-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CjMXAamtnZGW83cLkwsN0Ju/DJDWuP6S0+7uNzl6hGi1yRsgPJG/uPG8n1Std8n4 meV0J+R/P8IFUFhBF/e6+g== 0000912057-00-023867.txt : 20000515 0000912057-00-023867.hdr.sgml : 20000515 ACCESSION NUMBER: 0000912057-00-023867 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL ENVIRONMENTAL RESOURCE INC CENTRAL INDEX KEY: 0001065736 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25955 FILM NUMBER: 628940 BUSINESS ADDRESS: STREET 1: 1005 SKYVIEW DR STREET 2: BURLINGTON ONTARIO CITY: CANADA L7P5B1 STATE: A6 BUSINESS PHONE: 9053191237 MAIL ADDRESS: STREET 1: 1005 SKYVIEW DRIVE STREET 2: BURLINGTON ONTARIO CITY: CANADA L7P5B1 STATE: A6 10-Q 1 FORM 10-Q 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- CAPITAL ENVIRONMENTAL RESOURCE INC. INDEX TO FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000 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
-2- CAPITAL ENVIRONMENTAL RESOURCE INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF U.S. DOLLARS)
MARCH 31, DECEMBER 31, 2000 1999 ---------- ------------ unaudited) (audited) 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 ======== ========
The accompanying notes are an integral part of these statements -3- 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- 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- CAPITAL ENVIRONMENTAL RESOURCE INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS OF U.S. DOLLARS) (UNAUDITED)
ACCUMULATED COMMON STOCK OTHER ------------------------ COMPREHENSIVE RETAINED SHARES AMOUNT LOSS EARNINGS TOTAL --------- ------- ------------- -------- -------- 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 ========= ======= ======= ====== ========
The accompanying notes are an integral part of these statements -6- CAPITAL ENVIRONMENTAL RESOURCE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF U.S. DOLLARS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31 ------------------------ 2000 1999 ------- -------- 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 ------- --------
The accompanying notes are an integral part of these statements -7- 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- 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- 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- 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- 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- 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:
============================================================================================================ Three Months Ended March 31 2000 1999 ============================================================================================================ Basic Diluted Basic Diluted ---------------------------------------------------------------- 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 ============================================================================================================
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- 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- 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:
PERCENTAGE OF PERCENTAGE ($ THOUSANDS) REVENUE CHANGE ========================================================================================================================== 2000 Over Three Months Ended March 31 2000 1999 2000 1999 1999 ========================================================================================================================== 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 ==========================================================================================================
REVENUE The sources of revenue and growth rates are as follows: ($thousands)
================================================================================================================ GROWTH Three Months Ended March 31 2000 1999 RATES ================================================================================================================ 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% ==================================================================================================
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- 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)
=============================================================================================== Three Months Ended March 31 2000 1999 GROWTH RATES =============================================================================================== 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% ===============================================================================
-16- 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- 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)
======================================================================================== MARCH 31, 2000 DECEMBER 31, 1999 CHANGE ======================================================================================== (unaudited) 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 ========================================================================================
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- 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- 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- 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- 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- EX-27 2 EXHIBIT 27
5 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. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 135 0 14,102 252 0 18,785 56,080 10,099 169,555 24,284 0 0 0 57,066 1,388 169,555 0 26,362 0 16,995 6,692 0 2,010 665 326 339 0 0 0 339 0.05 0.05
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