<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
------------------------------------
JULY 20, 2000
Date of Report
PHILIP SERVICES CORPORATION
(Exact Name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-30417 98-131394
(State or other jurisdiction (Commission File Number) (IRS Employer Identification
of incorporation) No.)
</TABLE>
100 KING STREET WEST, P.O. BOX 2440, LCD1, HAMILTON, ONTARIO, CANADA L8N 4J6
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (905) 521-1600
NOT APPLICABLE
(Former name or former address, if changed since last report)
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<PAGE> 2
ITEM 5: OTHER EVENTS
This Form 8-K contains information relating to Philip Services Corp., an
Ontario company (the "Predecessor Company") and its subsidiaries which have been
prepared by management of Philip Services Corporation, a Delaware corporation
(the "Reorganized Company"). On April 7, 2000, the Predecessor Company
transferred substantially all of its assets and liabilities (except for
liabilities subject to compromise), at fair value, to the Reorganized Company or
its subsidiaries. The liabilities subject to compromise of $726.5 million were
retained by the Predecessor Company and as a result, the Predecessor Company is
now insolvent. Management of the Reorganized Company has determined that
financial information of the Predecessor Company at March 31, 2000 and December
31, 1999 and for the three months ended March 31, 2000 and 1999, may be of
interest to shareholders of the Reorganized Company and as such prepared these
financial statements. However, this information has not been audited or subject
to review procedures by any auditor of the Predecessor Company or the
Reorganized Company. Readers should therefore review this material with caution
and not rely on the information.
The Securities and Exchange Commission and the Ontario Securities
Commission ("OSC") are conducting investigations of the Predecessor Company
regarding the circumstances surrounding the restatement of its 1995, 1996 and
1997 financial statements. The OSC is also reviewing the disclosure contained in
a prospectus filed by the Predecessor Company in November 1997.
On June 25, 1999, the Predecessor Company and substantially all of its
wholly-owned subsidiaries located in the United States (the "U.S. Debtors"),
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code with the United States Bankruptcy Court for the District of
Delaware (the "U.S. Court"). The Predecessor Company and substantially all of
its wholly-owned subsidiaries located in Canada (the "Canadian Debtors")
commenced proceedings under the Companies' Creditors Arrangements Act in Canada
in the Ontario Superior Court of Justice (the "Canadian Court") on the same
date.
On July 12, 1999, the U.S. Debtors filed a Joint Plan of Reorganization
(the "U.S. Plan") with the U.S. Court and on July 15, 1999, the Canadian Debtors
filed a Plan of Compromise and Arrangement (the"Canadian Plan") with the
Canadian Court. In August 1999, a number of motions were brought before the
Canadian Court challenging the fairness of the Canadian Plan. As a result the
Predecessor Company filed an amended plan in the U.S. Court on September 21,
1999 (the "Amended U.S. Plan") and an amended plan in the Canadian Court on
September 24, 1999 (the "Amended Canadian Plan"). On November 2, 1999, the
Predecessor Company filed a Supplement to the Amended Canadian Plan (the
"Canadian Plan Supplement"). The Canadian Plan Supplement amended and restated
the Amended Canadian Plan and provided that substantially all of the assets of
the Canadian Debtors be transferred to new companies that, on the implementation
of the Amended U.S. Plan became wholly-owned subsidiaries of the Reorganized
Company. All the shares held by the Predecessor Company in the Reorganized
Company were cancelled under the Amended U.S. Plan. On November 5, 1999, the
Predecessor Company's lenders voted to approve the Canadian Plan Supplement. On
November 26, 1999 a hearing was held in the Canadian Court at which the Canadian
Plan Supplement was sanctioned. On November 30, 1999, the Amended U.S. Plan was
confirmed in the U.S. Court. On March 8, 2000, the Canadian Plan Supplement was
amended to permit the sale of the UK Metals business and certain tax
restructuring issues. On March 20, 1999, a similar amendment was made by the
U.S. Court with respect to the Amended U.S. Plan. The Amended U.S. Plan and the
Canadian Plan Supplement (collectively the "Plan") became effective on April 7,
2000. Under the Plan, the Reorganized Company emerged from bankruptcy protection
as a new public entity.
Under the Plan, syndicate debt of the Predecessor Company of $1 billion has
been converted into $250 million of senior secured debt, $100 million of
convertible secured payment in-kind debt and 91% of the common shares of the
Reorganized Company. The secured payment in-kind debt is convertible into 25% of
the common shares of the Reorganized Company on a fully diluted basis as of the
Plan effective date. The Plan also provided for the conversion of certain
specified impaired unsecured claims, into $60 million of unsecured payment
in-kind notes and 5% of the common shares of the Reorganized Company as of the
Plan effective date. The Plan allowed certain holders of the unsecured claims to
receive $1.50 in face amount of unsecured convertible notes in exchange for
every $1.00 in unsecured payment-in kind notes that such holder would have
2
<PAGE> 3
received under the Plan. The aggregate amount of unsecured convertible notes
issued will not exceed $18 million. The Reorganized Company also issued 1.5% of
its common shares to Canadian and U.S. class action plaintiffs to settle all
class action claims. Other potential equity claimants received 0.5% of the
common shares of the Reorganized Company and the shareholders of the Predecessor
Company received 2% of the common shares of the Reorganized Company.
3
<PAGE> 4
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion reviews the Predecessor Company's operations for
the three months ended March 31, 2000 and 1999 and should be read in conjunction
with the attached Predecessor Company's Consolidated Financial Statements and
related notes thereto. The Predecessor Company reports in U.S. dollars and in
accordance with U.S. generally accepted accounting principles.
The Predecessor Company reorganized its business operations into the
following segments:
- Metal Services, which has primarily three businesses, ferrous scrap,
commercial and mill services. The ferrous scrap operations collect and
process scrap for shipment to steel mills, the commercial business
provides brokerage services for scrap material and primary metals and
mill services provide on-site mill services including the sale of
secondary materials.
- Industrial Outsourcing Services which includes the operations which
perform cleaning and maintenance, mechanical, turnaround and outage
services, remediation, paint overspray recovery and refractory services.
- Specialty Businesses which perform analytical services, container and
tank cleaning services, demolition and decommissioning and electrical
installations.
- By-Products Management which includes hazardous and non-hazardous waste
collection, transportation, processing, disposal and related field
services.
The following table shows the results of operations of the Predecessor
Company's business segments in the first quarter of 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED IN MILLIONS OF U.S. DOLLARS)
----------------------------------------------------------------------------
INDUSTRIAL SHARED SERVICES
METAL OUTSOURCING SPECIALTY BY-PRODUCTS AND
SERVICES SERVICES BUSINESSES MANAGEMENT ELIMINATIONS TOTAL
-------- ----------- ---------- ----------- --------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue..................... $230.5 $165.7 $47.2 $44.1 -- $487.5
Income(loss) from
operations................ 9.2 9.2 6.0 (0.2) (12.4) 11.8
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED IN MILLIONS OF U.S. DOLLARS)
----------------------------------------------------------------------------
INDUSTRIAL SHARED SERVICES
METAL OUTSOURCING SPECIALTY BY-PRODUCTS AND
SERVICES SERVICES BUSINESSES MANAGEMENT ELIMINATIONS TOTAL
-------- ----------- ---------- ----------- --------------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenue..................... $157.3 $178.5 $34.0 $45.7 -- $415.5
Income(loss) from
operations................ (0.7) 5.3 2.2 (0.1) (18.1) (11.4)
</TABLE>
Metal Services
Metal Services revenue for the first quarter of 2000 was 47% more than the
first quarter of 1999. A significant increase in the volumes of ferrous scrap
handled, as well as a 32% increase in the average selling price of ferrous scrap
accounted for this revenue increase. The increased volumes and pricing as well
as cost reduction initiatives such as the closing of redundant offices resulted
in a $10 million increase in earnings from operations in the first quarter of
2000 compared with the first quarter of 1999. Ferrous prices have declined,
however, to date in the second quarter of 2000 and had a negative effect on
margins.
Industrial Outsourcing Services
The decrease in revenue of $13 million for the Industrial Outsourcing
Services business is entirely attributable to the sale of a non-core business in
May 1999. The income from operations demonstrates that higher margins were
attained in the first quarter of 2000. The higher margins are attributable in
part to an increase in turnaround and outage contracts performed in the first
quarter of 2000 and to cost reduction initiatives.
4
<PAGE> 5
Specialty Businesses
Revenue and earnings from operations have improved in the first quarter of
2000 compared to the first quarter of 1999 due to the increased size of
contracts in the electrical installation operations. Certain large contracts
have been ongoing since the fall of 1999 and are scheduled to be completed in
the second quarter of 2000.
By-Products Management
The By-Products Management business increased profitability in the first
quarter 2000 through capacity rationalization, closure of redundant facilities
and consolidations of operating zones. This improvement was offset by an
additional approximately $2 million of overhead costs compared to the first
quarter 1999 which were previously included in Industrial Outsourcing Services
and Shared Services. Therefore, the results for this division have actually
improved over the first quarter of the prior year. The first quarter of the year
is typically a slow period for this business unit due to weather issues.
Shared Services and Eliminations
The decrease in the Shared Service costs is attributable to cost reduction
initiatives and the inclusion of professional fees in the first quarter of 1999
which were reported as reorganization costs in the first quarter of 2000.
Certain insurance claims of $2 million have been included in the first quarter
of 2000 results.
5
<PAGE> 6
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents...................................... $ 36,454 $ 48,316
Accounts receivable (net of allowance for doubtful
accounts of $23,412; December 31, 1999 -- $23,938)..... 327,458 305,441
Inventory for resale...................................... 40,440 38,939
Other current assets...................................... 104,956 107,688
---------- ----------
509,308 500,384
Fixed assets................................................ 297,976 303,639
Other assets................................................ 60,471 57,556
---------- ----------
$ 867,755 $ 861,579
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities Not Subject to Compromise:
Current Liabilities
Accounts payable....................................... $ 105,967 $ 110,762
Accrued liabilities.................................... 151,218 136,256
Current maturities of long-term debt................... 11,333 11,917
---------- ----------
268,518 258,935
Long-term debt............................................ 4,235 5,268
Deferred income taxes..................................... 6,886 5,020
Other liabilities......................................... 96,373 97,021
Liabilities Subject to Compromise........................... 1,136,468 1,136,468
Contingencies
Shareholders' equity (deficit).............................. (644,725) (641,133)
---------- ----------
$ 867,755 $ 861,579
========== ==========
</TABLE>
These financial statements contain information relating to Philip Services
Corp., an Ontario company (the "Predecessor Company") and its subsidiaries which
have been prepared by management of Philip Services Corporation, a Delaware
corporation (the "Reorganized Company"). On April 7, 2000, the Predecessor
Company transferred substantially all of its assets and liabilities (except for
liabilities subject to compromise), at fair value, to the Reorganized Company or
its subsidiaries. The liabilities subject to compromise of $726.5 million were
retained by the Predecessor Company and as a result, the Predecessor Company is
now insolvent. Management of the Reorganized Company has determined that
financial information of the Predecessor Company at March 31, 2000 and December
31, 1999 and for the three months ended March 31, 2000 and 1999, may be of
interest to shareholders of the Reorganized Company and as such prepared these
financial statements. However, this information has not been audited or subject
to review procedures by any auditor of the Predecessor Company or the
Reorganized Company. Readers should therefore review this material with caution
and not rely on the information. The accompanying notes are an integral part of
these financial statements.
6
<PAGE> 7
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31
--------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue..................................................... $487,519 $415,544
Operating expenses.......................................... 426,227 362,587
Selling, general and administrative costs................... 37,043 49,669
Depreciation and amortization............................... 12,436 14,717
-------- --------
Income (loss) from operations............................... 11,813 (11,429)
Interest expense............................................ 952 26,524
Other income and expense -- net............................. (9,598) (742)
Cumulative effect of change in accounting principle......... -- 1,543
-------- --------
Earnings (loss) from continuing operations before tax and
reorganization costs...................................... 20,459 (38,754)
Reorganization costs........................................ 20,607 --
Income taxes................................................ 856 1,700
-------- --------
Loss from continuing operations............................. (1,004) (40,454)
Discontinued operations (net of tax)........................ 1,473 (1,443)
-------- --------
Net earnings (loss)......................................... $ 469 $(41,897)
======== ========
Basic and diluted earnings (loss) per share
Continuing operations....................................... $ (0.01) $ (0.31)
Discontinued operations..................................... 0.01 (0.01)
-------- --------
$ -- $ (0.32)
======== ========
Weighted average number of common shares outstanding
(000's)................................................... 131,144 131,144
======== ========
</TABLE>
These financial statements contain information relating to Philip Services
Corp., an Ontario company (the "Predecessor Company") and its subsidiaries which
have been prepared by management of Philip Services Corporation, a Delaware
corporation (the "Reorganized Company"). On April 7, 2000, the Predecessor
Company transferred substantially all of its assets and liabilities (except for
liabilities subject to compromise), at fair value, to the Reorganized Company or
its subsidiaries. The liabilities subject to compromise of $726.5 million were
retained by the Predecessor Company and as a result, the Predecessor Company is
now insolvent. Management of the Reorganized Company has determined that
financial information of the Predecessor Company at March 31, 2000 and December
31, 1999 and for the three months ended March 31, 2000 and 1999, may be of
interest to shareholders of the Reorganized Company and as such prepared these
financial statements. However, this information has not been audited or subject
to review procedures by any auditor of the Predecessor Company or the
Reorganized Company. Readers should therefore review this material with caution
and not rely on the information. The accompanying notes are an integral part of
these financial statements.
7
<PAGE> 8
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31
--------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss from continuing operations......................... $ (1,004) $(40,454)
Items included in earnings not affecting cash
Depreciation and amortization............................. 12,436 14,717
Accrued but unpaid interest............................... -- 26,512
Deferred income taxes..................................... -- 2,252
Gain on sale of assets.................................... (7,820) --
-------- --------
Cash flow from continuing operations........................ 3,612 3,027
Changes in non-cash working capital......................... (11,622) 7,227
-------- --------
Cash provided by (used in) continuing operating
activities................................................ (8,010) 10,254
Cash used in discontinued operating activities.............. (1,453) (3,156)
-------- --------
Cash provided by (used in) operating activities............. (9,463) 7,098
-------- --------
INVESTING ACTIVITIES
Purchase of fixed assets.................................... (8,403) (7,294)
Proceeds from sale of assets................................ 11,379 2,016
Other -- net................................................ (5,623) 4,983
-------- --------
Cash used in continuing investing activities................ (2,647) (295)
Cash provided by (used in) investing activities of
discontinued operations................................... 1,545 (6,113)
-------- --------
Cash used in investing activities........................... (1,102) (6,408)
-------- --------
FINANCING ACTIVITIES
Principal payments on long-term debt........................ (1,205) (1,579)
-------- --------
Cash used in continuing financing activities................ (1,205) (1,579)
Cash provided by (used in) financing activities of
discontinued operations................................... (92) 2,199
-------- --------
Cash provided by (used in) financing activities............. (1,297) 620
-------- --------
Net change in cash for the period........................... (11,862) 1,310
Cash and equivalents, beginning of period................... 48,316 60,727
-------- --------
Cash and equivalents, end of period......................... $ 36,454 $ 62,037
======== ========
</TABLE>
These financial statements contain information relating to Philip Services
Corp., an Ontario company (the "Predecessor Company") and its subsidiaries which
have been prepared by management of Philip Services Corporation, a Delaware
corporation (the "Reorganized Company"). On April 7, 2000, the Predecessor
Company transferred substantially all of its assets and liabilities (except for
liabilities subject to compromise), at fair value, to the Reorganized Company or
its subsidiaries. The liabilities subject to compromise of $726.5 million were
retained by the Predecessor Company and as a result, the Predecessor Company is
now insolvent. Management of the Reorganized Company has determined that
financial information of the Predecessor Company at March 31, 2000 and December
31, 1999 and for the three months ended March 31, 2000 and 1999, may be of
interest to shareholders of the Reorganized Company and as such prepared these
financial statements. However, this information has not been audited or subject
to review procedures by any auditor of the Predecessor Company or the
Reorganized Company. Readers should therefore review this material with caution
and not rely on the information. The accompanying notes are an integral part of
these financial statements.
8
<PAGE> 9
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
These financial statements contain information relating to Philip Services
Corp., an Ontario company (the "Predecessor Company") and its subsidiaries which
have been prepared by management of Philip Services Corporation, a Delaware
corporation (the "Reorganized Company"). On April 7, 2000, the Predecessor
Company transferred substantially all of its assets and liabilities (except for
liabilities subject to compromise), at fair value, to the Reorganized Company or
its subsidiaries. The liabilities subject to compromise of $726.5 million were
retained by the Predecessor Company and as a result, the Predecessor Company is
now insolvent. Management of the Reorganized Company has determined that
financial information of the Predecessor Company at March 31, 2000 and December
31, 1999 and for the three months ended March 31, 2000 and 1999, may be of
interest to shareholders of the Reorganized Company and as such prepared these
financial statements. However, this information has not been audited or subject
to review procedures by any auditor of the Predecessor Company or the
Reorganized Company. Readers should therefore review this material with caution
and not rely on the information.
The financial statements were issued on June 2, 2000 and therefore the
following notes to the consolidated financial statements are based on
information up to that date.
Philip Services Corp. was an integrated metals recovery and industrial
services company, which provided metal recovery and processing services and
industrial outsourcing services to major industry sectors throughout North
America and Europe.
The consolidated financial statements have been prepared in US dollars
using accounting principles generally accepted in the United States, except that
these consolidated financial statements have been prepared on the basis of
accounting principles applicable to a going concern which would assume that the
Predecessor Company will realize the carrying value of its assets, and satisfy
its obligations and commitments except as otherwise disclosed, in the normal
course of business. However, because of the reorganization and the circumstances
relating to this event, the Predecessor Company is insolvent, and therefore will
not be able to realize the carrying value of its assets and satisfy its
obligations and commitments. The financial statements do not give effect to any
adjustments to the carrying value of assets or amounts and priority of
liabilities that would be necessary under the basis of accounting principles
which would be applicable to an insolvent company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the 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 the Consolidated Financial Statements disclose the Utilities Management
division sold in May 1999 and the Predecessor Company's Copper and Non-ferrous
operations discontinued in 1998 as discontinued operations, as discussed in Note
3.
BANKRUPTCY FILING AND PLAN OF REORGANIZATION
On June 25, 1999, the Predecessor Company and substantially all of its
wholly-owned subsidiaries located in the United States (the "U.S. Debtors")
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code with the United States Bankruptcy Court for the District of
Delaware (the "U.S. Court"). The Predecessor Company and substantially all of
its wholly-owned subsidiaries located in Canada (the "Canadian Debtors")
commenced proceedings under the Companies' Creditors Arrangement Act ("CCAA") in
Canada in the Ontario Superior Court of Justice (the "Canadian Court") on the
same date. The U.S. Debtors and the Canadian Debtors (collectively the
"Debtors") were operating as debtors-in-possession under the supervision
9
<PAGE> 10
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(1) BASIS OF PRESENTATION (continued)
of the U.S. Court and Canadian Court (collectively the "Courts"). Under these
proceedings, substantially all liabilities, litigation and claims against the
Debtors in existence at the filing date were stayed unless the stay was modified
or lifted or payment was otherwise authorized by the Courts. The Debtors were
authorized to continue to pay in the ordinary course of their business both the
pre-petition and post-petition claims of trade creditors who continued to supply
trade credit on terms at least as favourable as those previously extended and to
pay the outstanding and future wages, salaries, employee benefits and other like
amounts due or accruing to current employees. With the interim and final orders
received in July 1999, the Courts authorized and directed the Debtors to enter
into debtor-in-possession ("DIP") financing which provided financing of up to
$100 million and allowed the Debtors access to $93 million of proceeds remaining
from previous sales of non-core assets. As at March 31, 2000, the Predecessor
Company had drawn all of these asset sale proceeds.
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. The motions were
brought by, among others, certain of the Predecessor Company's creditors
claiming contribution and indemnity from the Predecessor Company, including
Deloitte & Touche LLP, the underwriters of the Predecessor Company's November
1997 public offering (the "Underwriters") and certain former directors and
officers. In respect of the August 1999 motions, it was held that the Canadian
Plan as initially filed, failed to comply with the procedural and statutory
requirements of the CCAA regime. As a result of the decision, the Predecessor
Company filed an amended plan in the U.S. Court on September 21, 1999 (the
"Amended U.S. Plan") and an amended plan in the Canadian Court on September 24,
1999 (the "Amended Canadian Plan"). In summary, the Amended Canadian Plan
provided that in order for the Predecessor Company to be able to propose a
restructuring plan to its unsecured creditors, the Predecessor Company had to by
October 27, 1999, either (a) arrive at a settlement with each of the
contribution and indemnity claimants or (b) agree with each of the contribution
and indemnity claimants as to the amount of each of their claims and have the
agreement of each such claimant that they would vote in favour of the plan. In
an attempt to arrive at a global settlement and therefore meet the conditions of
the Amended Canadian Plan, a mediation was held on October 25th and October
26th, 1999 involving various parties. The mediation was unsuccessful and the
Predecessor Company brought a motion returnable November 1, 1999, to cancel the
meeting of the affected unsecured creditors scheduled for November 2, 1999 and
filed a Supplement to the Amended Canadian Plan (the "Canadian Plan
Supplement"). The Canadian Plan Supplement amended and restated the Amended
Canadian Plan such that the only affected class of creditors were the holders of
secured lender claims and unsecured creditors were no longer affected. The
Canadian Plan Supplement 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 would be wholly-owned subsidiaries of the Reorganized
Company. All the shares held by the Predecessor Company in the Reorganized
Company were cancelled under the Amended U.S. Plan. The motions brought by the
Predecessor Company, Deloitte & Touche LLP and the Underwriters were heard in
the Canadian Courts on November 1, 1999 at which time the judge reserved
decision until November 5, 1999. On November 3, 1999 a hearing was held in the
U.S. Court to consider confirmation of the Amended U.S. Plan. At that hearing,
the U.S. court overruled all remaining objections to the Amended U.S. Plan and
adjourned the hearing to November 30, 1999 to review the terms of the exit
financing facility. On November 4, 1999, the Canadian Court allowed the motion
to cancel the meeting of the unsecured creditors in Canada and the motions of
Deloitte & Touche LLP and the Underwriters were dismissed. On November 5, 1999,
the Predecessor Company's lenders voted to approve the Canadian Plan Supplement.
On November 26, 1999, a hearing was held in the Canadian Court at which the
Canadian Plan Supplement was sanctioned. On November 30, 1999, the Amended U.S.
Plan was confirmed in the U.S. Court. On March 8, 2000, the Canadian Plan
Supplement was amended to permit the
10
<PAGE> 11
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(1) BASIS OF PRESENTATION (continued)
sale of the UK Metals business and certain tax restructuring issues. On March
20, 2000, a similar hearing was made by the U.S. Court with respect to the
Amended U.S. Plan. The Amended U.S. Plan and the Canadian Plan Supplement
(collectively the "Plan") became effective on April 7, 2000. Under the Plan, the
Reorganized Company emerged from bankruptcy protection as a new public entity.
Under the Plan, syndicate debt of the Predecessor Company of $1 billion has
been converted into $250 million of senior secured debt, $100 million of
convertible secured payment in-kind debt and 91% of the common shares of the
Reorganized Company. The secured payment in-kind debt is convertible into 25% of
the common shares of the Reorganized Company on a fully diluted basis as of the
Plan effective date. The senior secured debt and the secured payment in-kind
debt each have a term of five years. The Plan also provided for the conversion
of certain specified impaired unsecured claims, into $60 million of unsecured
payment in-kind notes and 5% of the common shares of the Reorganized Company as
of the Plan effective date. The Plan allowed certain holders of the unsecured
claims to receive $1.50 in face amount of unsecured convertible notes in
exchange for every $1.00 in 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 will not exceed $18 million. The Predecessor
Company also reached an agreement with the Canadian and U.S. class action
plaintiffs to settle all class action claims for 1.5% of the common shares of
the Reorganized Company. Other potential equity claimants will receive 0.5% of
the common shares of the Reorganized Company and existing shareholders will
retain 2% of the common shares of the Reorganized Company. The Plan provided
that the Board of Directors of the Reorganized Company consist of nine directors
nominated by the new 91% shareholders (i.e., the lenders). The nominees would
include two members of the existing Board and two members nominated by High
River Limited Partnership ("High River") provided that High River and any lender
acting in concert with it beneficially own at least 25% of the syndicated debt.
REFLECTING THESE EVENTS IN THE FINANCIAL STATEMENTS
The Predecessor Company's financial statements as of March 31, 2000 have
been presented in conformity with the AICPA's Statement of Position 90-7
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7"). The statement requires that the amounts owing to the Predecessor
Company's lending syndicate as well as any other pre-petition liabilities that
are subject to compromise under the Plan be segregated in the Predecessor
Company's Consolidated Balance Sheet as liabilities subject to compromise and
the identification of all transactions and events that are directly associated
with the reorganization of the Predecessor Company in the Consolidated Statement
of Earnings. The liabilities are recorded at the amounts allowed as claims by
the Courts, rather than the amounts for which those allowed claims may
ultimately be settled.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the
Predecessor Company and all of its subsidiaries. All intercompany transactions
have been eliminated on consolidation. The equity method of accounting is used
for investment ownership ranging from 20% to 50%.
REVENUE RECOGNITION
Revenue from industrial services is recorded as the services are performed,
using the percentage of completion basis for fixed price contracts and as the
related service is provided for time and material contracts. Revenue from
by-product recovery operations is recognized upon receipt and acceptance of
materials for
11
<PAGE> 12
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
processing since the Predecessor 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 Predecessor Company brokers materials 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 Predecessor
Company is acting as an agent in those transactions, then only the commission on
the transaction is recorded.
CONTRACT ACCOUNTING
The Predecessor 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 incurred bear to estimated total costs for
each contract. Contract costs include all direct material and labour costs and
those indirect costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on incomplete contracts are recorded in the period in which
such losses are determined.
CASH AND EQUIVALENTS
Cash and equivalents consist of cash on deposit and term deposits 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
Fixed assets are stated at cost and are depreciated over their estimated
useful lives generally on the following basis: buildings 2.5% to 5%
straight-line; equipment 5% to 30% straight-line. Landfill sites and
improvements thereto are recorded at cost and amortized over the life of the
landfill site based on the estimated landfill capacity utilized during the year.
Operating costs associated with landfill sites are charged to operations as
incurred. Assets under development include the direct cost of land, buildings
and equipment acquired for future use together with engineering, legal and other
costs incurred before the assets are brought into operation.
The Predecessor Company includes, as part of the cost of its fixed assets,
all financing costs incurred prior to the asset becoming available for operation
The Predecessor 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.
OTHER ASSETS
Deferred financing costs are amortized over the useful life of the related
debt instrument. Other intangibles such as non-compete agreements are amortized
over periods relating to the terms of the agreements.
12
<PAGE> 13
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
ENVIRONMENTAL LIABILITY
The Predecessor Company accrued environmental remediation costs associated
with identified sites where an assessment has indicated that cleanup costs are
probable and can be reasonably estimated. Such accruals are undiscounted and are
based on currently available information, estimated timing of remedial actions
and related inflation assumptions, existing technology and presently enacted
laws and regulations. The liability for environmental and closure costs is
disclosed in the consolidated balance sheet under accrued liabilities and other
liabilities. Amounts required to dispose of waste materials located at the
Predecessor Company's industrial service facilities are included in accrued
liabilities.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities denominated in a foreign currency for foreign
operations, all of which are self-sustaining, are translated at exchange rates
in effect at the balance sheet date. The resulting gains and losses are
accumulated in a separate component of shareholders' equity.
FINANCIAL INSTRUMENTS
The Predecessor Company's accounts receivable, accounts payable and
long-term debt constitute financial instruments. The Predecessor Company's
accounts receivable and accounts payable approximated their fair value as at
March 31, 2000 and December 31, 1999. Concentration of credit risk in accounts
receivable is limited, due to the large number of customers the Predecessor
Company services throughout North America. The Predecessor Company performs
ongoing credit evaluations of its customers, but does not require collateral to
support customer accounts receivable. The Predecessor Company establishes an
allowance for doubtful accounts based on the credit risk applicable to
particular customers, historical and other information.
COMPREHENSIVE INCOME (LOSS)
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events from non-owner sources.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities and requires that an entity recognize these
items as assets or liabilities in the statement of financial position and
measure them at fair value. Changes in fair value of the derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction,
and if it is, the type of hedge transaction. The impact on the Reorganized
Company's financial position will be dependent on the level and types of
derivative instruments the Reorganized Company will have entered into at the
time SFAS No. 133 is implemented.
In June 1999, FASB issued SFAS No. 137 to defer the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. As a result, the standard will be adopted by the Reorganized Company in
its interim period ended September 30, 2000.
13
<PAGE> 14
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) DISCONTINUED OPERATIONS (in thousands)
On May 18, 1999, the Predecessor Company sold its investment in Philip
Utilities Management Corp. ("PUMC") for cash proceeds of $70,104, resulting in a
gain on sale of $39,115. The operations of PUMC, previously reported as the
Utilities Management division of the Industrial Services group, are now
reflected as discontinued operations. In December 1998, the Predecessor Company
made the decision to discontinue the Non-Ferrous and Copper operations of its
Metals Services business. The sale of certain aluminum 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 and 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 $36,403 for the three months ended
March 31, 2000 and 1999 respectively. Net earnings from discontinued operations
in the Consolidated Statement of Earnings is presented net of applicable income
tax provision of nil and $935 for the three months ended March 31, 2000 and 1999
respectively.
(4) OTHER CURRENT ASSETS (in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Restricted cash(a).......................................... $ 46,781 $ 48,028
Costs in excess of billings................................. 15,384 12,568
Consumable supplies......................................... 17,335 15,890
Non-trade receivables....................................... 10,156 13,676
Other....................................................... 15,300 17,526
-------- --------
$104,956 $107,688
======== ========
</TABLE>
(a) Restricted cash represents funds used as collateral for letters of credit,
and proceeds from the sale of assets which are held by the Predecessor
Company's lenders and to which the Predecessor Company has access under a
stipulation and order authorizing the use of cash collateral made by the
U.S. Court on June 28, 1999.
(5) OTHER ASSETS (in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Restricted investments(a)................................... $39,025 $33,412
Investments................................................. 10,373 12,262
Other....................................................... 11,073 11,882
------- -------
$60,471 $57,556
======= =======
</TABLE>
(a) Restricted investments are controlled by the Predecessor Company's
wholly-owned insurance subsidiary and are pledged as security for insurance
liabilities.
14
<PAGE> 15
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) ACCRUALS (in thousands)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Accrued employee compensation and benefit costs............. $ 33,584 $ 26,745
Insurance claims outstanding................................ 31,909 34,278
Accrued purchases........................................... 30,083 16,523
Accrued closure costs....................................... 14,099 13,956
Billings in excess of cost.................................. 7,528 10,304
Accrued waste material disposal costs....................... 6,208 4,205
Accrued environmental costs................................. 6,161 6,143
Accrued other............................................... 19,932 24,102
Income taxes payable........................................ 1,714 --
-------- --------
$151,218 $136,256
======== ========
</TABLE>
(7) LIABILITIES SUBJECT TO COMPROMISE
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Bank term loan(a)........................................... $1,004,086 $1,004,086
Convertible subordinated debentures(b)...................... 27,609 27,609
Other long-term debt(c)..................................... 25,910 25,910
Accrued liabilities......................................... 29,519 26,317
Other long-term liabilities................................. 27,043 28,068
Liabilities of discontinued operations...................... 22,301 24,478
---------- ----------
$1,136,468 $1,136,468
========== ==========
</TABLE>
(a) In August 1997, the Predecessor Company signed a $1.5 billion revolving
credit agreement which was amended in October 1997, February 1998, June
1998, October 1998 and December 1998 (the "Credit Facility") with a
syndicate of international lenders which replaced the 1996 revolving term
loan agreement and refinanced certain other long-term debt. The Credit
Facility expires in August of 2002, and contains certain restrictive
covenants and financial covenants including that: (a) the Predecessor
Company must meet specified interest coverage ratio, debt to EBITDA ratio,
fixed charge ratio and working capital ratio tests, and (b) acquisitions by
the Predecessor Company are subject to lenders' approval. Since June 30,
1998, the Predecessor Company has not been in compliance with certain
covenants in the Credit Facility, including the financial covenants, which
require the Predecessor Company to maintain a specified interest coverage
ratio, debt to EBITDA ratio, fixed charge ratio and working capital ratio.
Borrowings under the Credit Facility were guaranteed, jointly and severally
by the Predecessor Company and its direct and indirect wholly-owned
subsidiaries and were secured by a pledge of the issued and outstanding
securities of the Predecessor Company's direct and indirect wholly-owned
subsidiaries, and a charge over the present and future assets of the
Predecessor Company and its direct and indirect wholly-owned subsidiaries.
The Credit Facility bears interest based on a moving grid. In June 1998,
the Credit Facility was reduced from $1.5 billion to $1.2 billion, the
interest rate charged was increased by 100 basis points, the Predecessor
Company was permitted access to $60 million of the proceeds arising from an
asset
15
<PAGE> 16
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) LIABILITIES SUBJECT TO COMPROMISE (continued)
disposition of which $20 million was allocated to provide collateral for
letters of credit and the Predecessor Company agreed to a standstill until
September 30, 1998 respecting the incurrence of additional debt and the
occurrence of dispositions or acquisitions. On October 20, 1998, the Credit
Facility was further amended to permit the use of the letter of credit
facility for general corporate and other purposes and to extend the
Predecessor Company standstill on certain activities until June 30, 1999.
In November 1998, the Predecessor Company suspended payments of interest
under the Credit Facility. 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 Credit Facility ceased to accrue as at the filing
date.
The Plan set forth a new capital structure for the Reorganized 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 Credit Facility. Under the terms of the Plan,
syndicate debt of the Predecessor Company of $1 billion has been converted
into $250 million of senior secured debt, $100 million of convertible
secured payment in-kind debt and 91% of the common shares of the
Reorganized Company. The secured payment in-kind debt is convertible into
25% of the common shares of the Reorganized Company on a fully diluted
basis as of the Plan effective date. The senior secured debt and the
secured payment in-kind debt each have a term of five years.
(b) On the acquisition of Allwaste, Inc. ("Allwaste") the Predecessor Company
assumed the indenture with respect to Allwaste's 7 1/4% Convertible
Subordinated Debentures ("debenture") which were due 2014. At any time up
to and including June 1, 2014 the holder of any debenture had the right to
convert the principal amount of such debenture into common shares equal to
the principal amount of the debenture surrendered for conversion divided by
$19.5376. The debentures were redeemable for cash at the option of the
Predecessor Company. The debentures provided for annual mandatory sinking
fund payments equal to 5% of the aggregate principal amount of the
debenture issued, commencing June 1, 1999. Interest was payable
semi-annually on June 1 and December 1. Effective December 1, 1998, the
Predecessor Company suspended payments of interest on the debenture which
created a default under the indenture. Interest accrued in 1999 to the date
of the filing was approximately $2 million. Interest on the debenture
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 into $60 million of unsecured payment in-kind notes and 5% of
the common shares of the Reorganized Company as of the Plan effective date. The
Plan allowed certain holders of the unsecured claims to receive $1.50 in face
amount of unsecured convertible notes in exchange for every $1.00 in 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 will not
exceed $18 million.
16
<PAGE> 17
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) LONG-TERM DEBT (in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Secured loans, bearing interest at a weighted average fixed
rate of 5.5% (1999-5.6%) maturing at various dates up to
2020(a)................................................... $ 9,551 $ 9,712
Secured loans, bearing interest at prime plus a weighted
average floating rate of 0.5% (1999-0.5%) maturing at
various dates up to 2001.................................. 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..................................... 4,969 6,194
------- -------
15,568 17,185
Less current maturities of long-term debt................... 11,333 11,917
------- -------
$ 4,235 $ 5,268
======= =======
</TABLE>
(a) Included in the fixed rate secured loans are industrial development bonds
totaling $7,700 which were in default as at March 31, 2000 and December 31,
1999 as principal repayments required were not made. Therefore, these loans
have been classified as a current liability on the Predecessor Company's
Consolidated Balance Sheets.
(9) SHAREHOLDERS' EQUITY (DEFICIT) (in thousands except number of shares)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
Share capital............................................... $ 1,351,482 $ 1,351,482
Retained earnings (deficit)................................. (1,925,320) (1,925,789)
Cumulative foreign currency translation adjustment.......... (70,887) (66,826)
----------- -----------
$ (644,725) $ (641,133)
=========== ===========
</TABLE>
The issued and outstanding share capital of the Predecessor Company is
comprised of 131,144,013 common shares (December 31, 1999 -- 131,144,013)
(10) CHANGES IN NON-CASH WORKING CAPITAL (in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
2000 1999
-------- --------
<S> <C> <C>
Accounts receivable......................................... $(22,017) $ 7,668
Inventory for resale........................................ (1,515) (2,389)
Other....................................................... 2,305 16,161
Accounts payable and accrued liabilities.................... 7,666 (14,343)
Income taxes................................................ 1,939 130
-------- --------
$(11,622) $ 7,227
======== ========
</TABLE>
17
<PAGE> 18
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(10) CHANGES IN NON-CASH WORKING CAPITAL (in thousands) (continued)
STATEMENTS OF CASH FLOWS
The supplemental cash flow disclosures and non-cash transactions are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
2000 1999
------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................... $ 951 $ 740
Income taxes paid........................................... 2,248 1,905
NON CASH TRANSACTIONS:
Notes receivable from the sale of equipment................. -- 1,875
</TABLE>
(11) COMPUTATION OF EARNINGS PER SHARE (in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net earnings (loss) for the period -- basic and diluted..... $ 469 $(41,897)
======== ========
Basic and diluted weighted average number of commons shares
outstanding............................................... 131,144 131,144
======== ========
</TABLE>
(12) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The American Institute of Certified Public Accountants has issued Statement
of Position 98.5 "Reporting on the Costs of Start-Up Activities" which is
effective for fiscal years beginning after December 15, 1998. This statement
requires that all pre-operating costs be expensed as incurred. The statement
also requires that upon initial application any previous pre-operating costs
that had been deferred be expensed and reported as a cumulative effect of a
change in accounting principle.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin #101 ("SAB 101") on revenue recognition. In order to comply
with SAB 101, the Predecessor Company changed its accounting policy for
contracts where it brokers material between two parties. The revenue and
operating expenses are recorded on a gross basis rather than recording only the
net commission as has previously been done. This change in accounting policy
does not effect net earnings and has been applied retroactively. The revenues
and operating expenses for the three months ended March 31, 1999 have been
increased by $59 million accordingly.
18
<PAGE> 19
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(13) REORGANIZATION COSTS (in thousands)
The expenses resulting from the Predecessor Company's reorganization
filings has been segregated from expenses related to operations in the
accompanying Consolidated Statements of Earnings and includes the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
2000 1999
------- -------
<S> <C> <C>
Assets & liabilities adjusted to net realizable value....... $ 190 $ --
Professional fees........................................... 17,908 --
Employee severance and retention costs...................... 2,509 --
------- -------
$20,607 $ --
======= =======
</TABLE>
(14) 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 for the Predecessor Company is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
2000 1999
------- --------
<S> <C> <C>
Net earnings (loss)......................................... $ 469 $(41,897)
Other comprehensive income, net of tax:
Translations adjustments.................................... (4,061) 263
------- --------
Comprehensive income (loss)................................. $(3,592) $(41,634)
======= ========
</TABLE>
(15) SEGMENTED INFORMATION (in thousands)
The Predecessor Company reorganized its business operations into the
following segments:
- Metal Services which has primarily three businesses, ferrous scrap,
commercial and mill services. The ferrous scrap operations collect and
process scrap for shipment to steel mills, the commercial business
provides brokerage services for scrap material and primary metals and
mill services provide on-site mill services including the sale of
secondary materials.
- Industrial Outsourcing Services which includes the operations which
perform cleaning and maintenance, mechanical, turnaround and outage
services, remediation, paint overspray recovery and refractory services.
- Specialty Businesses which perform analytical services, container and
tank cleaning services, demolition and decommissioning and electrical
installations.
- By-Products Management which includes hazardous and non-hazardous waste
collection, transportation, processing, disposal and related field
services.
19
<PAGE> 20
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(15) SEGMENTED INFORMATION (in thousands) (continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
--------------------------------------------------------------------------------
INDUSTRIAL SHARED SERVICES
BY-PRODUCTS OUTSOURCING METAL SPECIALTY AND
MANAGEMENT SERVICES SERVICES BUSINESSES ELIMINATIONS TOTAL
----------- ----------- -------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue..................... $ 44,125 $165,749 $230,475 $47,170 $ -- $ 487,519
Income (loss) from
operations................ (245) 9,244 9,202 6,035 (12,423) 11,813
Total assets................ 121,580 219,756 284,173 80,706 161,540 867,755
Depreciation and
amortization.............. 2,199 4,547 3,699 1,270 721 12,436
Capital expenditures........ 1,526 3,592 2,255 1,001 29 8,403
Equity investments.......... -- -- 5,848 -- -- 5,848
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------------
INDUSTRIAL SHARED SERVICES
BY-PRODUCTS OUTSOURCING METAL SPECIALTY AND
MANAGEMENT SERVICES SERVICES BUSINESSES ELIMINATIONS TOTAL
----------- ----------- -------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue..................... $ 45,704 $178,620 $157,250 $33,970 $ -- $ 415,544
Income (loss) from
operations................ (127) 5,312 (732) 2,241 (18,123) (11,429)
Total assets................ 887,174 358,201 355,898 85,778 (612,724) 1,074,327
Depreciation and
amortization.............. 2,645 6,399 3,869 1,323 481 14,717
Capital expenditures........ 1,269 633 3,198 524 1,670 7,294
Equity investments.......... -- -- 3,959 -- 12,634 16,593
</TABLE>
The geographical segmentation of the Predecessor Company's business is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
------------------------------------------------
2000 1999
---------------------- ----------------------
LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Canada....................................... $ 49,412 $ 72,007 $ 46,747 $118,615
United States................................ 403,947 215,656 344,712 299,216
Other........................................ 34,160 65,111 24,085 62,072
-------- -------- -------- --------
$487,519 $352,774 $415,544 $479,903
======== ======== ======== ========
</TABLE>
(16) CONTINGENCIES (in thousands)
(a) The Predecessor Company in the normal course of its business expended funds
for environmental protection and remediation.
Certain of the Predecessor Company's facilities are contaminated primarily
as a result of operating practices at the sites prior to their acquisition
by the Predecessor Company. The Predecessor Company has established
procedures to routinely evaluate these sites giving consideration to the
nature and extent of the contamination. The Predecessor Company has
provided for the remediation of these sites based upon management's
judgement and prior experience. The Predecessor Company has estimated the
liability to remediate these sites to be $63,021 (December 31, 1999 --
$63,782).
As well, certain subsidiaries of the Predecessor Company have been named as
potentially responsible or liable parties under U.S. federal and state
superfund laws in connection with various sites. The Predecessor
20
<PAGE> 21
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(16) CONTINGENCIES (in thousands) (continued)
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 Predecessor
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 Predecessor Company has
accrued its estimate of its liability to remediate these sites at $22,678
(December 31, 1999 -- $22,519). If it is determined that more expensive
remediation approaches may be required in the future, the Predecessor
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>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Accrued liabilities......................................... $ 6,161 $ 6,143
Other long-term liabilities................................. 78,152 78,772
Liabilities subject to compromise........................... 1,386 1,386
------- -------
$85,699 $86,301
======= =======
</TABLE>
(b) Various class actions have been filed against the Predecessor Company,
certain of its past and present directors and officers, the underwriters of
the Predecessor Company's 1997 public offering and the Predecessor
Company's former auditors, Deloitte & Touche LLP. Each action alleges that
the Predecessor Company's financial disclosures for various time periods
between 1995 and 1997 contained material misstatements or omissions in
violation of U.S. federal securities laws (provisions of the Securities Act
of 1933 and of the Securities Exchange Act of 1934) and seeks to represent
a class of purchasers of the Predecessor Company's common shares. On June
2, 1998 the Judicial Panel on Multidistrict Litigation ordered that the
class actions be consolidated and transferred to the United States District
Court, Southern District of New York. On July 23, 1998, two pre-trial
orders of the District Court were made. Pre-Trial Order No. 1 dealt with
various administrative matters relating to the consolidation of the actions
and schedule for the plaintiffs to serve and file a consolidated amended
class action complaint and for the Predecessor Company's response.
Pre-Trial Order No. 2 appointed a lead plaintiff and lead counsel. On
November 13, 1998, the Predecessor Company filed a motion for an order
dismissing the class action on the grounds of forum non conveniens. On May
12, 1999, the Predecessor Company received notice that the United States
District Court, Southern District of New York, ruled in favour of the
Predecessor Company's motion to dismiss the U.S. plaintiffs' consolidated
and amended class action complaint on forum non conveniens grounds. The
District Court declined to assume jurisdiction over the complaint on the
grounds that Ontario provides an adequate alternative forum for litigation
of the class action plaintiff's claims, and ruled that adjudication in
Ontario would be more convenient and best serve the public interest. The
plaintiffs are appealing this decision.
A claim brought under the Ontario Class Proceedings Act was commenced on
October 26, 1998 against the Predecessor Company, the underwriters of the
Predecessor Company's 1997 public offering and the Predecessor Company's
former auditors, Deloitte & Touche LLP. The claim was brought on behalf of
persons in Canada who purchased common shares of the Predecessor Company
between November 6, 1997 and December 18, 1997 and also seeks damages on
behalf of persons in Canada who purchased common shares between May 21,
1996 and April 23, 1998. The claim contains various allegations that are
similar in nature to those made in the U.S. class action claims dismissed
on May 4, 1999.
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<PAGE> 22
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(16) CONTINGENCIES (in thousands) (continued)
On June 25, 1999, the Predecessor Company, the U.S. class action plaintiffs
and the Canadian class action plaintiffs entered into a memorandum of
understanding (the "MOU") with respect to the settlement of the U.S. and
Canadian class actions (collectively the "Security Claims"). The MOU
provided that the U.S. and Canadian class action plaintiffs receive 1.5% of
the common shares of the Reorganized Company in exchange for a release and
discharge of all claims. Additionally, the MOU provided that the Debtors
would support a joint application for attorneys' fees and reasonable
expenses of plaintiff's counsel not to exceed $575, subject to approval by
the Courts, and which would not be payable until after the plan
implementation date. The claims and causes of actions against the Debtors
described in the preceding two paragraphs are classified in the Amended
U.S. Plan as Class 8B Securities Claims. Under the Amended U.S. Plan, the
Securities Claims were discharged as of the plan implementation date.
Similar claims have been asserted against the Predecessor Company and
certain of its past and present officers and directors by the former
shareholders of the Steiner-Liff Metals group of companies (the "Liff
Actions") and the Southern-Foundry Supply group of companies (the "Chazen
Actions"). The Predecessor Company acquired these companies in October of
1997 and issued common shares in partial payment of the purchase price. The
claims allege that the Predecessor Company's financial disclosures for
various time periods between 1995 and 1997 contain material misstatements
or omissions and that these constitute a breach of certain representations
and warranties made to the former shareholders or, alternatively, a
violation of U.S. securities laws.
Under the Amended U.S. Plan, the claims in the Liff Actions and the Chazen
Actions are classified as Class 8C claims. The Amended U.S. Plan provided
that the claims against the Debtors arising from the Liff Actions and the
Chazen Actions were discharged on the plan implementation date.
(c) Upon the acquisition of Allwaste, the Predecessor Company assumed the
pre-existing indenture with respect to the Allwaste's 7 1/4% Convertible
Subordinated Debentures ("Old Debentures") which were due in 2014.
Effective December 1, 1998, the Predecessor Company suspended payments of
interest on the Old Debentures which created a default under the indenture.
Following the Predecessor Company's failure to cure the payment default
within thirty days, on April 22, 1999, First Union National Bank (the
"Indenture Trustee") invoked an acceleration clause and declared the
principal of all the Old Debentures to be immediately due and payable. On
April 27, 1999, the Indenture Trustee filed suit in the 11th Judicial
District Court of Harris County, Texas seeking the full amount due and
owing under the Old Debentures (the "Allwaste Collection Action").
The commencement of the Chapter 11 cases automatically stayed the further
prosecution of the Allwaste Collection Action. Under the Amended U.S. Plan,
claims arising out of the Old Debentures are classified as Class 7 Impaired
Unsecured Claims and received the treatment afforded such claims and were
discharged under the Amended U.S. Plan as of the plan implementation date.
(d) In June 1997, pursuant to a share purchase agreement, Republic
Environmental Systems, Inc. ("Republic") sold certain corporate entities to
RESI Acquisition (Delaware), Inc. ("RESI") for $17 million. As
consideration for the transaction, RESI paid $8 million in cash and
executed two promissory notes in favor of Republic in a combined amount of
$9 million. After the notes were executed, the parties made several
modifications to the payment schedule, allowing RESI extra time to fulfill
its obligations. However, RESI eventually defaulted and Republic thereafter
brought an action in the Superior Court of the State of Delaware against
the Predecessor Company and RESI to collect on the notes (the "U.S.
Republic Action"). In addition to the note involved in the U.S. Republic
Action, another note issued by Philip Enterprises Inc. in conjunction with
the RESI acquisition existed and was the subject of litigation in Canada
that was stayed in
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<PAGE> 23
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(16) CONTINGENCIES (in thousands) (continued)
connection with the Canadian filing (the "Canadian Republic Action"). The
Predecessor Company filed counterclaims alleging damages from the 1997
Share Purchase Agreement. On June 3, 1999, the court issued judgement
granting Republic's Motion for Final Judgement on the Pleadings as to the
notes and guaranty, and denying the Predecessor Company's motion to
dismiss. On June 4, 1999, RESI filed a petition for relief under Chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware. As a result of the CCAA and Chapter 11 filings, U.S.
Republic Action and the Canadian Republic Action were stayed. The claims of
Republic, which are classified under the Amended U.S. Plan as Class 7
Impaired Unsecured Claims, received the treatment afforded such claims, and
were discharged under the Amended U.S. Plan as of the plan implementation
date.
(e) In January 1999, Exxon Chemical Company ("Exxon") asserted a claim against
International Catalyst, Inc. ("INCAT"), an indirect wholly-owned subsidiary
of the Predecessor Company, for damages of $32.1 million arising from
certain work conducted by INCAT at Exxon's Baytown, Texas chemical plant.
Exxon alleges that INCAT was responsible for the purchase and installation
in 1996 of improper gasket materials in the internal bed piping flange
joints of the Baytown plant which caused damages to the facility and
consequential losses arising from the shutdown of the plant while repairs
were made. INCAT has conducted a preliminary review of these claims and
determined that it is not feasible to predict or determine the final
outcome of these proceedings. INCAT intends to vigorously defend the claims
and believes that it may have insurance coverage for such claims. There can
be no assurance, though, that the outcome of the claims will not have a
material adverse effect upon the financial condition or results of
operations of INCAT.
(f) In November 1998, the Predecessor Company ceased paying interest on its
$1.0 billion in outstanding secured syndicate debt, which includes accrued
but unpaid interest of $67.9 million, and stopped making payments on
certain other unsecured debt and contractual obligations ("the Unsecured
Obligations"). The Predecessor Company has reached an agreement with its
lending syndicate on the terms of a financial restructuring of the
Predecessor Company. On June 25, 1999, the Predecessor Company and
substantially all of its wholly-owned subsidiaries located in the United
States filed voluntary petitions for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. The Predecessor Company and substantially all of its
wholly-owned subsidiaries located in Canada commenced proceedings under the
Companies' Creditors Arrangement Act in Canada on the same date. Pursuant
to the Plan, syndicate debt of the Predecessor Company of $1 billion has
been converted into $250 million of senior secured debt, $100 million in
convertible secured payment in-kind debt and 91% of the common shares of
the Reorganized Company. The senior secured debt and the secured payment
in-kind debt each have a term of five years. The Plan also provided for the
conversion of certain specified impaired unsecured claims, into $60 million
of payment in-kind notes and 5% of the common shares of the Reorganized
Company as of the plan implementation date.
(g) The Predecessor Company is named as a defendant in several lawsuits which
have arisen in the ordinary course of its business. Management of the
Reorganized Company believes that none of these suits is likely to have a
material adverse effect on the Predecessor Company's business or financial
condition and therefore has made no provision in these financial statements
for the potential liability, if any.
17. SUBSEQUENT EVENTS (in thousands)
The Amended U.S. Plan and the Canadian Plan Supplement (collectively the
"Plan") became effective on April 7, 2000. Under the Plan, syndicate debt of the
Predecessor Company of $1 billion has been converted into $250 million of senior
secured debt, $100 million of secured payment in-kind debt and 91% of the common
shares of the Reorganized Company. The Plan also provided for the conversion of
certain specified impaired unsecured claims, into $60 million of unsecured
payment in-kind notes and 5% of the common shares of the
23
<PAGE> 24
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
17. SUBSEQUENT EVENTS (in thousands) (continued)
Reorganized Company as of the Plan effective date. The Plan allowed certain
holders of the unsecured claims to receive $1.50 in face amount of unsecured
convertible notes in exchange for every $1.00 in 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 will not exceed $18
million. The Predecessor Company also reached an agreement with the Canadian and
U.S. class action plaintiffs to settle all class action claims for 1.5% of the
common shares of the Reorganized Company. Other potential equity claimants
received 0.5% of the common shares of the Reorganized Company and existing
shareholders retained 2% of the common shares of the Reorganized Company.
On April 7, 2000, the Predecessor Company sold its metals recycling and
mill services businesses in the United Kingdom for proceeds of $47,684 in cash.
On May 25, 2000, the Canadian Court ordered the distribution of approximately
$44,587 of the net proceeds to the Reorganized Company which will reduce the
term debt of the Reorganized Company.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PHILIP SERVICES CORPORATION
/s/ PHILLIP WIDMAN
By:
--------------------------------------
Executive Vice President,
Chief Financial Officer
25
