-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ns0MInbjabUX8j3l6OhywYj1LUyp8ZsqxHcmti/buMV5BEbVMA7wf76BmZt61F6N tIkI+c1T6xlGC0m+sf22pA== 0001047469-99-017816.txt : 19990505 0001047469-99-017816.hdr.sgml : 19990505 ACCESSION NUMBER: 0001047469-99-017816 CONFORMED SUBMISSION TYPE: F-1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19990503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL ENVIRONMENTAL RESOURCE INC CENTRAL INDEX KEY: 0001065736 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: F-1 SEC ACT: SEC FILE NUMBER: 333-77633 FILM NUMBER: 99609332 BUSINESS ADDRESS: STREET 1: 1005 SKYVIEW DR STREET 2: BURLINGTON ONTARIO CITY: CANADA L7P5B1 STATE: A6 BUSINESS PHONE: 9053191237 MAIL ADDRESS: STREET 1: 1005 SKYVIEW DRIVE STREET 2: BURLINGTON ONTARIO CITY: CANADA L7P5B1 STATE: A6 F-1 1 FORM F-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- CAPITAL ENVIRONMENTAL RESOURCE INC. (Exact name of registrant as specified in its charter) ONTARIO, CANADA 4953 NOT APPLICABLE (State or jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
-------------------------- 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: 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
-------------------------- 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. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM AMOUNT MAXIMUM AGGREGATE TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) REGISTRATION FEE Common Stock, no par value 4,312,500 shares $15.00 $64,687,500 $17,983.13
(1) Includes 562,500 shares of common stock to be sold upon exercise of the Underwriters' over-allotment option, as well as all shares initially offered and sold outside the United States that may be resold from time to time in the United States. The shares are not being registered for the purpose of sales outside the United States. See "Underwriting." (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 of Regulation C under the Securities Act of 1933, as amended. -------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. SUBJECT TO COMPLETION, DATED MAY 3, 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 9.
Underwriting Proceeds to Proceeds to Price to Discounts and Capital Selling Public Commissions Environmental Shareholders ----------------- ----------------- ----------------- ----------------- Per Share........................... $ $ $ $ Total............................... $ $ $ $
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. Map of each of 3 geographic territories in which Capital Environmental conducts its business 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
PAGE --------- PROSPECTUS SUMMARY......................................................................................... 4 RISK FACTORS............................................................................................... 9 FORWARD-LOOKING STATEMENTS................................................................................. 14 USE OF PROCEEDS............................................................................................ 15 DIVIDEND POLICY............................................................................................ 15 EXCHANGE RATES............................................................................................. 15 DILUTION................................................................................................... 16 CAPITALIZATION............................................................................................. 17 SELECTED CONSOLIDATED FINANCIAL DATA....................................................................... 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 20 BUSINESS................................................................................................... 29 MANAGEMENT................................................................................................. 49 CERTAIN TRANSACTIONS....................................................................................... 56 PRINCIPAL AND SELLING SHAREHOLDERS......................................................................... 58 DESCRIPTION OF CAPITAL STOCK............................................................................... 60 SHARES ELIGIBLE FOR FUTURE SALE............................................................................ 63 TAX CONSEQUENCES........................................................................................... 64 UNDERWRITING............................................................................................... 69 LEGAL MATTERS.............................................................................................. 71 EXPERTS.................................................................................................... 71 AVAILABLE INFORMATION...................................................................................... 71 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-1
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 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 our strategy, for the month ended December 31, 1998, we disposed of approximately 24.8% 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. Additionally, we disposed of 4 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 waste we collected at our transfer stations, from which the waste was transported to remote disposal 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% at other third-party disposal sites. 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. We have 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. RECENT ACQUISITIONS IN ONTARIO On February 8, 1999, we acquired all of the shares of Can Pak Environmental Inc. and Can Pak Waste Management Ltd. The Can Pak companies provide residential, commercial and industrial waste collection and recycling services. We are integrating Can Pak's operations into three of our existing market areas in the Eastern Ontario and Central Ontario service areas: Scarborough, Lindsay and Newmarket. On March 1, 1999, we acquired all of the shares of Ram-Pak Compaction Systems Ltd. From offices located in Central Ontario, Ram-Pak provides waste collection management services to national companies in multiple locations in Canada and sells and leases compactors. Prior to our acquisition, Ram-Pak subcontracted its collection and disposal services for its national account customers to some of our competitors. Some of these collection and disposal services will be integrated into our existing operations. The compactor sales and leasing business allows us to provide additional services to our customers which are not available from many of our smaller competitors. On March 8, 1999, we acquired all of the shares of Effective Waste Management Services Inc. Effective Waste provides commercial and industrial waste collection and recycling services. We are integrating Effective Waste into our existing market area in Scarborough. On April 21, 1999, we signed a definitive agreement to purchase all of the shares of Premier Waste Systems Ltd. We completed this acquisition on April 30, 1999. Premier provides residential, commercial and industrial collection and recycling services in our Hamilton market area and operates a transfer station in Hamilton. Premier's operations will be integrated into our existing market area in Hamilton. RECENT ACQUISITION IN BRITISH COLUMBIA On April 16, 1999, we acquired all of the shares of Excel Disposal Service Ltd. Excel provides residential and commercial collection services in Vernon, British Columbia. The Excel acquisition expanded our operations into a new market near our Penticton operations. RECENT ACQUISITIONS IN THE NORTHERN UNITED STATES On February 1, 1999, we acquired the commercial, residential and industrial waste collection business, including customer accounts and related assets, of Clark Enterprises. The Clark Enterprises acquisition expanded our Central New York/Pennsylvania service area into Watertown, New York, an area contiguous with our Syracuse operations. 5 On February 5, 1999, we acquired the residential and commercial collection operations, including customer contracts, of Lossell Container Services and Lycoming Solid Waste Disposal, Inc. This acquisition is being integrated into our existing Williamsport, Pennsylvania operations. 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.
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 1998 MARCH 31, 1999 ------------------- ------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Revenues............................................................... $ 11,965 $ 17,876 Expenses: 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
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. 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. 6 THE OFFERING 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
- ------------------------ (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." 7 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CAPITAL ENVIRONMENTAL ------------------------------------ PERIOD FROM INCEPTION (MAY 23, 1997) THROUGH YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 ----------------- ----------------- 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% AS OF DECEMBER 31, 1998 ------------------------------------ ACTUAL AS ADJUSTED ----------------- ----------------- 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
- ------------------------ (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. 8 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. 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. 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. Additionally, 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. 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 we generate from acquired businesses, which could cause a decline in the market price of our common stock. 9 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 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 10 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 could prevent us from obtaining or maintaining contracts or 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. In the future, if we are unable to obtain performance bonds or letters of credit in sufficient amounts or at acceptable rates or to maintain existing performance bonds or letters of credit, we might be unable to enter into additional or continue existing municipal contracts or to obtain or retain operating permits. In the future, if we cannot obtain appropriate insurance, we may be unable to secure contracts conditioned on the adequacy of our insurance coverage. 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, 11 suitable land for new sites or expansion of existing landfill sites may be unavailable. Permits to expand landfills are often not approved until the remaining permitted disposal capacity of a landfill is very low. If 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. 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. An uninsured claim against us, if successful and of sufficient magnitude, could increase our costs and liabilities to an unacceptable level. 12 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, 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. 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. 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 13 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, 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. 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. 14 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.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 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
On April 15, 1999, the noon buying rate for Canadian dollars was $0.6709=C$1.00 15 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: 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 --------- ---------
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:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------------- -------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ----------- ------------- ----------- ----------- 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% ---------- ----- ------------- ----- ---------- ----- ------------- -----
- ------------------------ (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." 16 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.
DECEMBER 31, 1998 ----------------------------------- AS FURTHER ACTUAL AS ADJUSTED ADJUSTED --------- ----------- ----------- (IN THOUSANDS, EXCEPT SHARE DATA) 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 --------- ----------- ----------- --------- ----------- -----------
17 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 includes redeemable convertible preference stock, redeemable class "B" special stock, and redeemable common stock. See "Capitalization."
WESTERN WASTE CAPITAL ENVIRONMENTAL ------------------------------------------------- ------------------------------------ PERIOD FROM PERIOD FROM INCEPTION YEAR PERIOD FROM INCEPTION (NOVEMBER 22, ENDED NOVEMBER 1, (MAY 23, 1997) YEAR 1994) THROUGH OCTOBER 31, 1996 THROUGH THROUGH ENDED OCTOBER 31, 1995 1996 JUNE 5, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998 ----------------- --------------- ------------- ----------------- ----------------- (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
18
WESTERN WASTE CAPITAL ENVIRONMENTAL ------------------------------------------------- ------------------------------------ PERIOD FROM PERIOD FROM INCEPTION YEAR PERIOD FROM INCEPTION (NOVEMBER 22, ENDED NOVEMBER 1, (MAY 23, 1997) YEAR 1994) THROUGH OCTOBER 31, 1996 THROUGH THROUGH ENDED OCTOBER 31, 1995 1996 JUNE 5, 1997 DECEMBER 31, 1997 DECEMBER 31, 1998 ----------------- --------------- ------------- ----------------- ----------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 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%
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, ------------------------ 1997 ACTUAL AS ADJUSTED ------------- --------- ------------- 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
- ------------------------------ (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 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. 20 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: 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%
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 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 22 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: 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.
23 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:
PERIOD FROM INCEPTION PERIOD FROM (MAY 23, 1997) NOVEMBER 1, 1996 YEAR ENDED THROUGH YEAR ENDED OCTOBER 31, 1996 THROUGH DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 5, 1997 -------------------- -------------------- -------------------- -------------------- (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%
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 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. 24 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 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. 25 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 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 26 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. 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 27 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. 28 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 29 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 30 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 31 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; 32 - 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. 33 We have completed the following acquisitions of companies, businesses or selected assets of companies, as of the date set forth in the chart below:
ACQUISITION SERVICES MARKET AREAS DATE - --------------------------- --------------------------- --------------------------- ------------------------- 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
34
ACQUISITION SERVICES MARKET AREAS DATE - --------------------------- --------------------------- --------------------------- ------------------------- 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
- ------------------------ (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. 35 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 36 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. 37 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 38 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. 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. 39 The following chart sets forth the disposal characteristics of each of our current market areas:
CAPITAL ENVIRONMENTAL LONG- TERM MUNICIPAL TRANSFER DISPOSAL OWNERSHIP OF MARKET AREA STATION CONTRACT LOCAL LANDFILLS - -------------------------------------------------------- ------------------------- ------------- ------------------- 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 NUMEROUS DISPOSAL MARKET AREA ALTERNATIVES - -------------------------------------------------------- --------------- 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...........................................
- ------------------------ (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 40 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. 41 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. 42 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. 43 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 44 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, 45 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 46 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 47 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. 48 MANAGEMENT OFFICERS AND DIRECTORS The following table sets forth information concerning Capital Environmental's executive officers and directors:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- 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)
- ------------------------ (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 49 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:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- 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
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 50 of Western North America Operations where he was the senior operating officer responsible for 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. 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. 51 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
LONG-TERM COMPENSATION ---------------------------------- ANNUAL COMPENSATION SHARES UNDERLYING ------------------------------------ RESTRICTED OPTIONS ALL OTHER YEAR SALARY BONUS OTHER STOCK GRANTED(2) COMPENSATION --------- ------------ ---------- ---------- --------------- ----------------- --------------- 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 --
- ------------------------ (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
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% - --------------------------------- ----------- ------------- ------------- ------------------- ------------ ------------ 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
- ------------------------ (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. 52 (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
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 --------------- ------------- ------------- ------------- Tony Busseri.............................................. -- 84,466 -- C $590,000 Allard Loopstra........................................... -- 55,388 -- C $300,000
- ------------------------ (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 53 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, 54 which is defined as an initial public offering of our securities on a recognized stock exchange or an 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. 55 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. 56 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. 57 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.
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY SHARES OWNED BEING OWNED BEFORE OFFERING OFFERED AFTER OFFERING ---------------------- ----------- ---------------------- NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT - -------------------------------------------------------------------- --------- ----------- --------- ----------- 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%
- ------------------------ * 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. 58 (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. 59 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 60 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 2,506,587 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 2,506,587 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. 61 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 CIBC Mellon Trust Company will serve as registrar for the common stock. 62 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 certain rights with respect to the registration of these shares under the Securities Act. 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 certain volume, manner of sale and other limitations under Rule 144. Following the expiration of these lock-up periods, certain 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 certain 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 certain 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 63 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 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 certain 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 Except as specifically discussed below, 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) ("Canadian Act"): - 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. 64 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 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 65 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 - 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. 66 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 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 67 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. 68 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:
NUMBER UNDERWRITERS OF SHARES - --------------------------------------------------------------------------------- ---------- Credit Suisse First Boston Corporation........................................... Raymond James & Associates, Inc.................................................. Sanders Morris Mundy Inc......................................................... ---------- Total........................................................................ 3,750,000 ---------- ----------
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.
TOTAL ------------------------------ WITHOUT WITH PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT ----------- -------------- -------------- 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.......................... $ $ $
The underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. 69 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 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 said 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 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 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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
F-1 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. Toronto, Canada PricewaterhouseCoopers LLP March 8, 1999, except Chartered Accountants for notes 7 and 11(d) which are dated April 26, 1999
F-2 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)
1997 1998 --------- --------- 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 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements F-3 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)
PRO FORMA REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY DECEMBER 31, 1998 1997 1998 (UNAUDITED) --------- --------- ------------ 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 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements F-4 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
PERIOD FROM INCEPTION (MAY 23, 1997) TO DECEMBER 31, YEAR ENDED 1997 DECEMBER 31, 1998 ------------------- ----------------- 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 ---------- ----------------- ---------- -----------------
STATEMENT OF COMPREHENSIVE INCOME 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 ------- -------------- ------- --------------
See accompanying notes to consolidated financial statements F-5 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)
STOCKHOLDERS' EQUITY -------------------------------------------------------------- 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 ---------- --------- ------------- ------ --------- ---------- --------- ------------- ------ ---------
See accompanying notes to consolidated financial statements F-6 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)
PERIOD FROM INCEPTION (MAY 23, 1997) YEAR ENDED TO DECEMBER 31, DECEMBER 31, 1997 1998 --------------- ------------ 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 --------------- ------------ --------------- ------------
See accompanying notes to consolidated financial statements. F-7 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 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. Buildings.................................................... 10 to 25 years Vehicles..................................................... 10 years Containers, compactors and recycling equipment............... 5 to 12 years Furniture, fixtures and other office equipment and leaseholds................................................. 3 to 5 years
During 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 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 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 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:
WESTERN WASTE OTHER TOTAL --------- --------- --------- 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 --------- --------- --------- --------- --------- ---------
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 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:
RUBBISH GETS OTHER TOTAL --------- --------- --------- --------- 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 --------- --------- --------- --------- --------- --------- --------- ---------
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 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)
PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1997 1998 (UNAUDITED) (UNAUDITED) ------------ ------------ 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
3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ ------------ 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 ------------ ------------ ------------ ------------
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 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:
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ ------------ 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 ------------ ------------ ------------ ------------
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 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: 1999............................................................... $ 2,101 2000............................................................... 52,901 2001............................................................... 617 2002............................................................... 572 2003............................................................... 499 --------- $ 56,690 --------- ---------
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:
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ --------------- CURRENT Canada........................................................... $ 45 $ 200 United States.................................................... -- -- ------------ ----- 45 200 ------------ ----- DEFERRED Canada........................................................... (1,443) 523 United States.................................................... -- 17 ------------ ----- (1,443) 540 ------------ ----- $ (1,398) $ 740 ------------ ----- ------------ -----
F-16 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:
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ ------------- 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 ------------ ----- ------------ -----
The components of the deferred income tax amounts are as follows:
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ ------------ 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) ------------ ------------ ------------ ------------
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: 1999................................................................ $ 1,120 2000................................................................ 1,038 2001................................................................ 852 2002................................................................ 780 2003................................................................ 444 Thereafter.......................................................... 83 --------- $ 4,317 --------- ---------
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 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 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 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 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 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 $10.46 as at December 31, 1998) per share. These options expire as follows:
NUMBER OF SHARES LATEST VESTING OPTION EXPIRY SUBJECT TO OPTION OPTION PRICE DATE DATE - ------------------------------- ---------------- -------------------- -------------------- 163,394........................ C$ 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
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 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:
DECEMBER 31, DECEMBER 31, 1997 1998 ------------ ------------- 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 ------------ ------ ------------ ------
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: 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%
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 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.
LOSS PER SHARE PERIOD FROM INCEPTION (MAY 23, 1997) INCOME PER SHARE THROUGH FOR THE YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1998 -------------------------- ---------------------- 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 ------------ ------------ ---------- ---------- ------------ ------------ ---------- ----------
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS A) CASH FLOW INFORMATION
PERIOD FROM INCEPTION (MAY 23, 1997) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, 1997 1998 $ $ --------------- --------------- 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 ------ ----- ------ -----
F-24 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.
CANADA UNITED STATES TOTAL -------------------- -------------------- ---------------------- $ % $ % $ % --------- --------- --------- --------- --------- ----- 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 --------- --- --------- --- --------- --- --------- --- --------- --- --------- ---
Specified items included in the consolidated financial statements for the year ended December 31, 1998 by segment are as follows:
CANADA UNITED STATES TOTAL -------------------- -------------------- --------- $ % $ % $ --------- --------- --------- --------- --------- 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 --------- --- --------- --- --------- --------- --- --------- --- --------- % ----- Interest expense................................................... 100 --- --- Depreciation and amortization...................................... 100 --- --- Income tax expense................................................. 100 --- --- Expenditures for additions to fixed assets......................... 100 --- ---
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 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 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 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)
OCTOBER 31, JUNE 5, 1996 1997 ----------- --------- 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 ----------- --------- ----------- ---------
See accompanying notes to the consolidated financial statements. F-28 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
PERIOD FROM NOVEMBER 1, YEAR 1996 ENDED THROUGH OCTOBER 31, JUNE 5, 1996 1997 ----------- ------------- 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) ----------- ------------- ----------- -------------
See accompanying notes to the consolidated financial statements F-29 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)
STOCKHOLDERS' DEFICIT ------------------------------------------------------------------- FOREIGN CURRENCY ACCUMULATED COMMON STOCK TRANSLATION DEFICIT TOTAL ------------------------ --------------- ------------- --------- SHARES $ $ $ $ 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) -- -- -- -- --- ------ --------- --- ------ ---------
See accompanying notes to the consolidated financial statements. F-30 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)
PERIOD FROM NOVEMBER 1, YEAR 1996 ENDED THROUGH OCTOBER 31, JUNE 5, OPERATING ACTIVITIES 1996 1997 ----------- ----------- 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 ----------- ----------- ----------- -----------
See accompanying notes to the consolidated financial statements F-31 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 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. 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
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 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 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:
WEST JONES ALPINE COAST LACEY OTHER --------- --------- --------- --------- ----------- 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 --------- --------- --------- --------- ----- --------- --------- --------- --------- ----- TOTAL --------- Property and equipment............................................ $ 6,214 Goodwill and other intangibles.................................... 2,799 Deferred income taxes............................................. (831) --------- Net acquisition costs............................................. $ 8,182 --------- ---------
BUSINESSES ACQUIRED DURING THE PERIOD FROM NOVEMBER 1, 1996 THROUGH JUNE 5, 1997 No businesses were acquired during the period from November 1, 1996 through June 5, 1997. PRO FORMA ACQUISITION DATA (UNAUDITED) Condensed pro forma statement of operations data, as if the acquisitions accounted for as business combinations each period had occurred at the beginning of the periods presented, are as follows:
PERIOD FROM NOVEMBER 1, YEAR 1996 ENDED THROUGH OCTOBER 31, JUNE 5, 1996 1997 ----------- ------------- Revenue........................................................... $ 8,012 $ 5,680 ----------- ------ ----------- ------ Net income (loss) from operations................................. $ (553) $ (238) ----------- ------ ----------- ------ Net income (loss) for the period.................................. $ (1,018) $ (811) ----------- ------ ----------- ------
F-35 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:
OCTOBER 31, JUNE 5, 1996 1997 ----------- --------- 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 ----------- --------- ----------- ---------
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 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
OCTOBER 31, JUNE 5, 1996 1997 ------------- ----------- 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 ----- ----- ----- -----
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:
PERIOD FROM NOVEMBER 1, 1996 YEAR ENDED THROUGH OCTOBER 31, JUNE 5, 1996 1997 ------------- ------------- Current............................................................ $ -- $ 35 Deferred........................................................... 508 538 ----- ----- PROVISION FOR INCOME TAXES......................................... $ 508 $ 573 ----- ----- ----- -----
The current provision for income taxes for the period from November 1, 1996 through June 5, 1997 consists of capital taxes. F-37 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:
PERIOD FROM NOVEMBER 1, 1996 YEAR ENDED THROUGH OCTOBER 31, JUNE 5, 1996 1997 ------------- ------------- 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:
PERIOD FROM NOVEMBER 1, 1996 YEAR ENDED THROUGH OCTOBER 31, JUNE 5, 1996 1997 ----------- ------------- Net book value of property and equipment in excess of related tax cost............................................................. $ 1,782 $ 2,266 ----------- ------ FUTURE INCOME TAXES................................................ $ 1,782 $ 2,266 ----------- ------ ----------- ------
7. COMMITMENTS AND CONTINGENCIES LEASES The aggregate amount of future rent expense resulting from non-cancellable operating leases as at June 5, 1997 amounts to $1,762 as follows: 1998................................................................ 396 1999................................................................ 402 2000................................................................ 397 2001................................................................ 306 2002................................................................ 261 --------- $ 1,762 --------- ---------
Aggregate rent expense, which is included in cost of operations, was $170 for the year ended October 31, 1996 and $121 for the period from November 1, 1996 through June 5, 1997. ENVIRONMENTAL RISKS Western Waste is subject to liability for any environmental damage that its solid waste facilities may cause to neighbouring landowners or residents, particularly as a result of the contamination of soil, F-38 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 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
PERIOD FROM NOVEMBER 1, 1996 YEAR ENDED THROUGH OCTOBER 31, JUNE 5, 1996 1997 ------------- ------------- 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 -- ----- ----- ----- -----
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 [LOGO] 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. 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 ---------- ----------
- ------------------------ * 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 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 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 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 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 --Opinion of Tory Tory DesLauriers & Binnington* 8 --Opinion of PricewaterhouseCoopers LLP* 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* 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)
- ------------------------ * To be filed by amendment. (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 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 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY HAS DULY CAUSED THIS 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 30TH DAY OF APRIL, 1999. CAPITAL ENVIRONMENTAL RESOURCE INC. By: /s/ TONY BUSSERI ----------------------------------------- Name: Tony Busseri Title: Chairman of the Board and Chief Executive Officer
POWERS OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS TONY BUSSERI AND GEORGE BOOTHE, AND EACH OF THEM, WITH FULL POWER TO ACT WITHOUT THE OTHER, THIS PERSON'S TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN THIS REGISTRATION STATEMENT, ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS), ANY SUBSEQUENT REGISTRATION STATEMENTS PURSUANT TO RULE 462 OF THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY AMENDMENTS THERE AND TO FILE THE SAME, WITH EXHIBITS AND SCHEDULES, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING NECESSARY OR DESIRABLE TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR ANY OF THEM, OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Chairman of the Board and /s/ TONY BUSSERI Chief Executive Officer - ------------------------------ (Principal Executive April 30, 1999 Tony Busseri Officer) /s/ GEORGE BOOTHE Chief Financial Officer - ------------------------------ (Principal Financial and April 30, 1999 George Boothe Accounting Officer) /s/ ALLARD LOOPSTRA - ------------------------------ President, Chief Operating April 30, 1999 Allard Loopstra Officer and Director /s/ KENNETH C. LEUNG - ------------------------------ Director April 30, 1999 Kenneth C. Leung /s/ DAVID W. POLLAK - ------------------------------ Authorized United States April 30, 1999 David W. Pollak Representative
II-6 EX-3.1 2 RESTATED ARTICLES OF INCORPORATION OF THE COMPANY Exhibit 3.1 --------------------------------- For Ministry Use Only Ontario Corporation Number a usage exclusif du ministere Numero de la compagnie en Ontario ---------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ RESTATED ARTICLES OF INCORPORATION STATUTS MIS A JOUR Form 5 Business Corporations Act 1. The name of the corporation is: Denomination sociale de la compagnie: ------------------------------------------------------------------------------------------------------------- CAPITAL ENVIRONMENTAL RESOURCE ------------------------------------------------------------------------------------------------------------- Formula INC./ RESOURCES ENVIRONNEMENTALES numero 5 ------------------------------------------------------------------------------------------------------------- Loi sur aux CAPITAL INC. compagnies ------------------------------------------------------------------------------------------------------------- 2. Date of incorporation/amalgamation: Date de is constitution ou de la fusion: 25 MAY 1997 ------------------------------------------------------------------------------------------------------------------ (Day, Month, Year) (jour, mois, annee) 3. The address of the registered office is: Adresse du siege social: 1005 SKYVIEW DRIVE ------------------------------------------------------------------------------------------------------------------ (Street & Number, or R.R. Number & if Multi-Office Building give Room No.) (Rue et numero, ou numero de la R.R. ou s'il s'agit edifice a bureaux numero du bureau) BURLINGTON, ONTARIO L7PSB ------------------------------------------------------------------------------------------------------------------ (Name of Municipality or Post Office) (Postal code/Code postal) (Nom de la municipalite ou du bureau de poste) 4. Number (or minimum and maximum number) of Nombre (ou nombres minimal et maximal) directors is: d'administrateurs: MINIMUM OF 3; MAXIMUM OF 9 5. The director(s) is/are: Administrateur(s): Resident Canadian State First name, initials and surname Address for service, giving Street & No. or R.R. No., Yes or No Prenom, initiales et nom de famille Municipality and Postal Code Resident Domicile elu. y compris la rue et le numero, le numero Canadien de la R.R. ou le nom de la municipalite et le code postal Qui/Non ------------------------------------------------------------------------------------------------------------------ TONY BUSSERI 1386 GREENEAGLE DRIVE YES OAKVILLE, ONTARIO L6M 2N3 KENNETH LEUNG 17 PROSPECT PARK WEST NO BROOKLYN, NEW YORK 11215 ALLARD LOOPSTRA 29 CULLUM DRIVE YES CARLISLE, ONTARIO L0R 1H2 [ILLEGIBLE] Form 3 DAVID LOWENSTEIN 1 PALACE PIER COURT, UNIT 2303 YES ETOBICOKE, ONTARIO M8V 3W9
2 6. Restrictions, if any, on business the corporation may Limites s'il y a lieu, carry on or on powers the corporation may exercise. imposees aux activites commerciales ou aux pouvoirs de la compagnie. None. 7. The classes and any maximum number of shares that Categories et nombre s'il y a lieu, d'actions maximal, the corporation is authorized to issue: que la compagnie est autorisee a emettre: Unlimited number of common shares and unlimited number of Preferred Shares, issuable in series.
3 8. Rights, privileges, restrictions and conditions (if any) Droits, privileges, restrictions et attaching to each class of shares and directors conditions, s'il y a lieu, [ILLEGIBLE] a authority with respect to any class of shares which chaque categorie d'actions et pouvoirs des may be issued in series: administrateurs relatifs a chaque categorie d'actions qui peut etre emise en serie:
See attached pages 3A to 3C 3A SCHEDULE A I. PREFERRED SHARES The Preferred Shares, as a class, shall be designated as Preferred Shares and shall have attached thereto the following rights, privileges, restrictions and conditions: 1.1. Directors' Right to Issue in One or More Series The Preferred Shares may be issued at any time or from time to time in one or more series. Before any shares of a series are issued, the board of directors of the Corporation shall fix the number of shares that will form such series and shall, subject to the limitations set out in the Articles, determine the designation, rights, privileges, restrictions and conditions to be attached to the Preferred Shares of such series, the whole subject to the filing with the Director (as defined in the Business Corporations Act (the "Act")) of Articles of Amendment containing a description of such series including the rights, privileges, restrictions and conditions determined by the board of directors of the Corporation. 1.2. Ranking of the Preferred Shares The Preferred Shares of each series shall rank on a parity with the Preferred Shares of every other series with respect to dividends and return of capital in the event of the liquidation, dissolution or winding-up of the Corporation, and shall be entitled to a preference over the Common Shares of the Corporation and over any other shares ranking junior to the Preferred Shares with respect to priority in payment of dividends and in the distribution of assets in the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding up its affairs. If any cumulative dividends, whether or not declared, or declared non-cumulative dividends or amounts payable on a return of capital in the event of the liquidation, dissolution or winding-up of the Corporation are not paid in full in respect of any series of the Preferred Shares, the Preferred Shares of all series shall participate rateably in respect of such dividends in accordance with the sums that would be payable on such shares if all 3B such dividends were declared and paid in full, and in respect of such return of capital in accordance with the sums that would be payable on such return of capital if all sums so payable were paid in full; provided, however, that if there are insufficient assets to satisfy in full all such claims as aforesaid, the claims of the holders of the Preferred Shares with respect to return of capital shall be paid and satisfied first and any assets remaining thereafter shall be applied towards the payment and satisfaction of claims in respect of dividends. The Preferred Shares of any series may also be given such other preferences not inconsistent with the rights, privileges, restrictions and conditions attached to the Preferred Shares as a class over the Common Shares of the Corporation and over any other shares ranking junior to the Preferred Shares as may be determined in the case of such series of Preferred Shares. 1.3. Voting Rights Except as hereinafter referred to or as required by law or unless provision is made in the Articles relating to any series of Preferred Shares that such series is entitled to vote, the holders of the Preferred Shares as a class shall not be entitled as such to receive notice of, to attend or to vote at any meeting of the shareholders of the Corporation; provided, however, that the holders of Preferred Shares shall be entitled to notice of meetings of shareholders called for the purpose of authorizing the dissolution of the Corporation or the sale, lease or exchange of all or substantially all the property of the Corporation other than in the ordinary course of the business of the Corporation. 1.4. Amendment With Approval of Holders of the Preferred Shares The rights, privileges, restrictions and conditions attached to the Preferred Shares as a class may be added to, changed or removed but only with the approval of the holders of the Preferred Shares given as hereinafter specified. 1.5. Approval of Holders of the Preferred Shares The approval of the holders of the Preferred Shares to add to, change or remove any right, privilege, restriction or condition attaching to the Preferred Shares as a class or in respect of any other matter requiring the consent of the holders of the Preferred Shares may be 3C given in such manner as may then be required by law, subject to a minimum requirement that such approval be given by resolution signed by all the holders of the Preferred Shares or passed by the affirmative vote of at least 2/3 of the votes cast at a meeting of the holders of the Preferred Shares duly called for the purpose. The formalities to be observed with respect to the giving of notice of any such meeting or any adjourned meeting, the quorum required therefor and the conduct thereof shall be those from time to time prescribed by the by-laws of the Corporation with respect to meetings of shareholders, or if not so prescribed, as required by the Act as in force at the time of the meeting. On every poll taken at every meeting of the holders of the Preferred Shares as a class, or at any joint meeting of the holders of two or more series of Preferred Shares, each holder of Preference Shares entitled to vote thereat shall have one vote in respect of each $1.00 of the issue price of each Preferred Shares held. 2. COMMON SHARES The holders of the Common Shares shall be entitled to vote at all meeting of shareholders of the Corporation except meetings at which only the holders of the Preferred Shares as a class or the holders of one or more series of the Preferred Shares are entitled to vote, and shall be entitled to one vote at all such meetings in respect of each Common Share held. After payment to the holders of the Preferred Shares of the amount or amounts to which they may be entitled, the holders of the Common Shares shall be entitled to receive any dividend declared by the board of directors of the Corporation and to receive the remaining property of the Corporation upon liquidation, dissolution or winding up, whether voluntary or involuntary, and any other distribution of the assets of the Corporation among its shareholders for the purpose of winding up its affairs. 4. 9. The issue, transfer or ownership of shares L'emission, le transfert ou la propriete is/is not restricted and the restrictions d'actions est/n'est pas [ILLEGIBLE]. Les (if any) are as follows: restrictions, s'il y a lieu, sont les suivantes: The issue, transfer, or ownership of shares is not restricted. 10. Other provisions, (if any): Autres dispositions, s'il y a lieu: None
5. 11. These restated articles of incorporation correctly set Les presents statuts mis a jour enoncet out the corresponding provisions of the articles of correctement les dispositions correspondantes incorporation as amended and supersede the des status constitutifs relles qu'elles original articles of incorporation and all the sont modifiees et remplacent les statuts amendments thereto. constitutifes et les modifications qui y ont ete apportees. These articles are signed in duplicates. Les presents statuts sont signes en double exemplaire. CAPITAL ENVIRONMENTAL RESOURCE INC./ RESOURCES ENVIRONMENTALES CAPITAL INC. --------------------------------------------- (Name of Corporation) (Denomination sociale de la compagnie) By: Par: --------------------------------------------- (Signature) (Description of Office) (Signature) (Fonction)
EX-3.2 3 BY-LAWS OF THE COMPANY Exhibit 3.2 AMENDED AND RESTATED BY-LAW NO. 1 of CAPITAL ENVIRONMENTAL RESOURCE INC./ RESSOURCES ENVIRONNEMENTALES CAPITAL INC. (the "Corporation") 1. REGISTERED OFFICE 1.1. REGISTERED OFFICE. The registered office of the Corporation shall be in the place within Ontario specified in the articles of the Corporation and at such location therein as the directors may from time to time determine. 2. CORPORATE SEAL 2.1. CORPORATE SEAL. Until changed by the directors the corporate seal of the Corporation shall be in the form impressed in the margin hereof. 3. DIRECTORS 3.1. NUMBER AND QUORUM. The number of directors shall be not fewer than the minimum and not more than the maximum provided in the articles at least 2 of whom shall not be officers or employees of the Corporation of any or any of its affiliates. The number of directors shall be determined by the directors when they are empowered by special resolution to make such determination and otherwise the number of directors shall be determined by special resolution. A majority of the number of directors so determined or such greater number as may be fixed by the directors or shareholders shall constitute a quorum for the transaction of business at any meeting of directors. 3.2. QUALIFICATION. No person shall be qualified to be a director if such person is less than eighteen years of age; if such person is of unsound mind and has been so found by a court in Canada or elsewhere; or if such person has the status of a bankrupt. A majority of the directors -2- shall be resident Canadians. 3.3. ELECTION AND TERM OF OFFICE. At each annual meeting of the shareholders, directors shall be elected to hold office until the expiration of the term for which they are elected, which shall not exceed a term which ends at the third annual meeting of shareholders following such election. The directors of the Corporation shall be divided into two classes as nearly equal in size as practicable, hereby designated Class I and Class II. The term of the office of the initial Class I directors shall expire at the next annual meeting of the shareholders following such election and the term of office of the initial Class II directors shall expire at the second annual meeting of the shareholders following such election. At each annual meeting of the shareholders, directors to replace those of a class whose terms expire at such annual meeting shall be elected to hold office until the second annual meeting following such election or until their respective successors shall have been duly elected and qualified. Retiring directors are eligible for re-election. 3.4. VACATION OF OFFICE. A director ceases to hold office if such director dies, is removed from office by the shareholders, ceases to be qualified for election as a director or, subject to the BUSINESS CORPORATIONS ACT, resigns by a written resignation received by the Corporation. A written resignation of a director becomes effective at the time it is received by the Corporation, or at the time specified in the resignation, whichever is later. 3.5. REMOVAL OF DIRECTORS. The shareholders may by ordinary resolution at an annual or special meeting of shareholders remove any director or directors from office provided that where the holders of any class or series of shares have an exclusive right to elect one or more directors, a director so elected may only be removed by an ordinary resolution of the shareholders of that class or series. A vacancy created by the removal of a director may be filled at the meeting of the shareholders at which the director is removed. 3.6. VACANCIES. Subject to the Act, a quorum of directors may fill a vacancy among the directors. A director appointed or elected to fill a vacancy holds office for the unexpired term of such director's predecessor. -3- 3.7. ACTION BY DIRECTORS. The directors shall manage or supervise the management of the business and affairs of the Corporation. The powers of the directors may be exercised at a meeting (subject to sections 3.8 and 3.9) at which a quorum is present or by resolution in writing signed by all the directors entitled to vote on that resolution at a meeting of the directors. Where there is a vacancy in the board of directors the remaining directors may exercise all the powers of the board so long as a quorum remains in office. 3.8. CANADIAN MAJORITY AT MEETINGS. The directors shall not transact business at a meeting other than filling a vacancy in the board unless a majority of directors present are resident Canadians or if a resident Canadian director who is unable to be present approves in writing or by telephone or other communications facilities the business transacted at the meeting and a majority of resident Canadian directors would have been present had that director been present at the meeting. 3.9. MEETING BY TELEPHONE. If all the directors of the Corporation present at or participating in the meeting consent, a meeting of directors or of a committee of directors may be held by means of such telephone, electronic or other communication facilities as permit all persons participating in the meeting to communicate with each other simultaneously and instantaneously, and a director participating in such a meeting by such means is deemed to be present at that meeting. 3.10. PLACE OF MEETINGS. Meetings of directors may be held at any place within or outside of Ontario. A majority of the meetings of directors need not be held within Canada in any financial year of the Corporation. 3.11. CALLING OF MEETINGS. Meetings of the directors shall be held at such time and place as the Chairman of the Board, the President or any two directors may determine. 3.12. NOTICE OF MEETING. Notice of the time and place of each meeting of directors shall be given to each director by telephone not less than 48 hours before the time of the meeting or by written notice not less than four days before the day of the meeting and need not specify the -4- purpose of or the business to be transacted at the meeting. Meetings of the directors may be held at any time without notice if all the directors have waived or are deemed to have waived notice. 3.13. FIRST MEETING OF NEW BOARD. No notice shall be necessary for the first meeting of newly-elected directors held immediately following their election at a meeting of shareholders. 3.14. ADJOURNED MEETING. Notice of an adjourned meeting of directors is not required if the time and place of the adjourned meeting is announced at the original meeting. 3.15. REGULAR MEETINGS. The directors may appoint a day or days in any month or months for regular meetings and shall designate the place and time at which such meetings are to be held. A copy of any resolution of directors fixing the place and time of regular meetings of the board shall be sent to each director forthwith after being passed, and no other notice shall be required for any such regular meeting. 3.16. CHAIRMAN. The Chairman of the Board, or in the absence of the Chairman, the President if a director, or in the absence of the President, a director chosen by the directors at the meeting shall be the chairman of any meeting of directors. 3.17. VOTING AT MEETINGS. Questions arising at any meeting of directors shall be decided by a majority of votes. The Chairman of the Board shall not be entitled to a casting vote in the event of equality of votes. 3.18. CONFLICT OF INTEREST. A director or officer who is a party to, or who is a director or officer of or has a material interest in, any person who is a party to a material contract or transaction or proposed material contract or transaction with the Corporation shall disclose the nature and extent of such director's or officer's interest at the time and in the manner provided by the Act. 3.19. REMUNERATION AND EXPENSES. The directors shall be paid such remuneration, if any, as the directors may from time to time by resolution determine. The directors shall also be entitled to be paid their reasonable travelling and other expenses properly incurred by them in -5- going to, attending and returning from meetings of directors or committees of directors. If any director or officer of the Corporation shall be employed by or shall perform services for the Corporation otherwise than as a director or officer or shall be a member of a firm or a shareholder, director or officer of a body corporate which is employed by or performs services for the Corporation, the fact of such director or officer being a director or officer of the Corporation shall not disentitle such director or officer or such firm or body corporate, as the case may be, from receiving proper remuneration for such services. 4. COMMITTEES 4.1. COMMITTEES. The directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another director to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the directors, shall have and may exercise all the powers and authority of the directors in the management of the business and the affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power of authority in reference to approving or adopting, or recommending to the shareholders, any action or matter expressly required by law to be submitted to shareholders for approval, or adopting, amending or repealing this By-law. 4.2. TRANSACTION OF BUSINESS. Subject to section 3.9 the powers of a committee appointed by the directors may be exercised at a meeting at which a quorum is present or by resolution in writing signed by all members of the committee entitled to vote on that resolution at a meeting of the committee. Meetings of a committee may be held at any place in or outside Canada. -6- 4.3. PROCEDURE. Unless otherwise determined by the directors, each committee shall have power to fix its quorum and to regulate its procedure. 5. OFFICERS 5.1. GENERAL. The directors may from time to time appoint a Chairman of the Board, Chief Executive Officer, President, a Chief Financial Officer, one or more Executive Vice-Presidents, a Secretary and such other officers as the directors may determine, including one or more assistants to any of the officers so appointed. The officers so appointed may but need not be members of the board of directors except as provided in sections 5.3 and 5.4. 5.2. TERM OF OFFICE. Any officer may be removed by the directors at any time but such removal shall not affect the rights of such officer under any contract of employment with the Corporation. Otherwise, each officer shall hold office until such officer's successor is appointed. 5.3. THE CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall be appointed from among the directors and shall, when present, be chairman of meetings of shareholders and directors and shall have such other powers and duties as the directors may determine. The Chairman may or may not be an officer of the Corporation. 5.4. CHIEF EXECUTIVE OFFICER. Unless the directors otherwise determine, the Chairman of the Board shall be the Chief Executive Officer of the Corporation and as such shall, in addition to any other powers and duties determined by the directors from time to time, have general charge and control of the business affairs of the Corporation. 5.5. THE PRESIDENT. Unless the directors otherwise determine, the President shall be the Chief Operating Officer of the Corporation and shall have such powers and duties as the directors or the Chief Executive Officer may determine and in the absence of the Chairman of the Board and the absence of the Chief Executive Officer if not also the Chairman of the Board, shall be chairman at meetings of shareholders and directors when present. -7- 5.6. EXECUTIVE VICE-PRESIDENT. An Executive Vice-President shall have such powers and duties as the directors or the Chief Executive Officer may determine. 5.7. SECRETARY. The Secretary shall give, or cause to be given, all notices required to be given to shareholders, directors, auditors and members of committees; shall attend and be secretary of all meetings of shareholders, directors and committees appointed by the directors and shall enter or cause to be entered on books kept for that purpose minutes of all proceedings at such meetings; shall be the custodian of the corporate seal of the Corporation and of all records, books, documents and other instruments belonging to the Corporation; and shall have such other powers and duties as the directors or the Chief Executive Officer may determine. 5.8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall be responsible for financial matters of the Corporation and shall keep proper books of account and accounting records with respect to all financial and other transactions of the Corporation; shall be responsible for the deposit of money, the safe-keeping of securities and the disbursement of the funds of the Corporation; shall render to the directors when required an account of all his or her transactions as Chief Financial Officer and of the financial position of the Corporation; and shall have such other powers and duties as the directors or the Chief Executive Officer may determine. 5.9. OTHER OFFICERS. The powers and duties of all other officers shall be such as the directors or the Chief Executive Officer may determine. Any of the powers and duties of an officer to whom an assistant has been appointed may be exercised and performed by such assistant, if the directors or the Chief Executive Officer so direct. 5.10. VARIATION OF DUTIES. The directors may, from time to time, vary, add to or limit the powers and duties of any officer. 5.11. CONFLICT OF INTEREST. An officer shall disclose such officer's interest in any material contract or proposed material contract in accordance with section 3.18. 5.12. AGENTS AND ATTORNEYS. The directors shall have power from time to -8- time to appoint agents or attorneys for the Corporation in or out of Canada with such powers (including the power to sub-delegate) of management, administration or otherwise as the directors may specify. 6. PROTECTION OF DIRECTORS, OFFICERS AND OTHERS 6.1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Corporation shall indemnify a director or officer, a former director or officer or a person who acts or acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor, and the heirs and legal representatives of such a person to the extent permitted by the Act. 6.2. INSURANCE. The Corporation may purchase and maintain insurance for the benefit of any person referred to in section 6.1 to the extent permitted by the Act. 7. MEETINGS OF SHAREHOLDERS 7.1. ANNUAL MEETINGS. The annual meeting of the shareholders shall be held at the registered office of the Corporation or at such other place, in or outside Ontario, at such time in each year as the directors may determine, for the purpose of receiving the reports and statements required to be placed before the shareholders at an annual meeting, electing directors, appointing an auditor or auditors, and for the transaction of such other business as may properly be brought before the meeting. 7.2. OTHER MEETINGS. The directors shall have power at any time to call a special meeting of shareholders to be held at such time and at such place, in or outside Ontario, as may be determined by the board of directors. In addition to the requirements under the Act with respect to the requisition of meetings of the shareholders by the shareholders, the directors shall call a special meeting of the shareholders upon the requisition of holders of at least 20 per cent of the shares of the Corporation then outstanding. 7.3. NOTICE OF MEETINGS. Notice of the time, date and place of a meeting of -9- shareholders shall be given not less than ten days nor more than fifty days before the meeting to each holder of shares carrying voting rights at the close of business on the record date for notice, to each director and to the auditor of the Corporation. Notice of a meeting of shareholders at which special business is to be transacted shall state or be accompanied by a statement of the nature of that business in sufficient detail to permit the shareholder to form a reasoned judgment thereon and shall include the text of any special resolution or by-law to be submitted to the meeting. All business transacted at a special meeting of shareholders and all business transacted at an annual meeting of shareholders, except consideration of the minutes of an earlier meeting, the financial statements and auditor's report, election of directors and reappointment of the incumbent auditor, shall be deemed to be special business. 7.4. RECORD DATE FOR NOTICE. For the purpose of determining shareholders entitled to receive notice of a meeting of shareholders, the directors may fix in advance a date as the record date for such determination of shareholders, but the record date shall not precede by more than fifty days or by less than twenty-one days the date on which the meeting is to be held. Where no record date is fixed, the record date for the determination of shareholders entitled to receive notice of a meeting of shareholders shall be at the close of business on the day immediately preceding the day on which the notice is given, or, if no notice is given, shall be the day on which the meeting is held. If a record date is fixed, unless notice of the record date is waived in writing by every holder of a share of the class or series affected whose name is set out in the securities register at the close of business on the day the directors fix the record date, notice thereof shall be given, not less than seven days before the date so fixed, by advertisement in a newspaper published or distributed in the place where the Corporation has its registered office and in each place in Canada where it has a transfer agent or where a transfer of its shares may be recorded and by written notice to each stock exchange in Canada on which the shares of the Corporation are listed for trading. 7.5. PERSONS ENTITLED TO BE PRESENT. The only persons entitled to be present at a meeting of shareholders shall be those entitled to vote thereat, the directors, the auditor and other persons who are entitled or required under any provision of the Act or the articles or by-laws of -10- the Corporation to attend a meeting of shareholders of the Corporation. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. 7.6. CHAIRMAN. The Chairman of the Board, or in the absence of the Chairman or the Chief Executive Officer (if not the Chairman), the President, or in the absence of the President, a person chosen by a vote at the meeting shall be chairman of meetings of shareholders. 7.7. SCRUTINEERS. At each meeting of shareholders one or more scrutineers, who need not be shareholders, may be appointed by a resolution or by the chairman with the consent of the meeting. 7.8. QUORUM. The holders of not less than one third of the outstanding shares entitled to vote at a meeting of shareholders, whether present in person or represented by proxy, shall constitute a quorum for the transaction of business at any meeting of shareholders. 7.9. RIGHT TO VOTE. The Corporation shall prepare a list of shareholders entitled to receive notice of a meeting, arranged in alphabetical order and showing the number of shares held by each shareholder, which list shall be prepared, 7.9.1. if a record date is fixed as hereinbefore provided, not later than ten days after that date; 7.9.2. if no record date is fixed, at the close of business on the day immediately preceding the day on which the notice is given, or where no notice is given, on the day on which the meeting is held. A person named in the said list is entitled to vote the shares shown opposite such person's name at the meeting to which the list relates, except to the extent that the person has transferred any of such person's shares and the transferee of those shares produces properly endorsed share certificates, or otherwise establishes that such transferor owns the shares, and demands, not later than ten days before the meeting that the transferee's name be included in the -11- list before the meeting, in which case the transferee is entitled to vote the shares of the transferee at the meeting. 7.10. JOINT SHAREHOLDERS. Where two or more persons hold shares jointly, one of those holders present at a meeting of shareholders may in the absence of the others vote the shares, but if two or more of those persons are present, in person or by proxy, they shall vote as one on the shares jointly held by them. 7.11. REPRESENTATIVES. Where a body corporate or association is a shareholder of the Corporation, the Corporation shall recognize any individual authorized by a resolution of the directors or governing body of the body corporate or association to represent it at meetings of shareholders of the Corporation. An individual so authorized may exercise on behalf of the body corporate or association such individual represents all the powers it could exercise if it were an individual shareholder. 7.12. EXECUTORS AND OTHERS. An executor, administrator, committee of a mentally incompetent person, guardian or trustee and, where a corporation is such executor, administrator, committee, guardian or trustee of a testator, intestate, mentally incompetent person, ward or cestui que trust, any duly appointed representative of such corporation, upon filing with the secretary of the meeting sufficient proof of such appointment, shall represent the shares in such representative's hands at all meetings of shareholders of the Corporation and may vote accordingly as a shareholder in the same manner and to the same extent as the shareholder of record. If there be more than one executor, administrator, committee, guardian or trustee, the provisions of this by-law respecting joint shareholders shall apply. 7.13. PROXYHOLDERS. Every shareholder entitled to vote at a meeting of shareholders may by means of a proxy appoint a proxyholder or one or more alternate proxyholders, who need not be shareholders, as such shareholder's nominee to attend and act at the meeting in the manner, to the extent and with the authority conferred by the proxy. A proxyholder or an alternate proxyholder has the same rights as the shareholder who appointed a proxyholder or alternate proxyholder to speak at a meeting of shareholders in respect of any matter and to vote -12- by way of ballot at the meeting. A proxy shall be executed by the shareholder or such shareholder's attorney authorized in writing or, if the shareholder is a body corporate, by an officer or attorney thereof duly authorized and ceases to be valid one year from its date. A proxy shall be in such form as may be prescribed from time to time by the directors or in such other form as the chairman of the meeting may accept and as complies with all applicable laws and regulations. 7.14. TIME FOR DEPOSIT OF PROXIES. The directors may by resolution fix a time not exceeding forty-eight hours, excluding Saturdays and holidays, preceding any meeting or adjourned meeting of shareholders before which time proxies to be used at that meeting must be deposited with the Corporation or an agent thereof, and any period of time so fixed shall be specified in the notice calling the meeting. 7.15 VOTING. Except as otherwise provided in the articles of the Corporation, each shareholder shall be entitled to one vote for each share registered in the name of such shareholder upon the books of the Corporation. 7.16 VOTES TO GOVERN. Subject to the Act and the articles of the Corporation, at all meetings of shareholders every question shall be decided by a majority of the votes cast on the question. The chairman of the meeting shall not be entitled to a casting vote in the event of equality of votes. 7.17 BALLOTS. When directed by the presiding officer or upon the demand of any shraeholder, the vote upon any matter before a meeting of the shareholders shall be by ballot and each person present and entitled to vote at the meeting shall, unless the articles of the Corporation otherwise provide, be entitled to one vote for each share in respect of which such person is entitled to vote at the meeting. A demand for a ballot may be withdrawn at any time prior to taking of a poll on the ballot. 7.18 ADJOURNMENT. The chairman of any meeting of shareholders may, with the consent of the meeting and subject to such conditions as the meeting may decide, adjourn the -13- same from time to time and from place to place. If a meeting of shareholders is adjourned for less than thirty days it is not necessary to give notice of the adjourned meeting other than by announcement at the earliest meeting that is adjourned. If a meeting of shareholders is adjourned by one or more adjournments for an aggregate of thirty days or more, notice of the adjourned meeting shall be given as for an original meeting. Any business may be brought before or dealt with at any adjourned meeting which might have been brought before or dealt with at the original meeting in accordance with the notice calling such original meeting. 7.19 RESOLUTION IN LIEU OF MEETING. A resolution in writing signed by all the shareholders entitled to vote on that resolution at a meeting of shareholders is as valid as if it had been passed at a meeting of shareholders except where a written statement in respect thereof has been submitted by a director or where representations in writing are submitted by the auditor of the Corporation, in either case, in accordance with the Act. 8. SHARES 8.1. ISSUE. Subject to the Act and the articles of the Corporation, shares of the Corporation may be issued at such times and to such persons and for such consideration as the directors may determine, provided that no share may be issued until it is fully paid as provided in the Act. 8.2. COMMISSIONS. The directors may authorize the Corporation to pay a reasonable commission to any person in consideration of such person's purchasing or agreeing to purchase shares of the Corporation from the Corporation or from any other person, or procuring or agreeing to procure purchasers for any such shares. 8.3. SHARE CERTIFICATE. Every shareholder is entitled at such shareholder's option to a share certificate in respect of the shares held by such shareholder that complies with the Act or to a non-transferable written acknowledgement ("written acknowledgement") of such shareholder's right to obtain a share certificate from the Corporation in respect of the shares of the Corporation held by the shareholder, but the Corporation is not bound to issue more than one share certificate -14- or written acknowledgement in respect of a share or shares held jointly by several persons and delivery of a share certificate or written acknowledgement to one of several joint holders is sufficient delivery to all. Written acknowledgements shall be in such form or forms as the directors shall from time to time by resolution determine. The Corporation may charge a fee in accordance with the Act for a share certificate issued in respect of a transfer. Subject to the provisions of the Act and to the requirements of any stock exchange on which shares of the Corporation may be listed, share certificates shall be in such form or forms as the directors shall from time to time approve. Unless otherwise determined by the directors, share certificates shall be signed by the Chairman of the Board, the President, the Chief Financial Officer or an Executive Vice-President or a director and by the Secretary or an Assistant Secretary and need not be under the corporate seal and certificates for shares in respect of which a transfer agent and/or registrar has been appointed shall not be valid unless countersigned on behalf of such transfer agent and/or registrar. Share certificates shall be signed manually by at least one director or officer of the Corporation or by or on behalf of a registrar, transfer agent, branch transfer agent or issuing or other authenticating agent of the Corporation and any additional signatures required on share certificates may be printed or otherwise mechanically reproduced thereon. A manual signature is not required on a share certificate representing a fractional share. If a share certificate contains a printed or mechanically reproduced signature of a person, the Corporation may issue the share certificate, notwithstanding that the person has ceased to be a director or an officer of the Corporation, and the share certificate is as valid as if such person were a director or an officer at the date of its issue. 8.4. TRANSFER AGENTS AND REGISTRARS. For each class of shares issued by it, the Corporation may appoint one or more agents to keep the securities register and the register of transfers and one or more branch registers. Such an agent may be designated as a transfer agent or registrar according to functions and one agent may be designated both transfer agent and registrar. The securities register and the register of transfers shall be kept at the registered office of the Corporation or at such other places in Ontario as are designated by the directors, and the branch register or registers of transfers may be kept at such offices of the Corporation or other -15- places, either within or outside Ontario, as are designated by the directors. 8.5. TRANSFER OF SHARES. Subject to the Act, no transfer of a share shall be registered except upon presentation of the certificate representing such share with an endorsement which complies with the Act, together with such reasonable assurance that the endorsement is genuine and effective as the directors may prescribe, upon payment of all applicable taxes and fees and upon compliance with the articles of the Corporation. 8.6. NON-RECOGNITION OF TRUST. Subject to the Act, the Corporation may treat the registered holder of any share as the person exclusively entitled to vote, to receive notices, to receive any dividend or other payment in respect of the share, and to exercise all the rights and powers of an owner of the share. 8.7. REPLACEMENT OF SHARE CERTIFICATES. Where the owner of a share certificate claims that the share certificate has been lost, apparently destroyed or wrongfully taken, the Corporation shall issue or cause to be issued a new certificate in place of the original certificate if the owner (i) so requests before the Corporation has notice that the share certificate has been acquired by a bona fide purchaser; (ii) files with the Corporation an indemnity bond sufficient in the Corporation's opinion to protect the Corporation and any transfer agent, registrar or other agent of the Corporation from any loss that it or any of them may suffer by complying with the request to issue a new share certificate; and (iii) satisfies any other reasonable requirements imposed from time to time by the Corporation. 9. DIVIDENDS AND RIGHTS 9.1. DECLARATION OF DIVIDENDS. Subject to the Act the directors may from time to time declare dividends payable to the shareholders according to their respective rights and interest in the Corporation. 9.2. CHEQUES. A dividend payable in money shall be paid by cheque to the order of each registered holder of shares of the class or series in respect of which it has been declared and -16- mailed by prepaid ordinary mail to such registered holder at the address of such holder in the Corporation's securities register, unless such holder otherwise directs. In the case of joint holders the cheque shall, unless such joint holders otherwise direct, be made payable to the order of all such joint holders and mailed to them at their address in the Corporation's securities register. The mailing of such cheque as aforesaid, unless the same is not paid on due presentation, shall satisfy and discharge the liability for the dividend to the extent of the sum represented thereby plus the amount of any tax which the Corporation is required to and does withhold. 9.3. NON-RECEIPT OF CHEQUES. In the event of non-receipt of any dividend cheque by the person to whom it is sent as aforesaid, the Corporation shall issue to such person a replacement cheque for a like amount on such terms as to indemnity, reimbursement of expenses and evidence of non-receipt and of title as the directors may from time to time prescribe, whether generally or in any particular case. 9.4. RECORD DATE FOR DIVIDENDS AND RIGHTS. The directors may fix in advance a date, preceding by not more than fifty days the date for payment of any dividend or the date for the issue of any warrant or other evidence of the right to subscribe for securities of the Corporation, as a record date for the determination of the persons entitled to receive payment of such dividend or to exercise the rights to subscribe for such securities, and notice of any such record date shall be given not less than seven days before such record date in the manner provided by the Act. If no record date is so fixed, the record date for the determination of the persons entitled to receive payment of any dividend or to exercise the right to subscribe for securities of the Corporation shall be at the close of business on the day on which the resolution relating to such dividend or right to subscribe is passed by the directors. 9.5. UNCLAIMED DIVIDENDS. Any dividend unclaimed after a period of six years from the date on which the same has been declared to be payable shall be forfeited and shall revert to the Corporation. -17- 10. NOTICES 10.1. GENERAL. A notice or document required by the Act, the regulations thereunder, the articles or the by-laws of the Corporation to be sent to a shareholder or director of the Corporation may be sent by prepaid mail addressed to, or may be delivered personally or by electronic means of communication to the shareholder at the latest address of the shareholder as shown in the records of the Corporation or to the director at the latest address of such director as shown in the records of the Corporation or in the most recent notice filed under the Corporations Information Act, whichever is the more current. A notice or document if mailed to a shareholder or director of the Corporation shall be deemed to have been given when deposited in a post office or public letter box. A notice sent by electronic means of communication shall be deemed to have been given when sent by such means. If the Corporation sends a notice or document to a shareholder in accordance with this section and the notice or document is returned on three consecutive occasions because the shareholder cannot be found, the Corporation is not required to send any further notices or documents to the shareholder until the shareholder informs the Corporation in writing of the new address of such shareholder. 10.2. COMPUTATION OF TIME. In computing the time when a notice or document must be given or sent under any provision requiring a specified number of days' notice of any meeting or other event, a "day" shall mean a clear day and the period of days shall be deemed to commence the day following the event that began the period and shall be deemed to terminate at midnight of the last day of the period except that if the last day of the period falls on a Sunday or holiday the period shall terminate at midnight of the day next following that is not a Sunday or holiday. 10.3. OMISSION AND ERRORS. The accidental omission to give any notice or send any document to any shareholder, director or other person or the non-receipt of any notice or document by any shareholder, director or other person or any error in any notice or document not affecting the substance thereof shall not invalidate any action taken at any meeting held pursuant to such notice or otherwise founded on such notice or document. 10.4. NOTICE TO JOINT SHAREHOLDERS. All notices or documents with respect to any shares registered in more than one name may, if more than one address appears on the securities register -18- of the Corporation in respect of such joint holding, be given to such joint shareholders at the first address so appearing, and all notices so given or documents so sent shall be sufficient notice to all the holders of such shares. 10.5. PROOF OF SERVICE. A certificate of the Secretary or other duly authorized officer of the Corporation, or of any agent of the Corporation, as to facts in relation to the mailing or delivery or sending of any notice or document to any shareholder or director of the Corporation or to any other person or publication of any such notice or document, shall be conclusive evidence thereof and shall be binding on every shareholder or director or other person as the case may be. 10.6. SIGNATURE ON NOTICE. The signature on any notice or document given by the Corporation may be printed or otherwise mechanically reproduced thereon or partly printed or otherwise mechanically reproduced thereon. 10.7. WAIVER OF NOTICE. Notice may be waived or the time for the sending of a notice or document may be waived or abridged at any time with the consent in writing of the person entitled thereto. Attendance of any director at a meeting of the directors or of any shareholder at a meeting of shareholders is a waiver of notice of such meeting, except where such shareholder or director attends for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. 11. BUSINESS OF THE CORPORATION 11.1. VOTING SHARES AND SECURITIES IN OTHER CORPORATIONS. All of the shares or other securities carrying voting rights of any other body corporate or bodies corporate held from time to time by the Corporation may be voted at any and all meetings of holders of such securities of such other body corporate or bodies corporate in such manner and by such person or persons as the directors of the Corporation shall from to time determine or failing such determination the proper signing officers of the Corporation may also from time to time execute and deliver for and on behalf of the Corporation instruments of proxy and arrange for the issue of voting certificates -19- and other evidence of the right to vote in such names as they may determine. 11.2. BANK ACCOUNTS, CHEQUES, DRAFTS AND NOTES. The Corporation's bank accounts shall be kept in such chartered bank or banks, trust company or trust companies or other firm or corporation carrying on a banking business as the directors may by resolution from time to time determine. Cheques on bank accounts, drafts drawn or accepted by the Corporation, promissory notes given by it, acceptances, bills of exchange, orders for the payment of money and other instruments of a like nature may be made, signed, drawn, accepted or endorsed, as the case may be, by such officer or officers, person or persons as the directors may by resolution from time to time name for that purpose. Cheques, promissory notes, bills of exchange, orders for the payment of money and other negotiable paper may be endorsed for deposit to the credit of any one of the Corporation's bank accounts by such officer or officers, person or persons, as the directors may by resolution from time to time name for that purpose, or they may be endorsed for such deposit by means of a stamp bearing the Corporation's name. 11.3. EXECUTION OF INSTRUMENTS. The Chairman of the Board, the President, an Executive Vice-President, Chief Financial Officer or any director, together with the Secretary or Assistant Secretary or any other director, shall have authority to sign in the name and on behalf of the Corporation all instruments in writing and any instruments in writing so signed shall be binding upon the Corporation without any further authorization or formality. The board of directors shall have power from time to time by resolution to appoint any other officer or officers or any person or persons on behalf of the Corporation either to sign instruments in writing generally or to sign specific instruments in writing. Any signing officer may affix the corporate seal to any instrument requiring the same. The term "instruments in writing" as used herein shall, without limiting the generality thereof, include contracts, documents, powers of attorney, deeds, mortgages, hypothecs, charges, conveyances, transfers and assignments of property (real or personal, immovable or movable), agreements, tenders, releases, receipts and discharges for the payment of money or other obligations, conveyances, transfers and assignments of shares, stocks, bonds, debentures or other securities, instruments of proxy and all paper writing. -20- 11.4. FISCAL YEAR. Until changed by resolution of the directors the fiscal year of the Corporation shall terminate on the last day of December in each year. 12. INTERPRETATION 12.1. In this by-law, wherever the context requires or permits, the singular shall include the plural and the plural the singular; the word "person" shall include firms and corporations, and masculine gender shall include the feminine and neuter genders. Wherever reference is made to any determination or other action by the directors such shall mean determination or other action by or pursuant to a resolution passed at a meeting of the directors, or by or pursuant to a resolution consented to by all the directors as evidenced by their signatures thereto. Wherever reference is made to "the BUSINESS CORPORATIONS ACT" or the "Act", it shall mean the BUSINESS CORPORATIONS ACT of the Province of Ontario, and every other act or statute incorporated therewith or amending the same, or any act or statute substituted therefor. Unless the context otherwise requires, all words used in this by-law shall have the meanings given to such words in the Act. EX-10.1 4 1997 STOCK OPTION PLAN Exhibit 10.1 RESOLUTION OF THE DIRECTORS AND SHAREHOLDERS OF CAPITAL ENVIRONMENTAL RESOURCE INC. WHEREAS the directors adopted a stock option plan, by resolution dated the 30th day of July, 1997 (the "Plan"); AND WHEREAS the shareholders consented to the Plan; AND WHEREAS pursuant to the Plan, an aggregate total of 177,778 common shares, being 10% of the then issued and outstanding common shares of the Corporation (treating the 8,000 convertible preference shares of the Corporation as if converted to common shares) were made available for grant under the Plan; AND WHEREAS the number of issued shares in the Corporation has increased since the Plan was authorized and it was the intention of the directors and shareholders that the number of shares available for grant under the Plan should increase as the number of issued shares of the Corporation increases, provided that the maximum number of common shares available for grant under the Plan not exceed 10% of the issued common shares from time to time (treating both the convertible preference shares and the convertible Class "B" Special Shares of the Corporation as if converted to common shares); NOW THEREFORE BE IT RESOLVED THAT: 1. With effect as at and from May 1, 1998, paragraph 3 of the Plan is deleted and replaced with the following: "The total number of authorized but unissued shares allocated to and made available to be granted to Participants under the Plan shall not exceed ten percent (10%) of the issued common shares of the Corporation (treating the 8,000 convertible Preference Shares and the 400,000 Class "B" Special Shares as having been converted to common shares as provided in the Articles of the Corporation, as amended from time to time). For purposes of the immediately preceding sentence "issued common shares of the Corporation" shall mean those common shares issued at the time of each grant under the Plan. The aggregate number of common shares which may be issued under the Plan to any one Participant under the Plan shall not exceed fifty percent (50%) of the said aggregate number of common shares allocated to and made available under the Plan." 2. Pursuant to the Plan, as amended, the following grants of options to purchase that number of common shares of the Corporation set opposite the names of the Participants listed below, at the option price(s) set opposite such persons name be and are hereby confirmed, with effect from the dates noted below: Page 2 of 4 Option Exercise Price Participant No. of Shares (per share) Effective Date Tony P. Busseri 10,000 $20.00 May 1, 1998 Allard Loopstra 10,000 $20.00 May 1, 1998 Paul Marshall 10,000 $20.00 May 17, 1998 Kenneth Sweeney 10,000 $25.00 July 1, 1998 William Eeuwes 40,000 $25.00 August 1, 1998 E. Joy Grahek 30,000 $25.00 August 17, 1998 Tony Busseri 15,000 $25.00 August 31, 1998 3. The directors hereby determine that each of the above-named individuals, as senior officers of the Corporation, responsible for the management and growth of the Corporation, is qualified to participate in the Plan. 4. Each of the options hereby confirmed as granted has or will become effective upon execution by the Corporation and the Participant of an option agreement in the form attached to the Plan. 5. The number of common shares of the Corporation for which the options have been granted are hereby confirmed as allotted to the optionees. Subject to the right of the optionees to exercise such options in whole or in part, upon receipt from the optionees of the form and amount of consideration payable upon exercise as specified herein, the common shares for which the options are duly exercised be issued as fully paid and non-assessable common shares in the capital of the Corporation and the stated capital account of the Corporation for the common shares be adjusted accordingly. 6. The maximum number of shares for which options have been granted as herein provided be and are hereby reserved for issuance on the exercise of such options, provided that when and if an option terminates or becomes void or is not earned in accordance with the Plan, the common shares so reserved for such option shall no longer be so reserved and shall become available for further or other grants of options pursuant to the Plan. 7. The proper officers of the Corporation or the transfer agent of the Corporation be and is hereby authorized to countersign and deliver to the person exercising an option, share certificates representing the appropriate number of common shares being purchased on exercise, and to register as shareholders of the Corporation the persons directed in accordance with the particulars contained in each exercise form, all without charge to such person. Page 3 of 4 8. Any officer of the Corporation be and is hereby authorized and directed to do and perform all acts and things, including the execution of documents necessary or desirable to give effect to the foregoing and all acts and things performed by such officers of the Corporation in respect of the foregoing options to the date hereof be and the same are hereby ratified and confirmed. 9. This resolution may be executed in counterparts or by facsimile transmission. Each of the foregoing resolutions is hereby consented to by all of the directors of the Corporation as evidenced by their signatures pursuant to the Business Corporations Act, R.S.O. 1990, c. B 16, this 13th day of October 1998. /s/ Tony P. Busseri /s/ Allard Loopstra - ----------------------------------- ---------------------------------------- Tony P. Busseri Allard Loopstra /s/ Lynn Bishop /s/ Kenneth Leung - ----------------------------------- ---------------------------------------- Lynn Bishop Kenneth Leung Page 4 of 4 Each of the foregoing resolutions is hereby consented to by the holders of all of the Convertible Preference Shares of the Corporation, as evidenced by their signatures this day of October, 1998. ENVIRONMENTAL OPPORTUNITIES ENVIRONMENTAL OPPORTUNITIES FUND, L.P. FUND (CAYMAN), L.P. Per: /s/ Bruce R. McMaken Per: /s/ Bruce R. McMaken ------------------------------- ------------------------------------ Bruce R. McMaken, Manager of GP Bruce R. McMaken, Manager of GP ENVIRONMENTAL OPPORTUNITIES MANAGEMENT COMPANY, LLC Per: /s/ Bruce R. McMaken ------------------------------- Bruce McMaken, Manager For: George L. Ball CERI Investors L.P. Morton A. Cohn Samuel A. Jones R. Larry Kinney Bruce McMaken Donald J. Moorehead, Jr. Ben T. Morris John I. Mundy John M. O'Quinn Humbert B. Powell, III Leonard Rauch Rex C. Ross and Adrian T. Ross Nolan Ryan Brad D. Sanders Bret D. Sanders Don A. Sanders Christine M. Sanders Katherine U. Sanders Laura K. Sanders Susan Sanders Kellar Stephen D. Scott RESOLUTIONS OF THE DIRECTORS AND SHAREHOLDERS OF CAPITAL ENVIRONMENTAL RESOURCE INC. WHEREAS it is determined to be in the best interests of the Corporation to institute a Stock Option Plan (the "Plan") for the purpose of enabling certain key employees, officers, directors of the Corporation and its wholly and partially owned subsidiaries to participate in the growth of the Corporation and thereby provide effective incentives for such individuals: RESOLVED THAT: 1. For the purposes of enabling key employees, officers and directors of the Corporation and its wholly or partially owned subsidiaries (collectively, the "Participants") to participate in the growth of the Corporation and to provide effective incentives to such Participants, an aggregate of one hundred and seventy-seven thousand, seven hundred and seventy-eight (177,778) common shares, being ten percent (10%) of the issued and outstanding common shares of the Corporation (treating the eight thousand (8,000) convertible preference shares of the Corporation as having been converted to common shares), be hereby, subject to the approval of all applicable regulatory authorities, allocated to and made available for the Plan and the Participants therein and be allotted and issued pursuant to the Plan and options granted thereunder from time to time by the Board of Directors at such times and at such prices as the Board shall by resolution determine, all in accordance with the terms of the Plan and the rules, regulations and policies of any stock exchange or exchanges upon which the Corporation's securities are from time to time listed or any other applicable regulatory authority; 2. The Corporation institute the Plan (a copy of which is attached hereto as Schedule "A") and the Board of Directors be authorized from time to time to make such rules and regulations and interpretations with respect thereto as it shall deem advisable. The Board of Directors also shall be authorized to make such amendments to the Plan as from time to time it deems necessary or advisable having regard to any restrictions contained in the Articles of the Corporation from time to time and, subject to any such amendments not becoming effective until notice of such amendments has been accepted by any stock exchange or exchanges upon which the Corporation's securities are from time to time listed for trading and by all other applicable regulatory authorities; 3. The Board of Directors, or any committee thereof specifically designated by the Board of Directors to be responsible therefor, may determine from time to time those Participants to whom options under the Plan shall be granted and the number of such shares to be optioned to said Participants under the Plan. Directors, as directors, and other who are not otherwise bona fide full-time employees of the Corporation or its subsidiaries shall not be eligible to become Participants in the Plan unless notice of the participation in the Plan of such persons has been accepted by any stock exchange or exchanges upon which the -2- Corporation's securities are from time to time listed for trading and by all other applicable regulatory authorities; 4. The price at which options under the Plan can be granted to Participants shall not be less than that from time to time permitted by the Articles of the Corporation and any applicable rules, regulations and policies of any stock exchange or exchanges upon which any securities of the Corporation may from time to time be listed or otherwise traded on the day preceding the date on which the Board of Directors grants an option or designates an individual as a Participant in the Plan; 5. Any one officer of the Corporation, be hereby authorized and directed to do and perform all acts and things, including the execution of documents necessary or desirable to give effect to these resolutions, and the grant of options and the issuance of shares under the Plan as herein provided for; 6. Nothing herein contained shall restrict or limit, or be deemed to restrict or limit, the rights or powers of the Board of Directors in connection with the grant of any option on or the allotment or issuance of shares in the capital stock of the Corporation which are not allotted and issued pursuant to the provisions of the Plan; and 7. All decisions and interpretations of the Board of Directors respecting the Plan and all rules and regulations made by it from time to time pursuant thereto shall be binding and conclusive on the Corporation and on all Participants in the Plan and their respective legal representatives and on all individuals eligible under any provision of the Plan to participate therein. The foregoing resolutions are hereby approved by all the directors and shareholders of the corporation as evidence by their signatures pursuant to the provisions of the Business Corporations Act, R.S.O. 1990, c. B.16, as at the 30th day of July, 1997. DIRECTORS: /s/ Tony Busseri -------------------- Tony Busseri /s/ Allen E. Fracassi -------------------- Allen E. Fracassi /s/ Kenneth Leung -------------------- Kenneth Leung .....2 SCHEDULE "A" CAPITAL ENVIRONMENTAL RESOURCE INC. EMPLOYEE STOCK OPTION PLAN 1. A Stock Option Plan (herein called the "Plan") for Capital Environmental Resource Inc. (the "Corporation") is hereby established with the intent of advancing the interests of the Corporation by encouraging and enabling the acquisition of an equity interest in the Corporation by the participants. 2. The Board of Directors, or any committee thereof specifically designated by the Board of Directors to be responsible therefor, shall from time to time by resolution designate those key employees, directors and officers providing ongoing services to the Corporation, if any, who, in the opinion of the Board of Directors, are largely responsible for the management and growth of the Corporation and who, as an additional inducement to promote the best interests of the Corporation, are entitled to participate in the Plan (herein referred to as the "Participant(s)") and shall determine the extent and terms of such participation by said Participants. Directors, as directors, and others who are not otherwise bona fide full-time employees of the Corporation shall not be eligible to become Participants in the Plan unless notice of the participation in the Plan of such person has been accepted by or approved by any stock exchange or exchanges upon which any of the Corporation's securities are from time to time listed for trading and by any other applicable regulatory authority. The judgment of the said Board of Directors or committee thereof in designating Participants and the extent of their participation shall be final and conclusive; provided, however, that each designated Participant shall have the right not to participate in the Plan and any decision not to participate therein shall not affect the Participant's employment by or engagement with the Corporation. 3. The total number of authorized but unissued shares allocated to and made available to be granted to Participants under the Plan shall not exceed that number excepted from the anti-dilution provisions in the Articles of the Corporation, being one hundred and seventy-seven thousand, seven hundred and seventy-eight (177,778), or ten percent (10%) (disregarding fractions) of the issued common shares of the Corporation (treating the eight thousand (8,000) convertible Preference Shares as having been converted to common shares). The aggregate number of common shares which may be issued under the Plan to any one particular Participant under the Plan shall not exceed fifty percent (50%) of the said aggregate number of common shares allocated to and made available for the Plan. 4. Except as provided in paragraph 10 hereof or by the laws of descent and distribution, the rights of any Participant under the Plan are personal to the said Participant and are not assignable. 5. No resident of the United States of America or any territory or possession thereof may be a Participant in the Plan unless such participation can be accomplished -2- pursuant to or in accordance with and without violating any securities or other legislation of the United States of America or of any state, territory or possession thereof. 6. The Board of Directors, or any committee thereof specifically designated by the Board of Directors to be responsible therefor, shall have the unfettered right to interpret the provisions of this Plan and to make such regulations and formulate such administrative provisions for carrying this Plan into effect and to make such changes therein and in the regulations and administrative provisions therein as, from time to time, the said Board or committee thereof deem appropriate in the best interests of the Corporation provided however, that no such change, regulation or provision may increase the number of shares that may be optioned hereunder or change the manner of determining the exercise price, or impair or change the rights and options theretofore granted under the Plan without the prior written consent of the Participant or Participants affected. The Board of Directors shall also have the unfettered right from time to time and at any time to rescind or terminate the Plan as it shall deem advisable; provided, however, that no such rescission or termination shall impair or change the rights and options theretofore granted under the Plan without the prior written consent of the Participant or Participants affected. 7. The Corporation shall pay all costs of administering the Plan. 8. The exercise price of the shares purchased pursuant to stock options granted hereunder shall not be less than that from time to time permitted by the Articles of the Corporation and any applicable rules, regulations and policies of any stock exchange or exchanges upon which any securities of the Corporation may from time to time be listed or otherwise traded on the day preceding the date on which the Board of Directors grants an option or designates an individual as a Participant in the Plan. 9. Each Participant shall execute a Stock Option Agreement in substantially the form annexed hereto as Schedule "A" prior to the grant of any stock option to a Participant becoming effective. 10. (a) Each option granted hereunder shall be for a term not exceeding five (5) years and, unless the Board of Directors determines otherwise, shall be exercisable only after the second anniversary date of its grant, and all or any part of the Shares as to which the option shall have become exercisable may be purchased at any time or from time to time thereafter, until expiration or termination of the option. (b) Notwithstanding the foregoing, upon a Change of Control event, options shall become immediately exercisable in respect of any and all shares covered thereby in respect of which the Participant has not exercised such Participant's right to acquire under the option. For the purposes hereof, "Change of Control event" means either of the following: -3- (i) an offer made generally to the holders of the Corporation's voting securities in one or more jurisdictions to purchase directly or indirectly voting securities of the Corporation where the voting securities which are the subject of the offer to purchase, together with the offeror's then presently owned securities, will in the aggregate exceed fifty percent (50%) of the outstanding voting securities of the Corporation and where two (2) or more persons or companies make offers jointly or in concert or intending to exercise jointly or in concert any voting rights attaching to the securities to be acquired, then the securities owned by each of them shall be included in the calculation of the percentage of the outstanding voting securities of the Corporation owned by each of them; or (ii) the day prior to the completion of an initial public offering of the Corporation's securities on a recognized stock exchange. 11. (a) In the event of the physical or mental disability, retirement with the consent of the Corporation or death of the optionee on or prior to the expiry date while engaged as a key employee or director or officer of the Corporation, any option granted hereunder may be exercised up to the full amount of the optioned shares by the legal personal representative(s) of the Participant at any time up to and including eighteen (18) months following the physical or mental disability, retirement or death of the Participant after which date the option shall forthwith expire and terminate and be of no further force or effect whatsoever. (b) For greater certainty, any Participant who is deemed to be an employee of the Corporation pursuant to any medical or disability plan of the Corporation shall be deemed to be an employee for the purposes of the Plan. 12. In the event the Participant's employment by or engagement with (as a director or otherwise) the Corporation is terminated by the Corporation or the Participant for any reason other than the Participant's physical or mental disability, retirement with the consent of the Corporation or death before exercise of any options granted hereunder, the Participant shall have ninety (90) days from the date of such termination to exercise only that portion of the option such Participant is otherwise entitled to exercise at that time and thereafter such Participant's option shall expire and all rights to purchase shares hereunder shall cease and expire and be of no further force or effect. Options shall not be affected by any change of employment so long as the Participant continues to be employed by the Corporation or any of its subsidiaries or continues to be a director or officer of one of the foregoing. 13. Subject to the provisions of the Plan, the options granted hereunder may be exercised from time to time by delivery to the Corporation at its head office of a written notice of exercise specifying the number of shares with respect to which the option is being exercised and accompanied by payment in full of the purchase price of the shares then being purchased by way of cash or certified cheque in favour of the Corporation. Such notice shall -4- contain the Participant's undertaking to comply, to the satisfaction of the Corporation and its counsel, with all applicable requirements of any stock exchange or exchanges upon which any securities of the Corporation are from time to time listed and any applicable regulatory authority or authorities. 14. Subject to any required action by its shareholders, if the Corporation shall be a party to any reorganization, merger, dissolution or sale or lease of a11 or substantially all its assets, whether or not the Corporation is the surviving entity, the option shall be adjusted so as to apply to the securities to which the holder of the number of shares of capital stock of the Corporation subject to the option would have been entitled by reason of such reorganization, merger or sale or lease of all or substantially all of its assets, provided, however, that the Corporation may satisfy any obligations to a Participant hereunder by paying to the said Participant in cash the difference between the exercise price of all unexercised options granted hereunder and the fair market value of the securities to which the Participant would be entitled upon exercise of all unexercised options, regardless of whether all conditions of exercise relating to continuous employment have been satisfied. Adjustments under this paragraph or the determinations as to the fair market value of any securities shall be made by the Board of Directors, or any committee thereof specifically designated by the Board of Directors to be responsible therefor, and any reasonable determination made by the said Board or committee thereof shall be binding and conclusive. 15. In the event of any subdivision or subdivisions of the common shares of the Corporation as said common shares were constituted at the time any options granted hereunder were granted into a greater number of common shares, the Corporation will thereafter deliver at the time of exercise thereof in addition to the number of shares in respect of which the option is then being exercised, such additional number of shares as result from such subdivision or subdivisions of the shares for which the option is being exercised without the Participant exercising the option making any additional payment or giving any other consideration therefor. 16. In the event of any consolidation or consolidations of the common shares of the Corporation as said common shares were constituted at the time any options granted hereunder were granted into a lesser number of common shares, the Participant shall accept, at the time of the exercise thereof in lieu of the number of shares in respect of which the option is then being exercised, the lesser number of shares as result from such consolidation or consolidations of the shares for which the option is being exercised. 17. In the event of any change of the common shares of the Corporation as said common shares were constituted at the time any options granted hereunder were granted the Corporation shall thereafter deliver at the time of the exercise thereof the number of shares of the appropriate class resulting from the said change as the Participant exercising the option -5- would have been entitled to receive in respect of the number of shares so purchased had the option been exercised before such change. 18. If the Corporation at any time while any options granted hereunder are outstanding shall pay any stock dividend or stock dividends upon the shares of the Corporation in respect of which any options were granted hereunder, the Corporation will thereafter deliver at the time of exercise thereof in addition to the number of shares in respect of which the option is then being exercised, the additional number of shares of the appropriate class as would have been payable on the shares so purchased if they had been outstanding on the record date for the payment of said stock dividend or dividends. 19. The Corporation shall not be obligated to issue fractional shares in satisfaction of any of its obligations hereunder. 20. If at any time the Corporation grants to the holders of its capital stock rights to subscribe for and purchase pro rata additional securities of the Corporation or of any other corporation or entity, there shall be no adjustments made to the number of shares or other securities subject to the option in consequence thereof and the said stock option of the Participant shall remain unaffected. 21. Any stock option granted under the Plan may include a stock appreciation right, either at the time of grant or by amendment adding it to an existing stock option; subject, however, to the grant of such stock appreciation right being in compliance with the applicable regulations and policies of any stock exchange or exchange upon which any securities of the Corporation may from time to time be listed. The provisions of the Plan respecting the exercise of stock options and the adjustments to options arising from certain corporate actions shall apply mutatis mutandis to all stock appreciation rights granted hereunder. 22. Stock appreciation rights granted hereunder are exercisable to the extent, and only to the extent, the option to which it is included in exercisable. To the extent a stock appreciation right included in or attached to an option granted hereunder is exercised, the option to which it is included or attached shall be deemed to have been exercised to a similar extent. 23. A stock appreciation right granted hereunder shall entitle the Participant to elect to surrender to the Corporation unexercised the option in which it is included, or any portion thereof, and to receive from the Corporation in exchange therefor that number of shares, disregarding fractions, having an aggregate value equal to the excess of the value of one share over the purchase price per share specified in such option, times the number of shares called for by the option, or portion thereof, which is so surrendered. The value of a share shall be determined for these purposes by the weighted average sale price per share on the stock exchange or other publicly quoted market system having the greatest volume of trading of the -6- shares of the Corporation subject to the option for the ten (10) trading days preceding the date the notice provided for in paragraph 24 hereof is received by the Corporation. 24. Subject to the provisions of the Plan, a stock appreciation right granted hereunder may be exercised from time to time by delivering to the Corporation at its head office a written notice of exercise, which notice shall specify the number of stock appreciation rights to be exercised and options to be forfeited and the number of shares the Participant elects to receive thereby. Such notice shall contain the Participant's undertaking to comply, to the satisfaction of the Corporation and its counsel, with all applicable requirements of any stock exchange or exchanges upon which any securities of the Corporation are listed for trading and any other applicable regulatory authority. SCHEDULE "A" STOCK OPTION AGREEMENT THIS AGREEMENT made the day of , . BETWEEN: CAPITAL ENVIRONMENTAL RESOURCE INC., a corporation incorporated under the laws of Ontario (the "Corporation") and (the "Optionee") The parties agree as follows: 1. Pursuant to the Stock Option Plan of the Corporation established by the directors of the Corporation on July 30, 1997, and approved by the shareholders of the Corporation as at the same date, the Corporation hereby grants to the Optionee the irrevocable option to purchase up to ( ) common shares (the "Shares") in the capital stock of the Corporation, as presently constituted, for cash, at a price of Dollars ($ ) per Share, upon the following terms and conditions: (a) The option shall be nonexercisable until , 19 . On , , the option shall become exercisable, and all or any part of the Shares as to which the option shall have become exercisable may be purchased at any time, or from time to time, thereafter, until expiration or termination of the option. After becoming exercisable the option may only be exercised by the Optionee, or by the person or persons entitled to exercise the same pursuant to the provisions of subparagraph (d) below, on or prior to , , by the delivery to the Corporation at its head office of written notice of election to exercise the same, specifying the number of Shares with respect to which the option is being exercised and accompanied by payment in full of the purchase price of the Shares then purchased by way of cash or certified cheque in favour of the Corporation. Such notice shall constitute the Optionee's acknowledgement of and undertaking to comply to the satisfaction of the Corporation and its counsel, with all applicable requirements of any stock exchange or exchanges upon which any securities of the Corporation may from time to time be listed and of any applicable regulatory authority or authorities. Such requirements may include the replacement of legends on share certificates -2- restricting transfer of such Shares, the making of representations by the Optionee that the Optionee is acquiring such Shares for investment and not with a view to distribution, the filing of any required information or statements with the aforesaid authorities and the making of arrangements with the Optionee's employer to withhold income taxes which may become payable under the Optionee's exercise of an option under this Agreement. Concurrently with its receipt of any such notice and payment, the Corporation shall deliver, or cause to be delivered, to the Optionee a certificate representing the Shares purchased by the Optionee. The Corporation may at its election require that this Agreement be presented for appropriate endorsement upon any such exercise. Notwithstanding the foregoing, upon a Change of Control event, options shall become immediately exercisable in respect of any and all Shares covered thereby in respect of which the Optionee has not exercised such Optionee's right to acquire under the option. For the purposes of this subparagraph "Change of Control event" means: (i) an offer made generally to the holders of the Corporation's voting securities in one or more jurisdictions to purchase directly or indirectly voting securities of the Corporation where the voting securities which are the subject of the offer to purchase together with the offeror's then presently owned securities will in the aggregate exceed fifty percent (50%) of the outstanding voting securities of the Corporation and where two (2) or more persons or companies make offers jointly or in concert or intending to exercise jointly or in concert any voting rights attaching to the securities to be acquired, then the securities owned by each of them shall be included in the calculation of the percentage of the outstanding voting securities of the Corporation owned by each of them; or (ii) the day prior to the completion of an initial public offering of the Corporation's securities on a recognized stock exchange. (b) The option shall be non-assignable and non-transferable by the Optionee otherwise than by will or the laws of descent and distribution or as contemplated in subparagraph (d) hereof. (c) The option shall expire and all rights to purchase Shares hereunder shall cease and become null and void at 5:00 p.m. Eastern Standard time on , , and the option hereby granted shall expire and all rights hereunder shall cease at such time or upon the happening of certain events as hereinafter provided. -3- (d) In the event of the physical or mental disability, retirement with the consent of the Corporation or death of the Optionee on or prior to the expiry date while engaged as an employee, or director or officer of the Corporation, the option granted may be exercised, up to the full amount of the optioned Shares by the Optionee or the legal personal representative(s) of the Optionee, as the case may be, at any time up to and including eighteen (18) months following the physical or mental disability, retirement or death of the Optionee after which date the option shall forthwith expire and terminate and be of no further force or effect whatsoever. For greater certainty, any Optionee who is deemed to be an employee of the Corporation pursuant to any medical or disability plan of the Corporation shall be deemed to be an employee for the purposes of the Plan. (e) In the event the Optionee's employment by or engagement with the Corporation is terminated by the Corporation or the Optionee for any reason other than the Optionee's physical or mental disability, retirement or death before exercise of the option contained herein, the Optionee shall have ninety (90) days from the date of such termination to exercise only that portion of the option such Optionee is otherwise entitled to exercise at that point of time and thereafter this option shall expire and all rights to purchase Shares hereunder shall cease and expire and be of no further force or effect. Options shall not be affected by any change of employment so long as the Optionee continues to be employed by the Corporation or one of its subsidiaries or continues to be a director or an officer of one of the foregoing. (f) If the Corporation shall be a party to any reorganization, merger, dissolution or sale of all or substantially all of its assets, whether or not the Corporation is the surviving entity, the option shall be adjusted so as to apply to the securities to which the holder of the number of Shares of the Corporation subject to the option would have been entitled by reason of such reorganization, merger, dissolution or sale of all or substantially all of its assets provided, however, that the Corporation may satisfy any obligations to the Optionee hereunder by paying to the Optionee in cash the difference between the exercise price of all unexercised options granted hereunder and the fair market value of the securities to which the Optionee would be entitled, upon exercise of all unexercised options, regardless of whether all conditions of exercise relating to continuous employment have been satisfied. Adjustments under this subparagraph or any determinations as to the fair market value of any securities shall be made by the Board of Directors of the Corporation, or any committee thereof specifically designated by the Board of Directors to be responsible therefor, and any reasonable determination made by the said Board or committee thereof shall be binding and conclusive. -4- (g) In the event of any subdivision or subdivisions of the common shares of the Corporation as said common shares were constituted at the time any options granted hereunder were granted into a greater number of common shares, the Corporation will thereafter deliver at the time of exercise thereof in addition to the number of Shares in respect of which the option is then being exercised, such additional number of Shares as result from such subdivision or subdivisions without the Optionee exercising the option being obligated to make any additional payment or giving any other consideration therefor. (h) In the event of any consolidation or consolidations of the common shares of the Corporation as said common shares were constituted at the time any options granted hereunder were granted into a lesser number of common shares, the Optionee shall accept, at the time of the exercise thereof in lieu of the number of Shares in respect of which the option is then being exercised, the lesser number of Shares as result from such consolidation or consolidations. (i) In the event of any change of the common shares of the Corporation as said common shares were constituted at the time any options granted hereunder were granted, the Corporation shall thereafter deliver at the time of the exercise thereof the number of shares of the appropriate class resulting from the said change as the Optionee exercising the option would have been entitled to receive in respect of the number of shares so purchased had the option been exercised before such change. (j) If the Corporation at any time while any options granted hereunder are outstanding shall pay any stock dividend or stock dividends upon the shares of the Corporation in respect of which any options were granted hereunder, the Corporation will thereafter deliver at the time of exercise thereof in addition to the number of shares in respect of which the option is then being exercised, the additional number of shares of the appropriate class as would have been payable on the shares so purchased if they had been outstanding on the record date for the payment of said stock dividend or dividends. (k) The Corporation shall not be obligated to issue fractional Shares in satisfaction of its obligations hereunder. (l) If at any time the Corporation grants to its shareholders the right to subscribe for and purchase pro rata additional securities of the Corporation or of any other corporation or entity, there shall be no adjustments made to the number of Shares or other securities subject to the option in consequence thereof and the said option of the Optionee shall remain unaffected. -5- 2. Nothing in this Agreement shall confer upon the Optionee any right to continue in the employ of the Corporation or its subsidiaries and nothing herein contained shall interfere in any way with the right of the Corporation or any of its subsidiaries to terminate the employment of the Optionee at any time. 3. The Corporation hereby represents to and agrees with the Optionee that if for any reason, other than the failure or default of the Optionee, the Corporation is unable to issue and deliver the Shares as contemplated herein to the Optionee upon the exercise by the Optionee of the option to purchase any of the Shares covered by this option, the Corporation will pay, in complete satisfaction of its obligations hereunder, to the Optionee, in cash, an amount equal to the difference between the option exercise price and the fair market value of such Shares on the date that the Optionee gave notice of such exercise in accordance with paragraph 1(a) hereof. For the purposes of this Agreement, if the Shares subject to this option are traded on a stock exchange or exchanges, the fair market value shall be the closing sale price on the exchange having the greatest volume of trading on the last trading day immediately prior to the date such notice is given. 4. The Optionee hereby acknowledges receipt from the Corporation of a copy of the Stock Option Plan. The Optionee acknowledges that upon any conflict between the terms of said Plan and this option agreement the terms of this Agreement shall prevail. DATED this day of , 1997. CAPITAL ENVIRONMENTAL RESOURCE INC. By: ------------------------------------- Tony Busseri, President and Secretary By: ------------------------------------- Kenneth Leung, Director WITNESS: ) ) ) - --------------------------------------- ) -------------------------------------- ) Optionee ) SCHEDULE "B" OPTION EXERCISE FORM The undersigned Optionee (or the Optionee's legal representative(s) permitted under the Plan) hereby irrevocably elects to exercise this option for the number and class of Shares (or other property or securities subject thereto) as set forth below: (a) Number of Shares to be Acquired: ____________ (b) Class of Shares: ____________ (c) Option Exercise Price per Share: $___________ (d) Aggregate Purchase Price [(a) times (c)]: $___________ and hereby tenders a certified cheque or bank draft for such aggregate purchase price, directing such Shares to be registered and a certificate therefor to be issued as directed below. DATED this day of , 19 . WITNESS TO EXECUTION ) ) ) -------------------------------------- ) [Name of Optionee] ) - ------------------------------ ) ) -------------------------------------- ) [Signature of Optionee] ) Direction as to Registration: - ------------------------------ [Name of Registered Holder] - ------------------------------ [Address of Registered Holder] EX-10.2 5 1999 STOCK OPTION PLAN CAPITAL ENVIRONMENTAL RESOURCE INC. 1999 STOCK OPTION PLAN 1. A Stock Option Plan for Capital Environmental Resource Inc. is hereby established with the intent of advancing the interests of the Corporation by encouraging and enabling the acquisition of an equity interest in the Corporation by individuals who are important to the Corporation's growth and management. For purposes of the Plan, capitalized terms, unless defined where the respective term first appears in the Plan, shall have the meanings given in the last Paragraph hereof. 2. The Committee shall from time to time by resolution designate those key employees, directors, officers, consultants and other independent contrac tors providing ongoing services to the Corporation (or any of its subsidiaries) who, in the opinion of the Committee, are largely responsible for the management and growth of the Corporation and who, as an additional inducement to promote the best interests of the Corporation, shall receive grants of options under the Plan (herein referred to as the "Optionee(s)") and shall determine the size and terms of each such grant, subject to the provisions of the Plan. The judgment of the Committee in designating individuals to receive option grants and the size of such grants shall be final and conclusive; provided, however, that each designated individual shall have the right not to accept any grant and any such decision shall not affect the Optionee's employment by or engagement with the Corporation or any of its subsidiaries. 3. The total number of authorized but unissued Shares allocated to and made available to be subject to options granted to Optionees under both the Capital Environmental Resource Inc. Employee Stock Option Plan (sometimes called the "1997 Employee Stock Option Plan") and the Plan (together, the "Aggregate Available Shares") shall not exceed fifteen percent (15%) (disregarding any frac tional Share) of the issued common shares of the Corporation (treating any convert ible securities as having been converted to common shares). For purposes of the immediately preceding sentence, "issued common shares of the Corporation" shall mean those issued at the time of each grant under the Plan. The aggregate number of Shares subject to options granted under the Plan to any one particular individual shall not exceed fifty percent (50%) of the said aggregate number of Shares allocated to and made available for the Plan. The Aggregate Available Shares shall include a number of Shares which can be (but need not be) issued pursuant to Incentive Stock Options granted under the Plan, which number shall not exceed fifteen percent (15%) (disregarding any fractional Share) of the issued common shares of the Corporation (treating any convertible securities as having been converted to common shares). For purposes of the immediately preceding sentence, "issued common shares of the Corporation" shall mean those common shares (and convertible securities treated as having been converted to common shares) issued at the time of the adoption of the Plan. Any Shares which were subject to any unexercised portion of any terminated or expired option shall again become available to be subject to options granted under the Plan. 4. Except as provided by the laws of descent and distribution or by the Optionee's will, the rights of any Optionee under the Plan are personal to the said Optionee and such rights and the options granted hereunder are not assignable or transferable; provided, however, that, in the Committee's discretion, the terms of any option granted hereunder (other than an Incentive Stock Option) may expressly provide for specifically limited transferability. 5. The Committee shall have the unfettered right to interpret the provisions of this Plan and to make such regulations and formulate such administra tive provisions for carrying this Plan into effect and to make such changes therein and in the regulations and administrative provisions therein as, from time to time, the Committee deems appropriate and in the best interests of the Corporation; provided however, that no such change, regulation or provision may increase the number of Shares that may be optioned hereunder or change the manner of determining the exercise price, or impair or detrimentally change the rights of Optionees under options theretofore granted under the Plan without the prior written consent of the Optionee or Optionees affected. The Board of Directors of the Corporation (the "Board") shall have the unfettered right from time to time and at any time to amend, rescind or terminate the Plan as it shall deem advisable; provided, however, that no such rescission or termination shall impair or change the rights and options thereto fore granted under the Plan without the prior written consent of the Optionee or Optionees affected. 6. The Corporation shall pay all costs of administering the Plan. 7. If the Shares shall be publicly traded, listed or admitted to quotation on the day preceding the day on which the Committee grants an option or designates an individual as an Optionee under the Plan (the "Grant Date"), the 2 exercise price of the Shares purchased pursuant to stock options granted hereunder shall not be less than that from time to time permitted by any applicable rules, regulations and policies of any stock exchange or exchanges or national quotation system upon which any securities of the Corporation may from time to time be listed or otherwise traded or admitted to quotation on the day preceding the Grant Date. Otherwise, the exercise price of such Shares shall be as determined by the Commit tee, except that in the case of an Incentive Stock Option the exercise price shall not be less than the fair market value of such Shares on the Grant Date. 8. The grant of any stock option to an Optionee shall become effective at the time determined by the Committee in its sole discretion and shall be evidenced by a grant document or stock option agreement authorized by the Commit tee. If the Committee so determines, each Optionee may be required to execute a stock option agreement in substantially the applicable form annexed hereto as Schedule "A" or Schedule "B" prior to the grant of any stock option to an Optionee becoming effective. 9. (a) Each option granted hereunder shall be for a term not exceeding five (5) years and shall have an expiry date on the fifth anniversary of its grant. Unless the Committee determines otherwise, each option granted hereunder to an individual other than a non-employee member of the Board shall become fully vested and exercisable on the second anniversary date of its grant, and all or any part of the Shares as to which the option shall have become vested and exercisable may be purchased at any time or from time to time thereafter, until expiration or termina tion of the option. Each option granted hereunder to a non-employee member of the Board shall become fully vested and exercisable on the first anniversary date of its grant, and all or any part of the Shares as to which the option shall have become vested and exercisable may be purchased at any time or from time to time thereafter, until expiration or termination of the option. (b) Notwithstanding the foregoing provisions of this Paragraph 9, immediately prior to any Change in Control, options shall become immediately vested and exercisable in respect of any and all Shares covered thereby in respect of which the Optionee has not exercised such Optionee's right to acquire under the option, if the Optionee shall then be employed by (or be deemed to be employed by) or be engaged with the Corporation or any of its subsidiaries. As used in the immedi ately preceding sentence, "immediately prior" to the Change in Control shall mean sufficiently in advance of the Change in Control to permit the Optionee to take all steps reasonably necessary to exercise the option fully and to deal with the Shares 3 purchased under the option so that those Shares may be treated in the same manner in connection with the Change in Control as the Shares of other shareholders. 10. (a) Subject to the fifth anniversary expiry date of any option granted hereunder, in the event of the physical or mental disability, retirement (but only if the Committee has made a specific determination that the Optionee's termina tion of employment should be treated as retirement for purposes of the Plan) or death of an Optionee on or prior to the expiry date of the Optionee's option while engaged as a key employee or director or officer of, or consultant to, the Corporation or any of its subsidiaries, any option granted hereunder may be exercised up to the full amount of the optioned Shares by the Optionee (or, if the Optionee shall be disabled or deceased, the legal personal representative(s) of the Optionee) at any time up to and including eighteen (18) months following the physical or mental disability, such retirement or death of the Optionee after which date the option shall, forthwith expire and terminate and be of no further force or effect whatsoever. (b) For greater certainty, during the period that any Optionee is deemed to be an employee of the Corporation or any of its subsidiaries pursuant to any medical or disability plan of the Corporation or any of its subsidiaries, such Optionee shall also be deemed to be an employee for the purposes of the Plan, and the eighteen-month period of continued exercisability provided in this Paragraph 10 shall commence upon the termination of all actual and deemed employment by the Corporation or any of its subsidiaries; provided, however, that this sentence shall not apply with respect to any Incentive Stock Option granted hereunder; and, provided further, that any such period of deemed employment and any such eighteen-month period of continued exercisability shall be subject to the fifth anniversary expiry date of any option granted hereunder. 11. Subject to the fifth anniversary expiry date of any option granted hereunder, in the event the Optionee's employment by or engagement with (as a director or otherwise) the Corporation or any of its subsidiaries is terminated by the Corporation or any of its subsidiaries or the Optionee, for any reason other than the Optionee's physical or mental disability, retirement (as described in Paragraph 10(a) hereof) or death, before exercise of any options granted hereunder, the Optionee shall have ninety (90) days from the date of such termination (or if the Optionee is a non-employee member of the Board, the Optionee shall have one year) to exercise only that portion of the option such Optionee is otherwise entitled to exercise at the time of such termination and thereafter such Optionee's option shall expire and all rights to purchase Shares hereunder shall cease and expire and be of no further force or 4 effect. Options shall not be affected by any change of employment or engagement so long as the Optionee continues to be employed by the Corporation or any of its subsidiaries or continues to be a director, officer or consultant of one of the forego ing. 12. Subject to the provisions of the Plan, the options granted hereunder may be exercised from time to time by delivery to the Corporation at its head office of a written notice of exercise specifying the number of Shares with respect to which the option is being exercised and accompanied by payment in full of the purchase price of the Shares then being purchased by way of cash or certified cheque in favour of the Corporation, by way of any cashless exercise method authorized by the Committee, or, in the sole discretion of the Committee, by way of the tender of Shares already owned by the Optionee. Such notice shall contain the Optionee's undertaking to comply, to the satisfaction of the Corporation and its counsel, with all applicable requirements of any stock exchange or exchanges or national quotation system upon which any securities of the Corporation are from time to time listed (or admitted to quotation) and any applicable regulatory authority or authorities. In connection with the exercise of any option hereunder the Optionee must enter into arrangements satisfactory to the Corporation with respect to the withholding of any taxes required by applicable law. 13. Subject to any required action by its shareholders, if the Corpo ration shall be a party to any reorganization, merger, dissolution or sale or lease of all or substantially all its assets, whether or not the Corporation is the surviving entity, the option shall be adjusted so as to apply to the securities to which the holder of the number of Shares subject to the option would have been entitled by reason of such reorganization, merger or sale or lease of all or substantially all of its assets. Further, subject to any required action by the Corporation's shareholders, upon the occurrence of any event which affects the Shares in such a way that an adjustment of the option is appropriate in order to prevent the dilution or enlargement of rights under the option, the Committee shall make appropriate equitable adjustments, which may include, without limitation, adjustments to any or all of the number and kind of shares of stock (or other securities) which may thereafter be issued in connection with the option and adjustments to any exercise price specified in the option. Notwithstanding the foregoing provisions of this Paragraph 13, the Corporation may satisfy any obligations to an Optionee under the Plan by paying to the said Optionee in cash the difference between the exercise price of all unexercised options granted hereunder and the fair market value of the securities to which the Optionee would be entitled upon exercise of all unexercised options, regardless of whether all conditions 5 of exercise relating to continuous employment have been satisfied; further, the Corporation may give the Optionee the alternative of having the Plan's obligations to the Optionee satisfied in cash as provided in this sentence. Adjustments under this Paragraph or any determinations as to the fair market value of any securities shall be made by the Committee in accordance with this Plan, and any reasonable determina tion made by the Committee shall be binding and conclusive. 14. In the event of any subdivision or subdivisions of the Shares as said Shares were constituted at the time any options hereunder were granted into a greater number of Shares, the Corporation will thereafter deliver at the time of exercise thereof in addition to the number of Shares in respect of which the option is then being exercised, such additional number of Shares as result from such subdivi sion or subdivisions of the Shares for which the option is being exercised without the Optionee exercising the option making any additional payment or giving any other consideration therefor. 15. In the event of any consolidation or consolidations of the Shares as said Shares were constituted at the time any options hereunder were granted into a lesser number of Shares, the Optionee shall accept, at the time of the exercise thereof in lieu of the number of Shares in respect of which the option is then being exercised, the lesser number of Shares as result from such consolidation or consolidations of the Shares for which the option is being exercised. 16. In the event of any change of the Shares as said Shares were constituted at the time any options hereunder were granted, the Corporation shall thereafter deliver at the time of the exercise thereof the number of shares of the appropriate class resulting from the said change as the Optionee exercising the option would have been entitled to receive in respect of the number of Shares so purchased had the option been exercised before such change. 17. If the Corporation at any time while any options hereunder are outstanding shall pay any stock dividend or stock dividends upon the Shares in respect of which any options were granted hereunder, the Corporation will thereafter deliver at the time of exercise thereof in addition to the number of Shares in respect of which the option is then being exercised, the additional number of shares of the appropriate class as would have been payable on the Shares so purchased if they had been outstanding on the record date for the payment of said stock dividend or dividends. 6 18. The Corporation shall not be obligated to issue fractional Shares in satisfaction of any of its obligations hereunder. 19. If at any time the Corporation grants to the holders of its capital stock rights to subscribe for and purchase pro rata additional securities of the Corporation or of any other corporation or entity, there shall be no adjustments made to the number of Shares or other securities subject to the option in consequence thereof and the said stock option of the Optionee shall remain unaffected. 20. Any stock option granted under the Plan may have a stock appreciation right attached to it, either at the time of grant or by amendment adding it to an existing stock option; subject, however, to the grant of such stock appreciation right being in compliance with the applicable regulations and policies of any stock exchange or exchange or national quotation system upon which any securities of the Corporation may from time to time be listed or admitted to quotation. The provi sions of the Plan respecting exercise of stock options and the adjustments to options arising from certain corporate actions shall apply mutatis mutandis to all stock appreciation rights granted hereunder. 21. Stock appreciation rights granted hereunder are exercisable to the extent, and only to the extent, that the option to which it is attached is exercis able. To the extent a stock appreciation right attached to an option granted hereunder is exercised, the option to which it is attached shall be deemed to have been exer cised to a similar extent. 22. A stock appreciation right granted hereunder shall entitle the Optionee to elect to surrender to the Corporation unexercised the option to which it is attached, or any portion thereof, and to receive from the Corporation in exchange therefor that number of Shares, disregarding any fractional Share, having an aggre gate value equal to the excess of the Fair Market Value of one Share (on the trading day immediately preceding the day the notice provided for in Paragraph 23 hereof is received by the Corporation) over the purchase price per Share specified in such option, times the number of Shares called for by the option, or portion thereof, which is so surrendered. 23. Subject to the provisions of the Plan, a stock appreciation right granted hereunder may be exercised from time to time by delivering to the Corpora tion at its head office a written notice of exercise, which notice shall specify the number of stock appreciation rights to be exercised and options to be forfeited and 7 the number of Shares the Optionee elects to receive thereby. Such notice shall contain the Optionee's undertaking to comply, to the satisfaction of the Corporation and its counsel, with all applicable requirements of any stock exchange or exchanges upon which any securities of the Corporation are listed for trading and any other applicable regulatory authority. 24. In addition to any grants which may be made hereunder pursu ant to the other provisions of the Plan (including Paragraph 25 hereof) to an individ ual who becomes a non-employee member of the Board on or after the completion of the Initial Public Offering, the Committee, in its sole discretion, may (but need not) grant the individual an option as of the day on which the individual's service as a non-employee member of the Board commences. The option shall have an exercise price per Share for its underlying Shares equal to the Fair Market Value of a Share on the trading day immediately preceding such individual's first day of service (or on the day of completion of the Initial Public Offering in the case of any individual who becomes a non-employee member of the Board on such day). Any such option shall be for such number of Shares as the Committee, in its sole discretion, may determine and, subject to the provisions of the Plan, shall be subject to such terms and condi tions as the Committee, in its sole discretion, may determine. 25. In addition to any grants which may be made hereunder pursu ant to the preceding provisions of the Plan (including Paragraph 24 hereof) to an individual who is serving as a non-employee member of the Board on the day of an annual meeting of the Corporation and is re-elected to the Board at such annual meeting, each such individual shall automatically be granted an option for ten thousand (10,000) Shares as of the date of such meeting. Such option shall have an exercise price per Share for its underlying Shares equal to the Fair Market Value per Share on the trading date immediately preceding the date of such meeting. 26. For purposes of the Plan, the following terms, as used herein, shall have the respective meanings specified: (a) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (b) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 8 (c) "Change in Control" shall be deemed to have occurred prior to the completion of any Initial Public Offering upon the occurrence of either: (i) an offer made generally to the holders of the Corporation's voting securities in one or more jurisdictions to purchase directly or indirectly voting securities of the Corporation where the voting securities which are the subject of the offer to purchase, together with the offeror's then presently owned securities, will in the aggregate exceed fifty percent (50%) of the outstanding voting securities of the Corpora tion and where two (2) or more persons or companies make offers jointly or in. concert or intending to exercise jointly or in concert any voting rights attaching to the securities to be acquired, then the securities owned by each of them shall be included in the calculation of the percentage of the out standing voting securities of the Corporation owned by each of them; or (ii) the day prior to the completion of an initial public offering of the Corporation's securities on a recognized stock ex change. "Change in Control" shall be deemed to have occurred, following the completion of an Initial Public Offering, if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation or its Affiliates) representing thirty percent (30%) or more of the combined voting power of the Corpora tion's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individ uals who, on the date of completion of the Initial Public Offering, constitute the Board and any new director (other than a director whose 9 initial assumption of office is in connection with an actual or threat ened election contest, including but not limited to a consent solicita tion, relating to the election of directors of the Corporation) whose appointment or election by the Board or nomination for election by the Corporation's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date of completion of the Initial Public Offering or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Corporation or any direct or indirect subsidiary of the Corporation with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Corporation out standing immediately prior to such merger or consolidation continu ing to represent (either by remaining outstanding or by being con verted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any subsidiary of the Corporation, at least fifty-one percent (51%) of the combined voting power of the securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Corpora tion (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corpora tion representing thirty percent (30%) or more of the combined voting power of the Corporation's then outstanding securities; or (IV) the shareholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corpora tion of all or substantially all of the Corporation's assets, other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity, at least fifty-one percent (51%) of the combined voting power of the voting securities of which are owned by shareholders of the Corporation in substantially the same proportions as their ownership of the Corporation immediately prior to such sale. 10 Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Corporation immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Corporation immediately following such transaction or series of transactions. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" means a committee of the Board appointed to administer the Plan (which committee may also be the Compensation Committee of the Board). The Committee shall be composed solely of two or more "Non-Em ployee Directors" (as defined in Rule 16b-3(b)(3) under Section 16 of the Exchange Act) who are appointed from time to time to serve by the Board. If for any reason such a Committee shall not have been appointed by the Board, the Board shall serve as the Committee. (f) "Corporation" means Capital Environmental Resource Inc., or any successor corporation. (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (h) "Fair Market Value" of a Share, unless otherwise provided in the applicable grant document or stock option agreement, means: (i) If the Stock is admitted to trading on one or more national securities exchanges, (A) the average of the reported highest and lowest sale prices per Share as reported on the reporting system selected by the Committee on the relevant date; or (B) in the absence of reported sales on that date, the average of the re ported highest and lowest sales prices per Share on the last previous day for which there was a reported sale; or 11 (ii) If the Stock is not admitted to trading on any national securities exchange, but is admitted to quotation on NASDAQ and has been designated as a NASDAQ National Market ("NNM") security, (A) the average of the reported highest and lowest sale prices per Share as reported on NASDAQ on the relevant date; or (B) in the absence of reported sales on that date, the average of the re ported highest and lowest sales prices per Share on the last previous day for which there was a reported sale; or (iii) If the Stock is not admitted to trading on any national securities ex change, but is admitted to quotation on NASDAQ as a NASDAQ SmallCap Market security (and has not been designated as a NNM security), the aver age of the highest bid and lowest asked prices per Share on the relevant date; or (iv) If the preceding clauses (i), (ii) and (iii) do not apply, the Fair Market Value determined by the Committee, using such criteria as it shall determine, in good faith and in its sole discretion, to be appropriate for such valuation. (i) "Incentive Stock Option" means an option which can granted only to employees of the Corporation (or any of its "subsidiary corpora tions", within the meaning of Section 424(f) of the Code, including any "subsidiary corporations which become such after the adoption of the Plan) and which complies with the requirements of Section 422 of the Code: provided, however, that no option shall be an Incentive Stock Option if its terms, as of the time it is granted state that it will not be treated as an Incentive Stock Option; and, provided further, that the grant of any Incentive Stock Option shall be subject to obtaining (or having obtained) the approval of the Plan by the Corporation's stockholders within twelve (12) months before or after the date the Plan is adopted by the Board. (j) "Initial Public Offering" means the sale, in an underwritten public offering registered under the Securities Act of 1933, as amended from time to time, of Shares providing the Corporation with gross proceeds of at least thirty-five million dollars (US$35,000,000). (k) "NASDAQ" means National Association of Securities Dealers Automated Quotation System. 12 (l) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Corporation or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its Affiliates, (iii) an underwriter temporarily holding securi ties pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Corporation in substantially the same propor tions as their ownership of stock of the Corporation. (m) "Plan" means the Capital Environmental Resource Inc. 1999 Stock Option Plan, as it may be amended from time to time. (n) "Shares" means shares of Stock. (o) "Stock" means the capital stock of the Corporation, or, in the event that the outstanding capital stock is hereafter changed into, or exchanged for, different stock or securities, such other stock or securities. 13 EX-10.3 6 EMPL. AGREEMENT B/W CO. AND TONY BUSSERI Exhibit 10.3 THIS EMPLOYMENT AGREEMENT made as of the 14th day of August, 1998. BETWEEN: CAPITAL ENVIRONMENTAL RESOURCE INC., an Ontario corporation having its head office at 1105 Skyview Drive, Burlington, Ontario (hereinafter called "Capital") - and - TONY BUSSERI, of 1386 Greeneagle Drive, Oakville, Ontario (hereinafter called the "Employee") WHEREAS: 1. Capital and the Employee are parties to a letter agreement dated August 1, 1997, as amended by letter agreements dated June 17, 1998 and August 14, 1998 setting forth the terms of the Employee's employment with Capital. 2. The parties wish to incorporate and amend certain terms of the letter agreements into this Employment Agreement. NOW THEREFORE THIS AGREEMENT WITNESSES THAT the parties agree as follows: 1. EMPLOYMENT 1.01 Capital hereby employs the Employee as its Chairman of the Board and Chief Executive Officer, effective January 30, 1998. As such, the Employee will act as the senior officer of Capital and shall perform such duties, commensurate with his position, as may be assigned to him from time to time by the Board of Directors of Capital. The Employee hereby accepts employment with Capital upon the terms and conditions contained herein and agrees to devote his full time, attention and efforts to promote and further Capital's business. 2. COMPENSATION 2.01 For all services rendered by the Employee to Capital, Capital shall pay and reimburse the Employee the following amounts: (a) Effective July 1, 1998, the Employee's base salary shall be $175,000.00 per annum, payable in advance in equal monthly instalments, or on any other periodic basis consistent with Capital's payroll procedures for executive employees. The Employee's base salary shall be reviewed at least annually and shall be increased as agreed by Capital and the Employee from time to time. Upon the completion -2- of an initial public offering of the shares of common stock of Capital on a recognized stock exchange (which shall for purposes of this Agreement include the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market and the Toronto Stock Exchange), the Employee's base salary will be the greater of U.S. $130,000, converted into Canadian dollars or Cdn $175,000.00. (b) An annual bonus, payable at the discretion of the Board of Directors of Capital based on achieving goals fixed by the Board, of not less than fifty percent (50%) of Employee's base salary. The amount of the bonus will be fixed by the Board of Directors and paid not later than ninety (90) days after each fiscal year end of Capital; (c) Participation at the same level as other executive employees of Capital in a full benefits package and pension plan; (d) Four (4) weeks vacation in each fiscal year, to be taken at such times as mutually agreed between the Employee and Capital. Vacation may only be taken within the year of entitlement and may not be accumulated from year to year unless otherwise mutually agreed; (e) Stock option grants as and when authorized by the Board of Directors of Capital; (f) A vehicle commensurate with the Employee's position as Chairman of the Board, will be leased by Capital and provided to the Employee in lieu of a car allowance. Capital will pay and/or reimburse all operating, maintenance and insurance charges in respect of such vehicle. Capital will provide Employee with a mobile telephone and pay all charges incurred by Employee in connection with the use thereof; (g) Reimbursement of all expenses reasonably incurred by Employee in the performance of his duties, subject to submission of appropriate documentation in accordance with Capital's expense reimbursement policy in effect from time to time. 2.02 Capital will, at its expense, throughout the term of this Agreement maintain directors and officers indemnity insurance for such amount(s) as the Employee considers appropriate having regard to the standards in the waste management industry for companies with similar amounts of capital. Capital agrees to indemnify and save Employee harmless from all losses, costs and damages suffered by Employee as a result of his employment with Capital to the fullest extent permitted by law. -3- 3. TERM/TERMINATION 3.01 The initial term of this Agreement shall be three (3) years, beginning August 1, 1997 and expiring on July 31, 2000 and unless terminated as herein provided, shall continue thereafter on a year-to-year basis, on the same terms and conditions contained herein, unless amended by mutual agreement. 3.02 Notwithstanding the foregoing, if Capital shall complete an initial public offering of its common shares (or other securities) on a recognized stock exchange (which shall for purposes of this Agreement include the New York Stock Exchange, the American Stock Exchange, NASDAQ National Market and the Toronto Stock Exchange), this Agreement shall be automatically extended for a further term of three (3) years from the date of completion of such initial public offering. 3.03 Capital may terminate this Agreement in the following circumstances: (a) for just and reasonable cause, without notice and without pay in lieu of notice. For purposes of this Agreement. "just cause" shall include serious misconduct, habitual neglect of duty, incompetence or conduct incompatible with Employee's duties, and wilful disobedience of any proper direction or order of the Board of Directors of Capital; (b) the Employee's inability to perform his duties under this Agreement because of illness, physical or mental disability, or other incapacity which continues for an uninterrupted period in excess of three(3) months or a cumulative period of six (6) months in any twelve (12) month period; (c) without cause and without notice, provided that Capital shall pay to the Employee the following amounts: (i) Base salary for a period of twenty four (24) months, to be paid in a lump sum, at the option of the Employee, at the time of such termination; (ii) Bonus of two times (2x) the minimum annual bonus payable to the Employee, together with any bonus earned by the Employee to the date of termination. Bonus to be paid in a lump sum, at the option of the Employee, at the time of such termination; (iii) All stock options granted to the Employee prior to such termination shall fully vest effective at the date of such termination and shall be exercisable for a period of twelve (12) months thereafter notwithstanding any other provision of the Stock Option Agreement entered into between the Employee and Capital. (iv) All benefits and other entitlements owing to the Employee hereunder shall be payable for the same period as base salary is -4- payable under subsection (c) (i) hereof. (v) In addition to the above payments, on such termination, the housing loan outstanding to the Employee shall automatically be converted to a 3 year term, non-interest bearing, loan, payable in a lump sum at the end of such three year term. (d) on the Employee's death, Capital will pay to the Employee's beneficiary, within 10 days of Employee's death, an amount equal to accrued compensation owing to the Employee on the date of his death (including pro rata salary, bonus and other benefits, deferred compensation and accrued vacation pay). Capital will cause all death benefits payable as a consequence of the Employee's death to be paid to the Employee's beneficiary as soon as practicable. 3.04 If: (i) other than as a result of an initial public offering of the common shares of Capital, there is a Change of Control of Capital. For purposes of this provision, a "Change of Control" means (A) a transaction whereby property constituting all or substantially all of the assets of Capital and its subsidiaries, taken as a whole, is sold, in one or more related transactions to any person or group of persons or (B) an event or series of events (whether a share purchase, amalgamation, merger, consolidation, pooling or other business combination or otherwise) by which any person or group of affiliated persons becomes the beneficial owner of more than 50% of the combined voting power of the then outstanding securities of Capital, where such person or group of affiliated persons, immediately prior to the occurrence of such event or series of events, was not the beneficial owner of at least 50% of the combined voting power of the then outstanding securities of Capital; or (ii) At any time, prior to the completion of an initial public offering of the common shares of Capital which values the equity of Capital at at least $250 M (U.S.) (a "Qualified Public Offering"), Capital shall change the Employee's title or job responsibilities without the consent of the Employee; or (iii) At any time in connection with or after the completion of a Qualified Public Offering, Capital shall change the Employee's title or job responsibilities such that the Employee shall, after such action, be neither the Chairman of the Board nor the Chief Executive Officer of Capital, without the consent of the Employee; or (iv) Capital shall relocate its corporate head office outside of the Province of Ontario. then, in the circumstances described in subsection (ii) or (iv) above, Capital shall be -5- deemed, upon the occurrence of such event unless the Employee shall have delivered written notice to Capital waiving his rights hereunder within 30 days of the occurrence of such event or circumstance, to have terminated the Employee's employment without cause and the Employee shall be entitled to the payments described in section 3.03 (c) above. In the circumstances described in subsection (i) (A), (B) or (iii) above, the Employee shall, at the request of the Corporation, continue to be employed by Capital for a maximum of six (6) months after the occurrence of such event (the "Transition Period"). During the Transition Period, the Employee shall perform such services in the transition of his role as the Board of Directors of Capital may reasonably require and the Employee shall be entitled to receive his base salary and additional compensation as provided in Article 2 hereof. At the expiration of the Transition Period, the Employee's employment shall be deemed terminated without cause and the Employee shall thereupon be entitled to the payments described in section 3.03 (c) above, unless the Employee shall have delivered written notice to Capital waiving his rights hereunder on or before the expiration of the Transition Period. 3.05 If, during the term hereof, there is an event or series of events (whether a share purchase, amalgamation, merger, consolidation, pooling or other business combination or otherwise) by which any person or group of affiliated persons becomes the beneficial owner of more than 50% of the combined voting power of the then outstanding securities of Capital, where such person or group of affiliated persons, immediately prior to the occurrence of such event or series of events, was not the beneficial owner of at least 50% of the combined voting power of the then outstanding securities of Capital, the Employee shall have the irrevocable option exercisable as hereinafter provided, to require Capital to pay to the Employee at the time of the occurrence of such event or series of events, in cash, the difference between the exercise price of all unexercised options granted to the Employee (which at the date of this Agreement total 60,000) and the market value of the securities to which the Employee would be entitled upon the exercise of all unexercised options. For purposes of this provision, the market value of the securities to which the Employee would be entitled upon the exercise of his unexercised options, shall be determined on the same basis as the securities of Capital are valued in such event or series of events described in this section 3.05. The Employee shall exercise the option granted hereunder by delivering written notice of the exercise thereof to any officer or director of the Company no later than three (3) business days prior to the completion of the event or series of events giving rise to the right to exercise the option granted herein. If the Employee does not exercise his option as aforesaid, it shall thereafter expire and be of no further force and effect. 3.06 The Employee shall provide Capital with not less than three (3) months notice of his intention to resign. 4. NON-COMPETITION/CONFIDENTIALITY 4.01 Simultaneously with and as a condition to Capital offering employment to the Employee -6- on the terms and conditions set out herein, the Employee has executed and delivered a Non-competition and Confidentiality Agreement in the form attached hereto, which shall remain in full and force in accordance with its terms. 5. COMPLETE AGREEMENT 5.01 This Agreement sets forth the entire agreement between the parties respecting the subject matter hereof and supersedes any and all other agreements, either oral or in writing between Capital and the Employee with respect to the employment of the Employee. This Agreement may only be modified by further agreement in writing signed by the parties. 6. GOVERNING LAW 6.01 This Agreement shall be construed in accordance with and governed by the laws of the Province of Ontario and the laws of Canada applicable therein. 7. MISCELLANEOUS 7.01 This Agreement shall be binding upon the parties and shall inure to the benefit of the parties and their respective heirs, executors, administrators, successors and assigns. If Capital is merged or consolidated with another entity, such other entity shall automatically succeed to the rights, powers and responsibilities of Capital hereunder. IN WITNESS WHEREOF the parties have duly executed this Agreement as of the date first noted above. CAPITAL ENVIRONMENTAL RESOURCE INC. By: /s/ Ken Leung ------------------------------ Ken Leung-Director /s/ (Illegible) /s/ Tony Busseri ------------------------------ ------------------------------ Witness Tony Busseri EX-10.4 7 EMPL. AGREEMENT B/W CO. AND ALLARD LOOPSTRA Exhibit 10.4 THIS EMPLOYMENT AGREEMENT made as of the 14th day of August, 1998. BETWEEN: CAPTIAL ENVIRONMENTAL RESOURCE INC., an Ontario corporation having its head office at 1005 Skyview Drive, Burlington, Ontario (hereinafter called "Capital") -and- ALLARD LOOPSTRA, of P.O. Box 9, Carlisle, Ontario (hereinafter called the "Employee") WHEREAS: 1. Capital and the Employee are parties to a letter agreement dated June 19, 1997, as amended by memoranda dated January 30, 1998, May 19, 1998 and August 14, 1998 setting forth the terms of the Employee's employment with Capital. 2. The parties wish to incorporate into this Employment Agreement the existing employment arrangement and amend certain terms thereof as herein provided. NOW THEREFORE THIS AGREEMENT WITNESSES THAT the parties agree as follows: 1. EMPLOYMENT 1.01 Capital hereby employs the Employee as its President and Chief Operating Officer, effective January 30, 1998. As such, the Employee will have general supervision of the business of Capital and shall perform such duties, commensurate with his position, as may be assigned to him from time to time by Tony Busseri, the Chairman and Chief Executive Officer of Capital. The Employee hereby accepts employment with Capital upon the terms and conditions contained herein and agrees to devote his full time, attention and efforts to promote and further Capital's business. 2. COMPENSATION 2.01 For all services rendered by the Employee to Capital, Capital shall pay and reimburse the Employee the following amounts: (a) The Employee's base salary shall, effective July 1, 1998, be $170,000.00 per annum, payable in advance in equal monthly instalments, or on any other periodic basis consistent with Capital's payroll procedures for executive employees. The Employee's base salary shall be reviewed at least annually and shall be increased as agreed by Capital and the Employee from time to time. Upon the completion -2- of an initial public offering of the shares of common stock of Capital on a recognized stock exchange (which shall for purposes of this Agreement include the New York Stock Exchange, the American Stock Exchange, the NASDAQ National Market and the Toronto Stock Exchange), the Employee's base salary will be the greater of U.S.$125,000, converted into Canadian dollars or Cdn $170,000.00. (b) The Employee shall be entitled to receive the following additional compensation: (i) An annual bonus, payable at the discretion of the Board of Directors of Capital, having regard to the degree of success with which Employee has performed the services required of him, of not less than fifty percent (50%) of Employee's base salary. The amount of the bonus will be fixed by the Board of Directors and paid not later than ninety (90) days after each fiscal year end of Capital; (ii) Participation at the same level as other executive employees of Capital in a full benefits package and pension plan; (iii) Four (4) weeks vacation in each fiscal year, to be taken at such times as mutually agreed between the Employee and Capital. Vacation may only be taken within the year of entitlement and may not be accumulated from year to year unless otherwise mutually agreed; (iv) Stock option grants as and when authorized by the Board of Directors of Capital; (v) Capital will provide Employee with a vehicle commensurate with the Employee's position as President, which vehicle shall be leased by Capital. Capital will pay all operating, maintenance and insurance charges in respect of the vehicle. Capital will provide Employee with a mobile telephone and pay all charges incurred by Employee in connection with the use of such telephone; (vi) Reimbursement of all expenses reasonably incurred in the performance of his duties, subject to submission of appropriate documentation in accordance with Capital's expense reimbursement policy in effect from time to time. (c) Capital will, at its expense, throughout the term of this Agreement maintain directors and officers indemnity insurance for such amount(s) as Capital considers appropriate having regard to the standards in the waste management industry for companies with similar amounts of capital. Capital agrees to indemnify and save Employee harmless from all losses, costs and damages suffered by Employee as a result of his employment with Capital to the fullest extent permitted by law. (d) Within thirty (30) days of the completion of any of the following, Capital will pay -3- the Employee a one-time bonus of one hundred and twenty five thousand dollars (C $125,000.00): (i) an initial public offering of shares of common stock of Capital on a recognized stock exchanged (which for purposes of this Agreement shall include the NASDAQ National Market, the New York Stock Exchange, the American Stock Exchange and the Toronto Stock Exchange); (ii) the disposition by Capital of all or substantially all of its waste management and related assets in Ontario; or (iii) an event or series of events (whether a share purchase, amalgamation, merger, consolidation, pooling or other business combination or otherwise) by which any person or group of affiliated persons becomes the beneficial owner of more than 50% of the combined voting power of the then outstanding securities of Capital, where such person or group of affiliated persons, immediately prior to the occurrence of such event or series of events, was not the beneficial owner of at least 50% of the combined voting power of the then outstanding securities of Capital. 3. TERM/TERMINATION 3.01 The initial term of this Agreement shall be three (3) years, beginning July 4, 1997 and expiring on July 3, 2000 and unless terminated as herein provided, shall continue thereafter on a year-to-year basis, on the same terms and conditions contained herein, unless amended by mutual agreement. 3.02 Notwithstanding the foregoing, if Capital shall complete an initial public offering of its common shares (or other securities) on a recognized stock exchange (which shall for purposes of this Agreement include the New York Stock Exchange, the American Stock Exchange, NASDAQ National Market and the Toronto Stock Exchange), this Agreement shall be automatically extended for a further term of three (3) years from the date of completion of such initial public offering. 3.03 Capital may terminate this Agreement in the following circumstances: (a) for just and reasonable cause, without notice and without pay in lieu of notice. For purposes of this Agreement. "just cause" shall include serious misconduct, habitual neglect of duty, incompetence or conduct incompatible with your duties, and wilful disobedience of any proper direction or order of the Chairman of the Board of Capital; -4- (b) the Employee's inability to perform his duties under this Agreement because of illness, physical or mental disability, or other incapacity which continues for an uninterrupted period in excess of three(3) months or a cumulative period of six (6) months in any twelve (12) month period; (c) without cause and without notice, provided that Capital shall pay to the Employee the following amounts: (i) Base salary for a period of twenty four (24) months, to be paid in a lump sum, at the option of the Employee, at the time of such termination; (ii) Bonus of two times (2x) the minimum annual bonus payable to the Employee, together with any bonus earned by the Employee to the date of termination. Bonus to be paid in a lump sum, at the option of the Employee, at the time of such termination; (iii) All stock options granted to the Employee prior to such termination shall fully vest effective at the date of such termination and shall be exercisable for a period of twelve (12) months thereafter, notwithstanding any other provision of the Stock Option Agreement entered into between the Employee and Capital. (iv) All benefits and other entitlements owing to the Employee hereunder shall be payable for the same period as base salary is payable under subsection (c) (i) hereof. (iv) All benefits and other entitlements owing to the Employee hereunder shall be payable for the same period as base salary is payable under subsection (c)(i) hereof (d) on the Employee's death, Capital will pay to the Employee's beneficiary, within 10 days of Employee's death, an amount equal to accrued compensation owing to the Employee on the date of his death (including pro rata salary, bonus and other benefits, deferred compensation and accrued vacation pay). Capital will cause all death benefits payable as a consequence of the Employee's death to be paid to the Employee's beneficiary as soon as practicable. 3.04 Capital shall be deemed to have terminated the Employee's employment without cause and without notice, and the Employee shall be entitled to payment of the amounts set out in section 3.03 (c) above in the following circumstances (a) Tony Busseri shall cease to be employed full-time as the Chairman and/or Chief Executive Officer of Capital; and/or (b) Capital shall require the Employee, as a condition of his employment, to relocate outside of the Province of Ontario or commute for work to a location outside of the Province of Ontario. -5- 3.04 The Employee shall provide Capital with not less than three (3) months notice of his intention to resign. 4. NON-COMPETITION/CONFIDENTIALITY 4.01 Simultaneously with and as a condition to Capital offering employment to the Employee on the terms and conditions set out herein, the Employee has executed and delivered a Non-competition and Confidentiality Agreement in the form attached hereto, which shall remain in full and force in accordance with its terms. 5. COMPLETE AGREEMENT 5.01 This Agreement sets forth the entire agreement between the parties respecting the subject matter hereof and supersedes any and all other agreements, either oral or in writing between Capital and the Employee with respect to the employment of the Employee. This Agreement may only be modified by further agreement in writing signed by the parties. 6. GOVERNING LAW 6.01 This Agreement shall be construed in accordance with and governed by the laws of the Province of Ontario and the laws of Canada applicable therein. 7. MISCELLANEOUS 7.01 This Agreement shall be binding upon the parties and shall inure to the benefit of the parties and their respective heirs, executors, administrators, successors and assigns. If Capital is merged or consolidated with another entity, such other entity shall automatically succeed to the rights, powers and responsibilities of Capital hereunder. IN WITNESS WHEREOF the parties have duly executed this Agreement as of the date first noted above. CAPITAL ENVIRONMENTAL RESOURCE INC. By: /s/ (Illegible) ------------------------------ /s/ (Illegible) /s/ Allard Loopstra ------------------------------ ------------------------------ Witness Allard Loopstra THIS AMENDING AGREEMENT made this 30th day of October, 1998 to an Employment Agreement dated as of August 14, 1998 between Capital Environmental Resource Inc., an Ontario corporation having its head office at 1005 Skyview Drive, Burlington, Ontario ("Capital") and Allard Loopstra, of P.O. Box 9, Carlisle, Ontario (the "Employee") WITNESSES THAT the parties hereby agree to amend the terms of the above-described Employment Agreement as follows: 1. A new section 3.06 is added as follows: If, during the term hereof, there is an event or series of events (whether a share purchase, amalgamation, merger, consolidation, pooling or other business combination or otherwise) by which any person or group of affiliated persons becomes the beneficial owner of more than 50% of the combined voting power of the then outstanding securities of Capital, where such person or group of affiliated persons, immediately prior to the occurrence of such event or series of events, was not the beneficial owner of at least 50% of the combined voting power of the then outstanding securities of Capital, the Employee shall have the irrevocable option exercisable as hereinafter provided, to require Capital to pay to the Employee at the time of the occurrence of such event or series of events, in cash, the difference between the exercise price of all unexercised options granted to the Employee and the market value of the securities to which the Employee would be entitled upon the exercise of all unexercised options. For purposes of this provision, the market value of the securities to which the Employee would be entitled upon the exercise of his unexercised options, shall be determined on the same basis as the securities of Capital are valued in such event or series of events described in this section 3.06. The Employee shall exercise the option granted hereunder by delivering written notice of the exercise thereof to any officer or director of Capital no later than three (3) business days prior to the completion of the event or series of events giving rise to the right to exercise the option granted herein. If the Employee does not exercise his option as aforesaid, it shall thereafter expire and be of no further force and effect. 2. In all other respects the parties confirm that the terms of the Employment Agreement remain in full force and effect, unamended. Dated at Burlington, this 30th day of October, 1998. Capital Environmental Resource Inc. By: /s/ (Illegible) ----------------------------- /s/ (Illegible) /s/ Allard Loopstra ----------------------------- --------------------------------- Witness Allard Loopstra EX-10.5 8 AMENDED & RESTATED CREDIT AGREEMENT Exhibit 10.5 ================================================================================ - -------------------------------------------------------------------------------- AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF JANUARY 29, 1999 AMONG CAPITAL ENVIRONMENTAL RESOURCE INC./ RESSOURCES ENVIRONNEMENTALES CAPITAL INC., 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 ================================================================================ - -------------------------------------------------------------------------------- ARRANGED BY NATIONSBANC MONTGOMERY SECURITIES LLC || TABLE OF CONTENTS Section Page ARTICLE I DEFINITIONS 1.1 Certain Defined Terms...................................................1 1.2 Other Interpretive Provisions..........................................24 1.3 Accounting Principles..................................................25 1.4 Reallocation of Loans to Parent........................................25 ARTICLE II THE CREDITS 2.1 U.S. Dollar Borrowings.................................................26 2.1.1 Commitments to Make U.S. Dollar Loans to the Company...........26 2.1.2 Commitments to Make U.S. Dollar Loans to Parent................26 2.1.3 Ability to Reborrow............................................27 2.1.4 Procedure for U.S. Dollar Borrowings...........................27 2.1.5 Conversion and Continuation Elections for U.S. Dollar Borrowings.....................................................28 2.1.6 Optional Prepayments of U.S. Dollar Borrowings.................29 2.1.7 Repayment of U.S. Dollar Borrowings............................29 2.2 Canadian Dollar Borrowings.............................................30 2.2.1 Commitments to Make Canadian Dollar Loans to Parent............30 2.2.2 Ability to Reborrow............................................30 2.2.3 Procedure for Canadian Dollar Borrowings.......................30 2.2.4 Conversion and Continuation Elections for Canadian Dollar Borrowings.....................................................31 2.2.5 Optional Prepayments of Canadian Dollar Borrowings.............32 2.2.6 Repayment of Canadian Dollar Borrowings........................32 2.3 Bankers' Acceptances and BA Equivalent Notes...........................33 2.3.1 Commitments to Accept Drafts and Purchase BA Equivalent Notes..33 2.3.2 Procedure for Bankers' Acceptances.............................33 2.3.3 Maturity of Bankers' Acceptances...............................35 2.3.4 Special Provisions for Bankers' Acceptances....................36 2.3.5 Power of Attorney for Drafts and BA Equivalent Notes...........36 2.3.6 Non-Use Fee....................................................37 2.4 Interest...............................................................37 2.5 Fees...................................................................38 2.5.1 Agency and Arrangement Fees....................................38 2.5.2 Non-Use Fees...................................................38 2.5.3 BA Fees........................................................38 2.6 Computation of Fees and Interest.......................................39 2.7 Mandatory Prepayments Resulting from Currency Fluctuations.............39 2.8 Reduction or Termination of the Commitments............................39 2.8.1 Reduction or Termination of U.S. Commitments...................39 2.8.2 Reduction or Termination of Canadian Commitments...............40 2.9 Payments by the Borrowers..............................................40 2.10 Payments by the Lenders to the Agents.................................41 2.11 Sharing of Payments, Etc..............................................42 2.12 Optional Increase in Commitments......................................43 ARTICLE III LOAN ACCOUNTS; NOTES 3.1 Loan Accounts..........................................................44 3.2 Notes..................................................................44 ARTICLE IV THE LETTERS OF CREDIT 4.1 The Letter of Credit Subfacility.......................................45 4.2 Issuance, Amendment and Renewal of Letters of Credit...................46 4.3 Risk Participations, Drawings and Reimbursements.......................48 4.4 Repayment of Participations............................................50 4.5 Role of the Issuing Lenders............................................51 4.6 Obligations of Parent and the Company..................................51 4.7 Cash Collateral Pledge.................................................52 4.8 Letter of Credit Fees..................................................53 4.9 Uniform Customs and Practice...........................................53 ARTICLE V TAXES, YIELD PROTECTION AND ILLEGALITY 5.1 Taxes..................................................................54 5.2 Illegality.............................................................58 5.3 Increased Costs and Reduction of Return................................59 5.4 Funding Losses.........................................................59 ii 5.5 Inability to Determine Rates...........................................60 5.6 Certificates of Lenders................................................61 5.7 Substitution of Lenders................................................61 5.8 Right of Lenders to Fund through Branches and Affiliates...............61 5.9 Survival...............................................................61 ARTICLE VI CONDITIONS PRECEDENT 6.1 Conditions to Effectiveness............................................61 (a) Credit Agreement and Notes.......................................61 (b) Resolutions; Incumbency..........................................61 (c) Organization Documents; Good Standing............................62 (d) U.S. Guaranties..................................................62 (e) Canadian Guaranties..............................................62 (f) Payment of Fees..................................................62 (g) U.S. Security Agreement..........................................62 (h) Canadian Security Agreement......................................63 (i) U.S. Pledge Agreement............................................63 (j) Canadian Pledge Agreements.......................................63 (l) Insurance Certificates...........................................63 (n) Certificate......................................................63 (o) Legal Opinions...................................................64 (p) Estoppel Letters.................................................64 (q) Other Documents..................................................64 6.2 Conditions to All Credit Extensions....................................64 (a) Notice, Application..............................................64 (b) Continuation of Representations and Warranties...................64 (c) No Existing Default..............................................64 ARTICLE VII REPRESENTATIONS AND WARRANTIES 7.1 Existence and Power....................................................65 7.2 Authorization; No Contravention........................................65 7.3 Governmental Authorization.............................................65 7.4 Binding Effect.........................................................66 7.5 Financial Statements...................................................66 7.6 No Material Adverse Change.............................................66 iii 7.7 Litigation and Contingent Liabilities..................................66 7.8 Ownership of Properties; Liens.........................................66 7.9 Subsidiaries...........................................................66 7.10 Pension and Welfare Plans.............................................66 7.11 Investment Company Act................................................67 7.12 Public Utility Holding Company Act....................................67 7.13 Regulation U..........................................................67 7.14 Taxes.................................................................67 7.15 Solvency, etc.........................................................67 7.16 Hazardous Materials...................................................68 7.16.1 Release and Disposal..........................................68 7.16.2 Treatment and Storage.........................................68 7.17 Absence of Default....................................................68 7.18 Leased Premises.......................................................68 7.19 Information...........................................................68 7.20 Year 2000 Problem.....................................................69 7.21 Burdensome Obligations................................................69 7.22 Labor Matters.........................................................69 ARTICLE VIII COVENANTS 8.1 Reports, Certificates and Other Information............................69 8.1.1 Annual Reports.................................................69 8.1.2 Quarterly Reports..............................................70 8.1.3 Monthly Reports................................................70 8.1.4 Compliance Certificates........................................70 8.1.5 Reports to SEC and to Shareholders.............................70 8.1.6 Notice of Default, Litigation and ERISA Matters................70 8.1.7 Subsidiaries...................................................71 8.1.8 Projections....................................................71 8.1.9 Quebec Assets...................................................71 8.1.10 Other Information.............................................71 8.2 Books, Records and Inspections.........................................71 8.3 Insurance..............................................................72 8.4 Compliance with Laws; Payment of Taxes and Liabilities.................72 8.5 Maintenance of Existence, etc..........................................72 8.6 Financial Covenants....................................................72 8.6.1 Minimum Net Worth..............................................72 8.6.2 Interest Coverage Ratio........................................72 iv 8.6.3 Total Debt to EBITDA...........................................73 8.6.4 Senior Debt to EBITDA..........................................73 8.7 Limitations on Debt....................................................73 8.8 Liens..................................................................74 8.9 Restricted Payments....................................................74 8.10 Advances and Other Investments........................................74 8.11 Mergers, Consolidations and Amalgamations; Acquisitions...............75 8.12 Asset Dispositions....................................................76 8.13 Use of Proceeds.......................................................76 8.14 Transactions with Affiliates..........................................76 8.15 Pension Plans.........................................................76 8.16 Environmental Covenants...............................................77 8.16.1 Environmental Response Obligation.............................77 8.16.2 Environmental Liabilities.....................................77 8.17 Unconditional Purchase Obligations....................................77 8.18 Further Assurances....................................................77 8.19 Operating Leases......................................................78 8.20 Business..............................................................78 8.21 Inconsistent Agreements...............................................78 8.22 Capital Expenditures..................................................78 8.23 Other Negative Pledges................................................78 8.24 Redeemable Equity Interests...........................................78 8.25 Nova Scotia Sub and Ontario Sub.......................................78 8.26 Quebec Collateral.....................................................78 8.27 Release of JVS Pledge.................................................79 ARTICLE IX EVENTS OF DEFAULT 9.1 Event of Default.......................................................79 (a) Non-Payment of the Loans, etc....................................79 (b) Non-Payment of Other Debt........................................79 (c) Other Material Obligations.......................................79 (d) Bankruptcy, Insolvency, etc......................................79 (e) Non-Compliance with Provisions of This Agreement.................80 (f) Warranties.......................................................80 (g) Pension Plans....................................................80 (h) Judgments........................................................80 (i) Invalidity of Collateral Documents, etc..........................80 (j) Invalidity of Guaranties, etc....................................81 v (k) Change of Control, etc...........................................81 9.2 Remedies...............................................................81 9.3 Rights Not Exclusive...................................................82 ARTICLE X THE AGENTS 10.1 Appointment and Authorization.........................................82 10.2 Delegation of Duties..................................................83 10.3 Liability of Agents...................................................83 10.4 Reliance by Agents....................................................83 10.5 Notice of Default.....................................................84 10.6 Credit Decision.......................................................84 10.7 Indemnification of Agents.............................................84 10.8 Agents in Individual Capacity.........................................85 10.9 Successor Agents......................................................85 10.10 Withholding Tax......................................................86 10.11 Collateral Matters Releases of Guarantors............................86 10.12 Co-Agents............................................................87 ARTICLE XI GUARANTY BY THE COMPANY 11.1 Guaranty..............................................................87 11.2 Guaranty Unconditional................................................87 11.3 Discharge only upon Payment in Full; Reinstatement in Certain Circumstances.........................................................88 11.4 Waiver by Parent......................................................88 11.5 Subrogation...........................................................89 11.6 Stay of Acceleration..................................................89 ARTICLE XII MISCELLANEOUS 12.1 Amendments and Waivers................................................89 12.2 Notices...............................................................90 12.3 No Waiver; Cumulative Remedies........................................91 12.4 Costs and Expenses....................................................91 12.5 Borrower Indemnification..............................................91 vi 12.6 Payments Set Aside....................................................92 12.7 Successors and Assigns................................................92 12.8 Assignments, Participations, etc......................................92 12.9 Confidentiality.......................................................94 12.10 Set-off..............................................................94 12.11 Notification of Addresses, Lending Offices, Etc......................95 12.12 Counterparts.........................................................95 12.13 Severability.........................................................95 12.14 No Third Parties Benefited...........................................95 12.15 Governing Law and Jurisdiction.......................................95 12.16 Waiver of Jury Trial.................................................95 12.17 Judgment.............................................................96 12.18 Entire Agreement.....................................................96 || SCHEDULES Schedule 1.1A U.S. Commitments and Pro Rata Shares Schedule 1.1B Canadian Commitments and Pro Rata Shares Schedule 1.1C Pricing Schedule Schedule 7.7 Litigation and Contingent Liabilities Schedule 7.9 Subsidiaries and Other Investments Schedule 7.10 Pension and Welfare Plans Schedule 7.18 Leased Premises Schedule 7.22 Labor Matters Schedule 8.7 Debt Schedule 8.8 Liens Schedule 12.2 Canadian and Domestic Lending Offices, Addresses for Notices vii EXHIBITS Exhibit A-1 Form of Notice of U.S. Dollar Borrowing Exhibit A-2 Form of Notice of Canadian Dollar Borrowing Exhibit A-3 Form of Notice of BA Borrowing Exhibit B-1 Form of Notice of Conversion/Continuation (U.S. Dollar Loans) Exhibit B-2 Form of Notice of Conversion/Continuation (Canadian Dollar Loans) Exhibit C Form of Compliance Certificate Exhibit D-1 Form of Opinion of U.S. Counsel Exhibit D-2 Form of Opinion of Ontario Counsel Exhibit D-3 Form of Opinion of Alberta Counsel Exhibit D-4 Form of Opinion of British Columbia Counsel Exhibit D-5 Form of Opinion of Nova Scotia Counsel Exhibit D-6 Form of Opinion of General Counsel Exhibit E-1 Form of Assignment and Acceptance (U.S. Facility) Exhibit E-2 Form of Assignment and Acceptance (Canadian Facility) Exhibit F-1 Form of Promissory Note (Company) Exhibit F-2 Form of Promissory Note (Parent) Exhibit F-3 Form of BA Equivalent Note Exhibit G-1 Form of U.S. Subsidiary Guaranty (U.S. Facility) Exhibit G-2 Form of U.S. Subsidiary Guaranty (Canadian Facility) Exhibit G-3 Form of Canadian Guaranty Exhibit H-1 Form of U.S. Security Agreement Exhibit H-2 Form of Canadian Security Agreement (Canadian Subsidiaries) Exhibit H-3 Form of Canadian Security Agreement (Parent) Exhibit I-1 Form of U.S. Pledge Agreement Exhibit I-2 Form of Canadian Pledge Agreement Exhibit J Form of Subordination Language Exhibit K Form of Request for Increase Exhibit L Form of Facility Assignment Agreement Exhibit M-1 Form of Assignment of Partnership Interests (Parent) Exhibit M-2 Form of Assignment of Partnership Interests (Ontario GP) viii AMENDED AND RESTATED CREDIT AGREEMENT This AMENDED AND RESTATED CREDIT AGREEMENT is entered into as of January 29, 1999 among CERI, L.P., a Delaware limited partnership (the "COMPANY"), CAPITAL ENVIRONMENTAL RESOURCE INC./RESSOURCES ENVIRONNEMENTALES CAPITAL INC., an Ontario corporation ("PARENT"), various financial institutions, CANADIAN IMPERIAL BANK OF COMMERCE, as Co-Agent, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BOFA"), as U.S. Agent, and BANK OF AMERICA CANADA ("BACAN"), as Canadian Agent. WHEREAS, Parent, various financial institutions and Dresdner Bank Canada, as agent (in such capacity, the "EXISTING AGENT"), entered into a Credit Agreement dated as of September 25, 1997 (as amended, the "EXISTING AGREEMENT"); and WHEREAS, pursuant to a Facility Assignment Agreement dated as of even date herewith substantially in the form of EXHIBIT L (the "FACILITY ASSIGNMENT AGREEMENT"), (i) Dresdner Bank Canada is assigning to BACAN, in its capacity as a lender, all of its loans under the Existing Agreement and (ii) the Existing Agent is assigning to BACAN, and BACAN is assuming, the rights and responsibilities as "Agent" under and as defined in the Existing Agreement; and WHEREAS, the parties hereto have agreed to amend and restate the Existing Agreement so as to, among other things, (a) add the Company as a "Borrower", (b) add BofA as "U.S. Agent" hereunder, (c) amend the pricing, various covenants and various other provisions of the Existing Agreement and (d) revise the composition of the lender group; and WHEREAS, the parties hereto intend that this Agreement and the Loan Documents executed in connection herewith not effect a novation of the obligations of Parent under the Existing Agreement and the "Documents" (as defined in the Existing Agreement), but merely a restatement and, where applicable, an amendment of the terms governing such obligations; and WHEREAS, the parties hereto desire to amend and restate the Existing Agreement in its entirety pursuant hereto; NOW, THEREFORE, in consideration of the mutual agreements contained herein, the parties agree as follows: ARTICLE I DEFINITIONS 1 1.1 CERTAIN DEFINED TERMS. The following terms have the following meanings: ACQUISITION means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger, consolidation or amalgamation or any other combination with another Person (other than a Person that is a Subsidiary); PROVIDED that (i) if Parent or the Company is involved in any such transaction, Parent or the Company, as the case may be, shall be the surviving entity (or, in the case of an amalgamation, the continuing or successor entity shall be liable for all obligations of Parent or the Company, as applicable, hereunder and under the other Loan Documents) and (ii) in the case of any other such transaction, the surviving, continuing or successor entity shall be a Subsidiary. AFFECTED LENDER - see SECTION 5.7. AFFILIATE means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities or membership interests, by contract, or otherwise. AGENT-RELATED PERSONS means either Agent and any successor thereto in such capacity hereunder, together with their respective Affiliates and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. AGENTS means the Canadian Agent and the U.S. Agent; and AGENT means the Canadian Agent or the U.S. Agent. AGREEMENT means this Credit Agreement. APPLICABLE AGENT means (a) with respect to matters relating to U.S. Dollar Loans made to the Company and Letters of Credit issued for the account of the Company, the U.S. Agent, and (b) with respect to matters relating to U.S. Dollar Loans made to Parent, Canadian Dollar Loans, Letters of Credit issued for the account of Parent, Bankers' Acceptances and BA Equivalent Notes, the Canadian Agent. APPLICABLE BORROWER means (a) with respect to U.S. Dollar Loans made by the U.S. Lenders and Letters of Credit issued by the U.S. Issuing Lender, the Company, and (b) with respect to U.S. Dollar Loans made by the Canadian Lenders, Canadian Dollar 2 Loans, Bankers' Acceptances, BA Equivalent Notes and Letters of Credit issued by the Canadian Issuing Lender, Parent. APPLICABLE LENDERS means (a) with respect to matters relating to U.S. Dollar Loans made to the Company and Letters of Credit issued for the account of the Company, the U.S. Lenders, and (b) with respect to matters relating to U.S. Dollar Loans made to Parent, Canadian Dollar Loans, Letters of Credit issued for the account of Parent, Bankers' Acceptances and BA Equivalent Notes, the Canadian Lenders. APPLICABLE MARGIN means the applicable rate per annum for a Loan set forth in SCHEDULE 1.1C. ARRANGER means NationsBanc Montgomery Securities LLC. ASSIGNEE - see SUBSECTION 12.8(A). ASSIGNMENT OF PARTNERSHIP INTERESTS - see SUBSECTION 6.1(M). ASSIGNMENT AND ACCEPTANCE - see SUBSECTION 12.8(A). ATTORNEY COSTS means and includes all reasonable fees and charges of any law firm or other external counsel and, without duplication, the reasonable allocated cost of internal legal services and all reasonable disbursements of internal counsel, including all such fees, charges and disbursements on a solicitor-client basis. BA BORROWING means Bankers' Acceptance and BA Equivalent Notes accepted or purchased by the Canadian Lenders in amounts substantially equivalent (subject to SUBSECTION 2.3.2(B)) to their respective Pro Rata Shares on the same day and for the same term. BA DISCOUNT PROCEEDS means, with respect to any Bankers' Acceptance or BA Equivalent Note, an amount calculated on the applicable Borrowing Date which is (rounded to the nearest full cent) equal to the face amount of such Bankers' Acceptance or BA Equivalent Note divided by the sum of one plus the product of (i) the BA Discount Rate applicable thereto multiplied by (ii) a fraction, the numerator of which is the term of such Bankers' Acceptance or BA Equivalent Note and the denominator of which is 365. BA DISCOUNT RATE means, subject to SUBSECTION 2.3.4(B), with respect to any Bankers' Acceptances or BA Equivalent Notes to be purchased by the Canadian Lenders on any Borrowing Date, (i) for each Canadian Lender that is a bank named in Schedule I to the Bank Act (Canada), the CDOR for bankers' acceptances having an identical maturity date and (if shown on the CDOR page of the Reuters screen) comparable 3 aggregate face amount to the maturity date and aggregate face amount of such Bankers' Acceptances, (ii) for each Canadian Lender that is not a bank named in Schedule I to the Bank Act (Canada), the arithmetic average (rounded upward, if necessary, to an integral multiple of 1/100 of 1%) of the discount rate of interest at which each BA Reference Lender is offering as of 10:00 a.m. (Toronto time) on such Borrowing Date to purchase bankers' acceptances accepted by it having an identical maturity date and comparable aggregate face amount to the maturity date and aggregate face amount of the applicable Bankers' Acceptance of such BA Reference Lender, as notified by such Lender to the Canadian Agent and (iii) for each Non-BA Lender, the lesser of (A) the CDOR plus 0.1% and (B) the annual interest rate which is the cost to such Non-BA Lender of obtaining Canadian Dollars to fund such purchase by it, as notified by such Lender to the Canadian Agent. BA EQUIVALENT NOTE - see SECTION 2.3.1. BA LENDER means any Canadian Lender which is a bank chartered under the Bank Act (Canada) and which has not notified the Canadian Agent in writing that it is unwilling or unable to accept Drafts as provided in SECTION 2.3. BA REFERENCE LENDERS means BACAN and any other Canadian Lender designated in writing from time to time by such Canadian Lender, Parent and the Canadian Agent; PROVIDED that if any such Person ceases to be a Canadian Lender, such Person should concurrently cease to be a BA Reference Lender. BACAN - see the introductory clause hereto. BANK ACT SECURITY means assignments of inventory and proceeds by Parent to and in favour of each Canadian Lender creating a first fixed charge on such assets pursuant to Section 427 of the Bank Act (Canada), together with all documents related or ancillary thereto. BANKERS' ACCEPTANCE means a Draft which has been accepted by a BA Lender as provided in SECTION 2.3. BASE RATE means, for any day, the higher of: (a) 0.50% per annum above the latest U.S. Federal Funds Rate; and (b) the per annum rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above or below such announced rate.) Any change in the reference rate announced by BofA shall 4 take effect at the opening of business on the day specified in the public announcement of such change. BASE RATE LOAN means a Loan that bears interest based on the Base Rate. BOFA - see the introductory clause hereto. BORROWER means the Company or Parent; and BORROWERS means the Company and Parent. BORROWING means a borrowing hereunder consisting of (a) U.S. Dollar Loans of the same Type made to the Applicable Borrower on the same day by the Applicable Lenders under SECTION 2.1 and, other than in the case of Base Rate Loans, having the same Interest Period, (b) Canadian Dollar Loans of the same Type made to Parent on the same day by the Canadian Lenders under SECTION 2.2 and, other than in the case of Prime Rate Loans, having the same Interest Period or (c) a BA Borrowing. A Borrowing may be a U.S. Dollar Borrowing, a Canadian Dollar Borrowing or a BA Borrowing. BORROWING DATE means any date on which a Borrowing occurs under SECTION 2.1.4 or SECTION 2.2.3 or on which the Canadian Lenders accept Drafts and/or purchase BA Equivalent Notes pursuant to SECTION 2.3.2. BUSINESS DAY means any day other than a Saturday, Sunday or other day on which commercial banks in Chicago (and in the case of disbursements and payments in Canadian Dollars and any matter relating to U.S. Dollar Loans to Parent or Bankers' Acceptances or BA Equivalent Notes, in Toronto, Canada and New York, New York) are authorized or required by law to close and, if the applicable Business Day relates to an Offshore Rate Loan, means such a day on which dealings in U.S. Dollars or Canadian Dollars, as applicable, are carried on in the London interbank market. CANADIAN AGENT means BACAN in its capacity as agent hereunder and under the other Loan Documents, as provided in ARTICLE X, and any successor Canadian Agent under SECTION 10.9. CANADIAN COMMITMENT means, with respect to any Canadian Lender, the commitment of such Canadian Lender to make Loans to Parent, to accept and purchase Bankers' Acceptances or to purchase BA Equivalent Notes, and to participate in Letters of Credit issued for the account of Parent in a Dollar Equivalent amount not exceeding the amount set forth for such Canadian Lender on SCHEDULE 1.1B, as such amount is adjusted from time to time in accordance with the terms hereof. As of the date of this Agreement, the Dollar Equivalent amount of the combined Canadian Commitments of all Canadian Lenders is U.S. $40,000,000. 5 CANADIAN COST OF FUNDS RATE means a rate per annum equal to the cost of funds of the Canadian Agent as established by the Canadian Agent based on its customary practice. CANADIAN DOLLAR BORROWING means a Borrowing consisting of Canadian Dollar Loans made by the Canadian Lenders to Parent ratably according to their respective Pro Rata Shares. CANADIAN DOLLARS and CDN. $ each mean lawful money of Canada. CANADIAN DOLLAR LOANS means any Prime Rate Loan or Offshore Canadian Dollar Loan made to Parent by a Canadian Lender under SECTION 2.2. All Canadian Dollar Loans shall be made in Canadian Dollars. CANADIAN GUARANTOR means (a) as of the Closing Date, each Canadian Subsidiary listed on SCHEDULE 7.9 (other than Lacey Garbage Disposal Ltd. and Nova Scotia Sub) and (b) thereafter, the entities referred to in CLAUSE (A) and each other Person which from time to time executes and delivers a Canadian Guaranty (other than any of the foregoing which is released from its obligations under the applicable Guaranty in accordance with the terms hereof). CANADIAN GUARANTY - see SUBSECTION 6.1(E). CANADIAN ISSUING LENDER means BACAN in its capacity as Issuer of one or more Letters of Credit for the account of Parent hereunder, together with any replacement therefor pursuant to SECTION 10.9. CANADIAN L/C COMMITMENT means the commitment of the Canadian Issuing Lender to Issue, and the commitment of the Canadian Lenders severally to participate in, Letters of Credit from time to time Issued for the account of Parent under ARTICLE IV, in an aggregate Effective Amount not to exceed on any date an amount equal to the lesser of a Dollar Equivalent amount of U.S. $20,000,000 and the amount of the combined Canadian Commitments; IT BEING UNDERSTOOD that the Canadian L/C Commitment is a part of the combined Canadian Commitments, rather than a separate, independent commitment. CANADIAN LENDER means each Lender listed on SCHEDULE 1.1B under the heading "Canadian Lender" and any other Lender that may from time to time hold Loans made to Parent and/or accept a Bankers' Acceptance and/or hold a BA Equivalent Note. CANADIAN PLAN means a pension plan established by Parent or any Canadian Subsidiary for any of its employees which is not subject to ERISA. 6 CANADIAN PLEDGE AGREEMENT - see SUBSECTION 6.1(J) . CANADIAN SECURITY AGREEMENT - see SUBSECTION 6.1(H). CANADIAN SUBSIDIARY means any Subsidiary of Parent which is organized under the federal laws of Canada or the laws of any province thereof. CAPITAL ADEQUACY REGULATION means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case regarding capital adequacy of any bank or of any corporation controlling a bank. CASH COLLATERALIZE means, with respect to either Borrower, to pledge and deposit with or deliver to the Applicable Agent, for the benefit of such Agent and the Applicable Lenders, as collateral for the applicable Obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Applicable Agent. Derivatives of such term shall have corresponding meanings. Each Borrower hereby grants the Applicable Agent, for the benefit of such Agent and the Applicable Lenders, a security interest in any such cash and deposit account balances. Cash Collateral shall be maintained in blocked, deposit accounts at the Applicable Agent or an Affiliate thereof. CASH EQUIVALENT INVESTMENT means, at any time, (a) any evidence of Debt, maturing not more than one year after such time, issued or guaranteed by the United States Government, the Canadian Government or any agency or province thereof, (b) commercial paper, certificates of deposit (or time deposits represented by certificates of deposit) or bankers' acceptances, maturing not more than one year from the date of issue, or corporate demand notes, in each case (unless issued by a Lender or its holding company) rated at least A-l by Standard & Poor's Ratings Group or P-l by Moody's Investors Service, Inc. or R-1 by Dominion Bond Rating Service Limited, (c) any certificate of deposit (or time deposits represented by such certificates of deposit) or banker's acceptance, maturing not more than one year after such time, that is issued or sold by any Lender or a commercial banking institution that is a member of the Federal Reserve System or is a Schedule I Canadian bank and has a combined capital and surplus and undivided profits of not less than a Dollar Equivalent amount of U.S.$500,000,000, (d) any repurchase agreement entered into with any Lender (or other commercial banking institution of the stature referred to in CLAUSE (C)) which (i) is secured by a fully perfected security interest in any obligation of the type described in any of CLAUSES (A) through (C) and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such Lender (or other commercial banking institution) thereunder and (e) investments in short-term asset management accounts offered by any Lender for the purpose of investing in loans to any corporation (other than Parent or an Affiliate of Parent), state, province or municipality, in each case organized 7 under the laws of any state of the United States or of the District of Columbia or of any province or territory of Canada. CDOR means, for any day, the average of the annual discount rates (rounded upward to the nearest 1/100 of 1%) for bankers' acceptances denominated in Canadian Dollars for a specified term and, if shown, the aggregate face amount that appears on the CDOR page of the Reuters Screen as of 10:30 a.m. (Toronto time) on such day (or, if such day is not a Business Day, as of 10:30 a.m. (Toronto time) on the immediately preceding Business Day), all as determined by the Canadian Agent. CHANGE OF CONTROL means (a) any Person or group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, but excluding the Permitted Shareholders) shall acquire beneficial ownership (within the meaning of Rule 13d-3 promulgated under such Act) of 20% or more of the outstanding shares of common stock of Parent (and, prior to a Qualifying IPO, shall have beneficial ownership of more outstanding shares of common stock than the Permitted Shareholders collectively); or (b) during any 24-month period, individuals who at the beginning of such period constituted Parent's Board of Directors (together with any new directors whose election by Parent's Board of Directors or whose nomination for election by Parent's shareholders was approved by a vote of a majority of the directors who either were directors at beginning of such period or whose election or nomination was previously so approved) cease for any reason to constitute a majority of the Board of Directors of Parent. CLOSING DATE means the date on which all conditions precedent to the effectiveness hereof set forth in SECTION 6.1 are satisfied or waived by all Lenders. CODE means the Internal Revenue Code of 1986. COLLATERAL means any property on which or in which a lien is granted to the U.S. Agent, the Canadian Agent or any Lender pursuant to any Collateral Document. COLLATERAL DOCUMENTS means the U.S. Security Agreement, each Canadian Security Agreement, the U.S. Pledge Agreement, each Canadian Pledge Agreement, the Bank Act Security, each Assignment of Partnership Interests and any other document pursuant to which any Loan Party grants a Lien to either Agent or any Lender to secure any obligations hereunder or under any other Loan Document . COMMITMENT means, as to each Lender, the amount set forth opposite such Lender's name on SCHEDULE 1.1A or SCHEDULE 1.1B (or both), as adjusted from time to time in accordance with the terms of this Agreement. COMPANY - see the introductory clause hereto. 8 COMPANY OUTSTANDINGS means, with respect to any U.S. Lender, the aggregate principal amount of all outstanding Loans made by such U.S. Lender to the Company PLUS the amount of the participation of such U.S. Lender in the Effective Amount of all L/C Obligations of the Company. COMPUTATION DATE means the last Business Day of each calendar month AND (i) with respect to each Offshore Canadian Dollar Loan, the date on which Parent borrows such Loan and each date on which Parent converts or continues such Loan, (ii) with respect to each Prime Rate Loan, the date on which Parent borrows such Loan and each date on which Parent pays all or a portion of such Loan, (iii) with respect to any Bankers' Acceptance or BA Equivalent Note, the date of issuance or purchase thereof and the date of payment thereof, and (iv) with respect to each Letter of Credit issued for the account of Parent, the date on which such Letter of Credit is issued and on each date on which the Stated Amount of such Letter of Credit changes. COMPUTATION PERIOD means any period of four consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter. CONSOLIDATED NET INCOME means, with respect to Parent and its Subsidiaries for any period, the consolidated net income (or loss) of Parent and its Subsidiaries for such period (excluding any extraordinary, unusual or non-recurring items of income). CONTRACTUAL OBLIGATION means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. CONVERSION/CONTINUATION DATE means any Business Day on which (i) either Borrower converts Loans from one Type of U.S. Dollar Loans to the other Type, (ii) Parent converts Loans from one Type of Canadian Dollar Loans to the other Type or (iii) either Borrower continues Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. CREDIT EXTENSION means and includes (a) the making of any Loan hereunder, (b) the acceptance of any Draft or the purchase of any BA Equivalent Note hereunder and (c) the Issuance of any Letter of Credit hereunder. DEBT of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments, (b) all obligations of such Person as lessee under capital leases which have been recorded as liabilities on a balance sheet of such Person, (c) all obligations of such Person to pay the deferred purchase price of property or services (other than current 9 accounts payable in the ordinary course of business), (d) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person (it being understood that if such Person has not assumed or otherwise become personally liable for any such indebtedness, the amount of the Debt of such Person in connection therewith shall be limited to the lesser of the face amount of such indebtedness or the fair market value of all property of such Person securing such indebtedness), (e) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn) and bankers' acceptances issued for the account of such Person, (f) liabilities of such Person in respect of Hedging Agreements, and (g) all Suretyship Liabilities (other than Suretyship Liabilities in respect of operating leases of other Persons) of such Person. DOLLAR EQUIVALENT means, at any time, (a) as to any amount denominated in U.S. Dollars, the amount thereof at such time, and (b) as to any amount denominated in Canadian Dollars, the equivalent amount in U.S. Dollars as determined by the Canadian Agent at such time on the basis of the Spot Rate for the purchase of U.S. Dollars with such Canadian Dollars. DRAFT - see SECTION 2.3.1. EBITDA means, with respect to any Computation Period, Consolidated Net Income before deducting Interest Expense, taxes, depreciation and amortization for such period, but excluding pooling charges and, for any Computation Period ending on or prior to September 30, 1999, a Dollar Equivalent amount of U.S.$602,000 non-cash extraordinary charge related to the write-off of start-up and integration costs, all calculated on a PRO FORMA basis (as certified by Parent to the U.S. Agent) assuming that each Acquisition made during such Computation Period had been made on the first day of such Computation Period (calculated to exclude non-recurring private company expenses which are discontinued upon any such Acquisition (as certified by Parent and agreed to by the U.S. Agent)). EFFECTIVE AMOUNT means, with respect to the outstanding L/C Obligations of a Borrower on any date, the aggregate Dollar Equivalent amount of such L/C Obligations on such date after giving effect to any Issuances of Letters of Credit occurring on such date and any other changes in the aggregate Dollar Equivalent amount of the L/C Obligations as of such date, including as a result of any reimbursement of outstanding unpaid drawings under any Letter of Credit or any reduction in the maximum amount available for drawing under any Letter of Credit taking effect on such date. ENVIRONMENTAL LAWS means all applicable federal, state, provincial or local statutes, laws, ordinances, codes, rules, regulations, guidelines, orders and judgments (including consent decrees and administrative orders) relating to any hazardous, toxic or 10 dangerous substance or material, public health and safety, the protection of the environment, land use, chemical use, pollution, sanitation or the health and welfare of any plant or animal. ERISA means the Employee Retirement Income Security Act of 1974. EURODOLLAR RESERVE PERCENTAGE means, for any day for any Interest Period, (a) in the case of Loans made by the U.S. Lenders, the maximum reserve percentage (expressed as a decimal, rounded upward, if necessary, to an integral multiple of 1/100th of 1%) in effect on such day (whether or not applicable to any Lender) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"); and (b) in the case of Loans made by the Canadian Lenders, the maximum reserve percentage (expressed as a decimal, rounded upward, if necessary, to an integral multiple of 1/100th of 1%) in effect on such day (whether or not applicable to any Lender) under regulations issued from time to time by the Bank of Canada or any other relevant Governmental Authority in Canada for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding. EVENT OF DEFAULT means any event or circumstance specified in SECTION 9.1. EXISTING AGENT - see the RECITALS. EXISTING AGREEMENT - see the RECITALS. FACILITY ASSIGNMENT AGREEMENT - see the RECITALS. FINANCIAL LETTER OF CREDIT means any standby Letter of Credit (a) determined by the U.S. Agent to be a "financial guaranty-type Standby Letter of Credit" as defined in footnote 13 to Appendix A to the Risk Based Capital Guidelines issued by the Comptroller of the Currency (or in any successor regulation, guideline or ruling by any applicable banking regulatory authority) or (b) determined by the Canadian Agent to be a "direct credit substitute" having a 100% conversion factor for purposes of Section A.4.1, Categories of Off-Balance Sheet Instruments, of Guideline A, Capital Adequacy Requirements, of the Guidelines for Banks issued by the Office of the Superintendent of Financial Institutions (Canada) (or for purposes of any successor regulation, guideline or ruling by any applicable Governmental Authority). FISCAL QUARTER means a fiscal quarter of a Fiscal Year. 11 FISCAL YEAR means the fiscal year of Parent and its Subsidiaries, which period shall be the 12-month period ending on December 31 of each year. References to a Fiscal Year with a number corresponding to any calendar year (e.g., "Fiscal Year 1998") refer to the Fiscal Year ending on December 31 of such calendar year. FOREIGN SUBSIDIARY means any Subsidiary (i) organized under the laws of a jurisdiction other than the United States or a state thereof or Canada or a province or territory thereof and (ii) which conducts substantially all of its business and operations outside of the United States and Canada. FRB means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. FUNDED DEBT means all Debt of Parent and its Subsidiaries, excluding (i) contingent obligations in respect of undrawn letters of credit and Suretyship Liabilities (except to the extent constituting contingent obligations under letters of credit supporting, or Suretyship Liabilities in respect of, Debt of a Person other than Parent or any Subsidiary), (ii) liabilities under Hedging Agreements and (iii) Debt of Parent to Subsidiaries and Debt of Subsidiaries to Parent or to other Subsidiaries. GAAP means U.S. generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. GOVERNMENTAL AUTHORITY means any nation or government, any state or province or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. GUARANTOR means each U.S. Guarantor and each Canadian Guarantor. GUARANTY means each of each U.S. Guaranty and the Canadian Guaranty. HAZARDOUS MATERIAL means any hazardous, toxic or dangerous substance or material defined as such in (or for purposes of) any Environmental Law. 12 HEDGING AGREEMENT means any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices. HONOR DATE - see SUBSECTION 4.3(B). INDEMNIFIED LIABILITIES - see SECTION 12.5. INDEMNIFIED PERSON - see SECTION 12.5. INSOLVENCY PROCEEDING means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up, compromise, arrangement or relief of debtors (including any proceeding under the U.S. Bankruptcy Code, the Bankruptcy and Insolvency Act (Canada), the Companies' Creditor's Arrangement Act (Canada) or any similar legislation in any jurisdiction) or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other similar arrangement in respect of such Person's creditors generally or any substantial portion of such creditors. INTEREST COVERAGE RATIO means the ratio for any Computation Period of (a) Consolidated Net Income before deducting Interest Expense, taxes, depreciation and amortization for such period, but excluding pooling charges and, for any Computation Period ending on or prior to September 30, 1999, a Dollar Equivalent amount of U.S.$602,000 non-cash extraordinary charge related to the write-off of start-up and integration costs to (b) Interest Expense. INTEREST EXPENSE means, for any period, the consolidated interest expense of Parent and its Subsidiaries for such period (including all imputed interest on capital leases but excluding interest paid in kind on subordinated or convertible subordinated debt that is not repayable in cash prior to the date which is 91 days after the scheduled Termination Date). INTEREST PAYMENT DATE means (a) as to any Offshore Rate Loan, the last day of each Interest Period applicable to such Loan (and, if any Interest Period exceeds three months, the three-month anniversary of the first day of any such Interest Period) and at maturity and (b) as to any Base Rate Loan or Prime Rate Loan, the last Business Day of each calendar month and at maturity. INTEREST PERIOD means, as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or the Conversion/Continuation Date on which such 13 Loan is converted into or continued as an Offshore U.S. Dollar Loan or Offshore Canadian Dollar Loan, as applicable, and ending on the date one, two, three or six months thereafter as selected by the Applicable Borrower in its Notice of U.S. Dollar Borrowing, Notice of Canadian Dollar Borrowing or Notice of Conversion/Continuation, as the case may be; PROVIDED that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period for an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period for any Loan shall extend beyond (x) prior to consummation of a Qualifying IPO, January 10, 2000; and (y) thereafter, the scheduled Termination Date. INVESTMENT means, relative to any Person, (a) any loan or advance made by such Person to any other Person (excluding any commission, travel or similar advance made in the ordinary course of business to directors, officers and employees of such Person or any of its Subsidiaries), (b) any Suretyship Liability of such Person, (c) any ownership or similar interest held by such Person in any other Person and (d) deposits and the like relating to prospective acquisitions of businesses. IRS means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. ISSUANCE DATE - see SUBSECTION 4.1(A). ISSUE means, with respect to any Letter of Credit, to issue or to extend the expiry of, or to renew or increase the amount of, such Letter of Credit; and the terms "ISSUED," "ISSUING" and "ISSUANCE" have corresponding meanings. ISSUING LENDER means the Canadian Issuing Lender or the U.S. Issuing Lender; and ISSUING LENDERS means the Canadian Issuing Lender and the U.S. Issuing Lender. JVS means J.V. Services of Western N.Y., Inc., a New York corporation. 14 JVS SECURED PARTIES - see SECTION 8.27. L/C ADVANCE means each Lender's participation in any L/C Borrowing in accordance with its Pro Rata Share. L/C AMENDMENT APPLICATION means an application form for amendment of an outstanding standby letter of credit as shall at any time be in use at the applicable Issuing Lender, as such Issuing Lender shall specify. L/C APPLICATION means an application form for issuance of a standby letter of credit as shall at any time be in use by the applicable Issuing Lender, as such Issuing Lender shall specify. L/C BORROWING means an extension of credit resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date when made nor converted into a Borrowing of Loans under SUBSECTION 4.3(C). L/C OBLIGATIONS means, with respect to a Borrower at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit issued for the account of such Borrower, plus (b) the amount of all unreimbursed drawings under all Letters of Credit issued for the account of such Borrower, including all outstanding L/C Borrowings. L/C-RELATED DOCUMENTS means the Letters of Credit, the L/C Applications, the L/C Amendment Applications and any other document executed by a Borrower relating to any Letter of Credit. LENDER means each of the financial institutions identified on the signature pages hereof and their respective permitted successors and assigns. References to the "Lenders" shall include each of BofA and BACAN in its capacity as an Issuing Lender; for purposes of clarification only, to the extent that BofA or BACAN may have any rights or obligations in addition to those of the other Lenders due to its status as an Issuing Lender, its status as such will be specifically referenced. LENDING OFFICE means, as to any Lender, the office or offices of such Lender specified as its "Lending Office" or "Domestic Lending Office" or "Canadian Lending Office", as the case may be, on SCHEDULE 12.2, or such other office or offices as shall be making or maintaining any Loan hereunder. LETTER OF CREDIT means any standby letter of credit Issued by an Issuing Lender pursuant to ARTICLE IV. 15 LIBOR means for any Interest Period: (a) In the case of Offshore U.S. Dollar Loans, the rate at which U.S. Dollar deposits in the approximate amount of the Offshore U.S. Dollar Loan of the Applicable Agent included in the related Borrowing, and having a maturity comparable to such Interest Period, are offered by BofA to major banks in the London eurocurrency market at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. (b) In the case of Offshore Canadian Dollar Loans, the rate per annum (rounded upward, if necessary, to an integral multiple of 1/100 of 1%) appearing on the Dow Jones Market Service (formerly Telerate Access Service) Page 3740 (or any successor page) as the London interbank offered rate for deposits in Canadian Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period for a term comparable to such Interest Period. If for any reason the rate described in the foregoing sentence is not available, then such offered rate shall be determined by the Canadian Agent from an alternate, substantially similar independent source available to the Canadian Agent or shall be calculated by the Canadian Agent by a substantially similar methodology as that theretofore used to determine such offered rate on Dow Jones Market Service in the London interbank eurodollar market for a term comparable to such Interest Period and in an amount equal to or comparable to the principal amount of the Offshore Canadian Dollar Loan of the Canadian Agent included in the related Borrowing. LIEN means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or similar preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, or any financing lease having substantially the same economic effect as any of the foregoing, but not including the interest of a lessor under an operating lease). LOAN or LOANS means (a) one or more loans by a Lender to the Applicable Borrower pursuant to SECTION 2.1 (which may be Base Rate Loans or Offshore U.S. Dollar Loans), (b) one or more loans by a Canadian Lender to Parent pursuant to SECTION 2.2 (which may be Prime Rate Loans or Offshore Canadian Dollar Loans), (c) amounts made available to an Agent for the account of an Issuing Lender by a Lender pursuant to SUBSECTION 4.3(C), (d) any borrowing by a Borrower pursuant to SUBSECTION 5.2(B) or (e) one or more loans by a Lender to the Applicable Borrower pursuant to SECTION 5.5. LOAN DOCUMENTS means this Agreement, the Notes, the Bankers' Acceptances, the BA Equivalent Notes, the Guaranties, the Collateral Documents, the L/C-Related 16 Documents and all other documents delivered to either Agent or any Lender in connection herewith. LOAN PARTIES means Parent, the Company and each other Guarantor. MARGIN STOCK means "margin stock" as such term is defined in Regulation T, U or X of the FRB. MATERIAL ADVERSE EFFECT means a material adverse effect on (a) the financial condition, operations, business or assets of Parent and its Subsidiaries taken as a whole or (b) the ability of Parent, the Company or any other Subsidiary to timely and fully perform any of its payment or other material obligations under this Agreement or any other Loan Document to which it is a party. MATERIAL ENVIRONMENTAL EVENT means any event or condition relating to Hazardous Materials or resulting from a breach of any Environmental Law which is reasonably likely to result in liability to Parent and/or any Subsidiary during the term of this Agreement in an amount greater than a Dollar Equivalent amount of U.S.$1,000,000 for any single such event or condition or a Dollar Equivalent amount of U.S.$2,000,000 when combined with all other such events or conditions. NET WORTH means Parent's consolidated stockholders' equity plus, to the extent not included in such shareholders' equity in accordance with GAAP, all common and preferred stock (excluding Redeemable Equity Interests issued after the date of this Agreement) as shown on Parent's consolidated balance sheet. NON-BA LENDER means any Canadian Lender which is not a BA Lender. NON-FINANCIAL LETTER OF CREDIT means any standby Letter of Credit other than a Financial Letter of Credit. NOTE means a promissory note executed by a Borrower in favor of a Lender pursuant to SECTION 3.2, in substantially the form of EXHIBIT F-1 or F-2, as applicable. NOTICE OF BA BORROWING means a notice by Parent in substantially the form of EXHIBIT A-3 requesting the acceptance of Bankers' Acceptances and the purchase of BA Equivalent Notes. NOTICE OF CANADIAN DOLLAR BORROWING means a notice by Parent in substantially the form of EXHIBIT A-2 requesting Canadian Dollar Loans. 17 NOTICE OF CONVERSION/CONTINUATION means a notice by a Borrower in substantially the form of EXHIBIT B-1 (in the case of a notice pursuant to SECTION 2.1.5) or EXHIBIT B-2 (in the case of a notice pursuant to SECTION 2.2.5). NOTICE OF U.S. DOLLAR BORROWING means a notice by a Borrower in substantially the form of EXHIBIT A-1 requesting U.S. Dollar Loans. NOVA SCOTIA SUB means 3020378 Nova Scotia Company, a Nova Scotia corporation. OBLIGATIONS means all advances, debts, liabilities, obligations, covenants and duties arising under this Agreement or any other Loan Document owing by either Borrower to any Lender, either Agent or any Indemnified Person, whether absolute or contingent, due or to become due, or now existing or hereafter arising. OFFSHORE CANADIAN DOLLAR LOAN means any Canadian Dollar Loan that bears interest based on the Offshore Rate. OFFSHORE RATE means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward, if not an integral multiple of 1/16 or 1/100 of 1%, to an integral multiple of 1/100 of 1%) determined by the Applicable Agent as follows: Offshore Rate = LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage OFFSHORE RATE LOAN means any Offshore U.S. Dollar Loan or Offshore Canadian Dollar Loan. OFFSHORE U.S. DOLLAR LOAN means any U.S. Dollar Loan that bears interest based on the Offshore Rate. ONTARIO GP means 1312654 Ontario Inc., an Ontario corporation. ORGANIZATION DOCUMENTS means (i) for any corporation, the certificate or articles of incorporation, any memorandum and articles, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights or other shareholders' agreement (including any unanimous shareholders' agreement or declaration), and all applicable resolutions of the shareholders and/or the board of directors (or any committee thereof) of such corporation, (ii) for any partnership or joint venture, the partnership or joint venture agreement and any other organizational document of such entity, (iii) for any limited liability company, 18 the certificate or articles of organization, the operating agreement and any other organizational document of such limited liability company, (iv) for any trust, the declaration of trust, the trust agreement and any other organizational document of such trust and (v) for any other entity, the document or agreement pursuant to which such entity was formed and any other organizational document of such entity. OTHER TAXES means any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document. PARENT - see the introductory clause hereto. PARENT OUTSTANDINGS means, with respect to any Canadian Lender, the aggregate principal Dollar Equivalent amount of all outstanding Loans made by such Canadian Lender to Parent PLUS the amount of the participation of such Canadian Lender in the Effective Amount of all L/C Obligations of Parent PLUS the Dollar Equivalent face amount of all Bankers' Acceptances accepted by such Canadian Lender or BA Equivalent Notes purchased by such Canadian Lender. PARTICIPANT - see SUBSECTION 12.8(C). PAYMENT OFFICE means (i) in respect of payments in U.S. Dollars, the address for payments set forth on SCHEDULE 12.2 for the Applicable Agent or such other address as the Applicable Agent may from time to time specify in accordance with SECTION 12.2; and (ii) in the case of payments in Canadian Dollars, the address for payments set forth on SCHEDULE 12.2 for the Canadian Agent or such other address as the Canadian Agent may from time to time specify in accordance with SECTION 12.2. PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any of its principal functions under ERISA. PENSION PLAN means a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to title IV of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which Parent, the Company or any corporation, trade or business that is, along with Parent or the Company, a member of a controlled group of corporations or a controlled group of trades or businesses, as described in section 414 of the Code, or section 4001 of ERISA, may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. 19 PERMITTED ACQUISITION - see SECTION 8.11. PERMITTED SHAREHOLDERS means (a) Lynn Bishop, Tony Busseri, Kenneth Leung, Allard Loopstra, William Eeuwes, Elizabeth Joy Grahek, any member of the immediate family of any of the foregoing, any trust which is solely for the benefit of any of the foregoing and/or members of the immediate family of any of the foregoing, and any corporation or other entity of which at least 66 2/3% of the outstanding equity interests having the right to vote for the board of directors (or equivalent governing body) are owned by any of the foregoing, members of their immediate families and/or trusts described above; (b) CERI Investors, L.P.; (c) Environmental Opportunities Fund (Cayman), L.P.; (d) Environmental Opportunities Fund II (Institutional), L.P.; (e) Environmental Opportunities Fund III, L.P.; and (f) Environmental Opportunities Fund, L.P. PERSON means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. PRIME RATE means, for any day, the higher of: (a) 0.50% per annum above the average 30 day bankers' acceptance rate that appears on the CDOR page of the Reuters screen at or about 10:30 a.m. (Toronto time) on such day as determined by the Canadian Agent; and (b) the per annum rate of interest in effect for such day as publicly announced from time to time by BACAN in Toronto, Ontario as its "prime rate." (The "prime rate" is a rate set by BACAN based upon various factors including BACAN's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the prime rate announced by BACAN shall take effect at the opening of business on the day specified in the public announcement of such change. PRIME RATE LOAN means a Canadian Dollar Loan that bears interest based on the Prime Rate. PRO RATA SHARE means, as to any Lender at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of: (a) in the case of a U.S. Lender, (i) such Lender's U.S. Commitment divided by (ii) the combined U.S. Commitments of all the U.S. Lenders, and (b) in the case of a Canadian Lender, (i) such Lender's Canadian Commitment divided by (ii) the combined Canadian Commitments of all the Canadian Lenders. 20 QUALIFYING IPO means an initial public offering of the common stock of Parent which results in net cash proceeds to Parent of a Dollar Equivalent amount of U.S.$25,000,000 or more and after which Parent's common stock is traded on a nationally-recognized securities exchange in the United States or Canada. REDEEMABLE EQUITY INTEREST means, with respect to Parent or any Subsidiary, any preferred stock or other equity interest in such Person that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or otherwise (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise or (b) is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, in either case prior to the date which is 100 days after the scheduled Termination Date. REPLACEMENT LENDER - see SECTION 5.7. REQUIRED CANADIAN LENDERS means Canadian Lenders then holding at least 66- 2/3% of the amount of the combined Canadian Commitments. REQUIRED LENDERS means Lenders then holding at least 66-2/3% of the amount of the combined U.S. Commitments and Canadian Commitments; PROVIDED that such Lenders include U.S. Lenders then holding at least 51% of the amount of the combined U.S. Commitments and Canadian Lenders then holding at least 51% of the amount of the combined Canadian Commitments. REQUIRED U.S. LENDERS means U.S. Lenders then holding at least 66-2/3% of the amount of the combined U.S. Commitments. REQUIREMENT OF LAW means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. SAME DAY FUNDS means (i) with respect to disbursements and payments in U.S. Dollars, immediately available funds, and (ii) with respect to disbursements and payments in Canadian Dollars, same day or other funds as may be determined by the Canadian Agent to be customary in the place of disbursement or payment for the settlement of international banking transactions in Canadian Dollars. SEC means the Securities and Exchange Commission. SELLER SUBORDINATED DEBT means unsecured indebtedness of Parent or the Company that: 21 (a) is subordinated, substantially on the terms set forth in EXHIBIT J or other terms that are more favorable to the Agents and the Lenders, in right of payment to the payment in full in cash of the Loans and all other amounts owed under the Loan Documents (whether or not matured or due and payable), including amounts required to provide cash collateral for the Letters of Credit; and (b) represents all or part of the purchase price payable by Parent or the Company in connection with a transaction described in SUBSECTION 8.11(C). SENIOR DEBT means all Funded Debt of Parent and its Subsidiaries other than Subordinated Debt. SENIOR DEBT TO EBITDA RATIO means, as of the last day of any Fiscal Quarter, the ratio of (i) Senior Debt as of such day to (ii) EBITDA for the Computation Period ending on such day. SPOT RATE for a currency means the rate quoted by BACAN as the spot rate for the purchase by BACAN of such currency with another currency in accordance with its customary procedures at approximately 10:30 a.m. (Toronto time) on the date as of which the foreign exchange computation is made. STAMPING FEE RATE means the applicable rate per annum for accepting a Bankers' Acceptance or purchasing a BA Equivalent Note set forth in SCHEDULE 1.1C. SUBORDINATED DEBT means (i) Seller Subordinated Debt, (ii) Debt of Parent existing on the Closing Date and designated as Subordinated Debt on SCHEDULE 8.7, and (iii) any other Debt of Parent or the Company which has no amortization prior to March 31, 2002 and has subordination terms and other terms satisfactory to the Agents and the Required Lenders. SUBSIDIARY of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests is owned or controlled directly or indirectly by such Person, or by one or more of the Subsidiaries of such Person, or by a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of Parent. SURETYSHIP LIABILITY means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to or otherwise to invest in a debtor, or otherwise to assure a creditor against loss) any indebtedness, obligation or other liability of any other Person (other than by 22 endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Suretyship Liability shall (subject to any limitation set forth therein) be deemed to be the principal amount of the debt, obligation or other liability guaranteed thereby. The indemnity obligations of a Person in respect of a performance bond issued for its own account do not constitute Suretyship Liabilities. TAXES means any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of a Lender and an Agent, such taxes (including income taxes or franchise taxes) as are imposed on or measured by such Lender's or such Agent's, as the case may be, net income or capital by the jurisdiction (or any political subdivision thereof) under the laws of which such Lender or such Agent, as the case may be, is organized or maintains a lending office. TERMINATION DATE means January 28, 2002; PROVIDED that if a Qualifying IPO is not completed on or before September 30, 1999, then (effective on and after September 30, 1999), TERMINATION DATE shall mean January 10, 2000. TOTAL COMPANY OUTSTANDINGS means the combined Company Outstandings of all U.S. Lenders. TOTAL DEBT TO EBITDA RATIO means as of the last day of any Fiscal Quarter, the ratio of: (i) all Funded Debt of Parent and its Subsidiaries as of such day to (ii) EBITDA for the Computation Period ending on such day. TOTAL PARENT OUTSTANDINGS means the combined Parent Outstandings of all Canadian Lenders. TYPE of Loan means (a) in the case of U.S. Dollar Loans, a Base Rate Loan or an Offshore U.S. Dollar Loan; and (b) in the case of Canadian Dollar Loans, a Prime Rate Loan or an Offshore Canadian Dollar Loan. UNITED STATES and U.S. each means the United States of America. UNMATURED EVENT OF DEFAULT means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. U.S. AGENT means BofA in its capacity as agent hereunder and under the other Loan Documents, as provided in ARTICLE X, and any successor U.S. Agent arising under SECTION 10.9. 23 U.S. COMMITMENT means, with respect to any U.S. Lender, the commitment of such U.S. Lender to make Loans to the Company and to participate in Letters of Credit issued for the account of the Company in a Dollar Equivalent amount not exceeding the amount set forth for such U.S. Lender on SCHEDULE 1.1A, as such amount is adjusted from time to time in accordance with the terms hereof. As of the date of this Agreement, the Dollar Equivalent amount of the combined U.S. Commitments of all U.S. Lenders is U.S. $25,000,000. U.S. DOLLAR BORROWING means a Borrowing consisting of U.S. Dollar Loans made by the Applicable Lenders to a particular Borrower ratably according to their respective Pro Rata Shares. U.S. DOLLAR LOAN means any Base Rate Loan or Offshore U.S. Dollar Loan made to either Borrower under SECTION 2.1. All U.S. Dollar Loans shall be made in U.S. Dollars. U.S. Dollar Loans made to the Company shall be made by the U.S. Lenders under the U.S. Commitment. U.S. Dollar Loans made to Parent shall be made by the Canadian Lenders under the Canadian Commitment. U.S. DOLLARS and U.S.$ each means lawful money of the United States. U.S. FEDERAL FUNDS RATE means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the U.S. Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the U.S. Agent. U.S. GUARANTIES - see SUBSECTION 6.1(D). U.S. GUARANTOR means (a) as of the Closing Date, the Company, each other U.S. Subsidiary of Parent listed on SCHEDULE 7.9 and Nova Scotia Sub and (b) thereafter, the entities referred to in CLAUSE (A) and each other Person which from time to time executes and delivers a counterpart of a U.S. Guaranty (other than any of the foregoing which is released from its obligations under the applicable Guaranty in accordance with the terms hereof). U.S. ISSUING LENDER means BofA in its capacity as issuer of one or more Letters of Credit for the account of the Company hereunder, together with any replacement therefor pursuant to SECTION 10.9. 24 U.S. L/C COMMITMENT means the commitment of the U.S. Issuing Lender to Issue, and the commitment of the U.S. Lenders severally to participate in, Letters of Credit from time to time Issued for the account of the Company under ARTICLE IV, in an aggregate Effective Amount not to exceed on any date the lesser of U.S.$20,000,000 and the amount of the combined U.S. Commitments; IT BEING UNDERSTOOD that the U.S. L/C Commitment is a part of the combined U.S. Commitments, rather than a separate, independent commitment. U.S. LENDER means each Lender listed on SCHEDULE 1.1A under the heading "U.S. Lender" and any other Lender that may from time to time hold Loans made to the Company. U.S. PLEDGE AGREEMENT - see SUBSECTION 6.1(I). U.S. SECURITY AGREEMENT - see SUBSECTION 6.1(G). U.S. SUBSIDIARY means each Subsidiary of Parent which (a) is organized under the laws of the United States or a state thereof and (b) conducts substantially all of its business and operations in the United States. WELFARE PLAN means an "employee welfare benefit plan" as such term is defined in section 3(1) ERISA. 1.2 OTHER INTERPRETIVE PROVISIONS. (a) The meanings of defined terms are equally applicable to the singular and plural forms of such terms. (b) SECTION, SUBSECTION, SCHEDULE and EXHIBIT references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding"; and the word "through" means "to and including." 25 (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of this Agreement, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Subject to the foregoing, if there is any inconsistency between the terms of this Agreement and any other Loan Document, the provisions of this Agreement shall prevail to the extent of such inconsistency (but the foregoing shall not apply to limit or restrict in any way the rights and remedies of the Agents or the Lenders under the Collateral Documents in connection with the enforcement of the Liens created thereby). (g) This Agreement is the result of negotiations among and has been reviewed by counsel to the Agents, the Borrowers and the other parties, and is the product of all parties. Accordingly, this Agreement shall not be construed against the Lenders or the Agents merely because of the Lenders' or the Agents' involvement in their preparation. 1.3 ACCOUNTING PRINCIPLES. Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied; PROVIDED that if Parent notifies the U.S. Agent that Parent wishes to amend any covenant in ARTICLE VIII to eliminate the effect of any change in GAAP on the operation of such covenant (or if the U.S. Agent notifies Parent that the Required Lenders wish to amend ARTICLE VIII for such purpose), then Parent's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to Parent and the Required Lenders. 1.4 REALLOCATION OF LOANS TO PARENT. (a) The Borrowers, the Lenders and the Agents agree that (i) this Agreement amends and restates in its entirety the Existing Agreement and (ii) concurrently with the effectiveness hereof, the Canadian Commitments shall be reallocated in accordance with the terms hereof and each Canadian Lender shall have a Pro Rata Share of all outstanding Canadian Dollar Loans. 26 (b) To facilitate the reallocation described in CLAUSE (A), concurrently with the effectiveness hereof, (i) all loans under the Existing Agreement shall be deemed to be Canadian Dollar Loans hereunder, (ii) each Canadian Lender shall transfer to the Canadian Agent an amount equal to the excess, if any, of such Canadian Lender's Pro Rata Share of all outstanding Canadian Dollar Loans hereunder after giving effect hereto OVER the amount of such Canadian Lender's loans under the Existing Agreement immediately prior to giving effect hereto (but after giving effect to the Facility Assignment Agreement) and (iii) the Canadian Agent shall apply the funds received from the applicable Canadian Lenders pursuant to CLAUSE (II) to purchase from each applicable Canadian Lender the excess (if any) of the amount of such Canadian Lender's loans under the Existing Agreement immediately prior to giving effect hereto (but after giving effect to the Facility Assignment Agreement) OVER such Canadian Lender's Pro Rata Share of all outstanding Canadian Dollar Loans hereunder after giving effect hereto, so that each Canadian Lender shall have a Pro Rata Share of all outstanding Canadian Dollar Loans. ARTICLE II THE CREDITS 2.1 U.S. DOLLAR BORROWINGS. 2.1.1 COMMITMENTS TO MAKE U.S. DOLLAR LOANS TO THE COMPANY. Each U.S. Lender severally agrees, on the terms and conditions set forth herein, to make U.S. Dollar Loans to the Company from time to time, on any Business Day during the period from the Closing Date to the Termination Date, in an aggregate amount not to exceed at any time outstanding such U.S. Lender's Pro Rata Share of the amount of the combined U.S. Commitments; PROVIDED that, after giving effect to any Borrowing of U.S. Dollar Loans by the Company, the Total Company Outstandings shall not exceed the amount of the combined U.S. Commitments; and PROVIDED, FURTHER, that the Company Outstandings of any U.S. Lender shall not at any time exceed such U.S. Lender's U.S. Commitment. 2.1.2 COMMITMENTS TO MAKE U.S. DOLLAR LOANS TO PARENT. Each Canadian Lender severally agrees, on the terms and conditions set forth herein, to make U.S. Dollar Loans to Parent from time to time, on any Business Day during the period from the Closing Date to the Termination Date, in an aggregate amount not to exceed at any time outstanding such Canadian Lender's Pro Rata Share of the amount of the combined Canadian Commitments; PROVIDED that, after giving effect to any Borrowing of U.S. Dollar Loans by Parent, the Total Parent Outstandings shall not exceed the amount of the combined Canadian Commitments; and PROVIDED, FURTHER, that the Parent Outstandings of any Canadian Lender shall not at any time exceed such Canadian Lender's Canadian Commitment. 27 2.1.3 ABILITY TO REBORROW. Within each of the limits set forth in SECTIONS 2.1.1 and 2.1.2, and subject to the other terms and conditions hereof, each Borrower may borrow under this SECTION 2.1, prepay under SECTION 2.1.6 and reborrow under this SECTION 2.1. 2.1.4 PROCEDURE FOR U.S. DOLLAR BORROWINGS. (a) Each Borrowing of U.S. Dollar Loans shall be made upon Parent's or the Company's irrevocable written notice delivered to the U.S. Agent, in the case of a Borrowing by the Company, or to the Canadian Agent, in the case of a Borrowing by Parent, in each case in the form of a Notice of U.S. Dollar Borrowing, which notice must be received by the Applicable Agent, prior to 11:00 a.m. (Chicago time) (i) three Business Days prior to the requested Borrowing Date, in the case of Offshore U.S. Dollar Loans, and (ii) on the requested Borrowing Date, in the case of Base Rate Loans, specifying: (A) the amount of such Borrowing, which shall be in the amount of U.S.$1,000,000 or a higher integral multiple of U.S.$100,000, in the case of Offshore U.S. Dollar Loans, and U.S.$500,000 or a higher integral multiple of U.S.$100,000, in the case of Base Rate Loans; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising such Borrowing; and (D) in the case of Offshore U.S. Dollar Loans, the duration of the Interest Period therefor. (b) The Applicable Agent will promptly notify each Applicable Lender of its receipt of any Notice of U.S. Dollar Borrowing and of the amount of such Lender's Pro Rata Share of such U.S. Dollar Borrowing. (c) Each Applicable Lender will make the amount of its Pro Rata Share of each U.S. Dollar Borrowing available to the Applicable Agent for the account of the Applicable Borrower at the Applicable Agent's Payment Office by 2:00 p.m. (Chicago time) on the Borrowing Date requested by the Applicable Borrower in funds immediately available to the Applicable Agent. The proceeds of such U.S. Dollar Borrowing will then be made available to the Applicable Borrower by the Applicable Agent at such office by crediting an account of the Applicable Borrower maintained with BofA or BACAN, as applicable, with the aggregate of the amounts made available to the Applicable Agent by the Applicable Lenders in like funds as received by the Applicable Agent. (d) After giving effect to any Borrowing, there may not be more than six different Interest Periods in effect for all U.S. Dollar Borrowings. 28 2.1.5 CONVERSION AND CONTINUATION ELECTIONS FOR U.S. DOLLAR BORROWINGS. (a) Either Borrower may, upon irrevocable written notice to the Applicable Agent in accordance with SUBSECTION 2.1.5(B): (i) elect to convert, on any Business Day, any Base Rate Loans (in an aggregate minimum amount of U.S.$1,000,000 or a higher integral multiple of U.S.$100,000) into Offshore U.S. Dollar Loans; (ii) elect to convert, on the last day of the applicable Interest Period, any Offshore U.S. Dollar Loans (or any part thereof in an aggregate minimum amount of U.S.$500,000 or a higher integral multiple of U.S.$100,000) into Base Rate Loans; or (iii) elect to continue, as of the last day of the applicable Interest Period, any Offshore U.S. Dollar Loans having Interest Periods expiring on such day (or any part thereof in an aggregate minimum amount of U.S.$1,000,000 or a higher integral multiple of U.S.$100,000); PROVIDED that if at any time the aggregate amount of Offshore U.S. Dollar Loans in respect of any U.S. Dollar Borrowing shall have been reduced, by payment, prepayment or conversion of part thereof, to be less than U.S.$1,000,000, such Offshore U.S. Dollar Loans shall automatically convert into Base Rate Loans. (b) The Applicable Borrower shall deliver a Notice of Conversion/ Continuation to be received by the Applicable Agent not later than 11:00 a.m. (Chicago time) at least (i) three Business Days in advance of the Conversion/Continuation Date, if U.S. Dollar Loans are to be converted into or continued as Offshore U.S. Dollar Loans; and (ii) on the Conversion/Continuation Date, if U.S. Dollar Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of U.S. Dollar Loans to be converted or continued; (C) the Type of U.S. Dollar Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore U.S. Dollar Loans, the Applicable Borrower has failed to select timely a new Interest Period to be 29 applicable to such Offshore U.S. Dollar Loans, the Applicable Borrower shall be deemed to have elected to convert such Offshore U.S. Dollar Loans into Base Rate Loans effective as of the expiration date of such Interest Period. (d) The Applicable Agent will promptly notify each Applicable Lender of its receipt of a Notice of Conversion/Continuation or, if no timely notice is provided by the Applicable Borrower, the Applicable Agent will promptly notify each Applicable Lender of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the U.S. Dollar Loans held by each Applicable Lender with respect to which such notice was given. (e) Unless the Required U.S. Lenders otherwise agree, during the existence of an Event of Default or Unmatured Event of Default, the Company may not elect to have any U.S. Dollar Loan converted into or continued as an Offshore U.S. Dollar Loan. (f) Unless the Required Canadian Lenders otherwise agree, during the existence of an Event of Default or Unmatured Event of Default, Parent may not elect to have any U.S. Dollar Loans converted into or continued as an Offshore U.S. Dollar Loan. (g) After giving effect to any conversion or continuation of U.S. Dollar Loans, there may not be more than six different Interest Periods in effect for all U.S. Dollar Borrowings. 2.1.6 OPTIONAL PREPAYMENTS OF U.S. DOLLAR BORROWINGS. Subject to SECTION 5.4, either Borrower may, from time to time, ratably prepay any U.S. Dollar Loans in whole or in part, in an aggregate amount of U.S.$1,000,000 or a higher integral multiple of U.S.$100,000 in the case of Offshore U.S. Dollar Loans, and an aggregate amount of U.S.$500,000 or a higher integral multiple of U.S.$100,000 in the case of Base Rate Loans. The Applicable Borrower shall deliver a notice of prepayment in accordance with SECTION 12.2 to be received by the Applicable Agent not later than 12:00 noon (Chicago time) on the prepayment date (which shall be a Business Day). Each notice of prepayment shall specify the date and amount of such prepayment and the U.S. Dollar Loans to be prepaid. The Applicable Agent will promptly notify each Applicable Lender of its receipt of any such notice and of such Lender's Pro Rata Share of such prepayment. If any such notice is given by a Borrower, such Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with, in the case of Offshore U.S. Dollar Loans, accrued interest to such date on the amount prepaid and any amounts required pursuant to SECTION 5.4 with respect to such Offshore U.S. Dollar Loans. 2.1.7 REPAYMENT OF U.S. DOLLAR BORROWINGS. The Borrowers shall repay all outstanding U.S. Dollar Loans on the Termination Date. 30 2.2 CANADIAN DOLLAR BORROWINGS. 2.2.1 COMMITMENTS TO MAKE CANADIAN DOLLAR LOANS TO PARENT. Each Canadian Lender agrees, on the terms and conditions set forth herein, to make Canadian Dollar Loans to Parent from time to time on any Business Day during the period from the Closing Date to the Termination Date, in an aggregate principal amount at any time outstanding not to exceed such Canadian Lender's Pro Rata Share of the amount of the combined Canadian Commitments; PROVIDED that, after giving effect to any Canadian Dollar Borrowing, the Total Parent Outstandings shall not exceed the combined Canadian Commitments; and PROVIDED, FURTHER, that the Parent Outstandings of any Canadian Lender shall not at any time exceed such Canadian Lender's Canadian Commitment. 2.2.2 ABILITY TO REBORROW. Within the limits set forth in SECTION 2.2.1, and subject to the other terms and conditions hereof, Parent may borrow under this SECTION 2.2, prepay under SECTION 2.2.5 and reborrow under this SECTION 2.2. 2.2.3 PROCEDURE FOR CANADIAN DOLLAR BORROWINGS. (a) Each Canadian Dollar Borrowing shall be made upon Parent's irrevocable written notice delivered to the Canadian Agent in the form of a Notice of Canadian Dollar Borrowing, which notice must be received by the Canadian Agent prior to (i) 12:00 noon (Toronto time) three Business Days prior to the requested Borrowing Date, in the case of Offshore Canadian Dollar Loans; and (ii) 9:00 a.m. (Toronto time) on the requested Borrowing Date, in the case of Prime Rate Loans, specifying: (A) the amount of the Canadian Dollar Borrowing, which shall be in an aggregate amount not less than Cdn.$1,000,000 or a higher integral multiple of Cdn.$500,000, in the case of Offshore Canadian Dollar Loans, and Cdn.$500,000 or a higher integral multiple of Cdn.$100,000, in the case of Prime Rate Loans; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Canadian Dollar Borrowing; and (D) in the case of a Borrowing of Offshore Canadian Dollar Loans, the duration of the Interest Period therefor. (b) The Canadian Agent will promptly notify each Canadian Lender of its receipt of any Notice of Canadian Dollar Borrowing and of the amount of such Lender's Pro Rata Share of such Canadian Dollar Borrowing. (c) Each Canadian Lender will make the amount of its Pro Rata Share of each Canadian Dollar Borrowing available to the Canadian Agent for the account of Parent at the Canadian Agent's Payment Office by 1:00 p.m. (Toronto time) on the Borrowing Date requested by Parent 31 in Same Day Funds. The proceeds of such Canadian Dollar Borrowing will then be made available to Parent by the Canadian Agent at such office by crediting an account of Parent maintained with BACAN with the aggregate of the amounts made available to the Canadian Agent by the Canadian Lenders in like funds as received by the Canadian Agent. (d) After giving effect to any Canadian Dollar Borrowing, there may not be more than four different Interest Periods in effect in respect of all Canadian Dollar Loans then outstanding. 2.2.4 CONVERSION AND CONTINUATION ELECTIONS FOR CANADIAN DOLLAR BORROWINGS. (a) Parent may, upon irrevocable written notice to the Canadian Agent in accordance with SUBSECTION 2.2.4(B): (i) elect, as of any Business Day, in the case of Prime Rate Loans, or as of the last day of the applicable Interest Period, in the case of Offshore Canadian Dollar Loans, to convert any Canadian Dollar Loans (or any part thereof in an amount not less than Cdn.$1,000,000 or a higher integral multiple of Cdn.$500,000, in the case of conversion into Offshore Canadian Dollar Loans, and not less than Cdn.$500,000 or a higher integral multiple of Cdn.$100,000, in the case of conversion into Prime Rate Loans) into Canadian Dollar Loans of the other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Offshore Canadian Dollar Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than Cdn.$1,000,000 or a higher integral multiple of Cdn.$500,000); PROVIDED that if at any time the aggregate amount of Offshore Canadian Dollar Loans in respect of any Canadian Dollar Borrowing is reduced, by payment, prepayment or conversion of part thereof, to be less than Cdn.$1,000,000, such Offshore Canadian Dollar Loans shall automatically convert into Prime Rate Loans. (b) Parent shall deliver a Notice of Conversion/Continuation to be received by the Canadian Agent not later than (i) 12:00 noon (Toronto time) at least three Business Days prior to the Conversion/Continuation Date, if the Canadian Dollar Loans are to be converted into or continued as Offshore Canadian Dollar Loans; and (ii) 9:00 a.m. (Toronto time) on the Conversion/Continuation Date, if the Canadian Dollar Loans are to be converted into Prime Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Canadian Dollar Loans to be converted or continued; 32 (C) the Type of Canadian Dollar Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Prime Rate Loans, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Canadian Dollar Loans, Parent has failed to select timely a new Interest Period to be applicable to such Offshore Canadian Dollar Loans, Parent shall be deemed to have elected to convert such Offshore Canadian Dollar Loans into Prime Rate Loans effective as of the expiration date of such Interest Period. (d) The Canadian Agent will promptly notify each Canadian Lender of its receipt of a Notice of Conversion/Continuation pursuant to this SECTION 2.2.5 or, if no timely notice is provided by Parent, the Canadian Agent will promptly notify each Canadian Lender of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Canadian Dollar Loans held by each Canadian Lender. (e) Unless the Required Canadian Lenders otherwise agree, during the existence of an Event of Default or Unmatured Event of Default, Parent may not elect to have any Canadian Dollar Loan converted into or continued as an Offshore Canadian Dollar Loan. (f) After giving effect to any conversion or continuation of Canadian Dollar Loans, there may not be more than four different Interest Periods in effect in respect of all Canadian Dollar Loans together then outstanding. 2.2.5 OPTIONAL PREPAYMENTS OF CANADIAN DOLLAR BORROWINGS. Subject to SECTION 5.4, Parent may, from time to time, ratably prepay any Canadian Dollar Loans in whole or in part, in an aggregate amount of Cdn.$1,000,000 or a higher integral multiple of Cdn.$500,000 in the case of Offshore Canadian Dollar Loans, and an aggregate amount of Cdn.$500,000 or a higher integral multiple of Cdn.$100,000 in the case of Prime Rate Loans. Parent shall deliver a notice of prepayment in accordance with SECTION 12.2 to be received by the Canadian Agent not later than (i) 12:00 noon (Toronto time) three Business Days in advance of the prepayment date in the case of Offshore Canadian Dollar Loans and (ii) 10:00 a.m. (Toronto time) on the prepayment date in the case of Prime Rate Loans. Each notice of prepayment shall specify the date and amount of such prepayment and the Canadian Dollar Loans to be prepaid. The Canadian Agent will promptly notify each Canadian Lender of its receipt of any such notice and of such Lender's Pro Rata Share of such prepayment. If any such notice is given by Parent, such Parent shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with, in the case of Offshore Canadian Dollar 33 Loans, accrued interest to such date on the amount prepaid and any amounts required pursuant to SECTION 5.4. 2.2.6 REPAYMENT OF CANADIAN DOLLAR BORROWINGS. Parent shall repay all outstanding Canadian Dollar Loans on the Termination Date. 2.3 BANKERS' ACCEPTANCES AND BA EQUIVALENT NOTES. 2.3.1 COMMITMENTS TO ACCEPT DRAFTS AND PURCHASE BA EQUIVALENT NOTES. Each Canadian Lender severally agrees, on the terms and conditions set forth herein, (i) in the case of a BA Lender, to accept drafts (each such draft, a "DRAFT") drawn by Parent upon such BA Lender and (ii) in the case of a Non-BA Lender, to purchase non-interest-bearing promissory notes of Parent in favor of such Non-BA Lender (each such promissory note, a "BA EQUIVALENT NOTE"), in each case in an aggregate face amount not to exceed at any time outstanding such Canadian Lender's Pro Rata Share of the amount of the combined Canadian Commitments; PROVIDED that, after giving effect to any BA Borrowing, the Total Parent Outstandings shall not exceed the combined Canadian Commitments; and PROVIDED, FURTHER, that the Parent Outstandings of any Canadian Lender shall not at any time exceed such Canadian Lender's Canadian Commitment. 2.3.2 PROCEDURE FOR BANKERS' ACCEPTANCES. (a) Each BA Borrowing shall be made upon Parent's irrevocable written notice delivered to the Canadian Agent in the form of a Notice of BA Borrowing, which notice must be received by the Canadian Agent prior to 12:00 noon (Toronto time) one Business Day prior to the requested Borrowing Date, specifying: (i) the amount of such BA Borrowing, which shall be in an aggregate amount of not less than Cdn.$1,000,000 or a higher integral multiple of Cdn.$100,000; (ii) the requested Borrowing Date, which shall be a Business Day; (iii) the term for the Bankers' Acceptances and BA Equivalent Notes included in such BA Borrowing, which shall be 30, 60, 90 or 180 days (PROVIDED that such term may not extend beyond (x) prior to consummation of a Qualifying IPO, January 10, 2000, and (y) thereafter, the scheduled Termination Date); and (iv) whether the Notice of BA Borrowing specifies that the BA Lenders are to purchase the Bankers' Acceptances accepted by them. (b) The Canadian Agent will promptly notify each Canadian Lender of its receipt of any Notice of BA Borrowing and shall (i) advise each BA Lender of the face amount and term of each Draft to be accepted by it, (ii) advise each Non-BA Lender of the face amount and term of the BA Equivalent Note to be purchased by it and (iii) advise each Canadian Lender whether the BA Lenders are required by such Notice of BA Borrowing to purchase the Bankers' Acceptances 34 accepted by them. The term of all Bankers' Acceptances and BA Equivalent Notes issued pursuant to any Notice of BA Borrowing shall be identical. Each Bankers' Acceptance and BA Equivalent Note shall be dated the Borrowing Date on which it is issued and shall be in a face amount of Cdn.$100,000 or an integral multiple thereof. The aggregate face amount of the Drafts to be accepted at any time by a BA Lender, and the face amount of the BA Equivalent Note to be purchased at any time by a Non-BA Lender, shall be determined by the Canadian Agent based upon the amounts of the respective Canadian Commitments, except that, if the face amount of any Draft to be accepted by a BA Lender or of the BA Equivalent Note to be purchased by a Non-BA Lender, determined as aforesaid, would not be Cdn.$100,000 or an integral multiple thereof, the Canadian Agent in its sole discretion may increase such face amount to the nearest integral multiple of Cdn.$100,000 or may reduce such face amount to the nearest integral multiple of Cdn.$100,000. (c) Each BA Lender shall complete and accept on the applicable Borrowing Date Drafts having the face amounts and term advised by the Canadian Agent pursuant to SUBSECTION (B) above. If the BA Lenders have been required in the applicable Notice of BA Borrowing to purchase the Bankers' Acceptances accepted by them, each BA Lender shall purchase on the applicable Borrowing Date the Bankers' Acceptances accepted by it, for an aggregate price equal to the BA Discount Proceeds of such Bankers' Acceptances. In all other cases, it shall be the responsibility of Parent to arrange in accordance with normal market practice for the sale on each Borrowing Date of the Bankers' Acceptances issued by it on such Borrowing Date, and for such purpose Parent shall advise the Canadian Agent (which shall promptly give the relevant particulars to each BA Lender) as soon as possible and in any event not later than 10:00 a.m. (Toronto time) on such Borrowing Date of the price for each Bankers' Acceptance payable by the purchaser thereof and the identity of the person who will pay such price to and take delivery of such Bankers' Acceptance from the applicable BA Lender, and such BA Lender is hereby authorized to release such Bankers' Acceptance to such person on receipt of a certified cheque or bank draft in an amount equal to such price. (d) Each Non-BA Lender shall, in lieu of accepting Drafts or purchasing Bankers' Acceptances on any Borrowing Date, complete and purchase from Parent on such Borrowing Date a BA Equivalent Note in a face amount and for a term identical to the aggregate face amount and term of the Drafts which such Non-BA Lender would have been required to accept on such Borrowing Date if it were a BA Lender, for a price equal to the BA Discount Proceeds of such BA Equivalent Note. Each Non-BA Lender shall be entitled without charge to exchange any BA Equivalent Note held by it for two or more BA Equivalent Notes of identical date and aggregate face amount (subject to the minimum face amount specified in SUBSECTION (B) above), and Parent shall execute and deliver to the Canadian Agent (which shall then deliver to such Non-BA Lender) such BA Equivalent Notes upon not less than five Business Days prior written request therefor to Parent and delivery to Parent of the original BA Equivalent Note for cancellation. 35 (e) Upon acceptance of each Draft or purchase of each BA Equivalent Note, Parent shall pay to the applicable Canadian Lender the related fee specified in SECTION 2.5.3, and to facilitate payment such Canadian Lender shall be entitled to deduct and retain for its own account the amount of such fee from the amount to be transferred by such Canadian Lender to the Canadian Agent for the account of Parent pursuant to SUBSECTION 2.3.2(E) in respect of the sale of the related Bankers' Acceptance or of such BA Equivalent Note. (f) Each Canadian Lender shall transfer for value on each applicable Borrowing Date immediately available Canadian Dollars in an aggregate amount equal to the amount of all BA Discount Proceeds in respect of any Bankers' Acceptance or BA Equivalent Note purchased by it on such Borrowing Date and the amount of all proceeds received by it as contemplated by SUBSECTION 2.3.2(C) in respect of any Bankers' Acceptance accepted by it and purchased by a third party on such Borrowing Date, in each case net of the related fee payable to such Canadian Lender pursuant to SECTION 2.5.3, to the Canadian Agent's Payment Office. Subject to any direction given to the Canadian Agent by Parent, the Canadian Agent shall make all such amounts received by it from the Canadian Lenders as aforesaid available to Parent by depositing the same for value on the applicable Borrowing Date to such account in the name of Parent as Parent shall have previously designated by timely notice in writing to the Canadian Agent. (g) Notwithstanding any other provision hereof, for the purpose of determining the amount to be transferred by a BA Lender named in Schedule II to the Bank Act (Canada) to the Canadian Agent for the account of Parent pursuant to SUBSECTION (F) above in respect of the sale of any Bankers' Acceptance accepted by such BA Lender and purchased by a third party, the proceeds of sale thereof shall be deemed to be an amount equal to the BA Discount Proceeds calculated with respect thereto. Accordingly, in respect of any particular Bankers' Acceptance accepted by it and purchased by a third party, such BA Lender (i) shall be entitled to retain for its own account the amount, if any, by which the actual proceeds of sale thereof exceed the BA Discount Proceeds calculated with respect thereto and (ii) shall be required to pay from its own account to Parent the amount, if any, by which the actual proceeds of sale thereof is less than the BA Discount Proceeds calculated with respect thereto. 2.3.3 MATURITY OF BANKERS' ACCEPTANCES. On the date of maturity of each Bankers' Acceptance or BA Equivalent Note, Parent shall pay to the Canadian Agent, for the account of the Lender which accepted such Bankers' Acceptance or the holder of such BA Equivalent Note, Canadian Dollars in an amount equal to the face amount of such Bankers' Acceptance or BA Equivalent Note, as the case may be. The obligation of Parent to make such payment shall not be prejudiced by the fact that the holder of any such Bankers' Acceptance is the Canadian Lender that accepted such Bankers' Acceptance. No days of grace shall be claimed by Parent for the payment at maturity of any Bankers' Acceptance or BA Equivalent Note. If Parent does not make such payment, from the proceeds of Loans or the issuance of Bankers' Acceptances and/or BA Equivalent Notes hereunder or otherwise, the Canadian Lender that accepted such Bankers' Acceptance or initially purchased such BA Equivalent Note may (but shall not be obliged to), 36 without receipt of a Notice of Canadian Dollar Borrowing and irrespective of whether any other applicable conditions precedent specified herein have been satisfied, and without waiver of Parent's failure to make such payment, make a Prime Rate Loan to Parent in the face amount of such Bankers' Acceptance or BA Equivalent Note, as the case may be, and shall forthwith give notice thereof to Parent and the Canadian Agent (which shall promptly give similar notice to the other Canadian Lenders). Parent agrees to accept each such Prime Rate Loan and irrevocably authorizes and directs the applicable Canadian Lender to apply the proceeds thereof in payment of the liability of Parent with respect to the related Bankers' Acceptance or BA Equivalent Note. Notwithstanding any other provision hereof, all Prime Rate Loans made as contemplated by this SECTION 2.3.3 shall be payable on demand by the Canadian Agent or the Required Canadian Lenders. 2.3.4 SPECIAL PROVISIONS FOR BANKERS' ACCEPTANCES. (a) If the Canadian Agent determines in good faith, which determination shall be final, conclusive and binding upon Parent, and so notifies Parent, that there does not exist at the applicable time a normal market in Canada for the purchase and sale of bankers' acceptances, any right of Parent to require the Canadian Lenders to purchase Bankers' Acceptances and BA Equivalent Notes hereunder shall be suspended until the Canadian Agent determines that such market does exist and gives notice thereof to Parent, and any Notice of BA Borrowing shall be deemed to be a Notice of Canadian Dollar Borrowing requesting Prime Rate Loans in a similar aggregate principal amount. (b) If any BA Reference Lender is unable or otherwise fails to provide notice of a rate to the Canadian Agent when required hereunder, the Canadian Agent shall have the right to designate in a timely manner another Canadian Lender for the sole purpose of providing notice of such rate, failing which the applicable BA Discount Rate shall be determined on the basis of the rates provided in the notices from the remaining BA Reference Lenders. If in any case all BA Reference Lenders fail to provide notice of a rate to the Canadian Agent when required hereunder, then the applicable BA Discount Rate shall be determined as the weighted average (rounded upward, if necessary, to an integral multiple of 1/16 of 1%) of the respective annual interest rates notified to the Canadian Agent by the Canadian Lenders that are required to make available the applicable Bankers' Acceptances or BA Equivalent Notes as being the best estimate of each such Canadian Lender of the cost to it of obtaining Canadian Dollars to fund such Bankers' Acceptances or BA Equivalent Notes. 2.3.5 POWER OF ATTORNEY FOR DRAFTS AND BA EQUIVALENT NOTES. To facilitate availment of Bankers' Acceptances and BA Equivalent Notes, Parent hereby appoints each Canadian Lender as its attorney to sign and endorse on its behalf (in accordance with a Notice of BA Borrowing), in handwriting or by facsimile or mechanical signature as and when deemed necessary by such Canadian Lender, blank forms of (a) in the case of a BA Lender, Drafts in the form requested by such Lender, and (b) in the case of a Non-BA Lender, BA Equivalent Notes in the form of EXHIBIT F-3. In this respect, it is each Canadian Lender's responsibility to maintain an adequate supply of blank forms of Drafts or BA Equivalent Notes for acceptance or purchase, as 37 applicable, under this Agreement. Parent recognizes and agrees that all Bankers' Acceptances and BA Equivalent Notes signed and/or endorsed by a Canadian Lender on behalf of Parent shall bind Parent as fully and effectually as if signed in the handwriting of and duly issued by the proper signing officers of Parent. Each Canadian Lender is hereby authorized (in accordance with a Notice of BA Borrowing) to issue such Bankers' Acceptances or BA Equivalent Notes, as appropriate, endorsed in blank in such face amounts as may be determined by such Canadian Lender; PROVIDED that the aggregate amount thereof is equal to the aggregate amount of Bankers' Acceptance or BA Equivalent Notes required to be accepted or purchased by such Canadian Lender. No Canadian Lender shall be liable for any damage, loss or other claim arising by reason of any loss or improper use of any such instrument, except to the extent resulting from the gross negligence or willful misconduct of such Canadian Lender or its officers, employees, agents or representatives. Each Canadian Lender shall maintain a record with respect to Bankers' Acceptances or BA Equivalent Notes (i) accepted and purchased by it hereunder; and (ii) canceled at maturity. 2.3.6 NON-USE FEE. For the purpose of calculating the unused amount of the Canadian Commitments pursuant to SUBSECTION 2.5.2(B) and for any other relevant provision of this Agreement, the amount of the Canadian Commitment of any Canadian Lender used by any Bankers' Acceptance or BA Equivalent Note shall at all times be the face amount thereof. 2.4 INTEREST. (a) Each U.S. Dollar Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate or the Base Rate, as the case may be, PLUS the Applicable Margin PLUS, in the case of Base Rate Loans to Parent, 0.5%. Each Canadian Dollar Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate or the Prime Rate, as the case may be, PLUS the Applicable Margin. (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date therefor. Interest also shall be paid on the date of any prepayment of Offshore Rate Loans under SECTION 2.1.6 or 2.2.6 for the portion of the Loans so prepaid. (c) Notwithstanding SUBSECTIONS (A) and (B) of this Section, if any amount of principal of any Loan is not paid in full when due (whether at stated maturity, by acceleration, demand or otherwise), each Borrower agrees, to the extent permitted by applicable law, to pay interest on such unpaid principal from the date such amount becomes due until the date such amount is paid in full, after as well as before any entry of judgment thereon, payable on demand, at a rate per annum equal to (i) in the case of principal due in respect of any Loan prior to the end of an Interest Period applicable thereto, the rate otherwise applicable to such Loan plus 2%, and (ii) in the case of any other amount, (x) in the case of a U.S. Dollar Loan, the Base Rate from time to time in effect plus the Applicable Margin plus 2%, and (y) in the case of a Canadian Dollar Loan, the Prime Rate from time to time in effect plus the Applicable Margin plus 2%. 38 (d) Anything herein to the contrary notwithstanding, the obligations of each Borrower to any Lender hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder to the extent (but only to the extent) that contracting for or receiving such payment by such Lender would be contrary to the provisions of any law applicable to such Lender limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Lender, and in such event the Applicable Borrower shall pay such Lender interest at the highest rate permitted by applicable law. (e) Notwithstanding any provision hereof, in no event shall the aggregate "interest" (as defined in section 347 of the CRIMINAL CODE (Canada)) payable by Parent hereunder exceed the effective annual rate of interest on the "credit advanced" (as defined in such section 347) hereunder lawfully permitted by such section 347, and if any payment, collection or demand pursuant to this Agreement in respect of "interest" (as defined in such section 347) is determined to be contrary to the provisions of such section 347, such payment, collection or demand shall be deemed to have been made by mutual mistake of Parent and the applicable Canadian Lender and the amount of such payment or collection shall be refunded to Parent. For the purposes of this Agreement, the effective annual rate of interest shall be determined in accordance with generally accepted actuarial practices and principles over the relevant term and, in the event of dispute, a certificate of a Fellow of the Canadian Institute of Actuaries appointed by the Canadian Agent will be PRIMA FACIA evidence of such rate. (f) For the purpose of the INTEREST ACT (Canada) and any other purpose, (i) the principle of deemed reinvestment of interest shall not apply to any calculation under this Agreement and (ii) the rates of interest and fees stipulated in this Agreement are intended to be nominal rates and effective rates or yields. 2.5 FEES. In addition to certain fees described in SECTION 4.8: 2.5.1 AGENCY AND ARRANGEMENT FEES. Parent agrees to pay to the Arranger, the U.S. Agent and the Canadian Agent such arrangement and agent's fees as are mutually agreed to from time to time by Parent, the Arranger and the Agents. 2.5.2 NON-USE FEES. (a) The Company shall pay to the U.S. Agent for the account of each U.S. Lender a non-use fee computed at the applicable rate per annum set forth in SCHEDULE 1.1C multiplied by the average daily amount of such U.S. Lender's unused U.S. Commitment. (b) Parent shall pay to the Canadian Agent for the account of each Canadian Lender a non-use fee at the applicable rate per annum set forth in SCHEDULE 1.1C multiplied by the average daily amount of such Canadian Lender's unused Canadian Commitment. For purposes of calculating such non-use fee, the Dollar Equivalent amount of each Canadian Dollar 39 Loan made to Parent, of each Bankers' Acceptance, of each BA Equivalent Note and of each Letter of Credit issued for the account of Parent shall be determined on each applicable Computation Date and shall remain constant until the next Computation Date. Notwithstanding the foregoing sentence, the Canadian Agent may use any other reasonable method (such as applying an average or constant exchange rate for a particular period against the Canadian Dollar amounts outstanding during such period) for purposes of determining the non-use fee so long as such method is disclosed to Parent and the Canadian Lenders. (c) The non-use fees described in SUBSECTIONS (A) and (B) above shall be computed on a quarterly basis in arrears on the last Business Day of each calendar quarter (or, if earlier, the Termination Date) by the Applicable Agent. Such non-use fees shall accrue from the Closing Date to the Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter, with the final payment to be made on the Termination Date. 2.5.3 BA FEES. Parent shall pay to each BA Lender in respect of each Draft tendered by Parent to and accepted by such BA Lender, and to each Non-BA Lender in respect of each BA Equivalent Note tendered to and purchased by such Non-BA Lender, as a condition of such acceptance or purchase, a fee in Canadian Dollars calculated at a rate per annum equal to the Stamping Fee Rate, on the basis of the face amount and the term of such Bankers' Acceptance or BA Equivalent Note (it being understood that Parent's obligation to make such payment shall be satisfied to the extent that the applicable Canadian Lender nets the amount of such fee against the amount to be transferred to the Agent in respect of the applicable Bankers' Acceptance or BA Equivalent Note, as contemplated by SUBSECTION 2.3.2(F)). 2.6 COMPUTATION OF FEES AND INTEREST. (a) All computations of interest on Prime Rate Loans, all computations of the Stamping Fee Rate and all computations of interest on Base Rate Loans when the Base Rate is determined by reference to BofA's "reference rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of interest and fees shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest and fees being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate or a Dollar Equivalent amount by the Applicable Agent, and each determination of the BA Discount Rate or the CDOR by the Canadian Agent, shall be conclusive and binding on the Borrowers and the Lenders in the absence of manifest error. The Applicable Agent will, at the request of the applicable Borrower or any Lender, deliver to such Borrower or such Lender, as the case may be, a statement showing the quotations or other information used by such Agent in determining any interest rate, Dollar Equivalent amount, BA Discount Rate or CDOR. 40 (c) For the purposes of the Interest Act (Canada), where any rate of interest is stated herein to be calculated on the basis of a 360-day year, the annual rate of interest to which such stated rate is equivalent is such stated rate, multiplied by the number of days in the year (being 365 or 366, as the case may be), and divided by 360. 2.7 MANDATORY PREPAYMENTS RESULTING FROM CURRENCY FLUCTUATIONS. If, on any Computation Date, the Total Parent Outstandings exceed the combined Canadian Commitments, THEN Parent shall immediately prepay Loans in an amount sufficient to eliminate such excess. Any such prepayment shall be made in accordance with the provisions of SECTION 2.2.6, except that such prepayment shall be required and not optional. If all applicable Loans have been repaid and any portion of such excess still exists, then Parent shall provide Cash Collateral for the applicable Letters of Credit and/or the outstanding Bankers' Acceptance and BA Equivalent Notes, in an amount at least equal to such remaining excess. 2.8 REDUCTION OR TERMINATION OF THE COMMITMENTS. 2.8.1 REDUCTION OR TERMINATION OF U.S. COMMITMENTS. The Company may from time to time on at least three Business Days' prior written notice received by the U.S. Agent (which shall promptly advise each U.S. Lender thereof) permanently reduce the amount of the combined U.S. Commitments to an amount not less than the Total Company Outstandings. Any such reduction shall be in an amount not less than U.S.$1,000,000 or a higher integral multiple of U.S.$1,000,000. The Company may at any time on like notice terminate the U.S. Commitments upon payment in full by the Company of all Loans to the Company and all other obligations of the Company hereunder and Cash Collateralization in full, pursuant to documentation in form and substance reasonably satisfactory to the U.S. Lenders, of all obligations (contingent or otherwise) arising with respect to the Letters of Credit issued for the account of the Company. 2.8.2 REDUCTION OR TERMINATION OF CANADIAN COMMITMENTS. Parent may from time to time on at least three Business Days' prior written notice received by the Canadian Agent (which shall promptly advise each Canadian Lender thereof) permanently reduce the amount of the combined Canadian Commitments to an amount not less than the Total Parent Outstandings. Any such reduction shall be in an amount not less than U.S.$1,000,000 or a higher integral multiple of U.S.$1,000,000. Parent may at any time on like notice terminate the combined Canadian Commitments upon payment in full by Parent of all Loans to Parent and all other obligations of Parent hereunder and Cash Collateralization in full, pursuant to documentation in form and substance reasonably satisfactory to the Canadian Lenders, of all obligations (contingent or otherwise) arising with respect to the Letters of Credit issued for the account of Parent and of all obligations of Parent in respect of outstanding Bankers' Acceptances and BA Equivalent Notes. 2.9 PAYMENTS BY THE BORROWERS. (a) All payments to be made by the Borrowers shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided 41 herein, all payments by the Borrowers shall be made to the Applicable Agent for the account of the Lenders at the applicable Payment Office and (i) with respect to principal of, interest on and any other amount relating to any Canadian Dollar Loan, any amount relating to any Bankers' Acceptance or BA Equivalent Note and any fees payable by Parent, shall be made in Canadian Dollars, and (ii) with respect to all other amounts payable hereunder, shall be made in U.S. Dollars. Such payments shall be made in Same Day Funds and (x) in the case of payments to the U.S. Agent, no later than 12:00 noon (Chicago time) on the date specified herein and (y) in the case of payments to the Canadian Agent, no later than 12:00 noon (Toronto time) on the date specified herein. The Applicable Agent will promptly distribute to each Applicable Lender its Pro Rata Share (or its other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by an Agent later than the time specified in CLAUSE (X) or (Y) above, as applicable, shall be deemed to have been received on the following Business Day, and any applicable interest shall continue to accrue. (b) Whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day (unless, in the case of a payment with respect to an Offshore Rate Loan, such following Business Day is the first Business Day of a calendar month, in which event such payment shall be made on the preceding Business Day), and such extension of time shall be included in the computation of interest or fees, as the case may be. (c) Unless the Applicable Agent receives notice from the Applicable Borrower prior to the date on which any payment is due to the Lenders (or any of them) that such Borrower will not make such payment in full as and when required, such Agent may assume that such Borrower has made such payment in full to such Agent on such date in Same Day Funds and such Agent may (but shall not be required to), in reliance upon such assumption, distribute to each Applicable Lender on such date the amount then due such Lender. If and to the extent the Applicable Borrower has not made such payment in full to such Agent, each Applicable Lender shall repay to such Agent on demand such amount distributed to such Lender, together with interest thereon at (i) in the case of a payment in Canadian Dollars, the Canadian Cost of Funds Rate, and (ii) in the case of a payment in U.S. Dollars, the U.S. Federal Funds Rate, in each case for each day from the date such amount is distributed to such Lender until the date repaid. 2.10 PAYMENTS BY THE LENDERS TO THE AGENTS. (a) Unless the Applicable Agent receives notice from a Lender at least one Business Day prior to the date of any Credit Extension that such Lender will not make available as and when required hereunder to such Agent for the account of the Applicable Borrower the amount of that Lender's Pro Rata Share of such Credit Extension (or, in the case of a Canadian Lender, the funds required to be made available by such Canadian Lender pursuant to SUBSECTION 2.3.2(E)), as applicable, such Agent may assume that such Lender has made such amount available to such Agent in Same Day Funds on the applicable Borrowing Date and such Agent may (but shall not be required to), in reliance upon 42 such assumption, make available to the Applicable Borrower on such date a corresponding amount. (b) If and to the extent any Lender shall not have made the full amount of any Loan available to the Applicable Agent in Same Day Funds on the applicable Borrowing Date, and such Agent in such circumstances has made available to the Applicable Borrower such amount, pursuant to SUBSECTION (A) above, such Lender shall on the Business Day following such Borrowing Date make such amount available to such Agent, together with interest at (i) in the case of a Canadian Dollar Loan, the Canadian Cost of Funds Rate, and (ii) in the case of a U.S. Dollar Loan, the U.S. Federal Funds Rate, in each case for each day during such period. If such amount is so made available, such payment to the Applicable Agent shall constitute such Lender's Loan as of the Borrowing Date for all purposes of this Agreement. If such amount is not made available to the Applicable Agent on the Business Day following the Borrowing Date, such Agent will notify the Applicable Borrower of such failure to fund and, upon demand by such Agent, such Borrower shall pay such amount to such Agent for such Agent's account, together with interest thereon for each day elapsed since the Borrowing Date at a rate per annum equal to the interest rate applicable at the time to the applicable U.S. Dollar Loans or Canadian Dollar Loans, as the case may be. (c) If and to the extent that any Canadian Lender shall not have made the full amount required pursuant to SUBSECTION 2.3.2(E) available to the Canadian Agent in Same Day Funds on the applicable Borrowing Date, and the Canadian Agent in such circumstances has made available to Parent such amount pursuant to SUBSECTION (A) above, the Canadian Agent shall be entitled to recover from Parent, on demand the corresponding amount made available by the Canadian Agent to Parent as aforesaid, together with interest thereon at the rate applicable hereunder to Prime Rate Loans. If, after the applicable Borrowing Date but prior to such time as the Canadian Agent has demanded repayment from Parent as permitted by the preceding sentence, the funds required to be made available by the applicable Canadian Lender are in fact received by the Canadian Agent, the Canadian Agent shall be entitled to retain such funds for its own account and the corresponding amount made available by the Canadian Agent to Parent on such Borrowing Date shall, notwithstanding the preceding sentence, be deemed to have been the proceeds of a Bankers' Acceptance or a BA Equivalent Note, as the case may be, made available by such Canadian Lender to Parent on such Borrowing Date and such Canadian Lender shall pay to the Canadian Agent on demand interest at the Canadian Cost of Funds Rate for the period from such Borrowing Date to the date on which such funds are received by the Canadian Agent. (d) A notice of an Agent submitted to any Lender with respect to amounts owing under SUBSECTION (B) or (C) above shall be conclusive absent manifest error. (e) The failure of any Lender to make any Loan on any Borrowing Date shall not relieve any other Lender of its obligation hereunder (if any) to make a Loan on such 43 Borrowing Date, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on any Borrowing Date. 2.11 SHARING OF PAYMENTS, ETC. (a) If, other than as expressly provided elsewhere herein, any U.S. Lender or Canadian Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset, enforcement of security or otherwise) on account of principal of or interest on any Loan, its participation in any Letter of Credit, any Bankers' Acceptance or BA Equivalent Note or any fees (exclusive of payments or recoveries under ARTICLE V) in excess of its applicable Pro Rata Share (or other share contemplated hereunder) of amounts received by all U.S. Lenders or Canadian Lenders, as the case may be, such Lender shall immediately (a) notify the Applicable Agent of such fact and (b) purchase from the other Applicable Lenders, in a manner to be reasonably specified by the Applicable Agent, such participations in the Loans held by them (and, if applicable, such sub-participations in the Letters of Credit and/or participations in Bankers' Acceptances and BA Equivalent Notes) as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery pro rata with each of the other Applicable Lenders; PROVIDED that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with an amount equal to such paying Lender's ratable share (according to the proportion of (i) the amount of such paying Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. Each Borrower agrees that any Lender so purchasing a participation from another Lender may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to SECTION 12.10) with respect to such participation as fully as if such Lender were the direct creditor of such Borrower in the amount of such participation. The Agents will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Lenders following any such purchases or repayments. (b) If, after any amount payable by either Borrower hereunder has not been paid when due and either (i) the Canadian Agent or any Canadian Lender has made any demand upon the Company or any other U.S. Guarantor (with, in the case of any Canadian Lender, a copy of such demand to each Agent) under a U.S. Guaranty or (ii) the U.S. Agent or any U.S. Lender has made any demand upon Parent under SECTION 11 (with, in the case of any U.S. Lender, a copy of such demand to each Agent), the U.S. Lenders as a group or the Canadian Lenders as a group shall obtain aggregate payments or other recoveries (whether voluntary, involuntary, by application of offset or otherwise) from or on behalf of the Borrowers on account of amounts payable hereunder in excess of such group's pro rata share (based upon the aggregate Dollar Equivalent amount then owed to all Lenders hereunder by the Borrowers, including amounts owed pursuant to SECTION 11) of all payments and other recoveries received by both groups of Lenders from or on behalf of the Borrowers, THEN the group of Lenders receiving such excess payment (the "BENEFITTED GROUP") shall immediately pay such excess to the U.S. Agent 44 (unless otherwise directed by the U.S. Agent) and the U.S. Agent shall distribute such excess to the other group of Lenders in the amount necessary to cause the Benefitted Group to share the excess payment or recovery ratably with the other group of Lenders; PROVIDED that if all or any part of the excess payment or other recovery is thereafter recovered from the Benefitted Group, then the other group shall repay to the U.S. Agent for the account of the Benefitted Group the amount necessary to ensure that each group of Lenders receives its pro rata share (based upon the Dollar Equivalent amount owed to all Lenders hereunder by the Borrowers, including amounts owed pursuant to SECTION 11) of payments or other recoveries received by each group of Lenders from or on behalf of the Borrowers. The obligation of each member of each group of Lenders to make its share of any payment required under this SUBSECTION (B) shall be several, and not joint or joint and several, and after giving effect to any such payment each group of Lenders shall make such other adjustments as shall be necessary under SUBSECTION (A) above. The provisions of this SUBSECTION (B) are solely for the benefit of the Lenders and are not for the benefit of (and may not be enforced by) any other Person. The Lenders may, without the consent of either Borrower or any other Person, make arrangements among themselves to amend or otherwise modify this SUBSECTION (B) and to establish different sharing arrangements with respect to payments by or on behalf of the Borrowers; PROVIDED that any such amendment, modification or sharing arrangement shall be consented to by all Lenders. 2.12 OPTIONAL INCREASE IN COMMITMENTS. Either Borrower may at any time, by means of a letter to the Applicable Agent substantially in the form of EXHIBIT K, request that the combined Canadian Commitments (in the case of Parent) or the combined U.S. Commitments (in the case of the Company) be increased by (a) increasing the Canadian Commitment or the U.S. Commitment, as applicable, of one or more Lenders which have agreed to such increase and/or (b) adding a bank or other financial institution (a "NEW LENDER") as a party hereto with a Canadian Commitment or a U.S. Commitment, as the case may be, in an amount agreed to by such New Lender; PROVIDED that (i) no Person shall be added as a party hereto without the written consent of each Agent (which shall not be unreasonably withheld) and (ii) in no event shall the aggregate amount of the combined Canadian Commitments or the combined U.S. Commitments exceed a Dollar Equivalent amount of U.S.$50,000,000 without, in each case, the written consent of all Lenders. Any increase in the combined Canadian Commitments or the combined U.S. Commitments pursuant to this SECTION 2.12 shall be effective three Business Days after the date on which the Applicable Agent has received and accepted the applicable increase letter in the form of Annex 1 to EXHIBIT K (in the case of an increase in the Canadian Commitment or the U.S. Commitment of an existing Lender) or assumption letter in the form of Annex 2 to EXHIBIT K (in the case of the addition of a New Lender as a party hereto) or on such other date as is agreed among the Applicable Borrower, the Applicable Agent and the applicable increasing Lender or New Lender. The Applicable Agent shall promptly notify the Applicable Borrower and the Lenders of any increase in the amount of the combined Canadian Commitments or the combined U.S. Commitments pursuant to this SECTION 2.12 and of the Commitment and Pro Rata Share of each Lender after giving effect thereto. Each Borrower acknowledges that, in order to maintain Loans (and, in the case of Parent, Bankers' Acceptances and BA Equivalent Notes) in 45 accordance with each Applicable Lender's Pro Rata Share, a reallocation of the Canadian Commitments or the U.S. Commitments as a result of a non-pro-rata increase in the combined Canadian Commitments or the combined U.S. Commitments may require prepayment of all or portions of certain Loans (and, in the case of Parent, of outstanding Bankers' Acceptances and BA Equivalent Notes) on the date of such increase (and any such prepayment shall be subject to the provisions of SECTION 5.4). ARTICLE III LOAN ACCOUNTS; NOTES 3.1 LOAN ACCOUNTS. The Loans made by each Lender and the Letters of Credit Issued by the Issuing Lenders shall be evidenced by one or more accounts or records maintained by the Applicable Agent, such Lender or the applicable Issuing Lender, as the case may be, in the ordinary course of business. The accounts or records maintained by the Applicable Agent, each Issuing Lender and each Lender shall be conclusive (absent manifest error) as to the amount of the Loans made by the Lenders to the Borrowers and the Letters of Credit Issued for the account of either Borrower, and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligations of the Borrowers hereunder to pay any amount owing with respect to any Loan or Letter of Credit. 3.2 NOTES. Upon the request of any Lender made through the Applicable Agent, the Loans made by such Lender to either Borrower may be evidenced by a Note issued by such Borrower, instead of loan accounts. Each such Lender may endorse on the schedules annexed to its applicable Note the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Applicable Borrower with respect thereto, and such Lender's record shall be conclusive (absent manifest error); PROVIDED that the failure of a Lender to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Applicable Borrower hereunder or under any such Note to such Lender. ARTICLE IV THE LETTERS OF CREDIT 4.1 THE LETTER OF CREDIT SUBFACILITY. (a) On the terms and conditions set forth herein, (i) each Issuing Lender agrees, (A) from time to time, on any Business Day during the period from the Closing Date to the Termination Date, to issue Letters of Credit for the account of Parent (or the joint account of Parent and a Canadian Subsidiary), in the case of the Canadian Issuing Lender, or the Company (or the joint account of the Company and any other U.S. Subsidiary), in 46 the case of the U.S. Issuing Lender, and to amend or renew Letters of Credit previously issued by it, in accordance with SUBSECTIONS 4.2(C) and (D), and (B) to honor properly drawn drafts under Letters of Credit issued by it; (ii) the U.S. Lenders severally agree to participate in Letters of Credit Issued for the account of the Company; PROVIDED that the U.S. Issuing Lender shall not be obligated to Issue Letters of Credit for the account of the Company, and no U.S. Lender shall be obligated to participate in any such Letter of Credit, if as of the date of Issuance of such Letter of Credit (the "ISSUANCE DATE") (1) the Total Company Outstandings exceed the amount of the combined U.S. Commitments; (2) the Company Outstandings of such U.S. Lender exceed such U.S. Lender's U.S. Commitment; or (3) the Effective Amount of all L/C Obligations of the Company exceeds the U.S. L/C Commitment; and (iii) the Canadian Lenders severally agree to participate in Letters of Credit Issued for the account of Parent; PROVIDED that the Canadian Issuing Lender shall not be obligated to Issue Letters of Credit for the account of Parent, and no Canadian Lender shall be obligated to participate in any such Letter of Credit, if as of the date of Issuance of such Letter of Credit (the "ISSUANCE DATE") (1) the Total Parent Outstandings exceed the amount of the combined Canadian Commitments; (2) Parent Outstandings of such Canadian Lender exceed such Canadian Lender's Canadian Commitment; or (3) the Effective Amount of all L/C Obligations of Parent exceeds the Canadian L/C Commitment. Within the foregoing limits, and subject to the other terms and conditions hereof, the Company's and Parent's ability to obtain Letters of Credit shall be fully revolving, and, accordingly, the Company and Parent may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit which have expired or which have been drawn upon and reimbursed. (b) No Issuing Lender shall have an obligation to Issue any Letter of Credit if: (i) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain such Issuing Lender from Issuing such Letter of Credit, or any Requirement of Law applicable to such Issuing Lender or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over such Issuing Lender shall prohibit, or request that such Issuing Lender refrain from, the Issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Issuing Lender with respect to such Letter of Credit any restriction, reserve or capital requirement (for which such Issuing Lender is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon such Issuing Lender any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which such Issuing Lender in good faith deems material to it; (ii) such Issuing Lender has received written notice from any Lender, the U.S. Agent, the Canadian Agent, Parent or the Company, on or prior to the Business Day prior to the requested date of Issuance of such Letter of Credit, that one or more of the applicable conditions contained in ARTICLE VI is not then satisfied; 47 (iii) the expiry date of such Letter of Credit is later than one year after the issuance thereof or, if earlier, the date which is 10 days prior to the scheduled Termination Date (without giving effect to any change of the Termination Date to January 10, 2000, if applicable), unless all of the Lenders have approved such expiry date in writing; (iv) such Letter of Credit does not provide for drafts, or is not otherwise in form and substance acceptable to the applicable Issuing Lender, or the Issuance of a Letter of Credit shall violate any applicable policy of such Issuing Lender; (v) such Letter of Credit is denominated in a currency other than U.S. Dollars (in the case of the U.S. Issuing Lender) or Canadian Dollars (in the case of the Canadian Issuing Lender); or (vi) such Letter of Credit is not a standby letter of credit. (c) The Lenders approve the Issuance by BofA of the back-up Letter of Credit to Dresdner Bank of Canada as contemplated by the Facility Assignment Agreement with an expiry date of January 13, 2000 and the Issuance by Bank of America Canada of the back-up Letter of Credit to Dresdner Bank of Canada as contemplated by the Facility Assignment Agreement with an expiry date of June 15, 2000. 4.2 ISSUANCE, AMENDMENT AND RENEWAL OF LETTERS OF CREDIT. (a) Each Letter of Credit shall be irrevocable and shall be issued upon the written request of Parent or the Company received by such Issuing Lender (with a copy sent by Parent or the Company to the Applicable Agent) at least five days (or such shorter time as the applicable Issuing Lender and the Applicable Agent may agree in a particular instance in their sole discretion) prior to the proposed date of Issuance. Each such request for Issuance of a Letter of Credit shall be by facsimile, confirmed immediately in an original writing, in the form of an L/C Application, and shall specify in form and detail satisfactory to the applicable Issuing Lender: (i) the proposed date of issuance of the Letter of Credit (which shall be a Business Day); (ii) the face amount of the Letter of Credit; (iii) the expiry date of the Letter of Credit; (iv) the name and address of the beneficiary thereof; (v) the documents to be presented by the beneficiary of the Letter of Credit in case of any drawing thereunder; (vi) the full text of any certificate to be presented by the beneficiary in case of any drawing thereunder; and (vii) such other matters as the applicable Issuing Lender may reasonably require. (b) At least two Business Days prior to the Issuance of any Letter of Credit, the applicable Issuing Lender will confirm with the Applicable Agent (by telephone or in writing) that the Applicable Agent has received a copy of the L/C Application or L/C Amendment Application from Parent or the Company and, if not, such Issuing Lender will provide the Applicable Agent with a copy thereof. Unless the applicable Issuing Lender has 48 received, on or before the Business Day immediately preceding the date on which such Issuing Lender is to issue a requested Letter of Credit, (A) notice from the Applicable Agent directing such Issuing Lender not to issue such Letter of Credit because such issuance is not then permitted under SUBSECTION 4.1(A)(II) or SUBSECTION 4.1(A)(III) as a result of the limitations set forth in CLAUSE (1), (2) or (3) thereof or (B) a notice described in SUBSECTION 4.1(B)(II), then, subject to the terms and conditions hereof, such Issuing Lender shall, on the requested date, issue a Letter of Credit for the account of the Applicable Borrower in accordance with such Issuing Lender's usual and customary business practices. (c) From time to time while a Letter of Credit is outstanding and prior to the Termination Date, the applicable Issuing Lender will, upon the written request of the Applicable Borrower received by such Issuing Lender (with a copy sent by Parent or the Company to the Applicable Agent) at least five days (or such shorter time as the applicable Issuing Lender and the Applicable Agent may agree in a particular instance in their sole discretion) prior to the proposed date of amendment, amend any Letter of Credit issued by it. Each such request for amendment of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, made in the form of an L/C Amendment Application and shall specify in form and detail satisfactory to the applicable Issuing Lender: (i) the Letter of Credit to be amended; (ii) the proposed date of amendment of such Letter of Credit (which shall be a Business Day); (iii) the nature of the proposed amendment; and (iv) such other matters as the applicable Issuing Lender may require. No Issuing Lender shall have any obligation to amend any Letter of Credit if: (A) such Issuing Lender would have no obligation at such time to issue such Letter of Credit in its amended form under the terms of this Agreement; or (B) the beneficiary of such Letter of Credit does not accept the proposed amendment to such Letter of Credit. (d) The Issuing Lenders and the Lenders agree that, while any Letter of Credit is outstanding and prior to the Termination Date, at the option of the Applicable Borrower, and upon the written request of the Applicable Borrower, received by the applicable Issuing Lender (with a copy sent by such Borrower to the Applicable Agent) at least five days (or such shorter time as the applicable Issuing Lender and the Applicable Agent may agree in a particular instance in their sole discretion) prior to the proposed date of notification of renewal, the applicable Issuing Lender shall be entitled to authorize the automatic renewal of a Letter of Credit issued by such Issuing Lender. Each such request for renewal of a Letter of Credit shall be made by facsimile, confirmed immediately in an original writing, in the form of an L/C Amendment Application, and shall specify in form and detail satisfactory to the applicable Issuing Lender: (i) the Letter of Credit to be renewed; (ii) the proposed date of notification of renewal of such Letter of Credit (which shall be a Business Day); (iii) the revised expiry date of such Letter of Credit (which, unless all Lenders otherwise consent, shall not be more than one year after the date of such renewal and shall be at least 10 days prior to the scheduled Termination Date (without giving effect to any change of the Termination Date to January 10, 2000, if applicable)); and (iv) such other matters as the applicable Issuing Lender may reasonably require. No Issuing Lender shall have any obligation to renew any Letter of Credit if: (A) such 49 Issuing Lender would have no obligation at such time to issue or amend such Letter of Credit in its renewed form under the terms of this Agreement; or (B) the beneficiary of such Letter of Credit does not accept the proposed renewal of such Letter of Credit. If any outstanding Letter of Credit shall provide that it shall be automatically renewed unless the beneficiary thereof receives notice from the applicable Issuing Lender that such Letter of Credit shall not be renewed, and if at the time of renewal such Issuing Lender would be entitled to authorize the automatic renewal of such Letter of Credit in accordance with this SUBSECTION 4.2(D) upon the request of the Applicable Borrower but such Issuing Lender shall not have received any L/C Amendment Application from the Applicable Borrower with respect to such renewal or other written direction by such Borrower with respect thereto, such Issuing Lender shall nonetheless be permitted to allow such Letter of Credit to renew, and the Borrower and the Lenders hereby authorize such renewal, and, accordingly, such Issuing Lender shall be deemed to have received an L/C Amendment Application from the Applicable Borrower requesting such renewal. (e) Each Issuing Lender may (to the extent permitted under the applicable Letter of Credit), at its election (or as required by the Applicable Agent at the direction of the Required Lenders), deliver any notice of termination or other communication to any Letter of Credit beneficiary or transferee, and take any other action as necessary or appropriate, at any time and from time to time, in order to cause the expiry date of any Letter of Credit to be a date not later than 10 days prior to the scheduled Termination Date. (f) This Agreement shall control in the event of any conflict with any L/C-Related Document (other than any Letter of Credit). (g) The applicable Issuing Lender will deliver to the Applicable Agent, concurrently with or promptly following its delivery of a Letter of Credit, or an amendment to or renewal of a Letter of Credit, to an advising bank or a beneficiary, a true and complete copy of such Letter of Credit or amendment to or renewal of a Letter of Credit. 4.3 RISK PARTICIPATIONS, DRAWINGS AND REIMBURSEMENTS. (a) Immediately upon the Issuance of each Letter of Credit for the account of the Company, each U.S. Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the U.S. Issuing Lender a participation in such Letter of Credit and each drawing thereunder in an amount equal to the product of (i) such U.S. Lender's Pro Rata Share times (ii) the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. Immediately upon the Issuance of each Letter of Credit for the account of Parent, each Canadian Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Canadian Issuing Lender a participation in such Letter of Credit and each drawing thereunder in an amount equal to the product of (i) such Canadian Lender's Pro Rata Share times (ii) the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. 50 (b) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the applicable Issuing Lender will promptly notify the Applicable Borrower and the Applicable Agent. The Applicable Borrower shall reimburse the applicable Issuing Lender prior to 12:00 noon (Chicago time in the case of the U.S. Issuing Lender and Toronto time in the case of the Canadian Issuing Lender), on each date that any amount is paid by such Issuing Lender under any Letter of Credit (each such date, an "HONOR DATE"), in an amount equal to the amount so paid by such Issuing Lender. If the Company fails to reimburse the U.S. Issuing Lender for the full amount of any drawing under any Letter of Credit by 12:00 noon (Chicago time) on the Honor Date, the U.S. Issuing Lender will promptly notify the U.S. Agent and the U.S. Agent will promptly notify each U.S. Lender thereof, and the Company shall be deemed to have requested that Base Rate Loans be made by the U.S. Lenders to be disbursed on the Honor Date under such Letter of Credit, subject to the amount of the unutilized portion of the combined U.S. Commitments and subject to the conditions set forth in SECTION 6.2 (other than SUBSECTION 6.2(A)). If Parent fails to reimburse the Canadian Issuing Lender for the full amount of any drawing under any Letter of Credit by 12:00 noon (Toronto time) on the Honor Date, the Canadian Issuing Lender will promptly notify the Canadian Agent and each Canadian Lender thereof, and Parent shall be deemed to have requested that Prime Rate Loans be made by the Canadian Lenders to be disbursed on the Honor Date under such Letter of Credit, subject to the amount of the unutilized portion of the combined Canadian Commitments and subject to the conditions set forth in SECTION 6.2 (other than SUBSECTION 6.2(A)). Any notice given by an Issuing Lender or the Applicable Agent pursuant to this SUBSECTION 4.3(B) may be oral if immediately confirmed in writing (including by facsimile); PROVIDED that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (c) Each Applicable Lender shall upon receipt of any notice pursuant to SUBSECTION 4.3(B) make available to the Applicable Agent for the account of the applicable Issuing Lender an amount in U.S. Dollars or Canadian Dollars, as applicable, and in immediately available funds equal to its Pro Rata Share of the amount of the drawing, whereupon the participating Lenders shall (subject to SUBSECTION 4.3(D)) each be deemed to have made a Base Rate Loan to the Company or a Prime Rate Loan to Parent, as applicable, in such amount. If any Lender so notified fails to make available to the Applicable Agent for the account of the applicable Issuing Lender the amount of such Lender's Pro Rata Share of the amount of such drawing by no later than 2:00 p.m. (Chicago time) on the Honor Date, then interest shall accrue on such Lender's obligation to make such payment, from the Honor Date to the date such Lender makes such payment, at a rate per annum equal to, in the case of a U.S. Lender, the U.S. Federal Funds Rate in effect from time to time during such period, and (ii) in the case of a Canadian Lender, the Canadian Cost of Funds Rate in effect from time to time during such period. The Applicable Agent will promptly give notice of the occurrence of the Honor Date, but failure of the Applicable Agent to give any such notice on the Honor Date or in sufficient time to enable any Applicable Lender to effect such payment on such date shall not relieve such Lender from its obligations under this SECTION 4.3. 51 (d) With respect to any unreimbursed drawing that is not converted into Base Rate Loans or Prime Rate Loans in whole or in part, because of the Applicable Borrower's failure to satisfy the conditions set forth in SECTION 6.2 or for any other reason, such Borrower shall be deemed to have incurred from the applicable Issuing Lender an L/C Borrowing in the amount of such drawing, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at a rate per annum equal to (i) in the case of the Company, the Base Rate plus 2% per annum, and (ii) in the case of Parent, the Prime Rate plus 2% per annum, and each Applicable Lender's payment to the applicable Issuing Lender pursuant to SUBSECTION 4.3(C) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Lender in satisfaction of its participation obligation under this SECTION 4.3. (e) Each Lender's obligation in accordance with this Agreement to make Loans or L/C Advances, as contemplated by this SECTION 4.3, as a result of a drawing under a Letter of Credit, shall be absolute and unconditional and without recourse to the applicable Issuing Lender and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the applicable Issuing Lender, Parent, the Company or any other Person for any reason whatsoever; (ii) the existence of an Event of Default, an Unmatured Event of Default or a Material Adverse Effect; or (iii) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; PROVIDED that each Lender's obligation to make Loans (but not L/C Advances) under this SECTION 4.3 is subject to the conditions set forth in SECTION 6.2 (other than SUBSECTION 6.2(A)). 4.4 REPAYMENT OF PARTICIPATIONS. (a) Promptly upon (and only upon) receipt by the Applicable Agent for the account of the applicable Issuing Lender of immediately available funds from the Applicable Borrower (i) in reimbursement of any payment made by such Issuing Lender under a Letter of Credit with respect to which any Lender has paid the Applicable Agent for the account of such Issuing Lender for such Lender's participation in such Letter of Credit pursuant to SECTION 4.3 or (ii) in payment of interest thereon, the Applicable Agent will pay to each Applicable Lender, in the same funds as those received by such Agent for the account of such Issuing Lender, the amount of such Lender's Pro Rata Share of such funds, and such Issuing Lender shall receive the amount of the Pro Rata Share of such funds of any Lender that did not so pay the Applicable Agent for the account of such Issuing Lender. (b) If either Agent or either Issuing Lender is required at any time to return to a Borrower, or to a trustee, receiver, liquidator or custodian, or to any official in any Insolvency Proceeding, any portion of any payment made by the Company or Parent to an Agent for the account of an Issuing Lender pursuant to SUBSECTION 4.4(A) in reimbursement of a payment made under a Letter of Credit or any interest or fee thereon, each Lender shall, on demand of the Applicable Agent, forthwith return to the Applicable Agent or the applicable Issuing Lender the amount of its Pro Rata Share of any amount so returned by such Agent or such Issuing Lender 52 plus interest thereon from the date such demand is made to the date such amount is returned by such Lender to the Applicable Agent or the applicable Issuing Lender, at a rate per annum equal to (i) in the case of a U.S. Lender, the U.S. Federal Funds Rate in effect from time to time, and (ii) in the case of a Canadian Lender, the Canadian Cost of Funds Rate in effect from time to time. 4.5 ROLE OF THE ISSUING LENDERS. (a) Each Lender, Parent and the Company agree that, in paying any drawing under a Letter of Credit, the applicable Issuing Lender shall have no responsibility to obtain any document (other than any sight draft and certificate expressly required by such Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. (b) No Agent-Related Person nor any of the respective correspondents, participants or assignees of either Issuing Lender shall be liable to any Lender for: (i) any action taken or omitted in connection herewith at the request or with the approval of the Lenders (including the Required U.S. Lenders, the Required Canadian Lenders or the Required Lenders, as applicable); (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any L/C-Related Document. (c) Each Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit issued for the account of such Borrower; PROVIDED that this assumption is not intended to, and shall not, preclude either Borrower from pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. No Agent-Related Person, nor any of the respective correspondents, participants or assignees of either Issuing Lender, shall be liable or responsible for any of the matters described in CLAUSES (I) through (VII) of SECTION 4.6; PROVIDED that, anything in such clauses to the contrary notwithstanding, Parent or the Company may have a claim against the applicable Issuing Lender, and the applicable Issuing Lender may be liable to Parent or the Company, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by Parent or the Company which Parent or the Company proves were caused by the applicable Issuing Lender's willful misconduct or gross negligence or the applicable Issuing Lender's willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing: (i) an Issuing Lender may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; and (ii) an Issuing Lender shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. 53 4.6 OBLIGATIONS OF PARENT AND THE COMPANY. The obligations of the Applicable Borrower under this Agreement and any L/C-Related Document to reimburse the applicable Issuing Lender for a drawing under a Letter of Credit issued for the account of such Borrower, and to repay any L/C Borrowing and any drawing under any such Letter of Credit converted into Loans, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement and each L/C-Related Document under all circumstances, including the following: (i) any lack of validity or enforceability of this Agreement or any L/C- Related Document; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of such Borrower in respect of any such Letter of Credit or any other amendment or waiver of or any consent to departure from all or any of the L/C-Related Documents; (iii) the existence of any claim, set-off, defense or other right that such Borrower may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the applicable Issuing Lender or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by the L/C-Related Documents or any unrelated transaction; (iv) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit; (v) any payment by the applicable Issuing Lender under any Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; or any payment made by the applicable Issuing Lender under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of any Letter of Credit, including any arising in connection with any Insolvency Proceeding; (vi) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guarantee, for all or any of the obligations of such Borrower in respect of any Letter of Credit; or 54 (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, such Borrower or any guarantor. 4.7 CASH COLLATERAL PLEDGE. If any Letter of Credit issued for the account of a Borrower remains outstanding and partially or wholly undrawn as of the Termination Date, then such Borrower shall immediately Cash Collateralize the L/C Obligations in an amount equal to the maximum amount then available to be drawn under all such Letters of Credit. Without limiting the foregoing, if the scheduled Termination Date is changed to January 10, 2000 pursuant to the definition of "Termination Date", then (a) concurrently with the Issuance of any Letter of Credit Issued after September 30, 1999 which has an expiry date after December 30, 1999, the Applicable Borrower will provide Cash Collateral for such Letter of Credit in an amount equal to the Stated Amount of such Letter of Credit; and (b) on or before December 30, 1999, each Borrower shall Cash Collateralize all outstanding Letters of Credit Issued for the account of such Borrower in an amount equal to the Stated Amount of all such Letters of Credit. 4.8 LETTER OF CREDIT FEES. (a) Each Borrower shall pay to the Applicable Agent for the ratable account of the U.S. Lenders, in the case of the Company, or the Canadian Lenders, in the case of Parent, a letter of credit fee with respect to each Letter of Credit issued for the account of such Borrower computed at the applicable rate per annum set forth in SCHEDULE 1.1C of the average daily maximum amount available to be drawn on such Letter of Credit, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter and on the Termination Date (or such later date on which such Letter of Credit shall expire or be fully drawn) as calculated by the Applicable Agent. (b) Each Borrower shall pay to the Applicable Agent for the account of the applicable Issuing Lender a letter of credit fronting fee for each Letter of Credit Issued by such Issuing Lender for the account of such Borrower at the rate per annum separately agreed to by such Borrower and such Issuing Lender of the average daily maximum amount available to be drawn on such Letter of Credit, computed on the first day of each calendar quarter and on the Termination Date (or such later date on which such Letter of Credit shall expire or be fully drawn) as calculated by the Applicable Agent. (c) The letter of credit fees payable under SUBSECTION 4.8(A) and the fronting fees payable under SUBSECTION 4.8(B) shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter during which Letters of Credit are outstanding, commencing on the first such quarterly date to occur after the Closing Date, through the Termination Date (or such later date upon which all outstanding Letters of Credit shall have been terminated), with the final payment to be made on the Termination Date (or such later expiration date). 55 (d) Each Borrower shall pay to the applicable Issuing Lender from time to time on demand the normal issuance, presentation, amendment and other processing fees, and other standard costs and charges, of such Issuing Lender relating to letters of credit as from time to time in effect. 4.9 UNIFORM CUSTOMS AND PRACTICE. The Uniform Customs and Practice for Documentary Credits as published by the International Chamber of Commerce most recently at the time of issuance of any Letter of Credit shall (unless otherwise expressly provided in such Letter of Credit) apply to each Letter of Credit. ARTICLE V TAXES, YIELD PROTECTION AND ILLEGALITY 5.1 TAXES. (a) Any and all payments by either Borrower to each Lender and each Agent under this Agreement (including any payment made by Parent pursuant to SECTION 11) shall be made free and clear of, and without deduction or withholding for, any Taxes. In addition, the Applicable Borrower shall pay all Other Taxes. (b) The Applicable Borrower agrees to indemnify each Lender and each Agent for, and hold each such Person harmless from, the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section) paid by such Lender or such Agent and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date such Lender or such Agent makes written demand therefor. (c) If either Borrower shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to a Lender or an Agent, then: (i) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section) such Lender or such Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions or withholdings been made; (ii) such Borrower shall make such deductions and withholdings; and 56 (iii) such Borrower shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law. (d) Within 30 days after the date of any payment by a Borrower of Taxes or Other Taxes, such Borrower shall furnish the Agents the original or a copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Agents. (e) If either Borrower is required to pay additional amounts to any Lender or either Agent pursuant to SUBSECTION (C) of this Section, then such Lender shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by such Borrower which may thereafter accrue, if such change in the judgment of such Lender is not otherwise disadvantageous to such Lender. (f) (i) Each U.S. Lender which is a foreign Person (i.e., a Person other than a United States Person for United States Federal income tax purposes) agrees that: (A) it shall, no later than the Closing Date (or, in the case of a U.S. Lender which becomes a party hereto after the Closing Date, the date upon which such U.S. Lender becomes a party hereto) deliver to the U.S. Agent and to the Company through the U.S. Agent two accurate and complete signed originals of Internal Revenue Service Form 4224 or any successor thereto ("FORM 4224"), or two accurate and complete signed originals of Internal Revenue Service Form 1001 or any successor thereto ("FORM 1001"), as appropriate, in each case indicating that such U.S. Lender is on the date of delivery thereof entitled to receive payments of principal, interest and fees under this Agreement free from withholding of United States Federal income tax; (B) if at any time such U.S. Lender makes any change necessitating a new Form 4224 or Form 1001, it shall with reasonable promptness deliver to the U.S. Agent and to the Company through the U.S. Agent in replacement for, or in addition to, the forms previously delivered by it hereunder, two accurate and complete signed originals of Form 4224 or Form 1001, as appropriate, in each case indicating that such U.S. Lender is on the date of delivery thereof entitled to receive payments of principal, interest and fees under this Agreement free from withholding of United States Federal income tax; (C) it shall, before or promptly after the occurrence of any event (including the passing of time (and in any event (x) in the case of a Form 4224, before the payment of any interest in each succeeding taxable year of such U.S. Lender after the Closing Date during which interest may be paid under this Agreement, and (y) in the case of a Form 1001, before the payment of any interest 57 in each third succeeding calendar year after the Closing Date during which interest may be paid under this Agreement) but excluding any event mentioned in CLAUSE (B) above) requiring a change in or renewal of the most recent Form 4224 or Form 1001 previously delivered by such U.S. Lender, deliver to the U.S. Agent and to the Company through the U.S. Agent two accurate and complete original signed copies of Form 4224 or Form 1001 in replacement for the forms previously delivered by such U.S. Lender; and (D) it shall, promptly upon the Company's or the U.S. Agent's reasonable request to that effect, deliver to the Company or the U.S. Agent (as the case may be) such other forms or similar documentation as may be required from time to time by any applicable law, treaty, rule or regulation in order to establish such U.S. Lender's tax status for withholding purposes. (ii) Each Canadian Lender agrees that it shall, no later than the Closing Date (or, in the case of a Canadian Lender which becomes a party hereto after the Closing Date, the date upon which such Canadian Lender becomes a party hereto) deliver to the Canadian Agent and to Parent through the Canadian Agent an instrument in writing certifying one of the following: (A) that such Canadian Lender is not a non-resident of Canada for the purposes of Part XIII of the Income Tax Act (Canada) and that it is the sole beneficial owner of payments of principal of and interest on its Loans and other extensions of credit to Parent under this Agreement; (B) its jurisdiction of incorporation and residence for tax purposes, that it is the sole beneficial owner of payments of principal of and interest on its Loans and other extensions of credit to Parent under this Agreement and the rate of withholding tax applicable to any payment of interest to it pursuant to any applicable tax conventions between Canada, on the one hand, and its jurisdiction of residence for tax purposes, on the other hand; or (C) its jurisdiction of incorporation and residence for tax purpose, the names of the beneficial owners of payments of principal of and interest on its Loans and other extensions of credit to Parent under this Agreement, the residence for tax purposes of each of such beneficial owners and the rate of withholding tax applicable to any payment of interest in respect of each beneficial owner pursuant to any applicable tax convention between Canada, on the one hand, and the jurisdiction of residence for tax purposes of each beneficial owner, on the other hand; and undertaking to advise Parent and the Canadian Agent of any change in respect of CLAUSE (A), (B) or (C), as the case may be. In addition, each Canadian Lender shall, promptly upon Parent's 58 or the Canadian Agent's reasonable request to that effect, deliver to Parent or the Canadian Agent (as the case may be) such other instruments in writing, forms or similar documentation as may be required from time to time by any applicable law, treaty, rule or regulation or the official interpretation of such laws or regulations by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) in order to establish such Canadian Lender's tax status for withholding purposes. If the Canadian Agent receives a request from Revenue Canada Customs, Excise and Taxation or another taxing authority to provide additional information concerning the withholding tax status of any Canadian Lender, such Canadian Lender shall (upon notice of such request from the Canadian Agent) use reasonable efforts to obtain and deliver such information to such taxing authority and the Canadian Agent. (iii) Notwithstanding the foregoing provisions of this SUBSECTION (F) or any other provision of this SECTION 5.1, no Lender shall be required to deliver any form pursuant to this SECTION 5.1 if such Lender is not legally permitted to deliver such form as a result of a change in any Requirement of Law after the date of this Agreement. (g) (i) The Company will not be required to pay any additional amount in respect of United States Federal tax pursuant to this SECTION 5.1 to any U.S. Lender or to either Agent with respect to any U.S. Lender: (A) if the obligation to pay such additional amount would not have arisen but for a failure by such U.S. Lender to comply with its obligations under SUBSECTION 5.1(F)(I), SECTION 10.10 or SECTION 12.8; (B) if such U.S. Lender shall have delivered to the Company a Form 4224 in respect of its applicable Lending Office pursuant to SUBSECTION 5.1(F)(I), and such U.S. Lender shall at any time not be entitled to exemption from deduction or withholding of United States Federal income tax in respect of payments by the Company hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or in the official interpretation of such law or regulations by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 4224; or (C) if such U.S. Lender shall have delivered to the Company a Form 1001 in respect of its applicable Lending Office pursuant to SUBSECTION 5.1(F)(I), and such U.S. Lender shall at any time not be entitled to exemption from deduction or withholding of 59 United States Federal income tax in respect of payments by the Company hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or any applicable tax treaty or regulations or in the official interpretation of any such law, treaty or regulations by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 1001. (ii) Parent will not be required to pay any additional amount in respect of Canadian federal income tax pursuant to this SECTION 5.1 to any Canadian Lender: (A) if the obligation to pay such additional amount would not have arisen but for a failure by such Canadian Lender to comply with its obligations under SUBSECTION 5.1(F)(II), SECTION 10.10 or SECTION 12.8; or (B) if such Canadian Lender shall have delivered an instrument in writing pursuant to SUBSECTION 5.1(F)(II), and such Canadian Lender shall at any time not be entitled to exemption from deduction or withholding of Canadian federal income tax in respect of payments by Parent hereunder for the account of its applicable Lending Office for any reason other than a change in the laws of Canada, its provinces or any political subdivision thereof or any regulations promulgated thereunder or any applicable tax treaty or regulations or in the official interpretation of such laws, treaty or regulations by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of the delivery of said instrument. (h) If, at any time, the Company requests any U.S. Lender to deliver any forms or other documentation pursuant to SUBSECTION 5.1(F)(I)(D), then the Company shall, on demand of such U.S. Lender through the U.S. Agent, reimburse such U.S. Lender for any costs and expenses (including Attorney Costs) reasonably incurred by such U.S. Lender in the preparation or delivery of such forms or other documentation. If, at any time, Parent requests any Canadian Lender to deliver any forms or other documentation pursuant to SUBSECTION 5.1(F)(II), then Parent shall, on demand of such Canadian Lender through the Canadian Agent, reimburse such Canadian Lender for any costs and expenses (including Attorney Costs) reasonably incurred by such Canadian Lender in the preparation or delivery of such instruments, forms or other documentation. (i) If either Agent or any Lender receives a refund of any Taxes for which a payment has been made by a Borrower pursuant to this Agreement, or claims any credit or relief against or repayment of any Taxes through an actual reduction in Taxes paid as a result of the payment of such Taxes by a Borrower (a "Tax Credit"), which refund or Tax Credit in the 60 good faith judgment of such Agent or such Lender, as the case may be, is attributable to such payment made by such Borrower, then such Agent or such Lender, as applicable, shall reimburse such Borrower for such amount as such Agent or such Lender, as applicable, determines to be the proportion of the refund or Tax Credit as will leave it, after such reimbursement, in no better or worse position than it would have been in if the payment had not been required. If any tax benefit obtained by an Agent or a Lender is reduced after a payment in respect thereof has been made to a Borrower under this SUBSECTION (I) (through adjustment to such Agent's or such Lender's tax return or otherwise), such Borrower shall promptly upon demand repay to such Agent or such Lender, as applicable, the amount by which such tax benefit to such Agent or such Lender, as applicable, is reduced. In no event shall either Agent or any Lender be obliged to disclose any information regarding its tax affairs or computations to either Borrower. 5.2 ILLEGALITY. (a) If any Lender determines that the introduction of, or any change in, any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for such Lender or its applicable Lending Office to make Offshore U.S. Dollar Loans or, in the case of a Canadian Lender, Offshore Canadian Dollar Loans, then, on notice thereof by such Lender to the Applicable Borrower through the Applicable Agent, any obligation of such Lender to make Offshore U.S. Dollar Loans or Offshore Canadian Dollar Loans, as the case may be, shall be suspended until such Lender notifies the Applicable Agent and the Applicable Borrower that the circumstances giving rise to such determination no longer exist. (b) If a Lender determines that it is unlawful to maintain any Offshore U.S. Dollar Loan or, in the case of a Canadian Lender, Offshore Canadian Dollar Loan, the Applicable Borrower shall, upon its receipt of notice of such fact and demand from such Lender (with a copy to the Applicable Agent), prepay in full such Offshore U.S. Dollar Loan or Offshore Canadian Dollar Loan, as applicable, together with interest accrued thereon and amounts required under SECTION 5.4, either on the last day of the Interest Period thereof, if such Lender may lawfully continue to maintain such Offshore Rate Loan to such day, or on such earlier date on which such Lender may no longer lawfully continue to maintain such Offshore Rate Loan (as determined by such Lender). If either Borrower is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, such Borrower shall borrow from the affected Lender, in the amount of such repayment, a Base Rate Loan (in the case of a U.S. Dollar Loan) or a Prime Rate Loan (in the case of a Canadian Dollar Loan). 5.3 INCREASED COSTS AND REDUCTION OF RETURN. (a) If any Lender determines that, as a result, after the date hereof, of (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) compliance by such Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender (other than any general increase in the level of taxation of such Lender and similarly-situated financial institutions) of agreeing to make or making, funding or maintaining any Offshore Rate Loan or participating in Letters of Credit or, 61 in the case of an Issuing Lender, any increase in the cost to such Issuing Lender of agreeing to issue, issuing or maintaining any Letter of Credit, then the Applicable Borrower shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Applicable Agent), pay to the Applicable Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increased cost. (b) If any Lender shall have determined that, after the date hereof, (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by such Lender (or its Lending Office) or any corporation controlling such Lender with any Capital Adequacy Regulation affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) and that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Lender to the Applicable Borrower through the Applicable Agent, such Borrower shall pay to such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender for such increase. 5.4 FUNDING LOSSES. The Applicable Borrower shall reimburse each Lender and hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of: (a) the failure of such Borrower to borrow, continue or convert a Loan or to issue a Bankers' Acceptance or a BA Equivalent Note after such Borrower has given (or is deemed to have given) a Notice of Canadian Dollar Borrowing, a Notice of U.S. Dollar Borrowing, a Notice of Conversion/Continuation or a Notice of BA Borrowing; (b) the failure of such Borrower to make any prepayment in accordance with any notice delivered under SECTION 2.1.6 or 2.2.5; (c) the prepayment (including pursuant to SECTION 2.1.6 or 2.2.5) or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (d) the automatic conversion under SECTION 2.1.5 or 2.2.4 of any Offshore Rate Loan to a Base Rate Loan or a Prime Rate Loan, as applicable, on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its applicable Loans or from fees payable to terminate the deposits 62 from which such funds were obtained. For purposes of calculating amounts payable by a Borrower to a Lender under this Section and under SUBSECTION 5.3(A), each Offshore Rate Loan made by a Lender shall be conclusively deemed to have been funded (and to have been subject to each related reserve, special deposit or similar requirement) at the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period in U.S. Dollars or Canadian Dollars, as applicable, whether or not such Offshore Rate Loan is in fact so funded. 5.5 INABILITY TO DETERMINE RATES. If the Applicable Agent reasonably determines that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to an Offshore Rate Loan, or Applicable Lenders having an aggregate Pro Rata Share of 25% or more determine that the Offshore Rate to be applicable for any requested Interest Period with respect to an Offshore Rate Loan does not adequately and fairly reflect the cost to such Lenders of funding such Loan, then the Applicable Agent will promptly so notify the Applicable Borrower and each Applicable Lender. Thereafter, the obligation of the Applicable Lenders to make or maintain the applicable Offshore Rate Loans in the applicable currency hereunder shall be suspended until the Applicable Agent (upon the instructions of the Applicable Lenders, if applicable), revokes such notice in writing. Upon receipt of such notice, the Applicable Borrower may revoke any applicable Notice of U.S. Dollar Borrowing, Notice of Canadian Dollar Borrowing or Notice of Conversion/Continuation then submitted by it. If the Applicable Borrower does not revoke such Notice, the Applicable Lenders shall make, convert or continue the Loans, as proposed by the Applicable Borrower, in the amount specified in the applicable notice submitted by the Applicable Borrower, but such Loans shall be made, converted or continued as Base Rate Loans or Prime Rate Loans, as applicable, instead of Offshore Rate Loans. 5.6 CERTIFICATES OF LENDERS. Any Lender claiming reimbursement or compensation under this ARTICLE V shall deliver to the Applicable Borrower (with a copy to the Applicable Agent) a certificate setting forth in reasonable detail the basis for, and a calculation of, the amount payable to such Lender hereunder and such certificate shall be presumed to be accurate in the absence of manifest error. 5.7 SUBSTITUTION OF LENDERS. Upon the receipt by either Borrower or either Agent from any Lender (an "AFFECTED LENDER") of a claim for compensation under SECTION 5.1 or 5.3 or a notice of the type described in SUBSECTION 5.2(A) or (B), the Applicable Borrower may: (i) request one or more of the other Lenders to acquire and assume all or part of such Affected Lender's Loans and Commitment; or (ii) designate a replacement bank or financial institution satisfactory to Parent to acquire and assume all or a ratable part of all of such Affected Lender's Loans and Commitment (a "REPLACEMENT LENDER"). Any designation of a Replacement Lender shall be subject to the prior written consent of the Agents and the Issuing Lenders. 63 5.8 RIGHT OF LENDERS TO FUND THROUGH BRANCHES AND AFFILIATES. Each Lender may, if it so elects, fulfill its commitment as to any Loan hereunder by designating a branch or Affiliate of such Lender to make such Loan; PROVIDED that (a) such Lender shall remain solely responsible for the performance of its obligations hereunder and (b) no such designation shall result in any increased costs to the Applicable Borrower. 5.9 SURVIVAL. The agreements and obligations of the Borrowers in this ARTICLE V shall survive the termination of this Agreement and the payment of all Obligations. ARTICLE VI CONDITIONS PRECEDENT 6.1 CONDITIONS TO EFFECTIVENESS. This Agreement shall become effective and all outstanding loans under the Existing Agreement shall be Canadian Dollar Loans hereunder on the date that (a) the Agents shall have received evidence that the Facility Assignment Agreement has been executed and delivered by the parties thereto and the transactions contemplated thereby have been consummated (or will be consummated concurrently herewith) and (b) the Agents shall have received all of the following, in form and substance satisfactory to each Agent and each Lender, and in sufficient copies for each Agent and each Lender: (a) CREDIT AGREEMENT AND NOTES. This Agreement and the Notes (if any) executed by each party thereto. (b) RESOLUTIONS; INCUMBENCY. (i) Copies of resolutions of the board of directors (or other appropriate governing body) of each Loan Party authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary (or other appropriate representative) of such Loan Party; and (ii) a certificate of the Secretary or an Assistant Secretary (or other appropriate representative) of each Loan Party certifying the names and true signatures of the officers, partners or managers of such Loan Party authorized to execute, deliver and perform the Loan Documents to which such Loan Party is a party. (c) ORGANIZATION DOCUMENTS; GOOD STANDING. Each of the following documents: (i) the articles or certificate of incorporation or association or other certificate of formation and, if applicable, the bylaws, partnership agreement or operating 64 agreement of each Loan Party as in effect on the Closing Date, certified by the Secretary or an Assistant Secretary (or other appropriate representative) of such Loan Party as of the Closing Date; and (ii) in the case of the Company and each U.S. Subsidiary, a certificate of good standing from the jurisdiction of organization of each such entity; and in the case of Parent and each Canadian Subsidiary, a Certificate of Status from the Ministry of Consumer and Commercial Relations of Ontario, the Registrar of Companies of British Columbia, the Registrar of Corporations of Alberta or the Deputy Registrar of Joint Stock Companies of Nova Scotia, as applicable, with respect to such entity. (d) U.S. GUARANTIES. A guaranty, substantially in the form of EXHIBIT G-1, executed by each U.S. Subsidiary and by Nova Scotia Sub, and a guaranty, substantially in the form of EXHIBIT G-2, executed by each U.S. Subsidiary other than the Company and by Nova Scotia Sub (such guaranties, the "U.S. GUARANTIES"). (e) CANADIAN GUARANTIES. A Guaranty, substantially in the form of EXHIBIT G- 3, executed by each Canadian Guarantor other than the Nova Scotia Sub (such guaranty, the "CANADIAN GUARANTY"). (f) PAYMENT OF FEES. Evidence of payment by Parent and/or the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of the Agents to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute the Agents' reasonable estimate of Attorney Costs incurred or to be incurred through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between Parent and/or the Company and the Agents), including any such costs, fees and expenses arising under or referenced in SECTION 2.5 or 12.4. (g) U.S. SECURITY AGREEMENT. A security agreement, substantially in the form of EXHIBIT H-1 (the "U.S. SECURITY AGREEMENT"), executed by the Company and each other U.S. Guarantor, together with such searches, financing statements and other documents as may be requested by the U.S. Agent to perfect, and confirm the priority of, the Liens granted thereunder. (h) CANADIAN SECURITY AGREEMENT. A security agreement, substantially in the form of EXHIBIT H-2, executed by each Canadian Guarantor, and a security agreement, substantially in the form of EXHIBIT H-3, executed by Parent (such security agreements, the "CANADIAN SECURITY AGREEMENTS"), in each case together with such searches, registrations and other documents as may be requested by the Canadian Agent to perfect, and evidence the priority of, the Liens granted thereunder. 65 (i) U.S. PLEDGE AGREEMENT. A pledge agreement, substantially in the form of EXHIBIT I-1 (the "U.S. PLEDGE AGREEMENT"), executed by each U.S. Subsidiary which owns an interest in any corporation and by Nova Scotia Sub, together with all stock certificates, stock powers and other items required to be delivered thereunder. (j) CANADIAN PLEDGE AGREEMENTS. Pledge agreements, each substantially in the form of EXHIBIT I-2 (each a "CANADIAN PLEDGE AGREEMENT"), executed by Parent and each Canadian Subsidiary (other than Nova Scotia Sub) which owns an interest in any corporation, together with all stock certificates, stock powers and other items required to be delivered thereunder. (k) BANK ACT SECURITY. The Bank Act Security, together with all documentation required to perfect the Liens granted thereunder. (l) INSURANCE CERTIFICATES. Certificates of insurance naming the U.S. Agent as an additional insured and as loss payee, as required pursuant to SECTION 8.3. (m) ASSIGNMENT OF PARTNERSHIP INTERESTS. An assignment of partnership interests, substantially in the form of EXHIBIT M-1, executed by Parent, and an assignment of partnership interests, substantially in the form of EXHIBIT M-2, executed by Ontario GP (each an "ASSIGNMENT OF PARTNERSHIP INTERESTS"). (n) CERTIFICATE. A certificate signed by the chief executive officer or the chief financial officer of Parent, dated as of the Closing Date, stating that: (i) the representations and warranties contained in ARTICLE VII are true and correct on and as of such date, as though made on and as of such date; (ii) no Event of Default or Unmatured Event of Default exists or will result from the initial Credit Extensions; and (iii) no event or circumstance has occurred since December 31, 1997 that has resulted or could reasonably be expected to result in a Material Adverse Effect. (o) LEGAL OPINIONS. The opinion of Hodgson Russ Andrews Woods & Goodyear, LLP, U.S. counsel to Parent, the Company and the other U.S. Guarantors, substantially in the form of EXHIBIT D-1; the opinion of Tory Tory DesLauriers & Binnington, Ontario counsel to Parent and the Canadian Guarantors, substantially in the form of EXHIBIT D-2; the opinion Parlee McLaws, Alberta counsel to Western Waste Services Inc. and Alberta Waste Ltd., substantially in the form of EXHIBIT D-3; the opinion of Lawson Lundell Lawson & McIntosh, British Columbia counsel to West Coast Waste Systems Inc., substantially in the form of EXHIBIT D-4; the opinion of Stewart McKelvey Sterling Scales, Nova Scotia counsel to Nova 66 Scotia Sub, substantially in the form of EXHIBIT D-5; and the opinion of Joy Grahek, General Counsel of Parent, substantially in the form of EXHIBIT D-3. (p) ESTOPPEL LETTERS. An estoppel letter or subordination agreement from each existing creditor of Parent or any Subsidiary reasonably specified by the Canadian Agent. (q) OTHER DOCUMENTS. Such other approvals, opinions, documents or materials as either Agent or any Lender may reasonably request. 6.2 CONDITIONS TO ALL CREDIT EXTENSIONS. The obligation of each Lender to make any Credit Extension (including the initial Credit Extension) is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Issuance Date: (a) NOTICE, APPLICATION. The Applicable Agent shall have received a Notice of U.S. Dollar Borrowing, a Notice of Canadian Dollar Borrowing or a Notice of BA Borrowing, as applicable, or the applicable Issuing Lender and the Applicable Agent shall have received an L/C Application or L/C Amendment Application (in the case of any Issuance of a Letter of Credit). (b) CONTINUATION OF REPRESENTATIONS AND WARRANTIES. The representations and warranties in ARTICLE VII shall be true and correct in all material respects on and as of such Borrowing Date or Issuance Date with the same effect as if made on and as of such Borrowing Date or Issuance Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date). (c) NO EXISTING DEFAULT. No Event of Default or Unmatured Event of Default shall exist or shall result from such Credit Extension. Each Notice of U.S. Dollar Borrowing, Notice of Canadian Dollar Borrowing, Notice of BA Borrowing, L/C Application and L/C Amendment Application submitted by a Borrower hereunder shall constitute a representation and warranty by such Borrower, as of the date of such notice or request and as of the relevant Borrowing Date or Issuance Date, as applicable, that the applicable conditions in this SECTION 6.2 are satisfied. ARTICLE VII REPRESENTATIONS AND WARRANTIES Parent and the Company represent and warrant to each Agent and each Lender that: 7.1 EXISTENCE AND POWER. Each Borrower and each of its Subsidiaries: 67 (a) is duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has the power and authority and all governmental licenses, authorizations, consents and approvals (i) to own its assets and to carry on its business as currently conducted and (ii) to execute, deliver and perform its obligations under the Loan Documents to which it is a party; (c) is duly qualified as a foreign entity and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and (d) is in compliance with all Requirements of Law; except, in each case referred to in CLAUSE (B)(I), (C) or (D), to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 7.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by each Loan Party of each Loan Document to which such Loan Party is a party have been duly authorized by all necessary action on the part of such Loan Party (including any necessary action by the shareholders, partners or members thereof), and do not and will not: (a) contravene the terms of any of such Loan Party's Organization Documents; (b) conflict with or result in a breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which Parent, the Company or any Subsidiary is a party or any order, injunction, writ or decree of any Governmental Authority to which Parent, the Company or any Subsidiary or any of their respective assets is subject; or (c) violate any Requirement of Law. 7.3 GOVERNMENTAL AUTHORIZATION. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or the enforcement against, any Loan Party of any Loan Document to which such Loan Party is a party. 7.4 BINDING EFFECT. Each of this Agreement and each other Loan Document to which any Loan Party is a party constitutes the legal, valid and binding obligation of such Loan Party enforceable against such Loan Party in accordance with its terms, except as enforceability may 68 be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 7.5 FINANCIAL STATEMENTS. Parent has furnished or caused to be furnished to the Agents and the Lenders, (a) the audited consolidated financial statements of Parent and its Subsidiaries as at December 31, 1997, which statements have been prepared in conformity with GAAP and present fairly the financial condition of Parent and its Subsidiaries as at such date and the results of their operations for the period then ended and (b) the unaudited financial statements of Parent and its Subsidiaries as at September 30, 1998, which have been prepared in conformity with GAAP and present fairly the financial condition of Parent and its Subsidiaries as at such date and the results of operations for the period then ended (subject to normal year-end adjustments and the absence of footnotes). 7.6 NO MATERIAL ADVERSE CHANGE. Since the date of the audited consolidated financial statements described in SECTION 7.5, no event or events have occurred which, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect. 7.7 LITIGATION AND CONTINGENT LIABILITIES. No litigation (including any derivative action), arbitration proceeding or governmental proceeding is pending or, to Parent's knowledge, threatened against Parent, the Company or any Subsidiary which is reasonably likely to have a Material Adverse Effect, except as set forth in SCHEDULE 7.7. Other than any liability incident to such litigation or proceedings, neither Parent, the Company nor any Subsidiary has any material contingent liabilities not provided for or disclosed in the financial statements referred to in SECTION 7.5 or listed in SCHEDULE 7.7. 7.8 OWNERSHIP OF PROPERTIES; LIENS. Each of Parent, the Company and each Subsidiary owns good and marketable title to, or a valid leasehold interest in, all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, copyrights and the like) except as permitted pursuant to SECTION 8.8. 7.9 SUBSIDIARIES. Parent has no Subsidiaries except those listed in SCHEDULE 7.9. 7.10 PENSION AND WELFARE PLANS. Except as set forth on SCHEDULE 7.10, during the twelve-consecutive-month period prior to the date of the execution and delivery of this Agreement or the making of any Credit Extension hereunder, (a) no steps have been taken to terminate any Pension Plan which would be reasonably likely to result in Parent or the Company being required to make a contribution to such Pension Plan, or incurring a liability or obligation to such Pension Plan, in excess of U.S.$1,000,000, and (b) no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which 69 could result in the incurrence by Parent or the Company of any material liability, fine or penalty. Except as set forth on SCHEDULE 7.10, neither Parent nor the Company has any contingent liability with respect to any post-retirement benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of subtitle B of title I of ERISA. All Canadian Plans are duly registered where required by, and in good standing under, applicable law; all required contributions have been made under all Canadian Plans; all Canadian Plans are funded in accordance with the respective rules thereof and all Requirements of Law; and no past service or experience deficiency funding liabilities exist under any Canadian Plan. 7.11 INVESTMENT COMPANY ACT. Neither Parent, the Company nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940. 7.12 PUBLIC UTILITY HOLDING COMPANY ACT. Neither Parent, the Company nor any Subsidiary is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935. 7.13 REGULATION U. Neither Parent nor the Company is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. 7.14 TAXES. Each of Parent, the Company and each Subsidiary has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except for any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. 7.15 SOLVENCY, ETC. On the Closing Date, and immediately prior to and after giving effect to each Credit Extension hereunder and the use of the proceeds thereof (and taking into account any contribution or subrogation rights), (a) each of Parent's, the Company's and each Subsidiary's assets will exceed its liabilities and (b) each of Parent, the Company and each Subsidiary will be solvent, will be able to pay its debts as they mature, will own property with fair saleable value greater than the amount required to pay its debts and will have capital sufficient to carry on its business as then conducted. 7.16 HAZARDOUS MATERIALS. 7.16.1 RELEASE AND DISPOSAL. Except as previously disclosed to the Agents and the Lenders in writing prior to the date of this Agreement or for events or conditions which would not constitute a Material Environmental Event, (a) neither Parent, the Company nor, to the best of the Company's knowledge, any other Person has ever caused or permitted a "reportable 70 quantity" (as defined in the Comprehensive Environmental Response, Compensation and Liability Act) of any Hazardous Material to be released or disposed of on, under or at any real property located in the United States and now owned, leased or operated by Parent, the Company or any Subsidiary and neither Parent, the Company nor, to the best of Parent's knowledge, any other Person has ever caused or permitted any Hazardous Material to be released or disposed of on, under or at any real property located in Canada and now owned, leased or operated by Parent, the Company or any Subsidiary, (b) no such real property has ever been used (by Parent or, to the best of Parent's knowledge, by any other Person) as a site for intentional disposal of any Hazardous Material or a permanent storage site for any Hazardous Material, and (c) neither Parent nor, to the best of the Parent's knowledge, any of its predecessors has ever caused or permitted any Hazardous Material to be disposed of at any locations other than those identified pursuant to CLAUSE (A). 7.16.2 TREATMENT AND STORAGE. Except in compliance with applicable law or for events or conditions which would not constitute a Material Environmental Event, (a) neither Parent nor, to the best of Parent's knowledge, any other Person has ever caused or permitted any Hazardous Material to be treated or stored on, under or at any real property owned, leased or operated by Parent, the Company or any Subsidiary and (b) neither Parent nor, to the best of Parent's knowledge, any of its predecessors has ever caused or permitted any Hazardous Material (except for any which may have been present in raw materials or any products) to be transported to, treated, or stored at any locations other than those identified pursuant to CLAUSE (A). 7.17 ABSENCE OF DEFAULT. Neither Parent, the Company nor any Subsidiary is in material default under any material contract to which it is a party or by which it is bound. 7.18 LEASED PREMISES. As of the Closing Date neither Parent, the Company nor any Subsidiary is the lessee of any premises other than those premises set forth on SCHEDULE 7.18. 7.19 INFORMATION. All written information taken as a whole heretofore or contemporaneously herewith furnished by Parent, the Company or any Subsidiary to the Agents and the Lenders for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information taken as a whole hereafter furnished by or on behalf of Parent, the Company or any Subsidiary to either Agent or any Lender pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information taken as a whole is or will be incomplete by omitting to state any material fact necessary to make such information not misleading (it being recognized by the Agents and the Lenders that projections and forecasts provided by Parent are not to be viewed as representations and warranties and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results). 71 7.20 YEAR 2000 PROBLEM. Parent and its Subsidiaries have reviewed the areas within their business and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the "Year 2000 Problem" (that is, the risk that computer applications used by Parent and its Subsidiaries may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999). Based on such review and program, Parent reasonably believes that the "Year 2000 Problem" will not have a Material Adverse Effect. 7.21 BURDENSOME OBLIGATIONS. Neither Parent nor any Subsidiary is a party to any agreement or contract or subject to any corporate, partnership or other organizational restriction which might reasonably be expected to have a Material Adverse Effect. 7.22 LABOR MATTERS. Except as set forth on SCHEDULE 7.22, (a) neither Parent nor any Subsidiary is subject to any labor or collective bargaining agreement; and (b) there are no existing or threatened strikes, lockouts or other labor disputes involving Parent or any Subsidiary that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. Hours worked by and payments made to employees of Parent and its Subsidiaries are not in violation of the Fair Labor Standards Act, to the extent applicable, or any other applicable law, rule or regulation dealing with such matters. ARTICLE VIII COVENANTS So long as any Lender shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding, unless the Required Lenders waive compliance in writing, Parent shall: 8.1 REPORTS, CERTIFICATES AND OTHER INFORMATION. Furnish to each Agent and each Lender: 8.1.1 ANNUAL REPORTS. Promptly when available and in any event within 90 days after the close of each Fiscal Year, (i) a copy of the annual audit report of Parent and its Subsidiaries for such Fiscal Year, including therein consolidated balance sheets of Parent and its Subsidiaries as of the end of such Fiscal Year and consolidated statements of earnings and cash flow of Parent and its Subsidiaries for such Fiscal Year, which audit report shall be without qualification as to going concern or scope and shall be prepared by Price Waterhouse Coopers LLC or other independent auditors of recognized standing selected by Parent and acceptable to the Required Lenders; and (ii) consolidating balance sheets of Parent and its Subsidiaries as of the end of such Fiscal Year and consolidating statements of earnings for Parent and its Subsidiaries for such Fiscal Year, together with a certificate of the chief executive officer or the chief financial officer 72 of Parent certifying that such financial statements fairly present the financial condition and results of operations of Parent and its Subsidiaries as of the dates and periods indicated. 8.1.2 QUARTERLY REPORTS. Promptly when available and in any event within 45 days after the end of each Fiscal Quarter (except the last Fiscal Quarter) of each Fiscal Year, unaudited consolidated and consolidating balance sheets of Parent and its Subsidiaries as of the end of such Fiscal Quarter and unaudited consolidated and consolidating statements of earnings and cash flow for such Fiscal Quarter and for the period beginning with the first day of such Fiscal Year and ending on the last day of such Fiscal Quarter, together with a certificate of the chief executive officer or the chief financial officer of Parent, certifying that such financial statements (which may be prepared by Parent) fairly present the financial condition and results of operations of Parent and its Subsidiaries as of the dates and periods indicated, subject to changes resulting from normal year-end adjustments. 8.1.3 MONTHLY REPORTS. Until Parent completes a Qualified IPO, promptly when available and in any event within 30 days after the end of each month of each Fiscal Year, (i) unaudited consolidated and consolidating balance sheets of Parent and its Subsidiaries as of the end of such month and (ii) unaudited consolidated and consolidating statements of earnings for such month and for the period beginning with the first day of such Fiscal Year and ending on the last day of such month, together with a certificate of the chief executive officer or the chief financial officer of Parent, certifying that such financial statements (which may be prepared by Parent) fairly present the financial condition and results of operations of Parent and its Subsidiaries as of the dates and periods indicated, subject to changes resulting from normal year-end adjustments. 8.1.4 COMPLIANCE CERTIFICATES. Contemporaneously with the furnishing of a copy of each annual audit report pursuant to SECTION 8.1.1 and each set of quarterly statements pursuant to SECTION 8.1.2, a duly completed certificate in the form of EXHIBIT C, with appropriate insertions, dated the date of such annual report, such quarterly statements or such monthly statements and signed by the chief executive officer or the chief financial officer of Parent, containing a computation of each of the financial ratios and restrictions set forth in this SECTION 8 and to the effect that such officer has not become aware of any Event of Default or Unmatured Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it. 8.1.5 REPORTS TO SEC AND TO SHAREHOLDERS. Promptly upon the filing or sending thereof, a copy of any annual, periodic or special report or registration statement (inclusive of exhibits thereto) filed with the SEC or any securities exchange or commission and any report, proxy statement or other communication to Parent's shareholders generally. 8.1.6 NOTICE OF DEFAULT, LITIGATION AND ERISA MATTERS. Promptly (and in any event within one Business Day in the case of CLAUSE (A) and within five Business Days in the case of 73 CLAUSES (B) through (E)) after learning of any of the following, written notice describing the same and the steps being taken by Parent or the Subsidiary affected thereby with respect thereto: (a) the occurrence of an Event of Default or an Unmatured Event of Default; (b) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by Parent to the Agents and the Lenders which has been instituted or, to the knowledge of Parent, is threatened against Parent or any Subsidiary or to which any of the properties of any thereof is subject which has had or is reasonably likely to have a Material Adverse Effect; (c) any material adverse development which occurs in any litigation, arbitration or governmental investigation or proceeding previously disclosed pursuant to CLAUSE (B); (d) the institution of any steps by Parent, any of its Subsidiaries or any other Person to terminate any Pension Plan or any Canadian Plan, or the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA, or the taking of any action with respect to a Pension Plan or a Canadian Plan which could result in the requirement that Parent or the Company furnish a bond or other security to the PBGC or such Pension Plan or Canadian Plan, or the occurrence of any event with respect to any Pension Plan or Canadian Plan which could result in the incurrence by Parent or the Company of any material liability, fine or penalty, or any material increase in the contingent liability of Parent or the Company with respect to any post-retirement Welfare Plan benefit; and (e) the occurrence of any other event or circumstance which has had or is reasonably likely to have a Material Adverse Effect. 8.1.7 SUBSIDIARIES. Promptly upon the occurrences thereof, a written report of any change in the list of its Subsidiaries. 8.1.8 PROJECTIONS. As soon as practicable and in any event within 90 days after the commencement of each Fiscal Year, a consolidated plan and financial forecast for such Fiscal Year, including (a) a forecasted consolidated balance sheet and a consolidated statement of cash flow of Parent for such Fiscal Year and (b) forecasted consolidated statements of income and cash flows of Parent for each month of such Fiscal Year. 8.1.9 QUEBEC ASSETS. Concurrently with delivery of each quarterly report pursuant to SECTION 8.1.2, and promptly after any material increase therein, a report of the estimated fair market value of all assets of Parent and its Subsidiaries located in, and of the revenues of Parent and its Subsidiaries generated from accounts in, the Province of Quebec. 8.1.10 OTHER INFORMATION. Promptly from time to time, such other information concerning Parent and its Subsidiaries as either Agent or any Lender may reasonably request. 8.2 BOOKS, RECORDS AND INSPECTIONS. Keep, and cause each Subsidiary to keep, its books and records in accordance with sound business practices sufficient to allow the preparation of financial statements in accordance with GAAP; permit, and cause each Subsidiary to permit, on reasonable notice and at reasonable times and intervals, either Agent or any Lender or any representative thereof to inspect the properties and operations of Parent and of such Subsidiary; 74 and permit, and cause each Subsidiary to permit, on reasonable notice and at reasonable times and intervals, either Agent or any Lender or any representative thereof to visit any or all of its offices, to discuss its financial matters with its officers and its independent auditors (and Parent hereby authorizes such independent auditors to discuss such financial matters with either Agent or any Lender or any representative thereof), and to examine (and, at the expense of Parent or the applicable Subsidiary, photocopy extracts from) any of its books or other records. Parent agrees to pay the fees of its auditors incurred in connection with any reasonable exercise of the rights of the Agents and the Lenders pursuant to this Section. 8.3 INSURANCE. Maintain, and cause each Subsidiary to maintain, with reputable, financially sound insurance companies, insurance to such extent and against such hazards and liabilities as is customarily maintained by companies similarly situated (and, in any event, such insurance as may be required by any law or governmental regulation or any court order or decree); and, upon request of either Agent or any Lender, furnish to such Agent or such Lender a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by Parent and its Subsidiaries. Without limiting the foregoing, Parent will cause, and cause each Subsidiary to cause, each issuer of an insurance policy to provide the U.S. Agent with an endorsement or an independent instrument (i) in form and substance acceptable to the U.S. Agent and (ii) showing loss payable to the U.S. Agent and, if required by the U.S. Agent, naming the U.S. Agent as an additional insured. 8.4 COMPLIANCE WITH LAWS; PAYMENT OF TAXES AND LIABILITIES. (a) Comply, and cause each Subsidiary to comply, in all material respects with all material applicable laws, rules, regulations and orders; and (b) pay, and cause each Subsidiary to pay, prior to delinquency, all taxes and other governmental charges against it or any of its property; PROVIDED, HOWEVER, that the foregoing shall not require Parent or any Subsidiary to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP. 8.5 MAINTENANCE OF EXISTENCE, ETC. Maintain and preserve, and (subject to SECTION 8.11) cause each Subsidiary to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization; and (b) except where the failure to do so would not reasonably be expected to have a Material Adverse Effect its qualification and good standing as a foreign entity in each jurisdiction where the nature of its business makes such qualification necessary. 8.6 FINANCIAL COVENANTS. 8.6.1 MINIMUM NET WORTH. Not permit Net Worth at any time to be less than (a) a Dollar Equivalent amount of U.S.$19,000,000 PLUS (b) 75% of cumulative Consolidated Net Income for each Fiscal Quarter ending after December 31, 1998 (excluding any Fiscal Quarter in which Consolidated Net Income is not positive) PLUS (c) 80% of the net proceeds of any equity 75 issued by Parent or any of its Subsidiaries (other than equity issued by a Subsidiary to Parent or another Subsidiary) after December 31, 1998. 8.6.2 INTEREST COVERAGE RATIO. Not permit the Interest Coverage Ratio for any Computation Period to be less than the applicable ratio set forth below: - --------------------------------------------------- COMPUTATION INTEREST PERIOD ENDING: COVERAGE RATIO - --------------------------------------------------- 12/31/98 through 12/31/99 2.50 to 1.00 - --------------------------------------------------- 3/31/00 through 12/31/00 2.75 to 1.00 - --------------------------------------------------- 3/31/01 and thereafter 3.00 to 1.00. - --------------------------------------------------- 8.6.3 TOTAL DEBT TO EBITDA. Not permit the Total Debt to EBITDA Ratio as of the last day of any Fiscal Quarter to exceed the applicable ratio set forth below: - --------------------------------------------------- FISCAL TOTAL DEBT TO QUARTER ENDING: EBITDA RATIO - --------------------------------------------------- 12/31/98 through 6/30/99 4.75 to 1.00 - --------------------------------------------------- 9/30/99 through 12/31/99 4.25 to 1.00 - --------------------------------------------------- 3/31/00 through 12/31/00 4.00 to 1.00 - --------------------------------------------------- 3/31/01 and thereafter 3.75 to 1.00. - --------------------------------------------------- 8.6.4 SENIOR DEBT TO EBITDA. Not permit the Senior Debt to EBITDA Ratio as of the last day of any Fiscal Quarter to exceed the applicable ratio set forth below: - --------------------------------------------------- FISCAL SENIOR DEBT QUARTER ENDING: EBITDA RATIO - --------------------------------------------------- 12/31/98 through 6/30/99 3.90 to 1.00 - --------------------------------------------------- 9/30/99 through 12/31/99 3.75 to 1.00 - --------------------------------------------------- 3/31/00 through 12/31/00 3.50 to 1.00 - --------------------------------------------------- 3/31/01 and thereafter 3.25 to 1.00. - --------------------------------------------------- 8.7 LIMITATIONS ON DEBT. Not, and not permit any Subsidiary to, create, incur, assume or suffer to exist any Debt, except (a) obligations arising under the Loan Documents; (b) Debt of Subsidiaries to Parent or to other Subsidiaries; provided that an Agent has a perfected, first-priority security interest in all such Debt; (c) other Debt outstanding on the date hereof and listed 76 in SCHEDULE 8.7 or hereafter incurred in connection with Liens permitted by SECTION 8.8, and extensions, renewals and refinances of any Debt described in this CLAUSE (C) so long as the principal amount thereof is not increased; (d) Subordinated Debt; PROVIDED that the aggregate principal amount of all Seller Subordinated Debt at any time outstanding shall not exceed a Dollar Equivalent amount of U.S.$5,000,000; and (e) other Debt (which may be secured) in an aggregate amount not at any time exceeding a Dollar Equivalent amount of U.S.$10,000,000. 8.8 LIENS. Not, and not permit any Subsidiary to, create or permit to exist any Lien on any of its real or personal properties, assets or rights of whatsoever nature (whether now owned or hereafter acquired), except (a) Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves; (b) Liens arising in the ordinary course of business (such as (i) Liens of carriers, landlords, warehousemen, mechanics and materialmen and other similar Liens imposed by law and (ii) Liens incurred in connection with worker's compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA) or in connection with surety bonds (excluding appeal bonds and other bonds relating to judgments), bids, performance bonds and similar obligations) for sums not overdue or being contested in good faith by appropriate proceedings and not involving any deposits or advances or borrowed money or the deferred purchase price of property or services, and, in each case, for which it maintains adequate reserves; (c) Liens identified on SCHEDULE 8.8; (d) attachments, judgments and other similar Liens, and appeal bonds and other bonds relating to judgments, for sums not exceeding in the aggregate a Dollar Equivalent amount of U.S.$250,000, arising in connection with court proceedings, provided the execution or other enforcement of such Liens is effectively stayed and claims secured thereby are being actively contested in good faith and by appropriate proceedings; (e) easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of Parent and its Subsidiaries taken as a whole; (f) Liens securing Debt permitted pursuant to SUBSECTION 8.7(C) or (E); (g) extensions, renewals or replacements of any Lien permitted by the foregoing provisions of this SECTION 8.8, but only if the principal amount of the Debt secured thereby immediately prior to such extension, renewal or replacement is not increased and such Lien is not extended to any other property; (h) Liens securing Debt permitted by SUBSECTION 8.7(B), provided that the holder of each such Lien has granted an Agent a perfected, first-priority security interest in such Lien; and (i) Liens arising under the Loan Documents. 8.9 RESTRICTED PAYMENTS. Not, and not permit any Subsidiary to, (a) declare or pay any dividends on any of its capital stock (other than dividends payable in stock, warrants, options, or other non-cash rights with respect to stock of Parent), (b) purchase or redeem any capital stock of Parent or any Subsidiary or any warrants, options or other rights in respect of such stock, (c) make any other distribution (other than distributions payable in warrants, options, or other non-cash rights with respect to stock of Parent) to shareholders of Parent or any Subsidiary, (d) prepay, purchase or redeem any Subordinated Debt or (e) set aside funds for any of the 77 foregoing; PROVIDED that (i) any Subsidiary may declare and pay dividends or make any other distribution to Parent or to another wholly-owned Subsidiary, (ii) Parent may pay dividends of up to U.S.$1,500,000 to L & S Bishop Enterprises Inc., provided that concurrently therewith a corresponding amount is paid by L & S Bishop Enterprises Inc. to Parent to repay outstanding indebtedness of L & S Bishop Enterprises Inc. to Parent, and (iii) Parent may redeem up to U.S.$7,000,000 of its common stock held by the selling shareholders of Rubbish Removal, Inc. 8.10 ADVANCES AND OTHER INVESTMENTS. Not, and not permit any Subsidiary to, make, incur, assume or suffer to exist any Investment in any other Person, except the following: (a) Investments existing on the Closing Date and identified in SCHEDULE 7.9; (b) Investments to consummate Permitted Acquisitions; (c) in the ordinary course of business, contributions by Parent to the capital of any of its Subsidiaries, or by any such Subsidiary to the capital of any of its Subsidiaries; (d) in the ordinary course of business, Investments by Parent in any Subsidiary of Parent or by any of the Subsidiaries of Parent in any other Subsidiary of Parent, by way of intercompany loans, advances or guaranties, all to the extent permitted by SECTION 8.7; (e) Suretyship Liabilities permitted by SECTION 8.7; (f) good faith deposits made in connection with prospective Permitted Acquisitions; (g) loans to officers, directors and employees not at any time exceeding a Dollar Equivalent amount of U.S.$500,000 in the aggregate for all such individuals; and (h) to the extent they constitute Investments, deposits which give rise to Liens permitted by SUBSECTION (D), (F) or (G) (to the extent relating to Liens permitted by SUBSECTION (D) or (F)) of SECTION 8.8; and (i) Cash Equivalent Investments; PROVIDED that (x) any Investment which when made complies with the requirements of the definition of the term "CASH EQUIVALENT INVESTMENT" may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; and (y) no Investment otherwise permitted by CLAUSE (B), (C), (D), (E), (F) or (G) shall be permitted to be made if, immediately before or after giving effect thereto, any Event of Default or Unmatured Event of Default shall have occurred and be continuing. 78 8.11 MERGERS, CONSOLIDATIONS AND AMALGAMATIONS; ACQUISITIONS. Not, and not permit any Subsidiary to, be a party to any merger, consolidation or amalgamation, or make any Acquisition, except (a) any merger, consolidation or amalgamation of or by any wholly-owned Subsidiary into or with Parent or any other wholly-owned Subsidiary, (b) any merger, consolidation or amalgamation to consummate a Permitted Acquisition, (c) any Acquisition by Parent or any wholly-owned Subsidiary of the assets or stock of any wholly-owned Subsidiary, and (d) any Acquisition of a Person of the equity of a Person which is in, or of assets which are used, the same or a similar line of business as Parent and its Subsidiaries; PROVIDED that any Acquisition described in this CLAUSE (D) (a "PERMITTED ACQUISITION") must satisfy all of the following conditions: (i) each Person so acquired shall comply with all of the terms of this Agreement and the other Loan Documents that are applicable to such Person; (ii) in the case of the Acquisition of any Person, either the Board of Directors (or other equivalent governing body) of such Person incumbent at the time such Acquisition is proposed has approved such Acquisition or such Acquisition is otherwise deemed in the reasonable judgment of the Required Lenders to be a "friendly" Acquisition; (iii) no Event of Default or Unmatured Event of Default shall have occurred and be continuing at the time of, or would result from the making of, such Acquisition; (iv) either (A) the aggregate cash consideration to be paid by Parent and its Subsidiaries (including any Debt assumed or issued in connection therewith) in connection with such Acquisition (or any series of related Acquisitions) is less than (1) prior to a Qualifying IPO, a Dollar Equivalent amount of U.S.$7,500,000 or (2) after a Qualifying IPO, the greater of (x) a Dollar Equivalent amount of U.S.$10,000,000 and (y) 10% of the total consolidated assets of Parent or (B) the Required Lenders have consented to such Acquisition; and (v) in the case of an Acquisition of a landfill or a Person which owns a landfill, Parent shall have delivered to the Lenders an environmental review with respect to such landfill from an environmental consultant (who may be an employee of Parent) reasonably satisfactory to the U.S. Agent and such environmental report shall not disclose that, after giving effect to such Acquisition, there will be any Material Environmental Event. 8.12 ASSET DISPOSITIONS. Not, and not permit any Subsidiary to, sell, transfer, convey, lease or otherwise dispose of, or grant any option, warrant or other right with respect to, any of its assets, or sell, assign, pledge or otherwise transfer any receivables, contract rights, general intangibles, chattel paper or instruments, with or without recourse, except (a) the disposition of inventory or obsolete or unutilized assets in the ordinary course of business consistent with past practices and (b) other dispositions which do not exceed a Dollar Equivalent amount of U.S.$500,000 in any Fiscal Year. 8.13 USE OF PROCEEDS. Use the proceeds of the Loans (a) for general corporate purposes of Parent and its Subsidiaries (including capital expenditures and payments permitted by SECTION 8.9), (b) for ongoing working capital requirements of Parent and its Subsidiaries, (c) for Permitted Acquisitions and (d) to redeem up to a Dollar Equivalent amount of U.S.$7,000,000 of redeemable common stock held by the sellers of Rubbish Removal, Inc.; and not use or permit 79 any proceeds of any Loan to be used, either directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of "purchasing or carrying" any Margin Stock. 8.14 TRANSACTIONS WITH AFFILIATES. Not, and not permit any Subsidiary to, enter into or cause, suffer or permit to exist any transaction, arrangement or contract with any of its Affiliates (other than with Parent or any Subsidiary) which is on terms which are less favorable than are obtainable from any Person which is not one of its Affiliates. 8.15 PENSION PLANS. Maintain, and cause each Subsidiary to maintain, each Pension Plan and Canadian Plan in material compliance with all applicable requirements of law and regulations. 8.16 ENVIRONMENTAL COVENANTS. 8.16.1 ENVIRONMENTAL RESPONSE OBLIGATION. (a) Comply, and cause each Subsidiary to comply, in all material respects with any federal, provincial or state judicial or administrative order requiring the performance at any real property owned, operated or leased by Parent or any Subsidiary of activities in response to the release or threatened release of a Hazardous Material; (b) notify the U.S. Agent within ten days of the receipt of any written claim, demand, proceeding, action or notice of liability by any Person arising out of or relating to the release or threatened release of a Hazardous Material; and (c) notify the U.S. Agent within ten days of any release, threat of release, or disposal of Hazardous Material reported by Parent or any Subsidiary to any governmental or regulatory authority at any real property owned, operated, or leased by Parent or any Subsidiary. 8.16.2 ENVIRONMENTAL LIABILITIES. (a) Comply, and cause each Subsidiary to comply, in all material respects with all material Environmental Laws; (b) without limiting CLAUSE (A), not commence disposal of any Hazardous Material into or onto any real property owned, operated or leased by Parent or any Subsidiary; and (c) without limiting CLAUSE (A), not allow any Lien imposed pursuant to any law, regulation or order relating to Hazardous Materials or the disposal thereof to remain on any real property owned, operated or leased by Parent or any Subsidiary. 8.17 UNCONDITIONAL PURCHASE OBLIGATIONS. Not, and not permit any Subsidiary to, enter into or be a party to any material contract for the purchase of materials, supplies or other property or services, if such contract requires that payment be made by it regardless of whether or not delivery is ever made of such materials, supplies or other property or services. 8.18 FURTHER ASSURANCES. Take, and cause each Subsidiary to take, such actions as the U.S. Agent, the Canadian Agent, the Required U.S. Lenders, the Required Canadian Lenders or the Required Lenders may reasonably request from time to time (including the execution and delivery of guaranties, security agreements, pledge agreements, stock powers, financing statements and other documents, the filing or recording of any of the foregoing, the delivery of 80 stock certificates and other collateral with respect to which perfection is obtained by possession, and the delivery of opinions of counsel as to the effectiveness of the foregoing) to ensure that (a) the obligations of each Borrower hereunder and under the other Loan Documents to which it is a party are secured by substantially all of the assets (other than real property) of such Borrower and guarantied by (i) in the case of Parent, all Subsidiaries of Parent (including the Company) and (ii) in the case of the Company, Parent and all other Subsidiaries of Parent; and (b) the obligations of each Guarantor under each Guaranty to which it is a party are secured by substantially all of the assets (other than real property) of such Guarantor. Without limiting the foregoing, if at any time any Canadian bank is to be added as a Canadian Lender hereunder (pursuant to SECTION 2.12, SECTION 12.8 or otherwise), Parent will, prior to such Person becoming a Canadian Lender, execute and deliver such documents, and take such other actions, as are necessary to grant Bank Act Security to such Canadian Lender. Notwithstanding the foregoing, Lacey Garbage Disposal Ltd. shall not be obligated to issue any guaranty or grant any security so long as (x) its total assets do not at any time exceed Cdn.$250,000 and (y) it is wound up or dissolved on or before March 31, 1999. 8.19 OPERATING LEASES. Not, and not permit any Subsidiary to, be a party to Operating Leases requiring rental payments in excess of a Dollar Equivalent amount of U.S.$500,000 in the aggregate (excluding intercompany leases) in any Fiscal Year for Parent and its Subsidiaries taken as a whole. 8.20 BUSINESS. Not, and not permit any Subsidiary to, engage in any business other than the solid waste business. 8.21 INCONSISTENT AGREEMENTS. Not, and not permit any Subsidiary to, enter into any material agreement containing any provision which would be violated or breached by any borrowing by Parent or the Company hereunder or by the performance by Parent, the Company or any Subsidiary of any of its obligations hereunder or under any other Loan Document. 8.22 CAPITAL EXPENDITURES. Not permit all capital expenditures of Parent and its Subsidiaries (excluding, to the extent included in capital expenditures, assets acquired in a Permitted Acquisition) during any period of four consecutive Fiscal Quarters ending on the last day of a Fiscal Quarter (beginning with the Fiscal Quarter ending March 31, 1999) to exceed an amount equal to (a) 2 multiplied by (b) the amount of depreciation and amortization expensed by Parent and its Subsidiaries in accordance with GAAP during such period. 8.23 OTHER NEGATIVE PLEDGES. Not, and not permit any Subsidiary to, enter into any agreement, other than the Loan Documents, with any Person which in any way restricts the ability of Parent or any Subsidiary to place a Lien on any of its real or personal property, assets or rights of whatsoever nature. 81 8.24 REDEEMABLE EQUITY INTERESTS. Not, and not permit any Subsidiary to, issue any Redeemable Equity Interests. 8.25 NOVA SCOTIA SUB AND ONTARIO GP. Not permit Nova Scotia Sub to hold any assets other than the membership interests of CERI, L.L.C or to conduct any business whatsoever (other than making additional investments in CERI, L.L.C. and intercompany loans and advances to Parent and other Subsidiaries and borrowing funds to make such loans and advances); and not permit Ontario GP to hold any assets other than the 1% general partnership interest in the Company or to conduct any business whatsoever (other than making additional investments in the Company). 8.26 QUEBEC COLLATERAL. Promptly upon request of the Canadian Agent (acting at the direction or with the consent of the Required Lenders), grant, and cause each Subsidiary to grant, to the Canadian Agent a perfected security interest in all assets of Parent or such Subsidiary located in, and all accounts of Parent or such Subsidiary owed by Persons located in, the Province of Quebec. 8.27 RELEASE OF JVS PLEDGE. Cause JVS to make a lump sum payment of the amount owing to John Vinciguerra, Madeline Vinciguerra, Robert Vinciguerra, Janice Vinciguerra and John Vinciguerra, Jr. (the "JVS SECURED PARTIES") and obtain a release of all liens and security interests granted to the JVS Secured Parties, including the certificates for the shares of JVS, by February 28, 1999; and concurrently with such release (or as soon thereafter as practicable) cause all certificates evidencing shares of JVS to be delivered to the U.S. Agent to be held pursuant to the terms of the U.S. Pledge Agreement. ARTICLE IX EVENTS OF DEFAULT 9.1 EVENT OF DEFAULT. Any of the following shall constitute an "EVENT OF DEFAULT": (a) NON-PAYMENT OF THE LOANS, ETC. Default in the payment when due of the principal of any Loan, any Bankers' Acceptance, any BA Equivalent Note or any L/C Obligation; or default, and continuance thereof for five days, in the payment when due of any interest, fee or other amount payable by either Borrower hereunder or under any other Loan Document. (b) NON-PAYMENT OF OTHER DEBT. Any default shall occur under the terms applicable to any Debt of Parent or any Subsidiary in an aggregate amount (for all Debt so affected) exceeding a Dollar Equivalent amount of U.S.$1,000,000 and such default shall (a) consist of the failure to pay such Debt when due (subject to any applicable grace period), 82 whether by acceleration or otherwise, or (b) accelerate the maturity of such Debt or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Debt to become due and payable prior to its expressed maturity. (c) OTHER MATERIAL OBLIGATIONS. Default in the payment when due, or in the performance or observance of, any material obligation of, or condition agreed to by, Parent or any Subsidiary with respect to any material purchase or lease of goods or services if such default has had or is reasonably likely to have a Material Adverse Effect. (d) BANKRUPTCY, INSOLVENCY, ETC. Parent or any Subsidiary becomes insolvent or generally fails to pay, or admits in writing its inability or refusal to pay, debts as they become due; or Parent or any Subsidiary applies for, consents to, or acquiesces in the appointment of a trustee, receiver or other custodian for Parent or such Subsidiary or any property thereof, or makes a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed for Parent or any Subsidiary or for a substantial part of the property of any thereof and is not discharged within 60 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding (including any Insolvency Proceeding) under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding (except the voluntary winding up or dissolution, not under any bankruptcy or insolvency law, of any Subsidiary other than the Company), is commenced in respect of Parent or any Subsidiary, and if such case or proceeding is not commenced by Parent or such Subsidiary, it is consented to or acquiesced in by Parent or such Subsidiary, or remains for 60 days undismissed; or Parent or any Subsidiary takes any corporate, partnership or other organizational action to authorize, or in furtherance of, any of the foregoing. (e) NON-COMPLIANCE WITH PROVISIONS OF THIS AGREEMENT. Failure by Parent to comply with or to perform any covenant set forth in SECTIONS 8.6 through 8.15 or 8.17 through 8.22; or failure by Parent to comply with or to perform any other provision of this Agreement (and not constituting an Event of Default under any of the other provisions of this SECTION 9) and continuance of such failure for 30 days after written notice thereof to Parent from either Agent or any Lender. (f) WARRANTIES. Any warranty made by either Borrower herein is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by either Borrower to either Agent or any Lender is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified. (g) PENSION PLANS. (i) Institution of any steps by Parent or the Company or any other Person to terminate a Pension Plan or a Canadian Plan if as a result of such termination Parent or the Company could be required to make a contribution to such Pension Plan or Canadian Plan, or could incur a liability or obligation to such Pension Plan or Canadian Plan, in 83 excess of a Dollar Equivalent amount of U.S.$1,000,000, or (ii) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. (h) JUDGMENTS. Final judgments which exceed an aggregate Dollar Equivalent amount of U.S.$250,000 (excluding any portion thereof covered by insurance so long as the applicable insurer has not denied coverage and Parent reasonably believes such portions will be paid by such insurer) shall be rendered against Parent or any Subsidiary and shall not have been discharged or vacated or had execution thereof stayed pending appeal within 30 days after entry or filing of such judgments. (i) INVALIDITY OF COLLATERAL DOCUMENTS, ETC. Any Collateral Document shall cease to be in full force and effect in all material respects with respect to the Loan Party which is a party thereto; any Loan Party shall fail (subject to any applicable grace period) to comply with or to perform any applicable provision of any Collateral Document to which it is a party (i) if as a result thereof the Lien on any material portion of the collateral granted thereunder becomes unperfected or is otherwise adversely affected or (ii) within ten days after written request of either Agent or any Lender; or any Loan Party (or any Person by, through or on behalf of any Loan Party) shall contest in any manner the validity, binding nature or enforceability of any Collateral Document. (j) INVALIDITY OF GUARANTIES, ETC. Any Guaranty shall cease to be in full force and effect with respect to any applicable Guarantor; any Guarantor shall fail (subject to any applicable grace period) to comply with or to perform any applicable provision of the applicable Guaranty; any Guarantor (or any Person by, through or on behalf of such Guarantor) shall contest in any manner the validity, binding nature or enforceability of the applicable Guaranty with respect to such Guarantor; or Parent (or any Person by, through or on behalf of Parent) shall contest in any manner the validity, binding nature or enforceability of any provision of SECTION 11. (k) CHANGE OF CONTROL, ETC. Any Change of Control shall occur; or Allen Fracassi, Phillip Fracassi, any member of their respective immediate families or any Affiliate of the foregoing shall at any time collectively own or control 15% or more of the outstanding common stock of Parent; or the Company shall cease to be a wholly-owned Subsidiary (directly or indirectly) of Parent. (l) BONDING ARRANGEMENTS. The Company or any Subsidiary breaches or defaults with respect to the terms of one or more bonded contracts if the effect of such breach or default is to cause one or more Persons issuing bonds for the Company or any Subsidiary to take possession of the work under contracts which are subject to bonds aggregating a Dollar Equivalent amount of U.S. $1,000,000 or more. 84 (m) MATERIAL ADVERSE CHANGE. Any material adverse change shall occur in (a) the financial condition, operations, business or assets of Parent and its Subsidiaries taken as a whole or (b) the ability of Parent, the Company or any other Subsidiary to timely and fully perform any of its payment or other material obligations under this Agreement or any other Loan Document to which it is a party. 9.2 REMEDIES. If any Event of Default occurs, the Agents shall, at the request of, or may, with the consent of, the Required Lenders do any or all of the following: (a) declare the commitment of each Lender to make any Credit Extension (including any obligation of either Issuing Lender to Issue any Letter of Credit) to be terminated, whereupon such commitments and obligation shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers; (c) demand that each Borrower immediately provide Cash Collateral to the Applicable Agent in an amount equal to the maximum aggregate amount that is or at any time thereafter may become available for drawing under any outstanding Letter of Credit issued for the account of such Borrower (whether or not any beneficiary shall have presented, or shall be entitled at such time to present, the drafts or other documents required to draw under such Letter of Credit), whereupon such Borrower shall become immediately obligated to provide such Cash Collateral; (d) demand that Parent immediately provide Cash Collateral to the Canadian Agent in an amount equal to the face amount of all outstanding Bankers' Acceptances and BA Equivalent Notes, whereupon Parent shall become immediately obligated to provide such Cash Collateral; and (e) exercise on behalf of the Agents and the Lenders all rights and remedies available to the Agents and the Lenders under the Loan Documents or applicable law; PROVIDED, HOWEVER, that upon the occurrence of any Event of Default specified in SUBSECTION 9.1(D), the obligation of each Lender to make any Credit Extension (including the obligation of either Issuing Lender to Issue any Letter of Credit) shall automatically terminate and the unpaid principal amount of all outstanding Loans and all other Obligations shall automatically become due and payable and each Borrower shall automatically become obligated to provide Cash Collateral in the amounts set forth in CLAUSES (C) and (D) above, as applicable, in each case without further act of either Agent or any Lender. 85 9.3 RIGHTS NOT EXCLUSIVE. The rights provided for in this Agreement are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE X THE AGENTS 10.1 APPOINTMENT AND AUTHORIZATION. (a) Each Lender hereby irrevocably (subject to SECTION 10.9) appoints, designates and authorizes each Agent to take such action on its behalf under the provisions of this Agreement and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement, no Agent shall have any duties or responsibilities except those expressly set forth herein, nor shall either Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against either Agent. (b) The applicable Issuing Lender shall act on behalf of the Applicable Lenders with respect to the Letters of Credit Issued by it and the documents associated therewith until such time and except for so long as the Applicable Agent may agree at the request of the Required U.S. Lenders or the Required Canadian Lenders, as applicable, to act for such Issuing Lender with respect thereto; PROVIDED, HOWEVER, that each Issuing Lender shall have all of the benefits and immunities (i) provided to the Agents in this ARTICLE X with respect to any acts taken or omissions of such Issuing Lender in connection with Letters of Credit Issued by it or proposed to be Issued by it and the applications and agreements for letters of credit pertaining to the Letters of Credit as fully as if the term "Agent", as used in this ARTICLE X, included such Issuing Lender with respect to such acts or omissions, and (ii) as additionally provided in this Agreement with respect to such Issuing Lender. 10.2 DELEGATION OF DUTIES. Each Agent may execute any of its duties under this Agreement by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. No Agent shall be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 10.3 LIABILITY OF AGENTS. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Parent or any Subsidiary or Affiliate of Parent, or any officer thereof, contained in this Agreement or in any certificate, report, statement or other document 86 referred to or provided for in, or received by either Agent under or in connection with, this Agreement, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, or for any failure of Parent or the Company or any other party to perform its obligations hereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement, or to inspect the properties, books or records of Parent or any of Parent's Subsidiaries or Affiliates. 10.4 RELIANCE BY AGENTS. (a) Each Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Parent or the Company), independent accountants and other experts selected by either Agent. Each Agent shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first receive such advice or concurrence of the Required U.S. Lenders, the Required Canadian Lenders or the Required Lenders, as applicable, as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Each Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request or consent of the Required U.S. Lenders, the Required Canadian Lenders, the Required Lenders or all Lenders, as applicable, and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. (b) For purposes of determining compliance with the conditions specified in SECTION 6.1, each Lender that has executed this Agreement shall be deemed to have consented to, approved or accepted, or to be satisfied with, each document or other matter sent by an Agent to such Lender for consent, approval, acceptance or satisfaction. 10.5 NOTICE OF DEFAULT. No Agent shall be deemed to have knowledge or notice of the occurrence of any Event of Default or Unmatured Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to such Agent for the account of the Lenders, unless such Agent shall have received written notice from a Lender or a Borrower referring to this Agreement, describing such Event of Default or Unmatured Event of Default and stating that such notice is a "notice of default". If either Agent receives such a notice, such Agent will notify the other Agent and the Lenders of its receipt thereof. Each Agent shall take such action with respect to such Event of Default or Unmatured Event of Default as may be requested by the Required Lenders in accordance with ARTICLE IX; PROVIDED, HOWEVER, that unless and until such Agent has received any such request, such Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Event of Default or Unmatured Event of Default as it shall deem advisable or in the best interest of the Lenders. 87 10.6 CREDIT DECISION. Each Lender acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by either Agent hereinafter taken, including any review of the affairs of Parent and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to each Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Parent and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Borrowers hereunder. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Borrowers. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by an Agent, no Agent shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Borrowers which may come into the possession of any of the Agent-Related Persons. 10.7 INDEMNIFICATION OF AGENTS. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Borrowers and without limiting the obligation of the Borrowers to do so), ratably according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; PROVIDED, HOWEVER, that no Lender shall be liable for the payment to any Agent-Related Person of any portion of the Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse each Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by such Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement or any document contemplated by or referred to herein, to the extent that such Agent is not reimbursed for such expenses by or on behalf of the Borrowers. The undertaking in this Section shall survive the termination of this Agreement, the payment of all Obligations hereunder and the resignation or replacement of either Agent. 10.8 AGENTS IN INDIVIDUAL CAPACITY. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Parent and its Subsidiaries and Affiliates as though BofA were not the U.S. Agent and an Issuing Lender and BACAN were not the Canadian Agent and an Issuing Lender, and without 88 notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding Parent or its Affiliates (including information that may be subject to confidentiality obligations in favor of Parent, the Company or such Subsidiary) and acknowledge that BofA and its Affiliates shall be under no obligation to provide such information to them. With respect to their respective Loans, BofA and any Affiliate thereof shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Agent or an Issuing Lender. 10.9 SUCCESSOR AGENTS. Either Agent may, and at the request of the Required Lenders shall, resign as an Agent upon 30 days' notice to the Lenders. If either Agent resigns under this Agreement, the Required Lenders shall appoint from among the Lenders a successor U.S. Agent or Canadian Agent, as applicable, for the Lenders. If no successor agent is appointed prior to the effective date of the resignation of the Applicable Agent, such Agent may appoint, after consulting with the Lenders and Parent, a successor U.S. Agent or Canadian Agent, as applicable, from among the Lenders. Upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "U.S. Agent" or "Canadian Agent," as applicable, shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this ARTICLE X and SECTIONS 12.4 and 12.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was an Agent under this Agreement. If no successor agent has accepted appointment as the Applicable Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Applicable Lenders shall perform all of the duties of such Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. Notwithstanding the foregoing, however, BofA may not be removed as the U.S. Agent and BACAN may not be removed as Canadian Agent at the request of the Required Lenders unless such Person and each Affiliate thereof acting as an Agent or an Issuing Lender shall also simultaneously be relieved of its duties and responsibilities hereunder in such capacity pursuant to documentation in form and substance reasonably satisfactory to BofA, BACAN and any other applicable Affiliate thereof. 10.10 WITHHOLDING TAX. (a) If any U.S. Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 (or any successor form) pursuant to SUBSECTION 5.1(F) and such U.S. Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such U.S. Lender, then such U.S. Lender agrees to notify the U.S. Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such U.S. Lender. To the extent of such percentage amount, the U.S. Agent will treat such U.S. Lender's IRS Form 1001 as no longer valid, and such U.S. Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. 89 (b) If any U.S. Lender claiming exemption from United States withholding tax by filing IRS Form 4224 (or any successor form) with the U.S. Agent pursuant to SUBSECTION 5.1(F) grants a participation in all or part of the Obligations of the Company to such U.S. Lender, then such U.S. Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (c) If any Lender is entitled to a reduction in the applicable withholding tax, the Applicable Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by SUBSECTION 5.1(F) are not delivered to the Applicable Agent, then the Applicable Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (d) If the IRS or Revenue Canada or any other Governmental Authority of the United States, Canada or any other jurisdiction asserts a claim that an Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or was not properly executed, or because such Lender failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify such Agent fully for all amounts paid, directly or indirectly, by such Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to such Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Lenders under this subsection shall survive the payment of all Obligations. 10.11 COLLATERAL MATTERS RELEASES OF GUARANTORS. (a) The Lenders irrevocably authorize each Agent, at its option and in its discretion, to release any Lien granted to or held by such Agent upon any Collateral (i) upon termination of the Commitments and payment in full of all Loans and all other obligations of Parent and the Company hereunder and expiration or termination of all Letters of Credit; (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; (iii) constituting property in which Parent, the Company or the applicable Subsidiary owned no interest at the time the Lien was granted or at any time thereafter; or (iv) subject to SECTION 12.1, if approved, authorized or ratified in writing by the Required Lenders. (b) The Lenders irrevocably authorize each Agent, at its option and in its discretion, to release any Guarantor (other than a Borrower) from its obligations under any applicable Guaranty if such Guarantor ceases to be a Subsidiary of Parent as a result of a transaction permitted hereunder. 90 (c) Upon request by either Agent at any time, the Lenders will confirm in writing such Agent's authority to release particular types or items of Collateral, or to release a Guarantor, pursuant to this SECTION 10.11. 10.12 CO-AGENTS. No Lender identified on the facing page, the initial page or the signature pages of this Agreement as being a "Co-Agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders. Each Lender acknowledges that it has not relied, and will not rely, on any Lender so identified in deciding to enter into this Agreement or in taking or refraining from taking any action hereunder or pursuant hereto. ARTICLE XI GUARANTY BY THE COMPANY 11.1 GUARANTY. Parent hereby absolutely, unconditionally and irrevocably guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of all obligations of the Company (a) under this Agreement, including the principal of and interest on each Loan to the Company, all obligations of the Company under or in connection with any Bankers' Acceptance or BA Equivalent Note, and all costs and expenses of the Agents and the Lenders in enforcing any of their rights against the Company hereunder, and (b) under any Hedging Agreement with any Lender or any Affiliate thereof. Upon failure by the Company to pay punctually any such amount, Parent shall forthwith on demand pay the amount not so paid at the place, in the currency and in the manner specified in this Agreement or the applicable Hedging Agreement. 11.2 GUARANTY UNCONDITIONAL. The obligations of Parent under this SECTION 11 shall be absolute, unconditional and irrevocable and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of the Company under this Agreement, any other Loan Document or any applicable Hedging Agreement, by operation of law or otherwise; (b) any modification or amendment of or supplement to this Agreement, any other Loan Document or any applicable Hedging Agreement; (c) any release, impairment, non-perfection or invalidity of any other guaranty or of any direct or indirect security for any obligation of the Company under this Agreement, any other Loan Document or any applicable Hedging Agreement; 91 (d) any change in the corporate existence, structure or ownership of the Company or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Company or the Company's assets or any resulting release or discharge of any obligation of the Company contained in this Agreement, any other Loan Document or any applicable Hedging Agreement; (e) the existence of any claim, set-off or other right which Parent may have at any time against the Company, either Agent, any Lender or any other Person, whether in connection herewith or any unrelated transaction, PROVIDED that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (f) any invalidity or unenforceability relating to or against the Company for any reason of this Agreement, any other Loan Document or any applicable Hedging Agreement, or any provision of any applicable law or regulation purporting to prohibit the payment by the Company of the principal of or interest on any Loan or any other amount payable by the Company under this Agreement, any other Loan Document or any applicable Hedging Agreement; or (g) any other act or omission to act or delay of any kind by the Company, either Agent, any Lender or any other Person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of Parent's obligations as guarantor hereunder. 11.3 DISCHARGE ONLY UPON PAYMENT IN FULL; REINSTATEMENT IN CERTAIN CIRCUMSTANCES. Parent's obligations as guarantor hereunder shall remain in full force and effect until the Commitments shall have terminated and all obligations of the Company under this Agreement and any applicable Hedging Agreement shall have been paid in full. If at any time any payment of principal, interest or any other amount payable by the Company under or in connection with this Agreement, any other Loan Document or any applicable Hedging Agreement is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of the Company or otherwise, Parent's obligations hereunder with respect to such payment shall be reinstated as though such payment had been due but not made at such time. 11.4 WAIVER BY PARENT. Parent irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against the Company or any other Person. 11.5 SUBROGATION. Notwithstanding any payment made by or for the account of the Company pursuant to this ARTICLE XI, Parent shall not be subrogated to any right of either Agent or any Lender until such time as the Agents and the Lenders and any applicable Affiliate of any Lender shall have received final payment in cash of the full amount of all obligations of the Company hereunder and under any applicable Hedging Agreement. 92 11.6 STAY OF ACCELERATION. If acceleration of the time for payment of any amount payable by the Company under this Agreement, any other Loan Document or any applicable Hedging Agreement is stayed upon the insolvency, bankruptcy or reorganization of the Company, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by Parent hereunder forthwith on demand by the U.S. Agent made at the request of the Required Lenders. ARTICLE XII MISCELLANEOUS 12.1 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement, and no consent with respect to any departure by either Borrower herefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by the U.S. Agent at the written request or with the written consent of the Required Lenders) and Parent and acknowledged by the U.S. Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; PROVIDED that no such waiver, amendment or consent shall, unless in writing and signed by all Lenders and the Borrowers and acknowledged by the U.S. Agent, do any of the following: (a) increase or extend the Commitment of any Lender (or reinstate any Commitment terminated pursuant to SECTION 9.2); (b) postpone or delay any date fixed by this Agreement for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on, any Loan or (subject to CLAUSE (IV) below) reduce any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans and L/C Obligations which is required for the Lenders or any of them to take any action hereunder; (e) amend or release any Guaranty, amend ARTICLE XI or release Parent from any obligation thereunder or release or subordinate any substantial portion of the collateral granted under the Collateral Documents; or (f) amend this Section, the definition of "Pro Rata Share" or any provision herein providing for consent or other action by all Lenders; 93 and PROVIDED, FURTHER, that (i) no amendment, waiver or consent shall, unless in writing and signed by the applicable Issuing Lender in addition to the Required Lenders or all Lenders, as the case may be, affect the rights or duties of such Issuing Lender under this Agreement or any L/C-Related Document, (ii) no amendment, waiver or consent shall, unless in writing and signed by the Applicable Agent in addition to the Required Lenders or all Lenders, as the case may be, affect the rights or duties of such Agent under this Agreement, (iii) no amendment, waiver or consent shall, unless in writing and signed by all Canadian Lenders in addition to the Required Lenders or all Lenders, as the case may be, affect the rights or duties of the Canadian Lenders under this Agreement or any other Loan Document and (iv) the amount of any fee payable pursuant to SECTION 2.5.1 or SUBSECTION 4.8(B) may be changed pursuant to a written agreement between Parent and the Person to which such fee is payable. 12.2 NOTICES. (a) All notices, requests and other communications hereunder shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by either Borrower to either Agent by facsimile shall be immediately confirmed by a telephone call to the recipient at the number specified on SCHEDULE 12.2) and mailed, faxed or delivered to the address or facsimile number specified for notices on SCHEDULE 12.2; or, in the case of either Borrower or either Agent, to such other address as shall be designated by such party in a written notice to the other parties, and in the case of any other party, at such other address as shall be designated by such party in a written notice to the Borrowers and the Agents. (b) All such notices, requests and other communications hereunder shall, when transmitted by overnight delivery, or faxed, be effective when delivered, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. or Canadian mail; except that notices to either Agent pursuant to ARTICLE II, III, IV or X shall not be effective until actually received by such Agent, and notices pursuant to ARTICLE IV to an Issuing Lender shall not be effective until actually received by such Issuing Lender. (c) Any agreement of the Agents and the Lenders herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Borrowers. The Agents and the Lenders shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Applicable Borrower to give such notice and the Agents and the Lenders shall not have any liability to such Borrower or other Person on account of any action taken or not taken by either Agent or any Lender in reliance upon such telephonic or facsimile notice. The obligation of the Borrowers to repay the Loans and L/C Obligations shall not be affected in any way or to any extent by any failure of either Agent or any Lender to receive written confirmation of any telephonic or facsimile notice or the receipt by either Agent or any Lender of a confirmation which is at variance with the terms understood by such Agent or such Lender to be contained in the telephonic or facsimile notice. 94 12.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of either Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 12.4 COSTS AND EXPENSES. Parent shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse BofA (in its capacity as U.S. Agent and Issuing Lender) and BACAN (in its capacity as Canadian Agent and Issuing Lender) within five Business Days after demand (subject to SUBSECTION 6.1(F)) for all reasonable costs and expenses incurred by BofA (in its capacity as U.S. Agent and Issuing Lender) or BACAN (in its capacity as Canadian Agent and Issuing Lender) in connection with the development, preparation, syndication, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any other Loan Document and any other document prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by BofA (in its capacity as U.S. Agent and Issuing Lender) and BACAN (in its capacity as Canadian Agent and Issuing Lender) with respect thereto; and (b) pay or reimburse each Agent and each Lender within five Business Days after demand for all reasonable costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement or preservation of any right or remedy under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). The agreements in this Section shall survive the termination of this Agreement and the payment of all other Obligations. 12.5 BORROWER INDEMNIFICATION. Whether or not the transactions contemplated hereby are consummated, the Borrowers shall indemnify and hold the Agent-Related Persons and each Lender and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each an "INDEMNIFIED PERSON") harmless from and against any and all reasonable liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans, the termination of the Letters of Credit and the termination, resignation or replacement of either Agent or the replacement of any Lender) be imposed on, incurred by or asserted against any Indemnified Person in any way relating to or arising out of this Agreement or any document 95 contemplated by or referred to herein, or the transactions contemplated hereby or thereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or Letters of Credit or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "INDEMNIFIED LIABILITIES"); PROVIDED that neither Borrower shall have any obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities to the extent resulting from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive the termination of this Agreement and the payment of all other Obligations. 12.6 PAYMENTS SET ASIDE. To the extent that either Borrower makes a payment to either Agent or any Lender, or either Agent or any Lender exercises its right of set-off, and such payment or the proceeds of such set-off or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by such Agent or such Lender in its discretion) to be repaid to a trustee or receiver, or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred and (b) each Lender severally agrees to pay to the Applicable Agent upon demand its pro rata share of any amount so recovered from or repaid by such Agent. 12.7 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrowers may not assign or transfer any of their respective rights or obligations under this Agreement without the prior written consent of the Agents and each Lender. 12.8 ASSIGNMENTS, PARTICIPATIONS, ETC. (a) Any Lender may, with the written consent of Parent (at all times other than during the existence of an Event of Default), the Agents and the Issuing Lenders, which consents shall not be unreasonably withheld or delayed, at any time assign and delegate to one or more commercial banks or other financial institutions (provided that no written consent of Parent, either Agent or either Issuing Lender shall be required in connection with any assignment and delegation by a Lender to a commercial bank or financial institution that is an Affiliate of such Lender (so long as such assignment will not result in any increased costs to either Borrower) or to another Lender) (each an "ASSIGNEE") all or any part of the Loans, the Commitment, the L/C Obligations and the other rights and obligations of such Lender hereunder, in a minimum Dollar Equivalent amount of U.S.$5,000,000 or, if less, the entire amount of all Loans, the Commitment, L/C Obligations and other rights and obligations of such Lender hereunder; PROVIDED, HOWEVER, that the Borrowers and the Agents may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (x) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the 96 Borrowers and the Agents by such Lender and the Assignee; (y) such Lender and its Assignee shall have delivered to the Borrowers and the Agents an Assignment and Acceptance ("ASSIGNMENT AND ACCEPTANCE") in the form of EXHIBIT E-1 or EXHIBIT E-2, as applicable, together with any Note or Notes subject to such assignment and (z) the assignor Lender or Assignee shall have paid to the Applicable Agent a processing fee in a Dollar Equivalent amount of U.S.$3,500. (b) From and after the date that the U.S. Agent notifies the assignor Lender that it has received (and provided its consent and, to the extent required, received the consents of Parent, the other Agent and the Issuing Lenders with respect to) an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights hereunder have been assigned to it and obligations hereunder have been assumed by it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) Any Lender may at any time sell to one or more commercial banks or other Persons not Affiliates of Parent (a "PARTICIPANT") participating interests in any Loan, the Commitment of such Lender and the other interests of such Lender (the "ORIGINATING LENDER") hereunder and under the other Loan Documents; PROVIDED, HOWEVER, that (i) the originating Lender's obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) the Borrowers, the Issuing Lenders and the Agents shall continue to deal solely and directly with the originating Lender in connection with the originating Lender's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Lenders as described in the FIRST PROVISO to SECTION 12.1. In the case of any such participation, the Participant shall be entitled to the benefit of SECTIONS 5.1, 5.3, 5.4, 5.6 and 12.5 as though it were also a Lender hereunder (provided that neither Borrower shall be obligated to pay any amount under SECTION 5.1, 5.3, or 5.6 to any Participant which is greater than such Lender would have been required to pay to the originating Lender if no such participation had been sold), and if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, the Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. (d) Notwithstanding any other provision in this Agreement, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and 97 interest in this Agreement and any Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR ss.203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 12.9 CONFIDENTIALITY. Each Lender agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified in writing as "confidential" or "secret" by Parent or any of its Subsidiaries (including projections required by SECTION 8.1.8, which information is non-public and may constitute "inside information" for purposes of state, provincial or federal securities laws) and provided to it by Parent or any Subsidiary, or by either Agent on Parent's or any Subsidiary's behalf, under this Agreement, and neither such Lender nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with Parent or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by such Lender, or (ii) was or becomes available on a non-confidential basis from a source other than Parent or any Subsidiary, provided that such source is not bound by a confidentiality agreement with Parent or any Subsidiary known to such Lender; PROVIDED, HOWEVER, that any Lender may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which such Lender is subject or in connection with an examination of such Lender by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which either Agent or any Lender or any of their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Lender's independent auditors and other professional advisors; (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder; (H) as to any Lender or its Affiliates, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which Parent or any Subsidiary is party or is deemed party with such Lender or such Affiliate; and (I) to its Affiliates. 12.10 SET-OFF. In addition to any right or remedy of the Lenders provided by law, if an Event of Default exists, each Lender is authorized at any time and from time to time, without prior notice to either Borrower, any such notice being waived by each Borrower to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Lender to or for the credit or the account of either Borrower against any and all Obligations owing to such Lender, now or hereafter existing, irrespective of whether or not either Agent or such Lender shall have made demand under this Agreement and although such Obligations may be contingent or unmatured. Each Lender agrees promptly to notify Parent and the Agents after 98 any such set-off and application made by such Lender; PROVIDED that the failure to give such notice shall not affect the validity of such set-off and application. 12.11 NOTIFICATION OF ADDRESSES, LENDING OFFICES, ETC. Each Lender shall notify the U.S. Agent (and, in the case of a Canadian Lender, the Canadian Agent) in writing of any change in the address to which notices to such Lender should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as either Agent shall reasonably request. 12.12 COUNTERPARTS. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of which taken together shall constitute but one and the same instrument. 12.13 SEVERABILITY. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or such instrument or agreement. 12.14 NO THIRD PARTIES BENEFITED. This Agreement is made and entered into for the sole protection and legal benefit of the Borrowers, the Lenders, the Agents and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement. 12.15 GOVERNING LAW AND JURISDICTION. (a) THIS AGREEMENT AND ANY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK; PROVIDED THAT THE AGENTS AND THE LENDERS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH BORROWER, EACH AGENT AND EACH LENDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS. EACH BORROWER, EACH AGENT AND EACH LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. EACH BORROWER, EACH AGENT AND EACH LENDER WAIVES PERSONAL SERVICE OF ANY SUMMONS, 99 COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEW YORK LAW. 12.16 WAIVER OF JURY TRIAL. EACH BORROWER, EACH LENDER AND EACH AGENT WAIVES ITS RIGHT TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. EACH BORROWER, EACH LENDER AND EACH AGENT AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, EACH PARTY FURTHER AGREES THAT ITS RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENT, RENEWAL, SUPPLEMENT OR MODIFICATION TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 12.17 JUDGMENT. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or any other Loan Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Applicable Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of each Borrower in respect of any such sum due from it to the Applicable Agent hereunder or under any other Loan Document shall, notwithstanding any judgment in a currency (the "JUDGMENT CURRENCY") other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the "AGREEMENT CURRENCY"), be discharged only to the extent that on the Business Day following receipt by the Applicable Agent of any sum adjudged to be so due in the Judgment Currency, such Agent may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Applicable Agent in the Agreement Currency, the Applicable Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify such Agent or the Person to whom such obligation was owing against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Applicable Agent in such currency, such Agent agrees to return the amount of any excess to the Applicable Borrower (or to any other Person who may be entitled thereto under applicable law). 100 12.18 ENTIRE AGREEMENT. This Agreement, together with the other Loan Documents and any letters relating to fees described in SECTION 2.5.1 or SUBSECTION 4.8(B), embodies the entire agreement and understanding among the Borrowers, the Lenders and the Agents, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. 101 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. CAPITAL ENVIRONMENTAL RESOURCE, INC./RESSOURCES ENVIRONNEMENTALES CAPITAL INC. By: /s/ Tony Busseri ------------------------ Title: Chairman CERI, L.P. By: 1312654 Ontario Inc., its General Partner By: /s/ Tony Busseri ------------------------ Title: Chairman BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as U.S. Agent By: /s/ (Illegible) ------------------------ Title: Agency Officer BANK OF AMERICA CANADA, as Canadian Agent By: /s/ (Illegible) ------------------------ Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a U.S. Lender and as an Issuing Lender By: /s/ (Illegible) ------------------------ Title: Senior Vice President BANK OF AMERICA CANADA, as a Canadian Lender and as an Issuing Lender By: /s/ (Illegible) ------------------------ Title: Vice President CANADIAN IMPERIAL BANK OF COMMERCE, as a Canadian Lender and as Co-Agent By: /s/ (Illegible) ------------------------ Title: Director EX-10.6 9 FORM OF AMENDED & RESTATED SHAREHOLDERS AGREEMENT Exhibit 10.6 THIS AMENDED AND RESTATED SHAREHOLDERS AGREEMENT made this _________ day of April, 1999. BETWEEN: CAPITAL ENVIRONMENTAL RESOURCE INC., a corporation incorporated pursuant to the laws of the Province of Ontario (the "Corporation") - and - The holders of Common Shares of the Corporation listed in Schedule 1 to this Agreement (collectively, the "Common Shareholders") - and - The holders of the Preference Shares of the Corporation listed in Schedule 2 to this Agreement (collectively, the "Preference Shareholders") - and - The holders of the Warrants of the Corporation listed in Schedule 3 to this Agreement (collectively, the "Warrant Holders") WHEREAS the Corporation, the Preference Shareholders, and the Warrant Holders are parties to a shareholders agreement dated July 16, 1997 as amended by agreements INTER ALIA adding certain of the Common Shareholders as parties thereto dated June 16, 1998, and by further amendments dated October 8, 1998 and October 23, 1998 (collectively, the "Shareholders Agreement"); AND WHEREAS the Corporation intends to complete an initial public offering of common shares pursuant to a registration statement on Form F-1 to be filed with the United States Securities and Exchange Commission under the U.S. SECURITIES ACT OF 1933, as amended, in April or May of 1999 (the "Initial Public Offering"); AND WHEREAS each of the Preference Shareholders have agreed that the convertible Preference Shares held by them, as set out in Schedule 2 hereto, shall be automatically converted into common shares coincident with the closing of the Initial Public Offering, provided that the issue price to the public of the common shares of the Corporation on such Initial Public Offering is not less than U.S. $18.00 per share (prior to taking into account any subdivision of the common stock authorized in connection with such Initial Public Offering) (a "Qualifying Public Offering"); AND WHEREAS as a result of the conversion, the Preference Shareholders will be the holders of that number of common shares set opposite their respective names in Schedule 2 hereto; AND WHEREAS the parties wish to amend and restate the Shareholders Agreement conditional on and effective upon the closing of a Qualifying Public Offering to, among other things, restate the rights of the parties as shareholders of the Corporation. AND WHEREAS the parties intend that upon the closing of a Qualifying Public Offering this Agreement shall supersede all prior agreements, understandings, negotiations and discussions whether oral or written entered into between the parties in respect of their shareholdings in the Corporation, including without limitation the Shareholder Agreement dated July 16, 1997, as amended by Agreements dated June 16, 1998, October 8, 1998 and October 23, 1998. FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency whereof is hereby acknowledged, the Parties agree as follows: ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS. In this Agreement, the following terms shall have the meanings set out below unless the context requires otherwise: "1934 ACT" means the U.S. SECURITIES EXCHANGE ACT OF 1934, as amended, or any successor federal statute and the rules and regulations thereunder and as the same shall be in effect from time to time. "ACT" means the BUSINESS CORPORATIONS ACT, R.S.O. 1990, c. B16. "AGREEMENT" means this Agreement, including the Schedules to this Agreement, as it or they may be amended or supplemented from time to time and the expressions "HEREOF", "HEREIN", "HERETO", "HEREUNDER", "HEREBY" and similar expressions refer to this Agreement and not to any particular Section or other portion of this Agreement. "ARTICLES" means the Articles of Incorporation of the Corporation, as amended and restated effective upon the closing of the Qualifying Public Offering, a copy of which are annexed hereto as Exhibit A, and as the same may be amended from time to time thereafter. "AMENDING AGREEMENT" has the meaning ascribed to such term in Section 4.2. "BUSINESS DAY" means any day except Saturday, Sunday or any day on which banks are generally not open for business in the place where the registered office of the Corporation is located. "CANADIAN PUBLIC OFFERING" has the meaning ascribed thereto in Section 3.1 (e). "COMMON SHARES" means shares in the capital of the Corporation designated as common shares in the Articles and shall for greater certainty, include Common Shares issued to the Preference Shareholders on the conversion of their Convertible Preference Shares as set out in Schedule 2. "DEMAND HOLDER" has the meaning ascribed thereto in Section 3.2. "DEMAND REGISTRATION" has the meaning ascribed thereto in Section 3.2. "INCLUDING" means including without limitation and "INCLUDES" means includes without limitation. "OFFERING HOLDER" has the meaning ascribed thereto in Section 3.10. "PARTY" means a party to this Agreement and any reference to a Party includes its heirs, executors, administrators, successors and permitted assigns; and "PARTIES" means every Party. "PERSON" is to be broadly interpreted and includes an individual, a corporation, a partnership, a trust, an unincorporated organization, the government of a country or any political subdivision thereof, or any agency or department of any such government, and the executor, administrators or other legal representatives of an individual in such capacity. "REGISTRATION NOTICE" has the meaning ascribed to it in Section 3.2. "RESTRICTED SHARES" has the meaning ascribed to it in Section 2.1. "RULE 144" means Rule 144 promulgated by the U.S. Securities and Exchange Commission under the Securities Act, or any successor federal rule as the same shall be in effect from time to time. "RULE 144A" means Rule 144A promulgated by the U.S. Securities and Exchange Commission under the Securities Act, or any successor federal rule as the same shall be in effect from time to time. "SECURITIES ACT" means the U.S. SECURITIES ACT OF 1933, as amended, or any successor federal U.S. statute, and the rules and regulations thereunder, and as the same shall be in effect from time to time. "SHAREHOLDER" means each holder of Common Shares listed in Schedule 1 and the holders of Common Shares listed in Schedule 2 hereto following the conversion of their Convertible Preference Shares and any Person who acquires Restricted Shares in accordance with the provisions of this Agreement and for as long as such Person owns any issued shares of the Corporation; and "SHAREHOLDERS" means collectively every Shareholder. "SHAREHOLDER REQUEST" has the meaning ascribed thereto in Section 3.1. "TRANSFER" of shares includes any sale, exchange, transfer, assignment, gift, pledge, encumbrance, hypothecation, alineation, transmission or other transaction, whether voluntary, involuntary or by operation of law, by which the legal or beneficial ownership of, or a security interest or other interest in Restricted Shares passes from one Person to another, or to the same Person in a different capacity, whether or not for value. "WARRANT" means a warrant to purchase a Common Share of the Corporation pursuant to a Warrant Certificate (as hereinafter defined), and "WARRANTS" refers collectively to all Warrants. "WARRANT CERTIFICATES" refers to the Warrant Certificates issued to the Warrant Holders to purchase in the aggregate 88,889 Common Shares in the capital of the Corporation and "WARRANT CERTIFICATE" refers to any one of the Warrant Certificates. "WARRANT SHARES" means common shares issuable pursuant to the Warrants. 1.2 HEADINGS AND TABLE OF CONTENTS. The division of this Agreement into Articles and Sections and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. 1.3 NUMBER AND GENDER. Unless the context requires otherwise, words importing the singular include the plural and VICE VERSA and wordings importing gender include all genders. 1.4 BUSINESS DAYS. If any payment is required to be made or other action is required to be taken pursuant to this Agreement on a day which is not a Business Day, then such payment or action shall be made or taken on the next Business Day. 1.5 STATUTE REFERENCES. Any reference in this Agreement to any statute or any section thereof shall, unless otherwise expressly stated, be deemed to be a reference to such statute or section as amended, restated or re-enacted or replaced from time to time. 1.6 SECTIONS AND SCHEDULE REFERENCES. Unless the context requires otherwise, references in this Agreement to Articles, Sections, Subsections or Schedules are to Articles, Sections, Subsections or Schedules of this Agreement. ARTICLE 2 SHARE TRANSFERS 2.1 RESTRICTED SHARES. Each certificate for Common Shares (including for Common Shares issued to the Preference Shareholders on the conversion of their Convertible Preference Shares to Common Shares) issued to the Shareholders shall be stamped or imprinted with a legend substantially as follows: Restrictions: The shares represented by this certificate have not been registered under the SECURITIES ACT OF 1933, as amended (the "Securities Act"), or any state securities or blue sky laws, nor have the shares been qualified for distribution to the public under the securities laws of any Province of Canada. Such shares have been acquired for investment and may not be sold, transferred, pledged, or hypothecated in the absence of an effective registration statement for such shares under the Securities Act and any state securities or blue sky laws, or a qualification for distribution to the public under the securities laws of any Province of Canada unless in the written opinion of legal counsel (which opinion is satisfactory in form and substance to the Corporation acting reasonably) that such registration or qualification is not required. 2.2 SECURITIES LAW RESTRICTIONS. No Shareholder shall Transfer any shares containing the legend set out in Section 2.1 above, unless and until (i) the Transfer is registered under the Securities Act and any applicable state securities laws, or (ii) the Corporation shall have received a written opinion of legal counsel to the Shareholder, which is satisfactory in form and substance to the Corporation's legal counsel acting reasonably, that the Transfer is exempt from the registration requirements of the Securities Act and applicable state securities laws, and /or from the prospectus and registration requirements of applicable securities laws of any relevant province of Canada. ARTICLE 3 REGISTRATION RIGHTS 3.1 PIGGYBACK REGISTRATIONS. If at any time after the closing of a Qualifying Public Offering, while any Shareholder holds a share certificate evidencing Common Shares which bears the restrictive legend set forth in Section 2.1 above (the "Restricted Shares"), the Corporation proposes to file a registration statement under the Securities Act to register the sale of Common Shares on a form other than Form S-4, F-4 or S-8 (or such other forms as the Securities and Exchange Commission may promulgate hereafter for registration of the sale of securities in transactions for which Forms S-4, F-4 or S-8 may be used as of the date hereof) and, other than a registration statement to be filed pursuant to Section 3.2 hereof, it will give written notice to each Shareholder and Warrant Holder at least twenty (20) days prior to the date of the first filing of a registration statement with the U.S. Securities and Exchange Commission. Each Shareholder who is the holder of Restricted Shares at the time of receipt of such notice and each Warrant Holder (subject to compliance with the provisions of Subsection 3.1(e) may, within ten (10) days of receipt of such notice, request in writing (the "Shareholder Request") that the Corporation include in the registration statement to be filed by the Corporation that number of Restricted Shares owned by such Shareholder (the "Requesting Shareholder") and specified in the Shareholder Request and the Corporation shall include in the registration statement all of the Restricted Shares specified in the Shareholder Request subject to the following: (a) The Corporation will pay all expenses of such registration, except that each Requesting Shareholder whose Common Shares are included in such registration shall pay all underwriting discounts and commissions applicable to its Common Shares and all accounting and legal fees and expenses of its own accountant and legal counsel, if any; provided, however, that if the expense of such registration is borne by a Person other than the Corporation, the Corporation shall pay on behalf of the Requesting Shareholder, whose Common Shares are included in such registration, a PRO RATA share of the incremental expense of such Common Shares being included in such registration. (b) If such registration statement is for a prospective underwritten offering, the Requesting Shareholder agrees to sell its Common Shares on the same basis as the other Common Shares covered by such registration statement are being sold. Each Requesting Shareholder whose shares are to be registered pursuant to the registration statement shall be a party to the applicable underwriting agreement and shall provide customary representations, warranties, opinions and other agreements, and shall be responsible for its PRO RATA share of any underwriting fees, commissions or discounts payable to the underwriters. (c) The Corporation may withdraw any such registration statement before it becomes effective or postpone the offering of Common Shares contemplated by such registration statement without any obligation to any Requesting Shareholder. (d) If such registration statement is for an underwritten offering and, in the opinion of the managing underwriters or the Board of Directors of the Corporation (as determined by a resolution thereof), the inclusion in the registration statement of all or any part of the Restricted Shares specified in all Shareholder Requests received by the Corporation pursuant to this Section 3.1, would be detrimental to the proposed offering of Common Stock, the Corporation may reduce or eliminate the number of Restricted Shares to be included from all Requesting Shareholders; and, unless the Requesting Shareholder and the Corporation otherwise agree, in making such reduction, the Warrant Holders and the Preference Shareholders (notwithstanding the conversion of their shares to Common Shares coincident with the closing of the Qualifying Public Offering) shall have priority over the Common Shareholders in including their Restricted Shares in the offering and subject to a special allocation to accomplish the foregoing preference in favour of the Warrant Holders and Preference Shareholders , each Requesting Shareholder shall have Restricted Shares owned by it included in the registration statement in the same proportion that the number of its Restricted Shares requested to be included at that time bears to the total holdings of Restricted Shares that the Requesting Shareholders have requested be included in the registration statement; provided, however, in no event shall a Requesting Shareholder be entitled or required to include a greater number of Restricted Shares in the registration statement than are specified in the Shareholder Request. (e) In requesting the inclusion of Restricted Shares in the registration statement pursuant to Section 3.1, a Requesting Shareholder may include Common Shares to be acquired on the exercise of Warrants, provided such Warrants are then exercisable and the Warrant Holder shall have acquired the Common Shares to be included pursuant to the exercise of the Warrants in accordance with the terms thereof prior to the closing of the sale of such Common Shares pursuant to the registration statement. . (f) If, at any time while Restricted Shares are outstanding, the Corporation proposes to file a prospectus or otherwise qualify any Common Shares for offering to the public in any province in Canada (a "Canadian Public Offering") then any Shareholder and Warrant Holder who would have piggyback registration rights in accordance with the foregoing provisions of this Section 3.1 if those provisions become operative shall be afforded the opportunity to have its Common Shares qualified for participation in the Canadian Public Offering on the terms and conditions set out above. 3.2 DEMAND REGISTRATION. At any time after the expiration of one hundred and eighty (180) days following the closing of the Qualifying Public Offering and prior to the expiration or termination of this Agreement, holders of a majority of the then outstanding Restricted Shares and of the Warrant Shares taken together (the "Demand Holders") may make a written request to the Corporation (the "Demand") for registration under the Securities Act of all or part of the Restricted Shares held by the Demand Holders issuing the Demand, and which request shall specify the number of Restricted Shares (including Warrant Shares issuable on the exercise of Warrants that are then exercisable) and the intended method of distribution thereof and as soon as practicable thereafter, the Corporation will cause a registration on Form S-1 or F-1 (on form S-2, F-2, or S-3 or F-3 if any of such forms can be used) under the Securities Act , or any comparable form then in force, as selected by the Corporation in its discretion from time to time, to be filed covering the Restricted Shares specified in the Demand (the "Demand Registration") and shall use its best efforts to cause the registration statement to become effective, subject to the following: (a) Within ten (10) days after receipt of the Demand, the Corporation shall give written notice (the "Registration Notice") of the Demand to all other Demand Holders who did not join in the Demand. Subject to the applicable provisions of Section 3.1 (to the extent the same are not inconsistent with the provisions of this Section 3.2)) and this Section 3.2, the Corporation will include in the Demand Registration all Restricted Shares of such other Demand Holders and with respect to which the Corporation has received written request for inclusion therein within ten (10) days after the receipt by such other Demand Holders of the Registration Notice. All requests made pursuant to this Section 3.2(a) will specify the aggregate number of Restricted Shares to be registered and also will specify the intended methods of disposition thereof. In requesting the inclusion of Restricted Shares in the registration statement pursuant to this Section 3.2(a), the Warrant Holders may specify Common Shares which could then be acquired by each Warrant Holder pursuant to the exercise of the Warrant provided that such Warrant Holder shall have acquired Common Shares pursuant to the exercise of the Warrant in accordance with the terms thereof prior to the closing of the offering of such shares pursuant to the Demand Registration.. (b) Except as provided in Section 3.2(d) the Demand Holders shall not be entitled to more than two Demand Registrations pursuant to this Section 3.2 provided that no Demand Registration shall be counted toward this total unless and until declared effective by the Securities and Exchange Commission. The Demand Holders issuing the Demand may withdraw their request for a Demand Registration before it becomes effective provided that they reimburse the Corporation for out-of-pocket expenses incurred in connection with the Demand Registration and in such event the same shall not be counted as a Demand Registration pursuant to this Section 3.2. (c) If any request for a Demand Registration is for an underwritten public offering, such public offering shall be lead managed by an underwriter or underwriters of recognized national stature in the United States of America, selected by the Corporation. (d) If the managing underwriter or underwriters of any Demand Registration advises the Corporation in writing that in its or their opinion the number of securities proposed to be sold in such Demand Registration exceeds the number which can be sold in such offering, the Corporation will include in such registration only the number of Restricted Shares, if any, which in the opinion of such underwriter or underwriters, should be so included, and the Warrant Holders and the Preference Shareholders (notwithstanding the conversion of their shares to common shares coincident with the closing of the Qualifying Public Offering) shall have priority over the Common Shareholders in including their shares in the offering and subject to a special allocation to accomplish the foregoing preference in favour of the Warrant Holders and Preference Shareholders, Restricted Shares of the Demand Holders shall be excluded PRO RATA among all Demand Holders that have requested Common Shares to be included in such Demand Registration in the same proportion that their total holdings of Restricted Shares eligible for inclusion in the registration statement at that time bears to the total holdings of Restricted Shares eligible for inclusion in the registration statement of all Demand Holders requesting inclusion; provided, however that (i) if one third (1/3) or more of all Restricted Shares eligible for inclusion in the registration statement of the Restricted Shares requested for inclusion in any Demand Registration are not included in such Demand Registration, then notwithstanding the terms and provision of Section 3.2(b) a majority of the Demand Holders shall be entitled to an additional Demand Registration hereunder (on the same terms and conditions as would have applied to the Demand Holders had such initial Demand Registration not be made). (e) The Corporation will pay all expenses of any Demand Registration, except that each Demand Holder whose Restricted Shares are included in such registration shall pay all underwriting discounts and commissions applicable to its Common Shares and all accounting and legal fees and expenses of its own accountant and counsel, if any. If the Demand Registration is for an underwritten offering, each Demand Holder including Restricted Shares in such Demand Registration, shall be a party to the applicable underwriting agreement and shall provide customary representations, warranties, opinions and other agreements, and shall be responsible for its PRO RATA share of any underwriting fees, commissions or discounts payable to the underwriters. (f) Notwithstanding the foregoing, the Corporation may decline to effect a Demand Registration pursuant to this Section 3.2 during the period starting with the date sixty (60) days prior to the Corporation's estimated date of filing of, and ending on a date one hundred and twenty (120) days following the effective date of, a registration statement pertaining to an underwritten public offering of Common Shares for the account of the Corporation, provided that the Corporation's estimate of the date of filing such registration statement is made in good faith. If the Corporation (i) shall furnish to the Shareholders requesting inclusion in such Demand Registration a certificate signed by the President or Chief Executive Officer of the Corporation stating that the Board of Directors of the Corporation has in good faith adopted a resolution stating that it would be detrimental to the Corporation or its shareholders for a registration statement to be filed in the near future; or (ii) desires to postpone filing a registration statement in order to be able to include in such filing audited year-end financial statements prepared in the ordinary course of preparing its annual report to its shareholders (including on Form 10-K or such other applicable form); or (iii) gives notice to the Demand Holders, within thirty (30) days of the receipt of the Demand, that it is engaged or has plans to engage in an firm underwritten registered public offering of its securities within thirty (30) days of the notice date, then the Corporation may delay a requested Demand Registration for not more than one hundred and twenty (120) days from the date of the Demand, provided that such delay may be invoked on not more than three (3) occasions in total and on not more than one (1) occasion within any twelve (12) month period; and, provided further that such delay may not be invoked within one hundred and eighty (180) days of the Corporation having declined to effect a Demand Registration pursuant to the circumstances set forth in the first sentence of this Subsection 3.2(f). 3.3 EXPIRATION. This Agreement and all of the rights and obligations of the Shareholders, Warrant Holders and of the Corporation pursuant to this Article 3 shall automatically expire on the date when 2/3 of the Restricted Shares owned by all of the Shareholders on the date hereof have been sold in registered transactions or may be immediately sold pursuant to Rule 144 (taking into account the volume limitations thereunder). 3.4 AMENDMENTS. In connection with any registration statement filed pursuant to this Article 3, the Corporation shall file any post-effective amendment or amendments to the registration statement which may be required under the Securities Act during the period reasonably required to effect the distribution contemplated thereby; provided, however, that the Corporation shall not be required to file any post-effective amendment to any registration statement described in this Article 3 more than one hundred and twenty (120) days after the effective date of the registration statement. 3.5 NOTIFICATION OF CERTAIN EVENTS. During the period for which the Corporation is required to file and keep effective a registration statement pursuant to this Agreement, the Corporation shall furnish each Shareholder who included his Restricted Shares in the registration statement with the number of copies of the registration statement (including exhibits) and prospectuses contained therein that are reasonably requested for the purposes contemplated by the Securities Act. The Corporation shall notify each Shareholder selling Restricted Shares covered by such registration statement during the period such registration statement is required to remain effective, or at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the registration statement or the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of circumstances then existing. Each Shareholder who has included Restricted Shares in the registration statement agrees, upon receipt of such notice, forthwith to cease making offers and sales of such securities pursuant to such registration statement or deliveries of the prospectus contained therein for any purpose and to return to the Corporation the copies of such prospectus not theretofore delivered by such Shareholder. Subject to Section 3.5 at the request of such Shareholder, the Corporation shall prepare and furnish to such Shareholder a reasonable number of copies of any supplement to or amendment of such prospectus that may be necessary so that, as thereafter delivered to the purchaser of such shares, such prospectus shall 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 in light of circumstances then existing. The Corporation shall promptly notify all Shareholders who has included Restricted Shares in the registration statement of any stop order, injunction or similar proceeding initiated by state or federal regulatory bodies and, subject to Section 3.5, use its reasonable efforts to take all necessary steps expeditiously to remove such stop order or similar proceeding. The Corporation shall be permitted to suspend the effectiveness of a registration statement during such time as any such stop order, injunction or other similar proceeding is in effect. 3.6 PROVISION OF INFORMATION. As a condition to the Corporation's obligation under Article 3 to cause the registration statement or an amendment to be filed or Restricted Shares to be included in the registration statement, the holders of any Restricted Shares that are to be included in such registration statement shall provide such information and execute such documents and certificates (including any agreement or undertaking relating to expenses, indemnification or other matters contemplated by this Agreement) as may reasonably be required by the Corporation in connection with such registration. 3.7 REPORTS. After the first registration statement under the Securities Act for any securities of the Corporation shall have become effective, the Corporation will use its best efforts to file by the required filing date (as such date may be extended) all reports required to be filed by it pursuant to the 1934 Act and, upon the request of any Shareholder, to furnish such Shareholder such information as may be necessary to enable it to effect sales of its securities pursuant to Rule 144 or Rule 144A. 3.8 NEW CERTIFICATES. As expeditiously as possible after the effectiveness of any registration statement provided for in this Article 3, the Corporation shall deliver, in exchange for any certificate evidencing Restricted Shares the sale of which has been registered, new share certificates not bearing the legend set forth in Section 2.2 of this Agreement. In the event that any of such Common Shares remain unsold when such registration statement ceases to be effective, the share certificates not bearing such legends evidencing such unsold Common Shares shall be delivered to the Corporation in exchange for share certificates bearing such legends. 3.9 STATE SECURITIES LAWS. In connection with the offering of any Common Shares the sale of which is registered pursuant to this Article 3, the Corporation shall use reasonable efforts to qualify or register the Common Shares to be sold under the securities or "Blue Sky" laws of such jurisdictions within the United States as may be reasonably requested by the holder of any Common Shares so registered; provided, however, that the Corporation shall not be obligated to qualify as a foreign corporation to do business under the laws of any such jurisdiction in which it is not then qualified or to file any general consent to service of process. The expense of such qualification or registration shall be borne by the Corporation. 3.10 INDEMNIFICATION. In connection with any registration of the sale of Common Shares pursuant to this Article 3, to the extent permitted by law, the Corporation shall indemnify the Offering Holders of Common Shares and the Offering Holders of Common Shares shall indemnify the Corporation in the manner provided in this Section 3.10. (a) The Corporation shall indemnify and hold harmless each holder of Restricted Shares included in the registration statement pursuant to the provisions of this Article 3 (the "Offering Holder") and each officer, each director and each partner (and each officer or director of such partner), if any, of the Offering Holder, each underwriter, if any, for the sale or distribution of such Offering Holder's Common Shares, and each Person, if any, who controls such Offering Holder or underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which such Offering Holder, officer, director, partner, partner's officer or director, underwriter or controlling Person may become subject, under the Securities 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, prospectus or any amendment or supplement thereto filed by the Corporation in which an Offering Holder's Restricted Shares are included pursuant to the provisions of this Article 3, or arise out of or are based upon the omission or alleged omission to state therein a materiel fact required to be stated therein or necessary to make the statement therein, in the light of the circumstances under which they were made, not misleading and, subject to Section 3.10(c) of this Agreement, the Corporation shall reimburse each Offering Holder, officer, director, partner, partner's officer or director, underwriter or controlling Person thereof for any legal or other expenses reasonably incurred by such Offering Holder, officer, director, partner, partner's officer or director, underwriter or controlling Person thereof in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Corporation shall not be required to indemnify and hold harmless or reimburse an Offering Holder, officer, director, partner, partner's officer or director, underwriter or controlling Person thereof, as the case may be, to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in any document made in reliance upon and in conformity with written information furnished to the Corporation by or on behalf of an Offering Holder, officer, director, partner, partner's officer or director, underwriter or controlling Person thereof for use in the preparation of such documents. (b) Each Offering Holder shall severally and not jointly indemnify and hold harmless the Corporation, each of its directors and officers, each other Offering Holder, and each underwriter, if any, for the sale or distribution of such Offering Holder's shares, and each Person, if any, who controls the Corporation, such other Offering Holder(s) or such underwriter within the meaning the Securities Act, against all losses, claims, damages or liabilities to which the Corporation or any such director, officer, other Offering Holder, underwriter or controlling Person may become subject, under the Securities 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 or alleged untrue statement of any material fact contained in any registration statement, prospectus or any amendment or supplement thereto filed by the Corporation in which an Offering Holder's Restricted Shares are included pursuant to the provisions of this Article 3, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of circumstances under which they were made, 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 Corporation by and on behalf of such Offering Holder for use in the preparation thereof; and, subject to Section 3.10(c), such Offering Holder shall reimburse the Corporation or any such director, officer, underwriter, other Offering Holder(s) or controlling Person thereof for any legal or other expenses reasonably incurred by the Corporation or any such director, officer, other Offering Holder(s), underwriter or controlling Person thereof in connection with investigating or defending against any such loss, claim, damage, liability or action; provided, however, that the maximum amount of liability in respect of such indemnification shall be limited, in the case of any such Offering Holder, to an amount equal to the net proceeds actually received by such Offering Holder from the sale of Common Shares effected pursuant to such registration. (c) Promptly after receipt by an indemnified party under Section 3.10(a) or Section 3.10(b) of notice of the commencement of any action, the indemnified party shall notify the indemnifying party. The failure to so notify the indemnifying party shall relieve the indemnifying party from any liability hereunder with respect to the action to the extent such failure prevents the indemnifying party from contesting such action; provided, however, that any such failure shall not relieve the indemnifying party from any other liability which it may have to any other party. In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to assume and control the defence of the action at its expense and if the indemnifying party gives notice to such indemnified party of its election to assume and control the defense, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense or investigation of the action. 3.11 STANDBY. (a) Each of the Shareholders, Warrant Holders and the Corporation agree that, with respect to any registration statement under the Securities Act that the Corporation may file (other than on Forms S-8 or F-8 ), neither such Shareholder, Warrant Holder nor the Corporation will sell any securities of the Corporation (whether or not such securities are Restricted Shares, and however acquired) other than securities, if any, of such Shareholder, Warrant Holder or the Corporation included in such registration statement for a period of at least five (5) days before, and until one hundred and twenty (120) days after, the date such registration statement is declared effective, provided that such Shareholder or Warrant Holder shall be so limited only if notice of the effective date of such registration statement has been given to such Shareholder or Warrant Holder. (b) The Corporation agrees that any registration rights that it may grant with respect to its securities subsequent to the date of this Agreement will provide that upon receipt of a request from a holder or holders of Restricted Shares pursuant to this Article 3 of this Agreement, the Corporation shall not be obligated to file a registration statement under the Securities Act at the request of any holder or holders of subsequently issued securities of the Corporation until at least one hundred and twenty (120) days after the date on which the registration statement filed pursuant to this Article 3 of this Agreement becomes effective. 3.12 MERGERS, ETC. The Corporation agrees that, as a condition to any merger, amalgamation, consolidation or other business combination or the sale of all or substantially all of its assets in exchange for securities of another company, it will require the surviving, consolidated or purchasing company to enter into an agreement to register the sale of the securities of such surviving, continuing, consolidated or purchasing company to be received by the Shareholders and Warrant Holders on substantially the same terms and provisions as are provided in this Agreement. 3.13 ASSIGNMENT. The registration rights contained in this Agreement shall be transferable by a Shareholder or transferee of a Shareholder to any Person who acquires Restricted Shares from such Shareholder or transferee in compliance with the terms and conditions of this Agreement (including any pledgee but excluding any Person who acquires such shares in a transaction with respect to which a registration statement under the Securities Act is effective at the time or in a sale complying with Rule 144). 3.14 LIMITATION OF REGISTRATION RIGHTS. Nothing contained in this Agreement shall create any obligation on behalf of the Corporation to register under the Securities Act any securities that are not Common Shares. ARTICLE 4 GENERAL 4.1 ENTIRE AGREEMENT. This Agreement, together with any Schedules attached to this Agreement and any agreements and documents to be delivered pursuant to the terms of this Agreement, constitutes the entire agreement between the Parties pertaining to the subject matter of this Agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written with respect to the subject matter hereof including without limitation the Shareholder Agreement dated July 16, 1997, as amended by Agreements dated June 16, 1998, October 8, 1998, and October 23, 1998. There are no conditions, representations, warranties or other agreements between the Parties in connection with the subject matter of this Agreement, whether oral or written, express or implied, statutory or otherwise, except as specifically set out in this Agreement. 4.2 AMENDMENT. No amendment of this Agreement will be effective unless made in writing and signed by the parties (the "Amending Agreement"). This Agreement may and shall be amended if a majority of the holders of the Common Shares approve such an amendment, in which case such amendment shall be deemed to be agreed to by the Warrant Holders and the Corporation and the Warrant Holders and the Corporation shall execute the Amending Agreement. 4.3 WAIVER. A waiver of any default, breach or non-compliance under this Agreement is not effective unless in writing and signed by the Party to be bound by the waiver. No waiver shall be inferred from or implied by any failure to act or delay in acting by a Party in respect of any default, breach, non-observance or by anything done or omitted to be done by another Party. The waiver by a Party of any default, breach or non-compliance under this Agreement shall not operate as a waiver of that Party's rights under this Agreement in respect of any continuing or subsequent default, breach or non-compliance (whether of the same or any other nature). 4.4 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of New York. 4.5 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such prohibition or unenforceability and shall be severed from the balance of this Agreement, all without affecting the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 4.6 FURTHER ASSURANCES. Each Party shall promptly do, execute, deliver or cause to be done, executed and delivered all further acts, documents and things in connection with this Agreement that another Party may reasonably require for the purposes of giving effect to this Agreement. 4.7 NOTICES. (a) Any notice or other communication required or permitted to be given by this Agreement shall be in writing and shall be effectively given and made if (i) delivered personally; or (ii) sent by prepaid courier service; or (iii) sent by registered mail; or (iv) sent prepaid by fax or other similar means of electronic communication, in each case to the applicable address set out below: (i) if to the Common Shareholders or to the Preference Shareholders, to the addresses and facsimile numbers set out in Schedules 1 and 2, respectively; (ii) if to the Warrant Holders, to the respective addresses and facsimile numbers set out in Schedule 3; and (iii) if to the Corporation, to: Capital Environmental Resource Inc. 1005 Skyview Drive Burlington, ON L7P 5B1 Canada Attention: General Counsel Facsimile: (905) 319-9408 (b) Any notice or other communication so given shall be deemed to have been given and received on the day of delivery if delivered, or on the day of faxing or sending by other means of recorded electronic communication, provided that such day is a Business Day and such notice or other communication is so delivered, faxed or sent prior to 4:30 p.m. on such day. Otherwise, such notice or other communication shall be deemed to have been given and received on the next following Business Day. Any notice or other communication sent by registered mail shall be deemed to have been given and received on the fifth (5th) Business Day following the mailing thereof; provided, however, that no such notice or other communication shall be mailed during any actual or apprehended disruption of postal services. Any such notice or other communication given in any other manner shall be deemed to have been given and received only upon actual receipt. (c) Any Party may from time to time change its address under this Section 4.7 by notice to the Corporation given in the manner provided by this Section. 4.8 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of, and be binding on, the Parties and their respective heirs, executors, administrators, successors and permitted assigns. Except as otherwise provided herein, no Party hereto may assign or transfer, whether absolutely, by way of security or otherwise, all or any part of its rights or obligations under this Agreement without the prior written consent of the Corporation. 4.9 SUBDIVISION, CONSOLIDATION, ETC., OF SHARES. The provisions of this Agreement relating to Common Shares shall apply MUTATIS MUTANDIS to any securities into which the Common Shares or any of them may be converted or changed, to any securities of the Corporation resulting from a reclassification, subdivision or consolidation of any Common Shares, to any securities of the Corporation which are received by the Shareholders as a dividend in kind, and to any securities of the Corporation or of any successor body corporate which may be received by the Shareholders or the Warrant Holders on an amalgamation, reorganization, merger or combination of the Corporation. 4.10 TERMINATION OF AGREEMENT. This Agreement shall come into force and be effective as of and from the date of this Agreement appearing on the first page hereof and will continue in full force until the earlier of the date upon which this Agreement expires pursuant to Section 3.3 hereof, or is terminated by the written agreement of the Shareholders and the Warrant Holders and the Corporation, or the Corporation is dissolved pursuant to the Act (provided that if the Corporation is dissolved and is subsequently revived pursuant to the Act, the dissolution shall be deemed not to have occurred for the purposes of this Section). 4.11 COUNTERPARTS. This Agreement may be executed by the Parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF this Agreement has been duly executed on the date first noted above. CAPITAL ENVIRONMENTAL RESOURCE INC. BRANARD INVESTMENT CORP. By: C.S. By: C.S. ------------------------------ ---------------------------- Name: Name: Title: Title: ENVIRONMENTAL OPPORTUNITIES ENVIRONMENTAL OPPORTUNITIES FUND, L.P. FUND (CAYMAN), L.P. BY: ENVIRONMENTAL OPPORTUNITIES BY: ENVIRONMENTAL OPPORTUNITIES MANAGEMENT CO., LLC MANAGEMENT CO., LLC ITS GENERAL PARTNER ITS GENERAL PARTNER Per: /s/ Bruce R. McMaken Per: /s/ Bruce R. McMaken ---------------------------- ----------------------------- Name: Bruce R. McMaken Name: Bruce R. McMaken Title: Manager Title: Manager ENVIRONMENTAL OPPORTUNITIES ENVIRONMENTAL OPPORTUNITIES FUND II, L.P. FUND II (INSTITUTIONAL), L.P. BY: FUND II MGT. CO., LLC BY: FUND II MGT. CO., LLC ITS GENERAL PARTNER ITS GENERAL PARTNER Per: /s/ Bruce R. McMaken Per: /s/ Bruce R. McMaken ---------------------------- ----------------------------- Name: Bruce R. McMaken Name: Bruce R. McMaken Title: Manager Title: Manager CERI INVESTORS, L.P. CABOT CAPITAL CORPORATION Per: Per: ----------------------------- ------------------------------ Name: Name: Title Title: SANDERS MORRIS MUNDY INC. Per: ----------------------------- Name: Title: /s/ GEORGE BALL /s/ MICHAEL S. CHADWICK ----------------------------- ----------------------------- GEORGE BALL MICHAEL S. CHADWICK /s/ MORTON COHN /s/ CHARLES P. DAVIS ----------------------------- ----------------------------- MORTON COHN CHARLES P. DAVIS /s/ SAMUEL A. JONES /s/ SUSAN SANDERS KELLAR ----------------------------- ----------------------------- SAMUEL A. JONES SUSAN SANDERS KELLAR /s/ R. LARRY KINNEY /s/ JOHN H. AND JODY F. MALANGA ----------------------------- ----------------------------- R. LARRY KINNEY JOHN H. AND JODY F. MALANGA /s/ MICHAEL H. MCCONNELL /s/ BRUCE MCMAKEN ----------------------------- ----------------------------- MICHAEL H. MCCONNELL BRUCE MCMAKEN /s/ DONALD J. MOOREHEAD, JR. /s/ BEN T. MORRIS ----------------------------- ----------------------------- DONALD J. MOOREHEAD, JR. BEN T. MORRIS /s/ JOHN I. MUNDY /s/ JOHN M. O'QUINN ----------------------------- ----------------------------- JOHN I. MUNDY JOHN M. O'QUINN /s/ HUMBERT B. POWELL, III /s/ LEONARD RAUCH ----------------------------- ----------------------------- HUMBERT B. POWELL, III LEONARD RAUCH /s/ REX C. AND ADRIAN T. ROSS /s/ NOLAN RYAN ----------------------------- ----------------------------- REX C. AND ADRIAN T. ROSS NOLAN RYAN /s/ CHRISTINE M. SANDERS /s/ KATHERINE U. SANDERS ----------------------------- ----------------------------- CHRISTINE M. SANDERS KATHERINE U. SANDERS /s/ LAURA K. SANDERS /s/ BRAD D. SANDERS ----------------------------- ----------------------------- LAURA K. SANDERS BRAD D. SANDERS /s/ BRET D. SANDERS /s/ DON A. SANDERS ----------------------------- ----------------------------- BRET D. SANDERS DON A. SANDERS /s/ STEPHEN D. SCOTT /s/ ALLEN FRACASSI ----------------------------- ----------------------------- STEPHEN D. SCOTT ALLEN FRACASSI EX-10.7 10 SHARE TRANSFER AGREEMENT Exhibit 10.7 This SHARE TRANSFER AGREEMENT is made as of the 4th day of June, 1997. AMONG: USA WASTE SERVICES, INC., a Delaware company ("USA Waste"), having an office at 1275 North Service Road West, Suite 700, Oakville, Ontario, L6M 3G4 (the "Vendor") and: 1233666 ONTARIO INC., a corporation duly constituted under the laws of Ontario and having an address at Unit 213, 2511 Lakeshore Road West, Oakville, Ontario, L6L 6L9 (the "Purchaser") and: MR. LYNN BISHOP, a Businessman of the Hamlet of Sherwood Park, in the Province of Alberta (the "Shareholder") WHEREAS, the Vendor wishes to sell and the Purchaser wishes to buy all of the shares held by the Vendor in the capital stock of WESTERN CANADIAN WASTE SERVICES INC., a company incorporated under the laws of the Province of Alberta (the "Company"); AND WHEREAS, the Vendor entered into an unanimous shareholders' agreement (the "Shareholders Agreement") relating to the Company made effective as of the 24th day of November, 1994 with Mr. Lynn Bishop, a copy of which is attached as Schedule "A" to this Agreement; AND WHEREAS, the Shareholder consents to the sale and transfer of the Shares by and from the Vendor to the Purchaser and the release of the Vendor from the Shareholders Agreement; AND WHEREAS, the Shareholder and the Purchaser intend to enter into a new shareholders agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, it is agreed as follows: -2- 1. Shares. Subject to the provisions of this Agreement, the Vendor hereby sells to the Purchaser, and the Purchaser shall accept and pay for, all of the share in the capital stock of the Company owned by the Vendor, being one hundred (100) Class "A" shares (which shares are hereinafter collectively called the "Shares"). The Vendor represents and warrants to the Purchaser that: (i) it owns the Shares free and clear of all claims, liens or encumbrances whatsoever, and has the authority to sell and deliver the Shares to the Purchaser; and (ii) the Vendor shall obtain a clearance certificate with respect to section 116 of the Income Tax Act of Canada on or before June 30th, 1997. 2. Price and Payment. The Purchaser shall pay the Vendor the amount of FOURTEEN MILLION ONE HUNDRED and TWENTY-ONE THOUSAND DOLLARS ($14,121,000.00) as the total purchase price for the Shares, the shareholder's loan set out in Section 7 below and the advisory fee described in the last paragraph of this Section 2. The purchase price shall be paid as follows: (a) the amount of $3,175,000.00 shall be paid on or before June 30th, 1997; (b) the amount of $3,200,000.00 shall be paid on or before July 15th, 1997; (c) the Purchaser shall make monthly payments of interest only on the last day of each month, calculated at 6.75% per year from the Closing date, on the outstanding principal for such month; (d) the Purchaser shall make annual installment payments of $775,000.00 each on the first and second anniversary date of the Closing date; and (e) the Purchaser shall pay the remaining principal balance and interest in full on the third anniversary of the Closing date. Attached as Schedule "B" is an unexecuted promissory note setting out the foregoing payments, which note the Purchaser shall execute and deliver to the Vendor at Closing. As security for the payment of the purchase price, the Purchaser hereby pledges the Shares to the Vendor and the Vendor shall hold the Shares in trust for the benefit of the Purchaser and shall release such Shares to the Purchaser forthwith upon the payment of that part of the purchase price set out in Section 2 (a) and the discharge of the guarantees set out in Section 4. Notwithstanding the foregoing sentence, the Vendor agrees to postpone its security interest in the Shares to the security interest of a third party lender to the Purchaser, on notice in writing to the -3- Vendor by the Purchaser, and the Vendor will execute and deliver such documents as may reasonably be required by the Purchaser to evidence such postponement The Purchaser and Vendor acknowledge that $500,000.00 of the purchase price is allocated as an advisory fee in favor of the Vendor in rendering advice to the Purchaser and assisting in the refinancing required by the Purchaser in discharging the guarantee set out in Section 4 below, which allocated monies shall be treated as a fully deductible expense to the Purchaser and revenue to the Vendor. The balance of the purchase price shall be allocated as follows: (a) $7,356,844.00 to the Shareholder Loan in Section 7; and (b) $6,264,156.00 to the Shares. 3. Price Adjustment. The Vendor represents and warrants to the Purchaser that the projected earnings before interest, depreciation and amortization ("EBITDA") of the Company for the twelve month period immediately following the 30 day period after the Closing date shall not be less than $2,200,000.00. In the event the EBITDA in such twelve month period is less than $2,200,000.00 then the purchase price shall be reduced by 4.5 times the amount of any such shortfall in the EBITDA, provided always that no reduction in the purchase price shall be made by reason of a shortfall in the EBITDA arising from: (a) the cancellation of any of the customer contracts or accounts or the withholding or reduction of any amounts otherwise payable pursuant to such customer contracts or accounts as a result of the Company's default during the said 12 month period; (b) any failure of the Company to comply with applicable laws, regulations, by-laws, permits or any other authorizations, orders or judgments relating to the conduct of the business of the Company during the said 12 month period; (c) any event of force majeure which affects the Company and which causes a disruption in service to the customers of the Company, including but not limited to unusually severe weather, labour disruptions (including strikes, lockouts or work-to-rule actions), earthquakes, fires, blockage or failure of transportation systems, or change in the laws applicable to the conduct of the business of the Company which increases the costs of doing business; and (d) any material increase from or after the Closing date in the costs reasonably and properly incurred by the Company in the conduct of its business, as measured against the historical costs incurred by the Company in the conduct of its business, and any sales, general or administrative costs in excess of 9% of the gross revenues of the Company. -4- In calculating the EBITDA the parties shall treat any event referred to in subsections (a) through (d) above as if it had not occurred for the purposes of such calculation, and shall project the applicable EBITDA accordingly based upon historical information and the best information available to the parties. The parties shall exercise their best efforts to complete the aggregate EBITDA calculation and corresponding price adjustment, if any, by September 30th, 1998, failing which either party may take the matter to arbitration in accordance with and subject to the provisions of the Arbitration Act of Ontario, and for the purposes of any such arbitration the parties shall promptly select a person from a chartered accounting firm to act as the sole arbitrator. 4. Financial Arrangements The Vendor represents and warrants to the Purchaser that the limited recourse guarantee given by the Vendor to the Canadian Imperial Bank of Commerce, as set out in Schedule "C", is in good standing and there have been no defaults or claims under such guarantee, nor to the Vendor's knowledge are any defaults or claims thereunder threatened or pending, and that the Vendor shall maintain the said guarantee in place and in good standing for the six month period following the Closing date, and honor the said guarantee during such six month period. The Shareholder represents and warrants to the Purchaser that the loans and banking arrangements set out in Schedule "C" are in good standing and there have been no defaults or claims with respect to such banking arrangements, nor the Shareholder's knowledge are any defaults or claims threatened or pending with respect to any such banking arrangements. The Purchaser shall cause all of the guarantees made by the Vendor with respect to the loans and banking arrangements set out in Schedule "C" to be released on or before the date six months after the Closing date. 5. Shareholders Agreement. The Shareholder and the Vendor agree that the Shareholders Agreement shall forthwith be terminated and that both parties thereto are hereby released from all obligations, claims and liabilities whatsoever relating to or arising with respect to the Shareholders Agreement, whether past, present or future, known or unknown, contingent or otherwise. The Purchaser and the Shareholder may enter into a shareholder's agreement as they may deem appropriate. 6. Survival of Representations and Warranties The representations and warranties of the parties set out in this Agreement shall survive the Closing and remain in full force and effect for a period -5- of 18 months following the Closing date, after which period all such representations and warranties shall terminate and be null and void and no longer actionable by the parties. 7. Shareholder's Loan. The Shareholder and Vendor represent and warrant to the Purchaser that the shareholder's loan in the amount of $7,356,844.00 set out on the balance sheet of the Company dated March 31, 1997 (the "Shareholder Loan") is owed to the Vendor alone. The Vendor shall at Closing assign the Shareholder Loan to the Purchaser, and hereby represents and warrants to the Purchaser that it is able to assign the said loan to the Purchaser at Closing free and clear of all liens, claims or encumbrances whatsoever. 8. Liabilities. The Purchaser will not assume and will not be liable for, and the Vendor will indemnify the Purchaser from and against all obligations, commitments and liabilities (whether absolute, accrued or contingent) of the Company which are not accounted for, accrued or otherwise reserved or provided for in the balance sheet of the Company dated March 31st, 1997, related to, arising from, asserted against or associated with events to the extent occurring prior to the Closing date. Without limiting the generality of the foregoing, the Purchaser shall have no liability for and shall be indemnified by the Vendor for each of the following: (a) all liabilities, claims, proceedings, demands or litigation and obligations or debts in respect of or relating to the Company prior to the Closing date; (b) all liabilities, for taxes, duties, levies, assessments and other charges, including penalties, interest and fines with respect thereto, payable by the Company to any federal, provincial, municipal or other government agency, including without limitation any taxes in respect of or measured by the sale, consumption or performance by the Vendor of any service prior to the Closing date or any tax payable in respect of remuneration payable to all persons employed by the Company prior to the Closing date; (c) all liabilities and obligations with respect to the employees of the Company, including any obligations relating to salary, bonuses, vacation pay, benefits, pensions, collective agreements and termination of any such employee to the extent relating to the period prior to the Closing date; (d) all liabilities for claims of third parties in respect of events occurring at any time prior to the Closing date, including without limitation any claim in respect of the breach of any applicable environmental laws, regulations, ordinances, by-laws and codes in respect of the Real Property or the operation of the business. -6- 9. Closing. The closing of the purchase and sale contemplated herein shall occur and be completed on or before June 6th, 1997, simultaneously with and subject to the completion of that certain transaction between the Vendor and WMI Waste Management of Canada Inc., at the offices of the Vendor's lawyers in Toronto, Ontario (the "Closing"). At Closing the Vendor shall deliver a copy of the share certificate representing the Shares duly endorsed for transfer to the Purchaser, which Shares shall be held in trust the Vendor pursuant to Section 2 above, and the Purchaser shall pay the purchase price to the Vendor. At Closing the Vendor shall assign and transfer its interests in and to any general security agreement which it may hold with respect to the Shareholder Loan. 10. Further Acts and Effect. The parties agree to cooperate with each other, to execute and deliver such other documents, instruments of transfer or assignment files, books and records and do all such further acts and things as may be reasonably required to carry out the transaction contemplated by this Agreement This Agreement shall be binding on the parties and their respective successors and permitted assigns. This Agreement may not be assigned by the parties without the prior written consent of all parties, and any amendments to this Agreement shall only be of force and effect if written, stated to be an amendment to this Agreement and signed by the parties. This Agreement may be signed in any number of counterparts, all of which shall constitute one and the same Agreement and which shall be binding on the parties hereto. 11. Non-Competition. Neither the Vendor nor any affiliated company of the Vendor shall, for a period of 12 months following the Closing date (whether on its own account or as a stockholder, partner, joint venturer, advisor, consultant and/or agent of any person, corporation or other entity) solicit, provide or enter into any arrangement or agreement (whether written, oral, formal or informal) for the provision of solid or special waste collection, removal, or transportation for disposal or recycling services to any customer of the Company as of the date hereof, or use any customer information pertaining to the Company for any such purpose, provided always that the foregoing prohibitions shall not apply to the extent that any such customer arrangements of the Company are subject to tender. -7- 12. Applicable Laws. This Agreement shall be construed and interpreted in accordance with the laws in force in the Province of Ontario, and the parties hereby attorn to the jurisdiction of the courts of the Province of Ontario. IN WITNESS WHEREOF this Agreement has been duly executed by the parties as of the date first written above. (USA WASTE SERVICES, INC. (By: ( (/s/ [ILLEGIBLE] (--------------------------- (1233666 ONTARIO INC. (By: ( (/s/ Tony Busseri (--------------------------- ( ( /s/ [ILLEGIBLE] (/s/ Lynn Bishop - ------------------------- (--------------------------- Witness MR. LYNN BISHOP EX-10.8 11 ACQUISITION AGREEMENT Exhibit 10.8 SHARE PURCHASE AGREEMENT BETWEEN: LYNN BISHOP AND L & S BISHOP ENTERPRISES INC. (collectively called the "Vendors") OF THE FIRST PART - and - CAPITAL ENVIRONMENTAL RESOURCE INC. (hereinafter called the "Purchaser") OF THE SECOND PART - and - WESTERN WASTE SERVICES INC. (hereinafter called the "Corporation") OF THE THIRD PART TABLE OF ARTICLES ARTICLE DESCRIPTION PAGE NO. - ------- ----------- -------- RECITALS 1 ARTICLE I DEFINITIONS AND INTERPRETATIONS 1.01 Definitions 2 ARTICLE II PURCHASE OF SHARES 2.2. Agreement to Purchase 3 2.2 Amount of Purchase Price 4 2.3 Payment of Purchase Price 4 2.4 Advance to Vendor 4 2.5 Redemption of Class "C" Shares & Repayment of Shareholders' Loan 5 2.6 Interest 5 ARTICLE III CLOSING ARRANGEMENTS 3.1 Closing 5 3.2 Interim Period 5 3.3 Closing Procedure 5 ARTICLE IV CONDITIONS OF CLOSING 4.1 Conditions For the Benefit of Purchaser 7 4.2 Conditions For the Benefit of the Vendors 8 ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Representations and Warranties of the Vendors 10 5.2 Representations and Warranties of the Purchaser 13 5.3 Limitations and Set Off 19 ARTICLE VI RIGHTS OF VENDORS FOLLOWING CLOSING 20 ARTICLE VII IDEMINIFICATION 7.1 Indemnification of Purchaser 22 7.2 Indemnification of Vendors 22 ARTICLE VIII GENERAL 8.1 Interpretation 23 6.2 Expenses 24 -2- ARTICLE DESCRIPTION PAGE NO. - ------- ----------- -------- 8.3 Further Assurances 24 8.4 Entire Agreement 24 8.5 Non-Merger 24 8.6 Applicable Law 24 8.7 Notices 24 8.8 Successors and Assigns 25 8.9 Execution by Counterpart & Execution by Counterpart and Facsimile 26 EXECUTION 25 Schedule "A" - Purchaser's Solicitors' Opinion Schedule "B" - Vendor's solicitors' Opinion Schedule "C" - Amended Articles of Purchaser Schedule "D" - Unanimous Shareholders Agreement Schedule "E" - Promissory Note Schedule "F" - Employment Agreement Schedule "G" - List of Encumbrances of the Corporation Schedule "H" - List of Encumbrances of the Purchaser Schedule "I" - List of Preference Shareholders Schedule "J" - List of Law Suits involving the Corporation THIS SHARE PURCHASE AGREEMENT, made as of the 1st day of November, 1997. BETWEEN LYNN BISHOP, of the Hamlet of Sherwood Park, in the Province of Alberta and L & S BISHOP ENTERPRISES INC., a corporation incorporated pursuant to the laws of Alberta (collectively called the "Vendors") OF THE FIRST PART - and - CAPITAL ENVIRONMENTAL RESOURCE INC. a corporation incorporated pursuant to the laws of Ontario (hereinafter called the "Purchaser") OF THE SECOND PART - and - WESTERN WASTE SERVICES INC., a corporation incorporated pursuant to the laws of the Province of Alberta, formerly known as Western Canadian Waste Services Inc. (hereinafter, called the "Corporation") OF THE THIRD PART WHEREAS L & S Bishop Enterprises Inc. owns 96 Class "A" Shares in the capital of the Corporation; AND WHEREAS Lynn Bishop owns 4 Class "A" Shares and 200 Class "C" Shares in the capital of the Corporation; AND WHEREAS the 200 Class "C" Shares have a redemption value of $833.33 per share for a total redemption value of $166,666.00; AND WHEREAS a Shareholder's Loan in the amount of $250,000.00 is owing to Lynn Bishop by the Corporation; AND WHEREAS the Purchaser owns 200 Class "A" Shares in the capital of the Corporation; AND WHEREAS there are no other shares of the Corporation that are issued and outstanding; 2 AND WHEREAS the Vendors have agreed to sell all their shares in the capital of the Corporation to the Purchaser on the terms and at and for the consideration herein stated and on condition that the Vendor's Class "C" Shares be redeemed and the Vendor's Shareholder's Loan be repaid. AND WHEREAS certain words and phrases with initial capitals are terms as defined in this Agreement and are more particularly defined in Article 1.1 herein. NOW THEREFORE THIS AGREEMENT WITNESSES THAT, in consideration of the mutual covenants and agreements contained herein, the parties hereto covenant and agree each with the other as follows: ARTICLE I - DEFINITIONS 1.0 DEFINITIONS: (a) "AGREEMENT" means this Agreement and any instrument supplemental or ancillary hereto; (b) "ARTICLE", "Section" and "Subsection" followed by a number means and refers to the specified Article, Section or Subsection of this Agreement; (c) "ASSETS" means the undertaking, property and assets of the Corporation as a going concern, of every kind and description, wheresoever situated; (d) "BUSINESS" means the business carried on by the Corporation; (e) "CLOSING" means the time of closing on the Closing Date provided for in Section 3.1 hereof; (f) "CLOSING DATE" means the 7th day of November, 1997, or such earlier or later date as may be mutually acceptable to the parties hereto; (g) "CORPORATION" has the meaning ascribed thereto in the first recital of this Agreement; (h) "EBITDA" means earnings before interest, taxes, depreciation and amortization set forth in the Corporation's financial statements calculated in accordance with Generally Accepted Accounting Principles; (i) "EFFECTIVE DATE" means November 1, 1997; (j) "EMPLOYMENT AGREEMENT" means the agreement referred to in Section 4.1(e); 3 (k) "INTERIM PERIOD" means the period of time from the Effective Date to the Closing Date; (l) "PERSON" means an individual, a corporation, a partnership, a trustee or any unincorporated organization and words importing persons have a similar meaning; (m) "PREFERENCE SHAREHOLDERS" means those shareholders listed in the attached Schedule "I"; (n) "PURCHASE PRICE" has the meaning ascribed thereto in Section 2.1 hereof; (o) "PURCHASER'S ACCOUNTANTS" means BDO Dunwoody, Chartered Accountants; (p) "PURCHASER'S CLOSING OPINION" means an opinion of the Purchaser's solicitor substantially in the form attached hereto as Schedule "A", with any changes of form and substance thereof being acceptable to the Vendor's solicitors; (q) "PURCHASER'S SOLICITOR" means Tukstra Mazza Associates, Barristers and Solicitors; (r) "SHARES" means the following outstanding Shares in the capital of the Corporation being purchased by the Purchaser hereunder: 100 Class "A" Shares (s) "VENDORS' ACCOUNTANTS" means Coopers & Lybrand, Chartered Accountants; (t) "VENDORS' SOLICITOR" means Patrick A. Reid, Barrister and Solicitor; (u) "VENDORS' SOLICITORS' OPINION" means an opinion of the Vendor's Solicitor substantially in the form attached hereto as Schedule "B", with any changes in form and substance thereof being acceptable to the Purchaser's Solicitor; (v) "USA" means the Unanimous Shareholders Agreement referred to in Section 2.3(b); 4 ARTICLE II - PURCHASE OF SHARES 2.1 AGREEMENT TO PURCHASE: Subject to the terms and conditions hereof, the Vendors agree to sell and the Purchaser agrees to purchase the Shares as of the Effective Date. 2.2 AMOUNT OF PURCHASE PRICE: The purchase price ("Purchase Price") payable by the Purchaser to the Vendors for the Shares shall be $12,500,000.00. 2.3 PAYMENT OF PURCHASE PRICE: The Purchase Price shall be paid at Closing by the Purchaser to the Vendors and the Vendors agree to accept the following in full satisfaction of the Purchase Price as follows: (a) Cash on Closing - $500,000.00 payable to Lynn Bishop by certified cheque or bank draft; (b) Delivery of a Share Certificate in the name of L & S Bishop Enterprises Inc. representing 400,000 Class "B" Convertible Special Shares of the Purchaser (the "Special Shares") which Special Shares the parties agree have a redemption value of $12,000,000.00 prior to payment of the dividend referred to in Section 2.3(c) and the redemption value shall, after payment of the said dividend, be $10,500,000.00. The Special Shares shall have the rights, privileges and conditions as set out in the Amended Articles of Incorporation of the Purchaser, a copy of which is attached as Schedule "C" (the "Amended Articles") and a Unanimous Shareholders Agreement (the "USA"), a copy of which is attached hereto as Schedule "D". The Special Shares shall be converted into 350,000 Common Shares of the Purchaser contemporaneously with the successful completion of an initial public offering on the New York, NASDAQ, or Toronto stock exchange, or any other recognized major stock exchange, by the Purchaser for no less than Thirty ($30.00) Dollars per share (the "IPO") or shall be fully paid for no later than three (3) years from the Effective Date by redemption of the Special Shares as provided for in Article VI herein; and (c) Contemporaneously with the issuance of the 400,000 Special Shares of the Purchaser to L & S Bishop Enterprises Inc., the Purchaser shall declare a dividend of $1,500,000.00 on the Special Shares which dividend shall be paid immediately prior to the Purchaser's successful completion of the IPO. Except as provided for in this Agreement, in the Amended Articles and in the USA 5 the Vendor will have no other greater or lessor rights with respect to dividends or division of assets on liquidation, than it would if the Special Shares were converted to the 350,000 Common Shares. 2.4 ADVANCE TO VENDOR Contemporaneously with the Closing, the Purchaser shall loan L & S Bishop Enterprises Inc. the sum of $1,500,000.00 to be repayable without interest and as a set off against the declared but unpaid dividend referred to in Section 2.3(c) above just prior to the successful completion of the IPO. The said loan shall be evidenced by a Promissory Note in the form set out in Schedule "E" hereto (the "Promissory Note"). 2.5 REDEMPTION OF CLASS "C" SHARES & REPAYMENT OF SHAREHOLDERS' LOAN It shall be a condition precedent to this Agreement that on Closing the Corporation shall redeem the 200 Class "C" Shares held by Lynn Bishop by way of payment of the redemption value of $166,666.00 ($833.33 per share) and the Corporation shall repay the shareholder's loan owing to the Lynn Bishop in the approximate amount of $250,000.00. 2.6 INTEREST Interest shall be payable by the Purchaser to the Vendor on the sum of $2,000,000.00 from the Effective Date to the date of payment at the rate of eight (8%) per cent per annum calculated daily not in advance. ARTICLE III - CLOSING ARRANGEMENTS 3.1 CLOSING: Time shall be of the essence of this Agreement. The Closing of this transaction shall take place at 11:00 a.m. on the Closing Date at the offices of the Corporation in Sherwood Park, Alberta or at such other place as may be approved in writing by the parties hereto. 3.2 INTERIM PERIOD During the Interim Period the Vendors and the Purchaser shall consult about and jointly approve all material acts and decisions in respect of the Corporation. Subject thereto the Vendors shall cause the business of the Corporation (including its bank accounts and loans) to be carried on in the normal course. 6 3.3 CLOSING PROCEDURES: At or before the Closing on the Closing Date, the Vendors and the Purchaser shall take or cause to be taken all actions, steps and corporate proceedings necessary or desirable to validly and effectively approve or authorize the completion of the transactions herein provided for, and upon fulfillment of all the conditions set out in Article 4 hereof which have not been waived in writing as herein provided, the Vendors shall deliver to the Purchaser: (a) Certificates representing the Shares, in fully transferable form and accompanied by resolutions authorizing the transfer thereof. (The Vendors shall cause the transfers of the Shares to be fully entered in the Registers of the Corporation at Closing); (b) A Certificate of the Vendors dated as of the Effective Date, to the effect that, the representations and warranties set forth in Section 5.1 hereof are true and correct; (c) The Vendors' Solicitor's Closing Opinion; (d) A Postponement Agreement in a form acceptable to the Third Party Lender of the Security Agreement given by the Corporation, as Debtor, in favour of Lynn Bishop, as Secured Party, dated November 22, 1994 as amended by amendment dated November 8, 1995 (which Security Agreement is hereinafter referred to as the "Western GSA"); (e) The executed Employment Agreement, a true copy of which is attached as schedule "F"; (f) The executed Promissory Note; (g) The Agreement of L & S Bishop Enterprises Inc. to postpone its interest in the Purchaser in favour of a third party lender, on notice in writing to the Vendor by the Purchaser in the form attached as Schedule "K". L & S Bishop Enterprises Inc. agrees to execute and deliver such documents as may be reasonably required by the Purchaser or by the third party lender to evidence such postponement; (h) A Termination Agreement with respect to the Unanimous Shareholders Agreement dated June 7, 1997 between Lynn Bishop, the Purchaser and the Corporation; and upon fulfilment of the foregoing provisions of this Section 3.3, and upon fulfilment of all the conditions set out in Section 7 4.1 hereof which have not been waived in writing as herein provided, the Purchaser shall deliver to the Vendors: (a) The Cash on Closing of $500,000.00 described in Section 2.3(a) hereof; (b) The loan amount of $1,500,000.00 described in paragraph 2.4 hereof; (c) The Share Certificate for the Special Shares described in section 2.3(b) hereof; (d) A certified copy of the resolution declaring the dividend described in Section 2.3(c) hereof; (e) Proof of compliance with all Conditions Precedent to this Agreement including redemption of Lynn Bishop's Class "C" Shares and repayment of the Lynn Bishop's Shareholder Loan as described in Section 2.5; (f) The executed USA; (g) The Certificate of the Purchaser dated as of the effective dated as of the Effective Date to the effect that the representations and warranties set forth in Section 5.2 hereof are true and correct; (h) The approval in writing of the Preference Shareholders described in Section 4.1(e); and (i) The Purchaser's Solicitor's Closing Opinion; ARTICLE IV - CONDITIONS OF CLOSING 4.1 CONDITIONS FOR THE BENEFIT OF PURCHASER: The Purchaser shall not be obliged to complete the purchase herein provided for unless, on the Closing Date, each of the following conditions shall have been, it being understood that the conditions are included for the exclusive benefit of the Purchaser and may be waived in writing, in whole or in part, by the Purchaser at any time, and the Vendors shall use their best efforts to ensure that the conditions are fulfilled on or before the Closing Date. (a) CORPORATE AND LEGAL PROCEEDINGS AND APPROVALS All corporate and legal proceedings and approvals as considered necessary by the Purchaser's Solicitor shall have been taken or obtained to permit the Vendors to enter into this Agreement to sell the Shares to the Purchaser. 8 (b) REPRESENTATIONS AND WARRANTIES The representations and warranties set forth in Section 5.1 hereof shall be true and correct in all material respects as of the Closing Date. (c) COMPLIANCE WITH AGREEMENT All of the terms, covenants and agreements set forth in this Agreement to be complied with or performed by the Vendors at or before the Closing Date shall have been complied with or performed by the Vendors on or before the Closing Date. (d) EMPLOYMENT AGREEMENT Lynn Bishop shall execute and deliver to the Purchaser the Employment Agreement. (e) APPROVAL OF THE PREFERENCE SHAREHOLDERS The approval in writing of the Preference Shareholders to the transactions evidenced by this Share Purchase Agreement shall have been obtained. (f) POSTPONEMENT L & S Bishop Enterprises Inc. shall execute and deliver to the Purchaser a Postponement Agreement in a form acceptable to the third party lender subject only to payment of the dividend referred to in paragraph 2.3(c). (g) TERMINATION OF UNANIMOUS SHAREHOLDERS AGREEMENT Lynn Bishop, the Purchaser and the Corporation shall execute a Termination Agreement with respect to the Unanimous Shareholders Agreement dated June 7, 1997 between Lynn Bishop, the Purchaser and the Corporation. If any of the foregoing conditions shall not have been fulfilled on or before the Closing Date, the Purchaser may terminate this Agreement by notice in writing to the Vendor, in which event the Purchaser shall be released from all obligations under this Agreement, and (unless the Purchaser can show that the condition relied upon could reasonably have been performed by the Vendor) the Vendor shall also be released from all obligations hereunder, but the Purchaser shall be entitled to waive compliance with any such condition, in whole or in part, if it shall see fit to do so, without prejudice to its rights of termination in the event of non-fulfilment of any other condition, in whole or in part. 9 4.2 CONDITIONS FOR THE BENEFIT OF THE VENDORS The Vendors shall not be obliged to consummate the transactions herein provided for unless, on the Closing Date, each of the following conditions shall have been satisfied, it being understood that the conditions are included for the exclusive benefit of the Vendors and may be waived in writing, in whole or in part, by the Vendors at any time, and the Purchaser shall use their best efforts to ensure that the conditions are fulfilled on or before the Closing Date: (a) CORPORATE & LEGAL PROCEEDINGS AND APPROVALS All corporate and legal proceedings and approvals as considered necessary by the Vendors Solicitor shall have been taken or obtained to permit the Purchaser to enter into this Agreement and to issue the Special Shares to L & S Bishop Enterprises Inc. pursuant to this Agreement. (b) REPRESENTATIONS AND WARRANTIES The representations and warranties set forth in Section 5.2 hereof shall be true and correct in all material respects of the Closing Date. (c) COMPLIANCE WITH AGREEMENT All of the terms, covenants and agreements set forth in this Agreement to be complied with or performed by the Purchaser at or before the Closing Date shall have been complied with or performed by the Purchaser on or before the Closing Date. (d) APPROVAL OF PREFERENCE SHAREHOLDERS The approval in writing of the Preference Shareholders described in Section 4.1(e) shall have been obtained. (e) REDEMPTION AND REPAYMENT BY CORPORATION The Corporation shall have redeemed the Vendors' Class "C" Shares in the Corporation and repaid the Vendors' Shareholders Loan to the Corporation. In case any of the foregoing conditions shall not have been fulfilled on or before the Closing Date, the Vendors may terminate this Agreement by notice in writing to the Purchaser, in which event the Vendors shall be released from all obligations under this Agreement, and (unless the Vendors can show that the condition relied upon could reasonably have been performed by the Purchaser) the Purchaser shall also be released from all obligations hereunder; but the Vendors shall be entitled to waive compliance 10 with any such condition, in whole or in part, if they shall see fit to do so, without prejudice to its rights of termination in the event of non-fulfilment or any other condition in whole or in part. ARTICLE V - REPRESENTATIONS AND WARRANTIES 5.1 REPRESENTATIONS AND WARRANTIES OF THE VENDORS The Vendors jointly and severally represent and warrant to the Purchaser as follows: (a) GOOD STANDING The Corporation is now and, on the Closing Date will be, a Corporation: 1. duly incorporated, organized and validly subsisting and in good standing under the laws of Alberta, and 2. duly authorized and licensed to own its property and to carry on its businesses, as presently owned and carried on by it. (b) AUTHORIZED AND ISSUED CAPITAL OF THE CORPORATION The authorized capital of the Corporation is now, and on the Closing Date shall be, an unlimited number of Class "A", "B", "C", "D" and "E" Shares of which on Closing 300 Class "A" Shares will validly be issued and outstanding as fully paid and non-assessable, and will be the only outstanding Shares of the Corporation. (c) NO OPTIONS There is not now, nor at Closing will there be, any agreement or option existing pursuant to which the Corporation is or might be required to issue any further shares of its capital. (d) OWNERSHIP OF SHARES The Vendors are now, and at Closing will be, the beneficial owners of record of the Shares, with good and marketable title thereto, free and clear of any pledge, lien, charge, encumbrance or security interest of any kind and of any portion or other right thereto; and has now, and at Closing will have, the power and authority and right to sell the same in accordance with the terms of this Agreement. The Vendors are residents of Canada within the meaning of the Income Tax Act (Canada). 11 (e) SUBSIDIARIES The Corporation has now, and at Closing will have no wholly owned subsidiaries except West Coast Waste Systems Inc. and Lacey Garbage Disposal Ltd. (f) RECORDS COMPLETE All material financial transactions of the Corporation have now, and at Closing will have been properly recorded in its books and records. (g) COLLECTIVE AGREEMENTS Except as has been disclosed to the Purchaser, the Corporation is Not now nor at Closing will be a party to any contract with or commitment to, any labour union or employee association or collective agreement. (h) BENEFIT PLANS Except as has been disclosed to the Purchaser, the Corporation at Closing will not be a party to or operate any bonus, pension, profit sharing, deferred compensation, retirement, hospitalization insurance, medical insurance or similar plan or practice, formal and informal, in effect with respect to any employees or others. (i) EMPLOYMENT CONTRACTS Except as has been disclosed to the Purchaser, the Corporation is not now nor at Closing will be bound by any agreement whether written or oral with any employee provided for a specified period of notice of termination nor providing for any fixed term of employment and as now and at Closing will have no employees which cannot be dismissed upon such notice as common or statute law may prescribe. (j) OTHER CONTRACTS Except as has been disclosed to the Purchaser, the Corporation is not now nor at Closing will be bound by any outstanding contract or commitment except those entered into in the ordinary course of business and having not more than twelve months to run; and is not now nor at Closing will be material in default under any material contract by which it is bound or under which it is entitled to the benefits of and advantages thereof. 12 (k) TITLE TO ASSETS The Corporation now has, and at Closing will have, a good and marketable title to all its assets, free and clear of any claim, liens, encumbrances and security interests whatsoever except as listed in Schedule "G" hereto. (l) TAX MATTERS Except for the "stub" filings for June 6, 1997 necessitated by the change of control effected at that time, the Corporation is not now and at Closing will not be in arrears or in default in respect of the filing of any required federal, provincial or municipal tax or other returns; and at each of such times: 1. All taxes, filing fees and other assessments due and payable or collectible from the Corporation shall have been payed or collected; 2. No claim for additional taxes, filing fees or other amounts and assessments has been made which have not been paid; and 3. To the best of the Vendor's knowledge, no returns shall have contained any misstatement or concealed any statement that should have been included therein. The Corporation has withheld and will withhold up to the Closing Date from each payment made to any employee, the amount of all taxes (included but not limited to income tax) and other deductions required to be withheld therefrom and have been paid or will pay such amount or other receiving authority. (m) NO BREACH CAUSED BY THIS AGREEMENT Neither the execution nor delivery of this Agreement, nor the fulfilment or compliance with any of the terms hereof, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under the Articles and By-laws, as amended, of the Corporation, or any material agreement or instrument to which the Vendors or the Corporation or the Business is subject, or will require any consent or other action by any administrative or governmental body. (n) LITIGATION There are now, and at Closing will be, no actions, claims, demands or other proceedings, pending or 13 threatened before any court or administrative agency, which could materially adversely affect the financial condition or overall operations of the Corporation, and no judgment, order or decree, enforceable against the Corporation which involves or may involve, or restricts or may restrict, or requires or may require, the expenditure of money as a condition to or a necessity for, the right of ability of the Corporation to conduct its business in the manner in which such business has been carried on prior to the date hereof except as set out in Schedule "J" hereto. (o) ABSENCE OF CERTAIN CHANGES OR EVENTS DURING INTERIM PERIOD Except with the prior written consent of the Purchaser during the Interim Period: 1. Business in Normal Course - the Business has and will have been carried in the normal course of business, consistent with previous fiscal periods; 2. No Dividends - no dividends, redemptions of shares, payments or other distributions to the Vendor by the Corporation will have been made, agreed to, be made or declared except as provided for in Section 2.3(c); and 3. Articles - no amendments will have been made to the Articles or By-laws of the Corporation. 5.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Vendors as follows: (a) GOOD STANDING AND CORPORATE AUTHORITY The Purchaser is now, and on the Closing Date will be, a Corporation: 1. duly incorporated, organized and validly subsisting and in good standing under the laws of Ontario; 2. duly authorized and licensed to own its property and to carry on its businesses, as presently owned and carried on by it; and 3. with good right, full corporate power and absolute authority to enter into this Agreement and to issue the Special Shares in manner contemplated herein 14 and to perform all of the Purchaser's obligations under this Agreement. (b) AUTHORIZED AND ISSUED CAPITAL OF THE PURCHASER The authorized capital of the Purchaser on the Closing Date shall be an unlimited number of Common Shares, an unlimited number of Convertible Shares and 400,000 Class "B" Special Shares of which on Closing 1,031,110 Common Shares, 88,889 warrants for Common Shares And 8,000 Convertible Preference Shares will have been validly issued and outstanding as fully paid and non-assessable, and will be the only outstanding Shares of the Purchaser. (c) NO OPTIONS There is not now, or at Closing will there be, any agreement or option existing pursuant to which the Purchaser is or might be required to issue any further shares of its capital except those options granted to Glen Kingswood as previously disclosed to the Vendors. (d) AUTHORIZATION The Purchaser and its shareholders and board of directors have taken all necessary or desirable actions, steps and corporate and other proceedings to approve or authorize validly and effectively, the entering into, and the execution, delivery and performance of this Agreement and the issuance of the Special Shares by the Purchaser to the Vendors. This Agreement is a legal, valid and binding obligation of the Purchaser, enforceable against it in accordance with its terms. (e) SUBSIDIARIES Except as has been disclosed to the Vendors, the Purchaser has now, and at Closing will have no wholly or partially owned subsidiaries. (f) RECORDS COMPLETE All material financial transactions of the Purchaser have now, and at Closing will have been properly recorded in its books and records. (g) COLLECTIVE AGREEMENTS Except as has been disclosed to the Vendors, the Purchaser is not now nor at Closing will be a party to any contract with or commitment to, any labour union or employee association or collective agreement. 15 (h) CONTRACTS AFFECTED BY ISSUANCE OF SPECIAL SHARES The Purchaser is not now nor at Closing will be bound by any outstanding contract or commitment which requires prior approval of the issuance of the Special Shares to the Vendor by the Purchaser except for the Preference Shareholders. (i) NO OTHER CONTRACTS Except as has been disclosed to the Vendor, the Purchaser is not now nor at Closing will be bound by any outstanding contract or commitment except those entered into in the ordinary course of business and having not more than twelve months to run; and is not now nor at Closing will be materially in default under any material contract by which it is bound or under which it is entitled to the benefits of and advantages thereof. (j) TITLE TO ASSETS The Purchaser now has, and at Closing will have, a good and marketable title to all its assets, free and clear of any claim, liens, encumbrances and security interests whatsoever except as listed in Schedule "H" hereto. (k) TAX MATTERS The Purchaser is not now and at Closing will not be in arrears or in default in respect of the filing of any required federal, provincial or municipal tax or other returns; and at each of such times: 1. All taxes, filing fees and other assessments due and payable or collectible from the Purchaser shall have been payed or collected; 2. No claim for additional taxes, filing fees or other amounts and assessments has been made which have not been paid; and 3. To the best of the Purchaser's knowledge, no returns shall have contained any misstatement or concealed any statement that should have been included therein. The Purchaser has withheld and will withhold up to the Closing Date from each payment made to any employee, the amount of all taxes (included but not limited to income tax) and other deductions required to be withheld therefrom and have been paid or will pay such amount or other receiving authority. 16 (l) NO BREACH CAUSED BY THIS AGREEMENT Neither the execution nor delivery of this Agreement, nor the fulfilment or compliance with any of the terms hereof, will conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under the Articles and By-laws, as amended, of the Purchaser, or any material agreement or instrument to which the Vendor or the Purchaser or the Business is subject, or will require any consent or other action by any administrative or governmental body. (m) LITIGATION There are now, and at Closing will be, no actions, claims, demands or other proceedings, pending or threatened before any court or administrative agency, which could materially adversely affect the financial condition or overall operations of the purchaser, and no judgment, order or decree, enforceable against the Purchaser which involves or may involve, or restricts or may restrict, or requires or may require, the expenditure of money as a condition to or a necessity for, the right of ability of the Purchaser to conduct its business in the manner in which such business has been carried on prior to the date hereof. (n) CONTRACTUAL AND REGULATORY APPROVALS The Purchaser is not under any obligation, contractual or otherwise, to request or obtain the consent of any person, and no permits, licenses, certifications, authorizations or approvals of, or notifications to, any federal, provincial, municipal or local government or governmental agency, board, commission or authority are required to be obtained by the Purchaser; (o) COMPLIANCE WITH CONSTATING DOCUMENTS, AGREEMENTS AND LAWS The execution, delivery and performance of this Agreement and each of the other agreements contemplated or referred to herein by the Purchaser, and the completion of the transactions contemplated hereby, will not constitute or result in a violation or breach or default under, or cause the acceleration of any obligations of the Purchaser under: 1. Any term or provision of any of the articles, by-laws or other constating documents of the Purchaser; 17 2. Subject to obtaining the consents of the Preferred Shareholders referred to in Section 4.1(f) hereof, the terms of any agreement (written or oral), indenture, instrument or understanding or other obligation or restriction to which the Purchaser is a party or by which it is bound; or 3. Any term or provision of any of licenses or any order of any court, governmental authority or regulatory body or any law or regulation of any jurisdiction in which the Purchaser's business is carried on. (p) FINANCIAL RECORDS All material financial transaction of the Purchaser have been recorded in the financial books and records of the Purchaser in accordance with good business practice, and such financial books and records: 1. Accurately reflect in all material respects the bass for the financial condition and the revenues, expenses and results of operations of the Purchaser shown in the Purchaser's internal monthly financial statements; and 2. Together with all disclosures made in this Agreement or in the Schedules hereto, present fairly in all material respects the financial condition and the revenues, expenses and results of the operations of the Purchaser as of and to the date hereof. (q) PARTNERSHIPS OR JOINT VENTURES The Purchaser is not, and at Closing will not be, a partner or participant in any partnership, joint venture, profit-sharing arrangement or other association of any kind and is not party to any agreement under which the Purchaser agrees to carry on any part of the Purchaser's Business or any other activity in such manner or by which the Purchaser agrees to share any revenue or profit with any other person. (r) RESTRICTIONS ON DOING BUSINESS The Purchaser is not a party to nor will be at Closing or bound by any agreement which would restrict or limit its right to carry on any business or activity or to solicit business from any person or in any geographical area or otherwise to conduct its business as the Purchaser may determine. The Purchaser is not subject to any 18 legislation or any judgment, order or requirement of any court or governmental authority which is not of general application to persons carrying on a business similar to the Purchaser's business. There are no facts or circumstances which could materially adversely affect the ability of the Purchaser to continue to operate its business as presently conducted following the completion of the transactions contemplated by this Agreement. (s) GUARANTEES, WARRANTIES AND DISCOUNTS Except as has been disclosed to the Vendors, the Purchaser is not a party to or bound by any material agreement of guarantee, indemnification, assumption or endorsement or any other like commitment of the obligations, liabilities (contingent or otherwise) or indebtedness of any person other than the guaranteed redemption of the Vendors' Shares in the Purchaser; (t) COMPLIANCE WITH LAWS The Purchaser is not in violation of any federal, provincial, municipal or other law, regulation or order of any government or governmental or regulatory authority, domestic or foreign; (u) DISCLOSURE No representation or warranty contained in this section 5.02 and no statement contained in any schedule, certificate, list, summary or other disclosure document provided or to be provided to the Vendor pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact which is necessary in order to make the statements contained therein not misleading. (v) OUTSTANDING AGREEMENTS The Purchaser is not a party to or bound by any outstanding or executory agreement, contract or commitment, whether written or oral except for: 1. Any contract, lease or agreement described or referred to in this Agreement or in the schedules hereto; and 2. Any contract, lease or agreement made in the ordinary course of the routine daily affairs of the Purchaser. 19 (w) GOOD STANDING OF AGREEMENTS The Purchaser is not in default or breach of any of its obligations under any one or more contracts, agreements (written or oral), commitments, indentures or other instruments to which it is a party or by which it is bound and there exists no state of facts which, after notice or lapse of time or both, would constitute such a default or breach. All such contracts, agreements, commitments, indentures and other instruments are now in good standing and in full force and effect without amendment thereto, the Purchaser is entitled to all benefits thereunder and the other parties to such contracts, agreements, commitments, indentures and other instruments are not in default or breach or any of their obligations thereunder. There are no contracts, agreements, commitments, indentures or other instruments under which the Purchaser's rights or the performance of its obligations are dependent upon or supported by the guarantee of or any security provided by any other person. 5.3 LIMITATIONS AND SET OFF (a) The representations and warranties of the Vendor contained herein shall survive the Closing of the sale and the purchase of Shares herein provided for and, notwithstanding such Closing, shall continue in full force and effect for the benefit of the Purchaser for a period of three (3) year following the Closing Date, after which time the Vendor shall be released from all obligations and liabilities hereunder in respect of such representations and warranties except with respect to any claims made by the Purchaser in writing prior to the expiration of such period. (b) The representations and warranties of the Purchaser herein contained shall survive the Closing of the sale and purchase of Shares herein provided for and, notwithstanding such Closing, shall continue in full force and effect for the benefit of the Vendor for a period of three (3) year following the Closing Date, after which time the Purchaser shall be released from all obligations and liabilities hereunder in respect of such representations and warranties except with respect to any claims made by the Vendor in writing prior to the expiration of such period. 20 representations and warranties except with respect to any claims made by the Vendor in writing prior to the expiration of such period. ARTICLE VI - RIGHTS OF VENDORS FOLLOWING CLOSING 6.1 The Vendors and the Purchaser agree that following Closing: (a) Lynn Bishop shall sit on the Purchaser's Board of Directors (the "Board") as a director of the Purchaser. The Board shall be enlarged to four (4) directors, two of whom shall be nominees of Branard, one shall be a nominee of the Preference Shareholders and one a nominee of the Vendor. A Branard nominee shall be entitled to a casting or deciding vote in the event of a tie. Lynn Bishop shall continue to sit on the Board of Directors of the Corporation and have signing authority for the Corporation to a maximum of $100,000.00 per transaction without prior approval of the Board of Directors. (b) In the event that the Purchaser does not complete the IPO of its Common Shares at a share price of at least $30.00 per Share and/or in the event at least 50% of the Common Shares of the Purchaser which the Vendor receives on Closing are not sold for at least $30.00 per share on a secondary offering of the said IPO within three years of the Effective Date the Vendors are hereby entitled to require the Purchaser to redeem the Vendor's Special Shares or any Common Shares into which the Special Shares have been converted as applicable at a price which is the greater of: 1. fair market value, or 2. a price to be calculated by multiplying the Corporation's EBITDA for the six months prior to the third year anniversary after the Effective Date, plus its forecasted EBITDA for the next six months following the third year anniversary after the Effective Date, by six and by deducting from the product of that calculation the sum of $22,000,000.00 and any debt incurred by the Corporation or equity advances by the Purchaser after Closing for the purpose of acquisitions or internal growth, which sum shall then be divided by three and deducting from the product of that calculation the sum of $2,000,000.00, or 3. $10,500,000.00. 21 (which price is herein referred to as the "Redemption Price"). PROVIDED THAT in the event the Purchaser does complete the IPO but at a share price of less than $30.00 per share the Purchaser shall have the right to make up the difference between the initial offering price per share and $30.00 per share by issuance of additional Common Shares to the Vendors or by the payment of the cash difference to the Vendors at the Purchaser's sole option and in such event the parties hereto agree that the IPO shall be deemed for the purposes of this Agreement to have been completed at $30.00 per share. (c) In the event the Purchaser successfully completes the IPO at a share price of at least $30.00 per share within three (3) years of the Effective Date then the Vendors shall have the option, upon written notice to the Purchaser delivered at least thirty (30) days prior to the initial filing of the registration statement for such IPO, to require the Purchaser to include the Vendors' Common Shares of a value up to $5,250,000.00 (which Common Shares were issued as a result of the conversion of the Special Shares) as a secondary offering in the IPO at not less than $30.00 per share. The Purchaser shall have the option upon receipt of such written notice and prior to the IPO, to fulfil such obligation by purchasing at a price of $30.00 per share that number of Common Shares requested by the Vendors to be included. 6.2 In order to exercise the entitlement referred to in Section 6.1(b) hereof the Vendors shall: 1. Tender to the Purchaser at its registered office a request in writing specifying: A. that the Vendors desire to have the Special Shares registered in the name of the Vendors redeemed by the Corporation; and B. the business day, which shall not be less than 30 days after the day on which the request in writing is given to the Purchaser, on which the Vendors desire to have the Purchaser redeem the Special Shares (the "Redemption Date"), together with the share certificates, representing the Special Shares; 2. Upon receipt of such request and share certificates, the Purchaser shall, on the 22 Redemption Date and thereafter such shares shall cease to be entitled to dividends and the Vendors shall not be entitled to exercise any of the rights of shareholders in respect thereof, unless payment of the applicable Redemption Price is not made on the Redemption Date, in which case the rights of the Vendors shall remain unaffected. 6.3 In consideration of the Vendors entering into this transaction for the sale and purchase of the Shares, the Purchaser and the Corporation jointly and severally hereby unconditionally guarantee prompt payment to the Vendor of the Redemption Price on the terms stipulated in Section 6.1(b). The guarantee of Western shall be supported by the Western GSA. It is understood and agreed by the parties hereto that the Vendors would not have entered into this Agreement if it were not for this guarantee. ARTICLE VII - INDEMNIFICATION 7.1 INDEMNIFICATION OF PURCHASER The Vendors agree to indemnify and save harmless the Purchaser from or against any claims, demands, debts, actions, causes of action or other proceedings, for a period of three (3) years from the Closing Date, arising from or in respect of: (a) Any non-performance or non-fulfilment of any covenant or agreement on the part of the Vendors contained in this Agreement or in any document given in order to carry out the transactions contemplated hereby; (b) Any misrepresentation, inaccuracy, incorrectness or breach of any representation or warranty made by the Vendors contained in this Agreement or contained in any document or certificate given in order to carry out the transactions contemplated hereby; (c) All costs and expenses including, without limitation, legal fees on a solicitor-and-client basis, incidental to or in respect of the foregoing; The obligations of indemnification by the Vendors pursuant to paragraph (a) of this section will be subject to the limitations referred to in section 5.3 hereof with respect to the survival of the representations and warranties by the Vendors. 7.2 INDEMNIFICATION OF VENDORS The Purchaser agrees to indemnify and save harmless the Vendors from or against any claims, demands, debts, actions, causes 23 of action or other proceedings, for a period of three (3) years from the Closing Date, arising from or in respect of: (a) Any non-performance or non-fulfilment of any covenant or agreement on the part of the Purchaser contained in this Agreement or in any document given in order to carry out the transactions contemplated hereby; (b) Any misrepresentation, inaccuracy, incorrectness or breach of any representation or warranty made by the Purchaser contained in this Agreement or contained in any document or certificate given in order to carry out the transactions contemplated hereby; (c) All costs and expenses including, without limitation, legal fees on a solicitor-and-client basis, incidental to or in respect of the foregoing; The obligations of indemnification by the Purchaser pursuant to paragraph (a) of this section will be subject to the limitations referred to in section 5.3 hereof with respect to the survival of the representations and warranties by the Purchaser. ARTICLE VIII - GENERAL 8.1 INTERPRETATION: (a) DEFINITIONS Where used herein or in any amendment or supplement hereof, unless the context otherwise requires, the words and phrases with initial capitals set forth in Article 1.0 hereto will have the meanings so set forth therein. (b) SCHEDULES Schedules and other documents attached or referred to in this Agreement are an integral part of this Agreement. (c) SECTIONS AND HEADINGS The division of this Agreement into Articles, Section and Subsections, and the insertion of headings, are for convenience of reference only, and shall not affect the construction or interpretation hereof. (d) EXTENDED MEETINGS Words importing the singular number include the plural and vice-versa, words importing the masculine gender include the feminine and neuter genders. 24 (e) FUNDS All dollar amounts referred to in this Agreement are in lawful money of Canada. 8.2 EXPENSES Each party shall be responsible for its own legal and audit fees and other charges incurred in connection with the preparation of this Agreement, all negotiations between the parties and the consummation of the transactions contemplated hereby. 8.3 FURTHER ASSURANCES Each of the parties hereto will, from time to time, at the other's request and expense and without further consideration, execute and deliver such other instruments of transfer, conveyance and assignment and take such further action as the other may require to more effectively complete any matter provided herein. 8.4 ENTIRE AGREEMENT This Agreement constitutes the entire agreement among the parties and, except as herein stated and in the instruments and documents to be executed and delivered pursuant hereto, contains all of the representations and warranties of the respective parties. There are no oral representations and warranties among the parties of any kind. This Agreement may not be amended or modified in any respect except by written instrument signed by both parties. 8.5 NON-MERGER Each party hereby agrees that all provisions of this Agreement, other than the conditions in Article IV and (subject to the provisions of Article 5.4) the warranties and representations contained in Article V, shall forever survive the execution and delivery of this Agreement and any and all documents delivered in connection herewith. 8.6 APPLICABLE LAW This Agreement shall be interpreted in accordance with the laws of the Province of Alberta. 8.7 NOTICES Any notice required or permitted to be given hereunder shall be in writing and shall be effectively given if (1) delivered personally, (2) sent by prepared courier service or mail, or (3) sent prepaid by telecopier, telex or other similar means of electronic communication (confined on the same or following day by 25 prepaid mail) addressed, in the case of the notice to the Vendor, as follows: Lynn Bishop/L & S Bishop Enterprises Inc. 206, 52245 Range Road 232 Sherwood Park, Alberta T8A 2B1 and in the case of notice to the Purchaser, as follows: Capital Environmental Resource Inc. 500 Rennie Street Hamilton, Ontario L8H 3P6 Any notice so given shall be deemed conclusively to have been given and received when so personally delivered or sent by telex, telecopier or other electronic communications, or on the second day following the sending thereof by private courier or mail. Any party hereto or others mentioned above may charge any particulars of its address for notice by notice to the others in the manner aforesaid. 8.8 SUCCESSORS AND ASSIGNS This Agreement shall enure to the benefit of and be binding upon the parties hereto, their heirs, the executors, administrators, successors and assigns. * * * * * * * * * * * * 26 8.9 EXECUTION BY COUNTERPART & EXECUTION BY COUNTERPART AND FACSIMILE This Agreement, and any supplementary agreements or documents required by the terms hereof, may be executed by counterpart and, provided all parties execute one copy of the Agreement, each copy bearing an original signature of one party shall be deemed to be an original. This Agreement may be executed by facsimile machine and each facsimile signature shall be deemed to be an original signature. IN WITNESS WHEREOF the parties of the First and Third Parts have executed this Agreement by the hand of their proper signing authorities under their Corporate Seals, and the parties of the Second Part have hereunto signed and sealed this Agreement. L & S BISHOP ENTERPRISES INC. Per: /s/ Lynn Bishop ---------------------------------- [ILLEGIBLE] /s/ Lynn Bishop - ------------------------------ --------------------------------------- Witness to Lynn Bishop LYNN BISHOP CAPITAL ENVIRONMENTAL RESOURCE INC. Per: /s/ Tony Busseri ---------------------------------- Tony Busseri WESTERN WASTE SERVICES INC. Per: /s/ Lynn Bishop ---------------------------------- Lynn Bishop EX-10.9 12 ACQUISITION AGREEMENT Exhibit 10.9 PURCHASE and SALE AGREEMENT made this 4th day of June, 1997. Between: Canadian Waste Services Inc., an Ontario company; Canadian Waste Services of Ontario Ltd., an Ontario company; CWS Canadian Waste Services Ltd., a Canada company; CWS Canadian Waste Services (Canada) Ltd., a Canada company; and 1236886 Ontario Inc., an Ontario company, all having a business address at 1275 North Service Road West, Suite 700, Oakville, Ontario, L6M 3G4 (collectively the "Vendor") 324 of 20 Canada Inc. - and - 1233666 Ontario Inc., an Ontario company having an address at Unit 213, 2511 Lakeshore Road West, Oakville, Ontario L6L 6L9 (the "Purchaser") WHEREAS, the Vendor is required by the Director of Investigations (the "Director") acting under the authority of the Competition Act of Canada to divest of certain solid waste collection, removal and transportation for disposal businesses in the communities of Barrie, Brantford, Kitchener, Ottawa and Sarnia, Ontario, and in Calgary and Edmonton, Alberta, and in Vancouver, British Columbia; AND WHEREAS, the Purchaser is willing to purchase the said business from the Vendor; NOW, THEREFORE, this Purchase and Sale Agreement witnesses that in consideration of the articles of agreement set out herein, the parties agree with each other as follows: ARTICLE ONE 1.1 Definitions In this Purchase and Sale Agreement (the "Agreement"), unless there is something in the subject matter or context inconsistent therewith, the following terms shall have the following meanings respectively: "Assets" means the waste collection motor vehicles, containers, and the equipment listed in Schedules 1.1 to 1.9 collectively. -2- "Business" means collectively; (a) the solid waste collection, removal and transportation for disposal service businesses conducted by the Vendor as of the Closing date for the customers listed in Schedules 1.1 to 1.9 collectively, in the communities of Barrie, Brantford, Kitchener, Ottawa and Outaouais, and Sarnia in the Province of Ontario, and Calgary and Edmonton in the Province of Alberta, and Vancouver in the Province of British Columbia; and (b) the transfer station business in Strathcona, Alberta and the landfill operating and management business in Ryley, Alberta. "Closing" means the completion of the purchase and sale contemplated by this Agreement on or before June 6, 1997. "Customer Contracts" means the solid waste collection, removal and transportation for disposal service customer accounts and contracts listed in Schedules 1.1 to 1.8 collectively, and the transfer station customer accounts and contracts and the Beaver County Regional Waste Commission operating agreement set out in Schedule 1.9, and including all files, data and information relating thereto in the possession or control of the Vendor. "Permits" means any and all authorizations, licenses or permits used in the conduct of the Business, including but not limited to the transfer station permit for the facility located in Strathcona, Alberta. "Purchased Assets" means collectively the Assets, the Permits, the Customer Contracts and the Real Property. "Real Property" means the real property owned by the Vendor and used in the conduct of the Business in Brantford and Kitchener, Ontario, as identified in Schedules 1.2, and 1.5, and the leased property, including all leasehold improvements owned by the Vendor and forming part of such leased property, used by the Vendor in the Business in Sarnia, Ontario, a copy of which lease is set out in Schedule 1.7, and in Strathcona, Alberta, a copy of which lease is set out in Schedule 1.8. 1.2 Schedules The following schedules are incorporated into this Agreement as if set out in full herein, and are deemed to be an integral part of this Agreement: Schedules 1.1 to 1.9 - Assets, Customer Contracts, Real Property & Employees Schedule 2 - Disposal Agreements Schedule 3 - Promissory Note -3- ARTICLE TWO 2.1 Purchase and Sale Subject to the terms and provisions of this Agreement, the Purchaser shall purchase and assume, and the Vendor shall sell, transfer and assign to the Purchaser, the Purchased Assets. The parties acknowledge that some of the Customer Contracts proposed to be assigned may not be assignable without the consent of the customer or, even if assignable, the customer may object to assignment. The parties agree that customer satisfaction is important and the Vendor will substitute other contracts of approximately equal value to offset losses as a result of customer dissatisfaction or route efficiency considerations. 2.2 Price and Payment The total purchase price (consisting of the price for the Purchased Assets and the transitional license and assistance set out in Sections 2.03 and 2.10 below) payable by the Purchaser to the Vendor for the Purchased Assets shall be SIXTEEN MILLION AND SEVENTY-FOUR THOUSAND DOLLARS ($16,074,,000.00), subject to adjustment as hereinafter provided, which shall be paid by Purchaser to Vendor as follows: (a) the amount of $825,000.00 shall be paid on or before June 30th, 1997; (b) the amount of $800,000.00 shall be paid on or before July 15th, 1997; (c) the amount of $2,500,000.00 shall be paid on the date six months after the Closing date; (d) the Purchaser shall make monthly payments of interest only on the last day of each month, calculated at 6.75% per year from the Closing date, on the outstanding principal for such month; (e) the Purchaser shall make annual installment payments of $1,195,000.00 each on the first and second anniversary dates of the Closing date; and (f) the Purchaser shall pay the remaining principal balance and interest in full on the third anniversary date of the Closing date. Attached as Schedule 3 is an unexecuted promissory note setting out the foregoing payments, which note the Purchaser shall execute and deliver to the Vendor at Closing. -4- 2.3 Allocation, Security and Taxes The Purchaser and Vendor acknowledge that $5,500,000.00 of the purchase price is allocated to the grant by the Vendor to the Purchaser of the transitional licence and assistance set out in Section 2.10 below, which allocated monies shall be treated as an expense to the Purchaser and as revenue to the Vendor. The allocation of the remaining part of the purchase price shall be agreed to by the parties and finalized within 30 days of the Closing date, and the Vendor and the Purchaser shall record the purchase and sale for tax purposes in accordance with such allocation. As security for the payment of the purchase price, the Purchaser hereby grants the Vendor a security interest in and first lien and charge against the Purchased Assets, and shall enter into a security agreement with Vendor within 30 days following Closing date in this regard. Notwithstanding the foregoing sentence, the Vendor agrees to postpone its security interest in the Purchased Assets to the security interest of a third party lender to the Purchaser, on notice in writing to the Vendor, and the Vendor will execute and deliver such documents as may reasonably be required by the Purchaser to evidence such postponement. The Purchaser and its solicitors are hereby authorized to file any statements required pursuant to the Personal Property Security Act of Ontario to record the postponement of the Vendor's security interest in the Purchased Assets. The Purchaser shall be solely responsible for and shall pay, and shall indemnify the Vendor from and against, any and all GST, retail sales taxes, and similar taxes or charges relating to the purchase and sale of the Purchased Assets. 2.4 Price Adjustment The Vendor represents and warrants to the Purchaser that the aggregate projected earnings before interest, depreciation and amorization ("EBITDA") of the Business for the twelve month period commencing August 1, 1997 and ending July 31, 1998 shall not be less than $4,994,000.00. The aggregate EBITDA calculation provided for in this Section 2.4 shall not incorporate any EBITDA arising by virtue of the transfer station business in Strathcona, Alberta and the landfill operating and management business in Ryley, Alberta, set out in Schedule 1.8. In the event the aggregate EBITDA in such twelve month period is less than $4,994,000.00 then the purchase price shall be reduced by 4.5 times the amount of any such shortfall in the EBITDA, provided always that no reduction in the purchase price shall be made by reason of a shortfall in the EBITDA arising from: (a) the cancellation of any of the Customer Contracts or the withholding or reduction of any amounts otherwise payable pursuant to the Customer Contracts as a result of the Purchaser's default during the said 12 month period; -5- (b) any failure of the Purchaser to comply with applicable laws, regulations, by-laws, Permits or any other authorizations, orders or judgments relating to the conduct of the Business during the said 12 month period; (c) any event of force majeure which affects the Purchaser or the Business and which causes a disruption in service to the Customer Contracts, including but not limited to unusually severe weather, labour disruptions (including strikes, lockouts or work-to-rule actions, except to the extent that any of these events result from the non-compliance with a collective agreement relating to the transfer of the Purchased Assets set out in this Agreement), earthquakes, fires, blockage or failure of transportation systems, or change in the laws applicable to the conduct of the Business which increases the costs of doing business; and (d) any material increase from or after the Closing date in the costs reasonably and properly incurred by the Purchaser in the conduct of the Business, as measured against the historical costs incurred in the conduct of the Business, and any sales, general or administrative costs in excess of 9% of the gross revenues of the Business. In calculating the EBITDA the parties shall treat any event referred to in subsections (a) through (d) above as if it had not occurred for the purposes of such calculation, and shall project the applicable EBITDA accordingly based upon historical information and the best information available to the parties. The parties shall exercise their best efforts to complete the EBITDA calculation and corresponding price adjustment, if any, by September 30th, 1998, failing which either party may take the matter to arbitration in accordance with and subject to the provisions of the Arbitration Act of Ontario and for the purposes of any such arbitration the parties shall promptly select a person from a chartered accounting firm to act as the sole arbitrator. 2.5 Closing The Closing of the purchase and sale set out in this Agreement shall occur on or before June 6th, 1997, simultaneously with and subject to the completion of that certain transaction between the Vendor and WMI Waste Management of Canada Inc., at the offices of the Vendor's lawyers in Toronto, Ontario at a time to be mutually agreed upon by the parties. At Closing the Vendor shall sell, deliver, transfer and assign to the Purchaser, and the Purchaser shall assume, take possession of and pay for, the Purchased Assets. 2.6 Employees At Closing the Purchaser shall assume the employment of the employees of the Business listed in Schedules 1.1 to 1.9, as well as any and all obligations arising from and after the Closing date with respect to such employees, including all wages, salaries, bonuses, vacation and vacation pay, benefits and pensions, and collective agreements -6- with respect to such employees. The Purchaser shall recognize the seniority of the employees listed in Schedules 1.1 to 1.9 in terms of salaries, vacation and benefits. The Vendor shall pay all wages, salaries and bonuses and all amounts due in lieu of holiday pay to all employees listed in Schedules 1.1 to 1.9 owing up to and including the Closing date. 2.7 Assumed Liabilities Subject to the representations, warranties and undertakings of the Vendor set out in this Agreement from and after the time of Closing the Purchaser shall, without any further responsibility or liability of or recourse to the Vendor or its affiliated companies or their respective officers, directors, employees or representatives, indemnify and hold the Vendor harmless for any and all claims, liabilities, obligations, losses, costs, expenses, litigation, and demands whatsoever related to, arising from, asserted against or associated with any and all Assumed Liabilities. For the purposes of this Agreement, "Assumed Liabilities" shall mean: (a) all liabilities, claims, proceedings, demands or litigation, and obligations or debts of the Purchaser, relating to the use, ownership or possession by the Purchaser of the Purchased Assets; (b) all liabilities relating in any manner to the obligations of Vendor arising from and after the Closing date under the Customer Contracts or with respect to the Real Property, including but not limited to any violation, breach or failure to perform any obligation or requirement relating to the Customer Contracts or with respect to the Real Property. The Purchaser shall from and after the Closing date fulfill and comply with all the terms and provisions of the Customer Contracts as if the Purchaser were originally a party to the said agreements; and (c) all liabilities and obligations arising from and after the Closing date with respect to the employees of the Business listed in Schedules 1.1 to 1.9, including any and all obligations relating to salary, wages, bonuses, vacations and vacation pay, benefits, pensions, collective agreements, terminations of any such employees after the Closing date. In the event the landfill operating and management agreement with the Beaver Regional Waste Management Services Commission set out in Schedule 1.8 is not assigned and transferred to the Purchaser, then the Purchaser shall not assume or be liable for any closure and/or post-closure costs relating to the landfill site which is the subject of the said landfill operating and management agreement. 2.8 Assets The Purchaser acknowledges that the Vendor has not directly managed or operated the Business in several instances, having very recently acquired such parts of -7- the Business, and has been required by the Director to manage and operate some parts of the Business through an intermediary in other instances. It is the intention of the parties that the Assets, taken as a whole and as of the Closing date, be representative in terms of age, quality and condition, of the assets of the Vendor's business within the communities comprising the Business. In the event the Assets are not so representative then the parties shall agree to substitute assets of the Vendor's business in order to achieve the aforementioned intention. Subject to the foregoing, the Purchaser hereby agrees that it is buying and assuming the Purchased Assets on an "as-is, where-is" basis. The Vendor does not make any representations or warranties whatsoever to the Purchaser as to the state of repair, condition, quality, durability or suitability of the Purchased Assets for the Purchaser's purposes. THE PURCHASER HEREBY WAIVES, RELEASES AND FOREVER DISCHARGES THE VENDOR FROM ANY AND ALL REPRESENTATIONS, WARRANTIES AND CONDITIONS OF MERCHANTABLE QUALIFY OR FITNESS FOR PURPOSE, WHETHER EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, RELATING TO THE PURCHASED ASSETS. The limitations on the liability of the Vendor set out in this Section 2.8 shall survive the Closing and continue in full force and effect thereafter. 2.9 Purchaser's Undertakings The Purchaser shall replace the bid and performance bonds and letters of credit which the Vendor has given to the customers of the Business, or provide back-up letters of credit satisfactory to the Vendor acting reasonably in respect of such bonds or letters of credit, in favor of the Vendor at or as soon as practicable after Closing, but in any event within 180 days of Closing. The Purchaser shall defend, indemnify and save the Vendor harmless from and against any and all costs, claims or damages incurred by Vendor pertaining to any claims or draws made against any such bid or performance bonds or letters of credit with respect to any such bonds or letters of credit not so replaced or backed-up by letters of credit as of Closing. As soon as reasonably possible following the Closing, and in any event not later than 180 days after the Closing date, the Purchaser shall remove the Vendor's name and logos from the Purchased Assets, as well as the names and logos of any predecessor companies to the Vendor. The Vendor does not grant the Purchaser any rights in and to the name of the Vendor or any trademarks of the Vendor with respect to the ownership or use by the Purchaser of the Purchased Assets. 2.10 Transitional License and Assistance The Vendor hereby grants the Purchaser the right and non-exclusive license to use and share part of the Vendor's facilities relating to the conduct of the Business in the communities of Barrie, Ottawa and Sarnia in the Province of Ontario, Calgary and Edmonton in the Province of Alberta, and Vancouver, British Columbia for the period from the date hereof up to and including December 31, 1997 for the purposes of -9- (b) all liabilities, for taxes, duties, levies, assessments and other charges, including penalties, interest and fines with respect thereto, payable by the Vendor to any federal, provincial, municipal or other government agency, including without limitation any taxes in respect of or measured by the sale, consumption or performance by the Vendor of any service prior to the Closing date or any tax payable in respect of remuneration payable to all persons employed by the Business prior to the Closing date; (c) all liabilities and obligations with respect to the employees of the Business listed in Schedules 1.1 to 1.9, including any obligations relating to salary, bonuses, vacation pay, benefits, pensions, collective agreements and termination of any such employee against the Vendor or the Purchaser in respect of such employment to the extent relating to the period prior to the Closing date; (d) all liabilities for claims of third parties in respect of events occurring at any time prior to the Closing date, including without limitation any claim in respect of the breach of any applicable environmental laws, regulations, ordinances, by-laws and codes in respect of the Real Property or the operation of the Business; (e) all costs and expenses reasonably and properly incurred by the Purchaser in respect of the remediation of the Real Property or the Ryley Regional Landfill Site where such remediation related to conditions, events or circumstances existing prior to the Closing date (whether known or unknown) and not caused by any act or omission of the Purchaser. Notwithstanding any other provision of this Agreement, the Purchaser shall have a right to satisfy any amount from time to time owing by it to the Vendor for the balance of the purchase price, by way of set-off against any amount owing by the Vendor to the Purchaser, as a result of the Vendor's obligation to indemnify pursuant to this Section 2.13. 2.14 Purchaser's Covenant. The Vendor will not be liable for, and the Purchaser will indemnify the Vendor from and against, all obligations, commitments and liabilities of the Purchaser (whether absolute, accrued or contingent) related to, arising from, asserted against or associated with events, circumstances, conditions or occurrences (whether known or unknown) to the extent occurring after the Closing date. Without limiting the generality of the foregoing, the Vendor shall have no liability for and shall be indemnified by the Purchaser for each of the following: (a) all liabilities, claims, proceedings, demands or litigation and obligations or debts in respect of or relating to the operation of the Business after the Closing date; (b) all liabilities, for taxes, duties, levies, assessments and other charges, including penalties, interest and fines with respect thereto, payable by the Purchaser to any federal, provincial, municipal or other government agency, including without limitation any taxes in respect of or measured by the sale, consumption or performance by the Purchaser of any service after the Closing date or any tax -10- payable in respect of remuneration payable to all persons employed by the Business after the Closing date; (c) all liabilities and obligations with respect to the employees of the Business listed in Schedules 1.1 to 1.9, including any obligations relating to salary, bonuses, vacation pay, benefits, pensions, collective agreements and termination of any such employee against the Vendor or the Purchaser in respect of such employment to the extent relating to the period after the Closing date; (d) all liabilities for claims of third parties in respect of events occurring at any time after the Closing date, including without limitation any claim in respect of the breach of any applicable environmental laws, regulations, ordinances, by-laws and codes in respect of the Real Property. (e) all costs and expenses reasonably and properly incurred by the Vendor in respect of the remediation of the Real Property or the Ryley Regional Landfill Site where such remediation related to conditions, events or circumstances arising after the Closing date (whether known or unknown) and not caused by any act or omission of the Vendor. ARTICLE THREE 3.1 Representations and Warranties of Vendor The Vendor represents and warrants to the Purchaser as follows: (a) Organization The Vendor is a corporation which has been duly incorporated and organized and is validly subsisting and in good standing under the laws of its jurisdiction, and has the corporate power and authority and possesses all authorizations necessary to own or lease the Purchased Assets and to sell, transfer and assign the Purchased Assets to the Purchaser. (b) Authority The Vendor has the legal capacity to enter into and carry out it obligations under this Agreement. Neither the execution of this Agreement, nor the completion of the sale set out in this Agreement violates, conflicts with or results in, or will violate, conflict with or result in, a breach by the Vendor of the respective terms, conditions or provisions, as applicable, of its articles or other constating document or by-laws or of any deed of trust, loan agreement, to which it is a party or by which it is bound. All necessary corporate action on the part of the Vendor has been taken to authorize and approve the execution and delivery of this Agreement and the performance by the Vendor of its obligations hereunder. This Agreement has been duly executed and delivered by, and constitutes a valid and binding obligation of the Vendor. -11- (c) Title The Vendor does now and shall at Closing, own, possess and have a good and marketable title to the Purchased Assets free and clear of any charges or other encumbrances whatsoever and has full right to assign and sell the Purchased Assets to Purchaser free and clear of all claims. (d) Proceedings There are no actions, suits or proceedings, pending or threatened, before any court which, if successful, would adversely affect the title to the Purchased Assets, or the Vendor's right to sell the same to the Purchaser free and clear of all encumbrances. (e) Executions There are no judgments or executions outstanding against the Vendor which affect the Purchased Assets. (f) Compliance The Vendor is not now and at Closing will not be in default in any material respect under the terms of any of the Customer Contracts or Permits, nor to the best of the knowledge of the Vendor is any default threatened or pending under any such Customer Contracts or Permits. (g) Real Property The Seller shall convey the owned Real Property to Purchaser at Closing by deed/transfer of land made in favor of the Purchaser, free and clear of any liens and encumbrances, except for recorded easements and other property rights of record on title (but not including any liens or mortgages), none of which interfere with the continued operation of the Business as presently conducted. (h) Lease Property The Sarnia lease set out in Schedule 1.7 and the Strathcona lease set out in Schedule 1.8 are both in good standing, no amounts payable by the lessee thereunder are outstanding and the lessee thereunder is not in default nor at Closing will be in default, in any material respect, of any of the provisions of the said lease agreements. (i) Non-Resident The Vendor is not a non-resident within the meaning of the Income Tax Act of Canada. (j) Labor Relations To the best of Vendor's knowledge there is no strike, walkout or other labor disturbance threatened or pending with respect to any of the employees or collective agreements set out in Schedules 1.1 to 1.9. -12- 3.2 Representations and Warranties of Purchaser Purchaser represents and warrants to Vendor as follows: (a) Organization Purchaser is a corporation duly incorporated and validly existing under the laws of the Province of Ontario. (b) Authority Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated herein violates, conflicts with or results in, or will violate, conflict with or result in, a breach by Purchaser of the terms, conditions or provisions, as applicable, of Purchaser's articles or by-laws or of any deed of trust, debt instrument or loan agreement, or any other agreement affecting its assets or operations generally or its undertaking, to which it is a party of by which it is bound. (c) Corporate Action All necessary corporate action on the part of the Purchaser has been taken to authorize and approve the execution and delivery of this Agreement and the performance by the Purchaser of its obligations hereunder. This Agreement has been duly executed and delivered by, and constitutes a valid and binding obligation of the Purchaser. 3.3 Representations True at Closing The representations, warranties and covenants contained in Sections 3.1 and 3.2 hereof and in any certificate or document delivered in connection with the transaction contemplated herein shall be true at and as of the time of Closing as though such representations, warranties and covenants were made at and as of the time of Closing. 3.4 Survival of Representations and Warranties All representations and warranties set out in this Agreement, whether made by the Vendor or the Purchaser, shall survive the Closing and remain in force and effect for a period of one year following the Closing date, after which period all such representions and warranties shall terminate and be void, and no longer be actionable by the parties, except that any representations or warranties concerning: (a) environmental matters or claims shall survive for a period of 18 months following the Closing date; (b) employee matters or claims shall survive for a period of 3 years following the Closing date; and (c) taxes shall survive for the applicable statutory period; (d) EBITDA in Section 2.4 shall survive until resolved pursuant to Section 2.4; -13- after which applicable periods such representations and warranties shall terminate and be void, and no longer actionable by the parties. ARTICLE FOUR 4.1 Conditions Precedent for Purchaser The obligation of the Purchaser to complete the transaction set out in this Agreement is subject to the fulfillment of each of the following conditions: (a) No Material Breach There shall have been no material breach by the Vendor in the performance of any of its covenants herein, and each of the representations and warranties of the Vendor contained or referred to in this Agreement shall be true and correct in all material respects at Closing. (b) Covenants and Conditions Performed Except as otherwise provided herein, all covenants and conditions of or to be performed or satisfied by the Vendor at or before Closing, shall have been performed or satisfied in all material respects. (c) Permits The Purchaser shall assign its interest in the Permits to the Vendor at Closing by the delivery of an assignment agreement. (d) Corporate Proceedings The Vendor shall have taken or caused to be taken all necessary or desirable actions, steps and corporate proceedings to approve and authorize the transfer of the Purchased Assets to Purchaser. (e) Documents The Vendor shall have delivered to the Purchaser a bill of sale, assignment agreements and deeds/transfer of land in order to effectively transfer and assign the Purchased Assets to the Purchaser with a good and marketable title free and clear of all liens and security interests. 4.2 Purchaser's Right of Waiver In case any of the foregoing conditions shall not have been performed prior to Closing, the Purchaser may terminate this Agreement by notice in writing to the Vendor, in which event the Purchaser shall be under no obligation to any other party under this Agreement; provided, however, that aforesaid conditions are for the benefit of the Purchaser only and accordingly the Purchaser shall be entitled to waive compliance with any of such conditions in whole or in part if it sees fit to do so. -14- 4.3 Conditions Precedent for Vendor The obligation of the Vendor to complete the transaction set out in this Agreement is subject to the fulfillment of each of the following conditions: (a) There shall have been no material breach by the Purchaser in the performance of any of its covenants herein, and each of the representations and warranties of the Purchaser contained or referred to in this Agreement shall be true and correct in all material respects at Closing. (b) Purchaser shall have delivered to Vendor all of the payments, instruments and other documents and items required to be delivered to Vendor, including the payment set out in Section 2.2 and the performance bonds in Section 2.9. 4.4 Vendor's Right of Waiver In case any of the foregoing conditions shall not have been performed prior to Closing, the Vendor may terminate this Agreement by notice in writing to the Purchaser, in which event the Vendor shall be under no obligation to any other party under this Agreement; provided, however, that the aforesaid conditions are for the benefit of the Vendor only and accordingly the Vendor shall be entitled to waive compliance with any such condition in whole or in part if it sees fit to do so. ARTICLE FIVE 5.1 Indemnification by Vendor Subject to the provisions of this Agreement, the Vendor shall indemnify and hold harmless the Purchaser from and against all claims, damages, losses, liabilities, costs and expenses (including, without limitation, settlement costs and any legal fees, court costs, accounting or other investigating or defending expenses for any actions or threatened actions) in connection with: (i) any misrepresentation or breach of any representation or warranty made by the Vendor in this Agreement; or (ii) any breach of any covenant, agreement or obligation of the Vendor contained in this Agreement. Notwithstanding any other provision of this Agreement, the Purchaser shall have a right to satisfy any amount from time to time owing by it to the Vendor for the balance of the purchase price, by way of set-off against any amount owing by the Vendor to the Purchaser, as a result of the Vendor's obligation to indemnify pursuant to this Section 5.1. 5.2 Indemnification by Purchaser The Purchaser shall indemnify and hold harmless the Vendor from and against all claims, damages, losses, liabilities, costs and expenses (including, without limitation, settlement costs and any legal, court costs, accounting or other expenses for investigating or defending any actions or threatened actions) in connection with: (i) any misrepresentation -15- or breach of any representation or warranty made by the Purchaser in this Agreement; or (ii) any breach of any covenant, agreement or obligation of the Purchaser contained in this Agreement. 5.3 Limitation on Liability Notwithstanding any other provision of this Agreement, it is understood and agreed by the parties that the obligation of the Vendor, taken in the aggregate, to indemnify the Purchaser shall in no event commence unless and until the Purchaser has incurred indemnifiable claims in the aggregate in excess of two hundred and fifty-thousand dollars ($250,000.00), in which case the indemnity obligations of the Vendor shall apply to any indemnifiable claims in excess of such amount and the Purchaser hereby waives and forever releases the Vendor from any and all claims for damages or indemnification which taken in the aggregate are less than two hundred and fifty-thousand dollars ($250,000.00). ARTICLE SIX 6.1 Non-Competition Neither the Vendor nor any affiliated company of the Vendor shall, for a period of 12 months following the Closing date (whether on its own account or as a stockholder, partner, joint venturer, advisor, consultant and/or agent of any person, corporation or other entity) solicit, provide or enter into any arrangement or agreement (whether written, oral, formal or informal) for the provision of solid or special waste collection, removal, or transportation for disposal or recycling services to any customer identified in the Customer Contracts assigned by Vendor to the Purchaser pursuant to this Agreement, or use any customer information pertaining to the Customer Contracts for any such purpose, provided always that the foregoing prohibitions shall not apply to the extent that any such Customer Contracts are subject to tender. 6.2 Announcements No public announcement or press release concerning the transaction set out in this Agreement shall be made at any time by the Vendor or the Purchaser, as the case may be, without the prior consent of the other party. 6.3 Fees The Vendor and the Purchaser represent and warrant to each other that it has not engaged any broker or finder to act with respect to the purchase and sale set out in this Agreement, and each agrees to indemnify the other against any claim by any person for brokerage, commission or finder's or similar fees based upon the alleged act of such party. -16- 6.4 Applicable Law This Agreement and the rights, obligations and relations of the parties shall be governed by and construed in accordance with the laws in force in the Province of Ontario and the rights and obligations of the parties shall be interpreted accordingly. Exclusive jurisdiction in any action, suit or proceeding related to any dispute arising under this Agreement and the other agreements relating to this Agreement (for purposes of this Section, a "Dispute") shall be in any appropriate court in the Province of Ontario. The Vendor and Purchaser waive any right to trial by jury or to have a jury participate in resolving any Dispute, whether relating to contract, tort or otherwise. The Vendor and Purchaser do not waive venue in any action, suit or proceeding related to a Dispute brought before any court in the Province of Ontario. 6.5 Entire Agreement This Agreement contains the entire agreement of the parties hereto and supersedes all prior agreements and understandings, oral or written, between the parties hereto or their respective representatives with respect to the matters herein and shall not be modified or amended except by written agreement signed by the parties to be bound thereby. 6.6 Time Time shall be of the essence of this Agreement 6.7 Notices All notices, requests, demands or other communications required to be given or made hereunder shall be in writing and shall be deemed to be well and sufficiently given if hand delivered or sent by prepaid courier or by means of printed telephonic facsimile communication, if to the Vendor, addressed to: Canadian Waste Services Inc. 1275 North Service Road West, Suite 700 Oakville, Ontario L6M 3G4 Fax: (905) 825-5603 and if to the Purchaser, addressed to: 1233666 Ontario Inc. Unit 213, 2511 Lakeshore Road West Oakville, Ontario L6L 6L9 Fax: (905) 847-7988 -17- Such notice shall be deemed to have been given on the date of delivery or transmission. Any party may change its address for notice by written communication, mailed or delivered as aforesaid. 6.8 Successors and Assigns This Agreement shall be binding upon and enure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. 6.9 Confidentiality In the event that the purchase and sale herein provided for is not consummated, the Purchaser agrees that it will not, directly or indirectly, use for its own purposes any information, trade secrets or confidential data relating to the Vendor, or the Business (including the customers of the Business) discovered or acquired by the Purchaser, its representatives or auditors, or any of them, as a result of the Vendor making available to the Purchaser or its representatives any information relating to the Vendor, the Purchased Assets, and the Purchaser agrees that it will not disclose, divulge or communicate orally, in writing or otherwise, any such information, trade secrets or confidential data so discovered or acquired to any other person, firm or corporation. IN WITNESS WHEREOF the parties have signed this Agreement by their duly authorized officers. SIGNED AND DELIVERED: (Canadian Waste Services Inc. (By: ( (/s/ [ILLEGIBLE] (-------------------------------------- (Canadian Waste Services of Ontario Ltd. (By: ( (/s/ [ILLEGIBLE] (-------------------------------------- signatures continued ....... -18- (CWS Canadian Waste Services Ltd. (By: ( (/s/ [ILLEGIBLE] (-------------------------------------- (CWS Canadian Waste Services (Canada) Ltd. (By: ( (/s/ [ILLEGIBLE] (-------------------------------------- (1236886 Ontario Inc. (By: ( (/s/ [ILLEGIBLE] (-------------------------------------- (1233666 Ontario Inc. (By: ( (/s/ [ILLEGIBLE] (-------------------------------------- EX-21 13 SUBSIDIARIES OF THE COMPANY Exhibit 21 SUBSIDIARIES CANADA: 1312654 Ontario Inc. (non-operating) 231768 Ontario Inc. 3020378 Nova Scotia Company (non-operating) Alberta Waste Ltd. Bales Transfer Station Limited Can Pak Environmental Inc. Can Pak Waste Management Limited Capital Environmental Inc. Muskoka Containerized Services Limited Premier Waste Systems Ltd. Ram-Pak Compaction Systems Ltd. West Coast Waste Systems Inc. Western Waste Services Inc. UNITED STATES: Action Disposal, L.L.C. Capital Environmental Holdings Inc. Capital Environmental Resource (Pennsylvania) Inc. Capital Environmental Resource (U.S.) Inc. CERI, L.L.C. (non-operating) CERI, L.P. (non-operating) General Environmental Technical Services, Inc. J.V. Services of Western N.Y., Inc. Rubbish Removal of NY, Inc. Tousley Trash Service, Inc. Waste Leasing & Haulers, Inc. EX-23.1 14 CONSENT OF PRICEWATERHOUSECOOPERS 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------) 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 April 30, 1999 EX-23.3 15 CONSENT OF DAVID LOWENSTEIN Capital Environmental Resource Inc. 1005 Skyview Drive Burlington, Ontario L7P 5B1 Canada Ladies and Gentlemen: The undersigned hereby consents to being designated as a person expected to become a director of Capital Environmental Resource Inc., an Ontario corporation (the "Company"), in the Company's Registration Statement on Form F-1 to be filed with the United States Securities and Exchange Commission. Very truly yours, /s/ David Lowenstein David Lowenstein Date: March 11, 1999 EX-23.7 16 CONSENT OF COOPERS & LYBRAND 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------) 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 April 30, 1999 -----END PRIVACY-ENHANCED MESSAGE-----