<PAGE> 1
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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 SEPTEMBER 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)
9700 HIGGINS ROAD, SUITE 750 ROSEMONT, 60018
ILLINOIS (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
(847) 685-9752
(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 Common Shares of the Registrant outstanding at November 10,
2000 was 24,041,946.
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<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 September 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 September
30, 2000 and Consolidated Statement of Earnings
of the Predecessor Company for the Three Months
Ended September 30, 1999 (unaudited)........... 3
Consolidated Statement of Earnings of the
Company for the Six Months Ended September 30,
2000 and Consolidated Statements of Earnings of
the Predecessor Company for the Three Months
Ended March 31, 2000 and for the Nine Months
Ended September 30, 1999 (unaudited)........... 4
Consolidated Statement of Cash Flows of the
Company for the Six Months Ended September 30,
2000 and Consolidated Statements of Cash Flows
of the Predecessor Company for the Three Months
Ended March 31, 2000 and for the Nine Months
Ended September 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..................................... 29
PART II -- Other Information
Item 1 -- Legal Proceedings............................... 30
Item 2 -- Changes in Securities........................... 31
Item 3 -- Defaults upon Senior Securities................. 31
Item 4 -- Submission of Matters to a Vote of Securities
Holders........................................ 31
Item 5 -- Other Information............................... 31
Item 6 -- Exhibits and Reports on Form 8-K................ 31
Signatures................................................ 32
</TABLE>
1
<PAGE> 3
PHILIP SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
| PREDECESSOR
FRESH START | COMPANY
----------- | -----------
SEPTEMBER 30 MARCH 31 | DECEMBER 31
2000 2000 | 1999
------------ ----------- | -----------
(UNAUDITED) (AUDITED) | (UNAUDITED)
<S> <C> <C> | <C>
ASSETS |
Current Assets: |
Cash and equivalents.................................. $ 60,281 $ 32,116 | $ 48,316
Accounts receivable (net of allowance for doubtful |
accounts of $21,104; March 31, 2000 -- $23,412; |
December 31, 1999 -- $23,938)...................... 259,784 311,578 | 305,441
Inventory for resale.................................. 39,995 36,781 | 38,939
Other current assets.................................. 63,078 130,795 | 107,688
-------- -------- | ----------
423,138 511,270 | 500,384
Fixed assets............................................ 282,247 281,412 | 303,639
Other assets............................................ 55,764 54,650 | 57,556
-------- -------- | ----------
$761,149 $847,332 | $ 861,579
======== ======== | ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) |
Current Liabilities: |
Accounts payable...................................... $ 86,442 $ 94,397 | $ 110,762
Accrued liabilities................................... 120,995 143,057 | 136,256
Current maturities of long-term debt.................. 4,400 5,161 | 11,917
-------- -------- | ----------
211,837 242,615 | 258,935
Long-term debt.......................................... 343,609 384,540 | 5,268
Deferred income taxes................................... 9,209 6,580 | 5,020
Other liabilities....................................... 97,914 95,303 | 97,021
Liabilities subject to compromise....................... -- -- | 1,136,468
Contingencies |
Shareholders' equity (deficit).......................... 98,580 118,294 | (641,133)
-------- -------- | ----------
$761,149 $847,332 | $ 861,579
======== ======== | ==========
</TABLE>
These consolidated financial statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company") and Philip Services Corp. ("Oldco"), an Ontario
company and its subsidiaries (collectively the "Predecessor Company") which have
been prepared by management of PSC. On April 7, 2000, Oldco and certain of its
Canadian subsidiaries transferred substantially all of their 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 Oldco and certain of its Canadian subsidiaries and as a result,
Oldco is now insolvent. Management of PSC has determined that consolidated
financial information of the Predecessor Company at December 31, 1999 and for
the three months ended March 31, 2000 and three and nine months ended September
30, 1999 may be of interest to shareholders of PSC and has therefore included
such information in this document. The consolidated 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 consolidated financial 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 SEPTEMBER 30, | ENDED SEPTEMBER 30,
2000 | 1999
-------------------- | --------------------
<S> <C> | <C>
Revenue................................................ $359,313 | $383,413
Operating expenses..................................... 316,404 | 350,287
Selling, general and administrative costs.............. 33,274 | 36,167
Depreciation and amortization.......................... 11,220 | 13,259
-------- | --------
Income (loss) from operations.......................... (1,585) | (16,300)
Interest expense....................................... 9,755 | 591
Other income and expense -- net........................ (2,366) | (1,981)
-------- | --------
Loss from continuing operations before tax and |
reorganization costs................................. (8,974) | (14,910)
Reorganization costs (Note 13)......................... -- | 64,032
Income taxes........................................... 1,548 | 1,237
-------- | --------
Loss from continuing operations........................ (10,522) | (80,179)
Discontinued operations (net of tax)................... (1,054) | (3,064)
-------- | --------
Net loss............................................... $(11,576) | $(83,243)
======== | ========
Basic and diluted earnings (loss) per share |
Continuing operations................................ $ (0.44) |
Discontinued operations.............................. (0.04) |
-------- |
$ (0.48) |
======== |
Weighted average number of common shares outstanding |
(000's).............................................. 24,042 |
======== |
</TABLE>
These consolidated financial statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company") and Philip Services Corp.("Oldco") an Ontario
company and its subsidiaries (collectively the Predecessor Company) which have
been prepared by management of PSC. On April 7, 2000, Oldco and certain of its
Canadian subsidiaries transferred substantially all of their 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 Oldco and certain of its Canadian subsidiaries and as a result,
Oldco is now insolvent. Management of PSC has determined that consolidated
financial information of the Predecessor Company at December 31, 1999 and for
the three months ended March 31, 2000 and three and nine months ended September
30, 1999 may be of interest to shareholders of PSC and has therefore included
such information in this document. The consolidated 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 consolidated financial 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 SIX MONTHS | FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, | ENDED MARCH 31, ENDED SEPTEMBER 30,
2000 | 2000 1999
------------------- | -------------------- --------------------
<S> <C> | <C> <C>
Revenue.................................. $786,677 | $487,519 $1,195,969
Operating expenses....................... 690,308 | 426,227 1,065,815
Selling, general and administrative |
costs.................................. 71,489 | 37,043 136,244
Depreciation and amortization............ 22,366 | 12,436 41,664
-------- | -------- ----------
Income (loss) from operations............ 2,514 | 11,813 (47,754)
Interest expense......................... 19,163 | 952 52,490
Other income and expense -- net.......... (3,381) | (9,598) (3,409)
-------- | -------- ----------
Earnings (loss) from continuing |
operations before income tax and |
reorganization costs................... (13,268) | 20,459 (96,835)
Reorganization costs (Note 13)........... -- | 20,607 78,356
Income taxes............................. 2,111 | 856 5,587
-------- | -------- ----------
Loss from continuing operations.......... (15,379) | (1,004) (180,778)
Cumulative effect of change in accounting |
principle.............................. -- | -- (1,543)
Discontinued operations (net of tax)..... (1,054) | 1,473 34,668
-------- | -------- ----------
Net earnings (loss)...................... $(16,433) | $ 469 $ (147,653)
======== | ======== ==========
Basic and diluted earnings (loss) per |
share |
Continuing operations.................. $ (0.64) |
Discontinued operations................ (0.04) |
-------- |
$ (0.68) |
======== |
Weighted average number of common shares |
outstanding (000's).................... 24,034 |
======== |
</TABLE>
These consolidated financial statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company") and Philip Services Corp.("Oldco"), an Ontario
company and its subsidiaries (collectively the "Predecessor Company") which have
been prepared by management of PSC. On April 7, 2000, Oldco and certain of its
Canadian subsidiaries transferred substantially all of their 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 Oldco and certain of its Canadian subsidiaries and as a result,
Oldco is now insolvent. Management of PSC has determined that consolidated
financial information of the Predecessor Company at December 31, 1999 and for
the three months ended March 31, 2000 and three and nine months ended September
30, 1999 may be of interest to shareholders of PSC and has therefore included
such information in this document. The consolidated 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 consolidated financial 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 SIX MONTHS | FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, | ENDED MARCH 31, ENDED SEPTEMBER 30,
2000 | 2000 1999
------------------- | -------------------- --------------------
<S> <C> | <C> <C>
OPERATING ACTIVITIES |
Net loss from continuing operations........... $(15,379) | $ (1,004) $ (180,778)
Items included in earnings not affecting cash |
Depreciation and amortization............... 22,366 | 12,436 41,664
Accrued but unpaid interest................. 7,100 | -- 49,540
Deferred income taxes....................... 2,967 | -- 2,135
Writedown of investments.................... -- | -- 4,220
Gain on sale of assets...................... -- | (7,820) (3,523)
Non-cash reorganization costs............... -- | -- 64,239
-------- | -------- ----------
Cash flow from continuing operations.......... 17,054 | 3,612 (22,503)
Changes in non-cash working capital........... 83,529 | (11,622) 11,571
-------- | -------- ----------
Cash provided by (used in) continuing |
operating activities........................ 100,583 | (8,010) (10,932)
Cash provided by (used in) discontinued |
operating activities........................ 191 | (1,453) 2,834
-------- | -------- ----------
Cash provided by (used in) operating |
activities.................................. 100,774 | (9,463) (8,098)
-------- | -------- ----------
INVESTING ACTIVITIES |
Proceeds from sale of operations.............. -- | -- 23,085
Purchase of fixed assets...................... (26,158) | (8,403) (21,711)
Proceeds from sale of assets.................. 3,149 | 11,379 12,292
Other -- net.................................. (944) | (5,623) (1,838)
-------- | -------- ----------
Cash provided by (used in) continuing |
investing activities........................ (23,953) | (2,647) 11,828
Cash provided by investing activities of |
discontinued operations..................... -- | 1,545 66,969
-------- | -------- ----------
Cash provided by (used in) investing |
activities.................................. (23,953) | (1,102) 78,797
-------- | -------- ----------
FINANCING ACTIVITIES |
Proceeds from long-term debt.................. -- | -- 140
Principal payments on long-term debt.......... (48,906) | (1,205) (75,438)
Common shares issued for cash................. 250 | -- --
-------- | -------- ----------
Cash used in continuing financing |
activities.................................. (48,656) | (1,205) (75,298)
Cash provided by (used in) financing |
activities of discontinued operations....... -- | (92) 2,515
-------- | -------- ----------
Cash used in financing activities............. (48,656) | (1,297) (72,783)
-------- | -------- ----------
Net change in cash for the period............. 28,165 | (11,862) (2,084)
Cash and equivalents, beginning of period..... 32,116 | 48,316 60,727
-------- | -------- ----------
Cash and equivalents, end of period........... $ 60,281 | $ 36,454 $ 58,643
======== | ======== ==========
</TABLE>
These consolidated financial statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company") and Philip Services Corp.("Oldco"), an Ontario
company and its subsidiaries (collectively the "Predecessor Company") which have
been prepared by management of PSC. On April 7, 2000, Oldco and certain of its
Canadian subsidiaries transferred substantially all of their 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 Oldco and certain of its Canadian subsidiaries and as a result,
Oldco is now insolvent. Management of PSC has determined that consolidated
financial information of the Predecessor Company at December 31, 1999 and for
the three months ended March 31, 2000 and three and nine months ended September
30, 1999 may be of interest to shareholders of PSC and has therefore included
such information in this document. The consolidated 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 consolidated financial 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
(1) BASIS OF PRESENTATION
These consolidated financial statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company") and Philip Services Corp. ("Oldco"), an Ontario
company and its subsidiaries (collectively the "Predecessor Company") which have
been prepared by management of PSC. On April 7, 2000, Oldco and certain of its
Canadian subsidiaries transferred substantially all of their 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 Oldco and certain of its Canadian subsidiaries and as a result,
Oldco is now insolvent. Management of PSC has determined that consolidated
financial information of the Predecessor Company at December 31, 1999 and for
the three months ended March 31, 2000 and three and nine months ended September
30, 1999 may be of interest to shareholders of PSC and has therefore included
such information in this document. The consolidated 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 consolidated financial 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 and six months ended September 30, 2000.
The Company is an integrated industrial services and metals recovery
company that provides industrial outsourcing and metal recovery and processing
services to major industry sectors throughout North America. The Company
conducts 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 U.S. 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 of the Predecessor Company 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 that 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 judgments made in preparing these
financial statements.
For all periods presented, the Consolidated Financial Statements and Notes
to 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)
(1) BASIS OF PRESENTATION (continued)
BANKRUPTCY FILING AND PLAN OF REORGANIZATION
On June 25, 1999, Oldco 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"). Oldco 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, Oldco
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, Oldco 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 PSC. All the shares held by Oldco in PSC were cancelled
under the Amended U.S. Plan. On November 5, 1999, Oldco'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 to address 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, PSC
emerged from bankruptcy protection as a new public entity.
Under the Plan, syndicate debt of Oldco 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 PSC. The secured
payment-in-kind debt is convertible into 25% of the common shares of PSC 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 PSC 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. PSC 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 PSC and the
shareholders of Oldco received 2% of the common shares of PSC.
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 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
7
<PAGE> 9
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BASIS OF PRESENTATION (continued)
reorganization value were the industries in which the Company operates, the
general economic conditions that impact the Company and the application of
certain valuation methodologies, which included a discounted cash flow analysis
based on two year's cashflow projections prepared by management with discount
rates of between 11% and 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 PSC 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 management 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 investments 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.
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
8
<PAGE> 10
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
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 labor 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 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 are translated at exchange rates in effect at the balance sheet date.
The resulting gains and losses are reflected in the cumulative foreign currency
translation adjustment in 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 September 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. The Company
establishes an allowance for doubtful accounts based on the credit risk
applicable to particular customers and 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
9
<PAGE> 11
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
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. 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. Adoption of the standard had no effect on the
Company's financial position as the Company had no derivative instruments or
hedging activities.
(3) DISCONTINUED OPERATIONS (in thousands)
On May 18, 1999, Oldco 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, Oldco 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 $1,882 for the three months ended
March 31, 2000 and the six months ended September 30, 2000, respectively, $8,228
for the three months ended September 30, 1999 and $66,468 for the nine months
ended September 30, 1999. Net earnings from discontinued operations in the
Consolidated Statements of Earnings is presented net of applicable income tax
provision of $0 for the three months ended March 31, 2000 and $674 for the nine
months ended September 30, 1999.
(4) OTHER CURRENT ASSETS (in thousands)
<TABLE>
<CAPTION>
| PREDECESSOR
FRESH START | COMPANY
----------- | -----------
SEPTEMBER 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............................. 17,137 15,384 | 12,568
Consumable supplies..................................... 15,785 15,844 | 15,890
Non-trade receivables................................... 15,658 15,298 | 13,676
Other................................................... 11,401 15,648 | 17,526
-------- -------- | --------
$ 63,078 $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 Oldco's lenders.
These funds were released to the Company in April, 2000.
(b) On April 7, 2000, Oldco 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.
10
<PAGE> 12
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) OTHER ASSETS (in thousands)
<TABLE>
<CAPTION>
| PREDECESSOR
FRESH START | COMPANY
----------- | -----------
SEPTEMBER 30 MARCH 31 | DECEMBER 31
2000 2000 | 1999
------------ ----------- | -----------
<S> <C> <C> | <C>
Restricted investments(a)............................... $ 40,970 $ 39,025 | $ 33,412
Other................................................... 14,794 15,625 | 24,144
-------- -------- | --------
$ 55,764 $ 54,650 | $ 57,556
======== ======== | ========
</TABLE>
(a) Restricted investments are controlled by the Company's wholly owned
insurance subsidiary, and as at September 30, 2000 approximately $30,706 has
been pledged as security for the Company's insurance liabilities.
(6) ACCRUED LIABILITIES (in thousands)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
| PREDECESSOR
FRESH START | COMPANY
----------- | -----------
SEPTEMBER 30 MARCH 31 | DECEMBER 31
2000 2000 | 1999
------------ ----------- | -----------
<S> <C> <C> | <C>
Insurance claims outstanding............................ $ 30,449 $ 31,758 | $ 34,278
Accrued employee compensation and benefit costs......... 32,589 33,025 | 26,745
Accrued purchases....................................... 11,180 26,498 | 16,523
Accrued closure costs................................... 9,604 13,189 | 13,956
Billings in excess of costs............................. 4,966 7,528 | 10,304
Accrued waste material disposal costs................... 4,256 6,208 | 4,205
Accrued environmental costs............................. 3,065 6,161 | 6,143
Accrued other........................................... 24,193 16,976 | 24,102
Income taxes payable.................................... 693 1,714 | --
-------- -------- | --------
$120,995 $143,057 | $136,256
======== ======== | ========
</TABLE>
11
<PAGE> 13
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT (in thousands except per share amounts)
<TABLE>
<CAPTION>
| PREDECESSOR
FRESH START | COMPANY
----------- | -----------
SEPTEMBER 30 MARCH 31 | DECEMBER 31
2000 2000 | 1999
------------ ----------- | -----------
<S> <C> <C> | <C>
Credit Facility |
Term debt(a).......................................... $190,211 $235,825 | $ --
Convertible Payment-in-kind debt(a)................... 104,977 100,000 | --
Unsecured Payment-in-kind notes(b)...................... 38,124 36,000 | --
Secured loans bearing interest at a weighted average |
fixed rate of 5.8% maturing at various dates up to |
2020.................................................. 7,355 9,551 | 9,712
Secured loans bearing interest at prime plus a weighted |
average floating rate of 0.4% maturing at various |
dates up to 2001...................................... 913 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................................. 6,429 7,277 | 6,194
-------- -------- | --------
348,009 389,701 | 17,185
Less current maturities of long-term debt............... 4,400 5,161 | 11,917
-------- -------- | --------
$343,609 $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, 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 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% and 5% on the amount of
the term debt being redeemed and between 8 1/3% and 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 PSC at a conversion price of $11.72 per
common share, which was in excess of the fair market value of PSC 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
12
<PAGE> 14
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT (in thousands except per share amounts) (continued)
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 September 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 PSC and substantially all of its direct and
indirect wholly owned subsidiaries and is collateralized by security
interests in the assets of PSC and substantially all its direct and
indirect wholly owned subsidiaries and a pledge of securities of
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. If a change in control occurs, the Company is
required to make an offer to purchase an amount of unsecured notes 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. At September 30, 2000, the unsecured notes are recorded at their
fair value of $33,751 (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 April 15 and October 15. The unsecured convertible
notes may be converted at any time into common shares of PSC at a
conversion price of $30 per common share. If a change in control occurs the
Company is required to make an offer to purchase an amount of unsecured
convertible notes equal to between 64% and 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. At September 30, 2000, the unsecured convertible notes
are recorded at their fair value of $4,373 (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 and 0.75% times the sum of the Tranche B
advances.
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
13
<PAGE> 15
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LONG-TERM DEBT (in thousands except per share amounts) (continued)
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 September 30, 2000, the Company was in compliance with the provisions of
the exit facility.
The exit facility is guaranteed jointly and severally by PSC and
substantially all of its direct and indirect wholly owned subsidiaries and
is collateralized by security interests in the assets of PSC and
substantially all of its direct and indirect wholly owned subsidiaries and
a pledge of the securities of substantially all of its direct and indirect
wholly owned subsidiaries.
At September 30, 2000, the Company had undrawn credit capacity under the
exit facility of approximately $99,305 net of outstanding letters of credit
of approximately $75,695.
(8) OTHER LIABILITIES (in thousands)
<TABLE>
<CAPTION>
| PREDECESSOR
FRESH START | COMPANY
----------- | -----------
SEPTEMBER 30 MARCH 31 | DECEMBER 31
2000 2000 | 1999
------------ ----------- | -----------
<S> <C> <C> | <C>
Accrued environmental costs......................... $78,555 $77,053 | $78,772
Other............................................... 19,359 18,250 | 18,249
------- ------- | -------
$97,914 $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>
14
<PAGE> 16
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) LIABILITIES SUBJECT TO COMPROMISE (continued)
(a) In August 1997, Oldco 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, Oldco has not been in compliance with certain
covenants in the Syndicate Debt, including the financial covenants, which
require Oldco 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 Oldco and its direct and indirect wholly owned subsidiaries and were
secured by a pledge of the issued and outstanding securities of Oldco's
direct and indirect wholly owned subsidiaries, and a charge over the
present and future assets of Oldco and its direct and indirect wholly owned
subsidiaries. In November 1998, Oldco 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 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
Oldco 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 PSC. The secured payment-in-kind debt is
convertible into 25% of the common shares of PSC 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 has a term of five years.
(b) On the acquisition of Allwaste, Inc. ("Allwaste") Oldco 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, Oldco 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 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 PSC 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.
15
<PAGE> 17
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) SHAREHOLDERS' EQUITY (DEFICIT) (in thousands, except number of shares)
<TABLE>
<CAPTION>
| PREDECESSOR
FRESH START | COMPANY
----------- | -----------
SEPTEMBER 30 MARCH 31 | DECEMBER 31
2000 2000 | 1999
------------ ----------- | -----------
<S> <C> <C> | <C>
Share capital........................................... $118,544 $118,294 | $1,351,482
Retained earnings (deficit)............................. (16,433) -- | (1,925,789)
Cumulative foreign currency translation adjustment...... (3,531) -- | (66,826)
-------- -------- | ----------
$ 98,580 $118,294 | $ (641,133)
======== ======== | ==========
</TABLE>
The issued capital of PSC comprises 24,041,946 common shares.
(11) CHANGES IN NON-CASH WORKING CAPITAL (in thousands)
<TABLE>
<CAPTION>
| PREDECESSOR COMPANY
| ----------------------------------------
SIX MONTHS ENDED | THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, | MARCH 31, SEPTEMBER 30,
2000 | 2000 1999
----------------- | ------------------ ------------------
<S> <C> | <C> <C>
Accounts receivable.................... $52,285 | $(22,017) $ (84)
Inventory for resale................... (4,931) | (1,515) (1,405)
Proceeds from sale of UK Metals |
business............................. 44,587 | -- --
Other.................................. 22,313 | 2,305 31,896
Accounts payable and accrued |
liabilities.......................... (29,705) | 7,666 (16,284)
Income taxes payable................... (1,020) | 1,939 (2,552)
------- | -------- --------
$83,529 | $(11,622) $ 11,571
======= | ======== ========
</TABLE>
STATEMENTS OF CASH FLOWS
The supplemental cash flow disclosures and non-cash transactions for the
six months ended September 30, 2000 and the three months ended March 31, 2000
and for the nine months ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
| PREDECESSOR COMPANY
| ----------------------------------------
SIX MONTHS ENDED | THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, | MARCH 31, SEPTEMBER 30,
2000 | 2000 1999
----------------- | ------------------ ------------------
<S> <C> | <C> <C>
Supplemental Disclosures: |
Interest paid.......................... $ 7,473 | $ 951 $ 2,182
Income taxes paid...................... 1,953 | 2,248 7,687
Capital leases on the purchase of |
property and equipment............... -- | 2,782 --
Note receivable on sale of equipment... -- | -- 1,875
</TABLE>
(12) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 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
16
<PAGE> 18
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (continued)
done. This change in accounting policy does not effect net earnings and has been
applied retroactively. The revenues and operating expenses for the three months
ended September 30, 1999 have been increased by $25.4 million and the revenues
and operating expenses for the nine months ended September 30, 1999 have been
increased by $140.5 million.
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.
(13) REORGANIZATION COSTS (in thousands)
The expenses resulting from Oldco's reorganization filings have been
segregated from expenses related to operations in the accompanying Consolidated
Statements of Earnings and include the following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Assets and liabilities adjusted to net realizable
value.................................................. $ -- $ 49,915
Employee retention and severance......................... -- 6,424
Professional fees........................................ 17,908 6,839
Provision for future lease rejections.................... -- 6,164
Provision for litigation claims.......................... -- 6,360
Other.................................................... 2,699 2,654
-------- --------
$ 20,607 $ 78,356
======== ========
</TABLE>
(14) EARNINGS PER SHARE (in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------ ------------------
<S> <C> <C>
Net loss for the period -- basic and diluted............. $(11,576) $(16,433)
======== ========
Number of common shares outstanding...................... 24,042 24,042
Effect of using weighted average common shares
outstanding............................................ -- (8)
-------- --------
Basic and diluted weighted average number of common
shares outstanding..................................... 24,042 24,034
======== ========
</TABLE>
The weighted average number of common shares outstanding and the basic and
diluted earnings (loss) per share for the Predecessor Company have not been
presented as they are not comparable to subsequent periods due to the
restructuring and the implementation of fresh start reporting.
17
<PAGE> 19
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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
| ---------------------------------------
SIX MONTHS ENDED | THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 | MARCH 31, 2000 SEPTEMBER 30, 1999
------------------ | ------------------ ------------------
<S> <C> | <C> <C>
Net earnings (loss)...................... $(16,433) | $ 469 $(147,653)
Other comprehensive income, net of tax: |
Translation adjustments................ (3,531) | (4,061) 2,294
-------- | ------- ---------
Comprehensive loss....................... $(19,964) | $(3,592) $(145,359)
======== | ======= =========
</TABLE>
(16) SEGMENTED INFORMATION (in thousands)
The Company's business operations are organized into the following
segments:
- Industrial Outsourcing Services, which includes the operations that
perform cleaning and maintenance, mechanical turnaround and outage
services, remediation, paint overspray recovery and refractory services.
- By-Products Management, which includes hazardous and non-hazardous waste
collection, transportation, processing, disposal and related field
services.
- Specialty Businesses, which perform analytical services, container and
tank cleaning services, demolition and decommissioning and electrical
installations.
- Metals Services, which has three primary 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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------------------
INDUSTRIAL SHARED
OUTSOURCING BY-PRODUCTS SPECIALTY METALS SERVICES &
SERVICES MANAGEMENT BUSINESSES SERVICES ELIMINATIONS TOTAL
----------- ----------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenue................... $280,874 $110,544 $91,219 $304,040 $ -- $786,677
Income (loss) from
operations.............. 9,799 3,472 12,177 4,767 (27,701) 2,514
Total assets.............. 206,071 124,378 87,528 242,519 100,653 761,149
Depreciation and
amortization............ 9,078 4,070 2,621 5,236 1,361 22,366
Capital expenditures...... 11,414 3,501 2,905 5,318 3,020 26,158
Equity investments........ -- -- -- 1,544 -- 1,544
</TABLE>
18
<PAGE> 20
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) SEGMENTED INFORMATION (in thousands) (continued)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2000
---------------------------------------------------------------------------
INDUSTRIAL SHARED
OUTSOURCING BY-PRODUCTS SPECIALTY METALS SERVICES &
SERVICES MANAGEMENT BUSINESSES SERVICES ELIMINATIONS TOTAL
----------- ----------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenue................... $165,749 $ 44,125 $47,170 $230,475 $ -- $487,519
Income (loss) from
operations.............. 9,244 (245) 6,035 9,202 (12,423) 11,813
Total assets.............. 219,756 121,580 80,706 284,173 161,540 867,755
Depreciation and
amortization............ 4,547 2,199 1,270 3,699 721 12,436
Capital expenditures...... 3,592 1,526 1,001 2,255 29 8,403
Equity investments........ -- -- -- 5,848 -- 5,848
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------------------------
INDUSTRIAL SHARED
OUTSOURCING BY-PRODUCTS SPECIALTY METALS SERVICES &
SERVICES MANAGEMENT BUSINESSES SERVICES ELIMINATIONS TOTAL
----------- ----------- ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue.................. $460,029 $138,545 $112,705 $484,690 $ -- $1,195,969
Income (loss) from
operations............. (3,319) 772 9,139 1,433 (55,779) (47,754)
Total assets............. 236,799 160,116 84,505 284,261 182,117 947,798
Depreciation and
amortization........... 17,488 7,717 3,876 10,948 1,635 41,664
Capital expenditures..... 6,363 3,527 1,803 6,273 3,745 21,711
Equity investments....... -- -- -- 3,569 7,752 11,321
</TABLE>
The geographical segmentation of the Company and Predecessor Company's
business is as follows:
<TABLE>
<CAPTION>
| PREDECESSOR COMPANY
| -----------------------------------------------
SIX MONTHS ENDED | THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 | MARCH 31, 2000 SEPTEMBER 30, 1999
--------------------- | --------------------- -----------------------
LONG-LIVED | LONG-LIVED LONG-LIVED
REVENUE ASSETS | REVENUE ASSETS REVENUE ASSETS
-------- ---------- | -------- ---------- ---------- ----------
<S> <C> <C> | <C> <C> <C> <C>
United States.............. $669,501 $213,828 | $403,947 $215,656 $ 904,812 $245,655
Canada..................... 109,761 67,322 | 49,412 72,007 206,270 98,684
Other...................... 7,415 48,676 | 34,160 65,111 84,887 61,236
-------- -------- | -------- -------- ---------- --------
$786,677 $329,826 | $487,519 $352,774 $1,195,969 $405,575
======== ======== | ======== ======== ========== ========
</TABLE>
(17) CONTINGENCIES (dollars in thousands)
(a) The Company (together with the industries in which it operates) is subject
to federal, state, local and foreign (particularly Canadian provincial)
environmental laws and regulations concerning emissions to the air,
discharges to surface and subsurface waters and the generation, handling,
storage, transportation, treatment and disposal of waste materials and
hazardous substances. The Company and the industries in which it operates
are also subject to other federal, state, local and foreign (particularly
Canadian provincial) laws and regulations including those that require the
Company to remove or mitigate the effects of the disposal or release of
certain materials at various sites.
19
<PAGE> 21
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) CONTINGENCIES (dollars in thousands) (continued)
It is impossible to predict precisely what effect these laws and
regulations will have on the Company in the future. Compliance with
environmental laws and regulations will result in, among other things,
capital expenditures, costs and liabilities. Management believes, based on
past experience and its best assessment of future events, that these
environmental liabilities and costs will be assessed and paid over an
extended period of time. The Company believes that it will be able to fund
such liabilities and costs in the ordinary course of business.
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 periodically 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 $60,085.
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 $21,535. 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.
The liabilities discussed above are disclosed in the Consolidated Balance
Sheets as follows:
<TABLE>
<S> <C>
Accrued liabilities......................................... $ 3,065
Other liabilities........................................... 78,555
-------
$81,620
=======
</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 PSC, 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 a subsidiary of PSC. 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 PSC has operated a secondary aluminum smelter on approximately
24
20
<PAGE> 22
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) CONTINGENCIES (dollars in thousands) (continued)
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 Company is a defendant in lawsuits for which the Company has insurance
coverage. Each of these suits is, in the event of an adverse verdict,
subject to a deductible. Although the Company does not believe that the
uninsured liability from any of these suits would be material, it is not
possible to predict the effect of the cumulative deductibles. The Company is
named as a defendant in a number of other lawsuits which have arisen in the
ordinary course of its business. The Company believes that except as
otherwise reported herein, neither the insured litigation nor the other
litigation is likely to have a material adverse effect on its 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, Oldco 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"). Oldco 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, Oldco
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, Oldco 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 PSC. All the shares held by Oldco in PSC were cancelled
under the Amended U.S. Plan. On November 5, 1999, Oldco'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 to address 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, PSC
emerged from bankruptcy protection as a new public entity.
Under the Plan, syndicate debt of Oldco 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 PSC. The secured
payment-in-kind debt is convertible into 25% of the common shares of PSC 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 PSC 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. PSC 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 PSC and the
shareholders of Oldco received 2% of the common shares of PSC.
INTRODUCTION
The Company is a supplier of industrial outsourcing, by-product management
and metals recovery services. The Company has over 250 operating facilities and
over 12,000 employees that service industrial and commercial clients throughout
North America. Approximately 85% of the Company's revenue is generated in the
U.S. with the balance generated in Canada and Europe.
The Company's business is organized into four operating divisions:
Industrial Outsourcing Services, By-Product Management, Specialty Businesses and
Metals Services.
Industrial Outsourcing Services includes the operations that perform
cleaning and maintenance, mechanical, turnaround and outage services,
remediation, paint overspray recovery and refractory services. By-Products
Management includes hazardous and non-hazardous waste collection,
transportation, processing,
22
<PAGE> 24
disposal and related field services. Specialty Businesses perform analytical
services, container and tank cleaning services, demolition and decommissioning
and electrical contracting and process instrumentation.
Metals Services has three primary 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. Mill services provide on-site mill services
including the sale of secondary materials.
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 labor, indirect labor,
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, Oldco sold its metals recycling and mill services
business in the United Kingdom for net proceeds of $47.7 million. 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, Oldco 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, Oldco sold its investment in Philip Utilities Management
Corp. ("PUMC") for cash proceeds of $70.1 million resulting in a gain of $39.1
million. The operations of PUMC have been treated as discontinued operations.
RESULTS OF OPERATIONS
To facilitate a meaningful comparison of the Company's quarterly and
year-to-date operating performance in fiscal 2000, the following discussion of
results of operations compares the combined consolidated financial results for
the nine months ended September 30, 2000, which represents the consolidated
financial results for the Predecessor Company for the three months ended March
31, 2000 and the consolidated results for the Company for the six months ended
September 30, 2000, with the Predecessor Company's results of operation for the
nine months ended September 30, 1999. Consequently, the current year's
information presented below does not comply with AICPA's Statement of Position
90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code", which calls for separate reporting for the Company and the Predecessor
Company.
23
<PAGE> 25
The following table presents, for the periods indicated, the results of
operations and the percentage relationships which the various items in the
Consolidated Statements of Earnings bear to the consolidated revenue from
continuing operations.
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
COMPANY COMPANY
-------------- ----------------
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- ---------------- ----------------
($ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.................................. $359.3 100% $383.4 100% $1,274.1 100% $1,196.0 100%
Operating expenses....................... 316.4 88% 350.3 91% 1,116.5 88% 1,065.8 89%
Selling, general and administrative
costs.................................. 33.3 10% 36.2 10% 108.5 8% 136.2 11%
Depreciation and amortization............ 11.2 3% 13.2 3% 34.8 3% 41.7 4%
------ ---- ------ ---- -------- ---- -------- ----
Income (loss) from operations............ (1.6) (1%) (16.3) (4%) 14.3 1% (47.7) (4%)
Interest expense......................... 9.8 3% 0.6 -- 20.1 1% 52.5 4%
Other income and expense -- net.......... (2.4) (1%) (2.0) -- (13.0) (1%) (3.4) --
------ ---- ------ ---- -------- ---- -------- ----
Earnings (loss) from continuing
operations before tax and
reorganization costs................... (9.0) (3%) (14.9) (4%) 7.2 1% (96.8) (8%)
Reorganization costs..................... -- -- 64.0 17% 20.6 2% 78.4 7%
Income taxes............................. 1.5 -- 1.2 -- 3.0 -- 5.6 --
------ ---- ------ ---- -------- ---- -------- ----
Loss from continuing operations.......... (10.5) (3%) (80.1) (21%) (16.4) (1%) (180.8) (15%)
Cumulative effect of change in accounting
principle.............................. -- -- -- -- -- -- (1.5) --
Discontinued operations (net of tax)..... (1.1) -- (3.1) (1%) 0.4 -- 34.7 3%
------ ---- ------ ---- -------- ---- -------- ----
Net loss................................. $(11.6) (3%) $(83.2) (22%) $ (16.0) (1%) $ (147.6) (12%)
====== ==== ====== ==== ======== ==== ======== ====
</TABLE>
EARNINGS FROM CONTINUING OPERATIONS
For the three months ended September 30, 2000, the Company incurred a loss
from continuing operations of $10.5 million. This compares to a loss from
continuing operations of $80.1 million for the three months ended September 30,
1999. For the nine months ended September 30, 2000 on a combined basis, the
Company had a loss from continuing operations of $16.4 million, compared to a
loss from continuing operations of $180.8 million for the nine months ended
September 30, 1999.
OPERATING RESULTS
The operating results (excluding shared services and eliminations) for the
Company and Predecessor Company are:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2000 THREE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------- -------------------------------------------------
INDUSTRIAL INDUSTRIAL
OUTSOURCING BY-PRODUCTS SPECIALTY METALS OUTSOURCING BY-PRODUCTS SPECIALTY METALS
SERVICES MANAGEMENT BUSINESSES SERVICES SERVICES MANAGEMENT BUSINESSES SERVICES
----------- ----------- ---------- -------- ----------- ----------- ---------- --------
($ MILLIONS) ($ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $122.7 $ 54.9 $ 45.0 $136.7 $124.8 $ 47.9 $ 40.9 $169.8
Income (loss) from
operations............ 2.3 1.9 5.6 2.5 (7.3) 1.2 3.4 2.4
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------- -------------------------------------------------
INDUSTRIAL INDUSTRIAL
OUTSOURCING BY-PRODUCTS SPECIALTY METALS OUTSOURCING BY-PRODUCTS SPECIALTY METALS
SERVICES MANAGEMENT BUSINESSES SERVICES SERVICES MANAGEMENT BUSINESSES SERVICES
----------- ----------- ---------- -------- ----------- ----------- ---------- --------
($ MILLIONS) ($ MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $446.6 $154.7 $138.4 $534.5 $460.0 $138.5 $112.7 $484.7
Income (loss) from
operations............ 19.0 3.2 18.2 14.0 (3.3) 0.8 9.1 1.4
</TABLE>
24
<PAGE> 26
INDUSTRIAL OUTSOURCING SERVICES
Revenue for Industrial Outsourcing Services for the nine months ended
September 30, 2000 decreased by $13.4 million compared with the same period in
1999. This decrease was due in part to the sale in June of 1999 of Oldco's civil
construction and maintenance business, which generated $20.7 million of revenue
in the nine months ended September 30, 1999. As well, the Company has closed
certain unprofitable locations in Europe and the United States, which generated
$26 million of revenue in the nine months ended September 30, 1999. Excluding
the effect of the businesses sold or closed, revenue for the nine months ended
September 30, 2000 showed an increase of $33 million compared with the same
period in 1999. For the three months ended September 30, 2000, revenue was
consistent with the prior year at $122.7 million. Excluding the effect of
businesses closed, revenue for the three months ended September 30, 2000,
increased by $7 million or 6%.
Income from operations as a percentage of revenue was 2% and 4% for
Industrial Outsourcing Services for the three and nine month periods ended
September 30, 2000 compared with (6%) and (1%) for the three and nine month
periods ended September 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. Cost
reduction measures, the closure of unprofitable locations and the consolidation
of low margin businesses also contributed to the improvement in performance.
During 1999, the Predecessor Company was operating in an environment of
financial instability which resulted in difficult market conditions and
competitive pressures on pricing. The 1999 results were also impacted by Year
2000 costs and employee benefit adjustments of $2.3 million and $6.7 million for
the three and nine months ended September 30. Improvements in the market
conditions in the petroleum refining sector in the year 2000 due to increased
crude oil prices have also contributed to improved operating results.
BY-PRODUCTS MANAGEMENT
Revenue increased by $7.0 million or 15% and by $16.2 million or 12% in the
three and nine month periods ended September 30, 2000, respectively, compared
with the same periods in 1999. The Company believes that the revenue improvement
is due to improvements in the market conditions due to competitors' financial
difficulties and the fact 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 3.5% and 2.1% for the
three and nine months ended September 30, 2000, respectively, compared to 2.5%
and 1% in the same periods of 1999. The increase is due to increased revenue and
improved asset utilization, as well as continuing consolidation and cost
reduction initiatives. This improvement was substantially greater than appears
as the business unit also absorbed approximately $2 million in overhead costs in
the third quarter of 2000, or $6 million year to date, that had been allocated
to other business units in 1999. Due to the seasonal nature of this business,
the Company expects that revenue and profitability will be reduced in the fourth
quarter of 2000.
SPECIALTY BUSINESSES
Revenue and income from operations for the three and nine month periods
ended September 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, which has been ongoing since the fall of 1999,
was substantially completed during the third quarter of 2000. Accordingly,
revenue and profitability for this division are expected to decline in the
fourth quarter of 2000.
METALS SERVICES
Revenue for Metals Services operations for the nine months ended September
30, 2000 increased by $50 million compared with the same period in 1999, as
ferrous scrap prices were approximately 15% higher in the first half of 2000
when compared to 1999. Volumes were also higher in 2000 than in the prior year
as the operations were adversely impacted in 1999 by the negative financial
situation of the Predecessor Company. In the three months ended September 30,
2000, ferrous scrap prices declined and were approximately 10% less
25
<PAGE> 27
than the prices in the same period of the prior year, which contributed to lower
revenue. Also contributing to the decrease in revenue were a weak export market,
an oversupply of industrial scrap, a strong availability of scrap alternatives
and high scrap inventories at domestic mills.
Income from operations as a percentage of revenue was 2% and 3% for the
three and nine month period ended September 30, 2000 compared with 1% and 0.3%
for the three and nine month period ended September 30, 1999. The increase in
income from operations was due to inventory control, consolidation and cost
reduction efforts. While the rate of decline in ferrous scrap prices has
subsided compared to the first six months of 2000, the Company believes prices
may continue to erode further in the fourth quarter of 2000.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs for the three and nine months
ended September 30, 2000 were $33.3 million and $108.5 million respectively,
which included Shared Services costs of $8.8 million and $28.5 million,
respectively. This compared to selling, general and administrative costs of
$36.2 million and $136.2 million for the three and nine months ended September
30, 1999, which included Shared Services costs of $10.6 million and $49.7
million, respectively. The Company reduced its selling, general and
administrative costs by $2.9 million or 8% in the third quarter of 2000 compared
to the same period last year, the result of ongoing overhead cost reduction
efforts.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of fixed assets for the three and nine months
ended September 30, 2000 was $11.2 million and $34.8 million respectively,
representing a decrease of $2 million or 15% and $6.9 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 and reduced
capital expenditures during 1999 and 2000.
INTEREST EXPENSE
Interest expense for the three and nine months ended September 30, 2000 was
$9.8 million and $20.1 million, respectively. Interest expense was higher in the
three months ended September 30, 2000, but lower in the nine months ended
September 30, 2000 compared to 1999. Interest ceased to accrue on the Syndicate
Debt of Oldco at the date of the filing of the petition for reorganization and
even though Oldco suspended payments of interest under the Syndicate Debt in
November 1998, all amounts owing were expensed, although not paid, and included
in the balance of the syndicate debt loan up to the date of the filings of June
25, 1999.
OTHER INCOME AND EXPENSE -- NET
Other income and expense -- net for the nine months ended September 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 nine
months ended September 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 September 30, 2000. The Company has
recorded a valuation allowance of $130.7 million at September 30, 2000.
26
<PAGE> 28
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 September 30, 2000, the Company's working capital was $211.3 million
representing a decrease of $57.4 million over the fresh start balance sheet at
March 31, 2000. This decrease is largely attributable to the fact that the
Company used $49 million of restricted cash it had at March 31, 2000, to pay
down its term debt.
For the six months ended September 30, 2000, the Company reported cash
provided by continuing operating activities of $100.6 million. On April 7, 2000,
Oldco sold its metals recycling and mill services business in the UK for net
proceeds of $47.7 million. As a result of the reorganization, this amount was
reported as a receivable in the fresh start balance sheet in other current
assets. Included in the cash provided from operating activities is the receipt
of proceeds of $45 million from the sale of the UK metals business and $21
million of restricted cash released to the Company in April 2000. Excluding the
effects of these two items, cash provided by operating activities for the nine
months ended September 30, 2000 was $27 million compared to cash used by
operating activities of $11 million in the nine months ended September 30, 1999.
This improvement is due to an improvement in cash collection activities and
improved earnings.
As of March 31, 2000, the Company entered into a $335.8 million term credit
agreement with a syndicate of international lenders. Concurrently, 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 million. The term credit agreement and the revolving credit
agreement are guaranteed jointly and severally by PSC and substantially all of
its direct and indirect wholly owned subsidiaries and are collateralized by
security interests in the assets of PSC and substantially all of the direct and
indirect wholly owned subsidiaries and a pledge of the securities of
substantially all of its direct and indirect wholly owned subsidiaries. At
September 30, 2000 the Company had undrawn capacity under the revolving credit
agreement of approximately $99.3 million net of letters of credit of
approximately $75.7 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 $34.6 million for the
nine month period ending September 30, 2000 compared to $21.7 million for the
same period in 1999. Cash conservation measures by the Company reduced the
amount of capital expenditures for the first nine months of 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. 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. Adoption of the standard had no effect on the
Company's financial position as the Company had no derivative instruments or
hedging activities.
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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) decreased dependence on outsourcing and vendor
reduction trends; (5) environmental and regulatory risks; (6) closure costs for
the Company's operating sites that 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 in the U.S. or elsewhere which are less favorable than expected; and
(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.
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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 third quarter of 2000 is estimated to be
immaterial.
INTEREST RATE RISK
Substantially all of the Company's long-term debt at September 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
September 30, 2000, the Company had not borrowed under the exit facility,
although letters of credit outstanding have been charged against the Company's
borrowing capacity under the exit facility. Therefore, the Company's exposure to
interest rate risk is immaterial.
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. During 2000, the
Company's average selling price of ferrous scrap has decreased to $97 per ton
from $134 per ton in the first quarter of 2000. 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.
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<PAGE> 31
PHILIP SERVICES CORPORATION
PART II -- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
(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 PSC, 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 a subsidiary of PSC. 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 PSC 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 operations 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
PSC, 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.
(ii) The New York Attorney General's office conducted a criminal
investigation into the environmental practices of Philip Metals Recovery (USA),
Inc. ("PMR"), an indirect wholly owned subsidiary of PSC. 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.
Although the Company disputes certain of the allegations of the Attorney
General, the Company has agreed to settle the matter. The Company will plead
guilty to, a misdemeanor and will pay a fine and conduct supplementary
environmental projects, the scope and nature of which will be determined in
cooperation with the Attorney General, at an aggregate cost of $1 million. This
cost was recorded in the results from discontinued operations in the Statement
of Earnings for the three months ended September 30, 2000.
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In addition to the matters reported herein, from time to time PSC and its
subsidiaries become aware of compliance matters relating to, or receive notices
from federal, state or local governmental entities of alleged violations of,
environmental, health and/or safety laws and regulations pertaining to, among
other things, the disposal or discharge of chemical substances (including
hazardous wastes). In some instances, these matters may become the subject of
administrative proceedings or lawsuits and may involve monetary sanctions of
$100,000 or more (exclusive of interest and costs).
Moreover, PSC and its subsidiaries are involved in a number of other
lawsuits, all of which have arisen in the ordinary course of the Company's
business.
The Company is unable to predict the outcome of the foregoing matters, but
does not believe that the ultimate resolution of such matters will have a
material adverse effect on the consolidated financial statements 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 third 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>
27 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
Form 8-K dated July 20, 2000, presenting the annual consolidated financial
statements for Philip Services Corp. (Predecessor Company) for the fiscal year
ended December 31, 1999 (unaudited).
Form 8-K dated July 20, 2000, presenting the consolidated financial
statements for Philip Services Corp. (Predecessor Company) for the quarter ended
March 31, 2000 (unaudited).
Form 8-K dated July 20, 2000, presenting the fresh start consolidated
balance sheet of the Company at March 31, 2000 (audited).
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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: November 14, 2000
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
