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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

     
(Mark One)
   
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the Quarterly Period Ended March 31, 2004
 
or
 
o
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to

Commission File Number: 000-25955

Capital Environmental Resource Inc.

(Exact name of registrant as specified in its charter)
     
Ontario
   Not applicable
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)

1122 International Blvd., Suite 601, Burlington, Ontario, Canada L7L 6Z8

(Address of principal executive offices and zip code)

(905) 319-1237

(Registrant’s telephone number, including area code)

     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 þ          No o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). days.     Yes o          No þ

      The number of shares of Common Stock, no par value, of the registrant outstanding at May 1, 2004 was 95,373,778.

TABLE OF CONTENTS

             
Page
 PART I. FINANCIAL INFORMATION
   Financial Statements     2  
     Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003     2  
     Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003     3  
     Unaudited Condensed Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2004     4  
     Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003     5  
     Notes to Unaudited Condensed Consolidated Financial Statements     6  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     21  
   Quantitative and Qualitative Disclosures about Market Risk     35  
   Controls and Procedures     36  
 
 PART II. OTHER INFORMATION
   Legal Proceedings     36  
   Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities     36  
   Defaults Upon Senior Securities     37  
   Submission of Matters to a Vote of Security Holders     37  
   Other Information     37  
   Exhibits and Reports on Form 8-K     37  
 Signatures     38  
 Employment Agreement w/Ivan R. Cairns
 Employment Agreement w/Mark Pytosh
 Letter Dated May 12, 2004
 Sec 302 Chief Executive Officer Certification
 Sec 302 Chief Financial Officer Certification
 Sec 906 Chief Executive Officer Certification
 Sec 906 Chief Financial Officer Certification

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PART I. FINANCIAL INFORMATION

 
Item 1. Financial Statements

CAPITAL ENVIRONMENTAL RESOURCE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars, except share amounts)
                     
March 31, December 31,
2004 2003
(Unaudited)
ASSETS
Current assets:
                
 
Cash and cash equivalents
  $ 5,817     $ 21,062  
 
Restricted cash
    999       14,433  
 
Accounts receivable (net of allowance for doubtful accounts of $769 and $620 as of March 31, 2004 and December 31, 2003, respectively)
    26,387       26,999  
 
Prepaid expenses and other current assets
    29,553       29,649  
     
     
 
   
Total current assets
    62,756       92,143  
Property and equipment, net
     81,070       74,521  
Landfill sites, net
     152,076       117,541  
Deferred income taxes, net
     2,507       1,135  
Goodwill and other intangible assets, net
     184,220       163,380  
Other assets
     24,063       22,278  
     
     
 
   
Total assets
   $ 506,692     $ 470,998  
     
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
                
 
Accounts payable
  $ 13,309     $ 12,074  
 
Accrued expenses and other current liabilities
    26,145       25,401  
 
Short-term financing and current portion of long-term debt
    6,158       172,280  
     
     
 
   
Total current liabilities
     45,612       209,755  
Long-term debt
     186,215       3,130  
Accrued closure, post-closure and other obligations
     6,075       8,791  
Cumulative mandatorily redeemable Preferred Shares (net of discount of $12,357 and $13,558 as of March 31, 2004 and December 31, 2003, respectively)
     52,039       48,205  
     
     
 
   
Total liabilities
     289,941       269,881  
     
     
 
Commitments and contingencies
                
Shareholders’ equity:
                
 
Common stock, no par value; unlimited shares authorized; 73,707,902 and 68,338,828 shares issued as of March 31, 2004 and December 31, 2003, respectively
    245,133       215,395  
 
Options, warrants and deferred stock-based compensation
    24,624       25,828  
 
Accumulated other comprehensive income
    13,786       15,952  
 
Accumulated deficit
    (66,792 )     (56,058 )
     
     
 
   
Total shareholders’ equity
     216,751       201,117  
     
     
 
   
Total liabilities and shareholders’ equity
   $ 506,692     $ 470,998  
     
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CAPITAL ENVIRONMENTAL RESOURCE INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars and share amounts, except per share data)
                   
Three Months Ended
March 31,
2004 2003
Revenue
   $ 50,317     $ 25,280  
Operating and other expenses:
                
 
Cost of operations
    34,171       16,594  
 
Selling, general and administrative expense
    10,559       4,432  
 
Depreciation, depletion and amortization
    5,472       3,225  
 
Foreign exchange gain and other
    (90 )     (35 )
     
     
 
Income from operations
     205       1,064  
Interest expense
    6,316       1,320  
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs
    4,019       —  
     
     
 
Loss before income taxes
     (10,130 )     (256 )
Income tax provision
    829       43  
     
     
 
Loss before cumulative effect of change in accounting principle
     (10,959 )     (299 )
Cumulative effect of change in accounting principle, net of provision for income taxes of $132 and $256 for the three months ended March 31, 2004 and 2003, respectively
    225       518  
     
     
 
Net income (loss)
     (10,734 )     219  
Deemed dividend on Series 1 Preferred Shares
    —       (8,532 )
     
     
 
Net loss attributable to Common Shareholders
   $ (10,734 )   $ (8,313 )
     
     
 
Basic and diluted loss per share:
                
 
Basic and diluted loss per share before cumulative effect of change in accounting principle
  $ (0.15 )   $ (0.25 )
 
Cumulative effect of change in accounting principle
    —       0.01  
     
     
 
 
Loss per share — basic and diluted
  $ (0.15 )   $ (0.24 )
     
     
 
 
Weighted average Common Shares outstanding — basic and diluted
    70,583       35,195  
     
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CAPITAL ENVIRONMENTAL RESOURCE INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2004
(In thousands of U.S. dollars and share amounts)
                                                 
Options, Accumulated
Warrants and Other
Common Stock Deferred Comprehensive Total
Stock-Based Income Accumulated Shareholders’
Shares Amount Compensation (Loss) Deficit Equity
Balance, December 31, 2003
    68,339     $ 215,395     $ 25,828     $ 15,952     $ (56,058 )   $ 201,117  
Common Shares issued in acquisitions
    5,298       30,337       —       —       —       30,337  
Common Shares to be issued related to an acquisition (38 shares)
    —       —       241       —       —       241  
Exercise of options and warrants
    71       295       (54 )     —       —       241  
Deferred stock-based compensation
    —       —       (1,391 )     —       —       (1,391 )
Valuation adjustment for shares issued in an acquisition
    —       (894 )     —       —       —       (894 )
Foreign currency translation adjustment
    —       —       —       (2,166 )     —       (2,166 )
Net loss
    —       —       —       —       (10,734 )     (10,734 )
     
     
     
     
     
     
 
Balance, March 31, 2004
     73,708     $ 245,133     $ 24,624     $ 13,786     $ (66,792 )   $ 216,751  
     
     
     
     
     
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CAPITAL ENVIRONMENTAL RESOURCE INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)
                         
Three Months Ended
March 31,
2004 2003
Cash flows from operating activities:
                
 
Net income (loss)
  $ (10,734 )   $ 219  
 
Adjustments to reconcile net income (loss) to net cash flows from operating activities —
               
     
Depreciation and depletion
    4,648       3,067  
     
Amortization of intangible assets
    824       158  
     
Dividends and accretion on redeemable Preferred Shares
    4,019       —  
     
Amortization of debt issue costs
    2,210       220  
     
Income tax provision
    829       43  
     
Foreign exchange gain and other
    (90 )     (35 )
     
Non-cash stock-based compensation
    (1,391 )     (298 )
     
Cumulative effect of change in accounting principle, net of tax
    (225 )     (518 )
     
Other non-cash items
    36       67  
   
Changes in operating assets and liabilities (excluding the effects of acquisitions) —
               
       
Accounts receivable
    1,918       114  
       
Prepaid expenses and other current assets
    (5,779 )     (712 )
       
Accounts payable
    2,449       4,791  
       
Accrued expenses and other current liabilities
    1,122       (3,331 )
     
     
 
      (164 )     3,785  
     
     
 
Cash flows from investing activities:
                
 
Cash used in business combinations and significant asset acquisitions, net of cash acquired
    (28,858 )     (1,497 )
 
Capital expenditures
    (9,207 )     (2,768 )
 
Deposits for business acquisitions and other
    (2,445 )     (14,167 )
     
     
 
      (40,510 )     (18,432 )
     
     
 
Cash flows from financing activities:
                
 
Proceeds from issuance of debt
    12,000       8,801  
 
Principal repayments of debt
    (37 )     —  
 
Repayment of capital lease obligations
    (382 )     (308 )
 
Proceeds from restricted cash
    13,434       —  
 
Proceeds from letters of credit
    976       —  
 
Proceeds from the issuance of Series 1 Preferred Shares
    —       22,000  
 
Proceeds from the exercise of options and warrants
    241       —  
 
Fees paid for financing transactions
    (665 )     (1,329 )
     
     
 
      25,567       29,164  
     
     
 
Effect of exchange rate changes on cash and cash equivalents
     (138 )     133  
     
     
 
Increase (decrease) in cash and cash equivalents
     (15,245 )     14,650  
Cash and cash equivalents, beginning of period
     21,062       1,775  
     
     
 
Cash and cash equivalents, end of period
   $ 5,817     $ 16,425  
     
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CAPITAL ENVIRONMENTAL RESOURCE INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS
(In thousands of U.S. dollars, unless otherwise stated)
 
1. Organization of Business and Basis of Presentation

      Capital Environmental Resource Inc. (“Capital”, “we”, “us” or “our”) is a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers in the United States and Canada. As part of our business strategy to expand into the U.S., we intend to enter into a migration transaction (the “Migration Transaction”). Under the Migration Transaction, our corporate structure will be reorganized so that Waste Services, Inc. (“Waste Services”), currently a subsidiary of Capital Environmental Resource Inc., will become the parent company of our corporate group.

      The accompanying unaudited condensed consolidated financial statements include Capital’s accounts and the accounts of our wholly owned subsidiaries. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany transactions and accounts have been eliminated. All figures are presented in thousands of U.S. dollars, except share and per share data, or except where expressly stated as being in Canadian dollars (“C$”) or in millions. Certain information related to Capital’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. Except as disclosed in Note 2, the accounting policies followed in the preparation of these interim condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2003, as filed on Form 20-F. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state Capital’s financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 20-F for the year ended December 31, 2003. Income taxes during these interim periods have been provided for based upon our anticipated annual effective income tax rate. Certain reclassifications have been made to the prior period financial statement amounts to conform to the current presentation. Due to the seasonal nature of our business, operating results for interim periods are not necessarily indicative of the results for full years. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto appearing in our annual report on Form 20-F for the year ended December 31, 2003.

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, depletion of landfill development costs, liabilities for capping, closure and post-closure obligations, liabilities for potential litigation and deferred taxes.

      A significant portion of our operations are currently domiciled in Canada; as such, for each reporting period, we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, reported results of operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of Canadian operations have been translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of Canadian operations have been translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into

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CAPITAL ENVIRONMENTAL RESOURCE INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income (loss). Separately, monetary assets and liabilities denominated in U.S. dollars held by the Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates.

      Basic earnings (loss) per share is calculated by dividing income (loss) available to Common Shareholders by the weighted average number of Common Shares outstanding for the period. Diluted earnings (loss) per share is calculated based on the weighted average shares of Common Stock outstanding during the period plus the dilutive effect of Common Stock purchase warrants and stock options using the treasury stock method and the dilutive effects of convertible instruments using the if-converted method. Contingently issuable shares are included in the computation of basic earnings (loss) per share when issuance of the shares is no longer contingent. Due to the net losses attributable to Common Shareholders for the three months ended March 31, 2004 and 2003, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive. Dilutive securities not included in the diluted loss per share calculation are as follows:

                 
March 31, December 31,
2004 2003
(Unaudited)
Series 1 Preferred Shares
    —       13,582  
Options to purchase Common Shares
    1,