<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1999
REGISTRATION NO. 333-77633
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CAPITAL ENVIRONMENTAL RESOURCE INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
ONTARIO, CANADA 4953 NOT APPLICABLE
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
------------------------
1005 SKYVIEW DRIVE
BURLINGTON, ONTARIO, CANADA L7P 5B1
(905) 319-1237
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
CT CORPORATION SYSTEM
1633 BROADWAY
NEW YORK, NEW YORK 10019
(212) 246-5070
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID W. POLLAK, ESQ. MARC M. ROSSELL, ESQ.
MORGAN, LEWIS & BOCKIUS LLP SHEARMAN & STERLING
101 PARK AVENUE 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10178 NEW YORK, NEW YORK 10022
(212) 309-6058 (212) 848-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 18, 1999
3,750,000 Shares
[LOGO]
CAPITAL ENVIRONMENTAL RESOURCE INC.
Common Stock
-----------
We are selling 2,998,725 shares of common stock and selling shareholders are
selling 751,275 shares of common stock. We will not receive any proceeds from
shares of common stock sold by the selling shareholders.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $13.00 and
$15.00 per share. We have applied to list the common stock on the Nasdaq
National Market under the symbol "CERI."
We have granted the underwriters an option to purchase a maximum of 562,500
additional shares to cover over-allotments of shares.
Investing in the common stock involves risks. See "Risk Factors" starting on
page 8.
<TABLE>
<CAPTION>
Underwriting Proceeds to Proceeds to
Price to Discounts and Capital Selling
Public Commissions Environmental Shareholders
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
Total............................... $ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Raymond James & Associates, Inc.
Sanders Morris Mundy
The date of this Prospectus is , 1999.
<PAGE>
Geographic Territories Served by Capital Environmental
[Map of each of 3 geographic territories in which Capital Environmental conducts
its business]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO
DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS
NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS
IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER
OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY......................................................................................... 4
RISK FACTORS............................................................................................... 8
FORWARD-LOOKING STATEMENTS................................................................................. 13
USE OF PROCEEDS............................................................................................ 14
DIVIDEND POLICY............................................................................................ 14
EXCHANGE RATES............................................................................................. 14
DILUTION................................................................................................... 15
CAPITALIZATION............................................................................................. 16
SELECTED CONSOLIDATED FINANCIAL DATA....................................................................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 20
BUSINESS................................................................................................... 30
MANAGEMENT................................................................................................. 50
CERTAIN TRANSACTIONS....................................................................................... 57
PRINCIPAL AND SELLING SHAREHOLDERS......................................................................... 59
DESCRIPTION OF CAPITAL STOCK............................................................................... 61
SHARES ELIGIBLE FOR FUTURE SALE............................................................................ 64
TAX CONSEQUENCES........................................................................................... 65
UNDERWRITING............................................................................................... 69
LEGAL MATTERS.............................................................................................. 71
EXPERTS.................................................................................................... 71
AVAILABLE INFORMATION...................................................................................... 71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-1
</TABLE>
UNTIL , 1999 ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
This prospectus contains registered service marks, trademarks and trade
names of Capital Environmental, including the Capital Environmental Resource
Inc. name and logo.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS PROSPECTUS. IT MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THIS
OFFERING FULLY, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
RISK FACTORS AND THE FINANCIAL STATEMENTS.
THROUGHOUT THIS PROSPECTUS, REFERENCES TO "DOLLARS" OR "$" MEAN U.S. DOLLARS
AND "C$" MEANS CANADIAN DOLLARS.
CAPITAL ENVIRONMENTAL
Capital Environmental is a regional, integrated solid waste services company
that provides collection, transfer, disposal and recycling services. Capital
Environmental was founded in May 1997 in order to take advantage of
consolidation opportunities in the solid waste industry in markets other than
major urban centers in Canada and the northern United States. We began
operations in June 1997 when we acquired selected solid waste assets and
operations in Canada from Canadian Waste Services Inc. and its parent, USA Waste
Services, Inc. Since commencing operations, we have acquired 26 solid waste
services businesses in Canada and the United States, including 27 collection
operations, eight transfer stations, six recycling processing facilities and a
contract to operate two landfills. Our consolidated operations presently serve
over 540,000 residential, commercial and industrial customers. For the year
ended December 31, 1998, 67.7% of our revenue was derived in Canada. Largely as
a result of our acquisitions, we believe that we have become one of the largest
solid waste services companies in Canada, and that we have significant
opportunities for further growth in both Canada and the northern United States.
We have seven service areas through which we currently serve 22 markets in
Canada and four markets in the United States. We believe that these 26 market
areas provide significant opportunities for growth because:
- there is a large number of private solid waste services companies suitable
for acquisition in these markets;
- there are generally fewer competing national solid waste services
companies in these markets;
- some of these markets have strong projected economic and population growth
rates;
- there is adequate disposal capacity available in these markets; and
- our senior management team has substantial knowledge of these markets.
In addition, we believe that the Canadian market is particularly attractive
for us. Following this offering, we expect that we will be the only Canadian
headquartered, publicly-traded acquirer of Canadian solid waste companies, and
the only publicly held company that has the Canadian solid waste market as a
focus of its strategy. Combined with our senior management's knowledge of the
Canadian market, we believe we will be an attractive acquirer when owners of
Canadian firms consider selling their businesses, and a viable alternative to
the large U.S.-based solid waste companies.
Our objective is to build a leading solid waste services company in the
markets of Canada and the northern United States other than major urban centers.
Our strategy for achieving this objective is to make acquisitions that
complement our business and to generate internal growth. We seek to acquire
businesses that either establish our market presence in new target markets or
expand our existing market presence. Our internal growth strategy is focused on
increasing our services to existing customers, winning new customers,
implementing selective price increases and achieving operating efficiencies.
In the markets in which we operate, we seek to secure arrangements for the
disposal of the solid waste we collect which allow us to maintain competitive
prices for our collection services. As a result of
4
<PAGE>
our strategy, for the month ended December 31, 1998, we disposed of
approximately 80.5% of the waste we collected at:
- privately owned or operated landfills and transfer stations pursuant to
long-term disposal agreements which we believe are at or below market
rates;
- municipally owned landfills which generally charge the same disposal rates
to all customers; and
- through our transfer stations, from which the waste was transported to
remote disposal sites where we have favorable disposal contracts.
Capital Environmental's corporate offices are located at 1005 Skyview Drive,
Burlington, Ontario, Canada L7P 5B1. Our telephone number is (905) 319-1237. Our
web site is http://www.capitalenvironmental.com.
RECENT DEVELOPMENTS
Since January 1, 1999, we have expanded and strengthened our market presence
in Ontario, British Columbia and the northern United States through the
acquisition of seven solid waste businesses: four in Ontario, one in British
Columbia, one in New York and one in Pennsylvania. These acquisitions added two
new market areas and expanded our presence in five of our existing market areas.
These seven businesses collectively had annualized revenues of approximately
$9.4 million in 1998.
FIRST THREE MONTHS OF 1999 COMPARED TO THE FIRST THREE MONTHS OF 1998
Our revenues for the three months ended March 31, 1999 increased 49% to
$17.9 million from $12.0 million in the same period in 1998. Income from
operations increased 117% to $2.0 million from $918,000 in the same period in
1998. Our net income for the three months ended March 31, 1999, increased 110%
to $476,000 from $227,000 in the same period in 1998. Fully diluted net income
per share was $0.11 compared to $0.06 in the first quarter of 1998.
The increase in revenues and net income is predominately the result of
numerous acquisitions made since the first quarter of 1998 and internal growth.
Our working capital, long-term debt and equity were $3.5 million, $71.5
million and $22.7 million at March 31, 1999, respectively. The equity figure
includes the redeemable stock. Capital expenditures during the three months
ending March 31, 1999 were $2.0 million.
CREDIT FACILITY
We have pledged all of our assets, including the stock of our subsidiaries,
as collateral under our credit facility. On January 29, 1999, we amended our
credit facility to increase our available credit to $65.0 million from
approximately $44.3 million. In March 1999, we increased our available credit
under the facility to $70.0 million, of which approximately $59.4 million was
outstanding as of April 15, 1999. We use the credit facility for acquisitions,
capital expenditures, standby letters of credit and general corporate purposes.
In addition, the proceeds of our credit facility were used to repay a $14.7
million loan from Dresdner Bank Canada and to redeem common stock. This credit
facility terminates in January 2002, at which time the entire principal amount
will become due.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by:
Capital Environmental...................... 2,998,725 shares
The Selling Shareholders................... 751,275 shares
Total.................................... 3,750,000 shares
Common stock to be outstanding after this
offering................................... 6,885,479 shares (1)
Use of proceeds.............................. We intend to use the net proceeds of this
offering to repay indebtedness under our
credit facility. We will not receive any
proceeds from the sale of shares by the
selling shareholders in this offering.
Proposed Nasdaq National Market symbol....... CERI
</TABLE>
- ------------------------
(1) Excludes 618,804 shares of common stock issuable upon the exercise of
warrants and options outstanding as of April 15, 1999, at a weighted average
exercise price of C$10.35 ($6.94 at April 15, 1999) per share.
Unless otherwise specified, all financial information and share and per
share data in this prospectus:
- give effect to a 1.3847 for 1 stock split;
- assume no exercise of the underwriters' over-allotment option; and
- were determined in accordance with generally accepted accounting
principles in the United States.
As used in this prospectus, the term "Adjusted EBITDA" represents operating
income plus depreciation and amortization, start-up and integration costs and
absorption of acquisition and transition costs. Although not a measure of
financial performance under generally acceptable accounting principles, we have
included Adjusted EBITDA data because we believe that the data are commonly used
by investors to evaluate a company's performance in the solid waste industry.
Adjusted EBITDA, as measured by us, may not be comparable to similarly titled
measures reported by other companies. Adjusted EBITDA data should not be used as
a substitute for operating income, net income (loss) or cash flows from
operations in assessing Capital Environmental's operating performance, financial
position and cash flows. Funds described by the Adjusted EBITDA measure are not
available for our discretionary use due to required debt service and other
commitments or uncertainties. Adjusted EBITDA margin represents Adjusted EBITDA
expressed as a percentage of revenues.
For purposes of this prospectus, the "recapitalization" gives effect upon
the closing of this offering to the automatic conversion or reclassification
into common stock of all outstanding shares of redeemable convertible preference
stock, redeemable convertible class "B" special stock and redeemable common
stock. The "As Adjusted" column in the balance sheet gives effect to the sale of
the common stock offered in this prospectus by Capital Environmental at an
assumed offering price of $14.00 per share, the mid-point of the price range set
forth on the cover page of this prospectus, the application of the estimated net
proceeds from this offering, the recapitalization and the repurchase of 500,175
shares of redeemable common stock as if such events had occurred on December 31,
1998. See "Use of Proceeds" and "Capitalization."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL ENVIRONMENTAL
------------------------------------
PERIOD FROM
INCEPTION
(MAY 23, 1997)
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................................... $ 15,089 $ 62,056
Cost of operations......................................................... 10,676 43,002
Selling, general and administrative expenses............................... 1,389 8,490
Depreciation and amortization.............................................. 1,154 4,890
Start-up and integration costs............................................. 270 602
Absorption of acquisition and transition costs(1).......................... 4,055 --
----------------- -----------------
Income (loss) from operations.............................................. (2,455) 5,072
Interest expense, net...................................................... (898) (3,139)
----------------- -----------------
Income (loss) before income taxes and minority interest.................... (3,353) 1,933
Income tax (provision) benefit............................................. 1,398 (740)
Minority interest.......................................................... (117) --
----------------- -----------------
Net income (loss).......................................................... $ (2,072) $ 1,193
----------------- -----------------
----------------- -----------------
Basic net income (loss) per share.......................................... $ (1.51) $ 0.52
----------------- -----------------
----------------- -----------------
Shares used in calculating basic net income (loss) per share............... 1,374,220 2,304,847
----------------- -----------------
----------------- -----------------
Diluted net income (loss) per share........................................ $ (1.51) $ 0.29
----------------- -----------------
----------------- -----------------
Shares used in calculating diluted net income per share.................... 1,374,220 4,174,172
----------------- -----------------
----------------- -----------------
OTHER DATA:
Net cash provided by operating activities.................................. $ 1,167 $ 2,708
Net cash used in investing activities...................................... (12,529) (36,185)
Net cash provided by financing activities.................................. 13,918 32,313
Adjusted EBITDA............................................................ 3,024 10,564
Adjusted EBITDA margin..................................................... 20.0% 17.0%
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------------------
ACTUAL AS ADJUSTED
----------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash....................................................................... $ 1,060 $ 1,060
Working capital, including cash............................................ (994) (994)
Property and equipment, net................................................ 25,909 25,909
Total assets............................................................... 98,337 97,328
Long-term debt, net(2)..................................................... 54,589 22,979
Redeemable capital stock(3)................................................ 21,946 --
Total stockholders' equity................................................. 5,492 59,737
</TABLE>
- ------------------------
(1) Represents the absorption of acquisition and transition costs associated
with the acquisition of selected assets of Canadian Waste. See Note 2 of the
Notes to Capital Environmental's Consolidated Financial Statements.
(2) Excludes current portion of long-term debt. See Note 4 of the Notes to
Capital Environmental's consolidated financial statements.
(3) Redeemable capital stock includes redeemable convertible preference stock,
redeemable class "B" special stock and redeemable common stock. See
"Capitalization" and Note 7 of the Notes to Capital Environmental's
consolidated financial statements.
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE PURCHASING
OUR COMMON STOCK. OUR MOST SIGNIFICANT RISKS AND UNCERTAINTIES ARE DESCRIBED
BELOW; HOWEVER, THEY ARE NOT THE ONLY ONES WE FACE.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED, THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF
YOUR INVESTMENT.
RISKS SPECIFIC TO CAPITAL ENVIRONMENTAL'S GROWTH
Our growth strategy and profitability are dependent on expanding our
business through acquisitions and generating internal growth. If we are unable
to acquire and integrate new businesses, we will have lower than expected future
earnings, which could result in a decline in the market price of our common
stock. Our ability to carry out our growth strategy may be limited by a number
of factors, including:
WE HAVE A LIMITED OPERATING HISTORY AND IT MAY BE DIFFICULT TO SUSTAIN OUR
CURRENT LEVEL OF GROWTH.
Capital Environmental was formed on May 23, 1997, and commenced operations
on June 6, 1997. We may not be able to sustain the level of growth and the
financial results which we have achieved since our formation over a longer
period of time. We have only a limited operating history on which you may
evaluate our business, prospects and future operating results.
WE MAY BE UNABLE TO IDENTIFY SUITABLE ACQUISITION TARGETS, WHICH COULD LIMIT
OUR GROWTH.
In some of the markets where we operate, and particularly in the United
States, we compete for acquisition candidates with other companies, some of
which have greater financial resources than us. Increased competition for
acquisition candidates may result in fewer acquisition opportunities for us and
less attractive acquisition terms, including increased purchase prices which
could be beyond our financial capability. If we have fewer acquisition
opportunities, our growth could be limited.
WE MAY HAVE DIFFICULTY FINANCING OUR FUTURE ACQUISITIONS, WHICH COULD LIMIT
OUR GROWTH.
We expect to finance acquisitions through cash from operations, borrowings
under our credit facility and issuing shares of our common stock to sellers of
businesses. To the extent that we issue shares of our common stock as payment
for an acquisition, a material decline in the market price of our common stock
over a long period of time could make our stock less attractive as payment for
acquisitions. Therefore, we may not be able to acquire additional businesses
using stock as payment, and using cash for acquisitions may reduce the funds we
have available for other corporate purposes. Additionally, borrowing more money
from our banks may increase our indebtedness to an unacceptable level or may
cause us to agree to financial covenants that limit our operational and
financial flexibility. Under our credit facility we will need the consent of
66 2/3% of the interests of our banking syndicate for acquisitions where the
purchase price exceeds the greater of $10.0 million or 10% of our total assets.
WE MAY BE UNABLE TO INTEGRATE ACQUISITIONS, WHICH COULD DECREASE OUR
EARNINGS.
Our growth and future financial performance depend on our ability to
effectively combine the operations of acquired businesses into our existing
operations. The integration process may require changes in the operating methods
and strategies of acquired businesses. Additionally, the integration of acquired
businesses may divert management's attention from its day-to-day
responsibilities. We may also become responsible for liabilities of the acquired
businesses that we may not have discovered prior to their acquisition. Any
difficulties we encounter in the integration process could reduce the earnings
8
<PAGE>
we generate from acquired businesses, which could cause a decline in the market
price of our common stock.
WE MAY FIND IT DIFFICULT TO MANAGE RAPID GROWTH, WHICH COULD STRAIN OUR
MANAGEMENT, OPERATIONAL AND FINANCIAL RESOURCES.
As we carry out our acquisition strategy, we might experience periods of
rapid growth. Failure to expand our operational and financial systems and
controls, or to recruit and integrate appropriate personnel at a pace consistent
with any rapid growth we experience, would reduce our earnings, which could
cause a decline in the market price of our common stock. To manage our growth
effectively, we will need to continuously enhance our management information
systems and our operational and financial systems and controls. We will also
need to attract, train and retain additional senior managers, technical
professionals and other employees.
OUR EARNINGS MAY BE REDUCED BY INCREASING GOODWILL AMORTIZATION COSTS.
An important part of our strategy is to grow through acquisitions. We may
pay significant amounts for goodwill of the businesses we acquire. Goodwill is
the amount paid for a business in excess of the fair value of its other net
assets. At December 31, 1998, approximately 55% of the assets on our balance
sheet were goodwill. As the amount of goodwill we carry on our balance sheet
increases, we will have to charge increasing amortization costs against our
income, which will reduce our earnings.
Our policy is to amortize goodwill over 40 years. We have selected this
number of years because we believe that the goodwill acquired will endure for at
least 40 years. The Financial Accounting Standards Board is considering
substantially shortening the period of time over which goodwill may be
amortized. If this were adopted, we would have to charge larger amounts of
amortization against our income in each year which would reduce our earnings.
RISKS RELATED TO CAPITAL ENVIRONMENTAL'S COMPETITION
THE COMPETITION WE FACE FROM BOTH LARGE AND SMALL SOLID WASTE SERVICES
COMPANIES MAY RESULT IN LOST REVENUES.
The solid waste services industry in Canada and the northern United States
is highly competitive and fragmented and requires substantial labor and capital
resources. We compete with large, national solid waste services companies, as
well as smaller regional solid waste services companies of varying sizes and
resources, some of which are better capitalized, have greater name recognition
or are able to provide services at a lower cost than us. We also compete with
counties, municipalities and solid waste districts that maintain their own waste
collection and disposal operations. Public sector operators may have financial
advantages over us because of their access to user fees and similar charges, tax
revenues and tax-exempt financing.
We derive a portion of our revenue from exclusive municipal contracts that
require competitive bidding by potential service providers. In the future, we
intend to bid on additional municipal contracts and to rebid on existing
municipal contracts, but our bids may not succeed. In addition, our
non-municipal contracts generally have a term of three years or less and some of
our contracts permit our customers to terminate them before the end of the
contract term. If we were unable to replace revenues from contracts lost through
competitive bidding or early termination within a reasonable time period, the
lost revenues could reduce our earnings and result in a decline in the market
price of our common stock.
WE DEPEND ON THIRD PARTIES FOR DISPOSAL, WHICH COULD DECREASE OUR EARNINGS
IF THESE THIRD PARTIES INCREASE THEIR DISPOSAL RATES AND WE CANNOT PASS THESE
INCREASES ON TO OUR CUSTOMERS.
To the extent we depend on third parties for disposal of our solid waste, we
may be subject to cost increases which we cannot control or pass on to our
customers. We deliver a substantial portion of the
9
<PAGE>
solid waste we collect to privately owned or operated disposal facilities under
long-term contracts and to municipally owned disposal facilities. If
municipalities increase their disposal rates or if we cannot extend our
favorable long-term contracts with private owners or operators, we might incur
significant costs.
RISKS RELATED TO CAPITAL ENVIRONMENTAL'S OPERATIONS
THE LOSS OF KEY PERSONNEL COULD HARM THE IMPLEMENTATION OF OUR OPERATING AND
GROWTH STRATEGIES.
We depend on our recently assembled senior management team for implementing
our operating and growth strategies. The loss of one or more of our senior
management team could adversely affect our business because these individuals
have unique knowledge and experience in the solid waste industry. We maintain
C$3.0 million of key person life insurance on each of our Chairman and Chief
Executive Officer, and our President and Chief Operating Officer.
WE MAY BE AFFECTED BY FOREIGN EXCHANGE RATE FLUCTUATIONS WHICH COULD AFFECT
EARNINGS GENERATED BY OUR CANADIAN OPERATIONS.
For the year ended December 31, 1998, 67.7% of our revenue was derived from
our operations in Canada. All of our Canadian revenue and a substantial majority
of our Canadian expenditures are transacted in Canadian dollars. Since we report
our results in U.S. dollars, our revenue, expenses and earnings generated by our
Canadian operations will be negatively affected if the value of the Canadian
dollar declines compared to the U.S. dollar.
WE MAY BE UNABLE TO SECURE SOME CONTRACTS AND PERMITS IF WE CANNOT OBTAIN
PERFORMANCE BONDS, LETTERS OF CREDIT AND INSURANCE.
Municipal solid waste services contracts and permits to operate transfer
stations and recycling facilities typically require us to obtain performance
bonds, letters of credit or other means of financial assurance to secure our
contractual performance. Our failure to obtain means of financial assurance or
adequate insurance coverage or our failure to maintain existing performance
bonds or letters of credit could prevent us from obtaining or maintaining
municipal contracts or operating permits that require them. Losses of permits or
contracts, if not replaced, would reduce our earnings, which could result in a
decline in the price of our common stock. Obtaining performance bonds or letters
of credit is dependent on our creditworthiness.
WASTE REDUCTION PROGRAMS MAY REDUCE THE VOLUME OF WASTE AVAILABLE FOR
COLLECTION.
Waste reduction programs may reduce the volume of waste available for
collection in some areas where we operate and therefore our revenue in those
areas. This loss of revenue, if not replaced, could result in lower earnings and
a decline in the market price of our common stock. Some areas in which we
operate offer alternatives to landfill disposal, such as recycling, composting
and incineration. In addition, state, provincial and local authorities
increasingly mandate recycling and waste reduction at the source and prohibit
the disposal of certain types of wastes, such as yard wastes, at landfills.
WE MAY BE SUBJECT TO LIMITATIONS ON LANDFILL PERMITTING AND EXPANSION.
We may not be able to obtain or expand landfill sites or enter into
agreements which will give us long-term access to landfill sites in our markets.
The resulting increased costs could reduce our earnings and result in a decline
in the market price of our common stock. We do not currently own landfills. We
operate two landfills under an agreement with a Canadian municipality which
holds the permits for the landfills. However, our ability to meet our growth
objectives may depend in part on our ability to acquire, lease or expand
landfills, develop new landfill sites or enter into agreements which will give
us long-term access to landfill sites in our markets. In some areas in which we
operate, suitable land for new sites or expansion of existing landfill sites may
be unavailable. Permits to expand
10
<PAGE>
landfills are often not approved until the remaining permitted disposal capacity
of a landfill is very low. If we were to exhaust our permitted capacity at a
landfill, our ability to expand internally could be limited, and we could be
required to cap and close that landfill and forced to dispose of collected waste
at more distant landfills or at landfills operated by our competitors or other
third parties.
WE MAY BECOME LIABLE FOR LANDFILL CLOSING COSTS.
We currently own no landfills, we do operate two landfills and our growth
strategy includes acquiring landfills and additional contracts to operate
landfills in some markets. If we own landfills, we will have material financial
obligations to pay closure and post-closure costs. Operating contracts may also
require us to pay all, or some part of, closure and post closure costs. Our
obligations to pay closure or post-closure costs for landfills that we may
acquire could exceed our reserves or accruals for these costs. This could reduce
our earnings in the future which could result in a decline in the market price
of our common stock.
WE ARE SUBJECT TO CHANGING ENVIRONMENTAL REGULATION, WHICH MAY MAKE IT
DIFFICULT FOR US TO OBTAIN OR MAINTAIN THE PERMITS AND APPROVALS WE NEED TO
OPERATE.
We are subject to evolving environmental and land use laws and regulations
in Canada and the United States. The enactment of additional regulations or the
more stringent enforcement of existing regulations could materially and
adversely affect our business and financial condition. To own and operate solid
waste facilities, we must obtain and maintain licenses or permits, as well as
zoning, environmental and/or other land use approvals. It has become
increasingly difficult, costly and time-consuming to obtain required permits and
approvals to build, operate and expand solid waste management facilities,
including landfills and transfer stations. The process often takes several
years, requires numerous hearings and compliance with zoning, environmental and
other requirements and is resisted by citizen, public interest or other groups.
We may not be able to obtain and maintain the permits and approvals we need to
own, operate or expand solid waste facilities. Canada and the United States
impose stringent controls on the design, operation, closure and post-closure
care of solid waste facilities, which could require us to undertake
investigatory or remedial activities, curtail operations or close a facility
temporarily or permanently. In the future, we may be required to modify,
supplement or replace equipment or facilities at substantial costs.
WE MAY HAVE POTENTIAL ENVIRONMENTAL LIABILITY, WHICH MAY RESULT IN
SUBSTANTIAL COSTS TO US.
We are subject to liability for environmental damage at solid waste
facilities that we own or operate, including damage to neighboring landowners or
residents, particularly as a result of the contamination of soil, groundwater or
surface water, and especially drinking water and the costs of this liability can
be very substantial. An uninsured claim against us, if successful and of
sufficient magnitude, could increase our costs and liabilities to an
unacceptable level. Our potential liability may include damage resulting from
conditions existing before we purchased or operated these facilities. We may
also be subject to liability for any off-site environmental contamination caused
by pollutants or hazardous substances that we or our predecessors arranged to
transport, treat or dispose of at other locations.
In addition, we may be held legally responsible for liabilities as a
successor owner of businesses that we acquire or have acquired. These businesses
may have liabilities that we fail or are unable to discover, including
liabilities arising from noncompliance with environmental laws by prior owners.
Our insurance program may not cover all liabilities associated with
environmental cleanup or remediation.
11
<PAGE>
WE MAY FACE YEAR 2000 RISKS, WHICH MAY RESULT IN UNEXPECTED EXPENSES AND
DELAYS IN PAYMENT FOR OUR SERVICES AND IN OUR ABILITY TO CONDUCT NORMAL BANKING
OPERATIONS.
Some computer systems or software used by many companies may be unable to
distinguish 21st century dates from 20th century dates. As a result, beginning
on January 1, 2000, computer systems and software used by many companies in a
wide variety of industries will produce erroneous results or fail unless they
have been modified or upgraded to process date information correctly.
We believe our most significant Year 2000 risk lies with our banks and major
vendors and customers. If these third parties do not complete their Year 2000
modifications on time, we could experience unanticipated expenses and delays,
including delays in payment for our services and delays in our ability to
conduct normal banking operations. We do not currently have a contingency plan
to minimize operational problems if these third parties fail to complete their
Year 2000 modifications. However, we are requesting Year 2000 compliance
certifications from our banks, major vendors and large and municipal customers,
although there can be no assurance that we will receive all requested
certifications.
Internally, we have conducted a review of our computer systems to identify
the systems, if any, that could be affected by the Year 2000 issue. Because our
operations rely primarily on mechanical systems such as trucks to collect solid
waste, we do not expect our operations to be significantly affected by the Year
2000 issue. However, we use computer systems and software for accounting,
billing and truck routing purposes. We have obtained Year 2000 compliance
certifications from manufacturers of our main computer systems and software.
RISKS RELATED TO THIS OFFERING
AFTER THIS OFFERING, EXISTING STOCKHOLDERS WILL OWN A SIGNIFICANT PERCENTAGE
OF OUR COMMON STOCK.
After this offering, our officers, directors and existing stockholders will
together own 45.5% of our outstanding common stock, or 42.1% if the underwriters
exercise their over-allotment option. As a result, these stockholders, if they
act together, may be able to influence our management and affairs and all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may have the effect of delaying or preventing a change in control of Capital
Environmental. In addition, because our common stock is owned by fewer people,
it may be less liquid. This lack of liquidity could depress the market price of
our common stock.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If our existing stockholders sell a large number of shares or if we issue a
large number of shares of our common stock in connection with future
acquisitions, the market price of our common stock could decline significantly.
Moreover, the perception in the public market that these stockholders might sell
shares of common stock could depress the market price of the common stock.
Immediately after this offering, the public market for our common stock will
include only the 3,750,000 shares that are being sold in this offering. At that
time, there will be an additional 3,135,479 shares of common stock outstanding.
All of our 3,135,479 additional shares held by our existing stockholders,
and the outstanding options and warrants to acquire 618,804 common shares are
subject to lock-up agreements with the representatives of the underwriters, by
which the existing stockholders have agreed not to offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any of these shares
within the 180-day period following the date of this prospectus. When the
180-day lock-up period expires, or earlier with the consent of Credit Suisse
First Boston, the owners of these shares will be able to sell them in the public
market, subject to limitations of the securities laws.
12
<PAGE>
The majority of the holders of 2,580,441 shares of common stock and 123,084
warrants, have the right to force us to register their shares of common stock
with the Securities and Exchange Commission on two occasions after the
expiration of the lock-up. The right to force us to register their shares of
common stock expires on the date when the holders of two-thirds of the 2,580,441
shares of common stock and 123,084 warrants have disposed of their shares in
registered transactions or may, under Rule 144, immediately dispose of their
shares. If we register their shares of common stock, they can sell those shares
in the public market.
After this offering, we intend to initially register 15%, or approximately
1,000,000 shares, of the total outstanding shares of our common stock that we
have issued or may issue under our stock option plans. If we increase our total
outstanding shares of common stock, we will register additional shares so that
the stock available for issuance under our stock option plans will be
registered. Once we register these shares, they can be sold in the public market
upon issuance, subject to vesting provisions.
After this offering and before the 180-day lock-up period expires, we intend
to register an additional 2,600,000 shares of common stock that we may issue in
connection with future acquisitions. These shares, if issued within 180 days of
the date of this prospectus, will be subject to lock-up agreements.
YOU WILL BE IMMEDIATELY AND SUBSTANTIALLY DILUTED.
If you purchase shares of the common stock in this offering, you will
experience immediate and substantial dilution of $13.17 per share, based upon an
assumed initial offering price of $14.00 per share, the mid-point of the price
range set forth on the cover page of this prospectus, because the price you pay
will be substantially greater than the net tangible book value per share of
$0.83 for the shares you acquire. This dilution is due in large part to the fact
that prior investors in Capital Environmental paid an average price of $6.28 per
share when they purchased their shares of common stock, which is substantially
less than the initial public offering price, as well as the fact that a
considerable portion of our assets are intangible assets.
IT MAY BE DIFFICULT TO BRING AND ENFORCE SUITS AGAINST US.
Capital Environmental is a corporation incorporated in the province of
Ontario under the Business Corporations Act (Ontario). A majority of our
directors must be residents of Canada, and all or a substantial portion of their
assets are located outside of the United States. In addition, a substantial
portion of our assets are located in Canada. As a result, it may be difficult
for our stockholders to serve notice of a lawsuit on Capital Environmental or
our non-U.S. directors within the United States. Because many of our assets are
located in Canada, it may be difficult for our stockholders to enforce in the
United States judgments of United States courts. Tory Tory DesLauriers &
Binnington, our Canadian counsel, has advised us that Canadian courts, for
example, have in the past refused to enforce a judgment based solely on United
States federal securities laws on the grounds, among others, that those laws had
no extraterritorial effect or are penal in nature. Accordingly, our Canadian
counsel advises that there is some doubt whether an action of this type could be
brought successfully in a Canadian court.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing forward-looking statements are found in
the material set forth under the headings "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in this prospectus generally. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of various factors, including the risks described in this
prospectus.
13
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the 2,998,725
shares of common stock offered by Capital Environmental through this prospectus,
after deducting underwriting discounts and commissions and estimated offering
expenses, of $37.5 million, or $44.8 million if the underwriters exercise their
over-allotment option in full, assuming an initial public offering price of
$14.00 per share, the mid-point of the offering range set forth on the cover
page of this prospectus. Capital Environmental will not receive any proceeds
from the sale of shares of common stock in this offering by the selling
shareholders.
We intend to use the net proceeds to repay a portion of the outstanding
indebtedness under our credit facility. Our credit facility provides for
borrowing capacity of up to $70.0 million, of which approximately $59.4 million
was outstanding as of April 15, 1999. Of this outstanding amount, $23.5 million
consisted of U.S. dollar loans bearing interest at 7.5% and $35.9 million
consisted of Canadian dollar loans bearing interest at 7.6%. Our credit facility
will terminate in January 2002 at which time its entire principal amount will
become due. The credit facility is used for acquisitions of businesses in the
solid waste services industry that meet our acquisition criteria. While we
continuously and actively evaluate acquisition candidates, we are not presently
negotiating any probable acquisitions. In addition, the proceeds of our credit
facility are used for capital expenditures, standby letter of credit and general
corporate purposes. The proceeds of our credit facility were used to repay a
$14.7 million loan from Dresdner Bank Canada and to redeem common stock. The
terms of our credit facility permit us, subject to some restrictions, to redraw
on the facility for future acquisitions, capital expenditures and general
corporate purposes. The repayment of our debt under the credit facility using
the proceeds of this offering may be temporary and we do not expect any
permanent decrease in our interest expense in the near future.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. Our Board
of Directors currently intends to retain any earnings for use in the operation
and expansion of our business and does not anticipate paying any dividends on
the common stock for the foreseeable future. Additionally, our credit facility
restricts our ability to pay cash dividends on our common stock.
EXCHANGE RATES
The following table sets forth:
- the rates of exchange for Canadian dollars, expressed in U.S. dollars, in
effect at the end of each of the periods indicated;
- the average of exchange rates in effect on the last day of each month
during these periods; and
- the high and low exchange rates during these periods, in each case based
on the noon buying rate in New York City for cable transfers in Canadian
dollars as certified for customs purposes by the Federal Reserve Bank of
New York.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
Rate at End of Year........................................ $ 0.7143 $ 0.7353 $ 0.7299 $ 0.6991 $ 0.6504
Average Rate during Year................................... 0.7299 0.7299 0.7353 0.7223 0.6740
High....................................................... 0.7642 0.7533 0.7526 0.7493 0.7105
Low........................................................ 0.7097 0.7009 0.7212 0.6945 0.6341
</TABLE>
On April 15, 1999, the noon buying rate for Canadian dollars was $0.6709=C$1.00
14
<PAGE>
DILUTION
The net tangible book deficit of our common stock, excluding the redeemable
common stock, as of December 31, 1998 was $(53.0) million, or $(26.60) per
share. After giving effect to our sale of 2,998,725 shares of common stock
offered by Capital Environmental through this prospectus at the assumed initial
public offering price of $14.00 per share, the mid-point of the range set forth
on the cover page of this prospectus, and application of the estimated net
proceeds therefrom, and before deducting the underwriting discounts and
estimated offering expenses payable by us, our net tangible book deficit as
adjusted as of December 31, 1998 would have been $5.7 million, or $0.83 per
share. The adjusted book value also gives effect to the recapitalization and the
repurchase of 500,175 shares of redeemable common stock, which will occur upon
the closing of this offering. This represents an immediate increase in net
tangible book value as adjusted of $27.43 per share to existing stockholders,
and an immediate dilution in net tangible book value as adjusted of $13.17 per
share to new investors purchasing shares of common stock in this offering.
The following table illustrates the per share dilution as described above:
<TABLE>
<S> <C> <C>
Assumed initial public offering price..................... $ 14.00
Net tangible book deficit before this offering.......... $ (26.60)
Increase attributable to recapitalization............... 17.22
Increase attributable to new investors.................. 10.21
---------
Net tangible book value as adjusted after this offering... 0.83
---------
Dilution to new investors................................. $ 13.17
---------
---------
</TABLE>
These calculations do not include shares reserved for issuance upon the
exercise of stock options and warrants.
If the underwriters exercise their over-allotment option in full, the net
tangible book value as adjusted would be $1.83 per share, resulting in dilution
to new investors purchasing shares in the offering of $12.17 per share.
The following table sets forth, as of December 31, 1998, the number of
shares of common stock issued by Capital Environmental, reflecting the
reclassification of 280,240 shares of redeemable common stock into 280,240
shares of common stock, the conversion of 400,000 shares of redeemable
convertible class "B" special stock into 484,645 shares of common stock and the
conversion of 8,000 shares of convertible preference stock to 1,107,750 shares
of common stock. The table shows the total consideration paid and the average
price per share paid by existing stockholders and by new investors purchasing
shares of common stock in this offering, assuming an initial public offering
price of $14.00 per share, the mid-point of the range set forth on the cover
page of this prospectus:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)..................... 3,866,393 56.3% $ 24,272,000 36.6% $ 6.28
New investors................................. 2,998,725 43.7 41,982,000 63.4 $ 14.00
---------- ----- ------------- -----
Total..................................... 6,865,118 100.0% 66,254,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Sales by the selling shareholders in this offering will reduce the number of
shares of common stock held by existing shareholders to 3,115,118 shares or
approximately 45.4% (approximately 41.9% if the underwriters' over-allotment
option is exercised in full) of the total number of shares of common stock
outstanding after this offering.
As of April 15, 1999, we had outstanding warrants and stock options
exercisable for 618,804 shares of common stock at a weighted average exercise
price of C$10.35 per share ($6.94 at April 15, 1999). We may issue additional
shares to effect future business acquisitions or upon exercise of stock options
granted in the future or other equity awards, which could result in additional
dilution to then existing stockholders. See "Management--Executive
Compensation--Stock Options," "--1997 Stock Option Plan" and "--1999 Stock
Option Plan."
15
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of Capital
Environmental at December 31, 1998 and the capitalization of Capital
Environmental at December 31, 1998, as adjusted. This table should be read in
conjunction with our consolidated financial statements and notes which are
included elsewhere in this prospectus. See "Use of Proceeds" and "Description of
Capital Stock."
For purposes of this table:
- the "As Adjusted" column gives effect to the repurchase for $6.9 million
of 500,175 shares of redeemable common stock with an ascribed value of
$5.2 million;
- the "As Further Adjusted" column gives effect to the sale of the common
stock offered in this prospectus, at an assumed offering price of $14.00
per share, the mid-point of the price range set forth on the cover page of
this prospectus, the application of estimated net proceeds, after
deducting underwriting discounts and commissions and estimated offering
expenses, and the recapitalization as defined elsewhere in this
prospectus;
- the entire net proceeds raised have been applied to reduce outstanding
indebtedness under our credit facility; and
- the common stock shown under "Stockholders' Equity" excludes 632,652
shares issuable on the exercise of warrants and options outstanding at
December 31, 1998 at a weighted average exercise price of C$10.52, or
$6.84 at December 31, 1998, per share.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
<S> <C> <C> <C>
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
--------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Current portion of long-term obligations..................................... $ 3,899 $ 2,201 $ 2,201
--------- ----------- -----------
--------- ----------- -----------
Long-term obligations, net:
Senior debt................................................................ $ 41,701 $ 48,601 $ 10,091
Subordinated debt.......................................................... 10,720 10,720 10,720
Other...................................................................... 2,168 2,168 2,168
Redeemable convertible preference stock, unlimited shares authorized; 8,000
shares issued and outstanding actual; 8,000 shares issued and outstanding
as adjusted; no shares issued and outstanding as further adjusted........ 5,748 5,748 --
Redeemable convertible class "B" special stock, 400,000 shares authorized;
400,000 shares issued and outstanding actual; 400,000 shares issued and
outstanding as adjusted; no shares issued and outstanding as further
adjusted................................................................. 7,455 7,455 --
Redeemable common stock, 780,415 shares issued and outstanding actual;
280,240 shares issued and outstanding as adjusted; no shares issued and
outstanding as further adjusted.......................................... 8,743 3,541 --
Stockholders' equity:
Common stock, unlimited shares authorized; 1,993,758 issued and
outstanding actual; 1,993,758 shares issued and outstanding as
adjusted; 6,865,118 shares issued and outstanding as further
adjusted............................................................... 7,528 7,528 61,773
Accumulated comprehensive loss........................................... (1,157) (1,157) (1,157)
Accumulated deficit...................................................... (879) (879) (879)
--------- ----------- -----------
Total stockholders' equity............................................. 5,492 5,492 59,737
--------- ----------- -----------
Total capitalization................................................... $ 82,027 $ 83,725 $ 82,716
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated statements of operations
and balance sheet data of Capital Environmental and our predecessor, Western
Waste Services Inc., for the periods indicated. The financial data for the
periods ended October 31, 1995, October 31, 1996 and June 5, 1997 has been
derived from Western Waste's audited consolidated financial statements included
elsewhere in this prospectus. The financial data as of December 31, 1997 and
December 31, 1998 and for the period ended December 31, 1997 and the year ended
December 31, 1998 has been derived from Capital Environmental's audited
consolidated financial statements included elsewhere in this prospectus.
You should read the selected consolidated financial information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," Capital Environmental's consolidated financial
statements and notes thereto, and the consolidated financial statements and
notes thereto of Western Waste included elsewhere in this prospectus.
The "As Adjusted" column in the balance sheet data is adjusted to give
effect to the sale of the common stock offered by Capital Environmental in this
prospectus, assuming an initial public offering price of $14.00 per share, the
mid-point of the price range set forth on the cover page of this prospectus, the
application of the estimated net proceeds from this offering, the
recapitalization and the repurchase of 500,175 shares of redeemable common
stock, as if these events had occurred on December 31, 1998. See "Use of
Proceeds" and "Capitalization." The redeemable capital stock
17
<PAGE>
includes redeemable convertible preference stock, redeemable class "B" special
stock, and redeemable common stock. See "Capitalization."
<TABLE>
<CAPTION>
WESTERN WASTE
---------------------------------------------- CAPITAL ENVIRONMENTAL
PERIOD FROM ------------------------------------
INCEPTION PERIOD FROM
(NOVEMBER 22, YEAR PERIOD FROM INCEPTION
1994) THROUGH ENDED NOVEMBER 1, (MAY 23, 1997) YEAR
OCTOBER 31, OCTOBER 31, 1996 THROUGH THROUGH ENDED
1995 1996 JUNE 5, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998
--------------- --------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues................. $ 1,018 $ 7,421 $ 5,680 $ 15,089 $ 62,056
Cost of operations....... 560 5,257 3,472 10,676 43,002
Selling, general and
administrative
expenses............... 419 2,017 1,658 1,389 8,490
Depreciation and
amortization........... 115 741 612 1,154 4,890
Start-up and integration
costs.................. -- -- -- 270 602
Absorption of acquisition
and transition
costs(1)............... -- -- -- 4,055 --
------ --------------- ------------ ----------------- -----------------
Income (loss) from
operations............. (76) (594) (62) (2,455) 5,072
Interest (expense)
income, net............ 10 (8) (176) (898) (3,139)
------ --------------- ------------ ----------------- -----------------
Income (loss) before
income taxes and
minority interest...... (66) (602) (238) (3,353) 1,933
Income tax (provision)
benefit................ (190) (508) (573) 1,398 (740)
Minority interest........ -- -- -- (117) --
------ --------------- ------------ ----------------- -----------------
Net income (loss)........ $ (256) $ (1,110) $ (811) $ (2,072) $ 1,193
------ --------------- ------------ ----------------- -----------------
------ --------------- ------------ ----------------- -----------------
Basic net income (loss)
per share.............. $ (1.51) $ 0.52
----------------- -----------------
----------------- -----------------
Shares used in
calculating basic net
income (loss) per
share.................. 1,374,220 2,304,847
Diluted net income (loss)
per share.............. $ (1.51) $ 0.29
----------------- -----------------
----------------- -----------------
Shares used in
calculating diluted net
income (loss) per
share.................. 1,374,220 4,174,172
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
WESTERN WASTE
---------------------------------------------- CAPITAL ENVIRONMENTAL
PERIOD FROM ------------------------------------
INCEPTION PERIOD FROM
(NOVEMBER 22, YEAR PERIOD FROM INCEPTION
1994) THROUGH ENDED NOVEMBER 1, (MAY 23, 1997) YEAR
OCTOBER 31, OCTOBER 31, 1996 THROUGH THROUGH ENDED
1995 1996 JUNE 5, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998
--------------- --------------- ------------ ----------------- -----------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Net cash provided by
(used in) operating
activities............. $ 257 $ 256 $ (556) $ 1,167 $ 2,708
Net cash used in
investing activities... (2,396) (10,974) (1,189) (12,529) (36,185)
Net cash provided by
financing activities... 6,485 6,861 2,759 13,918 32,313
Adjusted EBITDA.......... 39 147 550 3,024 10,564
Adjusted EBITDA margin... 3.8% 2.0% 9.7% 20.0% 17.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF 1998
DECEMBER 31, ----------------------
1997 ACTUAL AS ADJUSTED
------------ --------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................................................................... $ 2,473 $ 1,060 $ 1,060
Working capital, including cash............................................ 2,475 (994) (994)
Property and equipment, net................................................ 19,174 25,909 25,909
Total assets............................................................... 50,495 98,337 97,328
Long-term debt, net(2)..................................................... 29,022 54,589 22,979
Redeemable capital stock................................................... 13,203 21,946 --
Total stockholders' equity................................................. (1,424) 5,492 59,737
</TABLE>
- ------------------------
(1) Represents the absorption of acquisition and transition costs associated
with the acquisition of selected assets of Canadian Waste. See Note 2 of the
Notes to Capital Environmental's Consolidated Financial Statements.
(2) Excludes current portion of long-term debt. See Note 4 of the Notes to
Capital Environmental's Consolidated Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS DISCUSSION IN CONJUNCTION WITH CAPITAL ENVIRONMENTAL'S
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO OF OUR PREDECESSOR, WESTERN WASTE, AND
OTHER FINANCIAL INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING WITHOUT
LIMITATION THOSE SET FORTH IN "RISK FACTORS" AND THE MATTERS SET FORTH IN THIS
PROSPECTUS GENERALLY.
BACKGROUND INFORMATION ON OUR HISTORY AND GROWTH
Capital Environmental is a regional, integrated solid waste services company
that provides solid waste collection, transfer, disposal and recycling services
in secondary markets in Canada in the provinces of Ontario, Alberta and British
Columbia, and in the northern United States in the states of New York and
Pennsylvania. As of December 31, 1998, we served more than 540,000 commercial,
industrial and residential customers. Since commencing operations, we have
acquired 27 collection operations, eight transfer stations, six recycling
processing facilities and a contract to operate two landfills.
Capital Environmental was incorporated on May 23, 1997. On June 6, 1997, we
purchased selected assets located in Ontario, Alberta and British Columbia from
Canadian Waste Services Inc., and acquired 50% of the outstanding shares of
common stock of Western Waste from USA Waste Inc. We have experienced
substantial growth since our formation which has affected our financial results
in several significant ways, including the following:
SUBSTANTIAL GROWTH FROM ACQUISITIONS. Since commencing operations, we
have acquired 26 solid waste services businesses in Canada and the United
States. All of these acquisitions were and will be accounted for under the
purchase method of accounting. Accordingly, these acquisitions have given
rise to significant increases in goodwill on our balance sheet and increased
amortization expense on our statement of operations. Further, as purchase
transactions, we have recognized revenues and earnings from the date of
acquisition. As a result, we believe that period-to-period comparisons of
our historical operating results are not necessarily indicative of what our
results would have been had these acquisitions occurred at the beginning of
the periods presented.
MANAGEMENT CAPABILITIES. Since our formation, we have assembled a
management team with substantial experience in the solid waste industry. We
believe that our management team has the ability to manage our operations as
they expand. Therefore, we believe that the amount of selling, general and
administrative expenses is likely to decline as a percentage of revenues as
we grow.
FORMATION RELATED CHARGES. In connection with the acquisition of
selected assets of Canadian Waste in June 1997 and other formation related
activities, we have expensed certain start-up, integration and organization
costs. We also incurred $4.1 million of expense during the year ended
December 31, 1997 for the absorption of acquisition and transition costs.
These costs represent amounts paid to Canadian Waste for a list of customers
which we could solicit to provide selected services. We also received
transition services and the right to share use of some Canadian Waste
facilities during a transition period which expired December 31, 1997. We
believe that these formation-related charges will not have a material impact
on our financial statements in the future.
MINORITY INTEREST. Following our original acquisition of shares of
Western Waste, we purchased an additional 16.7% interest in Western Waste
and on November 1, 1997, we purchased the remaining 33.3% interest in
Western Waste, giving us a 100% ownership stake in Western Waste.
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<PAGE>
As a result, no minority interest has been included in our consolidated
statement of operations for the periods from November 1, 1997 to December
31, 1998.
CAPITAL ENVIRONMENTAL'S ACCOUNTING POLICIES
REVENUES. Capital Environmental's revenues are attributable primarily to
fees charged to customers for solid waste collection, transfer, recycling
services and management of landfills. We derive a substantial portion of our
collection revenues from commercial, industrial and residential services, which
are frequently performed under contracts with municipalities or pursuant to
service agreements with businesses or subscription arrangements with homeowners.
See "Business." Revenues for the year ended December 31, 1998 were attributable
to the following services:
<TABLE>
<S> <C>
Commercial and industrial collection................................. 60.0%
Residential collection............................................... 19.1
Commercial and residential recycling................................. 1.6
Transfer station..................................................... 8.0
Contract management and other specialized services................... 11.3
---------
---------
Total............................................................ 100.0%
</TABLE>
Contract management revenue is generated from exclusive contracts to provide
comprehensive waste management services to large companies on a national or
regional basis. Revenues from the management of landfills are included in
residential collection revenue. We do not own any landfills and, therefore, have
not generated disposal revenues.
Our prices for collection services are typically determined by the frequency
and level of service, route density, volume, weight and type of waste collected,
type of equipment and containers furnished, the distance to the disposal or
processing facility, the cost of disposal or processing and prices charged by
competitors for similar services. Our ability to pass on price increases is
sometimes limited by the terms of our contracts. Our long-term solid waste
collection contracts with municipalities typically contain a formula, generally
based on a predetermined published price index, for automatic adjustment of fees
to cover increases in some, but not all, operating costs plus a pass-through of
any disposal costs increases.
EXPENSES. 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. We own and operate eight transfer
stations, which reduce our 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. We have obtained long-term disposal
agreements in some of our markets which we believe are at or below market
disposal rates. There can be no assurance that these contracts can be renewed on
favorable terms. In the northern United States and Canada, we provide waste
collection and recycling services to several industrial, commercial and
institutional customers on a national or regional basis. These clients are
serviced in part through subcontractors. Subcontracting costs are included in
cost of operations and operating margins on contract management accounts are
lower than for our core business.
Selling, general and administrative expenses include management, clerical,
financial, accounting and administrative compensation and overhead costs
associated with our marketing and sales force, professional services and
community relations 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. All business acquisitions to
21
<PAGE>
date have been accounted for using the purchase method of accounting, and the
respective purchase prices have been allocated to the fair value of the assets
acquired and liabilities assumed. Consequently, the amounts of depreciation and
amortization included in the statements of operations for the periods presented
reflect the changes in basis of the underlying assets that were made as a result
of the changes in ownership that occurred during the periods presented. We
capitalize some third-party expenditures relating to pending acquisitions or
development projects, such as legal and engineering expenses. All indirect
acquisition costs, such as executive salaries, corporate overhead, public
relations and other corporate services, are expensed as incurred. Our policy is
to charge against net income any unamortized capitalized expenditures and
advances (net of any portion thereof that we estimate to be recoverable, through
sale or otherwise) relating to any operation that is permanently shut down, any
pending acquisition that is not consummated and any landfill development project
that is not successfully completed. We routinely evaluate all capitalized costs,
and expense those related to projects we believe are not likely to be
successful.
As we do not currently own any landfills, we do not accrue for estimated
landfill closure and post-closure maintenance costs. We manage two municipally
owned non-hazardous waste landfill sites under a contract that expires in 2001.
The liability for closure and post-closure liabilities for the landfills remains
with the owners of the sites. If we acquire landfill sites in the future, we
will provide accruals for future closure and post-closure costs of landfills
based on engineering estimates of consumption of permitted landfill airspace
over the useful life of the landfill.
GOODWILL. At December 31, 1998, approximately 55% of the assets on our
balance sheet consisted of goodwill.
Goodwill represents the excess of the purchase price that we have paid for
each business acquired over the fair value of the net identifiable assets
acquired. Goodwill can reflect different things for each business acquisition,
including factors such as market share, market recognition, competitive position
and management, customer and employee loyalty. Goodwill is an accumulation of
various factors that we believe will lead to profits above those that might
normally be expected from just acquiring the tangible assets of that business.
We presently amortize our goodwill over 40 years. We have selected this
number of years based on our expectation of the on-going future cash flows
associated with our businesses and our belief that, with proper management and
integration of the acquired businesses, and the economies of scale that we can
achieve, the value of this goodwill will endure as a long-lived asset. Unlike
other industries, our industry is not prone to the risks of rapid changes in
technology. Amortizing goodwill over 40 years is the standard used by virtually
all of our peers in our industry and we believe that it is important that our
financial results be prepared on a basis consistent with industry standards,
where appropriate.
Generally accepted accounting principles require that we continually
evaluate the value and future benefit of our goodwill to ensure that it is not
impaired and we must also assess its estimated life, as facts and circumstances
might change which could require us to use a shorter amortization period. Under
this approach, the carrying value of our goodwill would be reduced as it becomes
probable that our best estimate for expected future cash flows of the related
businesses would be less than the carrying amount of the goodwill over the
remaining amortization period. To date there have been no adjustments required
to the carrying amounts of our goodwill.
BASIS OF PRESENTATION
We consider Western Waste to be a predecessor for financial reporting
purposes. For this reason, historical financial statements for Western Waste are
included in the financial presentation in this prospectus. The periods include
the year ended October 31, 1996, and the period from November 1, 1996 through
June 5, 1997. Financial statements for Capital Environmental are presented on a
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<PAGE>
consolidated basis for the period from inception (May 23, 1997) through December
31, 1997, and the year ended December 31, 1998.
WESTERN WASTE SERVICES INC. The financial statements of Western Waste
include the accounts of its wholly owned subsidiaries Lacey Garbage Disposal
Ltd. from March 1, 1996 and West Coast Waste Systems Inc. from December 1, 1995.
These acquisitions were accounted for by Western Waste using the purchase method
of accounting, and the respective purchase prices were allocated to the fair
values of the assets acquired and liabilities assumed.
CAPITAL ENVIRONMENTAL RESOURCE INC. Financial statements for Capital
Environmental are presented on an audited consolidated basis for the period from
inception (May 23, 1997) through December 31, 1997, and for the year ended
December 31, 1998.
The consolidated financial statements of Capital Environmental for the
period from inception (May 23, 1997) through December 31, 1997 include the
accounts of its wholly owned subsidiary Western Waste since November 1, 1997.
Prior to this date, the 33.33% interest in Western Waste not owned by us was
accounted for as a minority interest. The consolidated financial statements for
the year ended December 31, 1998 include the accounts of Western Waste, Rubbish
Removal commencing January 2, 1998, and General Environmental Technical
Services, Inc. and J.V. Services of Western N.Y., Inc. (collectively, "GETS")
commencing October 1, 1998, as well as other small acquisitions completed during
the year.
Due to the nature of our growth through acquisitions, and the fact that
these acquisition dates do not coincide with the year end dates for audited
financial statement purposes, the selection of comparative periods which include
an identical number of months is not possible. However, in order to provide
meaningful comparative analysis of operations, the following financial
statements have been included in the results of operations discussion that
follows:
<TABLE>
<S> <C>
FOR THE YEAR ENDED OCTOBER 31, The consolidated statement of operations for Western
1996 Waste for the twelve months ended October 31, 1996.
FOR THE PERIOD FROM NOVEMBER 1, The consolidated statement of operations for Western
1996 THROUGH JUNE 5, 1997 Waste for the period from November 1, 1996 through June
5, 1997.
FOR THE PERIOD FROM INCEPTION The consolidated statement of operations for Capital
(MAY 23, 1997) THROUGH DECEMBER Environmental for the period from inception (May 23,
31, 1997 1997) through December 31, 1997.
FOR THE YEAR ENDED DECEMBER 31, The consolidated statement of operations for Capital
1998 Environmental for the twelve months ended December 31,
1998.
FOR THE THREE MONTHS ENDED MARCH The unaudited consolidated financial information for the
31, 1999 AND 1998 three months ended March 31, 1999 and 1998.
</TABLE>
23
<PAGE>
UNAUDITED QUARTERLY RESULTS OF OPERATIONS FOR THE FIRST THREE
MONTHS OF 1999 COMPARED TO THE FIRST THREE MONTHS OF 1998
The following information is based on unaudited consolidated financial
information for the three months ended March 31, 1999 and 1998. The unaudited
financial information may not be indicative of our consolidated financial
information for the full year ending December 31, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1999
------------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Revenues............................................................... $ 11,965 $ 17,876
Cost of operations..................................................... 8,145 12,012
Selling, general and administrative expenses........................... 1,787 2,338
Depreciation and amortization.......................................... 1,115 1,533
------------------- -------------------
Income from operations................................................. 918 1,993
Interest expense, net.................................................. 551 1,250
Income from continuing operations before income taxes.................. 367 743
Income tax provision................................................... 140 267
------------------- -------------------
Net income............................................................. $ 227 $ 476
Basic net income per share............................................. $ 0.12 $ 0.19
------------------- -------------------
------------------- -------------------
Shares used in calculating basic net income per share.................. 1,922,396 2,447,680
------------------- -------------------
------------------- -------------------
Diluted net income per share........................................... $ 0.06 $ 0.11
------------------- -------------------
------------------- -------------------
Shares used in calculating diluted net income per share................ 3,756,513 4,358,406
------------------- -------------------
------------------- -------------------
EBITDA (Earnings before interest, taxes, depreciation and
amortization)........................................................ 2,033 3,526
</TABLE>
Revenues for the three months ended March 31, 1999 increased 49% to $17.9
million from $12.0 million in the same period in 1998. Income from operations
increased 117% to $2.0 million from $918,000 in the same period in 1998.
Net income for the three months ended March 31, 1999, increased 110% to
$476,000 from $227,000 in the same period in 1998. Fully diluted net income per
share was $0.11 compared to $0.06 in the first quarter of 1998.
The increase in revenues and net income is predominately the result of
numerous acquisitions made since the first quarter of 1998 and internal growth.
Working capital, long-term debt and equity were $3.5 million, $71.5 million
and $22.7 million at March 31, 1999, respectively. The equity figure includes
the redeemable stock. Capital expenditures during the three months ending March
31, 1999 were $2.0 million.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth items in Western Waste's Consolidated
Statement of Operations and Capital Environmental's consolidated statement of
operations as a percentage of revenues, with the corresponding dollar amounts
and other financial data, for the periods indicated:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NOVEMBER 1, 1996 INCEPTION
(MAY 23, 1997)
YEAR ENDED THROUGH THROUGH YEAR ENDED
OCTOBER 31, 1996 JUNE 5, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Revenues.................... $ 7,421 100.0% $ 5,680 100.0% $ 15,089 100.0% $ 62,056 100.0%
Cost of operations.......... 5,257 70.8 3,472 61.1 10,676 70.8 43,002 69.3
Selling, general and
administrative expenses... 2,017 27.2 1,658 29.2 1,389 9.2 8,490 13.7
Depreciation and
amortization.............. 741 10.0 612 10.8 1,154 7.6 4,890 7.9
Start-up and integration.... -- -- -- -- 270 1.8 602 0.9
Absorption of acquisition
and transition costs...... -- -- -- -- 4,055 26.9 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from
operations................ (594) (8.0) (62) (1.1) (2,455) (16.3) 5,072 8.2
Interest expense............ (8) (0.1) (176) (3.1) (898) (5.9) (3,139) (5.1)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes and minority
interest.................. (602) (8.1) (238) (4.2) (3,353) (22.2) 1,933 3.1
Income tax (provision)
benefit................... (508) (6.8) (573) (10.8) 1,398 9.3 (740) (1.2)
Minority interest........... -- -- -- -- (117) (0.8) -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)........... $ (1,110) (14.9)% $ (811) 14.3% $ (2,072) (13.7)% $ 1,193 1.9%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Adjusted EBITDA............. $ 147 2.0% $ 550 9.7% $ 3,024 20.0% $ 10,564 17.0%
</TABLE>
CAPITAL ENVIRONMENTAL--YEAR ENDED DECEMBER 31, 1998 VS. PERIOD FROM INCEPTION
THROUGH DECEMBER 31, 1997
REVENUES. Total revenues for the year ended December 31, 1998 were $62.1
million compared to $15.1 million for the period ended December 31, 1997. The
$47.0 million increase in revenues was attributable to the inclusion of a full
twelve months of operating results, operating results for businesses acquired
prior to December 31, 1997, operating results for the 17 businesses acquired
during the year ended December 31, 1998 and internal growth.
COST OF OPERATIONS. Cost of operations for the year ended December 31, 1998
were $43.0 million compared to $10.7 million for the period ended December 31,
1997. The increase in cost of operations was attributable primarily to increases
in our revenues described above. As a percentage of revenues, cost of operations
declined to 69.3% for the year ended December 31, 1998 from 70.8% for the period
ended December 31, 1997. This marginal decrease was attributable primarily to
the contribution of revenue growth towards fixed costs, offset in part by
acquisitions of businesses in new markets with margins lower than those of our
existing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1998 were $8.5 million
compared to $1.4 million for the period ended
25
<PAGE>
December 31, 1997. The increase was attributable to the effect of the full
year's results and the acquisitions described above plus the addition of service
and market area and corporate staff during 1998. As a percentage of revenues,
selling, general and administrative expenses increased to 13.7% for the year
ended December 31, 1998 from 9.2% for the period ended December 31, 1997. The
increase was attributable to the investment in corporate overhead to support the
planned growth in future revenues.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for the year ended December 31, 1998 was $4.9 million compared to $1.2
million for the period ended December 31, 1997. The increase was primarily due
to the inclusion of a full year's operating results, increased depreciation
arising as a result of vehicles and containers acquired, a change in our
depreciation rates whereby the maximum estimated life of steel containers was
reduced to 12 years from 20 years as of January 1, 1998, and increased
amortization of goodwill arising as a result of businesses acquired. As a
percentage of revenues, depreciation and amortization expense increased to 7.9%
for the year ended December 31, 1998 from 7.6% for the period ended December 31,
1997. The increase was attributable to the change in lives of our containers
offset by revenue growth exceeding depreciation and amortization for new
additions.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1998 was
$3.1 million compared to $898,000 for the period ended December 31, 1997. The
increase resulted from approximately $25.6 million of new debt incurred to
complete acquisitions during 1998 and the inclusion of a full fiscal year of
operations.
INCOME TAXES. Income tax expense for the year ended December 31, 1998 was
$740,000 compared to an income tax benefit of $1.4 million for the period ended
December 31, 1997. For the period ended December 31, 1997, the income tax
benefit was due to expected recovery of tax benefits related to the net
operating loss carryforwards generated in the period.
WESTERN WASTE--PERIOD ENDED JUNE 5, 1997 VS. YEAR ENDED OCTOBER 31, 1996
REVENUES. Total revenues for the period ended June 5, 1997 were $5.7
million compared to $7.4 million for the year ended October 31, 1996. On an
annualized basis, the growth in revenues was attributable primarily to the
inclusion of the full period operating results of acquisitions made during the
year ended October 31, 1996.
COST OF OPERATIONS. Cost of operations for the period ended June 5, 1997
was $3.5 million compared to $5.3 million for the year ended October 31, 1996.
On an annualized basis, the increase in cost of operations was attributable
primarily to increases in our revenues described above. As a percentage of
revenues, cost of operations declined to 61.1% for the period ended June 5, 1997
from 70.8% for the year ended October 31, 1996. The decrease was attributable
primarily to operating enhancements achieved by consolidating acquired
operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the period ended June 5, 1997 were $1.7 million
compared to $2.0 million for the year ended October 31, 1996. On an annualized
basis, the increase was primarily attributable to the impact of acquisitions
described above. As a percentage of revenues, selling, general and
administrative expenses increased to 29.2% for the period ended June 5, 1997
from 27.2% for the year ended October 31, 1996. The increase was attributable to
the impact of the acquisitions.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for the period ended June 5, 1997 was $612,000 compared to $741,000 for
the year ended October 31, 1996. The increase on an annualized basis was
primarily due to increased depreciation arising as a result of vehicles and
containers acquired and increased amortization of goodwill arising as a result
of the full year effect of selected acquisitions during the year ended October
31, 1996. As a percentage of
26
<PAGE>
revenues, depreciation and amortization expense increased to 10.8% for the
period ended June 5, 1997 as compared to 10.0% for the year ended October 31,
1996. The increase was attributable to a proportionately larger amount of
non-current assets being comprised of goodwill that was amortized over 40 years.
INTEREST EXPENSE. Interest expense for the period ended June 5, 1997 was
$176,000 compared to $8,000 for the year ended October 31, 1996. The increase
resulted from capital leases and term debt incurred in late 1996.
INCOME TAXES. We recorded income taxes of $573,000 for the period ended
June 5, 1997 compared to $508,000 for the year ended October 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The solid waste management business is capital intensive. Our capital
requirements include acquisitions, working capital increases and fixed asset
replacement. We plan to meet our capital needs through various financing
sources, including internally generated funds and debt and equity financing.
As of December 31, 1998, we had adjusted working capital of $2.9 million,
excluding the current portion of long-term debt and accrued purchase
liabilities, and including cash and cash equivalents of $1.1 million. Our
strategy is generally to apply the cash generated from our operations that
remains available after satisfying our working capital and capital expenditure
requirements to reduce our indebtedness under our credit facility and to
minimize our cash balances. We finance our working capital requirements from
internally generated funds and bank borrowings.
During 1998, we financed our growth through an equity private placement,
borrowings under a credit facility and the issuance of common stock to sellers.
In June 1998, we raised C$10.0 million for acquisitions through the sale to our
existing investors of 553,869 shares of common stock. In September 1997, we
entered into the credit facility to provide for borrowing capacity up to C$45.5
million ($29.6 million at December 31, 1998). During 1998, we amended this
facility to provide for borrowings of up to C$67.5 million ($44.1 million at
December 31, 1998). On January 29, 1999, we amended the credit facility to
provide for borrowings of up to $65.0 million. In March 1999, we increased the
amount of available borrowings to $70.0 million. Finally, during the year ended
December 31, 1998, we issued 787,338 shares of common stock to the owners of
acquired businesses, some of which are redeemable.
For the year ended December 31, 1998, net cash provided by operations was
$2.7 million and was primarily generated by net income and non-cash items. For
the period from inception (May 23, 1997) through December 31, 1997, net cash
provided by operations was $1.2 million.
For the year ended December 31, 1998, net cash used in investing activities
was $36.2 million. Most of this was used to fund the cash portion of the
acquisitions of Rubbish Removal, GETS and 15 other small businesses. Of the net
cash used in investing activities, we spent $3.7 million for trucks, containers
and information systems. For the period from inception (May 23, 1997) through
December 31, 1997, net cash used in investing activities was $12.5 million,
which was used predominantly for capital expenditures, including the purchase of
selected assets of Canadian Waste.
Capital expenditures for 1999 are currently expected to be approximately
$9.0 million and are expected to be utilized primarily for vehicle and equipment
additions and replacements. We intend to fund our planned 1999 capital
expenditures principally through internally generated funds, capital leases and
borrowings under our credit facility.
For the year ended December 31, 1998, net cash provided by financing
activities was $32.3 million. This was provided by net borrowings of $25.7
million, and the issuance of capital stock in the amount of $6.7 million. At
December 31, 1998, we had approximately $56.7 million of long-term debt
outstanding, including the current portion. For the period from inception (May
23, 1997) through
27
<PAGE>
December 31, 1997, net cash provided by financing activities was $13.9 million,
which was provided by net borrowings of $8.2 million and $5.7 million from the
sales of common and preference stock.
We have a $70.0 million credit facility with a syndicate of banks led by
Bank of America National Trust and Savings Association, as United States agent,
Bank of America Canada as Canadian agent and Canadian Imperial Bank of Commerce
as co-agent. As of April 15, 1999, approximately $59.4 of our credit facility
was outstanding. The credit facility is secured by all of our assets, including
our interest in the equity securities of our subsidiaries. Under our credit
facility, the interest rate on U.S. dollar loans differs from the interest rate
on Canadian dollar loans. U.S. dollar loans bear interest at a LIBOR-based rate
or the lender's base rate plus applicable margin, plus 0.5%, for loans at a base
interest rate. Our Canadian dollar loans bear interest at a Bankers Acceptance
or a Canadian lender's prime rate plus applicable margin. Of the $59.4 million
outstanding amount of our loans, $23.5 million consisted of U.S. dollar loans
bearing interest at 7.5% and $35.9 million consisted of Canadian dollar loans
bearing interest at 7.6%. The credit facility will terminate in January 2002 at
which time its entire principal amount will become due. The credit facility
requires us to maintain fixed financial ratios and satisfy other predetermined
requirements, such as a minimum net worth, a minimum interest coverage ratio, a
maximum debt to EBITDA ratio and a maximum senior debt to EBITDA ratio and
imposes annual restrictions on capital expenditures. The credit facility also
restricts our ability to incur or assume other debt for borrowed money or
capital leases to fixed amounts and requires the lenders' approval for
acquisitions where the purchase price exceeds the greater of $10.0 million or
10% of our total consolidated assets and for landfill acquisitions which expose
us to liability for environmental risks in excess of a fixed amount. As of April
15, 1999, an aggregate of $8.4 million was unused and available under our credit
facility after taking into account letters of credit of $2.2 million. The
weighted average rate of interest on outstanding borrowings under the credit
facility was 7.6% as of April 15, 1999.
INFLATION
To date, inflation has not had a significant effect on our operations.
Consistent with industry practice, many of our contracts provide for a
pass-through of certain costs, including increases in landfill tipping fees and,
in some cases, fuel costs. We believe, therefore, that we should be able to
implement price increases to offset many cost increases resulting from
inflation. However, competitive pressures may require us to absorb at least part
of these cost increases, particularly during periods of high inflation.
IMPACT OF CURRENCY FLUCTUATIONS
We generate revenues and incur expenses in the Canadian dollar and in the
U.S. dollar. For the year ended December 31, 1998, approximately 67.7% of
revenues and 65.6% of income before interest and taxes was generated by
operations in Canada. To the extent the U.S. dollar rises or falls in relation
to the Canadian dollar, net revenues earned in Canadian dollars will decrease or
increase, respectively, upon translation into U.S. dollars for accounting
purposes. If we expand further into the United States, we expect the impact of
variability of foreign exchange rates on Canadian generated income before taxes
will decrease in future years.
During 1998, the unrealized exchange loss on translation of the Canadian
operations into U.S. dollars for reporting purposes amounted to $1,006. This
loss is reported as a separate component of stockholder's equity. The
corresponding loss in the period from inception until December 31, 1997 was
$151.
Realized and unrealized exchange gains and losses on foreign denominated
monetary balances and transactions have been immaterial to date.
28
<PAGE>
SEASONALITY
We expect our results of operations to 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. We
attribute this seasonality to a number of factors. First, we believe less solid
waste is generated during the late fall, winter and early spring because of
decreased construction and demolition. Second, some of our 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. Also, during the summer months, there
are more tourists and part-time residents in some of our service areas in
Ontario, resulting in more residential and commercial collection. Consequently,
we expect operating income to be generally lower during the winter.
IMPACT OF YEAR 2000
Some computer systems or software used by many companies may be unable to
distinguish 21st century dates from 20th century dates. As a result, beginning
on January 1, 2000, computer systems and software used by many companies in a
wide variety of industries will produce erroneous results or fail unless they
have been modified or upgraded to process date information correctly. To date,
we have conducted an initial inventory and issue assessment of the Year 2000
issue for our computer systems, communications equipment and other potentially
date-sensitive equipment to identify the systems and equipment, if any, that
could be affected by the Year 2000 issue. We have retained an outside consultant
to conduct and report on this assessment. The next phase will be a formal impact
assessment and conversion planning which is expected to take 30 to 60 days and
should be completed by the end of the second quarter of 1999. We expect to
complete any required systems conversions and replacement of date sensitive
equipment by the end of the third quarter of 1999. Because our operations rely
primarily on mechanical systems such as trucks to collect solid waste, we do not
expect our operations to be significantly affected by the Year 2000 issue. In
addition, we believe that if our disposal vendors encounter Year 2000 problems,
they will convert to manual billing based on scale recordings until they resolve
those issues. However, we use computer systems and software for accounting,
billing and truck routing purposes. We have obtained Year 2000 compliance
certifications from manufacturers of our main computer systems and software. In
addition, we have formulated and are in the process of distributing a standard
vendor letter for the purpose of requesting Year 2000 information, efforts,
warranties and agreements from our banks, major vendors and large and municipal
customers. Each service area was to have distributed the vendor letter by April
30, 1999 and make follow-up requests for replies by May 30, 1999. Therefore, we
expect our survey to be complete by the end of the second quarter of 1999. There
can be no assurance, however, that we will receive all requested certifications.
Given our recent formation and our reliance on mechanical technology, we
believe our own computer systems and software currently are Year 2000 ready. In
assessing our exposure to Year 2000 issues, we believe our biggest risks lie
with our banks, municipal customers and acquired businesses between the time we
acquire them and the time we implement our own systems. If these third parties
do not complete their Year 2000 modifications on time, we could experience
unanticipated expenses and delays, including delays in payment for our services
and delays in our ability to conduct normal business operations. We believe,
however, that in the most reasonably likely worst case scenario, the effects of
Year 2000 issues on our operations would be brief and small relative to our
overall operations. Our costs to date associated with the Year 2000 issue have
not exceeded $20,000, which have been paid out of internally generated funds. We
expect that we will expend no more than $100,000 in the future for this issue
because our Year 2000 review has led us to conclude that we will not encounter
significant Year 2000 problems. We will utilize internally generated funds or
borrowings under our credit facility to pay these costs. If we determine that
our vendors, banks and municipal customers will not be Year 2000 compliant, we
will put in place a contingency plan to address operation and financial
disruptions to Capital Environmental which could be caused by their
non-compliance. Our time table for developing a contingency plan is the end of
the third quarter of 1999.
29
<PAGE>
BUSINESS
INDUSTRY OVERVIEW
According to WASTE AGE, the United States solid waste services industry
generated $36.9 billion in revenues during 1997. Based on the fact that Canada's
population is one-tenth the size of the population of the United States and has
similar economic and demographic characteristics, we believe that the Canadian
solid waste services industry generated revenues of approximately one-tenth
those of the United States solid waste services industry, or $3.7 billion, in
1997. In both the United States and Canada, the solid waste industry is
comprised of a small number of large national competitors, a substantial number
of small private operators and municipal governments that own waste collection
and disposal operations. In Canada, municipalities provide waste collection
services to approximately 43% of Canadian residents and own a substantial
majority of the nation's solid waste landfills. In the United States,
approximately 27% of the total revenue of the solid waste industry is accounted
for by more than 5,000 private, predominantly small, collection and disposal
businesses, approximately 41% by publicly traded solid waste services companies
and approximately 32% by municipal governments that provide collection and
disposal services.
We believe that the solid waste industry in secondary markets of Canada and
the northern United States is characterized by the following:
- a large number of private solid waste services companies suitable for
acquisition in these markets;
- generally fewer competing national solid waste services companies in these
markets; and
- some of these markets have strong projected economic and population growth
rates.
In addition, we believe that the Canadian market for solid waste services
has the following specific attributes:
- pricing structures for collection and disposal services are generally
higher than in the United States;
- a large portion of the residential solid waste collection and disposal
market is municipally controlled, creating privatization opportunities;
and
- exclusive municipal contracts and franchise agreements are frequently
granted to a single operator.
The solid waste services industry in both Canada and the United States has
undergone significant consolidation and integration since 1990. We believe that
this consolidation and integration in both Canada and the United States has been
caused primarily by:
- the ability of larger operators to achieve certain economies of scale;
- in the United States, the trend for companies to selectively integrate
collection and disposal capabilities where publicly available disposal is
not readily available at competitive rates;
- the continued privatization of solid waste collection and disposal
services by municipalities and other governmental bodies and authorities;
and
- stringent environmental regulation and enforcement in the United States
and in certain Canadian provinces, resulting in increased capital
requirements for collection companies and landfill operators in those
areas.
ECONOMIES OF SCALE. Larger operators achieve economies of scale by
expanding the breadth of services and density in their market areas, and through
vertical integration where such integration provides these operators with an
economic advantage. Control of the waste stream in their market
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<PAGE>
areas, combined with access to significant financial resources to make
acquisitions, has allowed larger solid waste collection and disposal companies
to be more cost-effective and competitive.
SELECTIVE INTEGRATION OF COLLECTION AND DISPOSAL OPERATIONS. In the United
States, we believe operators frequently seek to become more efficient by
establishing an integrated network of solid waste collection operations,
transfer stations and disposal options where this integration provides an
economic advantage over its competitors. In Canada, operators also seek to
establish integrated solid waste services networks, where doing so provides an
economic advantage. However, since landfills in Canada are predominantly
municipally owned, and the strict regulatory framework in certain Canadian
provinces makes it difficult for private companies to obtain permits to build
landfills, we believe owning landfills has not been a significant component of
the disposal strategy for operators in Canada.
PRIVATIZATION OF COLLECTION AND DISPOSAL SERVICES. In the provinces and
states in which we operate, city or municipal governments have historically
provided a variety of solid waste services using their own personnel. Over time,
many municipalities have opted to contract out their solid waste collection and
disposal services to the private sector. Privatization is often an attractive
alternative for municipalities due, among other reasons, to the ability of
integrated operators to leverage their economies of scale to provide the
community with a broader range of services while enabling the municipality to
reduce its own capital asset requirements. We believe that these factors have
caused municipalities throughout Canada and the northern United States to
consider privatization and have created significant growth opportunities for
solid waste services companies in Canada and the northern United States.
INCREASED REGULATORY IMPACT. Stringent industry regulations such as the
Environmental Protection Act in Ontario and the Waste Management Act in British
Columbia and the Subtitle D Regulations in the United States have resulted in
rising operating and capital costs and have accelerated consolidation of the
solid waste industry in those provinces and in the United States. Many smaller
industry participants have found the costs and technical expertise required by
these regulations difficult to bear and have decided to either close their
operations or sell them to larger operators.
According to the Ontario, Alberta and British Columbia Ministries of
Environment, in these provinces there are approximately 600 to 700 operating
landfill sites, of which less than 20 are privately owned. This lack of private
landfill ownership is due to the strict regulatory framework in these Canadian
provinces, which makes it difficult for private companies to obtain permits to
build new landfills or expand existing privately owned landfills. Accordingly,
most landfills in Canada are owned by the municipality in which the landfill is
located. Municipally owned landfills in Canada and the northern United States
typically charge all customers the same price per ton of waste disposed,
regardless of the customer's size or the volume of waste it disposes of at the
facility.
Despite the considerable consolidation and integration that has occurred in
the solid waste industry since 1990, the industry in Canada and the northern
United States remains primarily regional in nature and highly fragmented. We
believe that the fragmented nature of the industry presents substantial
consolidation and growth opportunities for us.
HISTORY OF CAPITAL ENVIRONMENTAL
Capital Environmental was incorporated in Ontario, Canada on May 23, 1997 in
order to take advantage of consolidation opportunities in the solid waste
services industry in secondary markets of Canada and the northern United States.
On June 6, 1997, we acquired a series of diverse, geographically dispersed
assets from Canadian Waste, a wholly owned subsidiary of USA Waste, and 50% of
the common stock of Western Waste from USA Waste. We later purchased the
remaining outstanding common stock of Western Waste. Together, these
acquisitions provided us with solid waste collection, transfer, disposal and
recycling operations in 14 markets in Canada. In connection with these
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<PAGE>
acquisitions, we acquired approximately C$44.0 million, or $29.5 million at
April 15, 1999, in annualized revenues and approximately 200,000 customers.
CAPITAL ENVIRONMENTAL'S OBJECTIVES AND STRATEGIES
Our objective is to build a leading solid waste services company in the
secondary markets of Canada and the northern United States. In the markets in
which we operate, we seek to:
- achieve a leading market share;
- control sufficient collection volume in order to secure cost-effective
disposal capacity;
- offer the full range of services required by our customers; and
- own landfills or other disposal options in those of our collection markets
where doing so provides us with an economic advantage.
Our strategy for achieving our objective is to:
- expand our operations into new markets and service areas through platform
acquisitions which establish an initial market presence, and through
tuck-in acquisitions which complement or expand our existing operations;
- generate internal growth by providing additional and upgraded services,
increasing sales penetration and implementing selective price increases;
and
- implement operating enhancements and efficiencies.
We focus on markets that are generally characterized by:
- a large number of private solid waste services companies suitable for
acquisition;
- a geographically dispersed population, which we believe deters competition
from established waste management companies;
- a competitive environment for solid waste services that offers us the
opportunity to acquire a leading market position;
- a small number of competitors;
- the availability of adequate disposal capacity, either through municipally
owned landfills, through long-term agreements with third-parties or
acquisition of a landfill;
- a regulatory environment that is favorable for well-capitalized operators;
and
- strong projected economic or population growth rates.
Following this offering, we expect that we will be the only Canadian
headquartered, publicly-traded acquirer of Canadian solid waste companies, and
the only publicly held company that has the Canadian solid waste market as a
focus of its strategy. Combined with our senior management's knowledge of the
Canadian market, we believe we will be an attractive acquirer when owners of
Canadian firms consider selling their businesses, and a viable alternative to
the large U.S.-based solid waste companies.
EXPANSION THROUGH ACQUISITIONS. We intend to expand significantly the scope
of our operations by acquiring solid waste collection, transfer and recycling
operations and disposal capacity in existing markets through tuck-in
acquisitions and in new service areas or markets through platform acquisitions.
We believe that numerous tuck-in acquisition opportunities exist within our
current and targeted market areas. We have identified more than 125 companies
that provide collection and disposal services in our current market areas. We
believe that acquiring many of these companies would provide us
32
<PAGE>
opportunities to market additional services and to improve our market share,
route density and profitability.
We intend to continue our acquisition-based growth strategy by entering new
service areas or markets through platform acquisitions that provide significant
collection volume and strategic relationships to secure access to disposal
capacity. We target platform acquisitions of companies with strong local
management expertise and relationships which can be retained in geographic areas
generally characterized by, among other things, an attractive competitive
landscape and the ability to effect other acquisitions in the vicinity. Once we
establish a platform in a new service area or market, we seek to strengthen our
presence there and in adjacent service areas and markets by marketing additional
and upgraded services to existing customers, adding new customers and making
tuck-in acquisitions.
INTERNAL GROWTH. To generate continued internal growth, we intend to:
- provide additional or upgraded waste services to our existing customers;
- increase sales penetration through intensified sales and marketing efforts
and bidding for new municipal contracts; and
- implement selective price increases.
OPERATING ENHANCEMENTS FOR ACQUIRED AND EXISTING BUSINESSES. We have
established standards for each of our markets which set operating criteria for
collection, transfer, disposal and other operations. These criteria include
collection and disposal routing efficiency, equipment utilization, cost
controls, commercial weight tracking and employee training and safety
procedures.
We have a decentralized operating strategy which encourages our employees to
develop cross-functional expertise, and thereby better serve the local markets
in which they operate. We believe that the cross-functional expertise of our
employees reduces selling, general and administrative costs and gives general
managers an opportunity to assume greater responsibility. While we have
developed certain company-wide operating and financial standards, such as the
use of the TRUX-Registered Trademark- software program and consolidated
bookkeeping, accounting and cash management controls for each of our 26 market
areas, we tailor our customer management for each of our markets based on
industry standards and local conditions.
ACQUISITION PROGRAM
We currently serve 26 markets in seven service areas in the provinces of
Ontario, Alberta and British Columbia and in the states of New York and
Pennsylvania. We also provide limited waste collection services in the province
of Quebec from our Ottawa, Ontario market. We believe that these and other
secondary markets in Canada and the northern United States with similar
characteristics offer significant opportunities for expanding the scope of our
operations and achieving our strategic objectives. We have assembled an
experienced team of acquisition professionals, including operations,
environmental, engineering, legal and financial personnel, each engaged in
identifying and evaluating acquisition opportunities.
We have developed a set of financial, geographic, environmental and
management criteria to assist management in evaluating acquisition candidates.
Management uses these criteria to evaluate a variety of factors, including, but
not limited to:
- the candidate's expected internal rate of return, return on assets and
return on revenue;
- the candidate's historical and projected financial performance;
- any potential operating cost savings that may be gained by combining the
candidate's operations with ours;
33
<PAGE>
- whether the geographic location of the candidate will enhance or expand
our market area or ability to attract other acquisition candidates;
- whether the acquisition will strengthen or increase our local market
position;
- the experience of the candidate's management and customer service
providers, their relationships with local communities and their
willingness to continue as our employees;
- the composition and size of the candidate's customer base and whether the
customer base is served under municipal contracts or other exclusive
arrangements;
- the liabilities of the candidate, including its environmental liabilities;
and
- the nature of the services provided.
Before completing an acquisition, our acquisition team, led by a corporate
development officer and supported by a service area Vice President, performs
extensive environmental, operational, engineering, legal, human resources and
financial due diligence. All acquisitions are subject to initial evaluation and
approval by our acquisition team and our senior management before being
recommended to our Board of Directors, which reviews any acquisition where the
purchase price exceeds C$5.0 million.
We seek to integrate each acquired business promptly and to minimize
disruption to the ongoing operations of both Capital Environmental and the
acquired business, and generally attempt to retain the senior management of
acquired businesses. Integration of an acquired operation is achieved by
implementing our 80-point acquisition checklist, which addresses key areas for
integration including human resources, finance and administration, asset
maintenance and marketing and public relations. The service area Vice President
and the appropriate corporate development officer assume primary responsibility
for implementing the 80-point acquisition checklist and improving the acquired
company's administrative efficiency, profitability and operational productivity.
We reward our service area Vice Presidents for the successful integration of a
newly acquired company through bonuses. We generally seek to integrate an
acquired business within 90 days of its acquisition.
34
<PAGE>
We have completed the following acquisitions of companies, businesses or
selected assets of companies, as of the date set forth in the chart below:
<TABLE>
<CAPTION>
ACQUISITION SERVICES MARKET AREAS DATE
- --------------------------- --------------------------- --------------------------- -------------------------
<S> <C> <C> <C>
ONTARIO:
Canadian Waste Collection Barrie, Brantford, Sarnia, June 6, 1997
Ottawa and Kitchener
Kingswood International Collection Brantford October 31, 1997
Maple Leaf Disposal Collection and Transfer Penetanguishene December 31, 1997
Browning Ferris Industries Collection Sarnia and Peterborough March 31, 1998
Muskoka Containerized Collection, Transfer and Bracebridge April 1, 1998
Services Landfill Management
John's Cartage Collection Lindsay July 1, 1998
McGill Environmental Collection and Transfer Orillia July 13, 1998
BSD Environmental Solutions Collection and Transfer Scarborough August 31, 1998
Canadian Waste Collection Hamilton and Burlington October 20, 1998
Bales Transfer Station Transfer Newmarket November 27, 1998
City Waste Systems Collection Kitchener November 30, 1998
Can Pak Waste Management Collection Uxbridge February 8, 1999
Ram-Pak Compaction Services National Account and March 1, 1999
Compactor Sales and
Leasing
Effective Waste Management Collection Scarborough March 8, 1999
Services
Premier Waste Collection and Transfer Hamilton and Burlington April 30, 1999
WESTERN CANADA:
Western Waste Collection Edmonton, Calgary, June 6, 1997/
Lakeland(1), Red Deer, November 1, 1997(2)
Comox Valley, Parksville,
Nanaimo and Penticton
Canadian Waste Collection and Transfer Burnaby June 6, 1997
Edmonton
Calgary
Alberta Waste Collection Calgary May 1, 1998
Excel Disposal Service Collection Vernon April 16, 1999
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION SERVICES MARKET AREAS DATE
- --------------------------- --------------------------- --------------------------- -------------------------
<S> <C> <C> <C>
NORTHERN UNITED STATES:
Rubbish Removal Collection and National Syracuse and Rochester, NY January 2, 1998
Account
Raite Rubbish Removal Collection Syracuse, NY April 1, 1998
Royal T. Collection Syracuse, NY June 26, 1998
ICW Collection Williamsport, PA July 15, 1998
and Transfer
Tousley Trash Service Collection Syracuse, NY August 24, 1998
GETS Collection Rochester, NY October 1, 1998
Potter's Trash Service Collection Syracuse, NY October 2, 1998
Clark Enterprises Collection Watertown, NY February 1, 1999
Lossell Container Service Collection Williamsport, PA February 5, 1999
</TABLE>
- ------------------------
(1) In October 1998, we sold our operations in Lakeland to Canadian Waste. These
operations generated approximately C$1.0 million in revenue in 1998.
(2) Capital Environmental acquired 50% of the common stock of Western Waste on
June 6, 1997, an additional 16.7% interest thereafter and the remaining
33.3% on November 1, 1997.
SERVICE AREAS
We operate on a decentralized basis, which places decision making authority
with operating management close to the customer. This enables us to identify
customer needs and competitive conditions quickly. We divide our operations into
seven service areas. We currently serve 26 market areas covering three
geographic territories: Ontario, currently comprised of the Eastern, Central and
Southwestern Ontario service areas, western Canada, currently comprised of the
Alberta and British Columbia service areas and the northern United States
currently comprised of the Western New York and Central New York/Pennsylvania
service areas. Within each service area we have tailored our competitive
strategy and identified multiple market areas which can support a local
operation. We will create new service areas as required to accommodate growth.
We currently have four service area Vice Presidents serving our seven
service areas, each of whom reports directly to our President. A service area
Vice President manages all the operations of a service area with the help of
general managers in most market areas. The service area Vice President is
responsible for budgeting, internal growth, municipal contract bidding,
coordination of operations, attaining economies of scale within the service
area, monthly reporting and integration of acquired businesses. The market area
general managers are responsible for maintaining service quality, promoting
safety, implementing marketing programs, cost management, and overseeing
day-to-day operations, including sales supervision and the management of
customer service agreements.
Our financial management, accounting, mergers and acquisitions,
environmental compliance, risk management and certain personnel functions are
centralized to improve productivity, lower operating costs and ensure
consistency of financial and operating standards. We have installed a
standardized management information system that assists market area personnel in
making decisions based on real time financial, productivity, maintenance and
customer information. While service area management operates with a high degree
of autonomy, our corporate management monitors service area operations and
requires adherence to our accounting, purchasing and internal control policies,
particularly with respect to financial and compliance matters. Our executive
officers review the performance of our service area Vice Presidents and
operations on a regular basis.
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<PAGE>
The following are our seven service areas by geographic territory:
ONTARIO
We have three service areas within the province of Ontario: Eastern Ontario,
Central Ontario and Southwestern Ontario. We established a market presence in
Ontario through our acquisition of selected assets from Canadian Waste in June
1997.
EASTERN ONTARIO SERVICE AREA. The Eastern Ontario service area is currently
made up of four
markets, Peterborough, Lindsay, Ottawa and Scarborough. It encompasses
approximately 5,930 square miles with a combined population of approximately 3.2
million residents and is characterized by a broad geographic territory with
pockets of more densely populated areas. In Peterborough and Lindsay, we dispose
of waste at municipal landfills. In Ottawa, we have secured a disposal contract
with a privately owned landfill which we believe is at or below market rates. In
Scarborough, we have acquired a transfer station that provides us an opportunity
to dispose of solid waste at remote disposal sites. In this service area, we
provide commercial and industrial collection and recycling services, and,
through municipal contracts with the City of Scarborough and the Regional
Municipality of Ottawa-Carleton and Gatineau, Quebec, we provide residential
collection and recycling services. We also operate a material recycling facility
in the Lindsay market area.
CENTRAL ONTARIO SERVICE AREA. The Central Ontario service area is currently
comprised of five markets, Penetanguishene, Barrie, Orillia, Bracebridge and
Newmarket. It encompasses approximately 9,125 square miles and has a combined
population of approximately 589,000 residents. The Central Ontario service area
is characterized by municipally owned landfills. We have also acquired four
transfer stations that provide us with the opportunity to dispose of solid waste
at remote disposal sites. We provide commercial and industrial collection and
recycling services and through municipal contracts in Bracebridge, Gravenhurst,
Huntsville, Parry Sound and Muskoka Lakes, we provide residential collection and
recycling services. We also operate a materials recycling facility in each of
Bracebridge and Orillia. We operate two landfills in Gravenhurst and
Bracebridge.
SOUTHWESTERN ONTARIO SERVICE AREA. Our Southwestern Ontario service area,
which currently includes four markets, Brantford, Kitchener, Hamilton and
Sarnia, encompasses approximately 4,177 square miles and has a combined
population of approximately 1.4 million residents. We operate a transfer station
in Hamilton. We also have disposal capacity in the Hamilton and Sarnia market
areas through disposal agreements with third-party disposal sites that we
believe are at or below market rates. Though we presently dispose of no waste
outside of Canada, the Southwestern Ontario service area provides us with the
ability to access disposal alternatives in the United States at rates which are
competitive with local third-party and municipal disposal alternatives. We
provide commercial and industrial collection and recycling services to our
customers in the Southwestern Ontario service area, and through municipal
contracts in Brantford, Paris, and Cambridge, we provide residential collection
and recycling services.
WESTERN CANADA
We have two service areas in western Canada: the southern portion of British
Columbia and the southern and central portions of Alberta. We established a
market presence in western Canada through our acquisition of the shares of
Western Waste and the acquisition of selected assets of Canadian Waste in June
1997.
BRITISH COLUMBIA SERVICE AREA. Our service area in British Columbia
currently includes six markets in Burnaby, Penticton, Vernon, Nanaimo,
Parksville and Comox. It encompasses approximately 2,600 square miles, has a
population of approximately 2.8 million residents and is characterized by
municipal disposal opportunities. We provide commercial and industrial
collection and recycling services to our
37
<PAGE>
customers in the British Columbia service area, and through municipal contracts
in Vernon, Nanaimo, Ladysmith, Courtney and Comox, we provide residential
collection and recycling services. We have materials recycling facilities in
each of Parksville, Nanaimo and Comox. We have a franchise agreement with the
City of Penticton that provides us with the exclusive right to provide
commercial, industrial and residential services within the city's boundaries.
ALBERTA SERVICE AREA. Our Alberta service area, which currently includes
three markets in Edmonton, Calgary and Red Deer, encompasses approximately
13,600 square miles and has a population of approximately 2.0 million residents.
We estimate that half of the solid waste we collect in the Alberta service area
is disposed of at municipally owned landfill sites and the other half is
disposed of through a long-term arrangement with a private landfill operator. We
provide commercial and industrial collection and recycling services to our
customers in the Alberta service area. We own and operate a transfer station in
Edmonton. We have a franchise agreement with the City of Red Deer that provides
us with the exclusive right to provide commercial and residential services
within the city's boundaries.
NORTHERN UNITED STATES
We have two service areas in the northern United States: Western New York
and Central New York/Pennsylvania. We established our market presence in the
northern United States through the acquisition of Rubbish Removal in January
1998.
WESTERN NEW YORK SERVICE AREA. Our Western New York service area, which
currently includes one market area in Rochester, encompasses approximately 900
square miles. It has a population of approximately 1.3 million residents and is
characterized by numerous alternatives for disposal. We provide commercial and
industrial collection services to our customers in this service area, and
residential collection services through subscription arrangements.
CENTRAL NEW YORK/PENNSYLVANIA SERVICE AREA. Our Central New
York/Pennsylvania service area, which currently includes three market areas in
Syracuse and Watertown, New York and Williamsport, Pennsylvania, encompasses
approximately 7,346 square miles and has a population of approximately 760,000
residents. The area is characterized by flow control regulations in Syracuse and
municipally owned disposal options in the other market areas. We own and operate
a transfer station in Williamsport. We provide commercial and industrial
collection and recycling services to our customers in the Central New
York/Pennsylvania service area, and through subscription arrangements in greater
Williamsport and Syracuse, we provide residential collection and recycling
services.
OPERATIONS
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES
As of December 31, 1998, we served approximately 544,000 customers,
comprised of approximately 22,000 commercial clients, approximately 2,000
industrial clients and approximately 520,000 residential clients.
We dispose of the waste we collect in one of four ways:
- at municipally owned landfills or incinerators that generally charge the
same per-ton disposal rates to all customers;
- under long-term disposal contracts with private landfill owners or
operators at market rates or, in some instances, at below market rates;
- through our own transfer stations that give us access to remote landfill
sites; or
- at privately owned landfills on an as needed basis.
38
<PAGE>
Our commercial and industrial services are performed under one to three year
service agreements or shorter term purchase orders. Our fees are determined by a
variety of factors, including collection frequency, level of service, route
density, the type, volume and weight of the waste collected, type of equipment
and containers furnished, the distance to the disposal or processing facility,
the cost of disposal or processing and prices charged in its markets for similar
service. Collection of larger volumes associated with commercial and industrial
waste streams generally helps improve our operating efficiencies, and
consolidation of these volumes allows us to negotiate more favorable disposal
prices. Our commercial and industrial customers use portable containers for
storage, enabling us to service many customers with fewer collection vehicles.
Commercial and industrial collection vehicles normally require one operator. We
provide two to eight cubic yard containers to commercial customers and 10 to 50
cubic yard containers to industrial customers. No single commercial or
industrial contract is material to our results of operations.
We generate fees under exclusive municipal contracts that grant us the right
to service all or a portion of the residences in a specified community for a set
fee. As of December 31, 1998, we had 76 municipal contracts, some of which were
awarded by the same municipality. Municipal contracts are typically awarded on a
competitive bid basis and thereafter on a bid or negotiated basis. No single
municipal contract is material to our results of operations. Similarly, we have
long-term franchise agreements with the cities of Red Deer, Alberta and
Penticton, British Columbia. Under the terms of each of these agreements, we
have exclusive rights to provide a range of solid waste services to the
community. In Red Deer, the service provisions are commercial and residential,
and in Penticton, commercial, industrial and residential. Each of the franchise
agreements was bid on a competitive bid basis. Rates for all service provisions
are set for the term of the agreement. We have approximately three years
remaining under both franchise agreements, which were originally five-year
agreements.
Our fees for residential solid waste services performed on a subscription
basis are based primarily on route density, the frequency and level of service,
the distance to the disposal or processing facility, the cost of disposal or
processing and prices charged in its markets for similar service. No single
residential subscription arrangement is material to our results of operations.
TRANSFER STATION SERVICES
We have an active program to acquire, develop, own and operate transfer
stations proximate to our operations. Currently, we operate a transfer station
in each of Edmonton, Alberta; Bracebridge, Hamilton, Newmarket, Penetanguishene,
Orillia and Scarborough, Ontario; and Williamsport, Pennsylvania. Each transfer
station receives, compacts and transfers solid waste to larger vehicles for
transport to landfills. We generally seek to establish a transfer station
network in service areas where we can gain access to remote disposal capacity at
rates that are lower than local municipal or third-party disposal options. We
believe that additional benefits of building a transfer station network include:
- concentrating the waste stream from a wider area, which gives us greater
leverage in negotiating for more favorable disposal rates at remote
landfill sites;
- improving utilization of collections personnel and equipment; and
- building relationships with municipalities and private operators that
deliver waste, which can lead to additional growth opportunities.
LANDFILLS
We seek to pursue an integrated approach to the solid waste business whereby
we will own landfills in those areas where ownership provides an economic
advantage and not own landfills in markets which provide ample disposal capacity
and equal access to disposal sites for all solid waste
39
<PAGE>
collection companies. At present we do not own any landfills; however, we
operate two landfills in Ontario. The markets in which we currently operate are
distinguished by one or more of the following characteristics:
- most landfills within a reasonable hauling distance are municipally owned
and charge common disposal rates;
- we have entered into a long-term disposal contract with a private landfill
owner or operator at or below market rates;
- local "flow control" regulations require us to dispose of the solid waste
we collect at the local, municipally owned incinerator or landfill; or
- excess disposal capacity exists in the market resulting in a depressed
market rate structure and little incentive to own landfills.
As a result, for the month ended December 31, 1998, we disposed of
approximately 24.8% of the solid waste we collected at privately owned or
operated landfills or transfer stations pursuant to long-term disposal
agreements which we believe are at or below market rates. Additionally, we
disposed of approximately 41.2% of the solid waste we collected at municipally
owned landfills which generally charge the same disposal rates to all customers.
We disposed of approximately 14.5% of the solid waste we collected through our
transfer stations, from which we transfer the waste to remote diposal sites
where we have favorable disposal contracts. Collectively, these three options
accounted for approximately 80.5% of the solid waste we collected. We disposed
of the remaining 19.5% of the solid waste we collected at other third-party
disposal sites.
We operate landfills in the towns of Bracebridge and Gravenhurst, Ontario
under a landfill management contract with the District Municipality of Muskoka,
which we expect will expire in December 2001. We intend to rebid this contract
when it expires. The responsibility for closure and post-closure costs including
any financial assurance requirements and cell development costs remains with the
owners of the landfills.
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<PAGE>
The following chart sets forth the disposal characteristics of each of our
current market areas:
<TABLE>
<CAPTION>
CAPITAL ENVIRONMENTAL LONG- TERM MUNICIPAL
TRANSFER DISPOSAL OWNERSHIP OF
MARKET AREA STATION CONTRACT LOCAL LANDFILLS
- -------------------------------------------------------- ------------------------- ------------- -------------------
<S> <C> <C> <C>
ONTARIO
EASTERN ONTARIO
Lindsay............................................. X
Peterborough........................................ X
Ottawa.............................................. X X
Scarborough......................................... X X
CENTRAL ONTARIO
Barrie.............................................. X
Penetanguishene..................................... X X
Bracebridge (1)..................................... X X
Orillia............................................. X X
Newmarket........................................... X
SOUTHWESTERN ONTARIO
Sarnia.............................................. X
Kitchener........................................... X
Brantford........................................... X
Hamilton............................................ X X
WESTERN CANADA
ALBERTA
Edmonton............................................ X X
Calgary............................................. X
Red Deer............................................ X
BRITISH COLUMBIA
Burnaby............................................. X
Penticton........................................... X
Comox Valley........................................ X
Parksville.......................................... X
Nanaimo............................................. X
Vernon.............................................. X
NORTHERN UNITED STATES
WESTERN NEW YORK
Rochester...........................................
CENTRAL NEW YORK/ PENNSYLVANIA
Williamsport........................................ X X
Syracuse (2)........................................ X
Watertown........................................... X
<CAPTION>
NUMEROUS
DISPOSAL
MARKET AREA ALTERNATIVES
- -------------------------------------------------------- ---------------
<S> <C>
ONTARIO
EASTERN ONTARIO
Lindsay.............................................
Peterborough........................................
Ottawa..............................................
Scarborough.........................................
CENTRAL ONTARIO
Barrie..............................................
Penetanguishene.....................................
Bracebridge (1).....................................
Orillia.............................................
Newmarket...........................................
SOUTHWESTERN ONTARIO
Sarnia..............................................
Kitchener...........................................
Brantford...........................................
Hamilton............................................
WESTERN CANADA
ALBERTA
Edmonton............................................
Calgary............................................. X
Red Deer............................................
BRITISH COLUMBIA
Burnaby............................................. X
Penticton...........................................
Comox Valley........................................
Parksville..........................................
Nanaimo.............................................
Vernon..............................................
NORTHERN UNITED STATES
WESTERN NEW YORK
Rochester........................................... X
CENTRAL NEW YORK/ PENNSYLVANIA
Williamsport........................................
Syracuse (2)........................................
Watertown...........................................
</TABLE>
- ------------------------
(1) Includes two landfills that we currently operate under a municipal contract
with the District Municipality of Muskoka in the towns of Bracebridge and
Gravenhurst.
(2) Our Syracuse market is also characterized by "flow control" regulations
which require us to dispose of the solid waste we collect at a local,
municipally owned incinerator.
RECYCLING
We offer municipal, commercial and industrial customers services for a
variety of recyclable materials, including cardboard, office paper, plastic
containers, glass bottles, fiberboard, and ferrous
41
<PAGE>
and aluminum metals. We operate six recycling processing facilities in Orillia,
Lindsay, Bracebridge, Comox, Parksville and Nanaimo and sell other collected
recyclable materials to third parties for processing before resale. In an effort
to reduce our exposure to commodity price fluctuation on recycled materials, we
have adopted a pricing strategy of charging collection and processing fees for
recycling volume collected from third parties. We believe that recycling will
continue to be an important component of provincial, state and local solid waste
management plans, due to the public's increasing environmental awareness and
regulations that mandate or encourage recycling.
OTHER SPECIALIZED SERVICES
Our specialized waste management services consist primarily of contract
waste management services for chain stores with multiple locations. Under our
contract management program, we have secured exclusive contracts to provide
comprehensive waste management services to large companies on a national or
regional basis. These services are performed directly by us or, in areas where
we have no present operations, by our subcontractors. We expect that the
percentage of revenues attributable to our contract management program will
decline as our other businesses continue to grow. In addition, in certain market
areas, we provide portable toilet services for certain special events or
construction sites.
Our specialized waste management services described above generated revenues
of $7.0 million for the year ended December 31, 1998, representing approximately
11.3% of our total revenue for this period.
SALES AND MARKETING
We market our services on a decentralized basis principally through our
general managers and direct sales representatives. We believe that this
structure enables us to deliver better customer service by encouraging our
employees to develop cross-functional expertise. We emphasize providing quality
service to ensure customer retention and believe that we will attract customers
in the future because of our reputation for quality service.
Our sales representatives visit customers on a regular basis and call upon
potential new customers within a specified territory or service area, including
high-growth areas in our current markets and in markets we do not currently
serve. We believe that we distinguish ourselves from our competitors by
compensating our sales representatives with a relatively higher base salary and
profit sharing compared to the traditional high commission, low base salary
model. We believe that this compensation structure provides our sales
representatives with the proper incentives to maximize our profitability.
In Canada, most residential waste collection and disposal services are
provided to a municipality or other government authority through exclusive
municipal contracts or franchise agreements and these residential services
typically are not provided directly to individual customers. We have been the
successful bidder for numerous new contracts with municipalities and other
governmental agencies and believe that opportunities for obtaining these
contracts are increasing due to trends among municipalities to privatize or
outsource solid waste services. Accordingly, our sales representatives monitor
our existing markets and new market areas for opportunities to bid for municipal
contracts which will provide us with an appropriate rate of return.
We have a diverse customer base. No single contract or customer accounted
for more than 3.0% of our revenues during the year ended December 31, 1998.
COMPETITION
The solid waste services industry in Canada and the northern United States
is highly competitive and fragmented and requires substantial labor and capital
resources.
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<PAGE>
The Canadian solid waste industry presently includes two large national
waste companies: Waste Management, Inc., operating through its Canadian
subsidiary, Canadian Waste, and Browning Ferris Industries. We believe that
there are currently no other publicly held solid waste companies operating in
Canada. The United States solid waste industry presently includes four large
national waste companies: Allied Waste Industries, Inc., Browning Ferris
Industries, Republic Services Group, Inc. and Waste Management, Inc. Several
other public solid waste services companies have annual revenues in excess of
$100 million, including Waste Connections, Inc., Casella Waste Systems, Inc.,
Superior Services, Inc. and Waste Industries, Inc.
Certain of the secondary markets in which we compete or will likely compete
are served by one or more large, national solid waste companies, as well as by
numerous regional and local solid waste companies of varying sizes and
resources, some of which have accumulated substantial goodwill in their markets.
We also compete with operators of alternative disposal facilities, including
incinerators, and with counties, municipalities, and solid waste districts that
maintain their own waste collection and disposal operations. Public sector
operations may have financial advantages over us, because of their access to
user fees and similar charges, tax revenues and tax-exempt financing.
We compete for collection, transfer and disposal volume based primarily on
the price and quality of our services. From time to time, competitors may reduce
the prices of their services in an effort to expand their market share or
service areas or to win competitively bid municipal contracts. These practices
may cause us to reduce the prices of our services or, if we elect not to do so,
to lose business.
We derive a portion of our revenue from exclusive municipal contracts that
require competitive bidding by potential service providers. In the future we
intend to bid on additional municipal contracts and to rebid existing municipal
contracts, but our bids may not succeed.
Competition exists not only for collection, transfer and disposal volume,
but also for acquisition candidates. We generally compete for acquisition
candidates with publicly owned regional, in the northern United States, and
large national, in Canada and the northern United States, waste management
companies.
REGULATION
INTRODUCTION
We are subject to evolving Canadian federal, provincial and local and United
States federal, state and local environmental laws and regulations, the
enforcement of which has become increasingly stringent in recent years. The
United States regulations affecting us are administered by the Environmental
Protection Agency and other federal, state and local environmental, zoning,
health and safety agencies and government offices. The Canadian environmental
regulations affecting us are administered by a variety of federal, provincial
and local agencies and government offices. We believe that we are currently in
substantial compliance with material applicable federal, provincial, state and
local environmental laws, permits, orders and regulations, and we do not
currently anticipate any material environmental costs necessary to bring our
operations into compliance, although there can be no assurance in this regard.
We anticipate that regulation, legislation and regulatory enforcement actions
related to the solid waste services industry will continue to increase. We
attempt to anticipate future regulatory requirements and to plan in advance as
necessary to comply with them.
To transport and manage solid waste, we must possess and comply with one or
more permits from federal, provincial, state or local agencies and government
offices. These permits also must be periodically renewed and may be modified or
revoked by the issuing agency.
The principal federal, provincial, state and local statutes and regulations
that apply to our operations are described below.
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<PAGE>
CANADIAN REGULATION
Our operations and activities in Canada are subject to a number of
environmental statutes and regulations at the federal, provincial and local
level. Among other things, these laws impose restrictions designed to control
air, soil and water pollution and regulate health, safety, zoning, land use and
the handling of hazardous and non-hazardous wastes. This regulatory framework
imposes significant compliance burdens and risks on us. Management believes that
we are currently in substantial compliance with material applicable
environmental laws. Our operations are principally governed by the laws of
Ontario, Quebec, British Columbia and Alberta.
ONTARIO. Ontario's Environmental Protection Act, including Ontario
Regulation 347, which regulates general waste management and Regulation 232/98,
which regulates landfill standards, prescribes the principal standards for waste
management systems, transfer and disposal sites. It also creates environmental
offenses for spills, unlawful discharges or failure to comply with permits or
approvals.
The operation of a waste management system or a transfer or disposal site
requires a certificate of approval or a provisional certificate of approval
issued by the Ontario Ministry of the Environment under Part V of the Ontario
Environmental Protection Act. Regulations 347 and 232/98 prescribe standards for
the location, maintenance and operation of transfer or disposal sites.
All environmental regulations in Ontario, including those related to waste
management, are currently under review by the Ontario Ministry and are
anticipated to be reformed and updated. These revised regulations are expected
to impose additional requirements on us, the full extent of which are presently
unknown.
Contravention of the Ontario Environmental Protection Act or the related
regulations may result in substantial fines which could equal or exceed the
amount of monetary benefit acquired as a result of the commission of the
offense. Enforcement and compliance orders and injunctions may also be granted
against persons in breach of the legislation or the regulations.
ALBERTA. Alberta's environmental laws have been largely consolidated in the
Environmental Protection and Enhancement Act which comprehensively regulates the
management and control of waste, including hazardous waste, and creates offenses
for spills and other matters of non-compliance. The Waste Control Regulation
deals in detail with the identification of wastes and requirements for the
handling, storage and disposal of waste. Failure to comply with these
requirements may expose us to substantial liabilities or penalties.
BRITISH COLUMBIA. Our operations in British Columbia are regulated
primarily through that province's Waste Management Act and the regulations under
that Act. This legislation authorizes the making of regulations and policies to
comprehensively address waste management issues. It also creates offenses
related to unlawful discharges and other matters. We may be subjected to
administrative orders and/or prosecutions for breach of regulatory requirements
that could result in the imposition of substantial costs or penalties that could
materially affect our financial position. Various other provincial statutes,
such as the Environmental Management Act and the Transportation of Dangerous
Goods Act deal generally with environmental matters and could impact our
operations in British Columbia.
QUEBEC. Quebec's Environmental Quality Act and the regulations pursuant
thereto prescribe the principal standards for waste management systems, transfer
and disposal sites.
The establishment and operation of a waste management system, or a part of a
waste management system, requires an operating permit under the Environmental
Quality Act. To obtain a modification of the activities or materials referred to
in a permit, the permit holder must satisfy the conditions for the issuance of a
permit which apply to the new materials or activities to be covered by the
permit.
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<PAGE>
Contravention of the Environmental Quality Act, or the related regulations
or permits issued under the Act or regulations may result in fines which may
equal the amount of monetary benefit acquired as a result of the commission of
the offense, and the Minister of the Environment may make orders to cease
certain activities.
UNITED STATES REGULATION
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976. RCRA regulates the
generation, treatment, storage, handling, transportation and disposal of solid
waste and requires states to develop programs to ensure the safe disposal of
solid waste. RCRA divides solid waste into two groups, hazardous and
non-hazardous. Wastes classified as hazardous under RCRA are subject to much
stricter regulation than wastes classified as non-hazardous.
In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, methane gas emission control
requirements, groundwater remediation standards and corrective action
requirements. The Subtitle D Regulations also require new landfill sites to meet
more stringent liner design criteria to keep leachate out of groundwater. Each
state is required to revise its landfill regulations to meet these requirements
or these requirements will be automatically imposed by the EPA on landfill
owners and operators in that state. Each state is also required to adopt and
implement a permit program or other appropriate system to ensure that landfills
in each state comply with the Subtitle D Regulations. Various states in which we
operate or in which we may operate in the future have adopted regulations or
programs as stringent as, or more stringent than, the Subtitle D Regulations.
THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972. The Clean Water Act
regulates the discharge of pollutants from a variety of sources into waters of
the United States. If run-off from our transfer stations or run-off or collected
leachate from landfills operated or owned by us in the future is discharged into
streams, rivers or other surface waters, the Clean Water Act would require us to
apply for and obtain a discharge permit, conduct sampling and monitoring and,
under certain circumstances, reduce the quantity of pollutants in the discharge.
Also, virtually all landfills are required to comply with the EPA's storm water
regulations issued in November 1990, which are designed to prevent contaminated
landfill storm water run-off from flowing into surface waters. We believe that
our transfer station facilities comply in all material respects with the Clean
Water Act requirements. Various states in which we operate or in which we may
operate in the future have adopted regulations that are more stringent than the
federal requirements.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF
1980. CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA imposes strict joint and several liability for cleanup of facilities on
current owners and operators of the site, former owners and operators of the
site at the time of the disposal of the hazardous substances, any person who
arranges for the transportation, disposal or treatment of the hazardous
substances, and the transporters who select the disposal and treatment
facilities. CERCLA also imposes liability for the cost of evaluation and
remediation of any damage to natural resources. The costs of a CERCLA
investigation and cleanup can be very substantial. Liability under CERCLA may be
based on the existence of small amounts of the more than 700 "hazardous
substances" listed by the EPA, many of which can be found in household waste. If
we were found to be a responsible party for a CERCLA cleanup, the enforcing
agency could hold us, or any other generator, transporter or the owner or
operator of the contaminated facility, responsible for all investigative and
remedial costs, even if others were also liable. CERCLA gives a responsible
party the right to bring a contribution action against other responsible parties
for their allocable shares of investigative and remedial costs. Our
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<PAGE>
ability to obtain reimbursement from others for their allocable shares of these
costs would be limited by our ability to find other responsible parties and
prove the extent of their responsibility and by the financial resources of these
other parties.
THE CLEAN AIR ACT. The Clean Air Act regulates emissions of air pollutants
from certain landfills depending on the date of the landfill construction, and
the location of the landfill and the materials disposed at the landfill. The EPA
has also issued standards regulating the disposal of asbestos-containing
materials under the Clean Air Act. Air permits to construct may be required for
gas collection and flaring systems, and operating permits may be required,
depending on the estimated volume of emissions.
All of the federal statutes described above contain provisions authorizing,
under certain circumstances, the institution of lawsuits by private citizens to
enforce the provisions of the statutes. In addition to a penalty award to the
United States government, some of those statutes authorize an award of
attorneys' fees to parties successfully advancing such an action.
THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970. The OSH Act is administered
by the Occupational Safety and Health Administration, and in many states by
state agencies whose programs have been approved by OSHA. The OSH Act
establishes employer responsibilities for worker health and safety, including
the obligation to maintain a workplace free of recognized hazards likely to
cause death or serious injury, to comply with adopted worker protection
standards, to maintain certain records, to provide workers with required
disclosures and to implement certain health and safety training programs.
Various OSHA standards may apply to our operations, including standards
concerning notices of hazards, the handling of asbestos and asbestos-containing
materials, and worker training and emergency response programs.
FLOW CONTROL/INTERSTATE WASTE RESTRICTIONS. Certain permits and approvals,
as well as certain state and local regulations, may limit a landfill to
accepting waste that originates from specified geographic areas, restrict the
importation of out-of-state waste or otherwise discriminate against out-of-state
waste. These restrictions, generally known as flow control restrictions, are
controversial, and some courts have held that some flow control schemes violate
constitutional limits on state or local regulation of interstate commerce. From
time to time, federal legislation is proposed that would allow some local flow
control restrictions. Although no such federal legislation has been enacted to
date, if this federal legislation should be enacted in the future, states in
which we operate or, in the future own, landfills could act to limit or prohibit
the importation of out-of-state waste or direct that wastes be handled at
specified facilities. These state actions could adversely affect any landfills
we may own in the future. These restrictions may also result in higher disposal
costs for our collection operations. If we were unable to pass these higher
costs through to our customers, our business, financial condition and results of
operations could be adversely affected.
Even in the absence of federal legislation, certain state and local
jurisdictions may seek to enforce flow control restrictions through local
legislation or contractually and, in certain cases, we may elect not to
challenge these restrictions based on various considerations. These restrictions
could result in the volume of waste going to landfills being reduced in certain
areas, which may adversely affect our ability to operate landfills we may own in
the future at their full capacity and/or reduce the prices that we can charge
for landfill disposal services. If we own landfills in the future, these
restrictions may also result in higher disposal costs for our collection
operations. If we were unable to pass these higher costs through to our
customers, our business, financial condition and results of operations could be
adversely affected.
STATE AND LOCAL REGULATION. Each state in which we now operate or may
operate in the future has laws and regulations governing the generation,
storage, treatment, handling, transportation and disposal of solid waste,
occupational safety and health, water and air pollution and, in most cases, the
siting,
46
<PAGE>
design, operation, maintenance, closure and post-closure maintenance of
landfills and transfer stations. In addition, many states have adopted statutes
comparable to, and in some cases more stringent than, CERCLA. These statutes
impose requirements for investigation and cleanup of contaminated sites and
liability for costs and damages associated with these sites, and some provide
for the imposition of liens on property owned by responsible parties.
Furthermore, many municipalities also have ordinances, local laws and
regulations affecting our operations. These include zoning and health measures
that limit solid waste management activities to specified sites or activities,
flow control provisions that direct the delivery of solid wastes to specific
facilities, laws that grant the right to establish franchises for collection
services and then put these franchises out for bid, and bans or other
restrictions on the movement of solid wastes into a municipality.
Permits or other land use approvals with respect to a landfill, as well as
state or local laws and regulations, may specify the quantity of waste that may
be accepted at the landfill during a given time period, and/or specify the types
of waste that may be accepted at the landfill. Once an operating permit for a
landfill is obtained, it must generally be renewed periodically.
There has been an increasing trend at the state and local level to mandate
and encourage waste reduction at the source and waste recycling, and to prohibit
or restrict the disposal of certain types of solid wastes, such as yard wastes,
leaves and tires, in landfills. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
affect our ability to operate our transfer facilities at their full capacity.
Some state and local authorities enforce certain federal laws in addition to
state and local laws and regulations. For example, in some states, RCRA, the OSH
Act, parts of the Clean Air Act and parts of the Clean Water Act are enforced by
local or state authorities instead of by the EPA, and in some states those laws
are enforced jointly by state or local and federal authorities.
PUBLIC UTILITY REGULATION. The rates that landfill operators may charge are
regulated in many states by public authorities. The adoption of rate regulation
or the reduction of current rates in states in which we own or operate landfills
in the future could have an adverse effect on our business, financial condition
and results of operations.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
We maintain environmental and other risk management programs that we believe
are appropriate for our business. Our environmental risk management program
includes evaluating existing facilities and potential acquisitions for
environmental law compliance. We do not presently expect environmental
compliance costs to increase above current levels, but we cannot predict whether
future changes in applicable laws or future acquisitions will result in an
increase in these costs. We also maintain a worker safety program that
encourages safe practices in the workplace. Operating practices at all our
operations emphasize minimizing the possibility of environmental contamination
and litigation. We believe that our facilities substantially comply with
material applicable Canadian and United States federal, provincial and state
regulations.
We carry a broad range of insurance for the protection of our assets and
operations that we believe are customary to the solid waste management industry,
including pollution liability coverage. Specifically, we maintain pollution
liability coverage of not less than C$1.0 million per occurrence subject to a
deductible. Our insurance program may not cover all liabilities associated with
environmental cleanup or remediation.
Some of our municipal solid waste services contracts, supply contracts and
permits to operate transfer stations and recycling facilities require us to
obtain performance bonds, letters of credit or other means of financial
assurance to secure our contractual performance. We have not experienced
difficulty in obtaining performance bonds or letters of credit for our current
operations. At
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December 31, 1998, we had provided customers and various regulatory authorities
with bonds and letters of credit in the aggregate amount of approximately $7.0
million to secure our obligations.
PROPERTY AND EQUIPMENT
We own four parcels of real property, located in Brantford and Kitchener,
Ontario; Parksville, British Columbia; and Williamsport, Pennsylvania. The
Brantford and Kitchener facilities are approximately 8,200 square feet and 6,500
square feet, respectively, and we use these properties for administration,
dispatch and maintenance. The Parksville property is approximately 6,000 square
feet and is used for administration, dispatch and maintenance. The Williamsport
property, on which we have a transfer station and an office building, is
approximately two acres. We own the Brantford, Kitchener, Parksville and
Williamsport properties free of any mortgage, lien or encumbrance, except for
those relating to our credit facility.
As of December 31, 1998, we leased a total of 21 facilities and other real
properties used in our solid waste operations which covered in the aggregate
approximately 568,850 square feet. We lease our corporate headquarters in
Burlington, Ontario under a lease that expires in June 2003.
As of December 31, 1998, we owned approximately 435 and leased approximately
31 pieces of equipment, including waste collection vehicles and related support
vehicles, as well as related heavy equipment used in landfill operations, and
had more than 32,000 carts and containers in use. Carts range in size from 30 to
95 gallons and containers range from one to 50 cubic yards. We believe that our
vehicles, equipment and operating properties are well maintained and adequate
for our current operations. However, we expect to make investments in additional
equipment and property for expansion and replacement of assets and in connection
with future acquisitions.
EMPLOYEES
As of December 31, 1998, we employed approximately 650 full-time employees,
including approximately 18 persons classified as professionals or managers,
approximately 518 employees involved in collection, transfer, disposal and
recycling operations, and approximately 114 sales, clerical, data processing or
other administrative employees.
Approximately 225 employees at 11 of our operating facilities are
represented by unions with which we have collective bargaining agreements. Nine
of these collective bargaining agreements have terms expiring between August 31,
1999 and December 2003. 63 employees are covered by collective bargaining
agreements that expire in 1999. We are renegotiating one recently expired
collective bargaining agreement which covers 10 employees in Nanaimo, British
Columbia. We expect to enter into a new collective bargaining agreement with
these employees. We are not aware of any other organizational efforts among our
employees and believe that relations with our employees are good.
LEGAL PROCEEDINGS
In the normal course of our business and as a result of the extensive
governmental regulation of the solid waste industry, we may periodically become
subject to various judicial and administrative proceedings involving United
States or Canadian federal, provincial, state or local agencies. In these
proceedings, an agency may seek to impose fines on us or to revoke or deny
renewal of an operating permit or license held by us. From time to time, we may
also be subject to actions brought by citizens' groups or adjacent landowners or
residents in connection with the permitting and licensing of transfer stations
and landfills or alleging environmental damage or violations of the permits and
licenses pursuant to which we operate.
In addition, we 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
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occurring during the normal operation of a solid waste services business.
However, there is no current proceeding or litigation involving Capital
Environmental that we believe will have a material adverse impact on our
business, financial condition, results of operations or cash flows.
EXCHANGE CONTROLS
There are no limitations on the right of non-residents of Canada or foreign
owners to hold or vote our shares of common stock or any of our other securities
imposed by Canadian or provincial laws or any of our constating documents.
Except for the INVESTMENT CANADA ACT (Canada) and Canadian withholding taxes
described in "Tax Consequences--Canadian Federal Income Tax Considerations for
United States Investors", there are no Canadian federal or provincial laws,
decrees or regulations that restrict the export or import of capital or affect
the remittance of dividends, interest or other payments to holders of any of our
securities who are not residents of Canada.
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MANAGEMENT
OFFICERS AND DIRECTORS
The following table sets forth information concerning Capital
Environmental's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Tony Busseri......................................... 30 Chairman of the Board, Chief Executive Officer and
Director (1)(2)
Allard Loopstra...................................... 52 President, Chief Operating Officer and Director (3)
George Boothe........................................ 40 Executive Vice President, Chief Financial Officer
Elizabeth Joy Grahek................................. 40 Executive Vice President, General Counsel
Kenneth Ch'uan-k'ai Leung............................ 54 Director (1)(2)(3)
David Lowenstein..................................... 37 Director (1)(2)(3)(4)
</TABLE>
- ------------------------
(1) Member of the Executive Committee, upon consummation of this offering.
(2) Member of the Audit Committee, upon consummation of this offering.
(3) Member of the Compensation Committee, upon consummation of this offering.
(4) Member of the Board of Directors, upon consummation of this offering.
TONY BUSSERI has been a Director of Capital Environmental since it was
formed, and served as President of Capital Environmental from May 1997 to April
1998. Mr. Busseri was elected Chairman and Chief Executive Officer in April
1998. Mr. Busseri has more than five years of experience conducting mergers and
acquisitions for Laidlaw Inc.'s wholly owned non-hazardous solid waste
management subsidiary, Laidlaw Waste Systems, Inc. and the predecessor to Philip
Services Corp., Philip Environmental Inc. Mr. Busseri served as a senior manager
in corporate development at Philip from May 1996 to May 1997, where he was
responsible for the sale of Philip's solid waste operations. Mr. Busseri also
served as a senior manager at Laidlaw from March 1992 to April 1996, where he
was responsible for acquisition and divestiture activity. Mr. Busseri holds an
honors degree in business administration from the University of Western Ontario,
and is a Certified Management Accountant.
ALLARD LOOPSTRA was appointed Vice President of Capital Environmental in
June 1997, Chief Operating Officer in January 1998, President in April 1998 and
Director of Capital Environmental in June 1998. Mr. Loopstra has more than six
years of experience in the solid waste industry and more than 27 years of senior
and executive management experience. He served as a general manager of Canadian
Waste, where he managed certain of its Ontario based operations from 1992 to
June 1997. Mr. Loopstra held various senior positions with Slater Industries, a
steel company, from 1974 to 1992, including vice president of sales and
marketing, vice president of materials and engineering services and president.
Mr. Loopstra graduated with honors in business administration from Mohawk
College.
GEORGE BOOTHE was appointed as Executive Vice President, Chief Financial
Officer of Capital Environmental in February 1999. Mr. Boothe has more than nine
years of experience in the solid waste industry in both financial operations and
general management roles. From April 1996 to December 1998, Mr. Boothe was a
district manager for Waste Management Inc., and its various predecessors. From
January 1994 to March 1996, Mr. Boothe was a market area controller for Laidlaw.
From July 1990 to December 1993, Mr. Boothe was Laidlaw's corporate controller
and director of
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financial operations. Mr. Boothe is a chartered accountant and received his
Bachelor of Commerce from the University of Windsor.
ELIZABETH JOY GRAHEK was appointed as Executive Vice President, General
Counsel of Capital Environmental in August 1998. From September 1997 to July
1998, Ms. Grahek was legal counsel to Philip Services. Prior to September 1997,
Ms. Grahek spent 14 years with Turkstra Mazza Associates, a law firm
specializing in matters pertaining to corporate and environmental law. Ms.
Grahek was outside counsel to Capital Environmental while she worked at Turkstra
Mazza Associates. Ms. Grahek received her law degree from the University of
Toronto.
KENNETH CH'UAN-K'AI LEUNG has served as Director of Capital Environmental
since July 1997. Mr. Leung has served as a managing director of investment
banking at Sanders Morris Mundy since March 1995 and as chief investment officer
of Environmental Opportunities Fund I since January 1996, and chief investment
officer of Environmental Opportunities Fund II since June 1998. Mr. Leung served
as a director of Eastern Environmental Services, Inc. through July 1998. From
1978 to 1994, Mr. Leung was a managing director of Smith Barney Inc. Mr. Leung
has over 30 years of experience with the environmental services industry as a
securities analyst and investment banker.
DAVID LOWENSTEIN will become a Director of Capital Environmental on the
closing of this offering. Mr. Lowenstein is currently and has been since May
1995 a director, executive vice president of corporate development and treasurer
of F.Y.I. Incorporated, a publicly-traded company which provides document and
information outsourcing services. Between February 1994 and May 1995, Mr.
Lowenstein served as vice president of business development of Laidlaw, with
overall responsibility for Laidlaw's acquisition and divestiture program in
North America. From April 1990 until February 1994, Mr. Lowenstein served in a
variety of capacities at Laidlaw, including director of Corporate Development.
Mr. Lowenstein holds a Bachelors of Arts specializing in Economics from Sir
Wilfred Laurier University and a Masters of Science specializing in Public and
Business Administration from Carnegie Mellon University.
Directors of Capital Environmental hold office until the next annual meeting
of stockholders and until their successors are elected and qualified, or until
their resignation or removal. All officers are appointed by and serve at the
discretion of the Board of Directors.
OTHER KEY EMPLOYEES
The following table sets forth information concerning certain of Capital
Environmental's key employees as of December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Lynn Bishop.......................................... 50 President, Western Waste
Mike Hess............................................ 37 Vice President, Western New York and Central New
York/Pennsylvania Operations
Ted Hutcheson........................................ 42 Vice President, Central and Eastern Ontario
Operations
Glen Kingswood....................................... 52 Vice President, Southwestern Ontario Operations
</TABLE>
LYNN BISHOP founded Western Waste in November 1994 and has been its
President since that date. Western Waste is Capital Environmental's operating
subsidiary for the western Canadian territory that comprises the Alberta and
British Columbia service areas. Prior to founding Western Waste, Mr. Bishop was
employed by Laidlaw for 25 years. From 1983 to 1994, he was Laidlaw's vice
president of Western North America Operations where he was the senior operating
officer responsible for
51
<PAGE>
Laidlaw's solid waste operations in four Western Canadian provinces and the
state of Utah. Mr. Bishop is a professional engineer.
MICHAEL HESS has worked in the waste management industry for over 16 years.
Prior to joining Capital Environmental in December 1997, Mr. Hess was employed
by USA Waste as general manager of the greater Washington, D.C. market area
starting in late 1995. Prior to overseeing the Washington, D.C. marketplace, Mr.
Hess was employed by Laidlaw from 1992 to 1995 as its general manager for
upstate New York where he was responsible for collection and materials recycling
facility operations. Previously, Mr. Hess was employed in operations and sales
positions with Browning Ferris Industries and Waste Management, Inc.
TED HUTCHESON, prior to joining Capital Environmental, was employed by
Laidlaw from 1991 to 1997 as a director of human resources and later as a market
general manager in Victoria, British Columbia. Commencing in 1997, Mr. Hutcheson
acted as an acquisition consultant for Capital Environmental and since 1998 he
has been employed as Vice President of our Central and Eastern Ontario
operations.
GLEN KINGSWOOD has over 15 years of experience in the waste management
sector. Before joining Capital Environmental in September 1997, Mr. Kingswood
worked for Philip Services from 1991 to 1996 including a position as vice
president of Ontario operations. Before joining Philip Services, Mr. Kingswood
owned and operated Kingswood Waste Systems, a private solid waste management
company in Ontario, from 1985 to 1991.
COMMITTEES OF THE BOARD
The Board of Directors has authorized an Executive Committee, an Audit
Committee and a Compensation Committee to become operative upon the closing of
this offering. A majority of the members of the Audit and Compensation
Committees will be independent directors who are not employees of Capital
Environmental or any of our subsidiaries.
ELECTION OF DIRECTORS
Following the completion of this offering, the Board of Directors will be
divided into two classes, each of whose members will serve for a staggered two
year term. Two of our directors will be elected to serve a one year term and two
of our directors will be elected to serve a two year term.
COMPENSATION OF DIRECTORS
Directors currently do not receive any compensation for attending meetings
of the Board of Directors. After completion of this offering, each independent
director will receive a fee of $1,500 for attendance at each Board meeting and
each committee meeting, unless held on the same day as the full Board meeting,
in addition to reimbursement of reasonable expenses.
The Compensation Committee will, in its discretion, issue options to
independent directors under our 1999 stock option plan. When Mr. Lowenstein
becomes an independent director at the completion of this offering, we will
grant him an option to purchase 20,770 shares at the initial public offering
price, exercisable on the twelve-month anniversary of the date of this offering,
pursuant to the Plan.
Under the 1999 stock option plan, Capital Environmental will grant each
independent director, on the annual anniversary of the date of his or her
appointment to the Board and during the time he or she serves on the Board, an
option to purchase 13,847 shares of our common stock. All these options will
have an exercise price equal to the fair market value of the common stock on the
grant date, will vest on the one-year anniversary of the grant date, and will
expire upon the earlier of five years after the grant date or one year after the
director ceases to be a member of the Board. In the event of a change of
control, options granted to independent directors under the 1999 stock option
plan will immediately vest.
52
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
Capital Environmental was incorporated on May 23, 1997. The following tables
set forth information regarding the annual and long-term compensation earned in
1997 and 1998 by the Chief Executive Officer and the President and Chief
Operating Officer. The individuals identified below have been compensated in
accordance with the terms of their Employment Agreements described below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION SHARES UNDERLYING
------------------------------------ RESTRICTED OPTIONS ALL OTHER
YEAR SALARY BONUS OTHER STOCK GRANTED(2) COMPENSATION
--------- ------------ ---------- ---------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tony Busseri................ 1998(1) C $150,000 C $96,250 C $ 7,500 -- 34,617 --
1997 C$ 52,083 C$29,167 C$ 5,083 -- 49,849 --
Allard Loopstra............. 1998(1) C $137,500 C $85,000 C $10,624 -- 41,541 --
1997 C$ 50,000 C$30,000 C$ 6,166 -- 13,847 --
</TABLE>
- ------------------------
(1) Salary and bonus figures reflect employment from June 1, 1997 through
December 31, 1997. Bonus figures reflect portion earned during 1997; these
bonuses were paid in cash.
(2) See "Option Grants" below.
All executive officers and directors of Capital Environmental as a group
were compensated C$161,250 in 1997 in salary and bonus and received options to
acquire an aggregate of 163,394 shares of common stock. In 1998, all executive
officers and directors of Capital Environmental as a group were compensated
C$468,750 in salary and bonus and received options to acquire an aggregate of
76,158 shares of common stock.
STOCK OPTIONS
OPTION GRANTS. The following table contains information concerning the
grant of options to purchase shares of our common stock to Capital
Environmental's Chief Executive Officer and the President and Chief Operating
Officer during our last fiscal year ended December 31, 1998.
1998 OPTION GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR
SHARES GRANTED TO EXERCISE OPTION TERM(3)
NAME OF UNDERLYING EMPLOYEES PRICE --------------------------
BENEFICIAL OWNER OPTIONS(1) IN 1998 PER SHARE(2) EXPIRATION DATE 5% 10%
- --------------------------------- ----------- ------------- ------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Tony Busseri..................... 13,847 5.9% C $14.44 April 30, 2003 C $ 55,200 C $122,100
20,770 8.8% C $18.05 August 30, 2003 C $103,650 C $228,900
Allard Loopstra.................. 27,694 11.7% C $14.44 January 30, 2003 C $110,400 C $244,200
13,847 5.9% C $14.44 April 30, 2003 C $ 55,200 C $122,100
</TABLE>
- ------------------------
(1) Options vest on the earlier of two years from the date of their grant or the
day prior to the completion of this offering.
53
<PAGE>
(2) The options were granted at or above fair market value as determined by the
Board of Directors on the date of grant.
(3) Amounts reported in these columns represent amounts that may be realized on
the exercise of options immediately prior to the expiration of their term
assuming the specified assumed rates of stock price appreciation (5% and
10%) on Capital Environmental's common stock annually. The potential
realizable values set forth above do not take into account applicable tax
and expense payments that may be associated with these exercises. Actual
realizable value, if any, will depend on the future price of the common
stock on the actual date of exercise, which may be earlier than the stated
expiration date. The 5% and 10% assumed annualized rates of stock price
appreciation over the exercise period of the options and warrants used in
the table above are mandated by the rules of the Securities and Exchange
Commission and do not represent Capital Environmental's estimate or
projection of the future price of the common stock on any date. There is no
representation, either express or implied, that the stock price appreciation
rates for the common stock assumed for purposes of this table will actually
be achieved.
As of December 31, 1998, all directors and officers as a group held 210,473
options to acquire shares of common stock at an average exercise price of
C$12.48, or $8.37 as of April 15, 1999. No director or officer exercised her or
his options during 1998.
1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
------------------------------ ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Tony Busseri.............................................. -- 84,466 -- C $590,000
Allard Loopstra........................................... -- 55,388 -- C $300,000
</TABLE>
- ------------------------
(1) There was no public trading market for our common stock at December 31,
1998. Accordingly, as permitted by the rules of the Securities and Exchange
Commission, these values have been calculated based on the fair market value
of our common stock as of December 31, 1998, of C$18.05 per share, or $11.74
as of December 31, 1998, as determined by the Board of Directors based on
recent arms-length transactions with third parties, less the aggregate
exercise price.
EMPLOYMENT AGREEMENTS
Tony Busseri is employed as the Chairman of the Board and Chief Executive
Officer of Capital Environmental pursuant to an employment agreement dated as of
August 14, 1998, which incorporates prior amendments made to his original
employment agreement of August 1, 1997. Prior to August 1, 1997, Mr. Busseri was
not compensated by us for his services. By the terms of the August 14, 1998
agreement, Mr. Busseri's base salary is fixed at C$175,000 effective July 1,
1998. Prior to July 1, 1998, Mr. Busseri's base salary was fixed at C$125,000.
Upon completion of this offering, Mr. Busseri's base salary will increase to the
greater of $130,000 converted into Canadian dollars or C$175,000. Mr. Busseri is
entitled to a minimum annual bonus of 50% of his base salary. Bonus amounts in
excess of the minimum guaranteed bonus are payable at the discretion of the
Board of Directors. The agreement has an initial term of three years, expiring
on July 31, 2000. On completion of this offering, the term of the agreement will
be automatically extended for a further three years. We may terminate the
employment agreement at any time without notice. However, if we terminate Mr.
Busseri's employment without cause, we are obligated to make severance payments
to him consisting of base salary and benefits for twenty-four months with the
option of a lump sum salary payment, and a bonus
54
<PAGE>
of two times the minimum annual bonus in addition to any bonus already earned.
In addition, all stock options vest and are exercisable for twelve months after
his termination. In the event of a change in control, Mr. Busseri can demand
that we cash out all of his options. If after this offering, Mr. Busseri no
longer holds one of the positions of either Chairman of the Board or Chief
Executive Officer, we will be obligated to make the severance payments described
above to him. Additionally, Mr. Busseri is subject to a two year non-competition
agreement.
Allard Loopstra is employed as President and Chief Operating Officer of
Capital Environmental pursuant to an employment agreement dated as of August 14,
1998, which incorporates prior amendments made to his original employment
agreement dated June 19, 1997. By the terms of the August 14, 1998 agreement,
Mr. Loopstra's base salary is fixed at C$170,000 effective July 1, 1998. Mr.
Loopstra's initial base salary was C$100,000 and was increased to C$120,000 in
January of 1998. Upon completion of this offering, Mr. Loopstra's base salary
will increase to the greater of $125,000 converted into Canadian dollars or
C$170,000. Mr. Loopstra is entitled to a minimum annual bonus of 50% of his base
salary. Bonus amounts in excess of the minimum guaranteed bonus are payable at
the discretion of the Board of Directors. The agreement has an initial term of
three years, expiring on July 31, 2000. On completion of this offering, the term
of the agreement will be automatically extended for a further three years. The
employment agreement also provides that on completion of this offering, Mr.
Loopstra will receive a one-time bonus of C$125,000. We may terminate the
employment agreement at any time without notice. However, if we terminate Mr.
Loopstra's employment without cause, we are obligated to make certain severance
payments to him which are substantially identical to the severance payments that
would be provided to Mr. Busseri. If after this offering, Mr. Busseri no longer
holds one of the positions of either Chairman of the Board or Chief Executive
Officer, we will be obligated to make these severance payments to Mr. Loopstra.
In the event of a change of control, Mr. Loopstra can demand that we cash out
all of his options. Additionally, Mr. Loopstra is subject to a non-competition
agreement for a maximum period of eighteen months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There was no Compensation Committee during 1997. At the time the employment
agreements with Mr. Busseri and Mr. Loopstra were approved by the Board of
Directors, Mr. Busseri and Mr. Loopstra were two of the four members of the
Board of Directors. None of our executive officers served as a director or
member of the compensation committee of another entity.
1997 STOCK OPTION PLAN
The Board of Directors adopted the 1997 stock option plan effective as of
July 30, 1997, and the stockholders approved it on July 30, 1997. The 1997 stock
option plan is intended to provide officers, employees and directors with
additional incentives by increasing their proprietary interests in Capital
Environmental. Under the 1997 stock option plan, we may grant options to acquire
shares of common stock up to a maximum of 10% of the then issued and outstanding
shares of common stock after giving effect to the conversion of the convertible
preference stock and the class "B" special stock. As of April 15, 1999, we had
granted options to purchase 384,944 shares of common stock at a weighted average
exercise price of C$12.48, or $8.37 as of April 15, 1999, per share under the
terms of the 1997. No further options will be granted under the 1997 stock
option plan following effectiveness of the 1999 stock option plan described
below.
The Board of Directors currently administers the 1997 stock option plan.
Upon consummation of this offering, the Compensation Committee will administer
the 1997 stock option plan.
Options generally become exercisable only after the second anniversary of
the grant date. No option will remain exercisable later than five years after
the grant date, unless the Compensation Committee determines otherwise.
Notwithstanding the foregoing, upon a "change of control" event, which is
defined as an initial public offering of our securities on a recognized stock
exchange or an
55
<PAGE>
offer to purchase more than 50.0% of our voting securities, the options become
immediately exercisable.
If an officer, employee or director with outstanding options retires or
becomes disabled or dies, he or she (or his or her estate) may exercise his or
her options, but only within the period ending on the earlier of the expiration
of the option or 18 months after retirement, death or disability. If the
optionee does not exercise his or her options within that time period, the
options will terminate, and the shares of common stock subject to the options
will become available for issuance under the 1999 stock option plan. If the
optionee ceases to be an officer, employee or director of Capital Environmental
for any reason other than retirement, death or disability, his or her vested
options terminate 90 days after this relationship terminates, and the shares of
common stock subject to the options will become available for issuance under the
1999 stock option plan.
1999 STOCK OPTION PLAN
The 1999 stock option plan was adopted by the Board of Directors and
approved by the stockholders in April 1999. The 1999 stock option plan is
intended to provide employees, officers, consultants and directors with
additional incentives by increasing their proprietary interests in Capital
Environmental. Under the 1999 stock option plan, we may grant options for a
maximum of 15%, including stock options issued under the 1997 stock option plan,
of the then issued and outstanding shares of common stock and common stock
equivalents.
A subcommittee of the Compensation Committee comprised solely of two
non-employee members of the Board will administer the 1999 stock option plan.
The administrator of the 1999 stock option plan will have the authority to
determine the employees, officers, consultants and directors to whom options are
granted, the type, size and term of the options, the grant date, the expiration
date, the vesting schedule and other terms and conditions of the options. Unless
otherwise determined by the Committee, options granted to directors under the
1999 stock option plan will generally vest one year from the date of grant and
expire upon the earlier of five years after the date of grant or one year after
the director ceases to be a member of the Board of Directors. Options for
non-directors will generally vest two years from the date of grant and will
generally expire five years after the grant date, unless the Compensation
Committee determines otherwise. Upon a change of control event, options become
immediately exercisable.
If an employee, officer, consultant or director with outstanding options
retires or becomes disabled or dies with outstanding options, this person, or
his or her estate, may exercise his or her options, but only within the period
ending on the earlier of the expiration of the option or 18 months after
retirement, death or disability. If the option holder does not exercise his or
her options within that time period, the options will terminate, and the shares
of common stock subject to the options will become available for issuance under
the 1999 stock option plan. If the option holder ceases to be an employee,
officer, consultant or director of Capital Environmental other than because of
retirement, death or disability, his or her options terminate 90 days after the
date this relationship terminates, and the shares of common stock subject to the
options will become available for issuance under the 1999 stock option plan.
56
<PAGE>
CERTAIN TRANSACTIONS
FUNDING
Capital Environmental was founded in May 1997 by Branard Investment Corp., a
private holding company for which Mr. Busseri serves as president, with the goal
of taking advantage of consolidation opportunities in the solid waste services
industry in Canada. In connection with the founding of Capital Environmental,
and prior to our acquisition of any assets or operations, we issued 1,353,924
shares of our common stock to Branard for nominal consideration. Subsequently,
we negotiated our purchase of selected assets of Canadian Waste and USA Waste's
50% interest in Western Waste.
In July 1997, we sold an aggregate of 8,000 shares of convertible preference
stock at a price of C$1,000 per share or C$7.22 per share of common stock on a
converted basis. Of the 8,000 shares of convertible preference stock, 6,802 were
purchased by principals and employees of Sanders Morris Mundy Inc. and
investment partnerships managed by or associated with Sanders Morris Mundy. Upon
completion of this offering, the shares of convertible preference stock will
convert into 1,107,750 shares of common stock. In July 1997, Sanders Morris
Mundy and an affiliate of Sanders Morris Mundy received warrants to purchase
92,312 shares of common stock at an exercise price of C$0.007 per share, all of
which are currently exercisable. These warrants expire in July 2002. Sanders
Morris Mundy is one of the representatives of the underwriters.
In July 1997, in connection with our formation, we granted Allen Fracassi a
warrant to purchase 30,772 shares of common stock at an exercise price of
C$0.007 per share. The warrant is currently exercisable and expires July 15,
2002.
On July 30, 1997, we granted to each of Tony Busseri, Kenneth Ch'uan-k'ai
Leung and Allen Fracassi options to acquire 49,849 shares of common stock, at an
exercise price of C$7.22 per share. Also on July 30, 1997, we granted Allard
Loopstra an option to acquire 13,847 shares of common stock, at an exercise
price of C$7.22 per share. In January and May, 1998, we granted Mr. Loopstra an
option to acquire 27,694 and 13,847 shares of common stock, respectively, at an
exercise price of C$14.44 per share. All of these options were granted pursuant
to the 1997 stock option plan. In May 1998, we granted Mr. Busseri an option to
acquire 13,847 shares of common stock under the 1997 stock option plan at an
exercise price of C$14.44 per share. These options become exercisable upon the
earlier of the day prior to the consummation of this offering or two years from
the date of grant and expire five years from the date of grant.
In May 1998, a principal of Sanders Morris Mundy received an option to
purchase 27,694 shares of common stock at an exercise price of C$14.44 per
share, which will be exercisable on the day prior to the consummation of this
offering and will expire five years from the date of grant. In June 1998, we
completed a private placement of 553,869 shares of our common stock at a price
of C$18.05 per share, for which Sanders Morris Mundy served as placement agent.
Principals and employees of Sanders Morris Mundy and investment partnerships
managed by or associated with Sanders Morris Mundy purchased 486,989 shares of
common stock in the private placement.
On August 31, 1998, we granted each of Tony Busseri and Kenneth Ch'uan-k'ai
Leung an option to acquire 20,770 shares of common stock at an exercise price of
C$18.05 per share. These options become exercisable upon the earlier of the day
prior to the consummation of this offering or two years from the date of grant
and expire five years from the date of grant.
In October 1998, principals and employees of Sanders Morris Mundy, and
investment partnerships managed by or associated with Sanders Morris Mundy,
purchased 612,037 shares of our common stock from certain existing shareholders
of Capital Environmental.
In December 1998, we paid $125,000 to Sanders Morris Mundy for services
provided as our financial advisor.
57
<PAGE>
ACQUISITIONS
In November 1997, in connection with our acquisition of the remaining 33.33%
of the outstanding common stock of Western Waste from L&S Bishop Enterprises
Inc. ("L&S"), a company controlled by Lynn Bishop, the President of Western
Waste, we issued to L&S 400,000 shares of class "B" special stock at C$21.67 per
share. The 400,000 shares of class "B" special stock will automatically convert
into 484,645 shares of common stock upon the consummation of this offering. If
the price per share of our common stock in this offering is less than C$21.67
per share, we have the right to make up to L&S any shortfall between C$21.67 per
share and the actual price per share of the common stock sold in this offering,
in our sole discretion, by either issuing these additional number of shares of
common stock at the actual price per share at which the common stock is sold in
this offering, or by payment of the cash difference. Also in connection with
this acquisition, we loaned C$1.5 million to L&S. The loan, which is evidenced
by a promissory note, bears no interest and the principal amount becomes due and
payable immediately prior to the completion of this offering. Repayment of the
loan is subject to a right of offset against our payment of a dividend of C$1.5
million declared in November 1997 on the shares of class "B" special stock,
payable immediately prior to the completion of this offering. If we complete
this offering at C$21.67 per share or elect to make up any difference, L&S has
the right to include in this offering shares of common stock having a value of
C$5,250,000. However, we have the right to repurchase these shares rather than
include them in this offering. We have elected to include 242,323 shares of
common stock owned by L&S in this offering.
LOAN TO THE CHIEF EXECUTIVE OFFICER
In July 1998, we loaned C$155,000, and in October 1998, we loaned an
additional C$45,000, to Tony Busseri, the Chairman and Chief Executive Officer
of Capital Environmental, to assist with the purchase of a principal residence.
As of April 15, 1999, C$155,000 and C$45,000, respectively, of the loans were
outstanding. The loans bear no interest and are repayable to us on demand. If we
terminate Mr. Busseri's employment, he will have three years from the date of
termination to pay the loan.
Under the terms of our credit facility, we may extend loans to officers and
directors in an aggregate amount not to exceed $500,000 for the purchase of a
principal residence and/or common stock of Capital Environmental.
Except as described above, we intend to enter into all transactions on an
arm's-length basis in the ordinary course of our business and on terms no less
favorable to us than could be obtained from unaffiliated third parties.
58
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of April 15, 1999, and as adjusted to reflect
the sale of the shares of common stock offered in this prospectus, by:
- each person or entity that we know owns more than 5% of our common stock;
- our Chief Executive Officer and each of our other executive officers;
- each of our directors;
- the selling shareholders; and
- all our current directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
SHARES
OWNED BEING OWNED
BEFORE OFFERING OFFERED AFTER OFFERING
---------------------- ----------- ----------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
- -------------------------------------------------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Environmental Opportunities Fund II(2).............................. 924,783 23.89% 924,783 13.43%
Environmental Opportunities Fund I(3)............................... 632,806 16.35 632,806 9.19
L&S Bishop Enterprises(4)........................................... 484,645 12.52 242,323 242,322 3.52
CERI Investors, L.P.(5)............................................. 336,527 8.59 336,527 4.85
Granvin Investments Inc.(6)......................................... 281,247 7.27 281,247 -- --
Branard Investment Corp.(7)......................................... 243,090 6.28 243,090 3.53
Tony Busseri(8)(9)(10).............................................. 219,859 5.56 219,859 3.15
9043-8284 Quebec Inc (11)........................................... 153,855 3.97 153,855 -- --
ABCO/Kingswood(13).................................................. 84,235 * 73,850 10,385 *
Kenneth Ch'uan-k'ai Leung(8)(10)(12)................................ 70,619 1.79 70,619 1.02
Allard Loopstra(8)(10).............................................. 55,388 1.41 55,388 *
David Lowenstein(8)................................................. -- -- 20,770 *
All executive officers and directors as a group (4 persons)......... 345,866 8.47% 366,636 5.15%
</TABLE>
- ------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In general, a person who has voting power and/or investment
power with respect to securities is treated as a beneficial owner of those
securities. Shares of common stock subject to options and/or warrants
currently exercisable or exercisable within 60 days of the date of this
prospectus count as outstanding for computing the percentage beneficially
owned by the person holding these options. Except as otherwise indicated by
footnote, we believe that the persons named in this table, have sole voting
and investment power with respect to the shares of common stock shown.
(2) Environmental Opportunities Fund II consists of Environmental Opportunities
Fund II, L.P. and Environmental Opportunities Fund II (Institutional), L.P.,
both of which are managed by Fund II Mgt. Co., L.L.C. ("EOF II Management").
Sanders Morris Mundy Inc., one of the representatives of the underwriters,
owns 99.0% of the membership interests in EOF II Management. The address of
Environmental Opportunities Fund II is 600 Travis St., Suite 3100, Houston,
Texas.
(3) Environmental Opportunities Fund I consists of Environmental Opportunities
Fund, L.P. and Environmental Opportunities Fund (Cayman), L.P., both of
which are managed by Environmental Opportunities Management Company, L.L.C.
("EOF I Management"). Sanders Morris Mundy Inc. owns 75% of the membership
interests in EOF I Management. The address of Environmental Opportunities
Fund I is 600 Travis St., Suite 3100, Houston, Texas.
59
<PAGE>
(4) The address of L&S Bishop Enterprises is 202-340 Sioux Road, Sherwood Park,
Alberta. The principal shareholder of L&S is Lynn Bishop, the President of
Western Waste.
(5) CERI Investors, L.P. includes as a principal limited partner an affiliate of
Sanders Morris Mundy Inc. Includes warrants to purchase 46,156 shares of
common stock at an exercise price of C$.007 per share which are currently
exercisable. The address of CERI Investors, L.P. is 1000 Louisiana St.,
Suite 1200, Houston, Texas.
(6) The address of Granvin Investments Inc. is 70 Balmoral, Suite 302, La
Prairie, Quebec J5R 4L5. Does not include options and warrants to purchase
80,621 shares of common stock held by Allen Fracassi. Mr. Fracassi holds
preference shares which have 50% of the voting power in a corporation which
holds all of the capital stock of Granvin.
(7) The address of Branard is 1005 Skyview Drive, Burlington, Ontario. Mr.
Busseri and Colin Soule serve as directors and executive officers of
Branard.
(8) The address of Mr. Bishop, Mr. Busseri, Mr. Loopstra, Mr. Leung and Mr.
Lowenstein is 1005 Skyview Drive, Burlington, Ontario.
(9) Includes 135,393 shares of common stock held by Branard and beneficially
owned by Mr. Busseri.
(10) The information set forth in the table above includes 84,466, 70,619 and
55,388 options to acquire shares of common stock held by Mr. Busseri, Mr.
Leung and Mr. Loopstra, respectively. All of these options were granted
under our 1997 stock option plan, except for 20,770 of the options held by
Mr. Leung.
(11) The address of 9043-8284 Quebec Inc. is 70 Balmoral, Suite 302, La Prairie,
Quebec J5R 4L5. Philip Fracassi holds preference shares which have 50% of
the voting power in a corporation which holds all of the capital stock of
9043-8284 Quebec.
(12) The chief investment officer of Environmental Opportunities Fund I and
Environmental Opportunities Fund II is Kenneth Ch'uan-k'ai Leung, a director
of Capital Environmental.
(13) The address of ABCO/Kingswood is 155 Glenwood Drive, Brantford, Ontario N3S
7R3. The principal stockholder of ABCO/Kingswood is Glen Kingswood, Vice
President, Southwestern Ontario Operations. Shares beneficially owned by
ABCO/Kingswood after the offering consist solely of 10,385 options to
acquire shares of common stock.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital of Capital Environmental consists of an unlimited
number of shares of convertible preference stock, 400,000 shares of class "B"
special stock and an unlimited number of shares of common stock. As of April 15,
1999, 8,000 shares of convertible preference stock, 400,000 class "B" special
shares and 2,278,782 shares of common stock, were issued and outstanding.
Simultaneously with this offering, we will file amended and restated articles of
incorporation, and our authorized capital stock will consist of an unlimited
number of shares of common stock and an unlimited number of shares of preferred
stock.
Following is a summary of the material provisions applicable to our common
stock and our preferred stock in our amended and restated articles of
incorporation and by-laws, copies of which have been filed as an exhibit to the
registration statement of which this prospectus forms a part and by the
provisions of applicable law.
COMMON STOCK
Holders of common stock are entitled to one vote for each share of common
stock held at all meetings of the shareholders of Capital Environmental, except
for meetings at which only holders of another specified class or series of
shares of Capital Environmental are entitled to vote separately as a class or
series. There are no cumulative voting rights. Holders of common stock are
entitled to dividends, if any, as and when declared by the Board of Directors at
its discretion out of funds legally available therefor, subject to any prior
rights of the holders of another class of shares of Capital Environmental. In
the event of our liquidation, dissolution or winding up, the holders of common
stock would be entitled to receive, subject to the prior rights of any holders
of another class of shares, our remaining property after payment of all debts
and liabilities. Holders of the common stock have no pre-emptive subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of common stock are subject to and may be adversely affected by the
rights of holders of any preferred stock issued in the future. All issued and
outstanding shares of common stock are, and the common stock offered in this
prospectus when issued and paid for will be, fully paid and non-assessable. The
Business Corporations Act (Ontario) does not impose restrictions upon the
ownership of our common stock by non-residents of Canada.
PREFERRED STOCK
The Board of Directors has the authority to issue the preferred stock in one
or more series and to fix the designation, rights, privileges, restrictions and
conditions attaching to the series, including dividend rights, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series, without further
vote or action by the stockholders. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of Capital
Environmental without further action by the stockholders. In addition, the
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock. At present, we have no
plans to issue any of the preferred stock.
STATUTORY, CHARTER AND BY-LAW PROVISIONS
The following brief description of provisions of the Business Corporations
Act (Ontario), our amended and restated articles of incorporation and our
by-laws does not purport to be complete and is subject in all respects to the
provisions of the Business Corporations Act (Ontario), our restated articles of
incorporation and our by-laws, copies of which have been filed as exhibits to
the registration statement of which this prospectus forms a part.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES. Our articles provide that,
subject to any rights of holders of preferred stock to elect additional
directors under specified circumstances, the number of
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directors comprising the entire Board is fixed at a minimum of three and a
maximum of nine. Pursuant to the Act and a special resolution passed by our
voting stockholders, any change in the minimum and maximum number of directors
fixed in the articles requires the approval of two-thirds of the votes cast by
our voting stockholders at a properly called meeting and the directors may from
time to time change the fixed number of directors within that range. We
currently have a fixed number of four directors. We have a staggered board. Two
of our directors have been elected to serve a one year term and two of our
directors have been elected to serve a two year term. Under the Act and provided
that a quorum of directors remains in office, vacancies may be filled by the
directors. However, where the vacancy results from an increase by the directors
in the number of directors within the minimum and maximum fixed by the articles
and if, after filling the vacancy, the number of directors would be more than
one and one-third times the number of directors required to be elected at the
last annual meeting of the stockholders, or where the vacancy results from a
failure to elect the number of directors required to be elected at any meeting
of stockholders, then the vacancy must be filled by the stockholders. If less
than a quorum of directors remains in office, or if there has been a failure to
elect the required fixed number of directors, any vacancy must be filled by the
stockholders and the directors are required to call a special meeting of the
stockholders to fill the vacancy.
INDEMNITY OF DIRECTORS. Our by-laws provide that our directors and officers
and former directors and officers shall be indemnified to the extent permitted
by the Act against all costs, charges and expenses reasonably incurred by them
in connection with actual or threatened proceedings and claims arising out of
their status as director or officer of Capital Environmental. However, the
director or officer must have acted honestly and in good faith with a view to
our best interests and in the case of a monetary penalty imposed in a criminal
or administrative proceeding, the director or officer must have had reasonable
grounds for believing that his or her conduct was lawful. In support of our
indemnification obligation, we will obtain $50.0 million of directors and
officers insurance.
CANADIAN DIRECTORS. Because Capital Environmental is an Ontario corporation
subject to the Act, a majority of its directors must be resident Canadians and
directors cannot transact business at a meeting of directors unless a majority
of directors present are Canadian directors.
REGISTRATION RIGHTS
After this offering, the holders of 2,580,441 shares of common stock and
warrants to purchase 123,084 shares of common stock may require that we register
these shares under U.S. federal securities laws. Under the terms of the
agreements between Capital Environmental and the holders of these registrable
securities, if we propose to register any of our securities under the Securities
Act of 1933, except for registration on Form S-4, F-4 or S-8, or any other forms
as the Securities and Exchange Commission may promulgate for registration of the
sale of securities in transactions for which Form S-4, F-4 or S-8 may be used as
of the date of this prospectus, we must notify these shareholders of this
registration. These shareholders may then elect to include their shares of
common stock in our proposed registration. In addition, if we propose to qualify
any of our securities for distribution to the public under the securities laws
of any province of Canada, we must notify these shareholders of this
registration and shareholders may then elect to include their shares of common
stock in our proposed qualification. After the expiration of 180 days following
this offering, holders of a majority of these 2,580,441 shares of common stock
and warrants to purchase 123,084 shares of common stock may also require us on
two occasions to file a registration statement under the Securities Act at our
expense with respect to their shares of common stock, and we are required to use
diligent reasonable efforts to effect the registration. These rights are subject
to certain conditions and limitations, among them the right of the underwriters
of an offering or the Board of Directors to limit the number of shares included
in a registration.
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LISTING
We have applied to list the common stock on the NASDAQ National Market under
the symbol "CERI".
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company and CIBC Mellon Trust Company will
serve as
co-transfer agents and American Stock Transfer and Trust Company will serve as
registrar for the common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have outstanding 6,885,479 shares of common
stock, or 7,447,979 shares if the underwriters' over-allotment option is
exercised in full. Of these shares, the 3,750,000 shares that we and the selling
shareholders expect to sell in this offering, or 4,312,500 shares if the
underwriters' over-allotment option is exercised in full, will be freely
tradable in the public market without restriction under the Securities Act,
unless these shares are held by our "affiliates," as that term is defined in
Rule 144 under the Securities Act.
The remaining 3,135,479 shares of common stock that will be outstanding
after this offering will be restricted shares. We issued and sold the restricted
shares in private transactions in reliance on exemptions from registration under
the Securities Act. Restricted shares may be sold in the public market only if
they are registered or if they qualify for an exemption from registration under
Rule 144 or Rule 701 under the Securities Act, as summarized below.
After this offering, the holders of 2,580,441 shares of common stock, and
warrants to purchase 123,084 shares of common stock, will be entitled to
registration rights with respect to these shares. See "Description of Capital
Stock--Registration Rights." Registration of these shares under the Securities
Act would result in these shares becoming freely tradeable without restriction
under the Securities Act, except for shares purchased by affiliates, immediately
upon the effectiveness of this registration.
Under lock-up agreements with the underwriters, all of the executive
officers, directors and our shareholders, who collectively hold an aggregate of
3,135,479 restricted shares, have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of any of these shares for a
period of 180-days from the date of this prospectus. We also have entered into
an agreement with the underwriters that we will not offer, sell or otherwise
dispose of common stock for a period of 180-days from the date of this
prospectus, except as consideration for business acquisitions, upon exercise of
currently outstanding stock options or warrants or upon the issuance of options
to employees, consultants and directors under the 1999 stock option plan, and
the exercise of options under the 1997 stock option plan and 1999 stock option
plan, without the prior written consent of Credit Suisse First Boston.
On the date of the expiration of the lock-up agreements, 3,115,118
restricted shares will be eligible for immediate sale, of which 2,570,662 shares
will be subject to volume, manner of sale and other limitations under Rule 144.
Following the expiration of these lock-up periods, some of the shares issued
upon exercise of options we granted prior to the date of this prospectus will
also be available for sale in the public market pursuant to Rule 701 under the
Securities Act. Rule 701 permits resales of these shares in reliance upon Rule
144 under the Securities Act but without compliance with some of its
restrictions, including the holding-period requirement, imposed under Rule 144.
Under Rule 144, beginning 90 days after the date of this prospectus, a person
who has beneficially owned restricted shares for at least one year would be
entitled to sell in any three-month period up to the greater of:
- 1% of the then-outstanding shares of common stock or approximately 68,855
shares immediately after this offering and
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to this
sale.
Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who has not been an affiliate of ours during the
preceding 90 days and who has beneficially owned the restricted shares for at
least two years is entitled to sell them without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
There has been no public market for the common stock prior to this offering
and no assurance can be given that an active public market for the common stock
will develop or be sustained after completion of this offering. Sales of
substantial amounts of the common stock, or the perception that
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these sales could occur, could adversely affect the prevailing market price of
the common stock and could impair our ability to raise capital or effect
acquisitions through the issuance of common stock.
After the completion of this offering, we intend to file a registration
statement under the Securities Act to register all shares issuable on exercise
of stock options or other awards granted or to be granted under the 1997 stock
option plan and the 1999 stock option plan. After this registration statement
becomes effective, and subject to some of the restrictions under Rule 144, those
shares will be freely saleable in the public market immediately following
exercise of these options. We currently intend to file a shelf registration
statement under the Securities Act covering up to an additional 2,600,000 shares
of common stock for our use in connection with acquisitions that may be made by
us. These shares, if issued within 180 days of the date of this prospectus, will
be subject to lock-up agreements, by which the holders will agree not to offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of any
of these shares within the 180-day period following the date of this prospectus.
See "Underwriting."
TAX CONSEQUENCES
BECAUSE CANADIAN AND UNITED STATES TAX CONSEQUENCES MAY DIFFER FROM ONE
HOLDER TO THE NEXT, THE DISCUSSION SET OUT BELOW DOES NOT PURPORT TO DESCRIBE
ALL OF THE TAX CONSIDERATIONS THAT MAY BE RELEVANT TO YOU AND YOUR PARTICULAR
SITUATION. ACCORDINGLY, YOU ARE ADVISED TO CONSULT YOUR OWN TAX ADVISOR AS TO
THE UNITED STATES AND CANADIAN FEDERAL, PROVINCIAL, STATE AND OTHER TAX
CONSEQUENCES OF INVESTING IN OUR COMMON STOCK. THE STATEMENTS OF UNITED STATES
AND CANADIAN TAX LAW SET OUT BELOW ARE BASED ON THE LAWS AND INTERPRETATIONS IN
FORCE AS OF THE DATE OF THIS PROSPECTUS, AND ARE SUBJECT TO ANY CHANGES
OCCURRING AFTER THAT DATE.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR UNITED STATES INVESTORS
The statements of law and legal conclusions regarding the material Canadian
federal income tax considerations applicable to a person who is a U.S. holder
contained in "Canadian Federal Income Tax Considerations for United States
Investors" are the opinion of Tory Tory DesLauriers & Binnington, Canadian
counsel for Capital Environmental. In this summary, a "U.S. holder" means a
person who, for the purposes of the Canada-United States Income Tax Convention
(1980), is a resident of the United States and not of Canada and who, for the
purposes of the Income Tax Act (Canada):
- deals at arm's length with us;
- is the beneficial owner of our common stock;
- holds our common stock as capital property;
- does not use or hold and is not deemed to use or hold our common stock in
the course of carrying on a business in Canada; and
- is not an insurer for whom our common stock constitutes designated
insurance property.
Our common stock will generally be capital property to a U.S. holder unless it
is held in the course of carrying on a business, in an adventure in the nature
of trade or as "mark-to-market" property for purposes of the Canadian Act. This
summary does not apply to a U.S. holder that is a "financial institution" for
purposes of the mark-to-market rules contained in the Canadian Act.
This summary is based on the current provisions of the Canadian Act and the
regulations in force on the date of this prospectus, the Convention, counsel's
understanding of the current published administrative and assessing practices of
Revenue Canada, Customs, Excise and Taxation, and all specific proposals to
amend the Canadian Act and the regulations announced by the Canadian Minister of
Finance prior to the date of this prospectus.
This summary is not exhaustive and, except for the proposed amendments to
the Canadian Act, does not take into account or anticipate changes in the law or
the administrative or assessing practices of Revenue Canada, whether by
judicial, governmental or legislative action or interpretation, nor does it take
into account tax legislation or considerations of any province or territory of
Canada. Because Canadian tax consequences may differ from one holder to the
next, this summary does not purport to
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describe all of the tax considerations that may be relevant to you and your
particular situation. You are advised to consult your own tax advisor.
DIVIDENDS
Dividends paid or deemed to be paid on our common stock are subject to
non-resident withholding tax under the Canadian Act at the rate of 25%, although
this rate may be reduced by the provisions of an applicable income tax treaty.
Under the Convention, U.S. holders will generally be subject to a 15%
withholding tax on the gross amount of dividends we pay or are deemed to have
paid on our common stock. Also pursuant to the Convention, in the case of a U.S.
holder that is a U.S. corporation which beneficially owns at least 10% of our
voting stock, the applicable rate of withholding tax on dividends will generally
be reduced to 5%.
DISPOSITIONS
A U.S. holder will not be subject to tax under the Canadian Act in respect
of a capital gain arising on a disposition or deemed disposition of our common
stock, including common stock that we purchase, unless (1) the common stock
constitutes "taxable Canadian property" within the meaning of the Canadian Act
to the U.S. holder, and (2) the capital gain is not exempt from taxation in
Canada under the Convention. Generally, our common stock will not constitute
taxable Canadian property of a U.S. holder provided our common stock is listed
on a prescribed stock exchange for purposes of the Canadian Act, which includes
the NASDAQ National Market, and the U.S. holder, alone or together with persons
with whom the U.S. holder does not deal at arm's length, has not owned, or had
under option, 25% or more of the issued shares of any class or series of our
capital stock at any time within five years preceding the date of disposition.
Under the Convention, capital gains derived by a U.S. holder from the
disposition of our common stock in circumstances where it constitutes taxable
Canadian property to the U.S. holder generally will not be taxable in Canada
unless the value of the common stock is derived principally from real property
situated in Canada.
A disposition or deemed disposition of our common stock by a U.S. holder in
respect of which our common stock is taxable Canadian property and which is not
exempt from capital gains taxation in Canada under the Convention will give rise
to a capital gain (or a capital loss) equal to the amount, if any, by which the
proceeds of disposition, less the reasonable costs of disposition, exceed (or
are less than) the adjusted cost base of the common stock to the U.S. holder at
the time of the actual or deemed disposition. Generally, three-quarters of any
capital gain realized will be required to be included in income as a taxable
capital gain and three quarters of any capital loss will be deductible, subject
to certain limitations, against taxable capital gains in the year of disposition
or the three preceding years or any subsequent year in accordance with the
detailed provisions in the Canadian Act.
Our purchase of common stock, other than by a purchase in the open market in
the manner in which shares are normally purchased by a member of the public,
will give rise to a deemed dividend equal to the amount we pay on the purchase
in excess of the paid-up capital of the common stock, determined in accordance
with the Canadian Act. This deemed dividend will be subject to non-resident
withholding tax, as described above, and will reduce the proceeds of disposition
to a U.S. holder of its common stock for purposes of computing the amount of any
capital gain or loss arising on the disposition.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
considerations arising from the acquisition, ownership and disposition of our
common stock by a United States holder. A United States holder is:
- an individual citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States or any of its political subdivisions; or
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- an estate or trust the income of which is subject to United States federal
income taxation regardless of its source.
This summary deals only with common stock that is held as a capital asset by a
United States holder, and does not address tax considerations applicable to
United States holders that may be subject to special tax rules, such as:
- dealers or traders in securities or currencies;
- financial institutions or other United States holders that treat income in
respect of our common stock as financial services income;
- life insurance companies;
- tax-exempt entities;
- United States holders that hold our common stock as a part of a straddle
or conversion transaction or other arrangement involving more than one
position or that hedge against currency risks in respect of our common
stock;
- United States holders that own, or are deemed for United States tax
purposes to own, 10% or more of the total combined voting power of all
classes of our voting stock;
- United States holders that have a principal place of business or "tax
home" outside the United States; or
- United States holders whose "functional currency" is not the United States
dollar.
The discussion below is based upon the provisions of the United States
Internal Revenue Code of 1986 and regulations, rulings and judicial decisions as
of the date of this prospectus; any authority may be repealed, revoked or
modified, perhaps with retroactive effect, so as to result in federal income tax
consequences different from those discussed below. The discussion below also is
based upon representations that we have made, which in turn rely upon
significant assumptions as to facts and circumstances in the future. The
following discussion does not purport to describe all of the tax considerations
that may be relevant to you. The statements of law and legal conclusions set out
below are the opinion of Morgan, Lewis & Bockius LLP, our special United States
counsel. However, opinions of tax counsel are not binding on United States tax
authorities or courts.
DISTRIBUTIONS
Distributions that we make with respect to our common stock, other than
distributions in liquidation and distributions in redemption of stock that are
treated as exchanges, will be taxed to United States holders as ordinary
dividend income to the extent that the distributions do not exceed the current
and accumulated earnings and profits of Capital Environmental. The amount
treated as a dividend will include any Canadian withholding tax deducted from
the distribution. Distributions, if any, in excess of the current and
accumulated earnings and profits of Capital Environmental will constitute a
nontaxable return of capital to a United States holder and will be applied
against and reduce the United States holder's tax basis in our common stock. To
the extent that these distributions exceed the tax basis of the United States
holder in its shares of our common stock, the excess generally will be treated
as capital gain.
In the case of distributions in Canadian dollars, the amount of the
distributions generally will equal the United States dollar value of the
Canadian dollars distributed, determined by reference to the spot currency
exchange rate on the date of receipt of the distribution by the United States
holder, and the United States holder will realize separate foreign currency gain
or loss only to the extent that gain or loss arises on the actual disposition of
foreign currency received. Any foreign currency gain or loss generally will be
treated as ordinary income or loss.
Dividend income derived with respect to our common stock generally will
constitute "portfolio income" for purposes of the limitation on the use of
passive activity losses, and, therefore, generally may not be offset by passive
activity losses, and as "investment income" for purposes of the limitation on
the deduction of investment interest expense. Dividends that we pay will not be
eligible for the
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dividends-received deduction generally allowed to United States corporations
under Section 243 of the Internal Revenue Code.
SALE OR EXCHANGE
Upon a sale or exchange of our common stock to a person other than Capital
Environmental, a United States holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale or exchange and
the United States holder's adjusted tax basis in the common stock. Any gain or
loss recognized will be capital gain or loss and will be long-term capital gain
or loss if the United States holder has held our common stock for more than one
year.
FOREIGN TAX CREDIT
In general, in computing its United States federal income tax liability, a
United States holder may elect for each taxable year to claim a deduction or,
subject to the limitations on foreign tax credits generally, a credit for
foreign income taxes paid or accrued by it, including any non-United States
taxes withheld from distributions, if any, that we pay on our common stock. For
foreign tax credit purposes, under Section 904(g) of the Internal Revenue Code,
in the event that at least 50 percent of our stock (determined by vote or value)
is owned, directly, indirectly or by attribution, by United States persons, and
subject to the limitations described below, a portion of the dividends that we
pay in each taxable year will be treated as United States-source income,
depending in general upon the ratio for that taxable year of our United
States-source earnings and profits to our total earnings and profits. The
remaining portion of our dividends will be treated as foreign-source income and
generally will be treated as passive income, subject to the separate foreign tax
credit limitation for passive income. The application of Section 904(g) is
subject to two limitations. First, if, in any taxable year, we have earnings and
profits and less than 10 percent of those earnings and profits are from United
States sources, then, in general, dividends that we pay from our earnings and
profits for that year will be treated entirely as foreign-source income. Second,
because dividends that we pay are treated entirely as foreign-source income
under the Canada-United States Income Tax Convention, a United States holder
that qualifies for the benefits of the Convention may elect to have the portion
of those dividends that would be treated as United States-source income under
Section 904(g) instead treated as foreign-source income that is subject to a
separate foreign tax credit limitation.
Gain realized by a United States holder on the sale or exchange of our
common stock generally will be treated as United States-source gain, and, under
recently-promulgated regulations, loss realized by a United States holder on the
sale or exchange of our common stock generally will be treated as United
States-source loss, for United States foreign tax credit purposes.
The availability of foreign tax credits depends on the particular
circumstances of each United States holder. You are advised to consult your own
tax advisor.
BACKUP WITHHOLDING TAX
Backup withholding tax at a rate of 31% may apply to payments of dividends
and to payments of proceeds of the sale or other disposition of our common stock
within the United States by a non-corporate United States holder, if the holder
fails to furnish a correct taxpayer identification number or otherwise fails to
comply with applicable requirements of the backup withholding tax rules. Backup
withholding tax is not an additional tax and may be credited against a United
States holder's United States federal income tax liability, provided that
correct information is provided to the Internal Revenue Service.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, the underwriters named below, for whom Credit
Suisse First Boston Corporation, Raymond James & Associates, Inc. and Sanders
Morris Mundy Inc. are acting as representatives, have severally but not jointly
agreed to purchase from Capital Environmental and the selling shareholders the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Credit Suisse First Boston Corporation...........................................
Raymond James & Associates, Inc..................................................
Sanders Morris Mundy Inc.........................................................
----------
Total........................................................................ 3,750,000
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent and the underwriters will be
obligated to purchase all of the shares of common stock, other than those shares
covered by the over-allotment option described below, if any are purchased. The
underwriting agreement also provides that, in the event of a default by an
underwriter, in certain circumstances the purchase commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated.
Capital Environmental has granted to the underwriters an option, expiring at
the close of business on the 30th day after the date of this prospectus to
purchase up to 562,500 additional shares at the initial public offering price
less the underwriting discounts and commissions all as set forth in the table on
the following page. The underwriters may exercise this option only to cover
over-allotments of common stock. If the underwriters exercise this option, each
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of these additional shares of common stock as
it was obligated to purchase pursuant to the underwriting agreement.
The representatives have advised us that the underwriters propose to offer
the shares of common stock initially at the public offering price set forth on
the cover page of this prospectus and, through the representatives, to certain
selling group members at that price less a concession of $ per share, and
the underwriters and this selling group members may allow a discount of
$ per share on sales to certain other broker/dealers. After the initial
public offering, the representatives may change the public offering price and
concession and discount to dealers.
The following table summarizes the compensation to be paid to the
underwriters by Capital Environmental and the selling shareholders, and the
expenses payable by Capital Environmental.
<TABLE>
<CAPTION>
TOTAL
------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions paid by Capital
Environmental....................................................... $ $ $
Expenses payable by Capital Environmental............................. $ $ $
Underwriting Discounts and Commissions paid by the Selling
Shareholders........................................................ $ $ $
Expenses payable by the Selling Shareholders.......................... $ $ $
</TABLE>
The underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
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Capital Environmental, its officers and directors and principal stockholders
and optionholders have agreed that they will not offer, sell, contract to sell,
announce their intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any shares of common stock or
securities exchangeable or exercisable for or convertible into shares of common
stock without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus except as
consideration for business acquisitions, upon exercise of currently outstanding
stock options or warrants or upon the issuance of options to employees,
consultants and directors under the 1997 stock option plan and the 1999 stock
option plan, and the exercise of these options. If we issue shares as
consideration for business acquisitions in the 180 day period after the date of
this prospectus, we will require the holders of these shares to agree to the
same restrictions on the disposition of these shares as those described in the
immediately preceeding sentence.
Capital Environmental and the selling shareholders have agreed to indemnify
the underwriters against liabilities under the Securities Act, or contribute to
payments which the underwriters may be required to make for these liabilities.
We have applied to list the common stock on The Nasdaq Stock Market's
National Market under the symbol "CERI."
Prior to the offering, there has been no public market for the common stock.
The initial public offering price was determined by negotiation between Capital
Environmental and the representatives. The principal factors considered in
determining the public offering price included:
- the information set forth in this prospectus and otherwise available to
the representatives;
- the history of, and the prospects for, Capital Environmental and the
industry in which it competes;
- an assessment of Capital Environmental's management;
- the prospects for, and the timing of, future earnings of Capital
Environmental;
- the present state of Capital Environmental's development and its current
financial condition;
- the general condition of the securities markets at the time of the
offering;
- the recent market prices of, and the demand for, publicly-traded common
stock of companies in businesses similar to those of Capital
Environmental;
- market conditions for initial public offerings; and
- other relevant factors.
The representatives, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
securities in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the representatives to
reclaim a selling concession from a syndicate member when the securities
originally sold by this syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
common stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on The Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
70
<PAGE>
In June 1998, we completed a private placement of 553,869 shares of our
common stock at a price of C$18.05, or $12.11 at April 15, 1999, per share, for
which Sanders Morris Mundy served as placement agent. Principals and employees
of Sanders Morris Mundy and investment partnerships managed by or associated
with Sanders Morris Mundy purchased 486,989 shares of common stock in the
private placement. In May 1998, a principal of Sanders Morris Mundy received an
option to purchase 27,694 shares of common stock at an exercise price of
C$14.44, or $9.69 at April 15, 1999, per share, which will be exercisable the
day prior to the completion of this offering, and in August 1998, Kenneth
Ch'uan-k'ai Leung, a principal of Sanders Morris Mundy and a director of Capital
Environmental, received an option to purchase 20,770 shares of common stock at
an exercise price of C$14.44 per share, or $9.69 at April 15, 1999, which will
be exercisable on the earlier of the day prior to the completion of this
offering and two years from the date of grant.
In October 1998, principals and employees of Sanders Morris Mundy, and
investment partnerships managed by or associated with Sanders Morris Mundy,
purchased 612,037 shares of our common stock from certain existing shareholders
of Capital Environmental.
Sanders Morris Mundy has provided various investment banking services to
Capital Environmental since July 1997 and may do so in the future, and has
received, and may in the future receive, customary compensation for these
services.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered in this
prospectus, the matter of enforcement of judgments in Canada, Canadian
environmental matters and Canadian tax consequences will be passed on by Tory
Tory DesLauriers & Binnington, Toronto, Ontario, Canadian counsel to Capital
Environmental. United States legal matters related to this offering, including
matters of United States law, will be passed upon for Capital Environmental by
Morgan, Lewis & Bockius LLP, New York, New York and for the underwriters by
Shearman & Sterling, New York, New York.
EXPERTS
The financial statements of Capital Environmental, for the year ended
December 31, 1998 and for the seven months ended December 31, 1997, appearing in
this prospectus and registration statement have been audited by
PricewaterhouseCoopers LLP, independent auditors, as set forth in their reports
appearing elsewhere in this prospectus and registration statement.
The financial statements of Western Waste, for the seven months ended June
5, 1997 and the year ended October 31, 1996, appearing in this prospectus and
registration statement have been audited by Coopers & Lybrand, independent
auditors, as set forth in their reports appearing elsewhere in this prospectus
and registration statement. These financial statements have been included in
this prospectus in reliance upon the reports, which have been given upon the
authority of the above firms as experts in accounting and auditing.
AVAILABLE INFORMATION
Capital Environmental has filed with the Securities and Exchange Commission
a registration statement (of which the prospectus is a part) on Form F-1, under
the Securities Act of 1933 for the Common Stock offered in this prospectus. This
prospectus, which forms a part of the registration statement, does not contain
all the information in the registration statement. Certain portions of the
registration statement contain exhibits and schedules as permitted by the rules
and regulations of the Commission. For further information about us and our
common stock offered in this prospectus, we refer you to the registration
statement and to its exhibits and schedules. You may inspect the registration
statement, including all its exhibits and schedules, without charge at the
principal office of the Securities and Exchange Commission located at 450 Fifth
Street, NW, Washington, DC 20549, and
71
<PAGE>
at the following regional offices of the Commission: Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
13th Floor, New York, New York 10048. You may obtain copies of this material
from the Public Reference Section of the Securities and Exchange Commission at
450 Fifth Street, NW., Room 1204, Washington, DC 20549, at prescribed rates. In
addition, we have applied for listing on the Nasdaq National Market. You may
inspect reports and other information concerning Capital Environmental at the
National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington,
DC.
Upon completion of this offering we will be subject to informational
requirements of some U.S. federal securities laws and therefore we will be
required or have agreed to file periodic reports and other information with the
Securities and Exchange Commission, except as described below. As a foreign
private issuer, Capital Environmental is exempt from the rules under the
Exchange Act of 1934 prescribing the furnishing and content of proxy statements.
Additionally, our officers, directors and principal shareholders are exempt from
the reporting and short-swing profit recovery provisions contained in Section 16
of the Exchange Act of 1934. In addition, under the Exchange Act, we are not
required to publish financial statements as frequently, as promptly or
containing the same information as United States companies. However, we have
agreed to provide our shareholders with reports on Form 10-Q and 10-K and to
comply with the United States proxy rules. In addition, we will furnish to
holders of common stock annual reports in English containing consolidated
financial statements, prepared in accordance with U.S. GAAP, examined by our
independent public auditors and including their report thereon. We also will
make available quarterly reports containing condensed unaudited financial
information for the first three fiscal quarters of each year, prepared in
accordance with U.S. GAAP. We will generally furnish annual reports within 90
days after the end of each fiscal year, and make available quarterly reports
within 45 days after the end of each of the first three fiscal quarters of each
year. We will also provide the holders of common stock with notice of meetings
of holders of common stock.
The Securities and Exchange Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission. The address of the Securities and Exchange Commission's web-site is
http://www.sec.gov.
72
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Capital Environmental Resource Inc.
Report of PricewaterhouseCoopers LLP, Independent Auditors......................... F-2
Consolidated Balance Sheets........................................................ F-3
Consolidated Statements of Operations and Comprehensive Income..................... F-5
Consolidated Statements of Stockholders' Equity.................................... F-6
Consolidated Statements of Cash Flows.............................................. F-7
Notes to Consolidated Financial Statements......................................... F-8
Western Waste Services Inc.
Report of Coopers & Lybrand, Independent Auditors.................................. F-27
Consolidated Balance Sheets........................................................ F-28
Consolidated Statements of Operations and Comprehensive Loss....................... F-29
Consolidated Statements of Stockholders' Deficit................................... F-30
Consolidated Statements of Cash Flows.............................................. F-31
Notes to Consolidated Financial Statements......................................... F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE FOLLOWING IS THE FORM OF OPINION THAT PRICEWATERHOUSECOOPERS LLP,
CHARTERED ACCOUNTANTS, WILL BE IN A POSITION TO ISSUE UPON THE SHAREHOLDERS'
APPROVAL OF THE STOCK SPLIT DISCUSSED IN NOTES 7 AND 11(D).
To the Stockholders of
Capital Environmental Resource Inc.
We have audited the consolidated balance sheets of Capital Environmental
Resource Inc. (the "Company") as at December 31, 1997 and 1998 and the
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows for the period from May 23, 1997, date of inception, to
December 31, 1997 and for the year ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1997 and 1998 and the results of its operations and its cash flows for the
periods then ended in accordance with generally accepted accounting principles
in the United States.
<TABLE>
<S> <C> <C>
Toronto, Canada PricewaterhouseCoopers LLP
March 8, 1999, except Chartered Accountants
for
notes 7 and 11(d) which
are dated April 26,
1999
</TABLE>
F-2
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................................... $ 2,473 $ 1,060
Trade accounts receivable (net of allowance for doubtful accounts of $331 and $761)......... 5,444 8,424
Prepaid expenses, deposits and other assets................................................. 1,711 1,266
Employee loans.............................................................................. -- 190
--------- ---------
9,628 10,940
PROPERTY AND EQUIPMENT, NET (note 3)........................................................ 19,174 25,909
GOODWILL (net of accumulated amortization of $164 and $1,568)............................... 18,802 54,430
OTHER INTANGIBLES (net of accumulated amortization of $23 and $912)......................... 676 3,082
OTHER NON-CURRENT ASSETS.................................................................... 405 149
DEFERRED INCOME TAXES (note 5).............................................................. 1,810 2,818
DEFERRED PUBLIC OFFERING COSTS.............................................................. -- 1,009
--------- ---------
$ 50,495 $ 98,337
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
REDEEMABLE
STOCK AND
STOCKHOLDERS'
EQUITY
DECEMBER 31,
1998
1997 1998 (UNAUDITED)
--------- --------- ------------
<S> <C> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Accounts payable............................................................. $ 2,401 $ 3,187
Accrued employee and subcontractor costs..................................... 601 793
Accrued disposal fees........................................................ 228 1,202
Other accrued liabilities.................................................... 2,525 2,853
Accrued purchase liabilities (notes 6(e) and 7(d))........................... -- 1,798
Current portion of long-term debt (note 4)................................... 1,398 2,101
--------- ---------
7,153 11,934
LONG-TERM DEBT (NOTE 4)...................................................... 29,022 54,589
DEFERRED INCOME TAXES (NOTE 5)............................................... 2,541 4,376
--------- ---------
38,716 70,899
--------- ---------
REDEEMABLE CONVERTIBLE PREFERENCE STOCK: unlimited shares authorized; 8,000
shares issued and outstanding at December 31, 1997 and 1998; no shares
issued and outstanding pro forma (notes 7(b) and 12)....................... 5,748 5,748 $ --
REDEEMABLE CONVERTIBLE CLASS "B" SPECIAL STOCK: 400,000 shares authorized;
400,000 shares issued and outstanding at December 31, 1997 and 1998 no
shares issued and outstanding pro forma (notes 7(c) and 12)................ 7,455 7,455 --
REDEEMABLE COMMON STOCK: unlimited shares authorized; no shares issued and
outstanding at December 31, 1997; 780,415 shares issued and outstanding
December 31, 1998 no shares issued and outstanding pro forma (notes 7(d),
11(d) and 12).............................................................. -- 8,743 --
--------- --------- ------------
13,203 21,946 --
--------- --------- ------------
COMMITMENTS AND CONTINGENCIES (note 6)
STOCKHOLDERS' EQUITY
COMMON STOCK: unlimited shares authorized; issued and outstanding 1,427,774
common shares issued and outstanding at December 31, 1997; 1,993,758 common
shares issued and outstanding at December 31, 1998; 3,866,393 common shares
issued and outstanding pro forma (notes 7(a), 11(d) and 12)................ 799 7,528 24,272
ACCUMULATED OTHER COMPREHENSIVE LOSS......................................... (151) (1,157) (1,157)
ACCUMULATED DEFICIT.......................................................... (2,072) (879) (879)
--------- --------- ------------
(1,424) 5,492 $ 22,236
--------- --------- ------------
------------
$ 50,495 $ 98,337
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
PERIOD FROM MAY 23, 1997 TO DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 23, 1997)
TO DECEMBER 31, YEAR ENDED
1997 DECEMBER 31, 1998
------------------- -----------------
<S> <C> <C>
REVENUES................................................................. $ 15,089 $ 62,056
COST OF OPERATIONS....................................................... 10,676 43,002
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............................. 1,389 8,490
DEPRECIATION AND AMORTIZATION............................................ 1,154 4,890
START-UP AND INTEGRATION COSTS........................................... 270 602
ABSORPTION OF ACQUISITION AND TRANSITION COSTS (note 2(b))............... 4,055 --
---------- -----------------
INCOME (LOSS) FROM OPERATIONS............................................ (2,455) 5,072
INTEREST EXPENSE......................................................... (898) (3,139)
---------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST.................. (3,353) 1,933
INCOME TAX (PROVISION) BENEFIT (note 5).................................. 1,398 (740)
MINORITY INTEREST........................................................ (117) --
---------- -----------------
NET INCOME (LOSS) FOR THE YEAR........................................... $ (2,072) $ 1,193
---------- -----------------
---------- -----------------
BASIC NET INCOME (LOSS) PER COMMON SHARE (note 8)........................ $ (1.51) $ 0.52
---------- -----------------
---------- -----------------
DILUTED NET INCOME (LOSS) PER SHARE (note 8)............................. $ (1.51) $ 0.29
---------- -----------------
---------- -----------------
SHARES USED IN PER SHARE CALCULATIONS (note 8)
Basic.................................................................... 1,374,220 2,304,847
---------- -----------------
---------- -----------------
Diluted.................................................................. 1,374,220 4,174,172
---------- -----------------
---------- -----------------
</TABLE>
STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<S> <C> <C>
NET INCOME (LOSS) FOR THE YEAR............................. $ (2,072) $ 1,193
Other comprehensive income (loss)--
Foreign currency translation adjustments............... (151) (1,006)
------- --------------
COMPREHENSIVE INCOME (LOSS) FOR THE YEAR................... $ (2,223) $ 187
------- --------------
------- --------------
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM MAY 23, 1997 TO DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ACCUMULATED
COMMON STOCK OTHER
--------------------- COMPREHENSIVE ACCUMULATED
SHARES AMOUNT INCOME DEFICIT TOTAL
---------- --------- ------------- ------------- ---------
BALANCES AT INCEPTION (MAY 23, 1997).............. -- $ -- $ -- $ -- $ --
Issuance of common shares......................... 1,427,774 799 -- -- 799
Foreign currency translation adjustments.......... -- -- (151) -- (151)
Net loss for the year............................. -- -- -- (2,072) (2,072)
---------- --------- ------------- ------ ---------
BALANCES AT DECEMBER 31, 1997..................... 1,427,774 799 (151) (2,072) (1,424)
Issuance of common shares......................... 565,984 6,729 -- -- 6,729
Foreign currency translation adjustments.......... -- -- (1,006) -- (1,006)
Net income for the year........................... -- -- -- 1,193 1,193
---------- --------- ------------- ------ ---------
BALANCES AT DECEMBER 31, 1998..................... 1,993,758 $ 7,528 $ (1,157) $ (879) $ 5,492
---------- --------- ------------- ------ ---------
---------- --------- ------------- ------ ---------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM MAY 23, 1997 TO DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 23, 1997) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1997 1998
--------------- ------------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss)................................................................. $ (2,072) $ 1,193
Adjustments for non-cash items --
Depreciation and amortization................................................... 1,154 4,890
Deferred income taxes........................................................... (1,433) 540
Minority interest............................................................... 117 --
Absorption of acquisition and transition costs.................................. 4,055 --
Net gain on disposal of property, plant and equipment........................... (19) (205)
Changes in assets and liabilities, net of effect of acquisitions and divestitures
--
Trade accounts receivable....................................................... (3,545) 513
Prepaid expenses, deposits and other assets..................................... (1,488) 1,091
Deferred public offering costs.................................................. -- (1,009)
Employee loans.................................................................. -- (190)
Accounts payable................................................................ 1,414 (3,743)
Accrued employee and subcontractor costs........................................ 330 67
Accrued disposal fees........................................................... 288 (20)
Income and other taxes.......................................................... 721 --
Other accrued liabilities....................................................... 1,645 (419)
--------------- ------------
1,167 2,708
--------------- ------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Capital expenditures.............................................................. (13,318) (3,710)
Acquisitions of businesses, net of cash acquired.................................. 653 (33,670)
Proceeds from sale of property and equipment...................................... 133 1,090
Loans and advances to employees and shareholders.................................. (149) 83
Collection of loans and advances to employees and shareholders.................... 26 --
Other assets...................................................................... 126 22
--------------- ------------
(12,529) (36,185)
--------------- ------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.......................................... 26,249 27,312
Principal payments on long-term debt.............................................. (17,909) (1,350)
Repayment of capital lease liability.............................................. (3) (287)
Net proceeds from issuance of common shares....................................... 89 6,729
Net proceeds from issuance of preference shares................................... 5,748 --
Increase in deferred financing costs.............................................. (256) (91)
--------------- ------------
13,918 32,313
--------------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS...................... (83) (249)
--------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 2,473 (1,413)
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR...................................... -- 2,473
--------------- ------------
CASH AND CASH EQUIVALENTS--END OF YEAR............................................ $ 2,473 $ 1,060
--------------- ------------
--------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1. BUSINESS, ORGANIZATION, AND SIGNIFICANT ACCOUNTING POLICIES
A) BUSINESS AND ORGANIZATION
Capital Environmental Resource Inc. (the "Company") is a regional,
integrated solid waste services company that provides collection, transfer,
disposal and recycling services to commercial, industrial and residential
customers in secondary markets in Canada. The Company's operations are currently
organized into seven service areas within three geographic territories: Ontario
(currently comprised of Southwestern, Central and Eastern Ontario), western
Canada (currently comprised of Alberta and British Columbia), and the northern
United States (Western New York and Central New York/ Pennsylvania). At December
31, 1998, the Company operated seven transfer stations and six material
recycling facilities. As at December 31, 1998, the Company did not own any
landfills but operated two municipal landfills under term contracts.
The Company was incorporated in the Province of Ontario, Canada on May 23,
1997 in order to take advantage of consolidation opportunities in the solid
waste services industry in Canada and the United States. On June 6, 1997, the
Company consummated: (i) the acquisition (the "Canadian Waste Acquisition") of a
series of diverse, geographically dispersed assets from Canadian Waste Services
Inc. ("Canadian Waste"), a wholly owned subsidiary of USA Waste Services Inc.
("USA Waste"); and (ii) the acquisition (the "Western Acquisition") of 50% of
the common stock of Western Waste Services Inc. ("Western Waste") from USA
Waste. The Canadian Waste assets included the right to provide selected services
under municipal and individual customer contracts in eight markets in Ontario,
Alberta and British Columbia. In addition, the Company acquired a transfer
station and certain trucks, containers, office and parking space and the right
to use certain of Canadian Waste's owned or controlled disposal facilities. The
Western Acquisition provided the Company with additional collection operations
and materials recovery facilities in eight markets in Alberta and British
Columbia. The Company subsequently transferred certain of its newly purchased
Canadian Waste assets to Western Waste in exchange for an additional 16.67% of
the outstanding common stock of Western Waste and thereby acquired a 66.67%
controlling majority stake in Western Waste. On November 1, 1997, Capital
Environmental purchased the remaining 33.33% of the outstanding common stock of
Western Waste in exchange for cash consideration and 400,000 Class "B" Special
Shares. During 1998, the Company has continued its growth with a series of
business acquisitions in both Canada and the United States (Note 2).
B) BASIS OF PRESENTATION
The Company's financial statements are prepared in accordance with generally
accepted accounting principles in the United States. All financial information
presented herein is in thousands of U.S. dollars except share and per share
data. All references to "dollars" or "$" mean U.S. dollars and "C$" mean
Canadian dollars.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. Prior to November 1, 1997, there was a
non-controlling interest of 33.33% in Western Waste that was accounted for as a
minority interest. All business acquisitions since the Company's inception have
been accounted for under the purchase method of accounting and the results of
operations of these businesses are included in the consolidated financial
statements from their respective dates of acquisition.
F-8
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
Assets and liabilities are reported in United States dollars. Assets and
liabilities of Canadian operations have been translated from Canadian dollars to
United States dollars at the exchange rates in effect at the relevant balance
sheet date, and revenue and expenses of Canadian operations have been translated
from Canadian dollars to United States dollars at the weighted average exchange
rates prevailing during the period. Unrealized gains and losses on translation
of the Canadian operations are reported as a separate component of stockholders'
equity.
C) CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash and cash equivalents and trade accounts receivable.
The Company places its cash and cash equivalents only with high credit quality
financial institutions. The Company's trade accounts receivable are not subject
to a concentration of credit risk. The Company's customers are diversified as to
both geographic and industry concentrations. The Company maintains an allowance
for losses based on the expected collectibility of the accounts.
D) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
period. Actual results could differ from those estimates.
E) CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and short-term highly liquid
deposits with maturity dates of less than 90 days.
F) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives on a straight-line basis as indicated below. Improvements
or betterments which significantly extend the life of an asset are capitalized.
Expenditures for maintenance and repair costs are charged to operations as
incurred. Gains and losses resulting from property or equipment disposals are
credited or charged to cost of operations.
<TABLE>
<S> <C>
Buildings.................................................... 10 to 25
years
Vehicles..................................................... 10 years
Containers, compactors and recycling equipment............... 5 to 12 years
Furniture, fixtures and other office equipment and
leaseholds................................................. 3 to 5 years
</TABLE>
During the year, the Company reduced the maximum estimated life of container
equipment from 20 years to 12 years. This change, which has been accounted for
prospectively commencing January 1, 1998, has resulted in a decrease in net
income and net income per share of $150 and $0.06, respectively in 1998.
F-9
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
G) GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net identifiable assets of acquired businesses, and is amortized on a
straight-line basis over the period of expected benefit of 40 years.
Should events or circumstances occur subsequent to the acquisition of a
business which bring into question the realizable value of the related goodwill,
the Company will re-evaluate the remaining useful life of goodwill and make
adjustments, if necessary. The carrying value would be reduced to the estimated
fair value if it becomes probable that the Company's best estimate for expected
future undiscounted cash flows of the business would be less than the carrying
amount. Fair value would be determined based on expected future discounted cash
flows.
H) OTHER INTANGIBLES
Other intangibles include disposal agreements, significant municipal
customer contracts and non-compete agreements related to acquisitions and are
recorded at their cost less accumulated amortization. Amortization is charged on
a straight-line basis over the life of the contracts or agreements which range
from one to five years.
I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the cash, cash equivalents and long-term debt
approximate their fair value as at December 31, 1997 and 1998, based on the then
current lending and borrowing rates for similar investing and financing
arrangements.
J) REVENUE RECOGNITION
The Company recognizes revenue when waste removal services are provided.
Amounts billed to customers, prior to providing the related services, are
deferred and reported as revenues in the period in which the services are
rendered. Long-term service contracts are reviewed on a regular basis for
losses. Losses are changed to operations in the period when the likelihood of a
loss has been established.
K) INCOME TAXES
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws expected to be
in effect when the differences are expected to reverse.
L) MINORITY INTEREST
The minority interest share of earnings represents the non-controlling
interest of 33.33% that existed in the earnings of Western Waste from June 6,
1997 to October 31, 1997.
F-10
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
M) ENVIRONMENTAL, LANDFILL CLOSURE AND POST-CLOSURE COSTS
Costs relating to environmental damages are accrued and charged to
operations in the period in which the likelihood of the occurrence has been
established as probable and the costs can be reasonably determined. As of
December 31, 1998, the Company did not own any landfills and, accordingly, does
not accrue for estimated landfill closure and post-closure monitoring and
maintenance costs. The Company may have material financial obligations relating
to closure and post-closure costs of any disposal facilities it may own in the
future. The Company will then provide accruals for future monitoring and
maintenance costs of its landfills, based on engineering estimates of
consumption of permitted landfill airspace over the estimated useful life of
such landfill.
N) DEFERRED FINANCING COSTS AND INITIAL PUBLIC OFFERING COSTS
Costs associated with arranging the Company's credit facility have been
deferred and are being written off over the term of the debt.
Costs associated with a planned initial public offering have been deferred
and will be charged to operations if the offering is not successful or will be
netted against the proceeds raised from the offering, if completed.
O) NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
Reporting on the Costs of Start-Up Activities ("SOP 98-5"). This statement
requires costs of start-up activities, integration expenses and organization
costs to be expensed as incurred and is effective for fiscal years beginning
after December 15, 1998. Since incorporation, the Company has followed the
prescribed requirements of SOP 98-5.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
disclosure standards for derivative instruments and hedging activities. The
statement, which is to be applied prospectively, is effective for the Company's
fiscal year beginning January 1, 2000. The Company is currently evaluating the
potential impact of SFAS No. 133 on its future results of operations and
financial position.
2. ACQUISITIONS
A) BUSINESSES ACQUIRED DURING 1997
On June 6, 1997, the Company purchased 50% of the outstanding shares of
Western Waste from USA Waste, for consideration of $9,642 in the form of a note
payable bearing interest at 6.75%. Subsequently, the Company received 100
treasury shares of Western Waste, representing 16.67% of the total outstanding
common shares, in exchange for certain of the Canadian Waste assets with a value
of $5,243. Both components of the acquisition of Western Waste were subject to
price adjustment clauses based upon the achievement of certain earnings targets
for the period September 1, 1997 to August 31, 1998; however, no adjustments
were ultimately required.
F-11
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
On November 1, 1997, the Company purchased the remaining 33.33% of the
common shares of Western Waste from L&S Bishop Enterprises Inc. for cash
consideration of $391, and 400,000 Class "B" Special Shares of the Company
valued at $7,455. The Company also immediately declared a dividend of $1,075 on
the Class "B" Special Shares, which amount is included as a component of the
purchase price. See Notes 6(e) and 7(c) for details of further contingency
payments.
In 1997, the Company purchased two other smaller businesses for $1,195
comprising cash consideration of $397 and the issue of 73,850 common shares and
10,385 options to acquire common shares.
The assets acquired and obligations assumed for business combinations
accounted for under the purchase method of accounting in the period ended
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
WESTERN
WASTE OTHER TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Net current assets (liabilities)............................... $ (8,554) $ 107 $ (8,447)
Property and equipment......................................... 10,881 409 11,290
Other non-current assets....................................... 257 679 936
Goodwill and other intangibles................................. 18,391 -- 18,391
--------- --------- ---------
20,975 1,195 22,170
Less:
Long-term obligations assumed................................ 229 -- 229
Deferred income taxes........................................ 2,183 -- 2,183
--------- --------- ---------
Net acquisition costs.......................................... $ 18,563 $ 1,195 $ 19,758
--------- --------- ---------
--------- --------- ---------
</TABLE>
B) ACQUISITION OF SIGNIFICANT ASSETS OF CANADIAN WASTE DURING 1997
Between June 6, 1997 and August 1, 1997, the Company acquired a series of
geographically dispersed assets and certain transition services from Canadian
Waste in Ontario, British Columbia and Alberta in connection with a sale
mandated by the Competition Bureau of Canada (the "Competition Bureau"). The
assets acquired included certain fixed assets (such as trucks, containers,
facilities and equipment), as well as a list of customers which the Company
could solicit to provide selected services (collectively, the "Canadian Waste
Assets"). The Company also received certain transition services and the right to
share use of certain Canadian Waste facilities during a transition period which
expired December 31, 1997. While many of the customers were under short term
contracts with Canadian Waste that did not provide for automatic transfer or
assignment, the transaction was structured such that, in the opinion of the
Competition Bureau, the Company acquired a sufficient market position to provide
adequate long-term competition to Canadian Waste.
Consideration for the Canadian Waste Assets and transition license included
$11,340, in the form of a note payable of $10,980, due June 6, 2000, bearing
interest at 6.75% and cash consideration of $360. Tangible assets represented
$7,285 of the purchase price and no liabilities were assumed in the transaction.
The Company allocated a portion of the consideration paid to property and
equipment based upon the estimated fair market value of the assets acquired. The
balance of the purchase cost of $4,055 was allocated to the customer lists and
transition services acquired in the transaction. The
F-12
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
Company did not allocate any portion of the consideration to goodwill, as the
transaction did not constitute the acquisition of a "business".
Due to the nature of the rights and the limited number of assignable
contracts acquired and the fact that the Company was required to negotiate new
service contracts with substantially all of the customers whose contracts it
acquired, as well as term of the transition license, the Company has amortized
the acquisition and transition services costs of $4,055 over the period from the
acquisition date to December 31, 1997.
C) BUSINESSES ACQUIRED DURING 1998
On January 2, 1998, the Company purchased 100% of the common shares of
Rubbish Removal Inc. ("Rubbish"). The purchase consideration paid on closing
amounted to $11,357, which included cash of $5,655, an obligation to pay
additional cash consideration of $500 over three years and 500,175 redeemable
common shares with a value of $5,202. The Company also subsequently paid
additional consideration of $1,798 which is included in the cost of acquisition.
See Notes 6(e) and 7(d) for details of further contingency payments.
On October 1, 1998, the Company acquired 100% of the common shares of
General Environmental Technical Services Inc. and J.V. Services of Western New
York (collectively "GETS") for cash consideration of $2,182 and 280,240
redeemable common shares with a value of $3,541.
The Company also acquired 15 other smaller businesses during 1998 at an
aggregate purchase cost of $24,848.
The assets acquired and obligations assumed for business combinations in the
year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
RUBBISH GETS OTHER TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net current assets (liabilities)........................................ $ (1,230) $ (426) $ (75) $ (1,731)
Property and equipment.................................................. 813 701 5,261 6,775
Other intangibles....................................................... 1,000 100 2,223 3,323
Goodwill................................................................ 12,572 5,921 18,264 36,757
--------- --------- --------- ---------
Total assets acquired................................................... 13,155 6,296 25,673 45,124
Less: long-term obligations assumed..................................... -- 573 535 1,108
Deferred taxes.......................................................... -- -- 290 290
--------- --------- --------- ---------
Net acquisition costs................................................... $ 13,155 $ 5,723 $ 24,848 $ 43,726
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
D) PRO FORMA ACQUISITION DATA (UNAUDITED)
The following table presents condensed pro forma statement of operations
data giving effect to the acquisitions of Rubbish, GETS and, the five next
largest acquisitions, as if the acquisitions had occurred at the beginning of
the periods presented. Together, these seven acquisitions comprised 78% of the
total net acquisition costs for the year ended December 31, 1998. This data does
not purport to be indicative of the results of operations of the Company that
might have occurred nor which might occur in the future.
F-13
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
Statement of Operations Data
Revenue.......................................................... $ 37,083 $ 75,171
------------ ------------
------------ ------------
Income (loss) from operations.................................... $ (1,966) $ 5,874
------------ ------------
------------ ------------
Net income (loss)................................................ $ (2,366) $ 1,241
------------ ------------
------------ ------------
Basic earnings (loss) per share.................................. $ (1.09) $ 0.49
------------ ------------
------------ ------------
Fully diluted earnings (loss) per share.......................... $ (1.09) $ 0.28
------------ ------------
------------ ------------
Pro forma weighted number of shares
Basic.......................................................... 2,166,754 2,522,289
Fully diluted.................................................. 2,166,754 4,391,615
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Land............................................................. $ 128 $ 114
Buildings........................................................ 958 1,055
Vehicles......................................................... 8,794 15,112
Containers, compactors and recycling equipment................... 9,646 12,410
Furniture, fixtures and other office equipment and leaseholds.... 509 957
------------ ------------
20,035 29,648
Less: Accumulated depreciation................................... 861 3,739
------------ ------------
$ 19,174 $ 25,909
------------ ------------
------------ ------------
</TABLE>
Included in property and equipment at December 31,1998 are assets held under
capital leases with a cost of $2,982 (1997--$70) and accumulated depreciation of
$917 (1997--$3).
Depreciation expense for the period ended December 31, 1997 was $861 and for
the year ended December 31, 1998 was $2,878.
F-14
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
4. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
SENIOR DEBT
Term loan payable under the credit facility bearing interest at 7.44% at December
31, 1998 (1997--6.25%), with no monthly payments, due June 3, 2000............... $ 16,579 $ 41,701
SUBORDINATED DEBT
Promissory notes payable, bearing interest at 6.75%, varying annual principal
payments, due June 6, 2000....................................................... 13,781 11,528
Promissory notes payable, bearing interest at 9.5%, varying annual principal
payments, due April 1, 2004...................................................... -- 479
OTHER
Obligations under capital leases for equipment..................................... 60 2,107
Other.............................................................................. -- 875
------------ ------------
30,420 56,690
Less: Current portion.............................................................. 1,398 2,101
------------ ------------
$ 29,022 $ 54,589
------------ ------------
------------ ------------
</TABLE>
On September 25, 1997, the Company entered into a C$45.5 million credit
facility with a syndicate led by Dresdner Bank Canada. On May 29, 1998, the
Company amended such credit facility and increased it to C$67.5 million
(U.S.$44.1 million at December 31, 1998) (as amended, the "Credit Facility"). At
December 31, 1998, borrowings under the Credit Facility bore interest based on
the Canadian prime rate plus 0.75%, the Bankers' Acceptance Rate or the
Eurodollar rate plus 1.75% per annum. The Credit Facility permits the Company to
redraw on the Credit Facility as needed for future acquisitions, capital
expenditures and general corporate purposes (subject to certain restrictions).
The Credit Facility is collateralized by substantially all of the Company's
assets (including the shares of the subsidiaries) and matures on June 3, 2000.
At December 31, 1998, the Company had C$0.3 million (U.S.$0.2 million at
December 31, 1998) of unused availability under the Credit Facility. The
weighted average rate of interest on the Credit Facility for the year ended
December 31, 1998 was 7.02%, and for the period ended December 31, 1997 it was
6.25%.
The Credit Facility contains certain covenants and restrictions regarding,
among other things, working capital minimum ratios, minimum equity requirements,
capital expenditures, consolidated earnings before interest, depreciation, and
taxes and maximum leverage requirements. Under certain circumstances the
lender's approval may be required for acquisitions of businesses. The terms of
the Company's Credit Facility also require the Company to obtain the consent of
the lending banks prior to consummating acquisitions of other businesses for
total consideration (including all liabilities assumed) in excess of $5.0
million.
The term loan payable under the Credit Facility is collateralized by an
interest in the real property of the Company, an interest in all of the present
and future personal property of the Company, an
F-15
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
assignment of all present and future property insurance of the Company, an
assignment of all material contracts of the Company, the equity securities of
the Company's subsidiaries and a general security interest in all of the assets
of the Company.
On January 29, 1999, the Company amended its existing Credit Facility and
has increased its available credit under the Amended Credit Facility (note
11(c)).
The 6.75% promissory notes are currently unsecured. The holders thereof have
entered into postponement and subordination agreements with the syndicate under
the Credit Facility.
The aggregate annual principal repayments required in respect of long-term
debt as at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................... $ 2,101
2000............................................................... 52,901
2001............................................................... 617
2002............................................................... 572
2003............................................................... 499
---------
$ 56,690
---------
---------
</TABLE>
Deferred debt issue costs at December 31, 1997 were $229 and at December 31,
1998 were $234.
5. INCOME TAXES
At December 31, 1998 the Company had approximately $6,355 of accumulated net
operating loss carryforwards for income tax purposes. Most of these net
operating loss carryforwards do not expire until 2004 and 2005, and their use is
not subject to any annual limitations. The benefit from these losses has been
reflected in these financial statements as deferred income tax assets.
Management believes that sufficient certainty exists regarding the realization
of these losses, and such amounts can be realized through the existing deferred
tax credits. Accordingly, a valuation allowance was not recorded.
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ---------------
<S> <C> <C>
CURRENT
Canada........................................................... $ 45 $ 200
United States.................................................... -- --
------------ -----
45 200
------------ -----
DEFERRED
Canada........................................................... (1,443) 523
United States.................................................... -- 17
------------ -----
(1,443) 540
------------ -----
$ (1,398) $ 740
------------ -----
------------ -----
</TABLE>
F-16
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
The reconciliation of the difference between income taxes at the Canadian
statutory rate and the income tax provision (benefit) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ -------------
<S> <C> <C>
Taxes at combined Canadian federal and provincial statutory
rate........................................................... $ (1,341) $ 870
Effect of lower tax rates applicable to U.S. income.............. -- (47)
Non-deductible expenses.......................................... (57) 490
Recognition of losses not previously booked...................... -- (739)
Large corporations tax........................................... -- 100
Other............................................................ -- 66
------------ -----
INCOME TAX PROVISION (BENEFIT)................................... $ (1,398) $ 740
------------ -----
------------ -----
</TABLE>
The components of the deferred income tax amounts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
DEFERRED INCOME TAX ASSETS
Tax benefit related to net operating loss carryforwards.......... $ 1,810 $ 2,818
DEFERRED INCOME TAX LIABILITIES
Property, equipment, deductible goodwill and other intangibles... (2,541) (4,376)
------------ ------------
NET DEFERRED INCOME TAX LIABILITIES.............................. $ (731) $ (1,558)
------------ ------------
------------ ------------
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
A) OPERATING LEASES
The aggregate amount of future rent expense resulting from non-cancellable
operating leases as at December 31, 1998 is as follows:
<TABLE>
<S> <C>
1999................................................................ $ 1,120
2000................................................................ 1,038
2001................................................................ 852
2002................................................................ 780
2003................................................................ 444
Thereafter.......................................................... 83
---------
$ 4,317
---------
---------
</TABLE>
Aggregate rent expense, which is included in the cost of operations, was
$241 for the period ended December 31, 1997 and $932 for the year ended December
31, 1998.
F-17
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
B) PERFORMANCE BONDS AND LETTERS OF CREDIT
Municipal solid waste services contracts, permits and licenses to operate
transfer stations and recycling facilities may require performance or surety
bonds, letters of credit or other means of financial assurance to secure
contractual performance. As of December 31, 1997 and December 31, 1998, the
Company had provided customers and various regulatory authorities with such
bonds and letters of credit amounting to approximately $3,800 and $6,982,
respectively, to collateralize its obligations. If the Company was unable to
obtain performance or surety bonds or letters of credit in sufficient amounts or
at acceptable rates, it could be precluded from entering into additional
municipal solid waste services contracts or obtaining or retaining landfill
transfer station, recycling facility or operating permits and licenses.
C) ENVIRONMENTAL RISKS
The Company is subject to liability for any environmental damage that its
solid waste facilities may cause to neighbouring landowners or residents,
particularly as a result of the contamination of soil, groundwater or surface
water, and especially drinking water, including damage resulting from conditions
existing prior to the acquisition of such facilities by 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.
D) LEGAL PROCEEDINGS
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, provincial or local agencies. In these proceedings, an agency
may seek to impose fines on the Company or to revoke or deny renewal of an
operating permit held by the Company. From time to time the Company may also be
subject to actions brought by citizens' groups or adjacent landowners in
connection with the permitting and licensing of landfills and transfer stations,
or alleging environmental damage or violations of the permits and licenses
pursuant to which the Company operates.
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring during the
normal operation of the waste management business. However, as at December 31,
1998, 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.
F-18
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
E) CONTINGENT PAYMENTS RELATED TO ACQUISITIONS
Certain business acquisitions made during 1997 and 1998 contain purchase
price contingencies which may increase the price paid by the Company for these
acquisitions.
The Class "B" special shares issued on the acquisition of Western Waste and
the redeemable common shares issued on the acquisitions of Rubbish and GETS both
contain provisions which may result in the payment of additional purchase
consideration in certain circumstances. See notes 7(c) and 7(d) for details on
these shares.
Based on the terms of the Rubbish acquisition, as at December 31, 1998, the
Company was obligated to pay additional purchase consideration to the former
shareholders of Rubbish. On February 1, 1999, the Company paid additional
consideration of $1,798 through the redemption of 500,175 redeemable common
shares (note 7(d)) and the payment of an additional $100. The additional
consideration is included as an accrued purchase liability at December 31, 1998.
7. CAPITAL STOCK
The Company has financed its growth through a series of private placements
of common and preference shares and shares given as consideration to owners of
acquired businesses. These transactions are included in the descriptions below.
All references to common shares in these financial statements give effect to the
1.3847 for 1 stock split referred to in note 11(d).
A) COMMON STOCK
Common shares issued since inception are as follows:
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 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 John's Cartage
Waste Management Services Ltd., the Company issued 5,192 common shares
valued at $64 as part of the acquisition consideration.
B) CONVERTIBLE PREFERENCE SHARES
On July 11, 1997, the Company issued 8,000 redeemable convertible preference
shares at a price of C$1,000 per share for net proceeds of $5,748 cash in a
private placement.
Each convertible preference share can be converted at the option of the
holder at any time into 138.47 common shares, subject to adjustments to the
conversion price if the Company issues common shares below C$7.22 ($4.69 as at
December 31, 1998) per share prior to a qualifying public offering. A
F-19
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
qualifying public offering is defined as a public offering that provides the
Company with gross proceeds of at least $15.0 million at a price per share that
is at least 300% of the conversion price (which represents C$21.67 ($14.09 at
December 31, 1998)).
Each convertible preference share shall be automatically converted into
138.47 common shares upon the Company's completion of a qualifying public
offering.
The convertible preference shares are redeemable at the option of the holder
if the Company has not completed a qualifying public offering by July 11, 2002
or a qualifying merger. The convertible preference shares will then become
redeemable at a price that is the greater of (i) C$1,000 ($650 at December 31,
1998) per share plus dividends payable and (ii) the fair market value of the
common shares on a fully diluted basis.
C) CLASS "B" SPECIAL STOCK
On November 1, 1997, the Company issued 400,000 redeemable convertible Class
"B" Special Stock valued at $7,455 in exchange for the remaining outstanding
common stock of Western Waste.
The Class "B" Special Stock will be automatically converted into 484,645
common shares upon the completion of an initial public offering at a price per
share of at least C$21.67 ($14.09 at December 31, 1998) per common share.
The holders of the Class "B" Special Stock have the right to include that
number of common shares that would be issued upon conversion of such shares, up
to a maximum value of C$5,250 ($3,415 at December 31, 1998) in a qualifying
initial public offering of common shares of the Company. However, the Company
has the right to purchase at a price of C$21.67 ($14.09 at December 31, 1998)
per share those shares requested to be included in lieu of including such shares
in a qualifying public offering. A qualifying public offering is defined as an
initial public offering of the Company's common shares, prior to November 1,
2000, at a price per share of at least C$21.67 ($14.09 at December 31, 1998).
The holders of the Class "B" Special Stock may require the Company to redeem
such shares at the greater of (i) their fair market value (ii) a value for the
businesses which existed at November 1, 1997 derived using an agreed formula or
(iii) C$10,500 ($6,829 at December 31, 1998), if the Company does not complete
an initial public offering of its common shares on a recognized major stock
exchange at a price per share of at least C$21.67 ($14.09 at December 31, 1998).
In the event the price per share of such offering is less than C$21.67, the
Company has the right to make up any shortfall between the initial public
offering price per share and C$21.67, rather than redeeming the Class "B"
Special Stock. The shortfall can be satisfied in cash or by issuing additional
common shares.
F-20
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
D) REDEEMABLE COMMON SHARES
On January 2, 1998, in connection with the acquisition of Rubbish, the
Company issued 500,175 redeemable common shares valued at $5,202.
On October 1, 1998, in connection with the acquisition of GETS, the Company
issued 280,240 redeemable common shares valued at $3,541.
The Company may be required to redeem the redeemable common stock issued
pursuant to the Rubbish acquisition for $7,802 and the GETS acquisition for
$4,250, if an initial public offering (an "IPO") of the Company's common stock
is not completed by December 31, 1998 and December 31, 1999, respectively. If an
IPO does occur, but does not yield a price in excess of $15.60 per share and
$15.17 per share, respectively, the Company is required to provide the holder of
the redeemable common stock with additional shares such that the value of the
redeemable common stock at the date of the IPO is no less than $7,802 and
$4,250, respectively. In addition, if prior to December 31, 1999 Tony Busseri
and/or Allard Loopstra cease to be employed as full time employees, or cease to
hold at least two of the positions of Chief Executive Officer, Chief Operating
Officer or President of Capital Environmental, the shares of common stock held
by the GETS Sellers are redeemable at the option of the holders, for an
aggregate price of $4,250 or $15.17 per share.
As at December 31, 1998, the Company received notification of its obligation
to redeem the 500,175 common shares. Subsequent to December 31, 1998, the
Company agreed to redeem these shares for cash of $6,900. The excess of the
redemption price over the value of the redeemable common shares of $1,698 is
included in accrued purchase liabilities and has been accounted for as
additional purchase consideration at December 31, 1998.
E) DIVIDENDS
On November 1, 1997, the Company declared a dividend of $1,050 on the
outstanding Class "B" Special Stock. The Company is obligated to pay this
dividend immediately prior to the successful completion of an initial public
offering or the redemption of the shares of Class "B" Special Stock whichever
occurs first. This dividend obligation has been offset by an equivalent note
receivable owing to the Company by the holders of shares of Class "B" Special
Stock. For accounting purposes, this dividend has been reflected as a component
of the purchase price of the capital stock of Western Waste.
F) STOCK OPTION AND OPTION GRANTS
The 1997 Stock Option Plan (the "1997 Stock Option Plan") was adopted by the
Board of Directors effective as of July 31, 1997, and was approved by the
shareholders on July 31, 1997. The 1997 Stock Option Plan is intended to provide
officers, employees and directors with additional incentives by increasing their
ownership interest in the Company. 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 inclusive of
common shares to be issued on conversion of the preference stock, class B
Special Stock and redeemable common stock. As of December 31, 1998, the Company
had granted options to purchase 398,792 common shares under the 1997 Stock
Option Plan and had also made additional option grants for 110,776 common
shares.
F-21
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
The weighted average exercise price of the aggregate outstanding options at
December 31, 1998 was C$13.06 (or $8.49 at December 31, 1998).
Options become exercisable only after the second anniversary of the grant
date. No option will remain exercisable later than five years after the grant
date, unless the Board of Directors determines otherwise. Notwithstanding the
foregoing, upon a change of control event, options become immediately
exercisable. A change of control is defined as either the day prior to the
completion of an initial public offering of the Company's securities on a
recognized stock exchange or an offer made to purchase more than 50% of its
voting securities.
Stock options have been granted to employees, consultants and directors of
the Company for the purchase of shares as follows:
During the period ended December 31, 1997, the Company issued stock options
to various shareholders, directors or employees of the Company to purchase
173,779 common shares at C$7.22 per share.
During the period ended December 31, 1998, the Company issued stock options
to various shareholders, directors and employees of the Company to purchase
335,789 common shares at a weighted average exercise price of C$16.08 (or $10.46
as at December 31, 1998) per share.
These options expire as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES LATEST VESTING OPTION EXPIRY
SUBJECT TO OPTION OPTION PRICE DATE DATE
- ------------------------------- ---------------- -------------------- --------------------
<S> <C> <C> <C>
163,394........................ C$ 7.22 July 30, 1999 July 29, 2002
10,385......................... C$ 7.22 October 31, 1999 October 31, 2002
27,694......................... C$ 14.44 January 31, 2000 January 30, 2003
27,694......................... C$ 14.44 February 23, 2000 February 22, 2003
24,232......................... C$ 14.44 April 1, 2000 March 31, 2003
6,923.......................... C$ 14.44 April 13, 2000 April 12, 2003
83,082......................... C$ 14.44 May 1, 2000 April 30, 2003
13,847......................... C$ 14.44 May 17, 2000 May 16, 2003
13,847......................... C$ 18.05 July 1, 2000 June 30, 2003
55,388......................... C$ 18.05 August 1, 2000 July 31, 2003
41,541......................... C$ 18.05 August 17, 2000 August 16, 2003
41,541......................... C$ 18.05 August 31, 2000 August 30, 2003
</TABLE>
As permitted by the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), the Company applies APB 25
in accounting for options to acquire common shares. As a result, no compensation
cost has been recognized. Had compensation cost been determined based on the
fair value of the options at the grant date consistent with the methodology in
F-22
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
SFAS No. 123, the Company's historical net income and earnings per share for the
year would have been as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ -------------
<S> <C> <C>
Net income (loss)--historical basis:
As reported.................................................... $ (2,072) $ 1,193
SFAS 123 adjustment............................................ (45) (314)
------------ ------
Pro forma...................................................... $ (2,117) $ 879
------------ ------
------------ ------
Basic net income (loss) per share:
As reported.................................................... $ (1.51) $ 0.52
------------ ------
------------ ------
Pro forma...................................................... $ (1.54) $ 0.38
------------ ------
------------ ------
</TABLE>
As permitted under SFAS 123, the fair value of options granted up to
December 31, 1998 was estimated using the Black-Scholes option pricing model
without considering volatility of the underlying shares and using the following
assumptions:
<TABLE>
<S> <C>
Annual dividend yield.............................................. 0%
Weighted-average expected lives (years)............................ 3 years
Risk-free interest rate............................................ 5.25%
Volatility (as required by the Minimum Value Method)............... 0%
</TABLE>
This resulted in a weighted-average grant-date fair value of options granted
of C$2.45 ($1.60).
G) STOCK WARRANTS
During 1997, the Company issued 123,084 warrants to certain 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.
8. EARNINGS (LOSS) PER SHARE INFORMATION
Earnings (loss) per share have been computed in accordance with the
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). The following table sets forth the computation of basic earnings (loss)
per share and the diluted earnings (loss) per share for the year ended December
31, 1997 and for the year ended December 31, 1998.
Basic earnings per share are calculated by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflect the dilution that would occur
if the dilutive securities and other contracts to issue common shares were
exercised or converted into common shares at the beginning of the period. The
fully
F-23
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
diluted earnings per share calculation for 1998 excludes the conversion of stock
options issued in 1998 because the impact would have been anti-dilutive.
<TABLE>
<CAPTION>
LOSS PER SHARE
PERIOD FROM INCEPTION
(MAY 23, 1997) INCOME PER SHARE
THROUGH FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------------- ----------------------
<S> <C> <C> <C> <C>
BASIC DILUTED BASIC DILUTED
------------ ------------ ---------- ----------
Numerator:
Net income (loss)......................................... $ (2,072) $ (2,072) $ 1,193 $ 1,193
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Denominator:
Weighted average common shares outstanding................ 1,374,220 1,374,220 2,304,847 2,304,847
Dilutive effect of stock options and warrants
outstanding............................................. -- -- -- 276,920
Common shares issuable upon conversion of preference
shares and Class B Special Stock........................ -- -- -- 1,592,405
------------ ------------ ---------- ----------
1,374,220 1,374,220 2,304,847 4,174,172
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Net loss per share.......................................... $ (1.51) $ (1.51) $ 0.52 $ 0.29
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS
A) CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 23, 1997)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
$ $
--------------- ---------------
<S> <C> <C>
Cash paid for interest............................................................. 1,371 3,279
------ -----
------ -----
Cash paid for income taxes......................................................... -- 205
------ -----
------ -----
B) NON-CASH TRANSACTIONS
Value of acquisitions partially or totally effected by the issue of capital
stock............................................................................ 9,325 8,878
------ -----
------ -----
Value of acquisitions partially or totally effected by the issuance of the
Company's debt................................................................... 9,642 529
------ -----
------ -----
The portion of the Canadian Waste Assets that were financed by the issuance of the
Company's debt................................................................... 10,980 --
------ -----
------ -----
Assets acquired under capital lease................................................ -- 1,237
------ -----
------ -----
</TABLE>
F-24
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
10. SEGMENT INFORMATION
Management principally views and manages the business by geography, with
each geographic segment's revenues being comprised of revenues from collection,
transfer, disposal and recycling services. The Company operated exclusively in
Canada during the fiscal period ended December 31, 1997. Acquisitions in 1998
have resulted in the provision of services in the United States. The tables
below present certain segment information of the Company as at and for the year
ended December 31, 1998.
<TABLE>
<CAPTION>
CANADA UNITED STATES TOTAL
-------------------- -------------------- ----------------------
$ % $ % $ %
--------- --------- --------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................................... 42,042 67.7 20,014 32.3 62,056 100
Operating expenses............................................. 38,713 67.9 18,271 32.1 56,984 100
--------- --- --------- --- --------- ---
Operating income............................................... 3,329 65.6 1,743 34.4 5,072 100
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
Total assets................................................... 66,466 67.6 31,871 32.4 98,337 100
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
Specified items included in the consolidated financial statements for the
year ended December 31, 1998 by segment are as follows:
<TABLE>
<CAPTION>
CANADA UNITED STATES TOTAL
-------------------- -------------------- ---------
$ % $ % $
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interest expense................................................... 2,222 70.8 917 29.2 3,139
--------- --- --------- --- ---------
--------- --- --------- --- ---------
Depreciation and amortization...................................... 3,684 75.3 1,206 24.7 4,890
--------- --- --------- --- ---------
--------- --- --------- --- ---------
Income tax expense................................................. 723 97.7 17 2.3 740
--------- --- --------- --- ---------
--------- --- --------- --- ---------
Expenditures for additions to fixed assets......................... 4,018 81.2 929 18.8 4,947
--------- --- --------- --- ---------
--------- --- --------- --- ---------
<CAPTION>
%
-----
<S> <C>
Interest expense................................................... 100
---
---
Depreciation and amortization...................................... 100
---
---
Income tax expense................................................. 100
---
---
Expenditures for additions to fixed assets......................... 100
---
---
</TABLE>
11. SUBSEQUENT EVENTS
A) OPTIONS GRANTED
Between January 1, 1999 and March 12, 1999, the Company issued options to
acquire 41,541 common shares to employees, directors and consultants at C$18.05.
These options have the same terms and vesting provisions as disclosed in note 7.
Option exercise dates are between January 1, 2001 and February 28, 2001 and
option expiry dates are between January 1, 2004 and February 28, 2004.
B) AMENDED AND RESTATED CREDIT FACILITY
On January 29, 1999, the Company amended and restated its Credit Facility
(note 4) to increase its available credit to $65.0 million from C$67.5 million
($44.1 million at December 31, 1998). The Company plans to use the proceeds of
its amended credit facility to redeem common shares issued to the sellers of
Rubbish Removal Inc., to make permitted acquisitions and for capital
expenditures, stand by letters of credit and for general corporate purposes. The
Company has pledged all of its assets, including the stock of its subsidiaries,
as collateral under the amended credit facility. The amended
F-25
<PAGE>
CAPITAL ENVIRONMENTAL RESOURCE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
credit facility will mature in January 2002, however, if the Company fails to
complete its initial public offering by September 30, 1999, the amended credit
facility will mature in January 2000.
C) ACQUISITIONS
Subsequent to December 31, 1998, the Company purchased two businesses in
Canada for approximately C$5.9 million and two businesses in the northern United
States for approximately $1.1 million.
D) COMMON STOCK SPLIT
On April 26, 1999, the Board of Directors of the Company approved a split of
the Company's common stock whereby 1.3847 common shares will be issued for each
one previously outstanding common share. This is subject to shareholder
approval. 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.
12. UNAUDITED PRO FORMA REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
The Company's unaudited pro forma redeemable stock and stockholders' equity
as of December 31, 1998 gives effect to (i) the redemption of 500,175 redeemable
common shares which occurred on February 1, 1999; (ii) the conversion of all
outstanding convertible preference shares into 1,107,750 common shares; (iii)
the conversion of all Class "B" special shares into 484,645 common shares; and
(iv) the conversion of the remaining 280,240 redeemable common shares into an
equivalent number of common shares, which has occurred or will occur
concurrently with the completion of the Company's initial public offering (note
7).
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS OF
WESTERN WASTE SERVICES INC.
We have audited the consolidated balance sheets of Western Waste Services
Inc. ("Western Waste") at October 31, 1996 and June 5, 1997 and the consolidated
statements of operations, comprehensive loss, stockholders' deficit and cash
flows for the year ended October 31, 1996 and the period from November 1, 1996
through June 5, 1997. These financial statements are the responsibility of
Western Waste's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Western Waste as at October 31,
1996 and June 5, 1997 and the results of its operations and its cash flows for
each of the periods then ended in accordance with generally accepted accounting
principles in the United States.
Edmonton, Canada COOPERS & LYBRAND
May 29, 1998 Chartered Accountants
F-27
<PAGE>
WESTERN WASTE SERVICES INC.
CONSOLIDATED BALANCE SHEETS
AS AT OCTOBER 31, 1996 AND JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 5,
1996 1997
----------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................................................. $ 252 $ 1,358
Trade accounts receivable (net of allowance for doubtful accounts of $22 at October 31,
1996 and $96 at June 5, 1997)........................................................... 1,664 1,899
Prepaid expenses and deposits............................................................. 149 223
----------- ---------
Total current assets...................................................................... 2,065 3,480
Property and equipment, net (Note 3)...................................................... 10,627 10,881
Goodwill (net of accumulated amortization of $94 at October 31, 1996 and $123 at June 5,
1997)................................................................................... 3,390 3,272
Other non-current assets.................................................................. 140 257
----------- ---------
Total assets.............................................................................. $ 16,222 $ 17,890
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Bank indebtedness (Note 4)................................................................ $ 7,831 $ 10,559
Accounts payable.......................................................................... 1,574 937
Accrued employee costs.................................................................... 91 271
Income and other taxes payable............................................................ 50 98
Other accrued liabilities................................................................. 206 43
Advances from stockholders (Note 5)....................................................... 5,673 5,528
Current portion of long-term debt (Note 5)................................................ 54 102
----------- ---------
Total current liabilities................................................................. 15,479 17,538
----------- ---------
Long-term debt (Note 5)................................................................... 232 127
----------- ---------
Future income taxes....................................................................... 1,782 2,266
----------- ---------
Redeemable Class C non-voting stock (Note 8)
Unlimited shares authorized; 200 shares issued and outstanding October 31, 1996 and June
5, 1997................................................................................. 124 124
----------- ---------
Commitments and contingencies (Note 7)
Stockholders' deficit
Capital stock (Note 8)
Unlimited Class A shares authorized; 200 shares issued and outstanding.................. 1 1
Cumulative foreign currency translation adjustments....................................... (30) 11
Accumulated deficit....................................................................... (1,366) (2,177)
----------- ---------
Total stockholders' deficit............................................................... (1,395) (2,165)
----------- ---------
Total liabilities and stockholders' deficit............................................... $ 16,222 $ 17,890
----------- ---------
----------- ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-28
<PAGE>
WESTERN WASTE SERVICES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
YEAR 1996
ENDED THROUGH
OCTOBER 31, JUNE 5,
1996 1997
----------- -------------
<S> <C> <C>
Revenues.............................................................................. $ 7,421 $ 5,680
----------- -------------
Cost of operations.................................................................... 5,257 3,472
Selling, general and administrative expenses.......................................... 2,017 1,658
Depreciation and amortization......................................................... 741 612
----------- -------------
Loss from operations.................................................................. (594) (62)
Interest expense...................................................................... (8) (176)
----------- -------------
Loss before income taxes.............................................................. (602) (238)
Provision for income taxes (Note 6)................................................... (508) (573)
----------- -------------
Net loss for the period............................................................... $ (1,110) $ (811)
----------- -------------
----------- -------------
COMPREHENSIVE LOSS
Net loss for the period............................................................... $ (1,110) $ (811)
Other comprehensive income (loss) --
Foreign currency translation adjustments............................................ (25) 41
----------- -------------
Comprehensive loss for the year....................................................... $ (1,135) $ (770)
----------- -------------
----------- -------------
</TABLE>
See accompanying notes to the consolidated financial statements
F-29
<PAGE>
WESTERN WASTE SERVICES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOREIGN
CURRENCY ACCUMULATED
COMMON STOCK TRANSLATION DEFICIT TOTAL
------------------------ --------------- ------------- ---------
<CAPTION>
SHARES $ $ $ $
<S> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 31, 1995................................ 200 1 (5) (256) (260)
Foreign currency translation adjustments.................... -- -- (25) -- (25)
Net loss for the year....................................... -- -- -- (1,110) (1,110)
-- --
--- ------ ---------
BALANCES AT OCTOBER 31, 1996................................ 200 1 (30) (1,366) (1,395)
Foreign currency translation adjustments.................... -- -- 41 -- 41
Net loss for the period..................................... -- -- -- (811) (811)
-- --
--- ------ ---------
BALANCES AT JUNE 5, 1997.................................... 200 1 11 (2,177) (2,165)
-- --
-- --
--- ------ ---------
--- ------ ---------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-30
<PAGE>
WESTERN WASTE SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
YEAR 1996
ENDED THROUGH
OCTOBER 31, JUNE 5,
OPERATING ACTIVITIES 1996 1997
----------- -----------
<S> <C> <C>
Net loss for the period............................................. $ (1,110) $ (811)
Adjustments to net loss for non-cash items:
Depreciation and amortization..................................... 741 612
Future income taxes............................................... 508 538
Net loss (gain) on disposal of property plant and equipment....... 12 (9)
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
Trade accounts receivable......................................... (1,353) (336)
Prepaid expenses and deposits..................................... (115) (22)
Accounts payable.................................................. 1,281 (601)
Accrued employee costs............................................ 60 185
Income and other taxes payable.................................... 34 47
Other accrued liabilities......................................... 198 (159)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................... 256 (556)
----------- -----------
INVESTING ACTIVITIES
Capital expenditures................................................ (2,839) (1,177)
Acquisitions of businesses, net of cash acquired.................... (8,182) --
Proceeds from sale of property and equipment........................ 74 105
Other assets........................................................ (27) (117)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES................................. (10,974) (1,189)
----------- -----------
FINANCING ACTIVITIES
Increase in bank indebtedness....................................... 7,690 2,954
Proceeds from issuance of long-term debt............................ -- 109
Principal payments on long-term debt................................ (54) (159)
Repayments of advance from stockholder.............................. (775) (145)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................. 6,861 2,759
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.......... (60) 92
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (3,917) 1,106
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................... 4,169 252
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 252 $ 1,358
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the consolidated financial statements
F-31
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Western Waste Services Inc. ("Western Waste") was incorporated in the
province of Alberta, Canada on November 22, 1994. Western Waste is a regional,
integrated solid waste services company that provides collection, transfer,
disposal and recycling services to commercial, industrial and residential
customers in secondary markets in the provinces of Alberta and British Columbia.
BASIS OF PRESENTATION
These financial statements are prepared in accordance with generally
accepted accounting principles in the United States. All financial information
presented herein is in thousands, except share and per share data. All
references to "dollars" or "$" mean U.S. dollars and "C$" mean Canadian dollars.
The consolidated financial statements include the accounts of Western Waste
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. All business acquisitions to June 5, 1997 have
been accounted for under the purchase method and the results of operations of
these businesses are included in the consolidated financial statements from
their respective dates of acquisition.
Assets and liabilities are reported in United States dollars. Assets and
liabilities have been translated from Canadian dollars to United States dollars
at the exchange rates in effect at the relevant balance sheet dates and revenues
and expenses have been translated from Canadian dollars to United States dollars
at the weighted average exchange rates prevailing during the relevant period.
Gains and losses resulting from translation are reported as a separate component
of stockholders' equity as cumulative foreign currency translation adjustments.
CREDIT RISK
Financial instruments that potentially subject Western Waste to credit risk
consist primarily of cash and cash equivalents and trade accounts receivable.
Western Waste places its cash and cash equivalents only with high credit quality
financial institutions. Western Waste's trade accounts receivable are not
subject to a concentration of credit risk. The customers are diversified as to
both geographic and industry concentrations. Western Waste maintains an
allowance for losses based on the expected collectibility of the accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
F-32
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and short-term deposits or
monetary instruments with maturity dates of less than 90 days.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives on a straight-line basis as indicated below. Improvements
or betterments which significantly extend the life of an asset are capitalized.
Gains and losses resulting from property or equipment disposals are credited or
charged to cost of operations.
<TABLE>
<S> <C>
10 to 25
Buildings.................................................... years
Vehicles..................................................... 10 years
Containers, compactors and recycling equipment............... 5 to 12 years
Furniture, fixtures and other office equipment and
leaseholds................................................. 3 to 5 years
</TABLE>
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired businesses and is amortized on a straight-line basis
over the period of expected benefit of 40 years.
Should events or circumstances occur subsequent to the acquisition of a
business which bring into question the realizable value or impairment of the
related goodwill, Western Waste will evaluate the remaining useful life of
goodwill and make appropriate adjustments. Impairment would be measured by
comparing expected future cash flows on an undiscounted basis to the carrying
amount of the goodwill.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the long-term debt approximate the fair values as at
October 31, 1996 and June 5, 1997, based on the then current incremental
borrowing rates for similar types of financing arrangements.
REVENUE RECOGNITION
Western Waste recognizes revenue when waste removal services are provided.
Amounts billed to customers, prior to providing the related services, are
deferred and reported as revenues in the period in which the services are
rendered.
INCOME TAXES
Western Waste uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
F-33
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION, BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement No. 129, Disclosure of
Information about Capital Structure ("SFAS 129"), which is effective for periods
ending after December 15, 1997. This statement establishes standards for
disclosing information about an entity's capital structure. Adoption of SFAS 129
will have no impact on Western Waste's existing disclosures.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for reporting and disclosure
of comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS 130, which
is in effect for fiscal years beginning after December 15, 1997, requires
classification of financial statements for earlier periods to be provided for
comparative purposes. SFAS has been implemented in these financial statements.
In June 1997, the FASB issued Statement No. 131, Disclosure about Segments
of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products, services, geographic areas and major customers. SFAS 131 is effective
for years beginning after December 15, 1997. In the initial year of application,
comparative information for previous years must be restated. Implementing the
provisions of SFAS 131 would not have had a significant impact on Western
Waste's existing disclosures for the periods presented.
2. ACQUISITIONS
BUSINESSES ACQUIRED DURING THE YEAR ENDED OCTOBER 31, 1996
On November 1, 1995, Western Waste acquired the business and certain capital
assets of Jones Disposal Services Ltd. ("Jones"), for total cash consideration
of $1,342.
On November 1, 1995, Western Waste acquired the business and certain capital
assets of Alpine Disposal & Recycling (Nanaimo) Ltd. ("Alpine"), for total cash
consideration of $2,237.
On December 1, 1995, Western Waste acquired 100% of the outstanding common
shares of West Coast Waste Systems Inc. ("West Coast"), for total cash
consideration of $2,705.
On March 1, 1996, Western Waste acquired 100% of the outstanding common
shares of Lacey Garbage Disposal Ltd. ("Lacey"), for total cash consideration of
$1,300.
During the year ended October 31, 1996 Western Waste acquired six other
smaller businesses for aggregate cash consideration of $598. The assets acquired
and obligations assumed for the above
F-34
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. ACQUISITIONS (CONTINUED)
business combinations all accounted for under the purchase method of accounting
in the period are as follows:
<TABLE>
<CAPTION>
WEST
JONES ALPINE COAST LACEY OTHER
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Property and equipment............................................ $ 1,193 $ 1,342 $ 2,133 $ 1,064 $ 482
Goodwill and other intangibles.................................... 149 895 1019 593 143
Deferred income taxes............................................. -- -- (447) (357) (27)
--------- --------- --------- --------- -----
Net acquisition costs............................................. $ 1,342 $ 2,237 $ 2,705 $ 1,300 $ 598
--------- --------- --------- --------- -----
--------- --------- --------- --------- -----
<CAPTION>
TOTAL
---------
<S> <C>
Property and equipment............................................ $ 6,214
Goodwill and other intangibles.................................... 2,799
Deferred income taxes............................................. (831)
---------
Net acquisition costs............................................. $ 8,182
---------
---------
</TABLE>
BUSINESSES ACQUIRED DURING THE PERIOD FROM NOVEMBER 1, 1996 THROUGH JUNE 5, 1997
No businesses were acquired during the period from November 1, 1996 through
June 5, 1997.
PRO FORMA ACQUISITION DATA (UNAUDITED)
Condensed pro forma statement of operations data, as if the acquisitions
accounted for as business combinations each period had occurred at the beginning
of the periods presented, are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
YEAR 1996
ENDED THROUGH
OCTOBER 31, JUNE 5,
1996 1997
----------- -------------
<S> <C> <C>
Revenue........................................................... $ 8,012 $ 5,680
----------- ------
----------- ------
Net income (loss) from operations................................. $ (553) $ (238)
----------- ------
----------- ------
Net income (loss) for the period.................................. $ (1,018) $ (811)
----------- ------
----------- ------
</TABLE>
F-35
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 5,
1996 1997
----------- ---------
<S> <C> <C>
Land.................................................................. $ 149 $ 145
Buildings............................................................. 597 582
Vehicles.............................................................. 5,297 5,411
Containers, compactors and recycling equipment........................ 5,107 5,735
Furniture, fixtures and other office equipment and leaseholds......... 200 230
----------- ---------
11,350 12,103
Less: Accumulated depreciation........................................ 723 1,222
----------- ---------
$ 10,627 $ 10,881
----------- ---------
----------- ---------
Depreciation expense for the period ended............................. $ 637 $ 499
----------- ---------
----------- ---------
</TABLE>
4. BANK INDEBTEDNESS
Bank indebtedness at October 31, 1996 and June 5, 1997 consisted of
short-term bankers acceptances. The weighted average interest rate was 5.04% at
October 31, 1996 and 3.65% at June 5, 1997.
Western Waste or its stockholders provided the following as collateral for
bank indebtedness.
(a) A stockholder's postponement of claim of $994 relating to stockholder
advances;
(b) A full recourse guarantee from one of the stockholders in the amount of
$10,814;
(c) A demand debenture providing a first fixed charge on property and
equipment in excess of $75 and a first and floating charge over all other
assets of Western Waste;
(d) An assignment of fire, liability, business interruption and other form
of insurance proceeds; and
(e) An assignment of the key man life insurance on one of the stockholders.
Western Waste had no remaining borrowing capacity under its credit facility
at June 5, 1997.
F-36
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. ADVANCES FROM STOCKHOLDERS AND LONG-TERM DEBT
<TABLE>
<CAPTION>
OCTOBER 31, JUNE 5,
1996 1997
------------- -----------
<S> <C> <C>
Term bank loan, interest at prime plus 1% repayable in monthly payments
of $1 plus interest, due January 2000................................. $ 30 $ 139
Capital lease obligations, interest rate at 8.3%, due 2000 to 2001...... 256 90
----- -----
286 229
Less: Current portion................................................... 54 102
----- -----
$ 232 $ 127
----- -----
----- -----
</TABLE>
The term bank loan and capital lease obligations are collateralized by fixed
charges on specific assets.
The term loan agreements provide for certain covenants and restrictions
regarding, among other things, working capital minimum ratios, minimum equity
requirements, consolidated earnings before interest, depreciation, and taxes
minimum requirement and maximum leverage requirements.
All of Western Waste's long-term debt was retired subsequent to June 5,
1997.
ADVANCES FROM STOCKHOLDERS
Advances from stockholders are unsecured, non-interest-bearing and have no
specified terms of repayment.
6. INCOME TAXES
At June 5, 1997, Western Waste had approximately $765 of accumulated net
operating loss carryforwards for income tax purposes, the tax benefits of which
have not been recognized due to uncertainty of realization. Most of these net
operating loss carryforwards do not expire until 2004 and their use is not
subject to any annual limitations.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
1996
YEAR ENDED THROUGH
OCTOBER 31, JUNE 5,
1996 1997
------------- -------------
<S> <C> <C>
Current............................................................ $ -- $ 35
Deferred........................................................... 508 538
----- -----
PROVISION FOR INCOME TAXES......................................... $ 508 $ 573
----- -----
----- -----
</TABLE>
The current provision for income taxes for the period from November 1, 1996
through June 5, 1997 consists of capital taxes.
F-37
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The reconciliation from income taxes at the Canadian federal statutory rate
to the provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
1996
YEAR ENDED THROUGH
OCTOBER 31, JUNE 5,
1996 1997
------------- -------------
<S> <C> <C>
Combined Canadian federal and provincial statutory rate............ $ (269) $ (106)
Non-deductible expenses and losses carried forward not recognized
due to uncertainty............................................... 777 679
----- -----
PROVISION FOR INCOME TAXES......................................... $ 508 $ 573
----- -----
----- -----
COMPONENTS OF FUTURE INCOME TAXES
Components giving rise to the future income taxes are as follows:
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
1996
YEAR ENDED THROUGH
OCTOBER 31, JUNE 5,
1996 1997
----------- -------------
<S> <C> <C>
Net book value of property and equipment in excess of related tax
cost............................................................. $ 1,782 $ 2,266
----------- ------
FUTURE INCOME TAXES................................................ $ 1,782 $ 2,266
----------- ------
----------- ------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASES
The aggregate amount of future rent expense resulting from non-cancellable
operating leases as at June 5, 1997 amounts to $1,762 as follows:
<TABLE>
<S> <C>
1998................................................................ 396
1999................................................................ 402
2000................................................................ 397
2001................................................................ 306
2002................................................................ 261
---------
$ 1,762
---------
---------
</TABLE>
Aggregate rent expense, which is included in cost of operations, was $170
for the year ended October 31, 1996 and $121 for the period from November 1,
1996 through June 5, 1997.
ENVIRONMENTAL RISKS
Western Waste is subject to liability for any environmental damage that its
solid waste facilities may cause to neighbouring landowners or residents,
particularly as a result of the contamination of soil,
F-38
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
groundwater or surface water, and especially drinking water, including damage
resulting from conditions existing prior to the acquisition of such facilities
by Western Waste. Western Waste may also be subject to liability for any
off-site environmental contamination caused by pollutants or hazardous
substances whose transportation, treatment or disposal was arranged by Western
Waste or its predecessors. Any substantial liability for environmental damage
incurred by Western Waste could have a material adverse effect on Western
Waste's financial condition, results of operations or cash flows. As at June 5,
1997, Western Waste was not aware of any such environmental liabilities.
LEGAL PROCEEDINGS
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, Western Waste may
periodically become subject to various judicial and administrative proceedings
involving federal, provincial or local agencies. In these proceedings, an agency
may seek to impose fines on Western Waste or to revoke or deny renewal of an
operating permit held by Western Waste. From time to time Western Waste may also
be subject to actions brought by citizens' groups or adjacent landowners in
connection with the permitting and licensing of its transfer station, or
alleging environmental damage or violations of the permits and licenses pursuant
to which Western Waste operates.
In addition, Western Waste may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring during the
normal operation of the waste management business. However, as of June 5, 1997,
there was no current proceeding or litigation involving Western Waste that
Western Waste believes will have a material adverse impact on Western Waste's
business, financial condition, results of operations or cash flows.
8. CAPITAL STOCK
The authorized capital stock of Western Waste consists of an unlimited
number of the following:
Class A voting common shares
Class B non-voting shares
Class C non-voting shares
Class D non-voting shares
Class E voting shares
CAPITAL STOCK TRANSACTIONS
On October 31, 1996, Western Waste issued an additional 100 Class C
non-voting shares, valued at $62 to a stockholder of Western Waste.
REDEMPTION FEATURES
The Class C, non-voting shares are redeemable at the option of the holder
and retractable at the option of Western Waste at the aggregate issue price of
$124.
F-39
<PAGE>
WESTERN WASTE SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED OCTOBER 31, 1996 AND THE PERIOD FROM NOVEMBER 1, 1996 THROUGH
JUNE 5, 1997
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. CAPITAL STOCK (CONTINUED)
DIVIDEND RESTRICTIONS
The dividends on the Class C shares may not exceed 16% of the redemption
price per annum.
9. CASH FLOW INFORMATION
Supplemental disclosures of cash flow information and non-cash transactions
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
1996
YEAR ENDED THROUGH
OCTOBER 31, JUNE 5,
1996 1997
------------- -------------
<S> <C> <C>
Cash paid for interest............................................. $ 214 $ 270
----- -----
----- -----
Cash paid for income/capital taxes................................. -- 35
----- -----
----- -----
Shares issued for services rendered................................ 62 --
----- -----
----- -----
Acquisitions of equipment through capital leases................... 297 --
----- -----
----- -----
</TABLE>
10. RELATED PARTY TRANSACTIONS
In the year ended October 31, 1996, Western Waste issued $62 of Redeemable
Class C non-voting stock to a common stockholder and officer of Western Waste in
exchange for employment services rendered.
11. SUBSEQUENT EVENTS
On June 6, 1997 a share transfer agreement was entered into between Capital
Environmental Resource Inc. and USA Waste, pursuant to which USA Waste
transferred 100 Class A shares of Western Waste to Capital Environmental.
Subsequently, Capital Environmental Resource Inc. transferred to Western Waste
certain assets in the amount of $5,384 acquired from Canadian Waste Services
Inc.
On June 15, 1997, Western Waste acquired the business and certain fixed
assets from Provincial Sanitation and City Waste Ltd. for total cash
consideration of $424. The final amount of consideration is contingent upon the
resolution of claims arising over the warranted condition of assets received.
On November 1, 1997, Western Waste redeemed 200 Class C shares issued in
prior years for aggregate cash of $62.
F-40
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with this offering. All of
these amounts (except the SEC registration fee and the NASD filing fee) are
estimated.
<TABLE>
<S> <C>
SEC registration fee............................................ $17,983.13
NASDAQ listing fee.............................................. 54,000
NASD filing fee................................................. 5,500
Blue Sky fees and expenses...................................... 12,000
Printing and Engraving Costs.................................... 234,000
Legal fees and expenses......................................... 465,000
Accounting fees and expenses.................................... 580,000
Consulting Fee.................................................. 125,000
Transfer Agent and Registrar fees and expenses.................. 4,000
Miscellaneous................................................... 44,517
----------
Total....................................................... $1,542,000
----------
----------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The By-laws of Capital Environmental Resource Inc. (the "Company") provide
that our directors and officers and former directors and officers shall be
indemnified to the fullest extent permitted by the Business Corporations Act
(Ontario), as amended from time to time, and provides for advances to any
indemnified director or officer of expenses in connection with actual or
threatened proceedings and claims arising out of their status as director or
officer of Capital Environmental.
The Underwriting Agreement to be filed as Exhibit 1 will provide that the
underwriters named therein will indemnify and hold harmless the Company and each
director, officer or controlling person of the Company from and against certain
liabilities, including liabilities under the Securities Act. The Underwriting
Agreement will also provide that these underwriters will contribute to certain
liabilities of these persons under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Capital Environmental was founded in May 1997 by Branard Investment Corp., a
private holding company for which Mr. Busseri serves as president, with the goal
of taking advantage of consolidation opportunities in the solid waste services
industry in Canada. In connection with the founding of Capital Environmental,
and prior to our acquisition of any assets or operations, we issued 1,353,924
shares of our common stock for nominal consideration. Subsequently, we
negotiated our purchase of selected assets of Canadian Waste and USA Waste's 50%
interest in Western Waste.
In July 1997, we sold an aggregate of 8,000 shares of convertible preference
stock at a price of C$1,000 per share (C$7.22 per share of common stock on a
converted basis). Of the 8,000 shares of convertible preference stock, 6,802
were purchased by principals and employees of Sanders Morris Mundy and
investment partnerships managed by or associated with Sanders Morris Mundy. Upon
completion of this offering, the shares of convertible preference stock will
convert into 1,107,750 shares of common stock. In July 1997, Sanders Morris
Mundy and an affiliate of Sanders Morris Mundy received warrants to purchase
92,312 shares of common stock at an exercise price of C$0.007 per share,
II-1
<PAGE>
all of which are currently exercisable. The warrants were issued for financial
advisory services rendered in connection with the issuance of the 8,000
convertible preference shares. These warrants expire in July 2002.
In July 1997, in consideration for services rendered in connection with our
formation, we granted Allen Fracassi a warrant to purchase 30,772 shares of
common stock at an exercise price of C$0.007 per share. The warrant is currently
exercisable and expires July 15, 2002.
On July 30, 1997, we granted to each of Tony Busseri, Kenneth Ch'uan-k'ai
Leung and Allen Fracassi options to acquire 49,849 shares of common stock, at an
exercise price of C$7.22 per share. Also on July 30, 1997, we granted Allard
Loopstra an option to acquire 13,847 shares of common stock, at an exercise
price of C$7.22 per share. In January and May, 1998, we granted Mr. Loopstra an
option to acquire 27,694 and 13,847 shares of common stock, respectively, at an
exercise price of C$14.44 per share. All of these options were granted pursuant
to the 1997 stock option plan. In May 1998, we granted Mr. Busseri an option to
acquire 13,847 shares of common stock under the 1997 stock option plan at an
exercise price of C$14.44 per share. These options become exercisable upon the
earlier of the day prior to the consummation of this offering or two years from
the date of grant and expire five years from the date of grant.
In May 1998, a principal of Sanders Morris Mundy received an option to
purchase 27,694 shares of common stock at an exercise price of C$14.44 per
share, which will be exercisable on the day prior to the consummation of this
offering and will expire five years from the date of grant. The option was
issued as consideration for customary financial advisory services. In June 1998,
we completed a private placement of 553,869 shares of our common stock at a
price of C$18.05 per share, for which Sanders Morris Mundy served as placement
agent. Principals and employees of Sanders Morris and investment partnerships
managed by or associated with Sanders Morris Mundy purchased 486,989 shares of
common stock in the private placement.
On August 31, 1998, we granted each of Tony Busseri and Kenneth Ch'uan-k'ai
Leung an option to acquire 27,694 shares of common stock at an exercise price of
C$18.05 per share. The options granted to Tony Busseri were issued under our
1997 stock option plan as executive compensation. The Company granted Mr.
Leung's options as consideration for his advisory services in connection with an
acquisition. These options become exercisable upon the earlier of the day prior
to the consummation of this offering or two years from the date of grant and
expire five years from the date of grant.
In October 1998, principals and employees of Sanders Morris Mundy, and
investment partnerships managed by or associated with Sanders Morris Mundy,
purchased 612,037 shares of our common stock from certain existing shareholders
of Capital Environmental.
In November 1997, in connection with our acquisition of the remaining 33.33%
of the outstanding common stock of Western Waste from L&S Bishop Enterprises
Inc. ("L&S"), a company controlled by Lynn Bishop, the President of Western
Waste, we issued to L&S 400,000 shares of class "B" special stock at C$21.67 per
share. The 400,000 shares of class "B" special stock will be automatically
converted into 484,645 shares of common stock upon the consummation of this
offering. If the price per share of our common stock in this offering is less
than C$21.67 per share, we have the right to make up to L&S any shortfall
between C$21.67 per share and the actual price per share of the common stock
sold in this offering, in our sole discretion, by either issuing additional
number of shares of common stock at the actual price per share at which the
common stock is sold in this offering, or by payment of the cash difference.
Also in connection with this acquisition, we loaned C$1.5 million to L&S. The
loan, which is evidenced by a promissory note, bears no interest and the
principal amount becomes due and payable immediately prior to the completion of
this offering. Repayment of the loan is subject to a right of offset against our
payment of a dividend of C$1.5 million declared in November 1997 on the shares
of class "B" special stock, payable immediately prior to the completion of this
offering. If we complete this offering at C$21.67 per share (or elect to make up
any difference),
II-2
<PAGE>
L&S has the right to include in this offering shares of common stock having a
value of C$5,250,000. However, we have the right to repurchase these shares
rather than include them in this offering. We have elected to include 242,323
shares of common stock owned by L&S in this offering.
In October 1997, in connection with our acquisition of certain assets of
Abco/Kingswood Waste Services Inc., we issued to Kingswood 73,850 shares of
common stock at C$14.44 per share. As additional consideration for the purchase
of the Kingswood assets, we granted to Kingswood an option to acquire 10,385
shares of our common stock at an exercise price of C$7.22 per share. This option
becomes exercisable on the earlier of October 31, 1999 or the day prior to the
completion of this offering and expires on October 31, 2002.
In January 1998, in connection with our acquisition of all of the issued and
outstanding shares of Rubbish Removal we issued an aggregate of 500,175 shares
of redeemable common stock at $10.40 per share to the sellers of Rubbish
Removal. On December 31, 1998, the sellers of Rubbish Removal, Inc. exercised a
put right granted to them under the Rubbish Removal purchase agreement.
Consequently, on February 1, 1999, we repurchased 500,175 shares of our
redeemable common stock from the sellers for a total of $6.9 million. In
exchange for our cash repurchase, the sellers released us from any further
liability or obligation of payment for these shares.
In April 1998, as additional consideration for our acquisition of Muskoka
Containerized Services, we granted Donald Coates, the Vice President of our
northern Ontario operations, an option to acquire 24,232 shares of our common
stock at an exercise price of C$14.44 per share. This option becomes exercisable
on the earlier of April 1, 2000 or the day immediately prior to the completion
of this offering and expires on March 31, 2003. In addition, we issued 6,923
shares of common stock to Mr. Coates at a value of C$14.44 per share. Under the
terms of his employment agreement, Mr. Coates is entitled to receive options to
acquire 3,461 shares of common stock on April 1, 1999, April 1, 2000 and April
1, 2001, provided Muskoka Containerized Services achieves certain performance
targets. The exercise price of these options is their fair market value on the
date of grant and the options expire within 90 days of the date of grant. In
July 1998, we issued 5,192 shares of common stock to Mr. Coates in connection
with an acquisition for which he was primarily responsible.
In September 1998, in connection with our acquisition of GETS we issued
280,240 shares of our common stock to the selling shareholders of GETS, at
$12.64 per share. If we failed to complete an initial public offering of our
common stock by December 31, 1999 or if prior to December 31, 1999 Tony Busseri
and/or Allard Loopstra cease to be employed as full time employees, or cease to
hold at least two of the positions of Chief Executive Officer, Chief Operating
Officer or President of Capital Environmental, these 280,240 shares of common
stock were redeemable at the option of the holders, for an aggregate price of
$4.3 million or $15.17 per share. Under the terms of the GETS acquisition
agreement, we would have been required to issue to the sellers some additional
shares of common stock to make up for any shortfall between $15.17 per share and
the actual initial public offering price per share. Capital Environmental has
agreed to issue an additional 15,577 shares of common stock upon the closing of
this offering at the initial public offering price per share in satisfaction of
this obligation.
In March 1999, in connection with our acquisition of Ram-Pak, we issued
4,784 shares of our common stock to Gregg Carrigan, a selling shareholder of
Ram-Pak, at a price of $13.72 per share.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1 --Form of Underwriting Agreement
3.1 --Restated Articles of Incorporation of the Company**
3.2 --Amended and Restated By-law No. 1 of the Company**
4 --Form of Common Stock Certificate of the Company*
5 --Form of Opinion of Tory Tory DesLauriers & Binnington
8 --Form of Opinion of Morgan, Lewis & Bockius LLP, Special Tax Counsel to the Company
10.1 --1997 stock option plan of the Company**
10.2 --1999 stock option plan of the Company**
10.3 --Employment Agreement between the Company and Tony Busseri**
10.4 --Employment Agreement between the Company and Allard Loopstra**
10.5 -- Amended and Restated Credit Agreement dated as of January 29, 1999 among the Company, CERI, L.P.,
various financial institutions, Canadian Imperial Bank of Commerce, as Co-Agent, Bank of America
National Trust and Savings Association, as U.S. Agent and Bank of America Canada, as Canadian Agent**
10.6 --Form of Amended and Restated Shareholders Agreement dated April 30, 1999**
10.7 -- Share Transfer Agreement dated as of June 4, 1997 between USA Waste Services, Inc., the Company and
Lynn Bishop**
10.8 -- Share Purchase Agreement dated as of November 1, 1997 among Lynn Bishop, L&S Bishop Enterprises Inc.,
the Company and Western Waste Services Inc.**
10.9 -- Purchase and Sale Agreement dated as of June 4, 1997 between Canadian Waste Services Inc., Canadian
Waste Services of Ontario Ltd., CWS Canadian Waste Services Ltd., CWS Canadian Waste Services (Canada)
Ltd., 1236886 Ontario Inc. and the Company**
21 --List of subsidiaries of the Company**
23.1 --Consent of PricewaterhouseCoopers LLP
23.2 --Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 8)
23.3 --Consent of David Lowenstein**
23.4 --Consent of Tory Tory DesLauriers & Binnington (contained in Exhibit 5)
23.7 --Consent of Coopers & Lybrand
24 --Powers of Attorney (included on signature page)**
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules
The financial statement schedules are omitted because they are inapplicable
or the requested information is shown in the consolidated financial statements
of the Company or related notes thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) The undersigned will provide to the underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
(2) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance on Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it is declared effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY HAS
DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK,
THE STATE OF NEW YORK, ON THE 18TH DAY OF MAY, 1999.
<TABLE>
<S> <C> <C>
CAPITAL ENVIRONMENTAL RESOURCE INC.
By: /s/ TONY BUSSERI
-----------------------------------------
Name: Tony Busseri
Title: Chairman of the Board and Chief
Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board and
/s/ TONY BUSSERI Chief Executive Officer
- ------------------------------ (Principal Executive May 18, 1999
Tony Busseri Officer)
/s/ GEORGE BOOTHE Chief Financial Officer
- ------------------------------ (Principal Financial and May 18, 1999
George Boothe Accounting Officer)
*
- ------------------------------ President, Chief Operating May 18, 1999
Allard Loopstra Officer and Director
*
- ------------------------------ Director May 18, 1999
Kenneth C. Leung
*
- ------------------------------ Authorized United States May 18, 1999
David W. Pollak Representative
</TABLE>
<TABLE>
<S> <C> <C> <C>
* /s/ TONY BUSSERI
-------------------------
Tony Busseri
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
3,750,000 SHARES
CAPITAL ENVIRONMENTAL RESOURCE INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_____ __, 1999
CREDIT SUISSE FIRST BOSTON CORPORATION
RAYMOND JAMES & ASSOCIATES, INC.
SANDERS MORRIS MUNDY INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. INTRODUCTORY. Capital Environmental Resource Inc., a company
incorporated under the laws of the Province of Ontario, Canada (the "COMPANY"),
proposes to issue and sell to the several underwriters named in Schedule A
hereto ("UNDERWRITERS"), for whom Credit Suisse First Boston Corporation,
Raymond James & Associates, Inc. and Sanders Morris Mundy Inc. are acting as
representatives (the "REPRESENTATIVES"), [2,998,725] common shares ("COMPANY
FIRM SECURITIES") of its capital stock ("SECURITIES"), and the shareholders of
the Company named in Schedule B hereto (collectively the "SELLING SHAREHOLDERS"
and each a "SELLING SHAREHOLDER") propose to sell to the underwriters an
aggregate of [751,275] shares of the Securities (and together with the Company
Firm Securities, "FIRM SECURITIES"), and the Company also proposes to issue and
sell to the Underwriters, at the option of the Underwriters, an aggregate of not
more than [562,500] additional shares ("OPTIONAL SECURITIES") of its Securities
as set forth below. The Firm Securities and the Optional Securities are herein
collectively called the "OFFERED SECURITIES." The Company and each Selling
Shareholder hereby agree with the several Underwriters as follows:
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND EACH SELLING
SHAREHOLDER.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 333- ) relating to the
Offered Securities, including a form of prospectus, has been filed
with the Securities and Exchange Commission ("COMMISSION") and
either (i) has been declared effective under the Securities Act of
1933 ("ACT") and is not proposed to be amended or (ii) is proposed
to be amended by amendment or post-effective amendment. If such
registration statement ("INITIAL REGISTRATION STATEMENT") has been
declared effective, either (i) an additional registration statement
("ADDITIONAL REGISTRATION STATEMENT") relating to the Offered
Securities may have been filed with the Commission pursuant to Rule
462(b) ("RULE 462(B)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered
Securities all have been duly registered under the Act pursuant to
the initial registration statement and, if applicable, the
additional registration statement or (ii) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing
pursuant to such Rule and upon such filing the Offered
<PAGE>
Securities will all have been duly registered under the Act pursuant
to the initial registration statement and such additional
registration statement. If the Company does not propose to amend the
initial registration statement or if an additional registration
statement has been filed and the Company does not propose to amend
it, and if any post-effective amendment to either such registration
statement has been filed with the Commission prior to the execution
and delivery of this Agreement, the most recent amendment (if any)
to each such registration statement has been declared effective by
the Commission or has become effective upon filing pursuant to Rule
462(c) ("RULE 462(C)") under the Act or, in the case of the
additional registration statement, Rule 462(b). For purposes of this
Agreement, "EFFECTIVE TIME" with respect to the initial registration
statement or, if filed prior to the execution and delivery of this
Agreement, the additional registration statement means (i) if the
Company has advised the Representatives that it does not propose to
amend such registration statement, the date and time as of which
such registration statement, or the most recent post-effective
amendment thereto (if any) filed prior to the execution and delivery
of this Agreement, was declared effective by the Commission or has
become effective upon filing pursuant to Rule 462(c), or (ii) if the
Company has advised the Representatives that it proposes to file an
amendment or post-effective amendment to such registration
statement, the date and time as of which such registration
statement, as amended by such amendment or post-effective amendment,
as the case may be, is declared effective by the Commission. If an
additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised
the Representatives that it proposes to file one, "EFFECTIVE TIME"
with respect to such additional registration statement means the
date and time as of which such registration statement is filed and
becomes effective pursuant to Rule 462(b). "EFFECTIVE DATE" with
respect to the initial registration statement or the additional
registration statement (if any) means the date of the Effective Time
thereof. The initial registration statement, as amended at its
Effective Time, including all information contained in the
additional registration statement (if any) and deemed to be a part
of the initial registration statement as of the Effective Time of
the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("RULE
430A(B)") under the Act, is hereinafter referred to as the "INITIAL
REGISTRATION STATEMENT". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the
additional registration statement as of its Effective Time pursuant
to Rule 430A(b), is hereinafter referred to as the "ADDITIONAL
REGISTRATION STATEMENT". The Initial Registration Statement and the
Additional Registration Statement are herein referred to
collectively as the "REGISTRATION STATEMENTS" and individually as a
"REGISTRATION STATEMENT". The form of prospectus relating to the
Offered Securities, as first filed with the Commission pursuant to
and in accordance with Rule 424(b) ("RULE 424(B)") under the Act or
(if no such filing is required) as included in a Registration
Statement, is hereinafter referred to as the "PROSPECTUS". No
document has been or will be prepared or distributed in reliance on
Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement:
(A) on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all material respects to
the requirements of the Act and the rules and regulations of the
Commission thereunder ("RULES AND REGULATIONS") and did not include
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration
Statement conformed, or will conform, in all material respects to
the requirements of the Act and the Rules and Regulations and did
not include, or will not include, any untrue statement of a material
fact and did not omit, or will not omit, to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading and (C) on the date of this Agreement, the
Initial Registration Statement and,
2
<PAGE>
if the Effective Time of the Additional Registration Statement is
prior to the execution and delivery of this Agreement, the
Additional Registration Statement each conforms, and at the time of
filing of the Prospectus pursuant to Rule 424(b) or (if no such
filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all
material respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will
omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. If the
Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all material respects
to the requirements of the Act and the Rules and Regulations,
neither of such documents will include any untrue statement of a
material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, and no Additional Registration Statement has been or
will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company
by any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such
information is that described as such in Section 7(c) hereof.
(iii) The Company has been duly incorporated and is a validly
existing corporation in good standing under the laws of the Province
of Ontario, Canada, with corporate power and authority to own its
properties and conduct its business as described in the Prospectus;
and the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business
requires such qualification.
(iv) Each of the Company and its subsidiaries, including those
subsidiaries organized as limited liability companies, has been duly
incorporated or organized and is validly existing as a corporation
or limited liability company, as the case may be, in good standing
under the laws of the jurisdiction of its incorporation or
organization, with power and authority (corporate or other), to own
its properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly qualified to
do business as a foreign corporation or limited liability company in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification except where the failure so to qualify would not have
a material adverse effect upon the business, results of operations,
prospect or conditions of the Company; all of the issued and
outstanding capital stock of, or other ownership interest in, each
subsidiary of the Company has been duly authorized and validly
issued and is fully paid and nonassessable; and the capital stock
of, or other ownership interest in, each subsidiary owned by the
Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects except those arising under the Company's
Amended and Restated Credit Agreement dated as of January 29, 1999
described in the Prospectus and those liens granted to another
subsidiary of the Company under the Company's "double dip" tax
structure.
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all
outstanding shares of capital stock of the Company are, and, when
the Offered Securities have been delivered and paid for in
accordance with this Agreement on each Closing Date (as defined
below), such Offered Securities will have been, validly issued,
fully paid and nonassessable and will conform to the description
thereof contained in the Prospectus; and except as disclosed in the
Prospectus or as waived, the stockholders of the Company have no
preemptive or similar rights with respect to the Securities.
3
<PAGE>
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or
any Underwriter for a brokerage commission, finder's fee or other
like payment in connection with this offering.
(vii) The Offered Securities have been approved for inclusion
for quotation on the Nasdaq National Market subject to notice of
issuance.
(viii) Except as disclosed in the Prospectus or as waived
pursuant to written waiver, there are no contracts, agreements or
understandings between the Company and any person granting such
person the right to require the Company to file a registration
statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act. All persons possessing such rights have
provided the Company with an express written waiver of said rights,
and the Company has provided true and correct copies of all such
waivers to the Representatives.
(ix) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is
required for the consummation of the transactions contemplated by
this Agreement in connection with the issuance and sale of the
Offered Securities by the Company, except such as have been obtained
and made under the Act and such as may be required under state
securities laws.
(x) The execution, delivery and performance of this Agreement,
and the issuance and sale of the Offered Securities will not result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any subsidiary of
the Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a party or
by which the Company or any such subsidiary is bound or to which any
of the properties of the Company or any such subsidiary is subject,
or the charter or by-laws of the Company or any such subsidiary, and
the Company has full corporate power and authority to authorize,
issue and sell the Offered Securities as contemplated by this
Agreement.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus, the Company and
its subsidiaries have good and marketable title to all real
properties and all other material properties and assets owned by
them, in each case free from liens, encumbrances and defects that
would materially affect the value thereof or materially interfere
with the use made or to be made thereof by them; and except as
disclosed in the Prospectus, the Company and its subsidiaries hold
any leased real or personal property under valid and enforceable
leases with no exceptions that would materially interfere with the
use made or to be made thereof by them.
(xiii) The Company and its subsidiaries possess those material
certificates, authorities or permits issued by appropriate
governmental agencies or bodies necessary to conduct the business
now operated by them in all material respects and have not received
any notice of proceedings relating to the revocation or modification
of any such certificate, authority or permit that, if determined
adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on
the condition (financial or other), business, prospects,
4
<PAGE>
properties or results of operations of the Company and its
subsidiaries taken as a whole ("MATERIAL ADVERSE EFFECT").
(xiv) No labor dispute with the employees of the Company or
any subsidiary exists or, to the knowledge of the Company, is
imminent that could have a Material Adverse Effect.
(xv) The Company and its subsidiaries own or possess adequate
trademarks, trade names, copyrights, confidential information and
other intellectual property (collectively, "INTELLECTUAL PROPERTY
RIGHTS") necessary to conduct the business now operated by them, or
presently employed by them, and have not received any notice of
infringement of or conflict with asserted rights of others with
respect to any intellectual property rights that, if determined
adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the
Company nor any of its subsidiaries are not in substantial
compliance with material applicable law, statute, rule, regulation
or permit decision or order of any governmental agency or body or
any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or relating to the
protection or restoration of the environment or natural resources or
human exposure to hazardous or toxic substances (collectively,
"ENVIRONMENTAL LAWS"), do not, to the knowledge of the Company, own
or operate any real property contaminated with any substance that is
subject to any environmental laws, is liable for any off-site
disposal or contamination pursuant to any environmental laws, or is
subject to any notice, claim or proceeding relating to any
environmental laws, which violation, contamination, liability,
notice, claim or proceeding would individually or in the aggregate
have a Material Adverse Effect; and the Company is not aware of any
circumstances which would lead to such violation, contamination,
liability, notice, claim or proceeding.
(xvii) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against the Company, any of
its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a Material Adverse
Effect, or would materially and adversely affect the ability of the
Company to perform its obligations under this Agreement; and to the
Company's knowledge, no such actions, suits or proceedings are
threatened.
(xviii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position
of the Company and its consolidated subsidiaries as of the dates
shown and their results of operations and cash flows for the periods
shown, and such financial statements have been prepared in
conformity with generally accepted accounting principles in the
United States applied on a consistent basis and the schedules
included in each Registration Statement present fairly the
information required to be stated therein.
(xix) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements included in the Prospectus
there has been no material adverse change, nor any development or
event involving a prospective material adverse change, in the
condition (financial or other), business, prospects, properties or
results of operations of the Company and its subsidiaries taken as a
whole, and, except as disclosed in or contemplated by the
Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital
stock.
(xx) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of
the proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of
1940.
5
<PAGE>
(xxi) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only
in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(xxii) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or
operations of the Company or any of its subsidiaries will be
affected by the Year 2000 Problem (that is, any significant risk
that computer hardware or software applications used by the Company
and its subsidiaries will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively
as in the case of dates or time periods occurring prior to January
1, 2000); as a result of such review, (i) the Company has no reason
to believe, and does not believe, that (A) there are any issues
related to the Company's preparedness to address the Year 2000
Problem that are of a character required to be described or referred
to in the Registration Statement or Prospectus which have not been
accurately described in the Registration Statement or Prospectus and
(B) the Year 2000 Problem will have a Material Adverse Effect, or
result in any material loss or interference with the business or
operations of the Company and its subsidiaries, taken as a whole;
and The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or
operations of the Company or any of its subsidiaries will be
affected by the Year 2000 Problem (that is, any significant risk
that computer hardware or software applications used by the Company
and its subsidiaries will not, in the case of dates or time periods
occurring after December 31, 1999, function at least as effectively
as in the case of dates or time periods occurring prior to January
1, 2000); as a result of such review, (i) the Company has no reason
to believe, and does not believe, that (A) there are any issues
related to the Company's preparedness to address the Year 2000
Problem that are of a character required to be described or referred
to in the Registration Statement or Prospectus which have not been
accurately described in the Registration Statement or Prospectus and
(B) the Year 2000 Problem will have a Material Adverse Effect, or
result in any material loss or interference with the business or
operations of the Company and its subsidiaries, taken as a whole;
and the Company will request Year 2000 compliance certifications
from its banks, major vendors and customers.
(xxiii) The Company and each of its subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the
value of their respective properties.
(b) Each Selling Shareholder represents and warrants to, and agrees
with, the several Underwriters that:
(i) Each Selling Shareholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the
Offered Securities to be delivered by it on such Closing Date and full
right, power and authority to enter into this Agreement and to sell,
assign, transfer and deliver the Offered Securities to be delivered by it
on such Closing Date hereunder; and upon the delivery of and payment for
the Offered Securities on each Closing Date hereunder the several
Underwriters will acquire valid and unencumbered title to the Offered
Securities to be delivered by each Selling Shareholder on such Closing
Date.
(ii) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between each Selling Shareholder and any
person that would give rise to a valid claim against any Selling
Shareholder or any Underwriter for a brokerage commission, finder's fee or
other like payment in connection with this offering.
6
<PAGE>
(iii) This Agreement has been duly authorized, executed and
delivered by or on behalf of each Selling Shareholder and is a valid and
binding agreement of each Selling Shareholder, enforceable in accordance
with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors
or by general equitable principles.
(iv) The execution and delivery by each Selling Shareholder of, and
the performance by each Selling Shareholder of his obligations under this
Agreement or the consummation by each Selling Shareholder of any of the
transactions contemplated hereby, will not contravene or conflict with,
result in a breach of, or constitute a default under, or require the
consent of any other party to any agreement or instrument to which each
Selling Shareholder is bound or under which he is entitled to any right or
benefit, any provision of applicable law or any judgment, order, decree or
regulation applicable to each Selling Shareholder of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over each Selling Shareholder. No consent, approval,
authorization or other order of, or registration or filing with, any court
or other governmental authority or agency, is required for the
consummation by each Selling Shareholder of the transactions contemplated
in this Agreement, except such as have been obtained or made and are in
full force and effect under the Act, applicable state securities or blue
sky laws and from the National Association of Securities Dealers ("NASD").
(v) Each Selling Shareholder has not taken and will not take,
directly or indirect, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price
of the Securities to facilitate the sale or resale of the Securities.
3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company and each Selling
Shareholder agree to sell to the Underwriters, and the Underwriters agree,
severally and not jointly, to purchase from the Company and each Selling
Shareholder, at a purchase price of $ per share, the respective numbers of
shares of Firm Securities set forth below the caption "COMPANY" or "SELLING
SHAREHOLDER", as the case may be, and opposite the names of the Underwriters in
Schedule A hereto.
The Company and each Selling Shareholder will deliver the Firm
Securities to the Representatives for the accounts of the Underwriters, against
payment of the purchase price in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to Credit Suisse
First Boston Corporation ("CSFBC") drawn to the order of the Company and each
Selling Shareholder at the office of Shearman & Sterling, 599 Lexington Avenue,
New York, New York 10022, at 10:00 A.M., New York time, on ________, 1999, or at
such other time not later than seven full business days thereafter as CSFBC and
the Company determine, such time being herein referred to as the "FIRST CLOSING
DATE." For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT"), the First Closing Date (if later than the
otherwise applicable settlement date) shall be the settlement date for payment
of funds and delivery of securities for all the Offered Securities sold pursuant
to the offering. The certificates for the Firm Securities so to be delivered
will be in definitive form, in such denominations and registered in such names
as CSFBC requests and will be made available for checking and packaging at the
office of Shearman & Sterling at least 24 hours prior to the First Closing Date.
In addition, upon written notice from CSFBC given to the Company
from time to time not more than 30 days subsequent to the date of the
Prospectus, the Underwriters may purchase all or less than all of the Optional
Securities at the purchase price per Security to be paid for the Firm
Securities. The Company agrees to sell to the Underwriters the number of shares
of Optional Securities specified in such notice and the Underwriters agree,
severally and not jointly, to purchase such Optional Securities. Such Optional
Securities shall be purchased for the account of each Underwriter in the same
proportion as the number of shares of Firm Securities set forth opposite such
Underwriter's name bears to the total number of shares of Firm Securities
(subject to adjustment by CSFBC to
7
<PAGE>
eliminate fractions) and may be purchased by the Underwriters only for the
purpose of covering over-allotments made in connection with the sale of the Firm
Securities. No Optional Securities shall be sold or delivered unless the Firm
Securities previously have been, or simultaneously are, sold and delivered. The
right to purchase the Optional Securities or any portion thereof may be
exercised from time to time and to the extent not previously exercised may be
surrendered and terminated at any time upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional
Securities, being herein referred to as an "OPTIONAL CLOSING DATE", which may be
the First Closing Date (the First Closing Date and each Optional Closing Date,
if any, being sometimes referred to as a "CLOSING DATE"), shall be determined by
CSFBC but shall be not later than five full business days after written notice
of election to purchase Optional Securities is given. The Company will deliver
the Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Company, at the office of Shearman & Sterling referred to
above. The certificates for the Optional Securities being purchased on each
Optional Closing Date will be in definitive form, in such denominations and
registered in such names as CSFBC requests upon reasonable notice prior to such
Optional Closing Date and will be made available for checking and packaging at
the office of Shearman & Sterling referred to above at a reasonable time in
advance of such Optional Closing Date.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus. Each of the Underwriters acknowledges that the
Offered Securities have not been qualified for sale in Canada and acknowledges
and agrees that it has not and will not offer the Offered Securities for sale in
Canada, except pursuant to applicable Canadian securities law exemptions.
5. CERTAIN AGREEMENTS OF THE COMPANY AND EACH SELLING SHAREHOLDER.
The Company, and in the case of paragraphs (h), (i), (k) and (l) below, each
Selling Shareholder severally, and not jointly, agree with the several
Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will
file the Prospectus with the Commission pursuant to and in accordance with
subparagraph (1) (or, if applicable and if consented to by CSFBC,
subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the
second business day following the execution and delivery of this Agreement
or (B) the fifteenth business day after the Effective Date of the Initial
Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant
to Rule 424(b). If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement and an
additional registration statement is necessary to register a portion of
the Offered Securities under the Act but the Effective Time thereof has
not occurred as of such execution and delivery, the Company will file the
additional registration statement or, if filed, will file a post-effective
amendment thereto with the Commission pursuant to and in accordance with
Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, on or prior to the time the Prospectus is
printed and distributed to any Underwriter, or will make such filing at
such later date as shall have been consented to by CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend
or supplement the initial or any additional registration statement as
filed or the related prospectus or the Initial Registration Statement, the
Additional Registration Statement (if any) or the Prospectus and will not
effect such amendment or supplementation without CSFBC's consent; and the
Company will also advise CSFBC promptly of the effectiveness of each
Registration Statement (if its Effective Time is subsequent to the
execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of the
institution by the Commission of any stop order proceedings in respect
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of a Registration Statement and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible its
lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of which
the Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will promptly
notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement which will
correct such statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of,
any such amendment or supplement shall constitute a waiver of any of the
conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earning statement covering a period of at least 12
months beginning after the Effective Date of the Initial Registration
Statement (or, if later, the Effective Date of the Additional Registration
Statement) which will satisfy the provisions of Section 11(a) of the Act.
For the purpose of the preceding sentence, "AVAILABILITY DATE" means the
45th day after the end of the fourth fiscal quarter following the fiscal
quarter that includes such Effective Date, except that, if such fourth
fiscal quarter is the last quarter of the Company's fiscal year,
"AVAILABILITY DATE" means the 90th day after the end of such fourth fiscal
quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (three of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a
prospectus relating to the Offered Securities is required to be delivered
under the Act in connection with sales by any Underwriter or dealer, the
Prospectus and all amendments and supplements to such documents, in each
case in such quantities as CSFBC requests. The Prospectus shall be so
furnished on or prior to 3:00 P.M., New York time, on the business day
following the later of the execution and delivery of this Agreement or the
Effective Time of the Initial Registration Statement. All other documents
shall be so furnished as soon as available. The Company and each Selling
Shareholder will pay the expenses of printing and distributing to the
Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for offer and sale under the laws of such jurisdictions as
CSFBC designates and will continue such qualifications in effect so long
as required for the distribution.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year, a
copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of
each report and any definitive proxy statement of the Company filed with
the Commission under the Exchange Act or mailed to stockholders, and (ii)
from time to time, such other information concerning the Company as CSFBC
may reasonably request.
(h) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, the Company and each
Selling Shareholder will pay or cause to be paid all expenses incident to
the performance of their obligations under this Agreement, including: (i)
the fees, disbursements and expenses of the Company's counsel, the
Company's accountants and counsel for each Selling Shareholder in
connection with the registration and delivery of the Securities under the
Securities Act and all other fees or expenses in connection with the
preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the
mailing and delivering of copies thereof to the Underwriters and dealers,
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<PAGE>
in the quantities hereinabove specified, (ii) all costs and expenses
related to the transfer and delivery of the Securities to the
Underwriters, including any transfer or other taxes payable thereon, (iii)
the cost of printing or producing any Blue Sky memorandum in connection
with the offer and sale of the Securities under state securities laws and
all expenses in connection with the qualification of the Securities for
offer and sale under the laws of such jurisdictions designated by CSFBC as
provided in Section 5(f) hereof, including filing fees and the reasonable
fees and disbursements of counsel for the Underwriters in connection with
such qualification and in connection with the Blue Sky memorandum, (iv)
all filing fees and the reasonable fees and disbursements of counsel to
the Underwriters incurred in connection with the review and qualification
of the offering of the Securities by the National Association of
Securities Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating
to the Common Stock and all costs and expenses incident to listing the
Securities on the Nasdaq National Market, (vi) the cost of printing
certificates representing the Securities, (vii) the costs and charges of
any transfer agent, registrar or depositary, (viii) the costs and expenses
of the Company relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the
Securities, including, without limitation, expenses associated with the
production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with
the prior written approval of the Company and travel and lodging expenses
of the representatives and officers of the Company and any such
consultants, and one-half of the cost of any aircraft chartered in
connection with the road show, and (ix) all other costs and expenses
incident to the performance of the obligations of the Company and each
Selling Shareholder hereunder for which provision is not otherwise made in
this Section. It is understood, however, that except as provided in this
Section and Section 7 entitled "Indemnification and Contribution", the
Underwriters will pay all of their costs and expenses, including fees and
disbursements of their counsel, stock transfer taxes payable on resale of
any of the Offered Securities by them and any advertising expenses
connected with any offers they may make.
The provisions of this Section shall not supersede or otherwise
affect any agreement that the Company and each Selling Shareholder may
otherwise have for the allocation of such expenses between themselves.
(i) The Company and each Selling Shareholder will indemnify and hold
harmless the Underwriters against any documentary, stamp or similar issue
tax, including any interest and penalties, on the creation, issue and sale
of the Offered Securities and on the execution and delivery of this
Agreement. All payments to be made by the Company and each Selling
Shareholder hereunder shall be made without withholding or deduction for
or on account of any present or future taxes, duties or governmental
charges whatsoever unless the Company or each Selling Shareholder is
compelled by law to deduct or withhold such taxes, duties or charges. In
that event, the Company and each Selling Shareholder shall pay such
additional amounts as may be necessary in order that the net amounts
received after such withholding or deduction shall equal the amounts that
would have been received if no withholding or deduction had been made.
(j) For a period of 180 days after the First Closing Date, the
Company will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Commission a
registration statement under the Act relating to, any additional shares of
its Securities or securities convertible into or exchangeable or
exercisable for any shares of its Securities, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of CSFBC, except (i) issuances of
Securities pursuant to the exercise of warrants or options, in each case
outstanding on the date hereof, (ii) grants of employee stock options
pursuant to the terms of a plan in effect on the date hereof, (iii)
issuances of Securities pursuant to the exercise of such options or (iv)
the issuance of up to 2,600,000 Securities ("Acquisition Securities")
pursuant to a shelf registration statement filed by the Company with the
Commission after the Closing Date in connection with business acquisitions
by the Company, PROVIDED that if any Acquisition Securities are to be
issued by the Company within 180 days after the date of the Prospectus,
the Company, as a condition to such issuance, shall obtain from the person
or persons to whom such Acquisition Securities are to be issued an
executed Lock-up Agreement (as defined in Section 6 hereof).
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<PAGE>
(k) Each Selling Shareholder agrees to deliver to CSFBC, attention:
Transactions Advisory Group on or prior to the First Closing Date a
properly completed and executed United States Treasury Department Form W-8
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(l) Each Selling Shareholder agrees, for a period of 180 days after
the date of the initial public offering of the Offered Securities, not to
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any additional shares of the Securities of the Company or
securities convertible into or exchangeable or exercisable for any shares
of Securities, or publicly disclose the intention to make any such offer,
sale, pledge or disposition, without the prior written consent of CSFBC.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Firm
Securities on the First Closing Date and the Optional Securities to be purchased
on each Optional Closing Date will be subject to the accuracy of the
representations and warranties on the part of the Company and each Selling
Shareholder herein, to the accuracy of the statements of Company officers and of
the Selling Shareholder made pursuant to the provisions hereof, to the
performance by the Company and the Selling Shareholder of their obligations
hereunder and to the following additional conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if the
Effective Time of the Initial Registration Statement is subsequent to the
execution and delivery of this Agreement, shall be prior to the filing of
the amendment or post-effective amendment to the registration statement to
be filed shortly prior to such Effective Time), of PricewaterhouseCoopers
LLP confirming that they are independent public accountants within the
meaning of the Act and the applicable published Rules and Regulations
thereunder and stating to the effect that:
(i) in their opinion the financial statements and financial
statement schedules examined by them and included in the
Registration Statements comply as to form in all material respects
with the applicable accounting requirements of the Act and the
related published Rules and Regulations;
(ii) on the basis of a reading of the latest available interim
financial statements of the Company, inquiries of officials of the
Company who have responsibility for financial and accounting matters
and other specified procedures, nothing came to their attention that
caused them to believe that:
(A) at the date of the latest available balance sheet
read by such accountants, or at a subsequent specified date
not more than three business days prior to the date of such
letter, there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt of the
Company and its consolidated subsidiaries or, at the date of
the latest available balance sheet read by such accountants,
there was any decrease in consolidated total current assets or
total assets, as compared with amounts shown on the latest
balance sheet included in the Prospectus; or
(B) for the period from the closing date of the latest
income statement included in the Prospectus to the closing
date of the latest available income statement read by such
accountants there were any decreases, as compared with the
corresponding period of the previous year, and with the period
of corresponding length ended the date of the latest statement
of operations included in the Prospectus, in revenues, income
from operations or increase in net loss or per share amounts
of net loss,
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except in all cases set forth in clauses (A) and (B) above for
changes, increases or decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter; and
(iii) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements (in each case
to the extent that such dollar amounts, percentages and other
financial information are derived from the general accounting
records of the Company and its subsidiaries subject to the internal
controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results
obtained from inquiries, a reading of such general accounting
records and other procedures specified in such letter and have found
such dollar amounts, percentages and other financial information to
be in agreement with such results, except as otherwise specified in
such letter.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "REGISTRATION STATEMENTS" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective
amendment to be filed shortly prior to its Effective Time, (ii) if the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement but the Effective Time of the
Additional Registration is subsequent to such execution and delivery,
"REGISTRATION STATEMENTS" shall mean the Initial Registration Statement
and the additional registration statement as proposed to be filed or as
proposed to be amended by the post-effective amendment to be filed shortly
prior to its Effective Time, and (iii) "PROSPECTUS" shall mean the
prospectus included in the Registration Statements.
(b) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the
date of this Agreement or such later date as shall have been consented to
by CSFBC. If the Effective Time of the Additional Registration Statement
(if any) is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or, if earlier, the time the
Prospectus is printed and distributed to any Underwriter, or shall have
occurred at such later date as shall have been consented to by CSFBC. If
the Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement, the Prospectus shall have been
filed with the Commission in accordance with the Rules and Regulations and
Section 5(a) of this Agreement. Prior to such Closing Date, no stop order
suspending the effectiveness of a Registration Statement shall have been
issued and no proceedings for that purpose shall have been instituted or,
to the knowledge of each Selling Shareholder, Company or the
Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or event
involving a prospective change, in the condition (financial or other),
business, prospects, properties or results of operations of the Company or
its subsidiaries taken as one enterprise which, in the judgment of the
Representatives, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the sale
of and payment for the Offered Securities; (ii) any downgrading in the
rating of any debt securities or preferred stock of the Company by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Act), or any public announcement that
any such organization has under surveillance or review its rating of any
debt securities or preferred stock of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any material
suspension or material limitation of trading in securities generally on
the New York Stock Exchange or the American Stock Exchange or in the
Nasdaq Stock Market National Market, or any setting of minimum prices for
trading on either such exchange or in such market, or any suspension of
trading of any securities of the Company on any exchange or in the
over-the-counter market; (iv) any banking moratorium declared by U.S.
Federal, New York or Canadian federal or provincial authorities; or (v)
any
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outbreak or escalation of major hostilities in which the United States or
Canada is involved, any declaration of war by Congress, the Prime Minister
and/or Parliament or any other substantial national or international
calamity or emergency if, in the reasonable judgment of the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Morgan, Lewis & Bockius LLP, United States counsel for
the Company, to the effect that:
(i) Except as disclosed in the Prospectus or as expressly
provided for by written waiver to the Company, there are no
contracts, agreements or understandings known to such counsel
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act
with respect to any securities of the Company owned or to be owned
by such person or to require the Company to include such securities
in the securities registered pursuant to the Registration Statement;
(ii) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of
the proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of
1940;
(iii) No consent, approval, authorization or order of, or
filing with, any United States governmental agency or body or any
court is required for the consummation of the transactions
contemplated by this Agreement in connection with the issuance or
sale of the Offered Securities by the Company or each Selling
Shareholder, except such as have been obtained and made under the
Act and such as may be required under state securities laws;
(iv) The execution, delivery and performance of this Agreement
and the issuance and sale of the Offered Securities will not result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, any United States statute, rule,
regulation or order of any United States governmental agency or body
or any court having jurisdiction over the Company or any subsidiary
of the Company or any of their properties, or any agreement or
instrument known to such counsel to which the Company or any such
subsidiary is a party or by which the Company or any such subsidiary
is bound or to which any of the properties of the Company or any
such subsidiary is subject;
(v) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the knowledge of
such counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; the descriptions in the Registration Statements and
Prospectus under the captions "Risk Factors - We are subject to
changing environmental regulation, which may make it difficult for
us to obtain or maintain the permits and approvals we need to
operate.", "Business - Regulation - United States Regulation" and
"Tax Consequences - United States Federal Income Tax Consideration,"
of United States statutes, legal and governmental proceedings and
the descriptions in the Registration Statements and Prospectus under
the captions "Certain Transactions" of contracts and other
13
<PAGE>
documents are accurate and fairly present in all material respects,
the information required to be shown; and such counsel do not know
of any legal or governmental proceedings required to be described in
a Registration Statement or the Prospectus which are not described
as required or of any contracts or documents of a character required
to be described in a Registration Statement or the Prospectus or to
be filed as exhibits to a Registration Statement which are not
described and filed as required; it being understood that such
counsel need express no opinion as to the financial statements or
other financial data contained in the Registration Statements or the
Prospectus;
(vi) Each United States subsidiary of the Company has been
duly incorporated and is an existing corporation in good standing
under the laws of the jurisdiction of its incorporation, with
corporate power and authority to own its properties and conduct its
business as described in the Prospectus; and each United States
subsidiary of the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its
business requires such qualification, except where the failure so to
qualify would not have a material adverse effect upon the business,
results of operations, prospects or condition of the Company; all of
the issued and outstanding capital stock of each United States
subsidiary of the Company has been duly authorized and validly
issued and is fully paid and nonassessable; and the capital stock of
each subsidiary is owned by the Company, directly or through
subsidiaries, to the best of such counsel's knowledge free from
liens, encumbrances and defects except those arising under the
Company's Amended and Restated Credit Agreement dated as of January
29, 1999 described in the Prospectus and those liens granted to
another subsidiary of the Company under the Company's "double dip"
tax structure; and
(vii) This Agreement has been duly delivered by the Company.
In rendering such opinion, Morgan, Lewis & Bockius LLP may rely as
to all matters governed by Canadian law upon the opinion of Tory
Tory DesLauriers & Binnington.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the Representatives and representatives of the
independent certified public accountants of the company, at which
conferences the contents of the Registration Statement and the Prospectus
and related maters were discussed and, although such counsel is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or any amendment thereto, as of its effective date or as of the
Closing Date, (except with respect to the financial statements and notes
and schedules thereto and other financial data, as to which such counsel
need express no belief) contained any untrue statement of a material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of the Closing Date, contained any
untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(e) The Representatives shall have received an opinion, dated such
Closing Date, of Tory Tory DesLauriers & Binnington, Canadian counsel for
the Company to the effect that:
(i) The Company has been duly incorporated and is validly
existing under the laws of the Province of Ontario, Canada, with
corporate power and authority to own its properties and conduct its
business as described in the Prospectus; and the Company is duly
qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such qualification;
(ii) The Offered Securities delivered on such Closing Date
[and all other outstanding shares of the Common Stock of the
Company] have been duly authorized and validly issued, are
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fully paid and nonassessable and conform to the description thereof
contained in the Prospectus; and the stockholders of the Company
have no preemptive or similar rights with respect to the Securities;
(iii) The descriptions in the Registration Statements and
Prospectus in "Risk Factors - We are subject to changing
environmental regulation which may make it difficult for us to
obtain or maintain the permits and approvals we need to operate;"
"Business - Regulation - Canadian Regulation," "Business - Exchange
Controls," and "Tax Consequences - Canadian Federal Income Tax
Considerations for United States Tax Investors," of Canadian
statutes, legal and governmental proceedings and the descriptions in
the Registration Statements and Prospectus under the captions
"Certain Transactions" of contracts and other documents are accurate
and fairly present in all material respects, the information shown;
(iv) The Company holds all material licenses, certificates and
permits from federal governmental authorities in Canada and
provincial authorities in the Province of Ontario which are
necessary to the conduct of its business;
(v) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court of Canada or the
Province of Ontario is required for the consummation of the
transactions contemplated by this Agreement in connection with the
issuance or sale of the Offered Securities by the Company;
(vi) The execution, delivery and performance of this Agreement
and the issuance and sale of the Offered Securities will not result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, (A) any Canadian or Province of Ontario
statute, rule, regulation or order of any governmental agency or
body or any court of Canada or the Province of Ontario having
jurisdiction over the Company or any subsidiary of the Company
formed under the laws of Canada or the Province of Ontario or any of
their properties or (B) the charter or by-laws of the Company or any
such subsidiary, and the Company has full corporate power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement;
(vii) Each subsidiary of the Company which is incorporated
under the laws of Canada or the Province of Ontario has been duly
incorporated and is an existing corporation in good standing under
such laws of Canada or the Province of Ontario, as the case may be,
with corporate power and authority to own its properties and conduct
its business as described in the Prospectus;
(viii) Except as disclosed in the Prospectus, under current
Canadian federal or Ontario provincial laws and regulations, all
dividends and other distributions declared and payable on the
Offered Securities may be paid by the Company to the holder thereof
in United States dollars or Canadian Dollars that may be converted
into foreign currency and freely transferred out of Canada and all
such payments made to holders thereof or therein who are
non-residents of Canada will not be subject to income, withholding
or other taxes under Canadian federal or Ontario provincial laws and
regulations thereof or therein and will otherwise be free and clear
of any other tax, duty, withholding or deduction in Canada and
without the necessity of obtaining any Canadian federal or Ontario
provincial governmental authorization; and
(ix) This Agreement has been duly executed by the Company.
(f) The Representatives shall have received from Shearman &
Sterling, counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to such matters as the Representatives may
require, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon
such matters. In rendering such opinion, Shearman
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& Sterling may rely as to all matters governed by Canadian law upon the
opinion of Tory Tory DesLauriers & Binnington.
(g) The Representatives shall have received a certificate, dated
such Closing Date, of the Chief Executive Officer, the President or any
Vice President and a principal financial or accounting officer of the
Company in which such officers, to the best of their knowledge after
reasonable investigation, shall state that: the representations and
warranties of the Company in this Agreement are true and correct; the
Company has complied with all agreements and satisfied all conditions on
its part to be performed or satisfied hereunder at or prior to such
Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of
subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule
462(b), including payment of the applicable filing fee in accordance with
Rule 111(a) or (b) under the Act, prior to the time the Prospectus was
printed and distributed to any Underwriter; and, subsequent to the date of
the most recent financial statements in the Prospectus, there has been no
material adverse change, nor any development or event involving a
prospective material adverse change, in the condition (financial or
other), business, prospects, properties or results of operations of the
Company and its subsidiaries taken as a whole except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(h) The Representatives shall have received a letter, dated such
Closing Date, of PricewaterhouseCoopers LLP which meets the requirements
of subsection (a) of this Section, except that the specified date referred
to in such subsection will be a date not more than three days prior to
such Closing Date for the purposes of this subsection.
(i) The Representatives shall have received an opinion, dated such
Closing Date, of _______, counsel for each Selling Shareholder, to the
effect that:
(i) Each Selling Shareholder had valid and unencumbered title
to the Offered Securities delivered by each Selling Shareholder on
such Closing Date and had full right, power and authority to sell,
assign, transfer and deliver the Offered Securities delivered by
each Selling Shareholder on such Closing Date hereunder; and the
several Underwriters have acquired valid and unencumbered title to
the Offered Securities purchased by them from each Selling
Shareholder on such Closing Date hereunder, except for any pledge or
lien in respect of the Offered Securities created by any
Underwriter;
(ii) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required to be obtained or made by each Selling Shareholder for the
consummation of the transactions contemplated by this Agreement in
connection with the sale of the Offered Securities sold by each
Selling Shareholder, except such as have been obtained and made
under the Act and such as may be required under state securities
laws;
(iii) The execution, delivery and performance of this
Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any statute,
any rule,regulation or order of any governmental agency or body or
any court having jurisdiction over each Selling Shareholder or any
of his properties or any agreement or instrument to which each
Selling Shareholder is a party or by which each Selling Shareholder
is bound or to which any of the properties of each Selling
Shareholder is subject; and
(iv) This Agreement has been duly authorized, executed and
delivered by each Selling Shareholder.
16
<PAGE>
(j) The Representatives shall have examined an opinion, dated such
Closing Date, of E. Joy Grahek, General Counsel of the Company to the
effect that:
(i) The Company is duly qualified to do business as a foreign
corporation in good standing in all jurisdictions in which its
ownership or lease of property or the conduct of its business
requires such qualification;
(ii) Except as disclosed in the Prospectus or as expressly
provided for by written waiver to the Company, there are no
contracts, agreements or understandings known to such counsel
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act
with respect to any securities of the Company owned or to be owned
by such person or to require the Company to include such securities
in the securities registered pursuant to the Registration Statement;
(iii) The execution, delivery and performance of this
Agreement and the issuance and sale of the Offered Securities will
not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any Canadian or
Province of Ontario statute, regulation or order of any governmental
agency or body or any court having jurisdiction over the Company or
any subsidiary of the Company formed under the laws of Canada or the
Province of Ontario or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a party or
by which the Company or any such subsidiary is bound or to which any
of the properties of the Company is subject; and
(iv) Each subsidiary of the Company is duly qualified to do
business and in good standing in all jurisdictions in which its
ownership or lease of property or the conduct of its business
requires such qualification, except where the failure so to qualify
would not have an adverse material effect upon the business, results
of operations, prospects or condition of the Company; all of the
issued and outstanding capital stock of each Canadian and Ontario
provincial subsidiary of the Company has been duly authorized and
validly issued and is fully paid and nonassessable; and the capital
stock of each such subsidiary is owned by the Company, directly or
through subsidiaries, to the best knowledge of such counsel free
from liens, encumbrances and defects except those arising under the
Company's Amended and Restated Credit Agreement dated as of January
29, 1999 described in the Prospectus and those liens granted to
another subsidiary of the Company under the Company's "double dip"
tax structure.
(k) The Representatives shall have received written agreements in
the form of Exhibit I hereto (collectively, "Lock-up Agreements") from the
holders all outstanding Securities, and all securities convertible into or
exercisable or exchangeable for Securities, that restrict such holders
from selling, making any short sale of, granting any option for the
purchase of, or otherwise transferring or disposing of, any of such
Securities, or any such securities convertible into or exercisable or
exchangeable for Securities (other than the Securities to be sold by the
Selling Stockholders in accordance with the terms hereof), for a period of
180 days after the date of the Prospectus without the prior written
consent of CSFBC; and the Company
17
<PAGE>
shall have imposed a stop-transfer instruction with the Company's transfer
agent in order to enforce the foregoing Lock-Up Agreements.
(l) The Representatives shall have received such other documents and
certificates as are reasonably requested by themselves or their counsel.
(m) The Representatives shall have examined an opinion, dated such
Closing Date, of [________], Canadian Counsel of the Company to the effect that:
(i) The execution, delivery and performance of this Agreement
and the issuance and sale of the Offered Securities will not result
in a breach or violation of any of the terms and provisions of, or
constitute a default under, (A) any Province of Alberta or British
Columbia statute, rule, regulation or order of any governmental
agency or body or any court of the Province of Alberta or British
Columbia having jurisdiction over the Company or any subsidiary of
the Company formed under the laws of the Province of Alberta or
British Columbia or any of their properties or (B) the charter or
by-laws of the Company or any such subsidiary, and the Company has
full corporate power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement;
(ii) Each subsidiary of the Company which is incorporated
under the laws of the Province of Alberta or British Columbia has
been duly incorporated and is an existing corporation in good
standing under such laws of the Province of Alberta or British
Columbia, as the case may be, with corporate power and authority to
own its properties and conduct its business as described in the
Prospectus; and
(iii) Each subsidiary of the Company is duly qualified to do
business and in good standing in all jurisdictions in which its
ownership or lease of property or the conduct of its business
requires such qualification, except where the failure so to qualify
would not have an adverse material effect upon the business, results
of operations, prospects or condition of the Company; all of the
issued and outstanding capital stock of each Alberta or British
Columbia provincial subsidiary of the Company has been duly
authorized and validly issued and is fully paid and nonassessable;
and the capital stock of each such subsidiary is owned by the
Company, directly or through subsidiaries, to the best knowledge of
such counsel free from liens, encumbrances and defects except those
arising under the Company's Amended and Restated Credit Agreement
dated as of January 29, 1999 described in the Prospectus and those
liens granted to another subsidiary of the Company under the
Company's "double dip" tax structure.
Each Selling Shareholder and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may in its sole
18
<PAGE>
discretion waive on behalf of the Underwriters compliance with any conditions to
the obligations of the Underwriters hereunder, whether in respect of an Optional
Closing Date or otherwise.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify
and hold harmless each Underwriter, its partners, directors and officers and
each person, if any, who controls such Underwriter within the meaning of Section
15 of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any reasonable legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are incurred; PROVIDED,
HOWEVER, that the Company will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; and FURTHER PROVIDED that
the foregoing indemnity agreement with respect to any untrue statement or
omission or alleged untrue statement or omission in any preliminary prospectus
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages, liabilities or judgments purchased Offered
Securities, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Offered Securities to
such person, and if the Prospectus (as so amended and supplemented) would have
cured the defect giving rise to such loss, claim, damage, liability or judgment.
(b) Each Selling Shareholder will indemnify and hold harmless each
Underwriter, its partners, directors and officers and each person who controls
such Underwriter within the meaning of Section 15 of the Act, against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred, but (x) only with reference to information relating
to such Selling Shareholder furnished in writing by or on behalf of such Selling
Shareholder expressly for use in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendments or supplements thereto and (y) only
to the extent of the gross proceeds received by such Selling Shareholders from
the offering of the Offered Securities; PROVIDED, HOWEVER, that each Selling
Shareholder will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by an Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below.
(c) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, its directors and officers and each person, if any
who controls the Company within the meaning of Section 15 of the Act, and each
Selling Shareholder against any losses, claims, damages or liabilities to which
the Company or each Selling Shareholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement
19
<PAGE>
of any material fact contained in any Registration Statement, the Prospectus, or
any amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representatives specifically for use therein, and will reimburse any legal or
other expenses reasonably incurred by the Company and each Selling Shareholder
in connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred, it being understood and
agreed that the only such information furnished by any Underwriter consists of
the following information in the Prospectus under the caption "Underwriting"
furnished on behalf of each Underwriter: (i) the concession and reallowance
figures appearing in the 4th paragraph, (ii) the 6th paragraph with respect to
discretionary sales, and (iii) the 11th paragraph with respect to stabilization.
(d) Promptly after receipt by an indemnified party under this
Section or Section 9 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under subsection (a) or (b) above or Section 9, notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under subsection (a) or (b) above or
Section 9. In case any such action is brought against any indemnified party and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section or Section 9, as the case may be, for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless (i) such settlement includes
an unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action and (ii) does not contain a
statement of fault or culpability or a failure to act on behalf of an
indemnified party.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above (i) in
such proportion as is appropriate to reflect the relative benefits received by
the Company and each Selling Shareholder on the one hand and the Underwriters on
the other from the offering of the Offered Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and each
Selling Shareholder on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company and each Selling
Shareholder on the one hand and the Underwriters on the other shall be deemed to
be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and each Selling Shareholder bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, each Selling Shareholder or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (e). Notwithstanding the provisions of this
subsection (e), no
20
<PAGE>
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and each Selling Shareholder
under this Section or Section 9 shall be in addition to any liability which the
Company and each Selling Shareholder may otherwise have and shall extend, upon
the same terms and conditions, to each person, if any, who controls any
Underwriter or the QIU (as defined below) within the meaning of the Act; and the
obligations of the Underwriters under this Section shall be in addition to any
liability which the respective Underwriters may otherwise have and shall extend,
upon the same terms and conditions, to each director of the Company, to each
officer of the Company who has signed a Registration Statement and to each
person, if any, who controls the Company within the meaning of the Act.
8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters
default in their obligations to purchase Offered Securities hereunder on either
the First or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date,
CSFBC may make arrangements satisfactory to the Company and each Selling
Shareholder for the purchase of such Offered Securities by other persons,
including any of the Underwriters, but if no such arrangements are made by such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Offered
Securities that such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to CSFBC, the Company and each Selling Shareholder
for the purchase of such Offered Securities by other persons are not made within
36 hours after such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter, the Company or each Selling
Shareholder except as provided in Section 10 (provided that if such default
occurs with respect to Optional Securities after the First Closing Date, this
Agreement will not terminate as to the Firm Securities or any Optional
Securities purchased prior to such termination). As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.
9. QUALIFIED INDEPENDENT UNDERWRITER. The Company hereby confirms
that at its request CSFBC has without compensation acted as "qualified
independent underwriter" (in such capacity, the "QIU") within the meaning of
Rule 2720 of the Conduct Rules of the NASD in connection with the offering of
the Offered Securities. The Company and each Selling Shareholder will severally
and not jointly indemnify and hold harmless the QIU against any losses, claims,
damages or liabilities, joint or several, to which the QIU may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
QIU's acting (or alleged failing to act) as such "qualified independent
underwriter" and will reimburse the QIU for any legal or other expenses
reasonably incurred by the QIU in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred and
provided, further, that a Selling Shareholder shall only be subject to liability
under this Section to the extent such liability arises out of or is based upon
any untrue statement or alleged untrue statement or upon an omission or alleged
omission based upon information provided by such Selling Shareholder or
contained in a representation or warranty given by such Selling Shareholder in
this Agreement; and provided, further, that the liability under this Section of
each Selling Shareholder shall be limited to an amount equal to the aggregate
gross proceeds to each Selling Shareholder from the sale of Securities sold by
each Selling Shareholder hereunder.
21
<PAGE>
10. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The
respective indemnities, agreements, representations, warranties and other
statements of each Selling Shareholder, of the Company or its officers and of
the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter, each Selling
Shareholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and each Selling Shareholder shall
remain responsible for the expenses to be paid or reimbursed by it pursuant to
Section 5 and the respective obligations of the Company, each Selling
Shareholder and the Underwriters pursuant to Section 7 and the obligations of
the Company and each Selling Shareholder pursuant to Section 9 shall remain in
effect, and if any Offered Securities have been purchased hereunder the
representations and warranties in Section 2 and all obligations under Section 5
shall also remain in effect. If the purchase of the Offered Securities by the
Underwriters is not consummated for any reason other than solely because of the
termination of this Agreement pursuant to Section 8 or the occurrence of any
event specified in clause (iii), (iv) or (v) of Section 6(c), the Company and
each Selling Shareholder will reimburse the Underwriters for all out-of-pocket
expenses (including fees and disbursements of counsel) reasonably incurred by
them in connection with the offering of the Offered Securities.
11. NOTICES. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department--Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 1005 Skyview Drive,
Burlington, Ontario L7P 5BI Canada, Attention: General Counsel; or, if sent to
each Selling Shareholder, will be mailed, delivered or telegraphed and confirmed
to _________ at _________________; provided, however, that any notice to an
Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and
confirmed to such Underwriter.
12. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective personal representatives
and successors and the officers and directors and controlling persons referred
to in Section 7, and no other person will have any right or obligation
hereunder.
13. REPRESENTATION OF UNDERWRITERS. The Representatives will act for
the several Underwriters in connection with this financing, and any action under
this Agreement taken by the Representatives jointly or by CSFBC will be binding
upon all the Underwriters.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby irrevocably (i) agrees that any legal suit,
action or proceeding arising out of or based upon this Agreement or the
transactions contemplated hereby may be instituted in any state or federal court
located in the Borough of Manhattan, The City of New York, New York (a "NEW YORK
COURT"), (ii) waives, to the fullest extent it may effectively do so, any
objection which it may now or hereafter have to the laying of venue of any such
proceeding. The Company irrevocably waives any immunity to jurisdiction to which
it may otherwise be entitled or become entitled (including sovereign immunity,
immunity to pre-judgment attachment, post-judgment attachment and execution) in
any legal suit, action or proceeding against it arising out of or based on this
Agreement or the transactions contemplated hereby which is instituted in any New
York Court or in any competent court in _______________ or the __________. The
Company irrevocably appoints CT Corporation System, 1633 Broadway, New York, New
York 10019, as its authorized agent in the Borough of Manhattan in The City of
New York upon
22
<PAGE>
which process may be served in any such suit or proceeding, and agrees that
service of process upon such agent, and written notice of said service to the
Company by the person serving the same to the address provided in Section 11,
shall be deemed in every respect effective service of process upon the Company
in any such suit or proceeding. The Company further agrees to take any and all
action as may be necessary to maintain such designation and appointment of such
agent in full force and effect for a period of seven years from the date of this
Agreement.
The obligation of the Company or each Selling Shareholder in respect
of any sum due to any Underwriter shall, notwithstanding any judgment in a
currency other than United States dollars, not be discharged until the first
business day, following receipt by such Underwriter of any sum adjudged to be so
due in such other currency, on which (and only to the extent that) such
Underwriter may in accordance with normal banking procedures purchase United
States dollars with such other currency; if the United States dollars so
purchased are less than the sum originally due to such Underwriter hereunder,
the Company and each Selling Shareholder agree, as a separate obligation and
notwithstanding any such judgment, to indemnify such Underwriter against such
loss. If the United States dollars so purchased are greater than the sum
originally due to such Underwriter hereunder, such Underwriter agrees to pay to
the Company or each Selling Shareholder an amount equal to the excess of the
dollars so purchased over the sum originally due to such Underwriter hereunder.
23
<PAGE>
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among each
Selling Shareholder, the Company and the several Underwriters in accordance with
its terms.
Very truly yours,
CAPITAL ENVIRONMENTAL RESOURCE INC.
By
------------------------------------
[INSERT TITLE]
L&S BISHOP ENTERPRISES INC.
By
------------------------------------
GRANVIN INVESTMENTS INC.
By
------------------------------------
9043 - 8284 QUEBEC INC.
By
------------------------------------
ABCO/KINGSWOOD
By
------------------------------------
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
RAYMOND JAMES & ASSOCIATES, INC.
SANDERS MORRIS MUNDY INC.
Acting on behalf of themselves and as the
Representatives of the several Underwriters
By CREDIT SUISSE FIRST BOSTON CORPORATION
By
-----------------------------------------
[INSERT TITLE]
24
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF FIRM SECURITIES TOTAL
TO BE SOLD BY NUMBER OF
------------------------- FIRM SECURITIES
SELLING TO BE
UNDERWRITER COMPANY STOCKHOLDER PURCHASED
----------- ------- ----------- ---------
<S> <C> <C> <C>
Credit Suisse First Boston Corporation....
Raymond James & Associates, Inc...........
Sanders Morris Mundy Inc..................
------- ----------- ---------
Total...............................
======= =========== =========
</TABLE>
<PAGE>
SCHEDULE B
SELLLING SHAREHOLDERS:
Granvin Investments Inc.
L&S Bishop Enterprises Inc.
9043-8284 Quebec Inc.
ABCO/Kingswood
<PAGE>
[Letterhead of Tory Tory DesLauriers & Binnington]
May __, 1999
The Board of Directors
Capital Environmental Resource Inc.
1005 Skyview Drive
Burlington, Ontario
L7P 5B1
RE: OFFERING OF 4,312,500 SHARES OF COMMON STOCK PURSUANT TO
REGISTRATION STATEMENT ON FORM F-1
Ladies and Gentlemen:
We have acted as special Canadian counsel to Capital Environmental
Resource Inc. (the "Corporation") in connection with the preparation and filing
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act") of a Registration Statement on Form F-1 (the "Registration
Statement") relating to the public offering (the "Public Offering") by the
Corporation and certain selling shareholders of an aggregate of 4,312,500 common
shares of the Corporation (including 562,500 shares subject to an over-allotment
option) (the "Shares").
We have made such investigations and examined originals or copies,
certified or otherwise identified to our satisfaction, of such certificates of
public officials and of such other certificates, documents and records as we
have considered necessary or relevant for the purposes of the opinions
hereinafter expressed, including:
(a) the articles and by-laws of the Corporation; and
(b) all minutes of meetings of the shareholders and directors of the
Corporation and of committees of the board of directors of the
Corporation contained in the books of the Corporation and
resolutions of the directors of the Corporation authorizing, among
other things, the issue of the Shares.
For the purpose of the opinion provided below, we have assumed (i)
that the Shares will be issued at a price greater than U.S.$13.00, (ii) that the
offering committee (the "Offering Committee") of the board of directors of the
Corporation has approved the Public Offering and the other terms and conditions
thereof, and (iii) that the Public Offering has been completed on such other
terms and conditions established by the Offering Committee.
Based on the foregoing, we are of the opinion that all necessary
corporate action has been taken by the Corporation to validly issue the Shares
and (in the case of the Shares to be issued and sold by the Corporation), when
issued and paid for as contemplated by the Registration Statement, the Shares
will be duly and validly issued as fully paid and non-assessable shares.
<PAGE>
-2-
In addition to providing the above opinion, we have been retained by
you to pass on some other matters of Canadian law as noted in the Registration
Statement on page 72 under the heading "Legal Matters". We note that our name is
also specifically referred to on page 14 in connection with information relating
to the enforcement of civil liabilities contained under the heading "Risk
Factors" and on page 65 in connection with the information contained under the
heading "Tax Consequences".
We hereby consent to the aforesaid references to our advice and
opinion and also consent to the inclusion of this consent in the Registration
Statement to be filed under the Act. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations thereunder, nor do we admit
that we are experts with respect to any part of the Registration Statement
within the meaning of the term "expert" as used in the Act or the rules and
regulations thereunder.
<PAGE>
[Letterhead of Morgan, Lewis & Bockius LLP]
Draft May __, 1999
Capital Environmental Resource Inc.
1005 Skyview Drive
Burlington, Ontario, Canada L7P 5B1
Re: Registration Statement on Form F-1
- --------------------------------------
Ladies and Gentlemen:
We have acted as special United States tax counsel to Capital
Environmental Resource Inc., a corporation organized under the laws of Ontario,
Canada (the "Company"), in connection with the preparation of a Registration
Statement on Form F-1, dated May __, 1999 (the "Registration Statement"),
relating to the initial public offering of common stock in the Company (the
"Common Stock").
Capitalized terms used herein and not otherwise defined herein
have the respective meanings ascribed to those terms in the Registration
Statement.
In arriving at the opinion referred to below, we have examined
and relied upon the following documents:
(a) the Registration Statement, including the Exhibits
thereto; and
(b) the tax representations letter of even date herewith
to us from the Company.
We have also read and relied upon originals or copies,
certified or otherwise identified to our satisfaction, of such records of the
Company and such certificates and representations of officers and
representatives of the Company and we have made such investigations of law as we
have deemed appropriate as a basis for the opinion referred to below. In our
examination, we have assumed the authenticity of original documents, the
accuracy of copies and the genuineness of signatures. We understand and assume
that (i) each agreement referred to in the Registration Statement represents the
valid and binding obligation of the respective parties thereto, enforceable in
accordance with its respective terms, and the entire agreement between the
parties with respect to the subject matter thereof, (ii) the parties to each
agreement have complied, and will comply, with all of their respective
covenants, agreements and
<PAGE>
Capital Environmental Resource Inc.
Draft May __, 1999
Page 2
undertakings contained therein and (iii) the transactions provided for by each
agreement were and will be carried out in accordance with their terms.
Our opinion is based upon existing United States federal
income tax laws, regulations, administrative pronouncements and judicial
decisions. All such authorities are subject to change, either prospectively or
retroactively. No assurance can be provided as to the effect of any such change
upon our opinion.
Our opinion has no binding effect on the United States
Internal Revenue Service or the courts of the United States. No assurance can be
given that, if the matter were contested, a court would agree with our opinion.
We have advised the Company in connection with the material
United States federal income tax consequences to United States holders of the
acquisition, ownership and disposition of the Common Stock, and we confirm that
the statements of law and legal conclusions contained in the Registration
Statement under the caption "Tax Consequences - United States Federal Income Tax
Considerations" are our opinion. While our opinion discusses the material
anticipated United States federal income tax consequences applicable to certain
United States holders, it does not purport to discuss all United States tax
consequences and is limited to those United States tax consequences specifically
discussed therein.
In giving our opinion, we express no opinion other than as to
the federal income tax law of the United States of America.
We are furnishing this letter in our capacity as special
United States tax counsel to the Company. This letter is not to be used,
circulated, quoted or otherwise referred to for any other purpose, except as set
forth below.
We hereby consent to the filing of this letter as an Exhibit
to the Registration Statement and we further consent to the use of our name
under the captions "Legal Matters" and "Tax Consequences - United States Federal
Income Tax Considerations" in the Registration Statement. In giving this
consent, we do not thereby admit that we are within the category of persons
whose consent is required to be filed with the Registration Statement under the
provisions of the Securities Act or the rules and regulations promulgated
thereunder.
Very truly yours,
<PAGE>
Exhibit 23.1
[LETTERHEAD OF PRICEWATERHOUSECOOPERS LLP]
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form F-1 (File
No. 333-77633) of our report dated March 8, 1999, except for notes 7 and
11(d) which are dated April 26, 1999, on our audits of the consolidated
financial statements of Capital Environmental Resource Inc. We also consent
to the references to our firm under the Caption "Experts".
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chartered Accountants
Toronto, Canada
May 14, 1999
<PAGE>
Exhibit 23.7
[LETTERHEAD OF COOPERS & LYBRAND]
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form F-1 (File
No. 333-77633) of our report dated May 29, 1998, on our audits of the
consolidated financial statements of Western Waste Services Inc. We also
consent to the references to our firm under the Caption "Experts".
/s/ Coopers & Lybrand
Coopers & Lybrand
Chartered Accountants
Edmonton, Canada
May 14, 1999
