<PAGE>
S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Commission file number 333-77633
CAPITAL ENVIRONMENTAL RESOURCE INC.
(Exact name of registrant as specified in its charter)
Ontario, Canada Not Applicable
(Jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
1005 Skyview Drive
Burlington, Ontario, Canada L7P 5B1
(Address of principal executive offices) (Postal Code)
Registrant's telephone number, including area code (905) 319-1237
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO _
As of April 30, 2000, there were 7,196,627 common shares outstanding.
-1-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
INDEX TO FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<S> <C> <C>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as at March 31, 2000 and December 31, 1999........ 3
Consolidated Statements of Operations and Comprehensive Income
for the three month periods ended March 31, 2000 and 1999..................... 5
Consolidated Statements of Stockholders' Equity for the three month
period ended March 31, 2000................................................... 6
Consolidated Statements of Cash Flows for the three month periods
ended March 31, 2000 and 1999................................................. 7
Notes to Consolidated Financial Statements ................................... 8
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk.................... 20
PART II OTHER INFORMATION
Item 1 Legal Proceedings............................................................. 21
SIGNATURES............................................................................. 22
</TABLE>
-2-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 135 $ 1,398
Trade accounts receivable (net of allowance for doubtful
accounts of $252; December 31, 1999 - $331) 13,850 14,655
Prepaid expenses and other current assets 4,314 3,724
Employee loans 486 471
-------- --------
TOTAL CURRENT ASSETS 18,785 20,248
PROPERTY AND EQUIPMENT, NET 45,981 40,692
OTHER ASSETS
Goodwill (net of accumulated amortization of
$4,148; December 31, 1999 - $3,528) 95,566 95,654
Other intangibles and non-current assets 5,048 5,358
Deferred income taxes 4,175 4,175
-------- --------
TOTAL ASSETS $169,555 $166,127
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
-3-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(unaudited) (audited)
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 10,887 $ 12,050
Accrued purchase liabilities -- 600
Current portion of long-term debt (Note 3) 13,397 13,145
--------- ---------
TOTAL CURRENT LIABILITIES 24,284 25,795
LONG-TERM DEBT (Note 3) 82,840 78,199
DEFERRED INCOME TAXES 3,977 3,813
--------- ---------
111,101 107,807
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY
Common Stock; 7,196,627 issued and outstanding;
(December 31, 1999 - 7,196,627) (Note 5) 57,066 57,066
Accumulated other comprehensive loss (1,095) (890)
Retained earnings 2,483 2,144
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 58,454 58,320
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 169,555 $ 166,127
========= =========
The accompanying notes are an integral part of these statements
-4-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31
----------------------------
2000 1999
---------- ----------
REVENUES $ 26,362 $ 17,876
OPERATING EXPENSES:
Cost of operations 16,995 12,012
Selling, general and administrative expenses 4,221 2,338
Depreciation and amortization expense 2,471 1,533
---------- ----------
INCOME FROM OPERATIONS 2,675 1,993
Interest and financing expense 2,010 1,250
---------- ----------
INCOME BEFORE INCOME TAXES 665 743
Income tax provision 326 267
---------- ----------
NET INCOME FOR THE PERIOD $ 339 $ 476
========== ==========
BASIC NET INCOME PER COMMON SHARE $ 0.05 $ 0.19
========== ==========
DILUTED NET INCOME PER COMMON SHARE $ 0.05 $ 0.11
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 6)
Basic 7,196,627 2,447,680
========== ==========
Diluted 7,290,580 4,358,406
========== ==========
STATEMENTS OF COMPREHENSIVE INCOME
NET INCOME FOR THE PERIOD $ 339 $ 476
Other comprehensive income (loss) -
foreign currency translation adjustments (205) 25
---------- ----------
COMPREHENSIVE INCOME FOR THE PERIOD $ 134 $ 501
========== ==========
The accompanying notes are an integral part of these statements
-5-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------------ COMPREHENSIVE RETAINED
SHARES AMOUNT LOSS EARNINGS TOTAL
--------- ------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1999 7,196,627 $57,066 $ (890) $2,144 $ 58,320
Foreign currency translation adjustments -- -- (205) -- (205)
Net income for the period -- -- -- 339 339
--------- ------- ------- ------ --------
BALANCES AT MARCH 31, 2000 7,196,627 $57,066 $(1,095) $2,483 $ 58,454
========= ======= ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these statements
-6-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
2000 1999
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 339 $ 476
Adjustments to reconcile net income to net cash flows
from operating activities -
Depreciation and amortization 2,471 1,533
Deferred income taxes 163 267
Net loss (gain) on disposal of property, plant and equipment (161) 5
Other 150 --
Changes in operating assets and liabilities, net of effect of
acquisitions and divestitures -
Trade accounts receivable 1,063 395
Prepaid expenses and other current assets 374 (649)
Accounts payable and accrued liabilities (583) (1,418)
Income and other taxes (690) --
------- --------
3,126 609
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (5,618) (6,155)
Capital expenditures, net of proceeds (2,228) (757)
Net loans and advances to employees (16) 30
Other (1,287) (598)
------- --------
(9,149) (7,480)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 5,296 16,981
Principal payments on long-term debt (146) (2,135)
Repayment of capital lease liability (329) (233)
Net proceeds from issuance of common stock -- (118)
Redemption of redeemable and convertible stock -- (6,900)
Debt issuance costs (59) (839)
------- --------
4,762 6,756
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (2) 17
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,263) (98)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,398 1,060
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 135 $ 962
======= ========
SUPPLEMENTARY INFORMATION ON NON-CASH TRANSACTIONS:
Value of acquisitions partially or totally effected by the issue of
capital stock $ -- $ 66
------- --------
Other long-term liabilities assumed on acquisition $ 55 $ --
------- --------
Assets acquired under capital leases $ 53 $ 1,272
------- --------
</TABLE>
The accompanying notes are an integral part of these statements
-7-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of Capital
Environmental Resource Inc. and its subsidiaries (the "Company") for the three
month periods ended March 31, 2000 and 1999 have been prepared in accordance
with generally accepted accounting principles in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the three month period ended March
31, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000.
The Company's consolidated balance sheet as of March 31, 2000, and the
interim consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for the three month periods ended March 31,
2000 and 1999 are unaudited. In the opinion of management, such financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position, results of operations, and cash flows for the periods presented. The
consolidated financial statements presented herein should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
2. ACQUISITIONS
For the three months ended March 31, 2000, the Company acquired one
solid waste collection business and one landfill that were each accounted for
using the purchase method of accounting. The aggregate consideration for these
acquisitions was approximately $5.7 million, consisting primarily of $5.6
million in cash and $0.1 million in assumed liabilities. The purchase prices
have been allocated to the identified intangible and tangible assets acquired
based on fair values at the dates of acquisition, with any residual amounts
allocated to goodwill or landfill property as appropriate.
3. LONG-TERM DEBT
During 1999, the Company amended and restated its Credit Facility to
increase its available credit to $85.0 million. The Company also entered into a
Term Loan for $25.0 million. The increased credit has been used primarily to
fund acquisitions. The Company has pledged all of its assets, including the
stock of its subsidiaries, as collateral under the amended Credit Facility. The
Credit Facility matures in November 2004. The Term Loan has principal repayments
beginning in November 2002.
-8-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS)
Long-term debt consists of the following:
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2000 1999
- --------------------------------------------------------------------------------
(unaudited) (audited)
Senior debt $78,021 $72,763
Subordinated promissory notes 11,335 11,371
Capital lease obligations 4,779 4,995
Other 2,102 2,215
- --------------------------------------------------------------------------------
96,237 91,344
Less: current portion 13,397 13,145
- --------------------------------------------------------------------------------
$82,840 $78,199
================================================================================
4. COMMITMENTS AND CONTINGENCIES
(A) ENVIRONMENTAL RISKS
The Company is subject to liability for environmental damage that its
solid waste facilities may cause, including damage to neighbouring landowners or
residents, particularly as a result of the contamination of soil, groundwater or
surface water, and especially drinking water, including damage resulting from
conditions existing prior to the acquisition of such facilities by the Company.
The Company may also be subject to liability for any off-site environmental
contamination caused by pollutants or hazardous substances whose transportation;
treatment or disposal was arranged by the Company or its predecessors. Any
substantial liability for environmental damage incurred by the Company could
have a material adverse effect on the Company's financial condition, results of
operations or cash flows. As at the date of these financial statements, the
Company is not aware of any such environmental liabilities that would be
material to the Company's operations or financial condition.
(B) LEGAL PROCEEDINGS
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, state, provincial or local agencies. In these proceedings, an
agency may seek to impose fines on the Company or to revoke or deny renewal of
an operating permit held by the Company. From time to time the Company may also
be subject to actions brought by citizens' groups or adjacent landowners in
connection with the permitting and licensing of landfills and transfer stations,
or alleging environmental damage or violations of the permits and licenses
pursuant to which the Company operates.
-9-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS)
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring during the
normal operation of the waste management business. However, other than as
described below, as at March 31, 2000, there was no current proceeding or
litigation involving the Company that the Company believes will have a material
adverse impact on the Company's business, financial condition, results of
operations or cash flows.
On October 12, 1999, Lynn Bishop and L&S Bishop Enterprises Inc.
(collectively "Bishop") commenced an action against the Company, Capital
Environmental Alberta Inc. and Tony Busseri, the Chairman of the Company, in
which Bishop claims damages in the aggregate amount of approximately $7.4
million. The claim includes $2.1 million for alleged wrongful termination, $5.3
million for misrepresentations allegedly made in connection with the Share
Purchase Agreement, dated as of November 1, 1997, among Lynn Bishop, L&S Bishop
Enterprises Inc., the Company and Western Waste Services Inc. (the "Share
Purchase Agreement"), as well as $0.3 million for punitive damages. The Company
believes that Bishop's claims are wholly without merit, and that Lynn Bishop's
employment was terminated for just cause and that it has no further obligation
to Bishop beyond the contingent payment described in Note 4 (c). The Company is
defending the claim and has issued a counterclaim against Bishop, and does not
believe the outcome will have a material adverse impact on the Company's
business, financial condition, results of operations or cash flows. Accordingly,
the Company has not made a provision for this claim in its financial statements.
(C) CONTINGENT PAYMENT RELATED TO ACQUISITIONS
In connection with the acquisition of Western Waste from L&S Bishop
Enterprises ("L&S"), the Company may have to make an additional payment to L&S.
L&S may elect to sell up to 112,323 shares in the future and if, at that time,
the price of the Common Stock is less than C$21.67 per share, the Company will
have to make up the shortfall. This agreement was subject to a 180-day lock-up
agreement, which expired on December 8, 1999. The Company has since been advised
that L&S has sold the aforementioned shares resulting in a shortfall of
approximately $1 million however, in view of the litigation referred to in Note
4 (b) challenging the Shares Purchase Agreement, the obligation of the Company,
if any, will not be recorded until the litigation is settled.
5. CAPITAL STOCK
A) CHANGES IN CAPITAL STOCK SINCE INCEPTION ON MAY 23, 1997:
COMMON AND PREFERRED STOCK
The Company has an unlimited number of Preferred Shares, issuable in
series. As of March 31, 2000, there were no Preferred Shares authorized or
outstanding.
-10-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS)
On April 27, 1999, the stockholders of the Company approved a split of
the Company's Common Stock whereby 1.3847 Common Shares were issued for each
previously outstanding Common Share. All Common Shares and per Common Share data
in the financial statements has been restated to give retroactive effect to this
1.3847 for 1 stock split.
(i) On May 23, 1997, the Company issued 1,353,924 Common Shares
for nominal cash consideration.
(ii) On October 31, 1997, the Company issued 73,850 Common Shares
with a value of $789 in exchange for certain business assets
and cash of $89.
(iii) On April 1, 1998, in connection with the acquisition of
Muskoka Containerized Services Limited ("MCS"), the Company
issued 6,923 Common Shares with a value of $71 as partial
consideration for the acquisition of MCS.
(iv) On June 15, 1998, the Company issued 553,869 Common Shares for
net proceeds of $6,595 cash in a private placement.
(v) On July 2, 1998, in connection with the acquisition of Johns
Cartage Waste Management Services Ltd., the Company issued
5,192 Common Shares valued at $64 as part of the acquisition
consideration.
(vi) On March 5, 1999, in connection with the acquisition of
Ram-Pak Compaction Services, the Company issued 4,784 Common
shares valued at C$100.
(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.
-11-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS)
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 non-directors become exercisable only after the second anniversary of the
grant date unless otherwise determined by the Compensation Committee. No option
will remain exercisable later than five years after the grant date, unless the
Compensation Committee determines otherwise. Upon a change of control event,
options become immediately exercisable.
At March 31, 2000, December 31, 1999, and March 31, 1999, the aggregate
options outstanding entitled holders to purchase 986,801, 1,004,301 and 495,720
Common Shares, respectively, at prices ranging from C$7.22 - $18.05 and US$5.30
- - $14.50. During the three months ended March 31, 2000, no Common Shares were
issued under the plans.
As permitted by the Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation", the Company applies APB 25 in
accounting for options to acquire Common Shares. As a result, no compensation
cost has been recognized as options have been granted at market value.
C) STOCK PURCHASE WARRANTS
In 1997, the Company issued 123,084 warrants to certain founding
stockholders. These warrants entitle the holder thereof to receive upon
exercise, one common share at C$0.007 per share. These warrants expire July 15,
2002.
At March 31, 2000, December 31, 1999, and March 31, 1999, the aggregate
warrants outstanding entitled holders to purchase 92,312, 92,312 and 123,084
Common Shares, respectively. During the three months ended March 31, 2000, no
Common Shares were issued on exercise of warrants.
D) SHAREHOLDER RIGHTS PLAN
On September 2, 1999, the Company adopted a Shareholder Rights Plan
(the "Plan"). Under the terms of the Plan, Common Share purchase rights (the
"Rights") were distributed at the rate of one Right for each Common Share held.
Each Right will entitle the holder to buy 1/100th of a Common Share of the
Company at an exercise price of $60.00. The Rights will be exercisable and will
trade separately from the Common Shares only if a person or group acquires
beneficial
-12-
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS OF U.S. DOLLARS)
ownership of 20% or more of the Company's Common Shares or commences a tender or
exchange offer that would result in owning 20% or more of the Common Shares
(unless the Board of Directors determines that the acquisition is fair to all
shareholders and amends the Plan to permit the acquisition). If either of these
events occurs, the Rights will entitle each holder to receive, upon exercise, a
number of Common Shares (or, in certain circumstances, a number of Common Shares
in the acquiring company) having a Current Market Price (as defined in the Plan)
equal to approximately two times the exercise price of the Right. The Rights
will not be exercisable with respect to the share ownership of Environmental
Opportunities Fund I, Environmental Opportunities Fund II and Sanders Morris
Mundy Inc. and any affiliate or associate thereof, that already own more than
20% of the Company's Common Shares as long as these persons, along with their
affiliates and associates, do not acquire beneficial ownership of 30% or more.
The number of Rights outstanding is subject to adjustment under certain
circumstances and all Rights expire on September 30, 2009.
6. NET INCOME PER SHARE INFORMATION
The following table sets forth the computation of earnings per Common
Share:
<TABLE>
<CAPTION>
============================================================================================================
Three Months Ended March 31 2000 1999
============================================================================================================
Basic Diluted Basic Diluted
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 339 $ 339 $ 476 $ 476
- ------------------------------------------------------------------------------------------------------------
Weighted average Common Shares
outstanding - basic 7,196,627 7,196,627 2,447,680 2,447,680
Dilutive effect of stock options and
warrants outstanding -- 93,953 -- 318,321
Common Shares issuable upon
conversion of redeemable and
convertible stock -- -- -- 1,592,405
- ------------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 7,196,627 7,290,580 2,447,680 4,358,406
- ------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.05 $ 0.05 $ 0.19 $ 0.11
============================================================================================================
</TABLE>
7. SUBSEQUENT EVENTS
On April 3, 2000, the Company acquired certain commercial and
industrial operations located in Canton and Akron, Ohio, from Republic Waste
Service Inc. This is a step out into the Ohio market and provides a platform for
the Company to continue to grow in the northeastern United States market.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
================================================================================
The following discussion should be read in conjunction with the
unaudited financial statements and notes thereto included elsewhere herein.
FORWARD LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Part 1, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934) that involve risks and uncertainties. Factors
set forth under the caption "Risk Factors" in the Company's Registration
Statement could affect the Company's actual results and could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company in this Report
on Form 10-Q.
OVERVIEW
Capital Environmental Resource Inc. ("Capital" or the "Company") is a
regional, integrated solid waste services company that provides collection,
transfer, disposal, landfill and recycling services. Capital 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 40 solid waste services businesses in Canada and the United
States, including 41 collection operations, 11 transfer stations, 7 recycling
processing facilities and a contract to operate 2 landfills. In addition, the
Company owns and operates a landfill located in Coronation, Alberta. The
consolidated operations presently serve over 589,000 residential, commercial and
industrial customers. Largely as a result of acquisitions, the Company believes
that it has become one of the largest solid waste services companies in Canada,
and that it has significant opportunities for further growth in both Canada and
the northern United States.
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.
-14-
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 21, 2000 AND 1999
The following table sets forth items in the Consolidated Statement of
Operations as a percentage of revenues and the percentage changes in the dollar
amounts of these items compared to the same period in the previous year:
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
($ THOUSANDS) REVENUE CHANGE
==========================================================================================================================
2000 Over
Three Months Ended March 31 2000 1999 2000 1999 1999
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues $26,362 $17,876 100.0% 100.0% 47.5%
Cost of operations 16,995 12,012 64.5 67.2 41.5
Selling, general and administrative expenses 4,221 2,338 16.0 13.1 80.5
Depreciation and amortization expense 2,471 1,533 9.4 8.6 61.2
- ----------------------------------------------------------------------------------------------------------
Income from operations 2,675 1,993 10.1 11.1 34.2
Interest and financing expense 2,010 1,250 7.6 6.9 60.8
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 665 743 2.5 4.2 (10.5)
Income tax expense 326 267 1.2 1.5 22.1
- ----------------------------------------------------------------------------------------------------------
Net income $ 339 476 1.3% 2.7 (28.8)
==========================================================================================================
EBITDA $ 5,146 $ 3,526 19.5% 19.7% 45.9
==========================================================================================================
</TABLE>
REVENUE
The sources of revenue and growth rates are as follows: ($thousands)
<TABLE>
<CAPTION>
================================================================================================================
GROWTH
Three Months Ended March 31 2000 1999 RATES
================================================================================================================
<S> <C> <C> <C> <C> <C>
Commercial and industrial collection $15,215 57.7% $10,301 57.6% 47.7%
Residential collection 5,752 21.8 4,399 24.6 30.8
Transfer station and landfill 2,078 7.9 1,214 6.8 71.2
Commercial and residential recycling 1,144 4.3 490 2.7 133.5
Contract management and other
specialized services 2,173 8.3 1,472 8.3 47.6
- --------------------------------------------------------------------------------------------------
$26,362 100.0% $17,876 100.0% 47.5%
==================================================================================================
</TABLE>
The composition of revenue has changed, with a higher portion being
generated from both transfer station and landfill and commercial and residential
recycling. These components have increased as a result of the revenue mix of
recent acquisitions.
-15-
<PAGE>
Management's estimates of the components of changes in the Company's
consolidated revenue are as follows:
================================================================================
Three Months Ended March 31 2000 1999
================================================================================
Price 2.1% 3.1%
Volume 2.4 1.7
Acquisitions, net of divestitures 41.8 48.5
Foreign currency translation 2.7 (3.9)
Other (1.5) --
- --------------------------------------------------------------------------------
Total 47.5% 49.4%
================================================================================
Total revenues in the quarter were $26.4 million compared to $17.9
million in the same quarter last year. The 47.5% increase was primarily as a
result of acquisitions made since the first quarter 1999. Internal growth has
remained close to the 5% level. The current period pricing growth has been
impacted by a disposal reduction in a market place located in the United States
that has been passed on to customers. Excluding these price rollbacks, pricing
growth was 3.3% in the quarter. Other represents the impact on revenues of the
April 1999 fire that destroyed one of the Company's combined material recycling
and transfer station facilities. These facilities should be fully operational in
early June.
During the quarter ended March 31, 2000, two acquisitions were
completed with annualized revenue of approximately $3.5 million. 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. In addition, the Company acquired a small commercial waste and
recycling collection, industrial and residential collection operation located in
Chilliwack, British Columbia. In the same period of the prior year, 5
acquisitions were completed with annualized revenue of approximately $6.0
million.
Revenue and growth in revenue from geographic components are as
follows: ($thousands)
<TABLE>
<CAPTION>
===============================================================================================
Three Months Ended March 31 2000 1999 GROWTH RATES
===============================================================================================
<S> <C> <C> <C> <C> <C>
Eastern Canada $13,622 51.7% $ 7,791 43.6% 74.8%
Western Canada 6,826 25.9 4,325 24.2 57.8
United States 5,914 22.4 5,760 32.2 2.7
- -------------------------------------------------------------------------------
$26,362 100.0% $17,876 100.0% 47.5%
===============================================================================
</TABLE>
-16-
<PAGE>
The growth in revenue in both Eastern and Western Canada exceeded the
growth in revenue in the United States as significant acquisitions were
completed in Canada during the past twelve months. The United States growth rate
is lower due to the disposal price decreases in certain markets that was
required to be passed onto customers, as described in the previous section, and
the competitive environment in which the company operates.
COST OF OPERATIONS
Cost of operations include labor, fuel, equipment maintenance, tipping
fees paid to third-party disposal facilities, worker's compensation and vehicle
insurance, the cost of materials purchased to be recycled, subcontractor expense
and local, state or provincial taxes. The Company owns and operates 11 transfer
stations, which reduces costs by improving utilization of collection personnel
and equipment and by consolidating the waste stream to gain access to remote
landfills with lower disposal rates. The Company obtained long-term disposal
agreements in some of its markets which it believes are at or below market
disposal rates. There can be no assurance that these contracts can be renewed on
favorable terms. Cost of operations for the three months ended March 31, 2000
was $17.0 million compared to $12.0 million for the three months ended March 31,
1999. The 41.5% increase in cost of operations was attributable primarily to
increases in the Company's revenues described above. Cost of operations as a
percentage of revenue for the three months ended March 31, 2000 was 64.5%,
compared with 67.2% in 1999. In the three months ended March 31, 2000, cost of
operations decreased as a percentage of revenue primarily as a result of the
synergies achieved from integrating acquisitions during the past 12 months and
further internalization of waste through the Company's transfer stations.
Compared to the previous quarter, the cost of operations as a percentage of
revenue has decreased from 66.8% to 64.5% due primarily to the impact of price
increases implemented January 1, 2000.
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 three months
ended March 31, 2000 were $4.2 million compared to $2.3 million for the period
ended March 31, 1999. The $1.9 million (80.5%) increase primarily relates to
additional management, consulting and related costs to support the Company's
level of growth and additional requirements related to the change to a public
company in June of 1999. SG&A expenses are not expected to increase in the
future unless the Company completes a significant acquisition in the future. As
a percentage of revenues, SG&A expenses increased slightly to 16.0% for the
three months ended March 31, 2000 from 15.7% in the past quarter. This increase
is largely due to severance payments as a result of a management reorganization
in the first quarter of 2000.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense includes depreciation of fixed
assets over the estimated useful life of the assets using the straight-line
method, the amortization of goodwill over 40 years and the amortization of other
intangible assets over appropriate time periods. The Company has accounted for
all business acquisitions since inception using purchase accounting which has
resulted in significant amounts of goodwill being included on the balance sheet.
Depreciation and amortization expense for the three months ended March 31, 2000
was $2.5 million compared to $1.5 million for the three months ended March 31,
1999. The 61.2% increase was primarily due to acquisition activity over the past
12 months. As a percentage of revenues, depreciation and amortization expense
increased to 9.4% for the three months ended March 31,
-17-
<PAGE>
2000 from 8.6% for the period ended March 31, 1999. The increase primarily
relates to depreciation and amortization associated with the increased goodwill
on the balance sheet and capital expenditures incurred over the past 12 months.
INTEREST AND FINANCING EXPENSE
In the three months ended March 31, 2000, interest and financing
expense increased 60.8% to $2.0 million from $1.3 million for the period ended
in 1999. The increase over the prior year was primarily a result of an increase
in the average level of outstanding debt due to borrowings to finance
acquisition activity over the past 12 months, an increase in the weighted
average rate of interest on the Senior Debt from 7.5% in 1999 to 7.6% in 2000,
and an increase in amortization of deferred financing costs related to the 1999
expansion in the Credit Facility.
INCOME TAXES
The effective income tax rate during 2000 has increased to 49.0%
compared to 35.9% during the same period in 1999. The increase rate over the
prior year primarily relates to the higher proportion of business in Canada,
which has a higher tax rate than the United States, and the increase in
non-deductible goodwill amortization.
FINANCIAL CONDITION
As of March 31, 2000 and December 31, 1999, the Company's capital
consisted of: ($thousands)
<TABLE>
<CAPTION>
========================================================================================
MARCH 31, 2000 DECEMBER 31, 1999 CHANGE
========================================================================================
(unaudited)
<S> <C> <C> <C> <C> <C>
Long-term debt $ 96,237 60.7% $ 91,344 59.5% $4,893
Deferred income taxes 3,977 2.5 3,813 2.5 164
Stockholders' equity 58,454 36.8 58,320 38.0 134
- ----------------------------------------------------------------------------------------
$158,668 100.0% $153,477 100.0% $5,191
========================================================================================
</TABLE>
The $4.9 million increase in long-term debt is primarily a result of
borrowing since year end to finance acquisition activity partly offset by
repayments during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements include acquisitions, working
capital increases and fixed asset replacement. The Company plans to meet capital
needs through various financial sources, including internally generated funds,
debt and equity financing. As of March 31, 2000, adjusted working capital was
$7.9 million (December 31, 1999 - $7.6 million), excluding the current portion
of long-term debt. The Company generally applies the cash generated from its
operations that remains available after satisfying working capital and capital
expenditure requirements to reduce indebtedness under the Credit Facility and to
minimize cash balances. Working capital requirements are financed from
internally generated funds and bank borrowings.
For the three months ended March 31, 2000, net cash provided by
operations was $3.1 million, compared to $0.6 million for the quarter ending
March 31, 1999. This increase was primarily due to the higher earnings before
depreciation and amortization expense. In addition, the increase is due to the
reduced working capital requirements largely attributable to the reduced trade
receivables balance from focussed collection efforts and seasonal fluctuations.
The Days Sales Outstanding has improved from 45 days in December to 44 days at
the end of the current quarter.
-18-
<PAGE>
For the three months ended March 31, 2000, net cash used in investing
activities was $9.1 million. Most of this was related to funding the cash
portion of the current year acquisitions of approximately $5.6 million. The
remainder of the cash spending primarily relates to capital expenditures of $2.2
million and $1.3 million spent on other assets. Other assets is primarily due to
contingent payouts related to prior year acquisitions. 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
increased $1.6 million from the $7.5 million used in investing activities for
the quarter ending March 31, 1999. This is primarily due to the timing and
increased level of capital expenditures in the current year.
For the three months ended March 31, 2000, net cash provided by
financing activities was $4.8 million. This was provided primarily by net
borrowings of $5.3 million and was partly offset by cash used for other
financing payments. The $2.0 million decrease from the $6.8 million provided by
financing activities in the prior year was primarily due to the higher debt
repayment requirements in 1999.
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 March 31,
2000 approximately $78.0 million (December 31, 1999 - $72.8 million) under the
Loan Agreement was outstanding. The Loan Agreement is secured by all of the
Company's assets, including the interest in the equity securities of the
Company's subsidiaries. Of the $78.0 million outstanding at March 31, 2000,
$19.8 million consisted of U.S. dollar loans bearing interest at 8.4% and $58.2
million consisted of Canadian dollar loans bearing interest at 7.6%. 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 total capital ratio and a maximum debt to proforma EBITDA ratio
and imposes annual restrictions on capital expenditures. The Loan Agreement also
restricts the Company's ability to incur or assume other debt or capital leases
beyond a fixed amount and does not permit the payment of cash dividends. In
addition, it requires the lenders' approval for acquisitions where the purchase
price exceeds $10.0 million and for landfill acquisitions. As of March 31, 2000,
an aggregate of up to $29.3 million was unused and available under the Loan
Agreement, after taking into account letters of credit of $2.7 million subject
to the restrictions noted above. The Company intends to use the Loan Agreement
to repay the $11.3 million subordinated promissory notes which are due in the
second quarter of 2000.
SEASONALITY
The Company's results of operations vary seasonally, with revenues
typically lowest in the first quarter of the year, higher in the second and
third quarters, and lower in the fourth quarter than in the third quarter. The
Company believes this seasonality can be attributed to a number of factors.
First, less solid waste is generated during the late fall, winter and early
spring because of decreased construction and demolition. Second, some of the
Company's operating costs are higher in the winter months because winter weather
conditions slow waste collection activities, resulting in higher labor costs,
and rain and snow increase the weight of collected waste, resulting in higher
disposal costs, which are calculated on a per ton basis. Consequently, operating
income is generally lower during the winter months. Finally, during the summer
months, there are more tourists and part-time residents in some of the Company's
service areas, resulting in more residential and commercial collection business.
-19-
<PAGE>
OTHER LEGAL PROCEEDINGS
See Note 4 (b) of Notes to Consolidated Financial Statements.
SUBSEQUENT EVENTS
On April 3, 2000, the Company acquired certain commercial and
industrial operations located in Canton and Akron, Ohio, from Republic Waste
Service Inc. This is a step out into the Ohio market and provides a platform for
the Company to continue to grow in the northeastern United States market.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in information that would be provided in
this section during the three months ended March 31, 2000.
-20-
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, state, provincial or local agencies. In these proceedings, an
agency may seek to impose fines on the Company or to revoke or deny renewal of
an operating permit held by the Company. From time to time the Company may also
be subject to actions brought by citizens' groups or adjacent landowners in
connection with the permitting and licensing of landfills and transfer stations,
or alleging environmental damage or violations of the permits and licenses
pursuant to which the Company operates.
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring during the
normal operation of the waste management business. However, other then as
described below, as at March 31, 2000, there was no current proceeding or
litigation involving the Company that the Company believes will have a material
adverse impact on the Company's business, financial condition, results of
operations or cash flows.
On October 12, 1999, Lynn Bishop and L&S Bishop Enterprises Inc.
(collectively "Bishop") commenced an action against the Company, Capital
Environmental Alberta Inc. and Tony Busseri, the Chairman of the Company, in
which Bishop claims damages in the aggregate amount of approximately $7.4
million. The claim includes $2.1 million for alleged wrongful termination, $5.3
million for misrepresentations allegedly made in connection with the Share
Purchase Agreement, dated as of November 1, 1997, among Lynn Bishop, L&S Bishop
Enterprises Inc., the Company and Western Waste Services Inc. (the "Share
Purchase Agreement"), as well as $0.3 million for punitive damages. The Company
believes that Bishop's claims are wholly without merit, and that Lynn Bishop's
employment was terminated for just cause and that it has no further obligation
to Bishop beyond the contingent payment described in Note 4 (c). The Company is
defending the claim and has issued a counterclaim against Bishop, and does not
believe the outcome will have a material adverse impact on the Company's
business, financial condition, results of operations or cash flows. Accordingly,
the Company has not made a provision for this claim in its financial statements.
-21-
<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.
CAPITAL ENVIRONMENTAL RESOURCE INC.
May 9, 2000 /s/ Tony Busseri
----------------------------------------
Tony Busseri
Chairman of the Board, Chief Executive
Officer
May 9, 2000 /s/ David Langille
----------------------------------------
David Langille
Executive Vice President, Chief
Financial Officer
-22-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 10Q FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 135
<SECURITIES> 0
<RECEIVABLES> 14,102
<ALLOWANCES> 252
<INVENTORY> 0
<CURRENT-ASSETS> 18,785
<PP&E> 56,080
<DEPRECIATION> 10,099
<TOTAL-ASSETS> 169,555
<CURRENT-LIABILITIES> 24,284
<BONDS> 0
0
0
<COMMON> 57,066
<OTHER-SE> 1,388
<TOTAL-LIABILITY-AND-EQUITY> 169,555
<SALES> 0
<TOTAL-REVENUES> 26,362
<CGS> 0
<TOTAL-COSTS> 16,995
<OTHER-EXPENSES> 6,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,010
<INCOME-PRETAX> 665
<INCOME-TAX> 326
<INCOME-CONTINUING> 339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 339
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
