<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Commission file number 0-30417
---------------------
PHILIP SERVICES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 98-131394
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification Number)
or Organization)
100 KING STREET WEST, HAMILTON, ONTARIO, L8N 4J6
CANADA (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
(905) 521-1600
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
The number of shares of Common Shares of the Registrant, outstanding at
August 11, 2000 was 24,041,946.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
REPORT INDEX
<TABLE>
<CAPTION>
PART AND ITEM NO. PAGE NO.
----------------- --------
<S> <C>
PART I -- Financial Information
Item 1 -- Financial Statements
Consolidated Balance Sheets of the Company as
of June 30, 2000 (unaudited) and March 31, 2000
(audited) and Consolidated Balance Sheet of the
Predecessor Company as of December 31, 1999
(unaudited).................................... 2
Consolidated Statement of Earnings of the
Company for the Three Months Ended June 30,
2000 and Consolidated Statement of Earnings of
the Predecessor Company for the Three Months
Ended June 30, 1999 (unaudited)................ 3
Consolidated Statement of Earnings of the
Company For the Three Months Ended June 30,
2000 and Consolidated Statements of Earnings
for the Predecessor Company for the Three
Months Ended March 31, 2000 and for the Six
Months Ended June 30, 1999 (unaudited)......... 4
Consolidated Statement of Cash Flows of the
Company for the Three Months Ended June 30,
2000 and Consolidated Statements of Cash Flows
of the Predecessor Company for the Three Months
Ended March 31, 2000 and for the Six Months
Ended June 30, 1999 (unaudited)................ 5
Notes to Consolidated Financial Statements
(unaudited).................................... 6
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 22
Item 3 -- Quantitative and Qualitative Disclosures About
Market Risk.................................... 28
PART II -- Other Information
Item 1 -- Legal Proceedings............................... 29
Item 2 -- Changes in Securities........................... 30
Item 3 -- Defaults upon Senior Securities................. 30
Item 4 -- Submission of Matters to a Vote of Securities
Holders......................................... 30
Item 5 -- Other Information............................... 30
Item 6 -- Exhibits and Reports on Form 8-K................ 30
Signatures..................................... 31
</TABLE>
1
<PAGE> 3
PHILIP SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PREDECESSOR
FRESH START COMPANY
----------- -----------
JUNE 30 MARCH 31 DECEMBER 31
2000 2000 1999
----------- ----------- -----------
(UNAUDITED) (AUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents................................. $ 46,954 $ 32,116 $ 48,316
Accounts receivable (net of allowance for doubtful
accounts of $25,643; March 31, 2000 -- $23,412;
December 31, 1999 -- $23,938)..................... 300,121 311,578 305,441
Inventory for resale................................. 38,125 36,781 38,939
Other current assets................................. 64,276 130,795 107,688
-------- -------- ----------
449,476 511,270 500,384
Fixed assets........................................... 279,045 281,412 303,639
Other assets........................................... 57,658 54,650 57,556
-------- -------- ----------
$786,179 $847,332 $ 861,579
======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable..................................... $ 88,410 $ 94,397 $ 110,762
Accrued liabilities.................................. 136,085 143,057 136,256
Current maturities of long-term debt................. 4,040 5,161 11,917
-------- -------- ----------
228,535 242,615 258,935
Long-term debt......................................... 341,409 384,540 5,268
Deferred income taxes.................................. 6,580 6,580 5,020
Other liabilities...................................... 98,244 95,303 97,021
Liabilities subject to compromise...................... -- -- 1,136,468
Contingencies
Shareholders' equity (deficit)......................... 111,411 118,294 (641,133)
-------- -------- ----------
$786,179 $847,332 $ 861,579
======== ======== ==========
</TABLE>
These consolidated financial statements contain information relating to
Philip Services Corporation, a Delaware corporation and its subsidiaries (the
"Company") and Philip Services Corp., an Ontario company (the "Predecessor
Company") and its subsidiaries which have been prepared by management of the
Company. On April 7, 2000, the Predecessor Company transferred substantially all
of its assets and liabilities (except for liabilities subject to compromise), at
fair value, to the Company. The liabilities subject to compromise of $726.5
million were retained by the Predecessor Company and as a result, the
Predecessor Company is now insolvent. Management of the Company has determined
that financial information of the Predecessor Company at December 31, 1999 and
for the three months ended March 31, 2000 and three and six months ended June
30, 1999 may be of interest to shareholders of the Company and has therefore
included such information in this document. The financial information of the
Predecessor Company does not reflect the effects of the application of fresh
start reporting. Readers should therefore review this material with caution and
not rely on the information disclosed for the Predecessor Company.
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
PHILIP SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT
SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, 2000 ENDED JUNE 30, 1999
-------------------- --------------------
<S> <C> <C>
Revenue.............................................. $427,364 $397,012
Operating expenses................................... 373,904 352,941
Selling, general and administrative costs............ 38,215 50,408
Depreciation and amortization........................ 11,146 13,688
-------- --------
Income (loss) from operations........................ 4,099 (20,025)
Interest expense..................................... 9,408 25,375
Other income and expense -- net...................... (1,015) (686)
-------- --------
Loss from continuing operations before tax and
reorganization costs............................... (4,294) (44,714)
Reorganization costs (Note 13)....................... -- 14,324
Income taxes......................................... 563 2,650
-------- --------
Loss from continuing operations...................... (4,857) (61,688)
Discontinued operations (net of tax)................. -- 39,175
-------- --------
Net loss............................................. $ (4,857) $(22,513)
======== ========
Basic and diluted earnings (loss) per share (Note 14)
Continuing operations.............................. $ (0.20)
Discontinued operations............................ --
--------
$ (0.20)
========
Weighted average number of common shares outstanding
(000's)............................................ 24,026
========
</TABLE>
These consolidated financial statements contain information relating to
Philip Services Corporation, a Delaware corporation and its subsidiaries (the
"Company") and Philip Services Corp., an Ontario company (the "Predecessor
Company") and its subsidiaries which have been prepared by management of the
Company. On April 7, 2000, the Predecessor Company transferred substantially all
of its assets and liabilities (except for liabilities subject to compromise), at
fair value, to the Company. The liabilities subject to compromise of $726.5
million were retained by the Predecessor Company and as a result, the
Predecessor Company is now insolvent. Management of the Company has determined
that financial information of the Predecessor Company at December 31, 1999 and
for the three months ended March 31, 2000 and three and six months ended June
30, 1999 may be of interest to shareholders of the Company and has therefore
included such information in this document. The financial information of the
Predecessor Company does not reflect the effects of the application of fresh
start reporting. Readers should therefore review this material with caution and
not rely on the information disclosed for the Predecessor Company.
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
PHILIP SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT
SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------------
FOR THE THREE MONTHS FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 2000 ENDED MARCH 31, 2000 ENDED JUNE 30, 1999
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Revenue........................... $427,364 $487,519 $812,556
Operating expenses................ 373,904 426,227 715,528
Selling, general and
administrative costs............ 38,215 37,043 100,077
Depreciation and amortization..... 11,146 12,436 28,405
-------- -------- --------
Income (loss) from operations..... 4,099 11,813 (31,454)
Interest expense.................. 9,408 952 51,899
Other income and expense -- net... (1,015) (9,598) (1,428)
-------- -------- --------
Earnings (loss) from continuing
operations before income tax and
reorganization costs............ (4,294) 20,459 (81,925)
Reorganization costs (Note 13).... -- 20,607 14,324
Income taxes...................... 563 856 4,350
-------- -------- --------
Loss from continuing operations... (4,857) (1,004) (100,599)
Cumulative effect of change in
accounting principle............ -- -- (1,543)
Discontinued operations (net of
tax)............................ -- 1,473 37,732
-------- -------- --------
Net earnings (loss)............... $ (4,857) $ 469 $(64,410)
======== ======== ========
Basic and diluted earnings (loss)
per share (Note 14)
Continuing operations........... $ (0.20)
Discontinued operations......... --
--------
$ (0.20)
========
Weighted average number of common
shares outstanding (000's)...... 24,026
========
</TABLE>
These consolidated financial statements contain information relating to
Philip Services Corporation, a Delaware corporation and its subsidiaries (the
"Company") and Philip Services Corp., an Ontario company (the "Predecessor
Company") and its subsidiaries which have been prepared by management of the
Company. On April 7, 2000, the Predecessor Company transferred substantially all
of its assets and liabilities (except for liabilities subject to compromise), at
fair value, to the Company. The liabilities subject to compromise of $726.5
million were retained by the Predecessor Company and as a result, the
Predecessor Company is now insolvent. Management of the Company has determined
that financial information of the Predecessor Company at December 31, 1999 and
for the three months ended March 31, 2000 and three and six months ended June
30, 1999 may be of interest to shareholders of the Company and has therefore
included such information in this document. The financial information of the
Predecessor Company does not reflect the effects of the application of fresh
start reporting. Readers should therefore review this material with caution and
not rely on the information disclosed for the Predecessor Company.
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
PHILIP SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------
FOR THE THREE MONTHS FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 2000 ENDED MARCH 31, 2000 ENDED JUNE 30, 1999
-------------------- -------------------- -------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss from continuing operations... $ (4,857) $ (1,004) $(100,599)
Items included in earnings not
affecting cash
Depreciation and amortization....... 11,146 12,436 28,405
Accrued but unpaid interest......... 3,381 -- 49,540
Deferred income taxes............... -- -- 2,135
Writedown of investments............ -- -- 4,220
Gain on sale of assets.............. -- (7,820) (3,523)
Non-cash reorganization costs....... -- -- 14,324
-------- -------- ---------
Cash flow from continuing
operations.......................... 9,670 3,612 (5,498)
Changes in non-cash working capital... 63,357 (11,622) 7,026
-------- -------- ---------
Cash provided by (used in) continuing
operating activities................ 73,027 (8,010) 1,528
Cash provided by (used in)
discontinued operating activities... 191 (1,453) 1,629
-------- -------- ---------
Cash provided by (used in) operating
activities.......................... 73,218 (9,463) 3,157
-------- -------- ---------
INVESTING ACTIVITIES
Proceeds from sale of operations...... -- -- 23,085
Purchase of fixed assets.............. (9,595) (8,403) (14,064)
Proceeds from sale of assets.......... 1,539 11,379 9,909
Other -- net.......................... (2,809) (5,623) (3,527)
-------- -------- ---------
Cash provided by (used in) continuing
investing activities................ (10,865) (2,647) 15,403
Cash provided by investing activities
of discontinued operations.......... -- 1,545 68,017
-------- -------- ---------
Cash provided by (used in) investing
activities.......................... (10,865) (1,102) 83,420
-------- -------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt.......... -- -- 140
Principal payments on long-term
debt................................ (47,765) (1,205) (74,178)
Common shares issued for cash......... 250 -- --
-------- -------- ---------
Cash used in continuing financing
activities.......................... (47,515) (1,205) (74,038)
Cash provided by (used in) financing
activities of discontinued
operations.......................... -- (92) 2,672
-------- -------- ---------
Cash used in financing activities..... (47,515) (1,297) (71,366)
-------- -------- ---------
Net change in cash for the period..... 14,838 (11,862) 15,211
Cash and equivalents, beginning of
period.............................. 32,116 48,316 60,727
-------- -------- ---------
Cash and equivalents, end of period... $ 46,954 $ 36,454 $ 75,938
======== ======== =========
</TABLE>
These consolidated financial statements contain information relating to
Philip Services Corporation, a Delaware corporation and its subsidiaries (the
"Company") and Philip Services Corp., an Ontario company (the "Predecessor
Company") and its subsidiaries which have been prepared by management of the
Company. On April 7, 2000, the Predecessor Company transferred substantially all
of its assets and liabilities (except for liabilities subject to compromise), at
fair value, to the Company. The liabilities subject to compromise of $726.5
million were retained by the Predecessor Company and as a result, the
Predecessor Company is now insolvent. Management of the Company has determined
that financial information of the Predecessor Company at December 31, 1999 and
for the three months ended March 31, 2000 and three and six months ended June
30, 1999 may be of interest to shareholders of the Company and has therefore
included such information in this document. The financial information of the
Predecessor Company does not reflect the effects of the application of fresh
start reporting. Readers should therefore review this material with caution and
not rely on the information disclosed for the Predecessor Company.
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
These consolidated financial statements contain information relating to
Philip Services Corporation, a Delaware corporation and its subsidiaries (the
"Company") and Philip Services Corp., an Ontario company (the "Predecessor
Company") and its subsidiaries which have been prepared by management of the
Company. On April 7, 2000, the Predecessor Company transferred substantially all
of its assets and liabilities (except for liabilities subject to compromise), at
fair value, to the Company. The liabilities subject to compromise of $726.5
million were retained by the Predecessor Company and as a result, the
Predecessor Company is now insolvent. Management of the Company has determined
that financial information of the Predecessor Company at December 31, 1999 and
for the three months ended March 31, 2000 and three and six months ended June
30, 1999 may be of interest to shareholders of the Company and has therefore
included such information in this document. The financial information of the
Predecessor Company does not reflect the effects of the application of fresh
start reporting. Readers should therefore review this material with caution and
not rely on the information for the Predecessor Company.
The consolidated financial statements herein have been prepared by the
Company or the Predecessor Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC"). As applicable
under such regulations, certain information and footnote disclosures normally
included in complete annual financial statements have been condensed or omitted.
The Company believes that the presentation and disclosures herein are adequate
to make the information not misleading, and the financial statements reflect all
elimination entries and normal adjustments which are necessary for a fair
statement of the results for the three months ended June 30, 2000.
Philip Services Corporation is an integrated metals recovery and industrial
services company, which provides metal recovery and processing services and
industrial outsourcing services to major industry sectors throughout North
America. The Company and its subsidiaries represent substantially the same
businesses as the Predecessor Company with the exception of the UK Metals
business, which was sold on April 7, 2000.
The consolidated financial statements have been prepared in US dollars
using accounting principles generally accepted in the United States except that
the consolidated financial statements of the Predecessor Company have been
prepared on the basis of accounting principles applicable to a going concern
which would assume that the Predecessor Company will realize the carrying value
of its assets, and satisfy its obligations and commitments except as otherwise
disclosed, in the normal course of business. However, because of the
reorganization and the circumstances relating to this event, the Predecessor
Company is insolvent, and therefore will not be able to realize the carrying
value of its assets and satisfy its obligations and commitments. The financial
statements do not give effect to any adjustments to the carrying value of assets
or amounts and priority of liabilities that would be necessary under the basis
of accounting principles which would be applicable to an insolvent company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company and the Predecessor Company
to make estimates and assumptions that affect reported amounts of assets,
liabilities, income and expenses and disclosures of contingencies. Actual
results could differ from the estimates and judgements made in preparing these
financial statements.
For all periods presented, the Consolidated Financial Statements and Notes
to the Consolidated Financial Statements disclose the Utilities Management
division sold in May 1999 and the Copper and Non-ferrous operations discontinued
in 1998, as discontinued operations, as discussed in Note 3.
6
<PAGE> 8
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(1) BASIS OF PRESENTATION (CONTINUED)
BANKRUPTCY FILING AND PLAN OF REORGANIZATION
On June 25, 1999, the Predecessor Company and substantially all of its
wholly-owned subsidiaries located in the United States (the "U.S. Debtors"),
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code with the United States Bankruptcy Court for the District of
Delaware (the "U.S. Court"). The Predecessor Company and substantially all of
its wholly-owned subsidiaries located in Canada (the "Canadian Debtors")
commenced proceedings under the Companies' Creditors Arrangements Act in Canada
in the Ontario Superior Court of Justice (the "Canadian Court") on the same
date.
On July 12, 1999, the U.S. Debtors filed a Joint Plan of Reorganization
(the "U.S. Plan") with the U.S. Court and on July 15, 1999, the Canadian Debtors
filed a Plan of Compromise and Arrangement (the "Canadian Plan") with the
Canadian Court. In August 1999, a number of motions were brought before the
Canadian Court challenging the fairness of the Canadian Plan. As a result, the
Predecessor Company filed an amended plan in the U.S. Court on September 21,
1999 (the "Amended U.S. Plan") and an amended plan in the Canadian Court on
September 24, 1999 (the "Amended Canadian Plan"). On November 2, 1999, the
Predecessor Company filed a Supplement to the Amended Canadian Plan (the
"Canadian Plan Supplement"). The Canadian Plan Supplement amended and restated
the Amended Canadian Plan and provided that substantially all of the assets of
the Canadian debtors be transferred to new companies that, on the implementation
of the Amended U.S. Plan became wholly-owned subsidiaries of the Company. All
the shares held by the Predecessor Company in the Company were cancelled under
the Amended U.S. Plan. On November 5, 1999, the Predecessor Company's lenders
voted to approve the Canadian Plan Supplement. On November 26, 1999 a hearing
was held in the Canadian Court at which the Canadian Plan Supplement was
sanctioned. On November 30, 1999 the Amended U.S. Plan was confirmed in the U.S.
Court. On March 8, 2000, the Canadian Plan Supplement was amended to permit the
sale of the UK Metals business and certain tax restructuring issues. On March
20, 2000, a similar amendment was made by the U.S. Court with respect to the
Amended U.S. Plan. The Amended U.S. Plan and the Canadian Plan Supplement
(collectively the "Plan") became effective on April 7, 2000. Under the Plan, the
Company emerged from bankruptcy protection as a new public entity.
Under the Plan, syndicate debt of the Predecessor Company of $1 billion has
been converted into $250 million of senior secured debt, $100 million of
convertible secured payment-in-kind debt and 91% of the common shares of the
Company. The secured payment-in-kind debt is convertible into 25% of the common
shares of the Company on a fully diluted basis as of the Plan effective date.
The Plan also provided for the conversion of certain specified impaired
unsecured claims, into $60 million of unsecured payment in-kind notes and 5% of
the common shares of the Company as of the Plan effective date. The Plan allowed
certain holders of unsecured claims to receive $1.50 in face amount of unsecured
convertible notes in exchange for every $1.00 in unsecured payment in-kind notes
that such holder would have received under the Plan. The aggregate amount of
unsecured convertible notes issued was $16 million. The Company also issued 1.5%
of its common shares to Canadian and U.S. class action plaintiffs to settle all
class action claims. Other potential equity claimants received 0.5% of the
common shares of the Company and the shareholders of the Predecessor Company
received 2% of the common shares of the Company.
FRESH START REPORTING
The Company has adopted fresh start reporting in accordance with the
AICPA's Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." For financial reporting purposes, the
effective date of the Plan was considered to be March 31, 2000. Under the
principles of fresh start reporting the Company is required to determine its
reorganization value. The reorganization value of the
7
<PAGE> 9
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(1) BASIS OF PRESENTATION (CONTINUED)
Company was determined with the assistance of independent advisors. The
methodology employed involved the estimation of an enterprise value (i.e. the
fair market value of the Corporation's debt and shareholders' equity) which was
approximately $500 million. The significant factors used in the determination of
the reorganization value were the industries in which the Company operates, the
general economic conditions which impact the Company and the application of
certain valuation methodologies which included a discounted cash flow analysis
based on two years cashflow projections prepared by management with discount
rates of between 11% to 12% and an analysis of comparable publicly traded
company multiples and sales transactions. The reorganization value was then
allocated to the Company's assets and liabilities based on their fair values. No
significant adjustments were made to the Company's assets and liabilities under
fresh start reporting as their fair values approximated recorded amounts at
March 31, 2000.
Due to the changes in the financial structure of the Company and the
application of fresh start reporting, as a result of the consummation of the
Plan, the consolidated financial statements of the Company issued subsequent to
Plan implementation are not comparable with the consolidated financial
statements issued by the Predecessor Company prior to Plan implementation. A
black line has been drawn on the accompanying consolidated financial statements
to separate and distinguish between the Company and Predecessor Company.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All intercompany transactions have been eliminated
on consolidation. The equity method of accounting is used for investment
ownership ranging from 20% to 50%.
REVENUE RECOGNITION
Revenue from industrial services is recorded as the services are performed,
using the percentage of completion basis for fixed price contracts and as the
related service is provided for time and material contracts. Revenue from
by-product recovery operations is recognized upon receipt and acceptance of
materials for processing since the Company accepts title to the materials at
such time and provides contractual indemnification to customers against future
liability with respect to the materials. Treatment, transportation and disposal
costs are accrued when the related revenue is recognized. Revenue from the sale
of recovered commodities and steel products is recognized at the time of
shipment. For contracts where the Company brokers material between two parties,
takes title to the product and assumes the risks and rewards of ownership, the
revenue is recognized at the time of shipment. If the Company is acting as an
agent in those transactions, then only the commission on the transaction is
recorded.
CASH AND EQUIVALENTS
Cash and equivalents consist of cash on deposit and term deposit in money
market instruments with maturity dates of less than three months from the date
they are acquired.
INVENTORY
Inventory is recorded at the lower of average purchased cost or net
realizable value.
8
<PAGE> 10
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS
In accordance with fresh start reporting, fixed assets were reflected at
their fair market values as of March 31, 2000. Fixed asset additions subsequent
to this date are recorded at cost. Fixed assets are depreciated over their
estimated useful lives generally on the following basis: buildings 2.5% to 5%
straight-line; equipment 5% to 30% straight-line. Landfill sites and
improvements thereto are recorded at cost and amortized over the life of the
landfill site based on the estimated landfill capacity utilized during the year.
Operating costs associated with landfill sites are charged to operations as
incurred. Assets under development include the direct cost of land, buildings
and equipment acquired for future use together with engineering, legal and other
costs incurred before the assets are brought into operation.
The Company includes, as part of the cost of its fixed assets, all
financing costs incurred prior to the asset becoming available for operation.
The Company periodically reviews the carrying value of its fixed assets
based on the undiscounted future cash flow from operating results to determine
whether such values are recoverable. Any resulting write-downs are charged to
earnings.
CONTRACT ACCOUNTING
The company uses the percentage of completion basis to account for its
fixed price contracts. Under this method, revenue is recognized as work
progresses in the ratio that costs bear to estimated total costs for each
contract. Contract costs include all direct material and labour costs and those
indirect costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on incomplete contracts are recorded in the period in which
such losses are determined.
ENVIRONMENTAL LIABILITY
The Company accrues environmental remediation costs associated with
identified sites where an assessment has indicated that cleanup costs are
probable and can be reasonably estimated. Such accruals are undiscounted and are
based on currently available information, estimated timing of remedial actions
and related inflation assumptions, existing technology and presently enacted
laws and regulations. The liability for environmental and closure costs is
disclosed in the consolidated balance sheet under accrued liabilities and other
liabilities. Amounts required to dispose of waste materials located at the
Company's industrial services facilities are included in accrued liabilities.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities denominated in a foreign currency for foreign
operations, all of which are self-sustaining, are translated at exchange rates
in effect at the balance sheet date. The resulting gains and losses are
accumulated in a separate component of shareholders' equity.
FINANCIAL INSTRUMENTS
The Company's accounts receivable, accounts payable and long-term debt
constitute financial instruments. The Company's accounts receivable, accounts
payable and long-term debt approximated their fair value as at June 30, 2000.
Concentration of credit risk in accounts receivable is limited, due to the large
number of customers the Company services throughout North America. The Company
performs ongoing credit evaluations of its customers, but does not require
collateral to support customer accounts receivable.
9
<PAGE> 11
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company establishes an allowance for doubtful accounts based on the credit
risk applicable to particular customers, historical and other information.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities and requires that an entity recognize these
items as assets or liabilities in the statement of financial position and
measure them at fair value. Changes in fair value of the derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction,
and if it is, the type of hedge transaction. The impact on the Company's
financial position will be dependent on the level and types of derivative
instruments the Company will have entered into at the time SFAS No. 133 is
implemented.
In June 1999, FASB issued SFAS No. 137 to defer the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. As a result, the standard will be adopted by the Company in its interim
period ended September 30, 2000.
(3) DISCONTINUED OPERATIONS (in thousands)
On May 18, 1999, the Predecessor Company sold its investment in Philip
Utilities Management Corp. ("PUMC") for cash proceeds of $70,104, resulting in a
gain on sale of $39,115. The operations of PUMC, previously reported as the
Utilities Management division of the Industrial Services group, are reflected as
discontinued operations. In December 1998, the Predecessor Company made the
decision to discontinue the Non-ferrous and Copper operations of its Metals
Services business. The sale of certain aluminium operations included in the
Non-Ferrous operations closed on January 11, 1999 for a total consideration of
approximately $69,500.
During 1999, certain Copper and Non-Ferrous operations and assets were
sold. The remainder of the operations in these segments will be closed or sold
in 2000, except for three operations with annual revenue of approximately
$7,000, which have been transferred to continuing operations.
Revenue from the Non-Ferrous, Copper and Utilities Management operations,
net of intercompany revenue, was $3,730 and $1,421 for the three months ended
March 31, 2000 and June 30, 2000, respectively, $36,403 for the three months
ended June 30, 1999 and $58,240 for the six months ended June 30, 1999. Net
earnings from discontinued operations in the Consolidated Statements of Earnings
is presented net of applicable income tax provision of nil for the three months
ended March 31, 2000 and $674 for the three and six months ended June 30, 1999.
10
<PAGE> 12
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(4) OTHER CURRENT ASSETS (in thousands)
<TABLE>
<CAPTION>
PREDECESSOR
FRESH START COMPANY
JUNE 30 MARCH 31 DECEMBER 31
2000 2000 1999
------- ----------- -----------
<S> <C> <C> <C>
Restricted cash(a)...................................... $ -- $ 20,937 $ 48,028
Proceeds receivable on sale of UK Metals business (b)... 3,097 47,684 --
Costs in excess of billings............................. 13,086 15,384 12,568
Consumable supplies..................................... 16,480 15,844 15,890
Non-trade receivables................................... 13,553 15,298 13,676
Other................................................... 18,060 15,648 17,526
------- -------- --------
$64,276 $130,795 $107,688
======= ======== ========
</TABLE>
(a) Restricted cash represented funds used as collateral for letters of credit,
and proceeds from the sale of assets which were held by the Predecessor
Company's lenders. These funds were released to the Company in April, 2000.
(b) On April 7, 2000, the Predecessor Company sold its metals recycling and mill
services business in the United Kingdom for net proceeds of $47,684. On May
25, 2000, the Canadian Court ordered the distribution of approximately
$44,587 of the net proceeds which was used to pay down the term debt of the
Company.
(5) OTHER ASSETS (in thousands)
<TABLE>
<CAPTION>
PREDECESSOR
FRESH START COMPANY
JUNE 30 MARCH 31 DECEMBER 31
2000 2000 1999
------- ----------- -----------
<S> <C> <C> <C>
Restricted investments(a)............................... $42,150 $ 39,025 $ 33,412
Other................................................... 15,508 15,625 24,144
------- -------- --------
$57,658 $ 54,650 $ 57,556
======= ======== ========
</TABLE>
(a) Restricted investments are controlled by the Company's wholly-owned
insurance subsidiary, and as at June 30, 2000 approximately $30,900 has been
pledged as security for the Company's insurance liabilities.
11
<PAGE> 13
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(6) ACCRUED LIABILITIES (in thousands)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR
FRESH START COMPANY
JUNE 30 MARCH 31 DECEMBER 31
2000 2000 1999
-------- ----------- -----------
<S> <C> <C> <C>
Insurance claims outstanding........................... $ 30,384 $ 31,758 $ 34,278
Accrued employee compensation and benefit costs........ 28,943 33,025 26,745
Accrued purchases...................................... 15,081 26,498 16,523
Accrued closure costs.................................. 14,122 13,189 13,956
Billings in excess of costs............................ 12,328 7,528 10,304
Accrued waste material disposal costs.................. 4,202 6,208 4,205
Accrued environmental costs............................ 3,452 6,161 6,143
Accrued other.......................................... 25,251 16,976 24,102
Income taxes payable................................... 2,322 1,714 --
-------- -------- --------
$136,085 $143,057 $136,256
======== ======== ========
</TABLE>
(7) LONG-TERM DEBT (in thousands except per share amounts)
<TABLE>
<CAPTION>
PREDECESSOR
FRESH START COMPANY
JUNE 30 MARCH 31 DECEMBER 31
2000 2000 1999
-------- ----------- -----------
<S> <C> <C> <C>
Credit Facility
Term debt(a)......................................... $190,756 $235,825 $ --
Convertible Payment in-kind debt(a).................. 102,361 100,000 --
Unsecured Payment in-kind notes(b)..................... 37,020 36,000 --
Secured loans bearing interest at a weighted average
fixed rate of 5.5% maturing at various dates up to
2020................................................. 7,196 9,551 9,712
Secured loans bearing interest at prime plus a weighted
average floating rate of 0.5% maturing at various
dates up to 2001..................................... 953 1,048 1,279
Obligations under capital leases on equipment bearing
interest at rates varying from 6% to 12% maturing at
various dates to 2004................................ 7,163 7,277 6,194
-------- -------- --------
345,449 389,701 17,185
Less current maturities of long-term debt.............. 4,040 5,161 11,917
-------- -------- --------
$341,409 $384,540 $ 5,268
======== ======== ========
</TABLE>
(a) Term debt and Convertible Payment in-kind debt
As of March 31, 2000 the Company entered into a $335,825 term credit
agreement ("credit facility") with a syndicate of international lenders.
Concurrently, as of March 31, 2000 the Company entered into a revolving
credit agreement ("exit facility") see Note 7 (c). The credit facility
provides a term debt of $235,825 ("term debt") and $100,000 in convertible
payment in-kind debt ("PIK debt"). The credit facility matures on March 31,
2005 and bears interest at a fixed rate of 9% for the term debt and 10% for
the PIK debt. Interest payments on the term debt are due quarterly in
arrears, up to a maximum of $20,000 in the first year, and on the PIK debt
interest is payable in full on March 31, 2005. The term debt
12
<PAGE> 14
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(7) LONG-TERM DEBT (in thousands except per share amounts) (continued)
or any part thereof and/or all of the PIK debt may be prepaid and redeemed
by the Company at any time during the agreement once the exit facility has
been terminated. The Company must pay a redemption premium of between 1% to
5% on the amount of the term debt being redeemed and between 8 1/3% to 25%
on the amount of the PIK debt being redeemed. The PIK debt is convertible
by the lenders at any time into common shares of the Company at a
conversion price of $11.72 per common share, which was in excess of the
Company's fair market value on a per share basis, determined based on an
enterprise valuation as discussed in Note 1.
The Company is required to repay the term debt first and then the PIK debt
in an amount equal to:
(i) net asset sale proceeds, and once the exit facility is terminated 75%
of the net asset sale proceeds, from the disposition of assets sold
not in the ordinary course of business;
(ii) the net proceeds from any foreign subsidiary dispositions; and
(iii) the net proceeds from the sale of the UK Metals business.
The Company is also required yearly for the first two years and quarterly
after that, to repay the term debt first and then the PIK debt in an amount
equal to 75% of the cash flow available for debt service.
The credit facility contains certain restrictive covenants, including
limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of specified investments, and the payment
of cash dividends. In addition, the Company is required to satisfy, among
other things, certain financial covenants including specified interest
coverage ratio, minimum amount of EBITDA, and maximum capital expenditures.
At June 30, 2000, the Company was in compliance with the provisions of the
credit facility.
The credit facility, subject first to the exit facility, is guaranteed,
jointly and severally by the Company and substantially all of its direct
and indirect wholly-owned subsidiaries and is collateralized by a pledge of
the issued and outstanding securities and assets of the Company and
substantially all of its direct and indirect wholly-owned subsidiaries.
(b) Unsecured Payment in-kind notes
Under the Plan, the Company issued an aggregate amount of $49,157 of
unsecured payment in-kind notes ("unsecured notes"). The unsecured notes
mature on April 15, 2010 and bear interest at a fixed rate of 6%. The
interest is payable semi-annually on April 15 and October 15, and can be
paid up to April 15, 2005 in cash or additional unsecured notes, at the
option of the Company. The Company is required to make an offer to purchase
the unsecured notes if a change in control occurs equal to the present
value of the remaining scheduled payments of principal and interest
discounted at 16% plus accrued interest thereon. The unsecured notes will
bear interest at a rate of 12% from the date of a change in control until
such time as the unsecured notes are redeemed. The unsecured notes provide
for annual mandatory sinking fund payments equal to 20% of the aggregate
principal amount of the outstanding unsecured notes at April 15, 2005 plus
all accrued and unpaid interest thereon commencing April 15, 2006. The
unsecured notes are recorded at their fair value of $32,736 (March 31, 2000
-- $31,841) based on a discount rate of 12%.
Under the Plan, the Company issued an aggregate amount of $16,265 of
unsecured convertible payment in kind notes ("unsecured convertible
notes"). The unsecured convertible notes mature on April 15, 2020 and bear
interest at a fixed rate of 3% starting April 15, 2003. The interest is
payable semi-annually on
13
<PAGE> 15
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(7) LONG-TERM DEBT (in thousands except per share amounts) (continued)
April 15 and October 15. The unsecured convertible notes may be converted
at any time into common shares of the Company at a conversion price of $30
per common share. The Company is required to make an offer to purchase the
unsecured convertible notes if a change of control occurs equal to between
64% to 100% of the principal amount of unsecured convertible notes
outstanding plus accrued interest thereon. The unsecured convertible notes
will bear interest at a rate of 12% from the date of a change in control
until such time as the unsecured convertible notes are redeemed. The
unsecured convertible notes are recorded at their fair value of $4,284
(March 31, 2000 -- $4,159) based on a discount rate of 12%.
(c) Exit Facility
The exit facility provides for a revolving line of credit, subject to a
borrowing base formula calculated on accounts receivable, of up to $175,000
divided into Tranche A for $100,000 and Tranche B for $75,000. The exit
facility matures on September 30, 2002. If the Company elects to terminate
the exit facility within eighteen months after April 7, 2000 then it must
pay a termination fee during the first year equal to 0.75% and during the
next 6 months equal to 0.375% times the sum of the Tranche A advances and
letters of credit outstanding.
Borrowings under the exit facility bear interest at a rate equal to the
base rate (which is based on the Wells Fargo Bank "prime rate") plus 1% on
Tranche A advances and 3% on Tranche B advances or at the option of the
Company on Tranche A advances at a rate equal to the Libor rate plus 3%. A
letter of credit fee of 2.75% is charged on the amount of all outstanding
letters of credit.
The Company is required to pay annually an agency fee and an annual fee
equal to $150 and $750 respectively. In addition, the Company is required
to pay monthly an unused line of credit fee equal to 0.375% and 0.75% per
annum on the average unused portion of Tranche A and Tranche B,
respectively, under the exit facility.
The exit facility contains certain restrictive covenants, including
limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of specified investments, and the payment
of cash dividends. In addition, the Company is required to satisfy, among
other things, certain financial covenants including specified interest
coverage ratio, minimum amount of EBITDA, and maximum capital expenditures.
At June 30, 2000, the Company was in compliance with the provisions of the
exit facility.
The exit facility is guaranteed, jointly and severally by the Company and
substantially all of its direct and indirect wholly owned subsidiaries and
is collateralized by a pledge of the issued and outstanding securities and
assets of the Company and substantially all of its direct and indirect
wholly-owned subsidiaries.
At June 30, 2000, the Company had undrawn credit capacity under the exit
facility of approximately $110,254, net of outstanding letters of credit of
approximately $64,746.
14
<PAGE> 16
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(8) OTHER LIABILITIES (in thousands)
<TABLE>
<CAPTION>
PREDECESSOR
FRESH START COMPANY
JUNE 30 MARCH 31 DECEMBER 31
2000 2000 1999
------- ----------- -----------
<S> <C> <C> <C>
Accrued environmental costs............................... $78,533 $77,053 $78,772
Other..................................................... 19,711 18,250 18,249
------- ------- -------
$98,244 $95,303 $97,021
======= ======= =======
</TABLE>
(9) LIABILITIES SUBJECT TO COMPROMISE
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
DECEMBER 31,
1999
------------
(IN
THOUSANDS)
<S> <C>
Bank term loan(a)........................................... $1,004,086
Convertible subordinated debentures(b)...................... 27,609
Other long-term debt(c)..................................... 25,910
Accrued liabilities......................................... 26,317
Other long-term liabilities................................. 28,068
Liabilities of discontinued operations...................... 24,478
----------
$1,136,468
==========
</TABLE>
(a) In August 1997, the Predecessor Company signed a $1.5 billion revolving
credit agreement which was amended in October 1997, February 1998, June
1998, October 1998 and December 1998 (the "Syndicate Debt") with a
syndicate of international lenders. Since June 30, 1998, the Predecessor
Company has not been in compliance with certain covenants in the Syndicate
Debt, including the financial covenants, which require the Predecessor
Company to maintain a specified interest coverage ratio, a debt to EBITDA
ratio, a fixed charge ratio and a working capital ratio.
Borrowings under the Syndicate Debt were guaranteed, jointly and severally
by the Predecessor Company and its direct and indirect wholly-owned
subsidiaries and were secured by a pledge of the issued and outstanding
securities of the Predecessor Company's direct and indirect wholly-owned
subsidiaries, and a charge over the present and future assets of the
Predecessor Company and its direct and indirect wholly-owned subsidiaries.
In November 1998, the Predecessor Company suspended payments of interest on
the Syndicate Debt. The total interest that was accrued but unpaid for the
fiscal year ended December 31, 1999 was $49.5 million. Interest on the
borrowings under the Syndicate Debt ceased to accrue as at June 25, 1999,
being the date of the filing of the Predecessor Company's petition for
reorganization under chapter 11.
The Plan set forth a new capital structure for the Company and the
conditions that governed the restructuring of approximately $1.0 billion in
secured term loans outstanding, which included accrued but unpaid interest,
under the Syndicate Debt. Under the terms of the Plan, Syndicate Debt of
the Predecessor Company of $ 1.0 billion has been converted into $250
million of senior secured debt, $100 million of convertible secured payment
in-kind debt and 91% of the common shares of the Company. The secured
payment in-kind debt is convertible into 25% of the common shares of the
15
<PAGE> 17
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(9) LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
Company on a fully diluted basis as at the Plan effective date of April 7,
2000. The senior secured debt and the secured payment in-kind debt each
have a term of five years.
(b) On the acquisition of Allwaste, Inc. ("Allwaste") the Predecessor Company
assumed the obligation under an indenture with respect to Allwaste's 7 1/4%
Convertible Subordinated Debentures ("debentures") which were due 2014.
Effective December 1, 1998, the Predecessor Company suspended payments of
interest on the debentures which created a default under the indenture.
Interest accrued in 1999 to June 25, 1999, being the date of the filing of
the Predecessor Company's petition for reorganization under chapter 11 was
approximately $2 million. Interest on the debentures ceased to accrue as of
the filing date.
(c) Included in other long-term debt are promissory notes, relating to certain
1996 and 1997 acquisitions, totalling $16,000 which were in default as
principal repayments required were not made.
The Plan provided for the conversion of certain specified impaired
unsecured claims, including those in (b) and (c) above into $60 million of
unsecured payment in-kind notes and 5% of the common shares of the Company as of
April 7, 2000 the Plan effective date. The Plan allowed certain holders of the
unsecured claims to receive $1.50 in face amount of unsecured convertible notes
in exchange for every $1.00 in face amount of unsecured payment in-kind notes
that such holder would have received under the Plan. The aggregate amount of
unsecured convertible notes issued was $16 million.
(10) SHAREHOLDERS' EQUITY (DEFICIT) (in thousands, except number of shares)
<TABLE>
<CAPTION>
PREDECESSOR
FRESH START COMPANY
JUNE 30 MARCH 31 DECEMBER 31
2000 2000 1999
-------- ----------- ------------
<S> <C> <C> <C>
Share capital........................................... $118,544 $118,294 $ 1,351,482
Retained earnings (deficit)............................. (4,857) -- (1,925,789)
Cumulative foreign currency translation adjustment...... (2,276) -- (66,826)
-------- -------- -----------
$111,411 $118,294 $ (641,133)
======== ======== ===========
</TABLE>
The issued capital of the Company is comprised of 24,041,946 common shares.
(11) CHANGES IN NON-CASH WORKING CAPITAL (in thousands)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 MARCH 31, 2000 JUNE 30, 1999
------------------ ------------------ ----------------
<S> <C> <C> <C>
Accounts receivable.................... $ 12,542 $(22,017) $ 9,257
Inventory for resale................... (2,822) (1,515) (891)
Proceeds from sale of UK Metals
business............................. 44,587 -- --
Other.................................. 22,725 2,305 31,605
Accounts payable and accrued
liabilities.......................... (14,283) 7,666 (27,001)
Income taxes payable................... 608 1,939 (5,944)
-------- -------- --------
$ 63,357 $(11,622) $ 7,026
======== ======== ========
</TABLE>
16
<PAGE> 18
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(11) CHANGES IN NON-CASH WORKING CAPITAL (in thousands) (continued)
STATEMENTS OF CASH FLOWS
The supplemental cash flow disclosures and non-cash transactions for the
three months ended June 30, 2000 and March 31, 2000 and for the six months ended
June 30, 1999 are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 MARCH 31, 2000 JUNE 30, 1999
------------------ ------------------ ----------------
<S> <C> <C> <C>
Supplemental Disclosures:
Interest paid.......................... $1,469 $ 951 $1,803
Income taxes paid...................... 1,242 2,248 7,687
Capital leases on the purchase of
property and equipment............... -- 2,782 --
</TABLE>
(12) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The American Institute of Certified Public Accountants has issued Statement
of Position 98.5 "Reporting on the Costs of Start-Up Activities" which is
effective for fiscal years beginning after December 15, 1998. This statement
requires that all pre-operating costs be expensed as incurred. The statement
also requires that upon initial application any previous pre-operating costs
that had been deferred be expensed and reported as a cumulative effect of a
change in accounting principle.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin #101 ("SAB 101") on revenue recognition. In order to comply
with SAB 101, the Predecessor Company changed its accounting policy for
contracts where it brokers material between two parties. The revenue and
operating expenses are recorded on a gross basis rather than recording only the
net commission as has previously been done. This change in accounting policy
does not effect net earnings and has been applied retroactively. The revenues
and operating expenses for the three and six months ended June 30, 1999 have
been increased by $56.5 million and $115.1 million, accordingly.
(13) REORGANIZATION COSTS (in thousands)
The expenses resulting from the Predecessor Company's reorganization
filings has been segregated from expenses related to operations in the
accompanying Consolidated Statements of Earnings and includes the following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2000 JUNE 30, 1999
------------------ ----------------
<S> <C> <C>
Professional fees......................................... $17,908 $ --
Provision for future lease rejections..................... -- 6,164
Provision for litigation claims........................... -- 6,360
Other..................................................... 2,699 1,800
------- -------
$20,607 $14,324
======= =======
</TABLE>
17
<PAGE> 19
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(14) EARNINGS PER SHARE (in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 2000
------------------
<S> <C>
Net loss for the period -- basic and diluted................ $(4,857)
=======
Number of common shares outstanding......................... 24,042
Effect of using weighted average common shares
outstanding............................................... (16)
-------
Basic and diluted weighted average number of common shares
outstanding............................................... 24,026
=======
</TABLE>
The weighted average number of common shares outstanding and the basic and
diluted earnings (loss) per share for periods prior to June 30, 2000 have not
been presented as they are not comparable to subsequent periods due to the
restructuring and the implementation of fresh start reporting.
(15) COMPREHENSIVE INCOME (in thousands)
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. Comprehensive income is as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 MARCH 31, 2000 JUNE 30, 1999
------------------ ------------------ ----------------
<S> <C> <C> <C>
Net earnings (loss).................. $(4,857) $ 469 $(64,410)
Other comprehensive income, net of
tax:
Translation adjustments............ (2,276) (4,061) (542)
------- ------- --------
Comprehensive loss................... $(7,133) $(3,592) $(64,952)
======= ======= ========
</TABLE>
18
<PAGE> 20
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(16) SEGMENTED INFORMATION (in thousands)
The Company's business operations are organized into the following
segments:
- Metals Services, which has primarily three businesses, ferrous scrap,
commercial and mill services. The ferrous scrap operations collect and
process scrap for shipment to steel mills, the commercial business
provides brokerage services for scrap material and primary metals and
mill services provide on-site mill services including the sale of
secondary materials.
- Industrial Outsourcing Services which includes the operations which
perform cleaning and maintenance, mechanical, turnaround and outage
services, remediation, paint overspray recovery and refractory services.
- Specialty Businesses which perform analytical services, container and
tank cleaning services, demolition and decommissioning and electrical
installations.
- By-Products Management which includes hazardous and non-hazardous waste
collection, transportation, processing, disposal and related field
services.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------------------------
INDUSTRIAL SHARED
METALS OUTSOURCING BY-PRODUCTS SPECIALTY SERVICES &
SERVICES SERVICES MANAGEMENT BUSINESSES ELIMINATIONS TOTAL
-------- ----------- ----------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenue......................... $167,369 $158,129 $ 55,674 $46,192 $ -- $427,364
Income (loss) from operations... 2,226 7,512 1,580 6,605 (13,824) 4,099
Total assets.................... 245,218 231,105 127,722 85,272 96,862 786,179
Depreciation and amortization... 3,060 4,242 2,025 1,294 525 11,146
Capital expenditures............ 2,462 4,703 1,304 1,002 123 9,594
Equity investments.............. 1,690 -- -- -- -- 1,690
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
THREE MONTHS ENDED MARCH 31, 2000
---------------------------------------------------------------------------
INDUSTRIAL SHARED
METALS OUTSOURCING BY-PRODUCTS SPECIALTY SERVICES &
SERVICES SERVICES MANAGEMENT BUSINESSES ELIMINATIONS TOTAL
-------- ----------- ----------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenue......................... $230,475 $165,749 $ 44,125 $47,170 $ -- $487,519
Income (loss) from operations... 9,202 9,244 (245) 6,035 (12,423) 11,813
Total assets.................... 284,173 219,756 121,580 80,706 161,540 867,755
Depreciation and amortization... 3,699 4,547 2,199 1,270 721 12,436
Capital expenditures............ 2,255 3,592 1,526 1,001 29 8,403
Equity investments.............. 5,848 -- -- -- -- 5,848
</TABLE>
19
<PAGE> 21
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(16) SEGMENTED INFORMATION (in thousands) (continued)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
SIX MONTHS ENDED JUNE 30, 1999
-----------------------------------------------------------------------------
INDUSTRIAL SHARED
METALS OUTSOURCING BY-PRODUCTS SPECIALTY SERVICES &
SERVICES SERVICES MANAGEMENT BUSINESSES ELIMINATIONS TOTAL
-------- ----------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue....................... $314,846 $335,246 $ 90,627 $71,837 $ -- $ 812,556
Income (loss) from
operations.................. (877) 4,005 (381) 5,713 (39,914) (31,454)
Total assets.................. 275,667 328,407 175,401 86,033 150,275 1,015,783
Depreciation and
amortization................ 7,554 12,287 5,222 2,634 708 28,405
Capital expenditures.......... 6,847 3,891 1,977 1,218 131 14,064
Equity investments............ 4,323 3,767 -- -- 4,659 12,749
</TABLE>
The geographical segmentation of the Company and Predecessor Company's
business is as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 MARCH 31, 2000 JUNE 30, 1999
---------------------- ---------------------- ----------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Canada................ $ 59,082 $ 65,901 $ 49,412 $ 72,007 $ 97,693 $119,156
United States......... 363,897 214,052 403,947 215,656 661,771 276,673
Other................. 4,385 50,912 34,160 65,111 53,092 62,313
-------- -------- -------- -------- -------- --------
$427,364 $330,865 $487,519 $352,774 $812,556 $458,142
======== ======== ======== ======== ======== ========
</TABLE>
(17) CONTINGENCIES (dollars in thousands)
(a) The Company in the normal course of its business expends funds for
environmental protection and remediation but does not expect these
expenditures to have a materially adverse effect on its financial condition
or results of operations.
Certain of the Company's facilities are contaminated primarily as a result
of operating practices at the sites prior to their acquisition by the
Company. The Company has established procedures to routinely evaluate these
sites giving consideration to the nature and extent of the contamination.
The Company has provided for the remediation of these sites based upon
management's judgement and prior experience. The Company has estimated the
liability to remediate these sites to be $59,307.
As well, certain subsidiaries of the Company have been named as potentially
responsible or liable parties under U.S. federal and state superfund laws
in connection with various sites. The Company's connection with these sites
relates to allegations that its subsidiaries or their predecessors
transported waste to the site, disposed of waste at the site, or operated
the site in question. The Company has reviewed the nature and extent of its
alleged connection to these sites, the number, connection and financial
ability of other named and unnamed potentially responsible parties and the
nature and estimated cost of the likely remedy. Based on its review, the
Company has accrued its estimate of its liability to remediate these sites
at $22,678. If it is determined that more expensive remediation approaches
may be required in the future, the Company could incur additional
obligations which could be material but cannot be estimated.
20
<PAGE> 22
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(17) CONTINGENCIES (dollars in thousands) (continued)
The liabilities discussed above are disclosed in the Consolidated Balance
Sheets as follows:
<TABLE>
<S> <C>
Accrued liabilities......................................... $ 3,452
Other long-term liabilities................................. 78,533
-------
$81,985
=======
</TABLE>
(b) In October 1999, Exxon Corporation ("Exxon") commenced an action in the
District Court, Harris County, Texas against International Catalyst, Inc.
("INCAT"), an indirect wholly-owned subsidiary of the Company, for damages
of approximately $32,100 arising from certain work conducted by INCAT at
Exxon's Baytown, Texas chemical plant. Exxon alleges that INCAT was
responsible for the purchase and installation in 1996 of improper gasket
materials in the internal bed piping flange joints of the Baytown plant
which caused damages to the facility and consequential losses arising from
the shutdown of the plant while repairs were made. The Company has conducted
a review of the allegations and determined that it is not feasible to
predict or determine the final outcome of the proceedings. The Company
intends to vigorously defend the action and believes that it may have
insurance coverage for any damages resulting from the action. There can be
no assurance, though, that the outcome of the action will not have a
material adverse effect upon the financial condition or results of
operations of the Company.
(c) On April 14, 2000, Maxus Energy Corporation et al. ("Maxus") commenced an
action in the United States District Court for Northern District of Ohio
against various parties including the Predecessor Company. The Company
anticipates that Maxus will amend its action to name a subsidiary of the
Company. The action is brought under the Comprehensive Environmental
Response, Compensation and Liability Act for the recovery of costs incurred
and to be incurred in responding to the releases and threatened releases of
hazardous substances at the Diamond Shamrock Painesville Works site located
in Painesville, Ohio. The site is approximately 1100 acres in size and has
been used for various purposes since 1912. The plaintiffs allege that they
have incurred more than $19,500 in response costs in connection with the
site. Since July of 1996, a subsidiary of the Company has operated a
secondary aluminum smelter on approximately 24 acres of property within the
site. The Company has conducted a preliminary review of the claims made in
the action and determined that it is not feasible to predict or determine
the final outcome of the proceedings. The Company intends to vigorously
defend the action but there can be no assurance that the outcome of the
claim will not have a material adverse effect upon the financial condition
or results of operation of the Company.
(d) The New York Attorney General's office is conducting a criminal
investigation into the environmental practices of Philip Metals Recovery
(USA), Inc. ("PMR"), an indirect wholly owned subsidiary of the Company. The
Attorney General alleges that PMR improperly disposed of lead contaminated
floor sweepings, improperly handled lead sludges and improperly discharged
lead contaminated waste water at a recycling facility it once operated in
Orangeburg, New York. The Company has conducted a review of the claim and is
vigorously defending the allegations. In the event the Company cannot reach
a negotiated settlement with the Attorney General, or alternatively, is
unsuccessful in defending the matter, the Company could be liable for
substantial monetary sanctions which it cannot currently estimate. There can
be no assurance that the outcome of the investigation will not have a
material adverse effect upon the financial condition or results of
operations of the Company.
(e) The Company is named as a defendant in several lawsuits which have arisen in
the ordinary course of its business. Management believes that none of these
suits is likely to have a material adverse effect on the Company's business
or financial condition and therefore, has made no provision in these
financial statements for the potential liability, if any.
21
<PAGE> 23
PHILIP SERVICES CORPORATION
PART 1, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On June 25, 1999, the Predecessor Company and substantially all of its
wholly-owned subsidiaries located in the United States (the "U.S. Debtors"),
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code with the United States Bankruptcy Court for the District of
Delaware (the "U.S. Court"). The Predecessor Company and substantially all of
its wholly-owned subsidiaries located in Canada (the "Canadian Debtors")
commenced proceedings under the Companies' Creditors Arrangements Act in Canada
in the Ontario Superior Court of Justice (the "Canadian Court") on the same
date.
On July 12, 1999, the U.S. Debtors filed a Joint Plan of Reorganization
(the "U.S. Plan") with the U.S. Court and on July 15, 1999, the Canadian Debtors
filed a Plan of Compromise and Arrangement (the "Canadian Plan") with the
Canadian Court. In August 1999, a number of motions were brought before the
Canadian Court challenging the fairness of the Canadian Plan. As a result, the
Predecessor Company filed an amended plan in the U.S. Court on September 21,
1999 (the "Amended U.S. Plan") and an amended plan in the Canadian Court on
September 24, 1999 (the "Amended Canadian Plan"). On November 2, 1999, the
Predecessor Company filed a Supplement to the Amended Canadian Plan (the
"Canadian Plan Supplement"). The Canadian Plan Supplement amended and restated
the Amended Canadian Plan and provided that substantially all of the assets of
the Canadian debtors be transferred to new companies that, on the implementation
of the Amended U.S. Plan became wholly-owned subsidiaries of the Company. All
the shares held by the Predecessor Company in the Company were cancelled under
the Amended U.S. Plan. On November 5, 1999, the Predecessor Company's lenders
voted to approve the Canadian Plan Supplement. On November 26, 1999 a hearing
was held in the Canadian Court at which the Canadian Plan Supplement was
sanctioned. On November 30, 1999 the Amended U.S. Plan was confirmed in the U.S.
Court. On March 8, 2000, the Canadian Plan Supplement was amended to permit the
sale of the UK Metals business and certain tax restructuring issues. On March
20, 2000, a similar amendment was made by the U.S. Court with respect to the
Amended U.S. Plan. The Amended U.S. Plan and the Canadian Plan Supplement
(collectively the "Plan") became effective on April 7, 2000. Under the Plan, the
Company emerged from bankruptcy protection as a new public entity.
Under the Plan, syndicate debt of the Predecessor Company of $1 billion has
been converted into $250 million of senior secured debt, $100 million of
convertible secured payment-in-kind debt and 91% of the common shares of the
Company. The secured payment-in-kind debt is convertible into 25% of the common
shares of the Company on a fully diluted basis as of the Plan effective date.
The Plan also provided for the conversion of certain specified impaired
unsecured claims, into $60 million of unsecured payment in-kind notes and 5% of
the common shares of the Company as of the Plan effective date. The Plan allowed
certain holders of the unsecured claims to receive $1.50 in face amount of
unsecured convertible notes in exchange for every $1.00 in unsecured payment
in-kind notes that such holder would have received under the Plan. The aggregate
amount of unsecured convertible notes issued was $16 million. The Company also
issued 1.5% of its common shares to Canadian and U.S. class action plaintiffs to
settle all class action claims. Other potential equity claimants received 0.5%
of the common shares of the Company and the shareholders of the Predecessor
Company received 2% of the common shares of the Company.
INTRODUCTION
The Company is a supplier of metals recovery and industrial services. The
Company has over 250 operating facilities and over 12,000 employees located
throughout North America, that provide services to more than 40,000 industrial
and commercial customers. The Company's primary base of operations is in the
United States.
The Company's business is organized into four operating divisions, Metals
Services, Industrial Outsourcing Services, By-Product Management and Specialty
Businesses. Metals Services has primarily three businesses, ferrous scrap,
commercial and mill services. The ferrous scrap operations collect and process
scrap
22
<PAGE> 24
for shipment to steel mills, the commercial business provides brokerage services
for scrap material and primary metals and mill services provide on-site mill
services including the sale of secondary materials. Industrial Outsourcing
Services includes the operations which perform cleaning and maintenance,
mechanical, turnaround and outage services, remediation, paint overspray
recovery and refractory services. Specialty Businesses perform analytical
services, container and tank cleaning services, demolition and decommissioning
and electrical installations. By-Products Management includes hazardous and
non-hazardous waste collection, transportation, processing, disposal and related
field services.
The Company earns revenue by providing industrial services, from the sale
of recovered commodities and from fees charged to customers for by-product
transfer and processing, collection and disposal services. The Company receives
by-products and, after processing, disposes of the residuals at a cost lower
than the fees charged to its customers. Other sources of revenue include fees
charged for environmental consulting and engineering and other services.
The Company's operating expenses include direct labour, indirect labour,
payroll related taxes, benefits, fuel, maintenance and repairs of equipment and
facilities, depreciation, property taxes, and accrual for future closure and
remediation costs. Selling, general and administrative expenses include
management salaries, clerical and administrative costs, professional fees,
facility rentals and insurance costs, as well as costs related to the Company's
marketing and sales force. Professional fees related to restructuring of the
Predecessor Company incurred prior to the filing were included in selling,
general and administrative expenses in 1999.
DISCONTINUED OPERATIONS AND DIVESTITURES
On April 7, 2000, the Predecessor Company sold its Metals recycling and
mill services business in the United Kingdom for net proceeds of $47,684,
resulting in a gain of $21,268. The business, whose results are included in
Metals Services, generated annual revenue of $81.2 million and income from
operations of $3.5 million in 1999.
In June 1999, the Predecessor Company sold its Birmingham, Alabama based
civil construction and maintenance business for $23.1 million resulting in a
gain on sale of $1.0 million. The business, whose results are included in
Industrial Outsourcing Services, generated annual revenue of $70 million and
income from operations of $4.5 million in 1998.
On May 18, 1999, the Predecessor Company sold its investment in Philip
Utilities Management Corp. ("PUMC") for cash proceeds of $70.1 million resulting
in a gain of $39.1 million. The operations of PUMC have been treated as
discontinued operations.
RESULTS OF OPERATIONS
To facilitate a meaningful comparison of the Company's quarterly and
year-to-date operating performance in fiscal 2000, the following discussion of
results of operations compares the combined consolidated financial results for
the six months ended June 30, 2000, which represents the consolidated financial
results for the Predecessor Company for the three months ended March 31, 2000
and the consolidated results for the Company for the three months ended June 30,
2000 with the Predecessor Company's results of operation for the six months
ended June 30, 1999. Consequently, the current year's information presented
below does not comply with AICPA's Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code", which calls
for separate reporting for the Company and the Predecessor Company.
23
<PAGE> 25
The following table presents, for the periods indicated, the results of
operations and the percentage relationships which the various items in the
Consolidated Statements of Earnings bear to the consolidated revenue from
continuing operations.
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
COMPANY COMPANY
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- -------------- --------------
($ MILLIONS) ($ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue..................................... $427.4 100% $397.0 100% $ 914.9 100% $ 812.6 100%
Operating expenses.......................... 373.9 87% 352.9 89% 800.1 87% 715.5 88%
Selling, general and administrative costs... 38.2 9% 50.4 13% 75.3 8% 100.1 12%
Depreciation and amortization............... 11.2 3% 13.7 3% 23.6 3% 28.4 4%
------ --- ------ --- ------- --- -------- ---
Income(loss) from operations................ 4.1 1% (20.0) (5%) 15.9 2% (31.4) (4%)
Interest expense............................ 9.4 2% 25.4 6% 10.4 1% 51.9 6%
Other income and expense-net................ (1.0) -- (0.7) -- (10.6) (1%) (1.4) --
------ --- ------ --- ------- --- -------- ---
Earnings(loss) from continuing operations
before tax and reorganization costs....... (4.3) (1%) (44.7) (11%) 16.1 2% (81.9) (10%)
Reorganization costs........................ -- -- 14.3 4% 20.6 2% 14.3 2%
Income taxes................................ 0.6 -- 2.7 1% 1.4 -- 4.4 --
------ --- ------ --- ------- --- -------- ---
Loss from continuing operations............. (4.9) (1%) (61.7) (16%) (5.9) -- (100.6) (12%)
Cumulative effect of change in accounting
principle................................. -- -- -- -- -- -- (1.5) --
Discontinued operations (net of tax)........ -- -- 39.2 10% 1.5 -- 37.7 4%
------ --- ------ --- ------- --- -------- ---
Net loss.................................... $ (4.9) (1%) $(22.5) (6%) $ (4.4) -- $ (64.4) (8%)
====== === ====== === ======= === ======== ===
</TABLE>
EARNINGS FROM CONTINUING OPERATIONS
For the three months ended June 30, 2000, the Company incurred a loss from
continuing operations of $4.9 million. This compares to a loss from continuing
operations of $61.7 million for the three months ended June 30, 1999. For the
six months ended June 30, 2000 on a combined basis the Company had a loss from
continuing operations of $5.9 million, compared to a loss from continuing
operations of $100.6 million for the six months ended June 30, 1999.
OPERATING RESULTS
The operating results for the Company and Predecessor Company reflect the
following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------------- -------------------------------------------------
INDUSTRIAL INDUSTRIAL
METALS SPECIALTY BY-PRODUCTS OUTSOURCING METALS SPECIALTY BY-PRODUCTS OUTSOURCING
SERVICES BUSINESSES MANAGEMENT SERVICES SERVICES BUSINESSES MANAGEMENT SERVICES
-------- ---------- ----------- ----------- -------- ---------- ----------- -----------
($ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $167.4 $46.2 $55.7 $158.1 $157.6 $37.2 $44.9 $157.3
Income (loss) from
operations............ 2.2 6.6 1.6 7.5 (0.1) 3.5 (0.3) (1.4)
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------------- -------------------------------------------------
INDUSTRIAL INDUSTRIAL
METALS SPECIALTY BY-PRODUCTS OUTSOURCING METALS SPECIALTY BY-PRODUCTS OUTSOURCING
SERVICES BUSINESSES MANAGEMENT SERVICES SERVICES BUSINESSES MANAGEMENT SERVICES
-------- ---------- ----------- ----------- -------- ---------- ----------- -----------
($ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $397.8 $ 93.4 $ 99.8 $ 323.9 $314.8 $ 71.8 $ 90.6 $ 335.2
Income (loss) from
operations............ 11.4 12.6 1.3 16.8 (0.9) 5.7 (0.4) 4.0
</TABLE>
24
<PAGE> 26
METALS SERVICES
The increase in revenue in Metals Services for the three and six months
ended June 30, 2000 of $9.8 million and $83.0 million, respectively, compared
with the same periods in 1999 is the result of ferrous scrap prices being
approximately 21% higher in the first half of 2000 when compared to 1999. The
increase in revenue in the three months ended June 30, 2000 was partially offset
from the sale by the Predecessor Company of its UK metals business on April 7,
2000. Volumes were also higher than in the prior period as the operations were
adversely impacted in 1999 by the negative financial situation of the
Predecessor Company.
Income from operations for the three and six month period ended June 30,
2000 as a percentage of revenue was 1% and 3% compared with breaking even for
the three and six month period ended June 30, 1999. The increase in the income
from operations over the same periods in 1999 is due to the increased ferrous
scrap prices and volumes in 2000. The income from operations as a percentage of
revenue for the three months ended June 30, 2000 is lower than the six months
ended June 30, 2000 as even though ferrous scrap prices were higher in the first
half of 2000 when compared to the same period in 1999 they have decreased by
approximately $31 per ton since January 2000. As well, there has been a weak
export market, an oversupply of industrial scrap, a strong availability of scrap
alternatives and high scrap inventories at domestic mills. While ferrous scrap
prices appear to have stabilized, seasonal shut downs in steel mills and metal
working plants are expected to delay any potential price recovery until the
fall.
INDUSTRIAL OUTSOURCING SERVICES
Revenue for the six months ended June 30, 2000 in the Industrial
Outsourcing Services operations decreased by $11.3 million compared with the
same period in 1999. This decrease was due to the sale in June of 1999 of the
Predecessor Company's Birmingham, Alabama based civil construction and
maintenance business which generated $20.7 million of revenue in the six months
ended June 30, 1999 and $8.5 million in the three months ended June 30, 1999.
Excluding the effect of the businesses sold revenue for the three months ended
June 30, 2000 showed an increase of $9.3 million compared with the same period
in 1999.
Income from operations in the Industrial Outsourcing Services for the three
and six month period ended June 30, 2000 as a percentage of revenue was 5%
compared with (1)% and 1% for the three and six month period ended June 30,
1999, respectively. An increase in higher margin critical path services,
including refinery turnarounds and utility outage services contributed to the
improvement in income from operations. As this is a highly seasonal business,
the Company expects that the demand for those services will decrease in the
third quarter of 2000, with a corresponding decrease in revenue and
profitability in this business unit. As well, during 1999 the Predecessor
Company was operating in an environment of financial instability which resulted
in difficult market conditions and competitive pressures on pricing.
SPECIALTY BUSINESSES
Revenue and income from operations for the three and six month period ended
June 30, 2000 for Specialty Businesses increased compared to the same period of
1999 due to a large contract in the electrical installation operations. The
large contract has been ongoing since the fall of 1999 and the majority of the
contract work is expected to be completed over the next few months.
BY-PRODUCTS MANAGEMENT
Revenue increased by $10.8 million or 24% and by $9.2 million or 10% in the
three and six month period ended June 30, 2000, respectively, compared with the
same period in 1999. The Company believes that in 1999 many customers were aware
of the Predecessor Company's anticipated reorganization filings and were
therefore reluctant to enter into service agreements until the financial
uncertainty was resolved.
Income from operations as a percentage of revenue was 3% and 1% for the
three and six months ended June 30, 2000, respectively, compared to a small loss
in the same periods of 1999. The increase is due to improved asset utilization
as well as continuing consolidation and cost reduction initiatives. This
improvement
25
<PAGE> 27
was substantially greater then appears as the business unit also absorbed
approximately $2 million in overhead costs in the second quarter of 2000 that
had been allocated to other business units in 1999.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs for the three and six months
ended June 30, 2000 were $38.2 million and $75.3 million, respectively, which
included Shared Services costs of $11.4 million and $20.3 million, respectively.
This compared to selling, general and administrative costs of $50.4 million and
$100.1 million for the three and six months ended June 30, 1999, which included
Shared Services costs of $21.8 million and $39.1 million, respectively.
Excluding reorganization costs of $6 million in the second quarter of 1999, the
Company reduced its costs by $6.2 million in the second quarter of 2000 compared
to the same period last year, the result of ongoing overhead cost reduction
efforts in all the business units.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of fixed assets for the three and six months
ended June 30, 2000 was $11.1 million and $23.6 million respectively,
representing a decrease of $2.6 million or 19% and $4.8 million or 17% over the
same periods in 1999. This decrease was due to the write-offs of fixed assets
during 1999 as part of the Predecessor Company's reorganization.
INTEREST EXPENSE
Interest expense for the three and six months ended June 30, 2000 was $9.4
million and $10.4 million, respectively. Interest expense increased by $8.4
million in the second quarter of 2000 over the first quarter of 2000 as a result
of interest on the Predecessor Company's syndicate debt being stayed in the
reorganization filings. Interest expense is higher in the three and six months
ended June 30, 1999 as even though the Company suspended payments of interest
under the syndicate debt in November 1998, all amounts owing were expensed and
included in the balance of the bank term loan up to the date of the filings of
June 25, 1999.
OTHER INCOME AND EXPENSE -- NET
Other income and expense -- net for the six months ended June 30, 2000
consists of gains on sale of assets of $7.8 million, and interest and equity
income on investments. Other income and expense -- net for the six months ended
June 30, 1999 consists of interest and equity income.
INCOME TAXES
In assessing the value of the deferred tax assets, management considers
whether it is more likely than not that all of the deferred tax assets will be
realized. Projected future income tax planning strategies and the expected
reversal of deferred tax liabilities are considered in making this assessment.
Based on the level of historical taxable income, projections for future taxable
income and subject to the limitation on the utilization of net operating loss
carryforwards and excess interest deduction carryforwards, the Company has
determined that it is more likely than not that the Company will not realize the
benefits of the deferred tax assets at June 30, 2000.
Certain future events may result in such deferred tax assets being utilized
in the Company's future income tax returns, which the Company will record as a
reduction in the valuation allowance, and in accordance with the principles of
fresh start reporting, a credit to additional paid-in capital.
FINANCIAL CONDITION
LIQUIDITY AND CREDIT FACILITY
At June 30, 2000, the Company's working capital was $220.9 million
representing a decrease of $20.5 million over December 31, 1999. This decrease
is largely attributable to the fact that the Company used $14.2 million of
restricted cash it had at December 31, 1999, to pay down its credit facility
when the Plan became effective.
26
<PAGE> 28
As of March 31, 2000, the Company entered into a $335.8 million term credit
agreement with a syndicate of international lenders. Concurrently, as of March
31, 2000, the Company entered into a revolving credit agreement which provides
for a revolving line of credit, subject to a borrowing base formula calculated
on accounts receivable of up to $175.0 million. The term credit agreement and
the revolving credit agreement are guaranteed, jointly and severally by the
Company and substantially all of its direct and indirect wholly-owned
subsidiaries and is collateralized by a pledge of the issued and outstanding
securities and assets of the Company and substantially all of its direct and
indirect wholly-owned subsidiaries. At June 30, 2000 the Company had undrawn
capacity under the revolving credit agreement of approximately $110.3 million
net of letters of credit of approximately $64.7 million.
The Company believes that over the next twelve months cash generated from
operations and the proceeds from the sale of operations together with amounts
available under the exit facility will be adequate to meet its capital
expenditures and working capital needs, although no assurance can be given in
this regard.
CAPITAL EXPENDITURES
Capital expenditures for continuing operations were $20.6 million for the
six month period ending June 30, 2000 compared to $14.1 million for the same
period in 1999.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires that an entity recognize these items as assets
or liabilities in the statement of financial position and measure them at fair
value. Changes in fair value of the derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction, and if it is the type of
hedge transaction. The impact on the Company's financial position will be
dependent on the level and types of derivative instruments the Company will have
entered into at the time SFAS No. 133 is implemented.
In June 1999, FASB issued SFAS No. 137 to defer the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. As a result, the standard will be adopted by the Company in its interim
period ended September 30, 2000.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the results of operations and businesses of the Company. When used in this
document, the words "anticipate," "believe" "estimate" and "expect" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Many factors could cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements that may be expressed or implied by
such forward-looking statements, including, among others: (1) outcome of legal
proceedings may have a material adverse effect on results of operations; (2)
risks associated with acquisitions including potential future liabilities; (3)
heightened competition, including the intensification of price competition and
the entry of new competitors; (4) dependence on outsourcing and vendor reduction
trends; (5) environmental and regulatory risks; (6) closure costs for the
Company's operating sites may exceed accrued amounts; (7) loss of key employees;
(8) commodity price and credit risks; (9) failure to obtain new customers or
retain existing customers; (10) general economic and business conditions which
are less favourable than expected; (11) unanticipated changes in industry
trends.
Should one or more of these risks or uncertainties materialize, or should
assumptions underlying the forward-looking statements prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend, and does not
assume any obligation, to update these forward-looking statements.
27
<PAGE> 29
PHILIP SERVICES CORPORATION
PART I, ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial risk resulting from volatility in
foreign exchange rates, interest rates and commodity prices. The Company seeks
to minimize these risks through its regular operating and financing activities
and, when deemed appropriate, through the use of derivative financial
instruments. In 2000, the use of derivative instruments has been limited.
FOREIGN CURRENCY RATE RISK
The revenue and expenses of the Company's Canadian and European
subsidiaries are generally denominated using the local currency. The functional
currency of these subsidiaries is the local currency and therefore, foreign
currency translation adjustments made on consolidation are reflected as a
component of shareholders' equity (deficit) as stated in the Company's
accounting policies. Changes in the foreign exchange rates compared to the
United States dollar can have an effect on the Company's revenue and
profitability. The sensitivity of the earnings (loss) from continuing operations
before tax to the changing foreign currency rates based on the operating results
from foreign subsidiaries for the second quarter of 2000 is estimated to be
immaterial.
INTEREST RATE RISK
Substantially all of the Company's long-term debt at June 30, 2000 bears
interest at a fixed rate. Borrowings under the exit facility bear interest at a
floating rate determined based on the Wells Fargo Bank prime rate. At June 30,
2000, excluding letters of credit, the Company had not borrowed under the exit
facility. Therefore, the Company's exposure to interest rate risk is minimal.
COMMODITY PRICE RISK
Prices in the Metals Services group are set and adjusted monthly by the
major steel producers. The price of ferrous scrap is a significant factor
influencing the profitability of the Metals Services group. In 2000, the
Company's average selling price of ferrous scrap decreased $31 to $103 per ton.
The Company manages its commodity price risk by acquiring ferrous metal scrap as
it is needed for its customers which allows the Company to turn its inventory
approximately every 30 days. Based on the inventory levels of the Metals
Services Group as at December 31, 1999 a 10% change in the price of ferrous
scrap during a 30 day period is estimated to change the Company's earnings
(loss) from continuing operations before tax by approximately $1.0 million.
28
<PAGE> 30
PHILIP SERVICES CORPORATION
PART II -- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
From time to time, the Company is named a defendant in legal actions
arising out of the normal course of business. The Company maintains liability
insurance against risks arising out of the normal course of business. There can
be no assurance that such insurance will be adequate to cover all such
liabilities. The following describes pending legal proceedings other than
ordinary, routine litigation incidental to its business.
(A) GENERAL
(i) In October 1999, Exxon Corporation ("Exxon") commenced an action in the
District Court, Harris County, Texas against International Catalyst, Inc.
("INCAT"), an indirect wholly-owned subsidiary of the Company, for damages of
$32.1 million arising from certain work conducted by INCAT at Exxon's Baytown,
Texas chemical plant. Exxon alleges that INCAT was responsible for the purchase
and installation in 1996 of improper gasket materials in the internal bed piping
flange joints of the Baytown plant which caused damages to the facility and
consequential losses arising from the shutdown of the plant while repairs were
made. The Company has conducted a review of the allegations and determined that
it is not feasible to predict or determine the final outcome of the proceedings.
The Company intends to vigorously defend the action and believes that it may
have insurance coverage for any damages resulting from the action. There can be
no assurance, though, that the outcome of the action will not have a material
adverse effect upon the financial condition or results of operations of the
Company.
(ii) On April 14, 2000, Maxus Energy Corporation et al ("Maxus") commenced
an action in the United States District Court for Northern District of Ohio
against various parties including the Predecessor Corporation. The Company
anticipates that Maxus will amend its action to name a subsidiary of the
Company. The action is brought under the Comprehensive Environmental Response,
Compensation and Liability Act for the recovery of costs incurred and to be
incurred in responding to the releases and threatened releases of hazardous
substances at the Diamond Shamrock Painesville Works site located in
Painesville, Ohio. The site is approximately 1100 acres in size and has been
used for various purposes since 1912. The plaintiffs alleged that they have
incurred more than $19.5 million in response costs in connection with the site.
Since July of 1996, a subsidiary of the Company has operated a secondary
aluminum smelter on approximately 24 acres of property within the site. The
Company has conducted a preliminary review of the claims made in the action and
determined that it is not feasible to predict or determine the final outcome of
the proceedings. The Company intends to vigorously defend the action but there
can be no assurance that the outcome of the action will not have a material
adverse effect upon the financial condition or results of operation of the
Company.
(B) REGULATORY
(i) In January 1997, the State of Missouri brought an enforcement action
against Solvent Recovery Company ("SRC"), an indirect wholly-owned subsidiary of
the Company, in state court alleging numerous violations of hazardous waste
regulations at SRC's Kansas City, Missouri facility. Included were allegations
that alterations or additions to the facility's operations had been implemented
without required modification of the facility's hazardous waste permit as well
as allegations of numerous deficiencies under regulations and SRC's permit in
the accumulation, record keeping, inspection, labelling, transportation and
handling of such waste. SRC and the State of Missouri have agreed upon a payment
of $225,000 to be made in two installments and a payment of approximately
$125,000 which payment is suspended and will be waived if the facility remains
in compliance with applicable federal and state environmental standards for
three years. The Company does not expect that the matter will have a material
adverse effect on its results of operations or financial position.
(ii) The New York Attorney General's office is conducting a criminal
investigation into the environmental practices of Philip Metals Recovery (USA),
Inc. ("PMR"), an indirect wholly owned subsidiary of the
29
<PAGE> 31
Company. The Attorney General alleges that PMR improperly disposed of lead
contaminated floor sweepings, improperly handled lead sludges and improperly
discharged lead contaminated waste water at a recycling facility it once
operated in Orangeburg, New York. The Company has conducted a review of the
claim and is vigorously defending the allegations. In the event the Company
cannot reach a negotiated settlement with the Attorney General, or
alternatively, is unsuccessful in defending the matter, the Company could be
liable for substantial monetary sanctions which it cannot currently estimate.
There can be no assurance that the outcome of the investigation will not have a
material adverse effect upon the financial condition or results of operations of
the Company.
ITEM 2: CHANGES IN SECURITIES
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the second quarter of the fiscal year ending December 31, 2000.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Incorporation
3.2 By-laws
</TABLE>
(B) REPORTS ON FORM 8-K
Form 8-k dated April 20, 2000, stating that the Company had emerged under
the Plan.
Form 8-k dated May 9, 2000, appending various credit agreements,
registration rights and other agreements.
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Philip Services Corporation, has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PHILIP SERVICES CORPORATION
By: /s/ PHILLIP C. WIDMAN
------------------------------------
Phillip C. Widman
Executive Vice President and
Chief Financial Officer
Dated: August 14, 2000
31
<PAGE> 33
(LOGO)
PRINTED IN CANADA
T23477
<PAGE> 34
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation
3.2 By-laws
27 Financial Data Schedule
