in Ontario and the Waste Management Act in British
Columbia and the Subtitle D Regulations in the United States have resulted in
rising operating and capital costs and have accelerated consolidation of the
solid waste industry in those provinces and in the United States. Many smaller
industry participants have found the costs and technical expertise required by
these regulations difficult to bear and have decided to either close their
operations or sell them to larger operators.
According to the Ontario, Alberta and British Columbia Ministries of
Environment, in these provinces there are approximately 600 to 700 operating
landfill sites, of which less than 20 are privately owned. This lack of private
landfill ownership is due to the strict regulatory framework in these Canadian
provinces, which makes it difficult for private companies to obtain permits to
build new landfills or expand existing privately owned landfills. Accordingly,
most landfills in Canada are owned by the municipality in which the landfill is
located. Municipally owned landfills in Canada and the northern United States
typically charge all customers the same price per ton of waste disposed,
regardless of the customer's size or the volume of waste it disposes of at the
facility.
Despite the considerable consolidation and integration that has occurred
in the solid waste industry since 1990, the industry in Canada and the northern
United States remains primarily regional in nature and highly fragmented. The
Company believes that the fragmented nature of the industry presents substantial
consolidation and growth opportunities.
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Strategy
The Company's objective is to build a leading solid waste services company
in the secondary markets of Canada and the northern United States. In the
markets in which the Company operates, it seeks to:
o achieve a leading market share;
o control sufficient collection volume in order to secure cost-effective
disposal capacity;
o offer the full range of services required by customers; and
o own landfills or other disposal options in those collection markets where
doing so provides an economic advantage.
The Company's strategy for achieving these objectives is to:
o expand operations into new markets and service areas through platform
acquisitions which establish an initial market presence, and through
tuck-in acquisitions which complement or expand existing operations;
o generate internal growth by providing additional and upgraded services,
increasing sales penetration and implementing selective price increases;
and
o implement operating enhancements and efficiencies.
The Company focuses on markets that are generally characterized by:
o a large number of private solid waste services companies suitable for
acquisition;
o a geographically dispersed population, which the Company believes deters
competition from established waste management companies;
o a competitive environment for solid waste services that offers the
opportunity to acquire a leading market position;
o a small number of competitors;
o the availability of adequate disposal capacity, either through municipally
owned landfills, through long-term agreements with third-parties or
acquisition of a landfill;
o a regulatory environment that is favorable for well-capitalized operators;
and
o strong projected economic or population growth rates.
Expansion Through Acquisitions. The Company intends to expand
significantly the scope of operations by acquiring solid waste collection,
transfer and recycling operations and disposal capacity in existing markets
through tuck-in acquisitions and in new service areas or markets through
platform acquisitions.
The Company believes that numerous tuck-in acquisition opportunities exist
within current and targeted market areas. The Company has identified more than
100 companies that provide collection and disposal services within existing
market areas. The Company believes that acquiring many of these companies would
provide opportunities to market additional services and to improve its market
share, route density and profitability.
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The Company intends to continue an acquisition-based growth strategy by
entering new service areas or markets through platform acquisitions that provide
significant collection volume and strategic relationships to secure access to
disposal capacity. The Company targets platform acquisitions of companies with
strong local management expertise and relationships which can be retained in
geographic areas generally characterized by, among other things, an attractive
competitive landscape and the ability to effect other acquisitions in the
vicinity. Once the Company has established a platform in a new service area or
market, it seeks to strengthen its presence there and in adjacent service areas
and markets by marketing additional and upgraded services to existing customers,
adding new customers and making tuck-in acquisitions.
Internal Growth. To generate continued internal growth, the Company:
o provides additional or upgraded waste services to its existing customers;
o increases sales penetration through intensified sales and marketing
efforts and bidding for new municipal contracts; and
o implements selective price increases.
Operating Enhancements for Acquired and Existing Businesses. The Company
has established standards for each of its markets which set operating criteria
for collection, transfer, disposal and other operations. These criteria include
collection and disposal routing efficiency, equipment utilization, cost
controls, commercial weight tracking and employee training and safety
procedures.
The Company has a decentralized operating strategy which encourages its
employees to develop cross-functional expertise and thereby better serve the
local markets in which they operate. The Company believes that the
cross-functional expertise of its employees reduces selling, general and
administrative costs and gives general managers an opportunity to assume greater
responsibility. While the Company has developed certain company-wide operating
and financial standards, such as the use of the TRUX(R) software program and
consolidated bookkeeping, accounting and cash management controls for each of
its 29 market areas, the Company tailors customer management for each market
based on industry standards and local conditions.
Acquisition Program
The Company currently serves 29 markets in seven service areas in the
provinces of Ontario, Alberta and British Columbia and in the states of New York
and Pennsylvania. The Company also provides limited waste collection services in
the province of Quebec from its Ontario market. The Company believes that these
and other secondary markets in Canada and the northern United States with
similar characteristics offer significant opportunities for expanding the scope
of operations and achieving strategic objectives. The Company has assembled an
experienced team of acquisition professionals, including operations,
environmental, engineering, legal and financial personnel, engaged in
identifying and evaluating acquisition opportunities.
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The Company has developed a set of financial, geographic, environmental
and management criteria to assist management in evaluating acquisition
candidates. Management uses these criteria to evaluate a variety of factors,
including, but not limited to:
o the candidate's expected internal rate of return, return on assets and
return on revenue;
o the candidate's historical and projected financial performance;
o any potential operating cost savings that may be gained by combining the
candidate's operations with the Company;
o whether the geographic location of the candidate will enhance or expand
existing market areas or ability to attract other acquisition candidates;
o whether the acquisition will strengthen or increase its local market
position;
o the experience of the candidate's management and customer service
providers, their relationships with local communities and their
willingness to continue as employees of the Company;
o the composition and size of the candidate's customer base and whether the
customer base is served under municipal contracts or other exclusive
arrangements;
o the liabilities of the candidate, including its environmental liabilities;
and
o the nature of the services provided.
Before completing an acquisition, the acquisition team, led by a corporate
development officer and supported by a service area Vice President, performs
extensive environmental, operational, engineering, legal, human resources and
financial due diligence. All acquisitions are subject to initial evaluation and
approval by the acquisition team and senior management before being recommended
to the Board of Directors, which reviews any material acquisition.
The Company seeks to integrate each acquired business promptly and to
minimize disruption to the ongoing operations of both Capital and the acquired
business, and generally attempt to retain the senior management of acquired
businesses. Integration of an acquired operation is achieved by implementing an
80-point acquisition checklist, which addresses key areas for integration
including human resources, finance and administration, asset maintenance and
marketing and public relations. The service area Vice President and the
appropriate corporate development officer assume primary responsibility for
implementing the 80-point acquisition checklist and improving the acquired
company's administrative efficiency, profitability and operational productivity.
Service area Vice Presidents are responsible for the successful integration of a
newly acquired company. The Company generally seeks to integrate an acquired
business within 90 days of its acquisition.
Service Areas
The Company operates on a decentralized basis, which places decision
making authority with operating management close to the customer. This enables
the Company to identify customer needs and competitive conditions quickly. The
Company's operations are divided into seven service areas. The Company currently
serves 29 market areas covering two geographic territories: Canada, currently
comprised of Eastern, Mid, Northern and Southwestern Ontario service areas, and
the Alberta and British Columbia service areas and the northern United States
currently comprised of the Western and Central New York and Pennsylvania service
area. Within each service area the Company has tailored its competitive strategy
and identified multiple market areas which can support a local operation. New
service areas will be created as required to accommodate growth.
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A service area Vice President manages all the operations of a service area
with the help of general managers in most market areas. A service area Vice
President is responsible for budgeting, internal growth, municipal contract
bidding, coordination of operations, attaining economies of scale within the
service area, monthly reporting and integration of acquired businesses. The
market area general managers are responsible for maintaining service quality,
promoting safety, implementing marketing programs, cost management, and
overseeing day-to-day operations, including sales supervision and the management
of customer service agreements.
The Company's financial management, accounting, mergers and acquisitions,
environmental compliance, risk management and certain personnel functions are
centralized to improve productivity, lower operating costs and ensure
consistency of financial and operating standards. The Company has a standardized
management information system that assists market area personnel in making
decisions based on real time financial, productivity, maintenance and customer
information. While service area management operates with a high degree of
autonomy, corporate management monitors service area operations and requires
adherence to accounting, purchasing and internal control policies, particularly
with respect to financial and compliance matters. Executive officers review the
performance of the service area Vice Presidents and operations on a regular
basis.
The following are the seven service areas by geographic territory:
Canada
The Company has four service areas within the province of Ontario: Eastern
Ontario, Mid Ontario, Northern Ontario and Southwestern Ontario.
Eastern Ontario Service Area. The Eastern Ontario service area, which
currently includes two markets, Ottawa and Kingston, encompasses approximately
4,864 square miles and has a combined population of approximately 1.36 million
residents. The Company operates a transfer station and a material recycling
facility in Kingston. The Company also has disposal capacity in the Ottawa
market area through a disposal agreement with a third-party disposal site that
it believes is at or below market rates. The Company provides commercial and
industrial collection and recycling services to its customers in the Eastern
Ontario service area, and through municipal contracts in Ottawa-Carleton and
Gatineau, Quebec provides residential collection and recycling services.
Mid Ontario Service Area. The Mid Ontario Service Area is currently made
up of four markets, Peterborough, Lindsay, Scarborough and Brampton. It
encompasses approximately 3,825 square miles with a combined population of
approximately 5.9 million residents and is characterized by a broad geographic
territory with pockets of more densely populated areas. In Peterborough and
Lindsay, the Company disposes of waste at municipal landfills. In Scarborough
and Brampton, the Company disposes of waste at it's own transfer stations. In
all of the described market areas, the Company provides commercial and
industrial collection and recycling services and through municipal contracts
with the City of Scarborough, the City of East York, the Town of Lindsay,
Mariposa Township, the Village of Omemee, the Village of Bobcaygeon and the
Village of Sturgeon Point provides residential collection and recycling
services. The Company also owns and operates a material recycling facility in
the Lindsay market area.
Northern Ontario Service Area. The Northern Ontario service area currently
includes six markets: Barrie, Bracebridge, Keswick, Newmarket, Penetanguishene
and Orillia. It
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encompasses approximately 8,700 square miles and has a combined population of
approximately 600,000 resident. The Company owns and operates three material
recycling facilities and four transfer stations located in the service area. In
addition to industrial and commercial collection services, the Company has
municipal waste collection and recycling contracts in the District Municipality
of Muskoka and the Municipalities of Newmarket, Keswick, East Gwillumbury,
Uxbridge and Parry Sound. The Company also operates two municipal landfills in
Gravenhurst and Bracebridge.
Southwestern Ontario Service Area. The Southwestern Ontario service area,
which currently includes four markets, Brantford, Kitchener, Hamilton and
Sarnia, encompasses approximately 4,177 square miles and has a combined
population of approximately 1.4 million residents. The Company operates a
transfer station in Hamilton. The Company also has disposal capacity in the
Hamilton and Sarnia market areas through disposal agreements with third-party
disposal sites that it believes are at or below market rates. Though the Company
presently disposes of no waste outside of Canada, the Southwestern Ontario
service area provides the ability to access disposal alternatives in the United
States at rates which are competitive with local third-party and municipal
disposal alternatives. The Company provides commercial and industrial collection
and recycling services to its customers in the Southwestern Ontario service
area, and through municipal contracts in Brantford, Paris, and Cambridge, it
provides residential collection and recycling services.
The Company also has two service areas in Western Canada: the southern
portion of British Columbia and the southern and central portions of Alberta.
British Columbia Service Area. The service area in British Columbia
currently includes six markets in Abbotsford, Penticton, Vernon, Kamloops,
Parksville and Comox. It encompasses approximately 2,600 square miles, has a
population of approximately 2.8 million residents and is characterized by
municipal disposal opportunities. The Company provides commercial and industrial
collection and recycling services to customers in the British Columbia service
area, and through municipal contracts in Vernon, Nanaimo, Lantzville and
provides residential collection and recycling services. The Abbotsford location
owns and operates a transfer station which will be used to export waste to the
Paintearth Landfill in Coronation, Alberta. The Company has material recycling
facilities in each of Parksville and Comox. Franchise agreements with Cities of
Penticton, Comox and Courtenay provides the Company with the exclusive right to
provide commercial, industrial and residential services within the city's
boundaries.
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Alberta Service Area. The Alberta service area, which currently includes
three markets in Edmonton, Calgary and Red Deer, encompasses approximately
13,600 square miles and has a population of approximately 2.0 million residents.
The Company estimates that half of the solid waste collected in the Alberta
service area is disposed of at municipally owned landfill sites and the other
half is disposed of through a long-term arrangement with a private landfill
operator. In February 2000, Capital purchased the Paintearth Municipal Landfill
in Coronation, Alberta. The landfill has 4.6 million cubic meters or 3.2 million
tons of permitted airspace. The permit covers 160 of 470 acres and the landfill
has at least 25 years of airspace on what is currently permitted. The Company
also provides commercial and industrial collection and recycling services to
customers in the Alberta service area, and operates a transfer station in
Edmonton. The Company has a franchise agreement with the City of Red Deer that
provides the exclusive right to provide commercial and residential service
within the city's boundaries.
United States
The Company has a service area in the northern United States covering
Western and Central New York state and Pennsylvania.
United States Service Area. The United States service area, which
currently includes four markets in Rochester, Syracuse and Watertown, New York
and Williamsport Pennsylvania, encompasses approximately 8,300 square miles and
has a population of approximately 2.1 million residents. The Rochester market
provides commercial and industrial collection services to customers in this
service area, and residential collection services through subscription
arrangements and municipal contracts. The Syracuse market is characterized by
flow control regulations and municipally owned disposal options in the Watertown
market area. The Company owns and operates a transfer station in Williamsport.
The Company provides commercial and industrial collection and recycling services
to its customers in the Syracuse and Watertown markets, and through subscription
arrangements in greater Williamsport and Syracuse, it provides residential
collection and recycling services.
Operations
Commercial, Industrial and Residential Waste Services
As of December 31, 1999, the Company served approximately 584,000
customers, comprised of approximately 30,000 commercial clients, approximately
4,000 industrial clients and approximately 550,000 residential and other
clients.
The Company disposes of the waste it collects in one of four ways:
o at municipally owned landfills or incinerators that generally charge the
same per-ton disposal rates to all customers;
o under long-term disposal contracts with private landfill owners or
operators at market rates or, in some instances, at below market rates;
o through the Company's own transfer stations that give it access to remote
landfill sites; or
o at privately owned landfills on an as needed basis.
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The Company's commercial and industrial services are performed principally
under one to three year service agreements or shorter term purchase orders. Fees
are determined by a variety of factors, including collection frequency, level of
service, route density, the type, volume and weight of the waste collected, type
of equipment and containers furnished, the distance to the disposal or
processing facility, the cost of disposal or processing and prices charged in by
competitors for similar service. The Company's ability to pass on price
increases is sometimes limited by the terms of its contracts. The Company's
long-term solid waste collection contracts with municipalities typically contain
a formula, generally based on a pre-determined published price index, for
automatic adjustment to fees to cover increases in some, but not all, operating
costs plus a pass-through of any disposal cost increases. Collection of larger
volumes associated with commercial and industrial waste streams generally helps
improve operating efficiencies, and consolidation of these volumes allows the
Company to negotiate more favorable disposal prices. The Company's commercial
and industrial customers use portable containers for storage, enabling the
Company to service many customers with fewer collection vehicles. Commercial and
industrial collection vehicles normally require one operator. The Company
provides two to eight cubic yard containers to commercial customers and 10 to 50
cubic yard containers to industrial customers. No single commercial or
industrial contract is material to the Company's results of operations.
The Company generates fees under exclusive municipal contracts that grant
it the right to service all or a portion of the residences in a specified
community for a set fee. As of December 31, 1999, the Company had 56 municipal
contracts, some of which were awarded by the same municipality. Municipal
contracts are typically awarded on a competitive bid basis and thereafter on a
bid or negotiated basis. No single municipal contract is material to the
Company's results of operations. Similarly, the Company has long-term franchise
agreements, with the cities of Red Deer, Alberta and Penticton, British
Columbia. Under the terms of each of these agreements, the Company has exclusive
rights to provide a range of solid waste services to the community. In Red Deer,
the service provisions are commercial and residential, and in Penticton,
commercial, industrial and residential. Each of the franchise agreements was bid
on a competitive bid basis. Rates for all service provisions are set for the
term of the agreement. The Company has approximately two years remaining under
both franchise agreements, which were originally five-year agreements.
Fees for residential solid waste services performed on a subscription
basis are based primarily on route density, the frequency and level of service,
the distance to the disposal or processing facility, the cost of disposal or
processing and prices charged in its markets for similar service. No single
residential subscription arrangement is material to the Company's results of
operations.
Transfer Station Services
The Company has an active program to acquire, develop, own and operate
transfer stations proximate to its operations. Currently, the Company operates
eleven transfer stations in Edmonton, Alberta; Abbotsford, British Columbia;
Barrie, Bracebridge, Brampton, Hamilton, Kingston, Newmarket, Orillia and
Scarborough, Ontario; and Williamsport, Pennsylvania. Each transfer station
receives, compacts and transfers solid waste to larger vehicles for transport to
landfills. The Company generally seeks to establish a transfer station network
in service areas where it can gain access to remote disposal capacity at rates
that are lower than local municipal or third-party disposal options. The Company
believes that additional benefits of building a transfer station network
include:
13
<PAGE>
o concentrating the waste stream from a wider area, which gives greater
leverage in negotiating for more favorable disposal rates at remote
landfill sites;
o improving utilization of collections personnel and equipment; and
o building relationships with municipalities and private operators that
deliver waste, which can lead to additional growth opportunities.
Landfills
The Company seeks to pursue an integrated approach to the solid waste
business whereby we will own landfills in those areas where ownership provides
an economic advantage and not own landfills in markets which provide ample
disposal capacity and equal access to disposal sites for all solid waste
collection companies. The markets in which the Company currently operates are
distinguished by one or more of the following characteristics:
o most landfills within a reasonable hauling distance are municipally owned
and charge common disposal rates;
o the Company has entered into a long-term disposal contract with a private
landfill owner or operator at or below market rates;
o local "flow control" regulations require the Company to dispose of the
solid waste it collects at the local, municipally owned incinerator or
landfill; or
o excess disposal capacity exists in the market resulting in a depressed
market rate structure and little incentive to own landfills.
The Company operates landfills in the towns of Bracebridge and
Gravenhurst, Ontario under a landfill management contract with the District
Municipality of Muskoka, which it expects will expire in December 2001. The
Company intends to rebid this contract when it expires. The responsibility for
closure and post-closure costs including any financial assurance requirements
and cell development costs remains with the owners of the landfills.
On February 3, 2000, the Company completed the purchase of the Paintearth
Municipal Landfill in Coronation, Alberta. The Paintearth assets acquired
include a landfill, permitted to accept solid waste, construction and demolition
waste and certain special wastes together with a composting facility, a
bio-remediation facility, and a material recycling facility. The landfill
currently has permitted airspace of 4.6 million cubic metres or 3.2 million
tons. The permit currently covers 160 of the 470 owned acres, and the remainder
of the acreage is adequate for future expansion. The Company estimates that the
landfill has at least 25 years of remaining airspace based on what is currently
permitted. The permit does not impose any volume, hours of operations or
generation area acceptance restrictions on the Paintearth facility. This
landfill will be used as the disposal site for certain of the Company's western
Canadian operations.
The following chart sets forth the disposal characteristics of each of our
current market areas:
14
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Municipal
Capital Transfer Long-term Ownership of Numerous Disposal
Market Area Station Disposal Contract Local Landfills Alternatives
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ontario
Eastern Ontario
Kingston..................... X
Ottawa....................... X X
Mid Ontario
Brampton..................... X
Lindsay...................... X
Peterborough................. X
Scarborough.................. X X
Northern Ontario
Barrie....................... X X
Bracebridge (1).............. X X
Keswick...................... X
Newmarket.................... X
Orillia....................... X X
Penetanguishene.............. X
Southwestern Ontario
Brantford.................... X
Hamilton..................... X
Kitchener.................... X
Sarnia....................... X
Western Canada
Alberta
Edmonton..................... X X
Calgary...................... X
Red Deer..................... X
British Columbia
Abbotsford................... X X
Comox........................ X
Kamloops..................... X
Parksville................... X
Penticton.................... X
Vernon X
United States
Rochester.................... X
Syracuse (2)................. X
Watertown.................... X
Williamsport................. X X
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes two landfills that the Comapny currently operate under a
municipal contract with the District Municipality of Muskoka in the towns
of Bracebridge and Gravenhurst.
(2) The Syracuse market is also characterized by "flow control" regulations
which require the Company to dispose of the solid waste collected at a
local, municipally owned incinerator.
15
<PAGE>
Recycling
The Company offers municipal, commercial and industrial customers services
for a variety of recyclable materials, including cardboard, office paper,
plastic containers, glass bottles, fiberboard, and ferrous and aluminum metals.
The Company operates seven recycling processing facilities in Barrie,
Bracebridge, Keswick, Kingston, Lindsay, Ontario and Comox and Parksville,
British Columbia and sells other collected recyclable materials to third parties
for processing before resale. In an effort to reduce the Company's exposure to
commodity price fluctuation on recycled materials, it has adopted a pricing
strategy of charging collection and processing fees for recycling volume
collected from third parties. The Company believes that recycling will continue
to be an important component of provincial, state and local solid waste
management plans, due to the public's increasing environmental awareness and
regulations that mandate or encourage recycling.
Other Specialized Services
Other specialized waste management services consist primarily of contract
waste management services for chain stores with multiple locations. Under a
contract management program, the Company has secured exclusive contracts to
provide comprehensive waste management services to large companies on a national
or regional basis. These services are performed directly by the Company or, in
areas where the Company has no present operations, by subcontractors. The
Company expects that the percentage of revenues attributable to the contract
management program will decline as other businesses continue to grow. In
addition, in certain market areas, the Company provides portable toilet services
for certain special events or construction sites.
The Company's specialized waste management services described above
generated revenues of $9.1 million for the year ended December 31, 1999,
representing approximately 9.3% of its total revenue for this period.
Sales and Marketing
The Company markets its services on a decentralized basis principally
through its general managers and direct sales representatives. This structure
enables the Company to deliver better customer service by encouraging employees
to develop cross-functional expertise. The Company emphasizes providing quality
service to ensure customer retention and believes that it will attract customers
in the future because of a reputation for quality service.
The Company sales representatives visit customers on a regular basis and
call upon potential new customers within a specified territory or service area,
including high-growth areas in existing markets and in markets the Company does
not currently serve. The Company believes that it distinguishes itself from its
competitors by compensating its sales representatives with a relatively higher
base salary and profit sharing compared to the traditional high commission, low
base salary model. The Company believes that this compensation structure
provides its sales representatives with the proper incentives to maximize
profitability.
16
<PAGE>
In Canada, most residential waste collection and disposal services are
provided to a municipality or other government authority through exclusive
municipal contracts or franchise agreements and these residential services
typically are not provided directly to individual customers. The Company has
been the successful bidder for numerous new contracts with municipalities and
other governmental agencies and believes that opportunities for obtaining these
contracts are increasing due to trends among municipalities to privatize or
outsource solid waste services. Accordingly, the Company's sales representatives
monitor existing markets and new market areas for opportunities to bid for
municipal contracts which will provide an appropriate rate of return.
The Company has a diverse customer base. No single contract or customer
accounted for more than 3.0% of revenues during the year ended December 31,
1999.
Competition
The solid waste services industry in Canada and the northern United States
is highly competitive and fragmented and requires substantial labor and capital
resources.
The Canadian solid waste industry presently includes one large national
waste company: Waste Management, Inc., operating through its Canadian
subsidiary, Canadian Waste. The Company believes that there are currently no
other publicly held solid waste companies operating in Canada. The United States
solid waste industry presently includes three large national waste companies:
Allied Waste Industries, Inc., Republic Services Group, Inc. and Waste
Management, Inc. Several other public solid waste services companies have annual
revenues in excess of $100 million, including Waste Connections, Inc., Casella
Waste Systems, Inc., and Waste Industries, Inc.
Certain of the secondary markets in which the Company competes or will
likely compete are served by one or more large, national solid waste companies,
as well as by numerous regional and local solid waste companies of varying sizes
and resources, some of which have accumulated substantial goodwill in their
markets. The Company also competes with operators of alternative disposal
facilities, including incinerators, and with counties, municipalities, and solid
waste districts that maintain their own waste collection and disposal
operations. Public sector operations may have financial advantages over the
Company, because of their access to user fees and similar charges, tax revenues
and tax-exempt financing.
The Company competes for collection, transfer and disposal volume based
primarily on the price and quality of services. From time to time, competitors
may reduce the prices of their services in an effort to expand their market
share or service areas or to win competitively bid municipal contracts. These
practices may cause the Company to reduce the prices of its services or, if it
elects not to do so, to lose business.
The Company derives a portion of its revenue from exclusive municipal
contracts that require competitive bidding by potential service providers. In
the future, the Company intends to bid on additional municipal contracts and to
rebid existing municipal contracts, but these bids may not succeed.
Competition exists not only for collection, transfer and disposal volume,
but also for acquisition candidates. The Company generally competes for
acquisition candidates with publicly owned regional (in the northern United
States) and large national (in Canada and the northern United States) waste
management companies.
17
<PAGE>
Regulation
The Company is subject to evolving Canadian federal, provincial and local
and United States federal, state and local environmental laws and regulations,
the enforcement of which has become increasingly stringent in recent years. The
United States regulations affecting the Company are administered by the
Environmental Protection Agency and other federal, state and local
environmental, zoning, health and safety agencies and government offices. The
Canadian environmental regulations affecting the Company are administered by a
variety of federal, provincial and local agencies and government offices. The
Company believes that it is currently in substantial compliance with material
applicable federal, provincial, state and local environmental laws, permits,
orders and regulations, and does not currently anticipate any material
environmental costs necessary to bring existing operations into compliance,
although there can be no assurance in this regard. The Company anticipates that
regulation, legislation and regulatory enforcement actions related to the solid
waste services industry will continue to increase. The Company attempts to
anticipate future regulatory requirements and to plan in advance as necessary to
comply with them.
To transport and manage solid waste, the Company must possess and comply
with one or more permits from federal, provincial, state or local agencies and
government offices. These permits also must be periodically renewed and may be
modified or revoked by the issuing agency.
The principal federal, provincial, state and local statutes and
regulations that apply to the Company's operations are described below.
Canadian Regulation
The Company's operations and activities in Canada are subject to a number
of environmental statutes and regulations at the federal, provincial and local
level. Among other things, these laws impose restrictions designed to control
air, soil and water pollution and regulate health, safety, zoning, land use and
the handling of hazardous and non-hazardous wastes. This regulatory framework
imposes significant compliance burdens and risks. Management believes that the
Company is currently in substantial compliance with material applicable
environmental laws. The laws of Ontario, Quebec, British Columbia and Alberta
principally govern operations.
Ontario. Ontario's Environmental Protection Act, including Ontario
Regulation 347, which regulates general waste management and Regulation 232/98,
which regulates landfill standards, prescribes the principal standards for waste
management systems, transfer and disposal sites. It also creates environmental
offenses for spills, unlawful discharges or failure to comply with permits or
approvals.
The operation of a waste management system or a transfer or disposal site
requires a certificate of approval or a provisional certificate of approval
issued by the Ontario Ministry of the Environment under Part V of the Ontario
Environmental Protection Act. Regulations 347 and 232/98 prescribe standards for
the location, maintenance and operation of transfer or disposal sites. The
Ministry of the Environment has proposed changes to Regulation 347 to further
harmonize Ontario law with respect to waste definition.
18
<PAGE>
All environmental regulations in Ontario, including those related to waste
management, are currently under review by the Ontario Ministry and are
anticipated to be reformed and updated. These revised regulations are expected
to impose additional requirements, the full extent of which are presently
unknown.
Contravention of the Ontario Environmental Protection Act or the related
regulations may result in substantial fines that could equal or exceed the
amount of monetary benefit acquired as a result of the commission of the
offense. Enforcement and compliance orders and injunctions may also be granted
against persons in breach of the legislation or the regulations.
Alberta. Alberta's environmental laws have been largely consolidated in
the Environmental Protection and Enhancement Act which comprehensively regulates
the management and control of waste, including hazardous waste, and creates
offenses for spills and other matters of non-compliance. The Waste Control
Regulation deals in detail with the identification of wastes and requirements
for the handling, storage and disposal of waste. Failure to comply with these
requirements may expose the Company to substantial liabilities or penalties.
Waste management facilities currently permitted under the Alberta Public Health
Act must be permitted by Alberta Environment no later than 2006.
British Columbia. Operations in British Columbia are regulated primarily
through that province's Waste Management Act and the regulations under that Act.
This legislation authorizes the making of regulations and policies to
comprehensively address waste management issues. It also creates offenses
related to unlawful discharges and other matters. The Company may be subjected
to administrative orders and/or prosecutions for breach of regulatory
requirements that could result in the imposition of substantial costs or
penalties that could materially affect its financial position. Various other
provincial statutes, such as the Environmental Management Act and the
Transportation of Dangerous Goods Act deal generally with environmental matters
and could impact operations in British Columbia.
Quebec. Quebec's Environmental Quality Act and the regulations pursuant
thereto prescribe the principal standards for waste management systems, transfer
and disposal sites.
The establishment and operation of a waste management system, or a part of
a waste management system, requires an operating permit under the Environmental
Quality Act. To obtain a modification of the activities or materials referred to
in a permit, the permit holder must satisfy the conditions for the issuance of a
permit, which apply to the new materials or activities to be covered by the
permit.
Contravention of the Environmental Quality Act, or the related regulations
or permits issued under the Act or regulations may result in fines which may
equal the amount of monetary benefit acquired as a result of the commission of
the offense, and the Minister of the Environment may make orders to cease
certain activities.
United States Regulation
The Resource Conservation and Recovery Act of 1976. RCRA regulates the
generation, treatment, storage, handling, transportation and disposal of solid
waste and requires states to develop programs to ensure the safe disposal of
solid waste. RCRA divides solid waste into two groups, hazardous and
non-hazardous. Wastes classified as hazardous under RCRA are subject to much
stricter regulation than wastes classified as non-hazardous.
19
<PAGE>
In October 1991, the EPA adopted the Subtitle D Regulations governing
solid waste landfills. The Subtitle D Regulations, which generally became
effective in October 1993, include location restrictions, facility design
standards, operating criteria, closure and post-closure requirements, financial
assurance requirements, groundwater monitoring requirements, methane gas
emission control requirements, groundwater remediation standards and corrective
action requirements. The Subtitle D Regulations also require new landfill sites
to meet more stringent liner design criteria to keep leachate out of
groundwater. Each state is required to revise its landfill regulations to meet
these requirements or these requirements will be automatically imposed by the
EPA on landfill owners and operators in that state. Each state is also required
to adopt and implement a permit program or other appropriate system to ensure
that landfills in each state comply with the Subtitle D Regulations. Various
states in which the Company operates or in which the Company may operate in the
future have adopted regulations or programs as stringent as, or more stringent
than, the Subtitle D Regulations.
The Federal Water Pollution Control Act of 1972. The Clean Water Act
regulates the discharge of pollutants from a variety of sources into waters of
the United States. If run-off from the Company's transfer stations or run-off or
collected leachate from landfills operated or owned by the Company in the future
is discharged into streams, rivers or other surface waters, the Clean Water Act
would require the Company to apply for and obtain a discharge permit, conduct
sampling and monitoring and, under certain circumstances, reduce the quantity of
pollutants in the discharge. Also, virtually all landfills are required to
comply with the EPA's storm water regulations issued in November 1990, which are
designed to prevent contaminated landfill storm water run-off from flowing into
surface waters. The Company believes that its transfer station facilities comply
in all material respects with the Clean Water Act requirements. Various states
in which the Company operates or in which the Company may operate in the future
have adopted regulations that are more stringent than the federal requirements.
The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980. CERCLA established a regulatory and remedial program intended to
provide for the investigation and cleanup of facilities where or from which a
release of any hazardous substance into the environment has occurred or is
threatened. CERCLA imposes strict joint and several liability for cleanup of
facilities on current owners and operators of the site, former owners and
operators of the site at the time of the disposal of the hazardous substances,
any person who arranges for the transportation, disposal or treatment of the
hazardous substances, and the transporters who select the disposal and treatment
facilities. CERCLA also imposes liability for the cost of evaluation and
remediation of any damage to natural resources.
The costs of a CERCLA investigation and cleanup can be very substantial.
Liability under CERCLA may be based on the existence of small amounts of the
more than 700 "hazardous substances" listed by the EPA, many of which can be
found in household waste. If the Company were found to be a responsible party
for a CERCLA cleanup, the enforcing agency could hold the Company, or any other
generator, transporter or the owner or operator of the contaminated facility,
responsible for all investigative and remedial costs, even if others were also
liable. CERCLA gives a responsible party the right to bring a contribution
action against other responsible parties for their allocable shares of
investigative and remedial costs. The Company's ability to obtain reimbursement
from others for their allocable shares of these costs would be limited by our
ability to find other responsible parties and prove the extent of their
responsibility and by the financial resources of these other parties.
20
<PAGE>
The Clean Air Act. The Clean Air Act regulates emissions of air pollutants
from certain landfills depending on the date of the landfill construction, and
the location of the landfill and the materials disposed at the landfill. The EPA
has also issued standards regulating the disposal of asbestos containing
materials under the Clean Air Act. Air permits to construct may be required for
gas collection and flaring systems, and operating permits may be required,
depending on the estimated volume of emissions.
All of the federal statutes described above contain provisions
authorizing, under certain circumstances, the institution of lawsuits by private
citizens to enforce the provisions of the statutes. In addition to a penalty
award to the United States government, some of those statutes authorize an award
of attorneys' fees to parties successfully advancing such an action.
The Occupational Safety and Health Act of 1970. The OSH Act is
administered by the Occupational Safety and Health Administration, and in many
states by state agencies whose programs have been approved by OSHA. The OSH Act
establishes employer responsibilities for worker health and safety, including
the obligation to maintain a workplace free of recognized hazards likely to
cause death or serious injury, to comply with adopted worker protection
standards, to maintain certain records, to provide workers with required
disclosures and to implement certain health and safety training programs.
Various OSHA standards may apply to the Company's operations, including
standards concerning notices of hazards, the handling of asbestos and
asbestos-containing materials, and worker training and emergency response
programs.
Flow Control/lnterstate Waste Restrictions. Certain permits and approvals,
as well as certain state and local regulations, may limit a landfill to
accepting waste that originates from specified geographic areas, restrict the
importation of out-of-state waste or otherwise discriminate against out-of-state
waste. These restrictions, generally known as flow control restrictions, are
controversial, and some courts have held that some flow control schemes violate
constitutional limits on state or local regulation of interstate commerce. From
time to time, federal legislation is proposed that would allow some local flow
control restrictions. Although no such federal legislation has been enacted to
date, if this federal legislation should be enacted in the future, states in
which the Company operates or, in the future own, landfills could act to limit
or prohibit the importation of out-of-state waste or direct that wastes be
handled at specified facilities. These state actions could adversely affect any
landfills the Company may own in the future. These restrictions may also result
in higher disposal costs for collection operations. If the Company were unable
to pass these higher costs through to its customers, the Company's business,
financial condition and results of operations could be adversely affected.
Even in the absence of federal legislation, certain state and local
jurisdictions may seek to enforce flow control restrictions through local
legislation or contractually and, in certain cases, the Company may elect not to
challenge these restrictions based on various considerations. These restrictions
could result in the volume of waste going to landfills being reduced in certain
areas, which may adversely affect the Company's ability to operate landfills it
may own in the future at their full capacity and/or reduce the prices that it
can charge for landfill disposal services. If the Company owns landfills in the
future, these restrictions may also result in higher disposal costs for its
collection operations. If the Company were unable to pass these higher costs
through to its customers, its business, financial condition and results of
operations could be adversely affected.
21
<PAGE>
State and Local Regulation. Each state in which the Company now operates
or may operate in the future has laws and regulations governing the generation,
storage, treatment, handling, transportation and disposal of solid waste,
occupational safety and health, water and air pollution and, in most cases, the
siting, design, operation, maintenance, closure and post-closure maintenance of
landfills and transfer stations. In addition, many states have adopted statutes
comparable to, and in some cases more stringent than, CERCLA. These statutes
impose requirements for investigation and cleanup of contaminated sites and
liability for costs and damages associated with these sites, and some provide
for the imposition of liens on property owned by responsible parties.
Furthermore, many municipalities also have ordinances, local laws and
regulations affecting the Company's operations. These include zoning and health
measures that limit solid waste management activities to specified sites or
activities, flow control provisions that direct the delivery of solid wastes to
specific facilities, laws that grant the right to establish franchises for
collection services and then put these franchises out for bid, and bans or other
restrictions on the movement of solid wastes into a municipality.
Permits or other land use approvals with respect to a landfill, as well as
state or local laws and regulations, may specify the quantity of waste that may
be accepted at the landfill during a given time period, and/or specify the types
of waste that may be accepted at the landfill. Once an operating permit for a
landfill is obtained, it must generally be renewed periodically.
There has been an increasing trend at the state and local level to mandate
and encourage waste reduction at the source and waste recycling, and to prohibit
or restrict the disposal of certain types of solid wastes, such as yard wastes,
leaves and tires, in landfills. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
affect the Company's ability to operate its transfer facilities at full
capacity.
Some state and local authorities enforce certain federal laws in addition
to state and local laws and regulations. For example, in some states, RCRA, the
OSH Act, parts of the Clean Air Act and parts of the Clean Water Act are
enforced by local or state authorities instead of by the EPA, and in some states
those laws are enforced jointly by state or local and federal authorities.
Public Utility Regulation. The rates that landfill operators may charge
are regulated in many states by public authorities. The adoption of rate
regulation or the reduction of current rates in states in which the Company owns
or operates landfills in the future could have an adverse effect on its
business, financial condition and results of operations.
Risk Management, Insurance and Performance Bonds
The Company maintains environmental and other risk management programs
that it believes are appropriate for business. The Company's environmental risk
management program includes evaluating potential acquisitions for environmental
law compliance. The Company does not presently expect environmental compliance
costs to increase above current levels, but cannot predict whether future
changes in applicable laws or future acquisitions will result in an increase in
these costs. The Company also maintains a worker safety program that encourages
safe practices in the workplace. Operating practices at all of the Company's
operations emphasize minimizing the possibility of environmental contamination
and litigation. The Company believes that its facilities substantially comply
with material applicable Canadian and United States federal, provincial and
state regulations.
22
<PAGE>
The Company carries a broad range of insurance for the protection of its
assets and operations that it believes are customary to the solid waste
management industry, including pollution liability coverage. Specifically, the
Company maintains pollution liability coverage of not less than $1.0 million per
occurrence subject to a deductible. The Company's insurance program may not
cover all liabilities associated with environmental cleanup or remediation.
Some of the Company's municipal solid waste services contracts, supply
contracts and permits to operate transfer stations and recycling facilities
require it to obtain performance bonds, letters of credit or other means of
financial assurance to secure contractual performance. The Company has not
experienced difficulty in obtaining performance bonds or letters of credit for
current operations. At December 31, 1999, the Company had provided customers and
various regulatory authorities with bonds and letters of credit in the aggregate
amount of approximately $8.0 million to secure obligations.
Employees
As of December 31, 1999, the Company employed approximately 890 full-time
employees, including approximately 79 persons classified as professionals or
managers, approximately 670 employees involved in collection, transfer, disposal
and recycling operations, and approximately 142 sales, clerical, data processing
or other administrative employees.
Approximately 246 employees at 9 of the Company's operating facilities are
represented by unions which have collective bargaining agreements. Five of these
collective bargaining agreements are presently in negotiation having had their
terms expire. 105 employees are covered by collective bargaining agreements that
expire in 2002 and 13 employees are covered by collective bargaining agreements
that expire in 2003. The Company expects to enter into a new collective
bargaining agreement with these employees. The Company is not aware of any other
organizational efforts among its employees and believes that relations with its
employees are good.
ITEM 2. PROPERTIES
- -------------------------------------------------------------------------------
The Company owns five parcels of real property, located in Brantford and
Kitchener, Ontario; Parksville, British Columbia; Coronation, Alberta; and
Williamsport, Pennsylvania. The Brantford and Kitchener facilities are
approximately 8,200 square feet and 6,500 square feet, respectively, and the
properties are used for administration, dispatch and maintenance. The Coronation
property is a landfill site on which is situated an office building and
comprises of approximately 480 acres. The Parksville property is approximately
6,000 square feet and is used for administration, dispatch and maintenance. The
Williamsport property, on which is situated a transfer station and an office
building, is approximately two acres. The Company owns the Brantford, Kitchener,
Parksville, Coronation and Williamsport properties free of any mortgage, lien or
encumbrance, other than those relating to its credit facility.
As of December 31, 1999, the Company leased a total of 31 facilities and
other real properties used in the solid waste operations. The Company leases its
corporate headquarters in Burlington, Ontario under a lease that expires in June
2003.
23
<PAGE>
As of December 31, 1999, the Company owned approximately 559 and leased
approximately 60 waste collection vehicles and related support vehicles. The
Company believes that its vehicles, equipment and operating properties are well
maintained and adequate for its current operations. However, the Company expects
to make investments in additional equipment and property for expansion and
replacement of assets and in connection with future acquisitions.
Capital Environmental's corporate offices are located at 1005 Skyview
Drive, Burlington, Ontario, Canada L7P 5B1. It's telephone number is (905)
319-1237, and its web site is http://www.capitalenvironmental.com.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------------------------------------------------------------
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 in which Bishop claims damages in
the aggregate amount of $7.4 million, being $2.1 million for alleged wrongful
termination and $5.3 million for misrepresentations allegedly made in the course
of purchasing Bishop's shares in Western Waste, as well as $0.3 million for
punitive damages. The Company's position is that Bishop's employment was
terminated for just cause and that Bishop has received everything he is entitled
to in connection with the purchase of his shares of Western Waste. The Company
is defending the claim and has issued a counterclaim against Bishop.
In connection with the acquisition of Western Waste from L & S
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 million however, in view of the litigation referred to in Note
6(d) of the Notes to Capital's Consolidated Financial Statements challenging the
Share Purchase Agreement, the obligation of the Company, if any, will not be
recorded until the litigation is settled.
In the normal course of the Company's 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 United States or Canadian federal, provincial, state 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 or license held by
it. From time to time, the Company may also be subject to actions brought by
citizens' groups or adjacent landowners or residents in connection with the
permitting and licensing of transfer stations and landfills or alleging
environmental damage or violations of the permits and licenses pursuant to which
it 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 a solid waste services business. However, there is no
current proceeding or litigation involving Capital Environmental other than
those described above, that management believes has a material adverse impact on
the Company's business, financial condition, results of operations or cash
flows.
24
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------------------
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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The Company completed an initial public offering on the NASDAQ National
Market on June 8, 1999 and has traded on this market under the symbol "CERI".
The following table provides the high and low common stock price information for
the periods indicated since the Company's initial public offering:
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High Low
- -------------------------------------------------------------------------------
June 8, to June 30, 1999 $14.6250 $11.0625
Third Quarter $14.4375 $5.3750
Fourth Quarter $6.8750 $4.8750
January 1, to March 1, 2000 $6.6250 $3.8750
- -------------------------------------------------------------------------------
As at March 20, 2000, the Company had 1,057 common stock holders of
record. Pursuant to the terms of the Company's Credit Agreement and Term Loan
Agreement, the Company is not permitted to declare or pay any cash dividends on
any of its capital stock. Both the Credit Agreement and the Term Loan Agreement
mature in November, 2004.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------
The following table presents selected consolidated statements of
operations and balance sheet data of Capital Environmental and the Company's
predecessor, Western Waste Services Inc. ("Western Waste"), for the periods
indicated. The financial data for the periods ended October 31, 1996 and June 5,
1997 has been derived from Western Waste's audited consolidated financial
statements included elsewhere in this document. The financial data as of
December 31, 1999 and December 31, 1998 and the years ended December 31, 1999
and December 31, 1998 and for the period ended December 31, 1997 has been
derived from Capital Environmental's audited consolidated financial statements
included elsewhere in this document.
The selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," Capital Environmental's consolidated financial
statements and notes thereto, and the consolidated financial statements and
notes thereto of Western Waste included elsewhere in this document.
25
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Western Waste Capital Environmental
- -----------------------------------------------------------------------------------------------------------------------------------
Period from Period from
Year Ended November 1, 1996 inception (May 23, Year Ended Year Ended
October through June 5, 1997) through December December
31, 1996 1997 December 31, 1997 31, 1998 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ...................................... $ 7,421 $ 5,680 $ 15,089 $ 62,056 $ 97,551
Cost of operations ............................ 5,257 3,472 10,676 43,002 66,091
Depreciation and amortization ................. 741 612 1,154 4,890 8,134
Selling, general and administrative
expenses .................................... 2,017 1,658 1,389 8,490 13,118
Gain on fixed assets (3) ...................... -- -- -- -- (1,100)
Start-up, integration and transition
costs (1) ................................... -- -- 4,325 602 --
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations ................. (594) (62) (2,455) 5,072 11,308
Interest (expense) income, net ................ (8) (176) (898) (3,139) (6,232)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and minority interest ....................... (602) (238) (3,353) 1,933 5,076
Income tax (provision) benefit ................ (508) (573) 1,398 (740) (2,053)
Minority Interest ............................. -- -- (117) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ............................. $ (1,110) $ (811) $ (2,072) $ 1,193 $ 3,023
- -----------------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share ............. $ (1.51) $ 0.52 $ 0.60
- -----------------------------------------------------------------------------------------------------------------------------------
Shares used in calculating basic net
income (loss) per share ..................... 1,374,220 2,304,847 5,068,607
Diluted net income (loss) per share ........... $ (1.51) $ 0.29 $ 0.51
- -----------------------------------------------------------------------------------------------------------------------------------
Shares used in calculating diluted
net income (loss) per share ................. 1,374,220 4,174,172 5,976,659
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Western Waste Capital Environmental
- -----------------------------------------------------------------------------------------------------------------------------------
Period from Period from
Year Ended November 1, 1996 inception (May 23, Year Ended Year Ended
October through June 5, 1997) through December December
31, 1996 1997 December 31, 1997 31, 1998 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Other data:
Net cash provided by (used in)
operating activities $ 256 $ (556) $ 1,167 $ 3,907 $ 5,975
Net cash used in investing activities (10,974) (1,189) (12,529) (36,375) (50,071)
Net cash provided by financing
activities 6,861 2,759 13,918 31,304 44,379
Adjusted EBITDA (4) 147 550 3,024 10,564 19,442
Adjusted EBITDA margin 2.0% 9.7% 20.0% 17.0% 19.9%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
As of December As of December 31, As of December
31, 1997 1998 31, 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash $2,473 $1,060 $1,398
Working capital, including cash 2,475 (994) (5,547)
Property and equipment, net 19,174 25,909 40,692
Total Assets 50,495 98,337 166,127
Long-term debt, including capital lease obligations net (2) 29,022 54,589 78,199
Redeemable capital stock 13,203 21,946 -
Total stockholders' equity (deficit) (1,424) 5,492 58,320
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes the absorption of acquisition and transition costs associated
with the acquisition of selected assets of Canadian Waste. See Note 2 of
the Notes to Capital's Consolidated Financial Statements.
(2) Excludes current portion of long-term debt and capital lease obligations.
See Note 5 of the Notes to Capital's Consolidated Financial Statements.
(3) The gain on replacement of assets destroyed in a fire. See Note 14 of the
Notes to Capital's Consolidated Financial Statements.
(4) Adjusted EBITDA represents operating income plus depreciation and
amortization, start-up, integration and transition costs.
The following table sets forth:
o the rates of exchange for Canadian dollars, expressed in U.S.
dollars, in effect at the end of each of the periods indicated;
o the average of exchange rates in effect on the last day of each
month during these periods; and
o the high and low exchange rates during these periods, in each case
based on the noon buying rate in New York City for cable transfers
in Canadian dollars as certified for customs purposes by the Federal
Reserve Bank of New York.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate at End of Year................... $ 0.7353 $ 0.7299 $ 0.6991 $ 0.6504 $0.6883
Average Rate during Year.............. 0.7299 0.7353 0.7223 0.6740 0.6731
High.................................. 0.7533 0.7526 0.7493 0.7105 0.6917
Low................................... 0.7009 0.7212 0.6945 0.6341 0.6463
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
On March 20, 2000, the noon buying rate for Canadian dollars was
$0.6802=C$1.00
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
- -------------------------------------------------------------------------------
The following discussion should be read in conjunction with the Company's
Consolidated Statements and Notes thereto included elsewhere herein.
History
Capital was incorporated on May 23, 1997. On June 6, 1997, the Company
purchased selected assets located in Ontario, Alberta and British Columbia from
Canadian Waste Services Inc., and acquired 50% of the outstanding shares of
common stock of Western Waste from USA
27
<PAGE>
Waste Inc. The Company considers Western Waste to be a predecessor for financial
reporting purposes. For this reason, historical financial statements for Western
Waste are included in the financial presentation in this Form 10-K. The periods
include the year ended October 31, 1996, and the period from November 1, 1996
through June 5, 1997. Financial statements for Capital Environmental are
presented on a consolidated basis for the period from inception (May 23, 1997)
through December 31, 1997, and the years ended December 31, 1998 and December
31, 1999. The Company has experienced substantial growth since its formation
which has affected the financial results in several significant ways, including
the following:
Substantial Growth from Acquisitions. Since commencing operations, the
Company has acquired 39 solid waste services businesses in Canada and the United
States. All of these acquisitions were and will be accounted for under the
purchase method of accounting. Accordingly, these acquisitions have given rise
to significant increases in goodwill on the balance sheet and increased
amortization expense on the statement of operations. Further, as purchase
transactions, the Company has recognized revenues and earnings from the date of
acquisition. As a result, the Company believes that period-to-period comparisons
of its historical operating results are not necessarily indicative of what its
results would have been had these acquisitions occurred at the beginning of the
periods presented.
Management Capabilities. Since the Company's formation, it has assembled a
management team with substantial experience in the solid waste industry. The
Company believes that its management team has the ability to manage operations
as they expand.
Purchase Accounting. All business acquisitions to date have been accounted
for using the purchase method of accounting, and the respective purchase prices
have been allocated to the fair value of the assets acquired and liabilities
assumed. Consequently, the amounts of depreciation and amortization included in
the statements of operations for the periods presented reflect the changes in
basis of the underlying assets that were made as a result of the changes in
ownership that occurred during the periods presented. The Company capitalizes
some third-party expenditures relating to pending acquisitions or development
projects, such as legal and engineering expenses. All indirect acquisition
costs, such as executive salaries, corporate overhead, public relations and
other corporate services, are expensed as incurred. The Company's policy is to
charge against net income any unamortized capitalized expenditures and advances
(net of any portion thereof that is estimated to be recoverable, through sale or
otherwise) relating to any operation that is permanently shut down, any pending
acquisition that is not consummated and any landfill development project that is
not successfully completed. The Company routinely evaluates all capitalized
costs, and expenses those related to projects it believes are not likely to be
successful.
At December 31, 1999, approximately 58% of the assets on the Company's
balance sheet consisted of goodwill. Goodwill represents the excess of the
purchase price that the Company has paid for each business acquired over the
fair value of the net identifiable assets acquired. Goodwill can reflect
different things for each business acquisition, including factors such as market
share, market recognition, competitive position and management, customer and
employee loyalty. Goodwill is an accumulation of various factors that the
Company believes will lead to profits above those that might normally be
expected from just acquiring the tangible assets of that business.
The Company presently amortizes goodwill over 40 years. Forty years is
based on the expectation of the on-going future cash flows associated with the
businesses and the belief that, with proper management and integration of the
acquired businesses, and the economies of scale that can be achieved, the value
of this goodwill will endure as a long-lived asset. Unlike other
28
<PAGE>
industries, the solid non-hazardous waste industry is not prone to the risks of
rapid changes in technology. Amortizing goodwill over 40 years is the standard
used by virtually all companies in the industry and the Company believes that it
is important that the financial results be prepared on a basis consistent with
industry standards, where appropriate.
Formation Related Charges. In connection with the acquisition of selected
assets of Canadian Waste in June 1997 and other formation related activities,
the Company expensed certain start-up, integration and organization costs. The
Company also incurred $4.1 million of expenses during the year ended December
31, 1997 for the absorption of acquisition and transition costs. These costs
represented amounts paid to Canadian Waste for a list of customers which the
Company could solicit to provide selected services. The Company also received
transition services and the right to share use of some Canadian Waste facilities
during a transition period which expired December 31, 1997.
Results of Operations
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 previous year. The 1999 and 1998 amounts
are for the fiscal year ended December 31, 1999 and 1998, while the 1997 amount
is for the period from inception on May 23, 1997 to December 31, 1997. The
percentage change in dollar amounts for 1998 over 1997 has not been provided, as
the periods are not comparable due to the partial fiscal year in 1997.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Percentage of Revenue % Dollar Change
1999 1998 1997 1999 Over
1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues 100.0 100.0 100.0 57.2
Cost of operations 67.8 69.3 70.8 53.7
Depreciation and amortization expense 8.3 7.9 7.6 66.3
Selling, general and administrative expenses 13.4 13.7 9.2 54.5
Gain on fixed assets (1.1) - - -
Start-up, integration and transition costs - 1.0 28.7 -
- -------------------------------------------------------------------------------------------------------
Income (loss) from operations 11.6 8.2 (16.3) 122.9
Interest and financing expense 6.4 5.1 5.9 98.5
- -------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and minority interest 5.2 3.1 (22.2) 162.6
Income tax expense (benefit) 2.1 1.2 (9.3) 177.4
Minority interest - - 0.8 -
- -------------------------------------------------------------------------------------------------------
Net income (loss) 3.1 1.9 (13.7) 153.4
- -------------------------------------------------------------------------------------------------------
Adjusted EBITDA 19.9 17.0 20.0 95.2
- -------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Revenue
The Company's revenues are attributable primarily to fees charged to
customers for solid waste collection, transfer, recycling services and
management of landfills. The Company derives a substantial portion of its
collection revenues from commercial, industrial and municipal services that are
generally performed under service agreements or pursuant to contracts with
municipalities. Certain of the Company's residential collection services are
performed on a subscription basis with individual households. Transfer station
customers are charged a tipping fee on a per ton basis for disposing of their
solid waste at the Company's transfer stations. Commercial and residential
recycling revenues consist of revenues from the sale of recyclable commodities.
Contract management and other specialized services include revenues primarily
from two landfills operated under contract and other revenue from the sale and
leasing of compactors. The Company's revenues are shown net of intercompany
eliminations. The Company typically establishes its intercompany transfer
pricing based upon prevailing market rates.
The following table shows, for the periods indicated, the percentage of
the Company's revenues attributable to services provided. The increase in the
Company's collection revenues as a percentage of revenues in fiscal 1999 and
fiscal 1998 is primarily attributable to the impact of the Company's acquisition
of collection businesses during these periods, as well as to internal growth
through price and business volume increases. The decrease in the Company's
transfer station revenues as a percentage of revenues in fiscal 1999 and fiscal
1998 is mainly due to a proportionately greater increase in collection and other
revenues occurring as the result of acquisitions in those areas. As the Company
acquires collection businesses from which it previously had derived transfer
station of disposal revenues, the acquired revenues are recorded by the Company
as collection revenues after the business is acquired.
The sources of revenue and growth rates are as follows: ($thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Growth
1999 1998 Rates
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial collection $55,778 57.1% $37,234 60.0% 49.8%
Residential collection 21,232 21.8 11,853 19.1 79.1
Transfer station 8,177 8.4 4,964 8.0 64.7
Commercial and residential recycling 3,294 3.4 993 1.6 231.7
Contract management and other
specialized services 9,070 9.3 7,012 11.3 29.3
- ------------------------------------------------------------------------------------------------
$97,551 100.0% $62,056 100.0% 57.2
- -------------------------------------------------------------------------------------------------
</TABLE>
The acquisitions completed in 1999 contained a similar mix of revenues by
source, with a slightly higher proportion of residential collection and
recycling operations. In addition, the Company experienced increased revenue
from existing residential contracts.
Management's estimates of the components of changes in the Company's
consolidated revenue are as follows:
30
<PAGE>
- ------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------
Price 2.4%
Volume 2.6
Acquisitions, net of divestitures 52.0
Foreign currency translation 0.2
- ------------------------------------------------------------------------------
Total 57.2%
- ------------------------------------------------------------------------------
The revenue growth in 1999 has been primarily as a result of acquisitions.
In addition, the Company experienced strong internal growth throughout the year.
The revenue growth between 1998 and 1997 was primarily due to acquisitions. In
addition, there was a full fiscal year in 1998, versus a partial period in 1997
from the Company's inception in May of 1997.
Revenue and growth in revenue from geographic components are as follows:
($thousands)
- -----------------------------------------------------------------------
Growth
1999 1998 Rates
- -----------------------------------------------------------------------
Canada $72,027 73.8% $42,042 67.7% 71.3%
United States 25,524 26.2 20,014 32.3 27.5%
- -----------------------------------------------------------------------
$97,551 100.0% $62,056 100.0% 57.2%
- -----------------------------------------------------------------------
The growth in revenue in Canada exceeded the growth in revenue in the
United States as acquisitions primarily focussed on the Canadian market. Future
acquisitions are expected to occur in both of the two geographic areas, but the
actual mix will be dependent upon the particular market conditions. In 1997, all
revenues were attributable to Canada.
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 year ended December 31, 1999 was
$66,091 compared to $43,002 for the year ended December 31, 1998. The 53.7%
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 year ended December 31, 1999 was improved at 67.8%, compared
with 69.3% in 1998. The 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. In addition, cost of operations has improved due to
greater use of transfer stations and private landfill contracts at reduced
disposal rates. The cost of operations as a percentage of revenues fluctuates
quarterly due to the seasonal nature of the business, with the second and third
quarters having generally higher margins. As a percentage of revenues, cost of
operations declined to 69.3% for the year ended December 31, 1998 from 70.8% for
the period ended December 31, 1997. This marginal decrease was attributable
primarily to the contribution of revenue growth toward fixed costs, offset
31
<PAGE>
in part by acquisitions of businesses in new markets with margins lower than
those of the Company's existing operations.
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. Depreciation and amortization
expense for the year ended December 31, 1999 was $8,134 compared to $4,890 for
the same period in 1998. 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. The 66.3% increase was
primarily due to acquisition activity over the past 12 months and full year
contribution of 1998 acquisitions. As a percentage of revenues, depreciation and
amortization expense increased to 8.3% in 1999 from 7.9% in 1998, primarily due
to the impact of acquisition and capital expenditures in the year. As a
percentage of revenues, depreciation and amortization expense increased to 7.9%
for the year ended December 31, 1998 from 7.6% for the period ended December 31,
1997. The increase was attributable to the change in lives of containers,
whereby the maximum estimated life of steel containers was reduced to 12 years
from 20 years as of January 1, 1998, offset by revenue growth exceeding
depreciation and amortization for new additions.
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 the marketing and sales force, professional services and
community relations expense. SG&A expenses for the year ended December 31, 1999
were $13,118 compared to $8,490 for the year ended December 31, 1998. The 54.5%
increase primarily relates to additional management, consulting and related
costs to support the Company's level of growth and additional requirements
related to the mid-year change to a public company. As a percentage of revenues,
SG&A expenses decreased to 13.4% in 1999 from 13.7% in 1998 as a result of the
larger revenue base. As part of the Company's acquisition program, many
administrative functions are centralized allowing for SG&A costs to increase at
a slower level than the rate of revenue growth. As a percentage of revenues,
SG&A increased to 13.7% for the year ended December 31, 1998 from 9.2% for the
period ended December 31, 1997. The increase was attributable to the investment
in corporate overhead to support the planned growth in revenues.
Gain on sale of fixed assets
During 1999, a fire destroyed one of the Company's combined material
recycling and transfer station operating facilities. The Company's material
recycling and other heavy equipment was insured for replacement cost and the
Company has recognized a gain of $1.1 million on replacement of the destroyed
assets.
Interest and financing expense
In the year ended December 31, 1999, interest and financing expense
increased 98.5% to $6,232 from $3,139 for the period ended in 1998. The overall
increase over the prior year was primarily a result of an increase in the
average level of outstanding debt due to borrowing to finance acquisition
activity over the past 12 months, an increase in the weighted average rate of
interest on the Senior Debt from 7.0% in 1998 to 7.3% in 1999, and an increase
in amortization of deferred financing costs. For the year ended December 31,
1998, interest and financing expense
32
<PAGE>
increased to $3,139 from $898 for the period ended December 31, 1997. The
increase was a result of new debt incurred to complete acquisitions during 1998
and the inclusion of a full fiscal year of operations.
Income Taxes
The effective income tax rate on income before minority interest during
1999 was 40.4% compared to 38.2% in 1998 and 41.7% in 1997. The increased rate
over the prior year primarily related to the higher proportion of acquisitions
in Canada, which has a higher tax rate than the United States. In addition, the
prior year's effective tax rate was reduced by a higher proportion of losses and
other benefits not previously recognized.
Financial Condition
As of December 31, 1999 and 1998, the Company's capital consisted of:
($thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1999 1998 Change
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-term debt $ 86,349 56.3% $ 54,583 61.7% $ 31,766
Capital lease obligations 4,995 3.2 2,107 2.4 2,888
Deferred income taxes 3,813 2.5 4,376 4.9 (563)
Redeemable and convertible
stock - - 21,946 24.8 (21,946)
Stockholders' equity 58,320 38.0 5,492 6.2 52,828
- --------------------------------------------------------------------------------------------------
$153,477 100.0% $ 88,504 100.0% $ 64,973
- -------------------------------------------------------------------------------------------------
</TABLE>
The $31.8 million increase in long-term debt is primarily a result of the
$62.9 million in borrowings since December 31, 1998 and includes approximately
$45.7 million to finance acquisition activity and $6.9 million related to the
redemption of redeemable common stock. The remainder of the borrowings related
to working capital financing, capital expenditure requirements and repayments of
subordinated debt. These increases were partly offset by repayments of $37.8
million, including $30.7 million of the net proceeds from the IPO, which were
used to repay a portion of the Company's outstanding indebtedness under its
Credit Facility. The remainder of the change primarily relates to the effect of
foreign currency translation on long-term debt and the increase in long-term
liabilities items related to acquisitions.
The decrease in the redeemable stock relates to the combination of stock
redeemed for cash, with the remainder due to the conversion to Common Shares
upon the completion of the initial public offering ("IPO").
Shareholders' equity increased by $52.8 million primarily as a result of
$32.0 million in net after-tax proceeds from the IPO, $17.5 million on the
conversion of redeemable stock and net earnings of $3.0 million.
Liquidity and Capital Resources
The solid waste management business is capital intensive. 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 December 31, 1999, adjusted working capital was $7.6 million,
excluding the current portion of long-term debt and capital lease obligations.
The Company's Loan Agreement permits, subject to covenant restrictions,
borrowing to repay
33
<PAGE>
other outstanding 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 year ended December 31, 1999, net cash provided by operations was
$6.0 million, compared to $3.9 million in the prior year. This increase was
primarily due to the higher net income, partly offset by additional working
capital requirements, including tax payments in the current year. Days sales
outstanding was unchanged year over year at 45 days.
For the year ended December 31, 1999, net cash used in investing
activities was $50.1 million. Most of this was used to fund the cash portion of
acquisitions of approximately $45.7 million. The remainder of the cash spending
primarily relates to capital expenditures of $3.6 million (excluding capital
lease additions of $3.7 million) and other assets. Capital expenditures for 2000
are expected to be approximately $12.0 million primarily for vehicle and
equipment additions and replacements. The Company intends to continue to fund
capital expenditures principally through internally generated funds, capital
leases and borrowings under the Credit Facility. The net cash used in investing
activities was $50.1 million, an increase of $13.7 million from the $36.4
million used in the prior year and was primarily due to the increased level of
acquisition activity in the 1999 fiscal year.
For the year ended December 31, 1999, net cash provided by financing
activities was $44.4 million. This was provided primarily by net cash proceeds
from the IPO of $30.7 million, and net borrowings of $25.1 million. Partly
offsetting these cash inflows was cash used for the redemption of certain
redeemable stock and other financing payments. Cash from financing activities
increased by $13.1 million from the $31.3 million provided by financing
activities in the 1998 fiscal year, primarily due to the increased requirements
related to 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 December 31,
1999, approximately $72.8 million under the Loan Agreement was outstanding. The
Loan Agreements is secured by all of the Company's assets, including the
interest in the equity securities of the Company's subsidiaries. Of the $72.8
million outstanding, $44.8 million consisted of U.S. dollar loans bearing
interest at 8.72% and $28.0 million consisted of Canadian dollar loans bearing
interest at 7.27%. The 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 EBITDA 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 acquisitions
where the purchase price exceeds $10.0 million and for landfill acquisitions. As
of December 31, 1999, an aggregate of up to $34.6 million was unused and
available under the Credit Facility, after taking into account letters of credit
of $2.6 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
34
<PAGE>
factors. First, less solid waste is generated during the late fall, winter and
early spring because of decreased construction and demolition activity. 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 certain of
the Company's service areas, resulting in more residential and commercial
collection business.
Inflation and prevailing economic conditions
To date, inflation has not had a significant effect on the Company's
operations. Consistent with industry practice, many of the Company's contracts
provide for a pass-through of certain costs, including increases in landfill
tipping fees and, in some cases, fuel costs. The Company believes, therefore,
that it should be able to implement price increases to offset many cost
increases resulting from inflation. However, competitive pressures may require
the Company to absorb at lease part of these cost increases, particularly during
periods of high inflation.
Impact of Year 2000
In prior years, the Company provided information on the nature of progress
of its plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, it experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believe those systems successfully responded to the Year 2000 date change. The
Company is not aware of any material problems resulting from Year 2000 issues,
either with products, internal systems, or the products and services of third
parties. The Company continues to monitor mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
Risk Factors
In addition to the factors discussed elsewhere in this document, the
following factors may affect future results.
Highly Competitive Industry
The Company operates in a highly competitive business environment. The
Company's growth strategy and profitability is dependent on expanding its
business through acquisitions and generating internal growth. The Company's
ability to carry out its growth strategy may be limited by a number of factors,
including the ones outlined below.
The Company competes for acquisition candidates with other companies, some
of which have significantly greater financial resources. Increased competition
for acquisition candidates may result in fewer acquisition opportunities for the
Company and less attractive acquisition terms, including increased purchase
prices which could be beyond the Company's financial capability. If there are
fewer acquisition opportunities, growth could be limited.
Acquisition Financing
The Company expects to finance acquisitions through cash from operations,
borrowings under credit facility and issuing shares of common stock to sellers
of businesses. To the extent
35
<PAGE>
that the Company issues shares of its common stock as payment for acquisitions,
a material decline in the market price of common stock over a long period of
time could make the stock less attractive as payment for acquisitions.
Therefore, the Company may not be able to acquire additional businesses using
stock as payment, and using cash for acquisitions may reduce the funds available
for other corporate purposes. Additionally, borrowing additional money may
increase the Company's indebtedness to an unacceptable level or may require the
Company to agree to financial covenants that limit its operational and financial
flexibility.
Integration of Acquired Businesses
The Company's growth and future financial performance is dependent on its
ability to effectively combine the operations of acquired businesses into
existing operations. The integration process may require changes in the
operating methods and strategies of acquired businesses. Additionally, the
integration of acquired businesses may divert management's attention from its
day-to-day responsibilities. The Company also becomes responsible for
liabilities of the acquired businesses that it may not have been discovered
prior to their acquisition. Any difficulties encountered in the integration
process could reduce the earnings generated from acquired businesses.
Managing Growth
The Company's acquisition strategy, may create periods of rapid growth.
Failure to expand operational and financial systems and controls, or to recruit
and integrate appropriate personnel at a pace consistent with any rapid growth
experienced would reduce its earnings. To manage growth effectively, the Company
will need to continuously enhance management information systems and operational
and financial systems and controls. The Company will also need to attract, train
and retain additional senior managers, technical professionals and other
employees.
Foreign Exchange Exposure
For the year ended December 31, 1999, 73.8% of the Company's revenue was
derived from operations in Canada. All of the Company's Canadian revenue and a
substantial majority of its Canadian expenditures are transacted in Canadian
dollars. Since the Company reports its result in U.S. dollars, revenue, expenses
and earning generated by Canadian operations will be negatively affected if the
value of the Canadian dollar declines compared to the U.S. dollar. If the
Company expands further in the United States, it is anticipated that the impact
of the variability of Canadian/United States dollar exchange rates will be less
pronounced in the future.
Regulatory Approval to Expand Landfills/Obtain Cost Effective Disposal Rates
The Company may not be able to obtain or expand landfill sites or enter
into agreements which will give it long-term access to landfill sites in some
markets. The resulting increased costs could reduce earnings. As at March 20,
2000 the Company owns one landfill, and operates two landfills under an
agreement with a Canadian municipality which holds the permits for the two
landfills. The Company's ability to meet its growth objectives may depend in
part on its ability to acquire, lease or expand landfills, develop new landfill
sites or enter into agreements which will give it long-term access to landfill
sites in its markets. In some areas in which the Company operates, suitable land
for new sites or expansion of existing landfill sites may be unavailable.
Permits to expand landfills are often not approved until the remaining permitted
disposal capacity of a landfill is very low. If the Company were to exhaust
permitted capacity at a landfill, its ability to expand internally could be
limited, and it could be required to cap and close that landfill and
36
<PAGE>
forced to dispose of collected waste at more distant landfills or at landfills
operated by competitors or other third parties.
Undisclosed/Unknown Liabilities
With the acquisition of its first landfill, the Company may have material
financial obligations to pay closure and post-closure costs. Operating contracts
may also require the Company to pay all, or some part of, closure and post
closure costs. The Company's obligations to pay closure or post-closure costs
for landfills acquired could exceed its reserves or accruals for these costs.
The Company is subject to liability for environmental damage at solid
waste facilities that it owns or operates, including damage to neighboring
landowners or residents, particularly as a result of the contamination of soil,
groundwater or surface water, and especially drinking water and the costs of
this liability can be very substantial. An uninsured claim against the Company,
if successful and of sufficient magnitude, could increase its costs and
liabilities to an unacceptable level. The Company's potential liability may
include damage resulting from conditions existing before it purchased or
operated these facilities. The Company may also be subject to liability for any
off-site environmental contamination caused by pollutants or hazardous
substances that it or its predecessors arranged to transport, treat or dispose
of at other locations.
In addition, the Company may be held legally responsible for liabilities
as a successor owner of businesses that it acquires or has acquired. These
businesses may have liabilities that the Company fails or is unable to discover,
including liabilities arising from noncompliance with environmental laws by
prior owners.
The Company's insurance program may not cover all liabilities associated
with environmental cleanup or remediation.
Subsequent Events
Refer to Note 15 of the 1999 Notes to the Consolidated Financial
Statements which is incorporated by reference, for events subsequent to December
31, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------------------
In November 1999, the Company entered into a cross-swap transaction (the
"Cross-Swap") with the Bank of America. Under the Cross-Swap, which is effective
through November 2004, the Company has effectively converted US$25.0 million of
the term loan into a C$36.725 million loan. The interest rate on the debt has
also been converted from a United States dollar libor interest rate basis into a
Canadian dollar bankers acceptance interest rate basis. The Company receives a
floating US$ libor interest rate less applicable margin and pays a floating C$
bankers acceptance interest rate throughout the term of the Cross-Swap.
The Company is exposed to cash flow risk due to changes in the
Canadian/United States dollar exchange rate.
The table below provides information about the Company's interest
sensitive financial instruments and constitutes a "forward-looking statement".
The Company's interest rate risk exposure is to changing interest rates in the
United States and Canada and in fluctuations in both US libor and Canadian
bankers acceptance rates. The Company intends to manage interest rate risk
through the use of a combination of fixed and floating debt and derivative
instruments.
37
<PAGE>
Under the terms of the Loan Agreement, the Company is required, prior to
the end of the second quarter of its 2000 fiscal year, to effectively fix or cap
interest rates on not less than $25.0 million of debt under the Loan Agreement.
As at December 31, 1999 no interest rate agreements had been entered into.
All items described below are non-trading and are as at December 31, 1999.
- -----------------------------------------------------------------------
Expected Maturity Date Variable
Rate Debt
$ %
- -----------------------------------------------------------------------
2002 3,100 4.2%
2003 3,100 4.2%
2004 67,000 91.6%
- -----------------------------------------------------------------------
Total 73,200 100.0%
- -----------------------------------------------------------------------
The fair value of variable rate debt approximates the carrying value
since interest rates are variable and therefore approximate current market
rates.
38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENT
Capital Environmental Resource Inc.
Report of PricewaterhouseCoopers LLP, Independent Auditors.......... 40
Consolidated Balance Sheets......................................... 41
Consolidated Statements of Operations and Comprehensive Income...... 43
Consolidated Statements of Cash Flows............................... 44
Consolidated Statements of Stockholders' Equity .................... 45
Notes to Consolidated Financial Statements.......................... 46
Western Waste Services Inc.
Report of Coopers & Lybrand, Independent Auditors................... 67
Consolidated Balance Sheets......................................... 68
Consolidated Statements of Operations and Comprehensive Loss........ 70
Consolidated Statements of Stockholder's Deficit.................... 71
Consolidated Statements of Cash Flows............................... 72
Notes to Consolidated Financial Statements.......................... 73
39
<PAGE>
Report of Independent Auditors
To the Stockholders of
Capital Environmental Resource Inc.
We have audited the consolidated balance sheets of Capital Environmental
Resource Inc. (the "Company") as at December 31, 1999 and 1998 and the
consolidated statements of operations, comprehensive income, cash flows, and
stockholders' equity for the years ended December 31, 1999 and 1998 and for the
period from May 23, 1997 to December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1999
and 1998 and the results of its operations and its cash flows for the years
ended December 31, 1999 and 1998 and for the period from May 23, 1997 to
December 31, 1997, in accordance with generally accepted accounting principles
in the United States.
Toronto, Canada PricewaterhouseCoopers LLP
February 29, 2000 Chartered Accountants
40
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
------------- -----------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 1,398 $ 1,060
Accounts receivable - trade (net of allowance for doubtful
accounts of $331; 1998 - $761) 14,655 8,424
Prepaid expenses and other assets (Note 14) 3,724 1,266
Employee loans 471 190
------------- -----------
Total current assets 20,248 10,940
Property and equipment, net (Note 3) 40,692 25,909
Goodwill 95,654 54,430
Other intangibles and non-current assets 5,358 3,231
Deferred income taxes (Note 10) 4,175 2,818
Deferred public offering costs - 1,009
------------- -----------
Total assets $166,127 $ 98,337
------------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
41
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31 December 31
1999 1998
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Accounts payable $ 3,869 $ 3,187
Accrued expenses and other current liabilities (Note 4) 8,181 4,848
Accrued purchase liabilities (Note 2) 600 1,798
Current portion of long-term debt (Note 5) 12,123 1,594
Current portion of capital lease obligations (Note 6) 1,022 507
----------- ------------
Total current liabilities 25,795 11,934
Long-term debt (Note 5) 74,226 52,989
Capital lease obligations (Note 6) 3,973 1,600
Deferred income taxes (Note 10) 3,813 4,376
----------- ------------
107,807 70,899
----------- ------------
Redeemable and convertible stock (Note 8) - 21,946
----------- ------------
Commitments and contingencies (Note 6)
Stockholders' Equity
Common Stock: unlimited stock without par value
authorized; 7,196,627 issued and outstanding (1998 -
1,993,758) (Note 9) 57,066 7,528
Accumulated other comprehensive loss (890) (1,157)
Retained earnings (deficit) 2,144 (879)
---------- ------------
Total stockholders' equity 58,320 5,492
---------- ------------
Total liabilities and stockholders' equity $ 166,127 $ 98,337
---------- ------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
42
<PAGE>
CAPITAL ENVIORNMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Inception (May 23)
December 31 to December 31
---------------------------- ------------------
1999 1998 1997
--------------- ---------- ------------------
<S> <C> <C> <C>
Revenues $ 97,551 $ 62,056 $ 15,089
Operating expenses:
Cost of operations 66,091 43,002 10,676
Depreciation and amortization 8,134 4,890 1,154
Selling, general and administrative 13,118 8,490 1,389
Gain on fixed assets (Note 14) (1,100) -- --
Start-up, integration and transition costs (Note 2) -- 602 4,325
----------- ----------- -----------
Income (loss) from operations 11,308 5,072 (2,455)
Interest and financing expense (6,232) (3,139) (898)
----------- ----------- -----------
Income (loss) before income taxes and minority
interest 5,076 1,933 (3,353)
Income tax (provision) benefit (Note 10) (2,053) (740) 1,398
Minority interest -- -- (117)
----------- ----------- -----------
Net income (loss) $ 3,023 $ 1,193 $ (2,072)
----------- ----------- -----------
Basic net income (loss) per common share (Note 11) $ 0.60 $ 0.52 $ (1.51)
----------- ----------- -----------
Diluted net income (loss) per common share (Note 11) $ 0.51 $ 0.29 $ (1.51)
----------- ----------- -----------
Weighted average number of common shares
outstanding (Note 11)
Basic 5,068,607 2,304,847 1,374,220
----------- ----------- -----------
Diluted 5,976,659 4,174,172 1,374,220
----------- ----------- -----------
STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss) $ 3,023 $ 1,193 $(2,072)
Other comprehensive income (loss) - Foreign currency
translation adjustments 267 (1,006) (151)
----------- ----------- -----------
Comprehensive income (loss) $ 3,290 $ 187 $(2,223)
----------- ----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
43
<PAGE>
CAPITAL ENVIORNMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
Period from
Inception
Year Ended (May 23) to
December 31 December 31
------------------------------------------
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,023 $ 1,193 $ (2,072)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities -
Depreciation and amortization 8,134 4,890 1,154
Gain on fixed assets (Note 14) (1,100) -- --
Deferred income taxes 645 540 (1,443)
Net gain on disposal of property, plant and equipment (99) (205) (19)
Absorption of acquisition and transition costs -- -- 4,055
Other 375 -- 127
Changes in operating assets and liabilities, net of effect of
acquisitions and divestitures -
Accounts receivable - trade, net (2,285) 513 (3,545)
Prepaid expenses and other current assets (660) 1,091 (1,488)
Accounts payable (1,665) (3,743) 1,414
Accrued expenses and other current liabilities 680 (372) 2,263
Income and other taxes (1,073) -- 721
-------- -------- --------
5,975 3,907 1,167
-------- -------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (45,653) (33,670) 653
Capital expenditures (3,562) (3,710) (13,318)
Proceeds from disposal of property and equipment 497 1,090 133
Net loans and advances to employees (269) (107) (123)
Other (1,084) 22 126
-------- -------- --------
(50,071) (36,375) (12,529)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 62,868 27,312 26,249
Principal payments on long-term debt (37,807) (1,350) (17,909)
Repayment of capital lease liability (1,230) (287) (3)
Net proceeds from issuance of common stock 30,670 6,729 89
Issuance (redemption) of redeemable and convertible stock
(Note 8) (6,900) -- 5,748
Debt issuance costs (3,222) (91) (256)
Deferred public offering costs -- (1,009) --
-------- -------- --------
44,379 31,304 13,918
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents 55 (249) (83)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 338 (1,413) 2,473
Cash and cash equivalents at beginning of period 1,060 2,473 --
-------- -------- --------
Cash and cash equivalents at end of period $ 1,398 $ 1,060 $ 2,473
-------- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
44
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
Accumulated Total
Common stock other Retained stockholders'
-------------------------- comprehensive earnings equity
Shares Amount loss (deficit) (deficit)
----------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at inception (May 23, 1997) -- $ -- $ -- $ -- $ --
Issuance of common stock 1,427,774 799 -- -- 799
Foreign currency translation adjustments -- -- (151) -- (151)
Net loss -- -- -- (2,072) (2,072)
--------- --------- --------- --------- ---------
Balance at December 31, 1997 1,427,774 799 (151) (2,072) (1,424)
Issuance of common stock 565,984 6,729 -- -- 6,729
Foreign currency translation adjustments -- -- (1,006) -- (1,006)
Net income -- -- -- 1,193 1,193
--------- --------- --------- --------- ---------
Balance at December 31, 1998 1,993,758 7,528 (1,157) (879) 5,492
Issuance of common stock, net of costs 3,193,334 32,085 -- -- 32,085
Conversion of redeemable and
convertible stock 1,978,763 17,453 -- -- 17,453
Exercise of stock warrants 30,772 -- -- -- --
Foreign currency translation adjustments -- -- 267 -- 267
Net income -- -- -- 3,023 3,023
--------- --------- --------- --------- ---------
Balance at December 31, 1999 7,196,627 $ 57,066 $ (890) $ 2,144 $ 58,320
--------- --------- --------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
45
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
1. Organization, Business and Summary of Significant Accounting Policies
Organization and business
Capital Environmental Resource Inc. (the "Company") is a regional,
integrated solid waste services company that provides collection, transfer,
disposal and recycling services to commercial, industrial and residential
customers in secondary markets in Canada and the Northern United States. The
Company's operations are currently organized into service areas within two
geographic territories: Canada (currently comprised of Eastern, Southwestern,
Mid and Northern Ontario, Alberta and British Columbia) and the United States
(Western New York and Central New York/Pennsylvania). At December 31, 1999, the
Company operated 11 transfer stations, 7 material recycling facilities and
operated, but did not own, two municipal landfills under term contracts.
The Company was incorporated in the Province of Ontario, Canada on May 23,
1997 in order to take advantage of consolidation opportunities in the solid
waste services industry in Canada and the United States. On June 6, 1997, the
Company consummated: (i) the acquisition (the "Canadian Waste Acquisition") of a
series of diverse, geographically dispersed assets from Canadian Waste Services
Inc. ("Canadian Waste"), a wholly owned subsidiary of USA Waste Services Inc.
("USA Waste"); and (ii) the acquisition (the "Western Acquisition") of 50% of
the common stock of Western Waste Service Inc. ("Western Waste") from USA Waste.
The Canadian Waste assets included the right to provide selected services under
municipal and individual customer contracts in eight markets in Ontario, Alberta
and British Columbia. In addition, the Company acquired a transfer station and
certain trucks, containers, office and parking space and the right to use
certain of Canadian Waste's owned or controlled disposal facilities. The Western
Acquisition provided the Company with additional collection operations and
materials recovery facilities in eight markets in Alberta and British Columbia.
The Company subsequently transferred certain of its newly purchased Canadian
Waste assets to Western Waste in exchange for an additional 16.67% of the
outstanding common stock of Western Waste and thereby acquired a 66.67%
controlling majority stake in Western Waste. On November 1, 1997, Capital
Environmental purchased the remaining 33.33% of the outstanding common stock of
Western Waste in exchange for cash consideration and 400,000 shares of Class "B"
Special stock. During 1998 and 1999, the Company has continued its growth with a
series of business acquisitions in both Canada and the United States (Note 2).
Basis of presentation
The Company's financial statements are prepared in accordance with
generally accepted accounting principles in the United States. All financial
information presented herein is in thousands of U.S. dollars except share and
per share data. All references to "dollars" or "$" mean U.S. dollars and "C$"
mean Canadian dollars.
46
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions and balances
have been eliminated in consolidation. All business acquisitions since the
Company's inception have been accounted for using the purchase method of
accounting and the results of operations of these businesses are included in the
consolidated financial statements from their effective date of acquisition.
Assets and liabilities are reported in United States dollars. Assets and
liabilities of Canadian operations have been translated from Canadian dollars to
United States dollars at the exchange rates in effect at the relevant balance
sheet date, and revenue and expenses of Canadian operations have been translated
from Canadian dollars to United States dollars at the weighted average exchange
rates prevailing during the period. Unrealized gains and losses on translation
of the Canadian operations are reported as a separate component of stockholders'
equity and are included in comprehensive income.
Business combinations and acquisitions
The Company has used the purchase method of accounting since inception to
account for all business combinations and acquisitions. The Company allocates
the cost of the acquired business to the assets acquired and the liabilities
assumed based on estimates of fair values thereof. These estimates are revised
during the allocation period as necessary when, and if, information regarding
contingencies becomes available to define and quantify assets acquired and
liabilities assumed. The allocation period varies but does not exceed one year.
The Company does not believe potential deviations between its fair value
estimates and actual fair values will be material.
In certain business combinations and acquisitions, the Company agrees to
pay additional amounts to sellers contingent upon achievement by the acquired
business of certain negotiated goals, such as targeted cash flow levels.
Contingent payments, when determinable, are recorded as purchase price
adjustments.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents are defined as cash and short-term highly liquid
deposits with maturity dates of less than 90 days.
47
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
Concentration of credit risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash and cash equivalents and trade accounts receivable.
The Company places its cash and cash equivalents only with high credit quality
financial institutions. The Company's trade accounts receivables are not subject
to a concentration of credit risk. The Company's customers are diversified as to
both geographic and industry concentrations. The Company maintains an allowance
for losses based on the expected collectibility of the accounts. Credit losses
have been within management's expectations.
Property and equipment
Property and equipment are recorded at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to operations as incurred. Gains
and losses resulting from property or equipment retirements or disposals are
credited or charged to cost of operations in the year of disposal. Depreciation
is computed over the estimated useful lives using the straight-line method
estimated as follows:
Buildings..................................................... 10 to 25 years
Vehicles...................................................... 10 years
Containers, compactors and recycling equipment................ 5 to 12 years
Furniture, fixtures and other office equipment and leaseholds. 3 to 5 years
During 1998, the Company reduced the maximum estimated life of
container equipment from 20 years to 12 years. This change was accounted for
prospectively commencing January 1, 1998, resulting in a decrease in net income
and net income per share of $150 and $0.06, respectively in 1998.
Goodwill
Goodwill represents the excess of the purchase price over the fair
value of the net identifiable assets of acquired businesses, and is amortized on
a straight-line basis over the period of expected benefit of 40 years.
Accumulated amortization was $3,528 and $1,568 at December 31, 1999 and 1998,
respectively.
Should events or circumstances occur subsequent to the acquisition
of a business which bring into question the realizable value of the related
goodwill, the Company will re-evaluate the remaining useful life of goodwill and
make adjustments, if necessary. The carrying value would be reduced to the
estimated fair value if it becomes probable that the Company's best estimate for
expected future undiscounted cash flows of the business would be less than the
carrying amount.
48
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
Other intangibles and non-current assets
Other intangibles and non-current assets include disposal agreements,
significant municipal customer contracts and non-compete agreements related to
acquisitions and deferred financing costs and are recorded at their cost less
accumulated amortization. Amortization is charged on a straight-line basis over
the life of the contracts or agreements, which range from 3 to 10 years.
Accumulated amortization was $2,247 and $912 at December 31, 1999 and 1998,
respectively.
Fair value of financial instruments
The book values of the cash and cash equivalents, trade receivables and
trade payables approximate their respective fair values due to the short-term
nature of these instruments. The Company's debt instruments that are outstanding
as at December 31, 1999 have carrying values that approximate their respective
fair values based on the current rate offered to the Company for debt with
similar market risk and maturities. See Note 5 for the terms and carrying values
of the Company's various debt instruments.
Derivative financial instruments
From time to time, the Company uses derivatives to manage interest rate
and currency risk. The Company's policy is to use derivatives for risk
management purposes only, and it does not enter into such contracts for trading
purposes. The Company enters into derivatives only with high credit quality
financial institutions.
Instruments accounted for as hedges must be effective at managing risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the hedge contract. Accordingly, changes in market values or
cash flows of hedge instruments must have a high degree of inverse correlation
with changes in market values or cash flows of the underlying hedged items.
Under hedge accounting treatment, current period income is not affected by the
increase or decrease in the fair market value of derivative instruments as these
instruments are not reflected in the financial statements at fair market value.
Early termination of a hedging instrument does not result in recognition of
immediate gain or loss except in those cases when the debt instruments to which
a contract is specifically linked is terminated.
Environmental costs
The Company accrues for costs associated with environmental remediation
obligations when such costs are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remedial feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Cost of future expenditures for environmental remediation obligations are not
discounted to their present value. Environmental liabilities and apportionment
of responsibility among potentially responsible parties are accounted for in
accordance with the guidance provided by the Statement of Position 96-1 ("SOP
96-1") "Environmental Remediation Liabilities".
49
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
Accrued closure and post-closure costs
As of December 31, 1999, the Company did not own any landfills, and
accordingly, does not accrue for estimated landfill closure and post-closure
costs. On February 3, 2000, the Company acquired the Paintearth landfill located
in Coronation, Alberta (See Note 15). Accrued closure and post-closure costs
will represent an estimate of the future obligation associated with closure and
post-closure monitoring of non-hazardous solid waste landfills owned by the
Company. Site specific closure and post-closure engineering cost estimates will
be prepared for landfills owned by the Company for which it is responsible for
closure and post-closure. The impact of changes determined to be changes in
estimates, based on an annual update, will be accounted for on a prospective
basis. The present value of estimated future costs are accrued based on accepted
tonnage as permitted landfill airspace is consumed. The Company will estimate
the amounts and timing of payments related to closure and post-closure costs and
will discount these future costs.
Revenue recognition
The Company recognizes revenue when waste removal services are provided.
Amounts billed to customers, prior to providing the related services, are
deferred and reported as revenues in the period in which the services are
rendered. Long-term service contracts are reviewed on a regular basis for
losses. Full provision for anticipated losses is made in the period when the
likelihood of a loss has been established.
Income taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws expected to be
in effect when the differences are expected to reverse. Deferred tax assets
include tax loss and credit carry forwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Net income (loss) per share information
Earnings (loss) per share have been computed in accordance with the
statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128").
Basic earnings per share are calculated by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the dilution that would occur
if the dilutive securities and other contracts to issue common stock were
exercised or converted into common stock at the beginning of the period.
50
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
Deferred financing costs and initial public offering costs
Costs associated with arranging the Company's Term and Credit Facility
Agreements have been deferred and are being written off over the term of the
debt. Costs associated with the Company's initial public offering were deferred
until the offering was completed, at which time they were netted against the
proceeds raised.
Minority interest
The minority interest share of earnings represents the non-controlling
interest of 33.33% that existed in the earning of Western Waste from June 6,
1997 to October 31, 1997.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and disclosure standards for derivative instruments and hedging
activities. In June 1999, the FASB issued SFAS No. 137, which deferred the
effective date of SFAS No. 133 until fiscal periods beginning after June 15,
2000. The Company is currently evaluating the potential impact of SFAS No. 133
on its future results of operations and financial position.
Reclassifications
Certain 1998 and 1997 financial statement amounts have been reclassified
to conform with the 1999 presentation.
2. Business Combinations and Asset Acquisitions
During the periods ended December 31, 1999, 1998 and 1997, the Company
acquired 19, 16 and 4 non-hazardous, solid waste operations respectively. The
assets acquired and liabilities assumed were accounted for by the purchase
method of accounting and include the following:
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Net current assets (liabilities) $ (722) $(1,731) $(8,447)
Property and equipment 11,712 6,775 11,290
Goodwill and other intangibles 37,575 40,080 19,327
- -------------------------------------------------------------------------------
Total assets acquired 48,565 45,124 22,170
Less: long-term deferred obligations 1,418 1,108 229
deferred taxes 563 290 2,183
- -------------------------------------------------------------------------------
Net cost of acquisition $ 46,584 $ 43,726 $ 19,758
- -------------------------------------------------------------------------------
51
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
Purchase price allocations for certain of the 1999 acquisitions have not
been finalized, pending receipt of valuations and other information. The
acquisitions were financed as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Cash $ 45,667 $ 32,550 $ 788
Long-term debt assumed 851 2,298 9,642
Class "B" Special Stock - - 7,455
Class "B" Special Stock dividend - - 1,075
Common stock and common stock options 66 135 798
Redeemable common stock - 8,743 -
- --------------------------------------------------------------------------------
$ 46,584 $ 43,726 $ 19,758
- --------------------------------------------------------------------------------
Certain purchase agreements contain contingent purchase consideration.
When there is certainty regarding the amount and timing of the contingency, a
liability is recorded and the amount is treated as additional purchase
consideration in the period where the amount is determined to be payable. As at
December 31, 1999, $600 (1998 - $1,798) was accrued as additional consideration
payable, both amounts related to 1998 acquisitions.
Between June 6, 1997 and August 1, 1997, the Company acquired a series of
geographically dispersed assets and certain transition services from Canadian
Waste in Ontario, British Columbia and Alberta in connection with a sale
mandated by the Competition Bureau of Canada (the "Competition Bureau"). The
assets acquired included certain fixed assets (such as trucks, containers,
facilities and equipment), as well as a list of customers which the Company
could solicit to provide selected services (collectively, the "Canadian Waste
Assets"). The Company also received certain transition services and the right to
share use of certain Canadian Waste facilities during a transition period, which
expired December 31, 1997. While many of the customers were under short-term
contracts with Canadian Waste that did not provide for automatic transfer or
assignment, the transaction was structured such that, in the opinion of the
Competition Bureau, the Company acquired a sufficient market position to provide
adequate long-term competition to Canadian Waste.
Consideration for the Canadian Waste Assets and transition license
included $11,340, in the form of a note payable of $10,980, due June 6, 2000,
bearing interest at 6.75% and cash consideration of $360. Tangible assets
represented $7,285 of the purchase price and no liabilities were assumed in the
transaction. The Company allocated a portion of the consideration paid to
property and equipment based upon the estimated fair market value of the assets
acquired. The balance of the purchase cost of $4,055 was allocated to the
customer lists and transition services acquired in the transaction. The Company
did not allocate any portion of the consideration to goodwill, as the
transaction did not constitute the acquisition of a "business".
Due to the nature of the rights and the limited number of assignable
contracts acquired and the fact that the Company was required to negotiate new
service contracts with substantially all of the customers whose contracts it
acquired, as well as the term of the transition license, the Company has
amortized the acquisition and transition services costs of $4,055 over the
period from the acquisition date to December 31, 1997.
52
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
The following unaudited condensed pro forma consolidated statement of
operations information shows the results of the Company's operations for the
periods ended December 31, 1999 and 1998 as if the acquisitions in 1999 and 1998
had occurred at January 1, 1998:
- --------------------------------------------------------------------------------
(unaudited) 1999 1998
- --------------------------------------------------------------------------------
Statement of Operations Data:
Revenue $ 110,325 $ 106,059
Income from operations 13,235 10,612
Net income 3,315 2,230
Basic net income per common share $ 0.65 $ 0.88
Diluted net income per common share $ 0.55 $ 0.51
Proforma weighted average number of shares:
Basic 5,069,446 2,527,073
Fully diluted 5,977,498 4,396,399
- --------------------------------------------------------------------------------
These pro forma results have been prepared for comparative purposes only
and are not necessarily indicative of the actual results of operations had the
acquisitions taken place as of January 1, 1998, or the results of future
operations of the Company. Furthermore, the pro forma results do not give effect
to all cost savings or incremental costs that may occur as a result of the
integration and consolidation of the acquisitions.
3. Property and Equipment
Property and equipment consists of the following as at December 31, 1999
and 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 1,073 $ 1,169
Vehicles 25,956 15,112
Containers, compactors and recycling equipment 19,733 12,410
Furniture, fixtures and other office equipment and leaseholds 2,638 957
- -------------------------------------------------------------------------------------------
Total property and equipment 49,400 29,648
Less: Accumulated depreciation 8,708 3,739
- -------------------------------------------------------------------------------------------
Property and equipment, net $40,692 $25,909
- -------------------------------------------------------------------------------------------
</TABLE>
Included in property and equipment at December 31, 1999 are assets held
under capital leases with a cost of $5,799 (1998 - $2,112) and accumulated
depreciation of $574 (1998 - $71).
Depreciation expense for the period ended December 31, 1999 was $5,214
(1998 - $2,878; 1997 - $861).
53
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
4. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the
following as at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued employee and subcontractor costs $ 1,285 $ 793
Accrued disposal fees 2,199 1,202
Other accrued expenses and current liabilities 4,697 2,853
- --------------------------------------------------------------------------------------------------
$ 8,181 $ 4,848
- --------------------------------------------------------------------------------------------------
</TABLE>
5. Long Term Debt
Long-term debt at December 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Senior debt $ 72,763 $ 41,701
Subordinated Promissory notes payable, bearing interest at 6.75%,
due June 6, 2000 10,850 11,528
Subordinated Promissory notes payable, bearing interest at 9.5%,
repaid during 1999 - 479
Other subordinated promissory notes payable 521 -
Other long-term debt 2,215 875
- ----------------------------------------------------------------------------------------------------
86,349 54,583
Less: Current portion 12,123 1,594
- ----------------------------------------------------------------------------------------------------
$ 74,226 $52,989
- ----------------------------------------------------------------------------------------------------
</TABLE>
On January 29, 1999, the Company amended its Credit Facility to increase
its available credit to $65.0 million from C$67.5 million ($44.1 million at
December 31, 1998). The Company used the proceeds of its amended Credit Facility
to redeem common stock issued to the sellers of Rubbish Removal Inc., to make
permitted acquisitions for capital expenditures, to issue standby letters of
credit and for general corporate purposes. On November 26, 1999, the Company
further amended its Credit Facility to increase its available credit to $85.0
million. The Credit Facility matures in November 2004. Also on November 26,
1999, the Company entered into a Term Loan for $25.0 million. The Term Loan has
principal repayments on November 26, 2002, 2003 and 2004 of $3.1, $3.1 and $18.8
million respectively.
Both the Credit Facility and the Term Loan (the "Senior Debt") may be used
for acquisitions, working capital and other general corporate purposes. The
Senior Debt is collateralized by an interest in the real property of the
Company, an interest in all of the present and future personal property of the
Company, an assignment of all present and future property insurance of the
Company, an assignment of all material contracts of the Company, the equity
securities of the Company's subsidiaries and a general security interest in all
of the assets of the Company.
54
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
The Senior Debt contains certain covenants and restrictions regarding,
among other things, minimum equity requirements, capital expenditures,
consolidated earnings before interest, depreciation, and taxes and maximum
leverage requirements. The Company is not permitted to pay cash dividends on its
capital stock while the Senior Debt agreement remains in force. Under certain
circumstances the lender's approval may be required for acquisitions of
businesses. The terms of the Company's Senior Debt also requires the Company
to obtain the consent of the lending banks prior to consummating acquisitions of
other businesses for total consideration (including all liabilities assumed) in
excess of $10.0 million.
At December 31, 1999, the Company had, subject to the covenants and
restrictions described in the preceding paragraph and including letters of
credit, up to $34.6 million of unused availability under the Senior Debt. The
weighted average rate of interest on the Senior Debt for the year ended December
31, 1999 was 7.3% (1998 - 7.0%).
The 6.75% promissory notes are unsecured. The holders thereof have entered
into postponement and subordination agreements with the syndicate under the
Senior Debt.
The aggregate annual principal repayments required in respect of long-term
debt as at December 31, 1999 are as follows:
2000............................................................. $12,123
2001............................................................. 385
2002............................................................. 3,326
2003............................................................. 3,261
2004............................................................. 66,669
Thereafter....................................................... 585
--------
$86,349
--------
Deferred debt issue costs at December 31, 1999 and 1998 were $2,931 and
$234, respectively.
6. Commitments and Contingencies
a) Leases
The following is a schedule of future minimum lease payments, at December
31, 1999:
55
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
Operating Capital
---------- ----------
<S> <C> <C>
2000............................................................................ $ 1,819 $ 1,423
2001............................................................................ 1,572 1,304
2002............................................................................ 1,301 1,264
2003............................................................................ 983 1,429
2004............................................................................ 676 639
Thereafter...................................................................... 1,084 4
---------- ----------
$ 7,435 6,063
----------
Less: amount representing interest............................................. (1,068)
----------
4,995
Less: current portion of capital lease obligations............................. (1,022)
----------
Long-term capital lease obligations............................................. $ 3,973
----------
</TABLE>
Total rent expense, under operating leases charged to operations, was
approximately $1,583 for the period ended December 31, 1999 (1998 - $932, 1997 -
$241).
The Company leases certain heavy equipment and hauling vehicles under
leases that qualify for treatment as capital leases. The assets related to
these leases have been capitalized and are included in property and equipment.
b) Performance bonds and letters of credit
Municipal solid waste services contracts, permits and licenses to operate
transfer stations and recycling facilities may require performance or surety
bonds, letters of credit or other means of financial assurance to secure
contractual performance. As of December 31, 1999, the Company had provided
customers and various regulatory authorities with such bonds and letters of
credit amounting to approximately $8,028 (1998 - $6,982), to collateralize its
obligations. If the Company was unable to obtain performance or surety bonds or
letters of credit in sufficient amounts or at acceptable rates, it could be
precluded from entering into additional municipal solid waste services contracts
or obtaining or retaining landfill, transfer station, recycling facility or
operating permits and licenses.
c) 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.
56
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
d) 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, as at December 31,
1999, 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 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 6 (e). 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.
e) 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 million however, in view of
the litigation referred to in Note 6 (d) challenging the Share Purchase
Agreement, the obligation of the Company, if any, will not be recorded until the
litigation is settled.
57
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
7. Derivative Financial Instruments
Concurrent with the amendment and restatement of the Term Loan, as
described in Note 5, the Company was required to enter into a foreign
exchange/interest rate cross swap agreement to reduce its exposure to
fluctuations in exchange rate changes between the Canadian and United States
dollars. The transaction effectively converts the Term Loan from a United States
dollar denominated United States LIBOR interest rate based loan into a Canadian
dollar denominated Canadian Bankers Acceptance interest rate based loan. As at
December 31, 1999, this instrument effectively converted the Term Loan into a
C$36,725 loan bearing interest at the Canadian Bankers Acceptance interest rate.
The cross swap agreement is structured to hedge the principal amount
outstanding under the life of the Term Loan agreement. The fair value of the
cross swap agreement as at December 31, 1999, was $357, which reflects the
estimated amount the Company would have to pay to terminate the cross swap
agreement.
Under the terms of the Loan Agreement, the Company is required, prior to
the end of the second quarter of its 2000 fiscal year, to effectively fix or cap
interest rates on not less than $25.0 million of debt under the Loan Agreement.
As of December 31, 1999 no interest rate agreements had been entered into.
8. Redeemable and Convertible Stock
a) Convertible Preference Stock
On July 11, 1997, the Company issued 8,000 shares of redeemable
convertible preference stock at a price of C$1,000 per share for net proceeds of
$5,748 cash in a private placement. Each preference share was convertible at the
option of the holder or automatically convertible into 138.47 Common Shares upon
completion of a "qualifying initial public offering". On June 8, 1999, the
convertible preference shares were converted into 1,107,750 Common Shares. No
convertible preference stock remains authorized or outstanding as at December
31, 1999 (December 31, 1998 - 8,000).
b) Class "B" Special Stock
On November 1, 1997, the Company issued 400,000 redeemable convertible
Class "B" Special shares valued at $7,455 in exchange for the remaining
outstanding common stock of Western Waste. The Class B Special Stock was
automatically convertible into Common Stock on completion of a "qualifying
public offering". The holders could otherwise require the Company to redeem such
shares at a specified price of C$21.67 per share. On June 8, 1999, the Class "B"
Special Stock was converted into 484,645 Common Shares on completion of the
initial public offering. In satisfaction of the shortfall of the price of the
initial public offering, the Company paid the holder an additional $459. In
addition, it agreed to pay the holder an additional payment if the holder
elected to sell up to 112,323 shares in the future, based on the shortfall if
the selling price is less than C$21.67 per share. No Class "B" Special Stock
remains authorized or outstanding as at December 31, 1999 (December 1998 -
400,000).
c) Redeemable Common Stock
On January 2, 1998, in connection with a business acquisition, the Company
issued 500,175 Redeemable Common Shares valued at $5,202. In February 1999, the
Company redeemed the 500,175 shares for cash of $6,900. The excess of the
redemption price over the value of the Redeemable Common Shares of $1,698 was
accounted for as additional purchase consideration in fiscal 1998.
58
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
On October 1, 1998, in connection with a business acquisition, the Company
issued 280,240 Redeemable Common Shares valued at $3,541. The Common Shares were
redeemable for $4,250 if an IPO was not completed by December 31, 1999. To the
extent that the IPO price was less than $15.60 per share, the Company was
obligated to issue additional Common Shares such that the value of the Common
Stock at the date of the IPO was $4,250. On June 8, 1999, the Redeemable Common
Shares were converted into 280,240 Common Shares and an additional 106,128
Common Shares were issued in satisfaction of the obligation (see Note 9(a)). No
Redeemable Common Shares remains authorized or outstanding as at December 31,
1999 (December 31, 1998 - 780,415).
d) Dividends
On November 1, 1997, the Company declared a dividend of $1,050 on the
outstanding Class "B" Special Stock. The Company was obligated to pay this
dividend immediately prior to the successful completion of an initial public
offering or the redemption of the shares of Class "B" Special Stock whichever
occurred first. This dividend obligation had been offset by an equivalent note
receivable owing to the Company by the holders of shares of Class "B" Special
Stock. For accounting purposes, this dividend has been reflected as a component
of the purchase price of the capital stock of Western Waste.
9. Capital Stock
Changes in Capital Stock since Inception on May 23, 1997:
a) Common and Preferred Stock
The Company has an unlimited number of Preferred Shares, issuable in
series. As of December 31, 1999, 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.
59
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
(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.
(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
(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 15% 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 employees
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.
60
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
All options granted have been granted at or above market price. The
weighted average exercise price of the aggregate outstanding options at December
31, 1999 was C$14.70 (or $10.12) compared to C$13.06 (or $8.49) at December
31, 1998. Stock option activity for each of the periods ended December 31, 1999,
1998, and 1997 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, beginning of period 509,568 173,779 -
Options granted during the period 570,122 335,789 173,779
Options terminated during the period (75,389) - -
- ----------------------------------------------------------------------------------------------
Options outstanding, end of period 1,004,301 509,568 173,779
- ----------------------------------------------------------------------------------------------
Options exercisable, end of period 495,721 - -
- ----------------------------------------------------------------------------------------------
Weighted average price: ($C)
Options granted $18.05 $16.08 $7.22
Options terminated $18.05 - -
Options exercisable $12.92 - -
Options outstanding, end of period $12.92 $13.06 $7.22
Weighted average price: ($US)
Options granted $11.35 - -
Options terminated $12.00 - -
Options outstanding, end of period $11.32 - -
Option price ranges: ($C)
Options granted $18.05 $14.14-18.05 $7.22
Options terminated $18.05 - -
Options outstanding, end of period $7.22-18.05 $7.22-18.05 $7.22
Option price ranges: ($U.S.)
Options granted $5.30-14.50 - -
Options terminated $12.00 - -
Options outstanding, end of period $5.30-14.50 - -
- ---------------------------------------------------------------------------------------------
</TABLE>
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. Had
compensation cost been determined based on the fair value of the options at the
grant date consistent with the methodology in SFAS No. 123, the Company's
historical net income and earnings per share for the year would have been as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - Historical basis:
as reported $ 3,023 $ 1,193 $(2,072)
SFAS 123 adjustment (1,093) (314) (45)
- ----------------------------------------------------------------------------------------------
Pro forma $ 1,930 $ 879 $(2,117)
- ----------------------------------------------------------------------------------------------
Basic net income (loss) per share:
As reported $ 0.60 $ 0.52 $ (1.51)
- ----------------------------------------------------------------------------------------------
Pro forma $ 0.38 $ 0.38 $ (1.54)
- ----------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
As permitted under SFAS 123, the fair value of options granted up to
December 31, 1999 was estimated using the Black-Scholes option pricing model
using the following assumptions:
Annual dividend yield...................... 0%
Weighted-average expected lives (years).... 3 years
Risk-free interest rate.................... 5.5%
Volatility................................. 60%
This resulted in a weighted-average grant-date fair value of options
granted of $3.60 (1998 - $1.60). The prior year's amounts were calculated using
the Minimum Value Method.
c) Stock purchase warrants
In 1997, the Company issued 123,084 warrants to certain founding
stockholders. As at December 31, 1998 the Company had outstanding warrants to
purchase 123,084 shares of the Company's Common Stock at an exercise price of
C$0.007 per share expiring July 15, 2002.
During the year ended December 31, 1999, 30,772 Common Shares were issued
on exercise of warrants. At December 31, 1999, the aggregate warrants
outstanding entitled holders to purchase 92,312 Common Shares.
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.
62
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
10. Income Taxes
At December 31, 1999, the Company had approximately $11,150 of accumulated
net operating loss carryforwards for income tax purposes. Most of these net
operating loss carryforwards do not expire until 2004 and 2005, and their use is
not subject to any annual limitations. The benefit from these losses has been
reflected in these financial statements as deferred income tax assets.
Management believes that sufficient certainty exists regarding the realization
of these losses, and such amounts can be realized through the existing deferred
tax credits. Accordingly, a valuation allowance was not recorded.
The income tax provision (benefit) for the periods ended December 31,
1999, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Canada $ 1,123 $ 200 $ 45
United States 285 - -
- -----------------------------------------------------------------------------------------------------------------------
1,408 200 45
- -----------------------------------------------------------------------------------------------------------------------
Deferred
Canada 519 523 (1,443)
United States 126 17 -
- -----------------------------------------------------------------------------------------------------------------------
645 540 (1,443)
- -----------------------------------------------------------------------------------------------------------------------
$ 2,053 $ 740 $(1,398)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of the difference between income taxes at the Canadian
statutory rate and the income tax provision for the periods ended December 31,
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes at combined Canadian federal and provincial
statutory rate $ 2,265 $ 870 $(1,341)
Effect of lower tax rates applicable to U.S. income (77) (47) -
Non-deductible expenses 858 490 (57)
Recognition of losses not previously booked and other benefits (1,181) (673) -
Large corporations tax 188 100 -
- -----------------------------------------------------------------------------------------------------------------------
Income tax provision $ 2,053 $ 740 $(1,398)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred income tax assets and
liabilities were as follows as of December 31, 1999 and 1998:
63
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets
Tax benefit related to net operating loss carryforwards $ 4,175 $ 2,818
Deferred income tax liabilities
Property, equipment, deductible goodwill and other intangibles (3,813) (4,376)
- ---------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets (liabilities) $ 362 $ (1,558)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11. Net Income (Loss) Per Share Information
The following table sets forth the calculation of the numerator and
denominator used in the computation of basic and diluted net income (loss) per
share for the periods ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 3,023 $ 1,193 $ (2,072)
- ---------------------------------------------------------------------------------------------------------------------------------
Denominator:
Weighted average Shares outstanding - basic 5,068,607 2,304,847 1,374,220
Dilutive effect of stock options and warrants outstanding 214,375 276,920 -
Common Shares issuable upon conversion of redeemable
and convertible stock 693,677 1,592,405 -
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - diluted 5,976,659 4,174,172 1,374,220
- ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 0.60 $ 0.52 $ (1.51)
Diluted earnings (loss) per share $ 0.51 $ 0.29 $ (1.51)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The diluted earnings per share calculation for 1997 excludes the
conversion of stock options and warrants issued in 1997 because the impact would
have been anti-dilutive.
12. Supplemental Disclosures of Cash Flow Information and Non-cash
Transactions
a) Cash flow information for the periods ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $5,902 $3,279 $ 1,371
- ---------------------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes $1,073 $ 205 $ -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
b) Non-cash transactions:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Value of acquisitions partially or totally effected by the issue of capital stock $ 66 $8,878 $9,325
- ---------------------------------------------------------------------------------------------------------------------------------
Value of acquisitions partially or totally effected by the issuance of the Company's debt $327 $ 529 $9,642
- ---------------------------------------------------------------------------------------------------------------------------------
The portion of the Canadian Waste Assets that were financed by the issuance of the
Company's debt $ - $ - $10,980
- ---------------------------------------------------------------------------------------------------------------------------------
Assets acquired under capital lease
$3,711 $1,237 -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13. Segment Information
Management principally views and manages the business by geography, with
each geographic segment's revenues being comprised of revenue from collection,
transfer, disposal and recycling services. The Company operated exclusively in
Canada during the fiscal period ended December 31, 1997. Acquisitions in 1998
resulted in the provision of services in the United States. The tables below
present certain segment information of the Company as at and for the year ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Canada United States Total
$ % $ % $ %
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues 72,027 73.8 25,524 26.2 97,551 100.0
Operating expenses 63,809 74.0 22,434 26.0 86,243 100.0
- -------------------------------------------------------------------------------------------------------------------------
Operating income 8,218 72.7 3,090 27.3 11,308 100.0
- -------------------------------------------------------------------------------------------------------------------------
Total assets 128,356 77.3 37,771 22.7 166,127 100.0
- -------------------------------------------------------------------------------------------------------------------------
Interest and financing expense 4,845 77.8 1,387 22.2 6,232 100.0
- -------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 6,393 78.6 1,741 21.4 8,134 100.0
- -------------------------------------------------------------------------------------------------------------------------
Income tax expense 1,642 80.0 411 20.0 2,053 100.0
- -------------------------------------------------------------------------------------------------------------------------
Expenditures for additions to
fixed assets 5,289 72.7 1,984 27.3 7,273 100.0
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Canada United States Total
$ % $ % $ %
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Revenues 42,042 67.7 20,014 32.3 62,056 100.0
Operating expenses 38,713 67.9 18,271 32.1 56,984 100.0
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 3,329 65.6 1,743 34.4 5,072 100.0
- ----------------------------------------------------------------------------------------------------------------------------
Total assets 66,466 67.6 31,871 32.4 98,337 100.0
- ----------------------------------------------------------------------------------------------------------------------------
Interest and financing expense 2,222 70.8 917 29.2 3,139 100.0
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 3,684 75.3 1,206 24.7 4,890 100.0
- ----------------------------------------------------------------------------------------------------------------------------
Income tax expense 723 97.7 17 2.3 740 100.0
- ----------------------------------------------------------------------------------------------------------------------------
Expenditures for additions to
fixed assets 4,018 81.2 929 18.8 4,947 100.0
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
14. Gain On Fixed Assets
During 1999, a fire destroyed one of the Company's combined material
recycling and transfer station operating facilities. The Company's material
recycling and other heavy equipment was insured for replacement cost and the
Company has recognized a gain of $1.1 million on replacement of the destroyed
assets.
15. Subsequent Events
On February 3, 2000, the Company completed the purchase of the Paintearth
Municipal Landfill in Coronation, Alberta. The Paintearth assets acquired
include a landfill, permitted to accept solid waste, construction and demolition
waste and certain special wastes together with a composting facility, a
bio-remediation facility, and a material recycling facility. The landfill
currently has permitted airspace of 4.6 million cubic metres or 3.2 million
tons. The permit currently covers 160 of the 470 owned acres, and the remainder
of the acreage is adequate for future expansion. The Company estimates that the
landfill has at least 25 years of remaining airspace based on what is currently
permitted. The permit does not impose any volume, hours of operations or
generation area acceptance restrictions on the Paintearth facility.
66
<PAGE>
Report of Independent Auditors
To the Stockholders of
Western Waste Services Inc.
We have audited the consolidated balance sheets of Western Waste Services
Inc. ("Western Waste") at October 31, 1996 and June 5, 1997 and the consolidated
statements of operations, comprehensive loss, stockholders' deficit and cash
flows for the year ended October 31, 1996 and the period from November 1, 1996
through June 5, 1997. These financial statements are the responsibility of
Western Waste's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Western Waste as at October 31,
1996 and June 5, 1997 and the results of its operations and its cash flows for
each of the periods then ended in accordance with generally accepted accounting
principles in the United States.
Edmonton, Canada COOPERS & LYBRAND
May 29, 1998 Chartered Accountants
67
<PAGE>
WESTERN WASTE SERVICES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
October 31, June 5,
1996 1997
---------- -------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 252 $ 1,358
Trade accounts receivable (net of allowance for doubtful
accounts of $22 at October 31, 1996 and $96 at June 5,
1997) 1,664 1,899
Prepaid expenses and deposits 149 223
------- -------
Total current assets 2,065 3,480
Property and equipment, net (Note 3) 10,627 10,881
Goodwill (net of accumulated amortization of $94 at
October 31, 1996 and $123 at June 5, 1997) 3,390 3,272
Other non-current assets 140 257
------- -------
Total assets $16,222 $17,890
------- -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
68
<PAGE>
<TABLE>
<CAPTION>
October 31, June 5,
1996 1997
----------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities
Bank indebtedness (Note 4) $ 7,831 $ 10,559
Accounts payable 1,574 937
Accrued employee costs 91 271
Income and other taxes payable 50 98
Other accrued liabilities 206 43
Advances from stockholders (Note 5) 5,673 5,528
Current portion of long-term debt (Note 5) 54 102
-------- --------
Total current liabilities 15,479 17,538
-------- --------
Long-term debt (Note 5) 232 127
-------- --------
Future income taxes 1,782 2,266
-------- --------
Redeemable Class C non-voting stock (Note 8) Unlimited shares authorized; 200
shares issued and
outstanding October 31, 1996 and June 5, 1997 124 124
-------- --------
Commitments and contingencies (Note 7)
Stockholders' deficit
Capital stock (Note 8): Unlimited Class A shares
authorized; 200 shares issued and outstanding 1 1
Cumulative foreign currency translation adjustments (30) 11
Accumulated deficit (1,366) (2,177)
-------- --------
Total stockholders' deficit (1,395) (2,165)
-------- --------
Total liabilities and stockholders' deficit $ 16,222 $ 17,890
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
69
<PAGE>
WESTERN WASTE SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands of U.S. dollars)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Year ended October November 1, 1996
31, 1996 through June 5, 1997
------------------ ---------------------
<S> <C> <C>
Revenues $ 7,421 $ 5,680
------- -------
Operating expenses:
Cost of operations 5,257 3,472
Selling, general and administrative 2,017 1,658
Depreciation and amortization 741 612
------- -------
Loss from operations (594) (62)
Interest expense (8) (176)
------- -------
Loss before income taxes (602) (238)
Provision for income taxes (Note 6) (508) (573)
------- -------
Net loss for the period $(1,110) $ (811)
------- -------
COMPREHENSIVE LOSS
Net loss for the period $(1,110) $ (811)
Other comprehensive income (loss) - Foreign currency
translation adjustments (25) 41
------- -------
Comprehensive loss for the year $(1,135) $ (770)
------- -------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
70
<PAGE>
WESTERN WASTE SERVICES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands of U.S. dollars, except share data)
<TABLE>
<CAPTION>
Foreign
currency
Common stock Total Accumulated
------------------------ translation deficit Total
Shares $ $ $ $
-------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1995 200 1 (5) (256) (260)
Foreign currency translation adjustments -- -- (25) -- (25)
Net loss for the year -- -- -- (1,110) (1,110)
------ ------ ------ ------ ------
Balance at October 31, 1996 200 1 (30) (1,366) (1,395)
Foreign currency translation adjustments -- -- 41 -- 41
Net loss for the period -- -- -- (811) (811)
------ ------ ------ ------ ------
Balance at June 5, 1997 200 1 11 (2,177) (2,165)
------ ------ ------ ------ ------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
71
<PAGE>
WESTERN WASTE SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
Period from
Year ended November 1, 1996
October 31, 1996 through June 5, 1997
----------------- --------------------
<S> <C> <C>
Operating activities:
Net loss for the period $ (1,110) $ (811)
Adjustments to net loss for non-cash items:
Depreciation and amortization 741 612
Future income taxes 508 538
Net loss (gain) on disposal of property plant and equipment 12 (9)
Changes in assets and liabilities, net of effects of acquisitions and
divestitures:
Trade accounts receivable (1,353) (336)
Prepaid expenses and deposits (115) (22)
Accounts payable 1,281 (601)
Accrued employee costs 60 185
Income and other taxes payable 34 47
Other accrued liabilities 198 (159)
-------- --------
Net cash provided by (used in) operating activities 256 (556)
-------- --------
Investigating activities:
Capital expenditures (2,839) (1,177)
Acquisition of businesses, net of cash acquired (8,182) --
Proceeds from sale of property and equipment 74 105
Other assets (27) (117)
-------- --------
Net cash used in investing activities (10,974) (1,189)
-------- --------
Financing activities:
Increase in bank indebtedness 7,690 2,954
Proceeds from issuance of long-term debt -- 109
Principal payments on long-term debt (54) (159)
Repayments of advance from stockholder (775) (145)
-------- --------
Net cash provided by financing activities 6,861 2,759
-------- --------
Effect of exchange rate changes on cash and cash
equivalents (60) 92
-------- --------
Increase (decrease) in cash and cash equivalents (3,917) 1,106
Cash and cash equivalents at beginning of period 4,169 252
-------- --------
Cash and cash equivalents at end of period $ 252 $ 1,358
-------- --------
</TABLE>
72
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousand of U.S. dollars)
1. Organization, business and significant accounting policies
Organization and business
Western Waste Services Inc. ("Western Waste") was incorporated in the
province of Alberta, Canada on November 22, 1994. Western Waste is a regional,
integrated solid waste services company that provides collection, transfer,
disposal and recycling services to commercial, industrial and residential
customers in secondary markets in the provinces of Alberta and British Columbia.
Basis of presentation
These financial statements are prepared in accordance with generally
accepted accounting principles in the United States. All financial information
presented herein is in thousands, except share and per share data. All
references to "dollars" or "$" mean U.S. dollars and "C$" mean Canadian dollars.
The consolidated financial statements include the accounts of Western
Waste and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. All business acquisitions to
June 5, 1997 have been accounted for under the purchase method and the results
of operations of these businesses are included in the consolidated financial
statements from their respective dates of acquisition.
Assets and liabilities are reported in United States dollars. Assets and
liabilities have been translated from Canadian dollars to United States dollars
at the exchange rates in effect at the relevant balance sheet dates and revenues
and expenses have been translated from Canadian dollars to United States dollars
at the weighted average exchange rates prevailing during the relevant period.
Gains and losses resulting from translation are reported as a separate component
of stockholders' equity as cumulative foreign currency translation adjustments.
Credit risk
Financial instruments that potentially subject Western Waste to credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. Western Waste places its cash and cash equivalents only with high
credit quality financial institutions. Western Waste's trade accounts receivable
are not subject to a concentration of credit risk. The customers are diversified
as to both geographic and industry concentrations. Western Waste maintains an
allowance for losses based on the expected collectibility of the accounts.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
73
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousand of U.S. dollars)
Cash and cash equivalents
Cash and cash equivalents are defined as cash and short-term deposits or
monetary instruments with maturity dates of less than 90 days.
Property and equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives on a straight-line basis as indicated below. Improvements
or betterments which significantly extend the life of an asset are capitalized.
Gains and losses resulting from property or equipment disposals are credited or
charged to cost of operations.
Buildings...................................................... 10 to 25 years
Vehicles....................................................... 10 years
Containers, compactors and recycling equipment................. 5 to 12 years
Furniture, fixtures and other office equipment and leaseholds.. 3 to 5 years
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of the net assets of acquired businesses and is amortized on a straight-line
basis over the period of expected benefit of 40 years.
Should events or circumstances occur subsequent to the acquisition of a
business which bring into question the realizable value or impairment of the
related goodwill, Western Waste will evaluate the remaining useful life of
goodwill and make appropriate adjustments. Impairment would be measured by
comparing expected future cash flows on an undiscounted basis to the carrying
amount of the goodwill.
Fair value of financial instruments
The carrying values of the long-term debt approximate the fair values as
at October 31, 1996 and June 5, 1997, based on the then current incremental
borrowing rates for similar types of financing arrangements.
Revenue recognition
Western Waste recognizes revenue when waste removal services are provided.
Amounts billed to customers, prior to providing the related services, are
deferred and reported as revenues in the period in which the services are
rendered.
Income taxes
Western Waste uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
74
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousand of U.S. dollars)
New accounting pronouncements
In February 1997, the FASB issued Statement No. 129, Disclosure of
Information about Capital Structure ("SFAS 129"), which is effective for periods
ending after December 15, 1997. This statement establishes standards for
disclosing information about an entity's capital structure. Adoption of SFAS 129
will have no impact on Western Waste's existing disclosures.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for reporting and disclosure
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS 130, which
is in effect for fiscal years beginning after December 15, 1997, requires
classification of financial statements for earlier periods to be provided for
comparative purposes. SFAS has been implemented in these financial statements.
In June 1997, the FASB issued Statement No. 131, Disclosure about Segments
of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products, services, geographic areas and major customers. SFAS 131 is effective
for years beginning after December 15, 1997. In the initial year of application,
comparative information for previous years must be restated. Implementing the
provisions of SFAS 131 would not have had a significant impact on Western
Waste's existing disclosures for the periods presented.
2. Acquisitions
Businesses acquired during the year ended October 31, 1996
On November 1, 1995, Western Waste acquired the business and certain
capital assets of Jones Disposal Services Ltd. ("Jones"), for total cash
consideration of $1,342.
On November 1, 1995, Western Waste acquired the business and certain
capital assets of Alpine Disposal & Recycling (Nanaimo) Ltd. ("Alpine"), for
total cash consideration of $2,237.
On December 1, 1995, Western Waste acquired 100% of the outstanding common
shares of West Coast Waste Systems Inc. ("West Coast"), for total cash
consideration of $2,705.
On March 1, 1996, Western Waste acquired 100% of the outstanding common
shares of Lacey Garbage Disposal Ltd. ("Lacey"), for total cash consideration of
$1,300.
During the year ended October 31, 1996 Western Waste acquired six other
smaller businesses for aggregate cash consideration of $598. The assets acquired
and obligations assumed for the above business combinations all accounted for
under the purchase method of accounting in the period are as follows:
75
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousand of U.S. dollars)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Jones Alpine West Coast Lacey Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property and equipment $1,193 $1,342 $2,133 $1,064 $482 $6,214
Goodwill and other intangibles 149 895 1,019 593 143 2,799
Deferred income taxes - - (447) (357) (27) (831)
- ----------------------------------------------------------------------------------------------------------------------------------
Net acquisition costs $1,342 $2,237 $2,705 $1,300 $598 $8,182
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Businesses acquired during the period from November 1, 1996 through June 5, 1997
No businesses were acquired during the period from November 1, 1996
through June 5, 1997.
Pro forma acquisition data (unaudited)
Condensed pro forma statement of operations data, as if the acquisitions
accounted for as business combinations each period had occurred at the beginning
of the periods presented, are as follows:
- -------------------------------------------------------------------------------
Period from
Year ended October November 1, 1996
31, 1996 through June 5, 1997
- -------------------------------------------------------------------------------
Revenue $8,012 $5,680
------- ------
Net income (loss) from operations $ (553) $ (238)
------- ------
Net income (loss) for the period $(1,018) $ (811)
- -------------------------------------------------------------------------------
3. Property and equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
October 31, June 5,
1996 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 149 $ 145
Buildings 597 582
Vehicles 5,297 5,411
Containers, compactors and recycling equipment 5,107 5,735
Furniture, fixtures and other office equipment and leaseholds 200 230
- -----------------------------------------------------------------------------------------------
11,350 12,103
Less: Accumulated depreciation 723 1,222
- -----------------------------------------------------------------------------------------------
$10,627 $ 10,881
- -----------------------------------------------------------------------------------------------
Depreciation expense for the period ended $ 637 $ 499
- -----------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousand of U.S. dollars)
4. Bank indebtedness
Bank indebtedness at October 31, 1996 and June 5, 1997 consisted of
short-term bankers acceptances. The weighted average interest rate was 5.04% at
October 31, 1996 and 3.65% at June 5, 1997.
Western Waste or its stockholders provided the following as collateral for
bank indebtedness.
(a) A stockholder's postponement of claim of $994 relating to
stockholder advances;
(b) A full recourse guarantee from one of the stockholders in the amount
of $10,814;
(c) A demand debenture providing a first fixed charge on property and
equipment in excess of $75 and a first and floating charge over all
other assets of Western Waste;
(d) An assignment of fire, liability, business interruption and other
form of insurance proceeds; and
(e) An assignment of the key man life insurance on one of the
stockholders.
Western Waste has no remaining borrowing capacity under its credit
facility at June 5, 1997.
5. Advances from stockholders and long-term debt
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
October 31, June 5,
1996 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Term bank loan, interest at prime plus 1%, repayable in monthly
payments of $1 plus interest, due January 2000 $ 30 $ 139
Capital lease obligations, interest rate at 8.3%, due 2000 to 2001 256 90
- -----------------------------------------------------------------------------------------------------
286 229
Less: Current portion 54 102
- -----------------------------------------------------------------------------------------------------
$ 232 $ 127
- -----------------------------------------------------------------------------------------------------
</TABLE>
The term bank loan and capital lease obligations are collateralized by
fixed charges on specific assets.
The term loan agreements provide for certain covenants and restrictions
regarding, among other things, working capital minimum ratios, minimum equity
requirements, consolidated earnings before interest, depreciation, and taxes
minimum requirement and maximum leverage requirements.
All of Western Waste's long-term debt was retired subsequent to June 5,
1997.
Advances from stockholders
Advances from stockholders are unsecured, non-interest-bearing and have no
specified terms of repayment.
77
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousand of U.S. dollars)
6. Income taxes
At June 5, 1997, Western Waste had approximately $765 of accumulated net
operating loss carryforwards for income tax purposes, the tax benefits of which
have not been recognized due to uncertainty of realization. Most of these net
operating loss carryforwards do not expire until 2004 and their use is not
subject to any annual limitations.
The provision of income taxes consists of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Period from
November 1, 1996
Year ended October through June 5,
31, 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current $ - $ 35
Deferred 508 538
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 508 $ 573
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The current provision for income taxes for the period from November 1,
1996 through June 5, 1997 consists of capital taxes.
The reconciliation from income taxes at the Canadian federal statutory
rate to the provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Period from
November 1, 1996
Year ended October through June 5,
31, 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Combined Canadian federal and provincial statutory rate $ (269) $ (106)
Non-deductible expenses and losses carried forward not
recognized due to uncertainty 777 679
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 508 $ 573
- ---------------------------------------------------------------------------------------------------------------------
Components of future income taxes
Components giving rise to the future income taxes are as follows:
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Period from
November 1, 1996
Year ended October through June 5,
31, 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net book value of property and equipment in excess of related tax
cost $ 1,782 $ 2,266
- ---------------------------------------------------------------------------------------------------------------------
Future income taxes $ 1,782 $ 2,266
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
78
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousand of U.S. dollars)
7. Commitments and contingencies
Leases
The aggregate amount of future rent expense resulting from non-cancellable
operating leases as at June 5, 1997 amounts to $1,762 as follows:
1998..................................................... $ 396
1999..................................................... 402
2000..................................................... 397
2001..................................................... 306
2002..................................................... 261
-------
$1,762
-------
Aggregate rent expense, which is included in cost of operations, was $170
for the year ended October 31, 1996 and $121 for the period from November 1,
1996 through June 5, 1997.
Environmental risks
Western Waste is subject to liability for any environmental damage that
its solid waste facilities may cause 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 Western Waste. Western
Waste 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 Western Waste or its predecessors. Any
substantial liability for environmental damage incurred by Western Waste could
have a material adverse effect on Western Waste's financial condition, results
of operations or cash flows. As at June 5, 1997, Western Waste was not aware of
any such environmental liabilities.
Legal proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, Western Waste may
periodically become subject to various judicial and administrative proceedings
involving federal, provincial or local agencies. In these proceedings, an agency
may seek to impose fines on Western Waste or to revoke or deny renewal of an
operating permit held by Western Waste. From time to time Western Waste may also
be subject to actions brought by citizens' groups or adjacent landowners in
connection with the permitting and licensing of its transfer station, or
alleging environmental damage or violations of the permits and licenses pursuant
to which Western Waste operates.
79
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousand of U.S. dollars)
In addition, Western Waste 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, as of June 5, 1997,
there was no current proceeding or litigation involving Western Waste that
Western Waste believes will have a material adverse impact on Western Waste's
business, financial condition, results of operations or cash flows.
8. Capital stock
The authorized capital stock of Western Waste consists of an unlimited
number of the following:
Class A voting common shares
Class B non-voting shares
Class C non-voting shares
Class D non-voting shares
Class E voting shares
Capital stock transactions
On October 31, 1996, Western Waste issued an additional 100 Class C
non-voting shares, valued at $62 to a stockholder of Western Waste.
Redemption features
The Class C, non-voting shares are redeemable at the option of the holder
and retractable at the option of Western Waste at the aggregate issue price of
$124.
Dividend restrictions
The dividends on the Class C shares may not exceed 16% of the redemption
price per annum.
9. Cash flow information
Supplemental disclosures of cash flow information and non-cash
transactions
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Period from
November 1, 1996
Year ended October through June 5,
31, 1996 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid for interest $ 214 $ 270
Cash paid for income/capital taxes - 35
Shares issued for services rendered 62 -
Acquisitions of equipment through capital leases 297 -
- ----------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousand of U.S. dollars)
10. Related party transactions
In the year ended October 31, 1996, Western Waste issued $62 of Redeemable
Class C non-voting stock to a common stockholder and officer of Western Waste in
exchange for employment services rendered.
11. Subsequent events
On June 6, 1997 a share transfer agreement was entered into between
Capital Environmental Resource Inc. and USA Waste, pursuant to which USA Waste
transferred 100 Class A shares of Western Waste to Capital Environmental.
Subsequently, Capital Environmental Resource Inc. transferred to Western Waste
certain assets in the amount of $5,384 acquired from Canadian Waste Services
Inc.
On June 15, 1997, Western Waste acquired the business and certain fixed
assets from Provincial Sanitation and City Waste Ltd. for total cash
consideration of $424. The final amount of consideration is contingent upon the
resolution of claims arising over the warranted condition of assets received.
On November 1, 1997, Western Waste redeemed 200 Class C shares issued in
prior years for aggregate cash of $62.
81
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------------
None.
PART III
The information required by Part III of Form 10-K is incorporated by
reference from the Company's definitive Proxy Statement for the 2000 Annual
Meeting of Shareholders, which the Company will file with the Commission
pursuant to Regulation 14A within 120 days after the end of the Company's 1999
fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------
(a) Exhibits:
4.1 Shareholder Rights Plan, dated as of September 2, 1999, between the
Company and American Stock Transfer & Trust Company. (Filed as an exhibit to the
Company's Current Report on Form 8-K dated September 2, 1999.)
(b) Reports on Form 8-K
On September 7, 1999, the Company filed a report on Form 8-K dated
September 2, 1999. The 8-K was filed to report the adoption of a Shareholder
Rights Plan and the declaration by the Company's Board of Directors of a
dividend distribution of one Right for each outstanding share of the Company's
Common Shares, no par value per share, to the shareholders of record at the
close of business on September 2, 1999.
82
<PAGE>
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, on the 20th day of March, 2000
CAPITAL ENVIRONMENTAL RESOURCE INC.
/s/ Tony Busseri
-----------------------------------------------
Tony Busseri
Chairman of the Board, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 20th day of March, 2000.
Signature Title
/s/ Allard Loopstra Chief Operating Officer and Director
- ------------------------------
Allard Loopstra
/s/ George Boothe President
- ------------------------------
George Boothe
/s/ David Langille Executive Vice President,
- ------------------------------ Chief Financial Officer
David Langille
/s/ Dennis Nolan Executive Vice President,
- ------------------------------ Secretary and General Counsel
Dennis Nolan
/s/ Marta Pirie Gimon Vice President,
- ------------------------------ Finance Chief Accounting Officer
Marta Pirie Gimon
/s/ Kenneth Ch'uan-k'ai Leung Director
- ------------------------------
Kenneth Ch'uan-k'ai Leung
/s/ David Lowenstein Director
- ------------------------------
David Lowenstein
/s/ Bruce Cummings Director
- ------------------------------
Bruce Cummings
83
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 10K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,398
<SECURITIES> 0
<RECEIVABLES> 14,986
<ALLOWANCES> 331
<INVENTORY> 0
<CURRENT-ASSETS> 20,248
<PP&E> 49,400
<DEPRECIATION> 8,708
<TOTAL-ASSETS> 166,127
<CURRENT-LIABILITIES> 25,795
<BONDS> 0
0
0
<COMMON> 57,066
<OTHER-SE> 1,254
<TOTAL-LIABILITY-AND-EQUITY> 166,127
<SALES> 0
<TOTAL-REVENUES> 97,551
<CGS> 0
<TOTAL-COSTS> 66,091
<OTHER-EXPENSES> 20,152
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,232
<INCOME-PRETAX> 5,076
<INCOME-TAX> 2,053
<INCOME-CONTINUING> 3,023
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,023
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.51
<FN>
<F1>Net gain on fixed assets of $1,100 included.
</FN>
</TABLE>
