<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 and for the fiscal year
ended December 31, 1999 and 1998, 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
received under the Plan. The aggregate amount of unsecured convertible notes
issued will not exceed $18 million.
2
<PAGE> 3
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 years ended December 31, 1999 and 1998 and should be read in conjunction
with the 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 following table shows, for the periods indicated, the results of
operations of the Predecessor Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31
------------------- ----------------------
1999 1998 1999 1998
-------- -------- --------- ----------
(Unaudited in millions of U.S. dollars)
<S> <C> <C> <C> <C>
Continuing operations:
Revenue........................................ $ 425.1 $ 460.0 $ 1,621.1 $ 2,409.7
Special charges................................ -- 761.3 -- 1,109.9
Loss from operations........................... (25.2) (815.3) (73.0) (1,213.7)
Interest expense............................... 0.3 23.1 52.8 76.4
Loss from operations before tax and
reorganization costs........................ (25.1) (836.0) (123.5) (1,288.5)
Reorganization costs........................... 85.8 -- 164.2 --
Net loss....................................... (99.8) (842.5) (282.1) (1,329.9)
Loss per share (basic & diluted)............... (0.76) (6.42) (2.15) (10.14)
Discontinued operations:
Net earnings (loss)............................ (5.2) (25.4) 29.4 (256.9)
Earnings (loss) per share (basic & diluted).... (0.04) (0.19) 0.22 (1.96)
</TABLE>
Revenue from continuing operations for the year ended December 31, 1999 was
$1.6 billion compared to $2.4 billion for the year ended December 31, 1998. Over
$160 million of this revenue decrease is attributable to the sale or exit of
non-core businesses. The brokerage revenue declined by $285 million in 1999
compared to 1998 due to reductions in price and volumes. For the 1999 fiscal
year, the loss from operations of $73 million included professional fees and
other restructuring costs of $23 million. In the prior year, the loss from
operations in 1998 was $1,214 million, which included special charges of $1,110
million.
Including reorganization costs of $164.2 million and accrued but unpaid
interest of approximately $50 million, the net loss from continuing operations
was $282.1 million ($2.15 per share) for the year ended December 31, 1999.
Special charges of $1.2 billion were included in the loss from continuing
operations of $1.3 billion ($10.14 per share) for the year ended December 31,
1998.
REORGANIZATION COSTS
Reorganization costs of $164.2 million were recorded during fiscal year
1999 including $118 million relating to the revaluation of assets and
liabilities to fair value, $20 million relating to professional fees, $13
million relating to employee severance and retention programs and $13 million in
additional legal claims and other costs.
SPECIAL CHARGES
The following table summarizes the special charges recorded by the
Predecessor Company in 1998 and identifies where they are recorded in the
Statement of Earnings:
<TABLE>
<S> <C>
Asset impairments and other costs recorded as special
charges................................................... $1,109.9
Costs recorded as selling, general and administrative
expense................................................... 61.0
Writedowns of investments recorded as other income and
expense................................................... 38.2
--------
$1,209.1
========
</TABLE>
4
<PAGE> 5
The special charges in 1998 reflect the effects of impairments of fixed
assets and goodwill of $1.1 billion as well as charges for financing fees and
debt restructuring costs, reduction in the carrying value of the Predecessor
Company's long-term investments, additional provisions for doubtful accounts
receivable and severance and other costs relating to the restructuring.
Estimates of future cash flows and enterprise value were used to determine the
amount of asset impairments.
5
<PAGE> 6
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents...................................... $ 48,316 $ 60,727
Accounts receivable (net of allowance for doubtful
Accounts of $23,938; December 31, 1998 -- $24,354)..... 305,441 302,204
Inventory for resale...................................... 38,939 32,633
Other current assets (Note 5)............................. 107,688 185,390
---------- ----------
500,384 580,954
Fixed assets (Note 6)....................................... 303,639 416,936
Other assets (Note 7)....................................... 57,556 100,967
---------- ----------
$ 861,579 $1,098,857
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities Not Subject to Compromise:
Current Liabilities:
Accounts payable....................................... $ 110,762 $ 86,584
Accrued liabilities (Note 8)........................... 136,256 182,707
Current maturities of long-term debt (Note 10)......... 11,917 1,083,831
---------- ----------
258,935 1,353,122
Long-term debt (Note 10).................................. 5,268 13,715
Deferred income taxes (Note 15)........................... 5,020 15,982
Other liabilities (Note 11)............................... 97,021 109,163
Liabilities Subject to Compromise (Note 9).................. 1,136,468 --
Commitments and contingencies (Notes 1, 23 and 25)
Shareholders' equity (deficit).............................. (641,133) (393,125)
---------- ----------
$ 861,579 $1,098,857
========== ==========
</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 and for the fiscal year
ended December 31, 1999 and 1998 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>
YEARS ENDED DECEMBER 31
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue..................................................... $ 1,621,101 $ 2,409,677
Operating expenses.......................................... 1,462,348 2,146,677
Special charges (Note 19)................................... -- 1,109,877
Selling, general and administrative costs................... 177,919 269,594
Depreciation and amortization............................... 53,786 97,229
----------- -----------
Loss from operations........................................ (72,952) (1,213,700)
Interest expense............................................ 52,774 76,432
Other income and expense -- net............................. (3,772) (1,648)
Cumulative effect of change in accounting principle
(Note 20)................................................. 1,543 --
----------- -----------
Loss from continuing operations before tax and
reorganization costs...................................... (123,497) (1,288,484)
Reorganization costs (Note 21).............................. 164,205 --
Income taxes................................................ (5,616) 41,443
----------- -----------
Loss from continuing operations............................. (282,086) (1,329,927)
Discontinued operations (net of tax) (Note 3)............... 29,443 (256,945)
----------- -----------
Net loss.................................................... $ (252,643) $(1,586,872)
=========== ===========
Basic and diluted earnings (loss) per share (Note 16)
Continuing operations....................................... $ (2.15) $ (10.14)
Discontinued operations..................................... 0.22 (1.96)
----------- -----------
$ (1.93) $ (12.10)
=========== ===========
Weighted average number of common shares outstanding
(000's)................................................... 131,144 131,130
=========== ===========
</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 and for the fiscal year
ended December 31, 1999 and 1998 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>
YEARS ENDED DECEMBER 31
------------------------
1999 1998
--------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss from continuing operations......................... $(282,086) $(1,329,927)
Items included in earnings not affecting cash
Depreciation and amortization............................. 53,786 73,090
Amortization of goodwill.................................. -- 24,139
Accrued but unpaid interest (Note 9a)..................... 49,540 --
Deferred income taxes..................................... -- 33,092
Writedown of investments.................................. 4,220 --
Gain on sale of assets.................................... (3,523) (16,843)
Non-cash reorganization costs............................. 112,874 --
Special charges (Note 18)................................. -- 1,209,141
--------- -----------
Cash flow from continuing operations........................ (65,189) (7,308)
Changes in non-cash working capital (Note 14)............... 56,621 (51,745)
--------- -----------
Cash used in continuing operating activities................ (8,568) (59,053)
Cash used in discontinued operating activities.............. (2,249) (2,349)
--------- -----------
Cash used in operating activities........................... (10,817) (61,402)
--------- -----------
INVESTING ACTIVITIES
Proceeds from sale of operations (Note 4)................... 23,085 104,922
Acquisitions -- including acquired cash (bank
indebtedness)............................................. -- (22,181)
Purchase of fixed assets.................................... (27,438) (56,289)
Proceeds from sale of fixed assets.......................... 16,647 25,785
Other -- net................................................ (12,613) (12,155)
--------- -----------
Cash provided by (used in) continuing investing
activities................................................ (319) 40,082
Cash provided by (used in) investing activities of
discontinued operations................................... 72,123 (21,868)
--------- -----------
Cash provided by investing activities....................... 71,804 18,214
--------- -----------
FINANCING ACTIVITIES
Proceeds from long-term debt................................ 140 202,570
Principal payments on long-term debt........................ (75,982) (103,624)
Common shares issued for cash............................... -- 566
--------- -----------
Cash provided by (used in) continuing financing
activities................................................ (75,842) 99,512
Cash provided by (used in) financing activities of
discontinued operations................................... 2,444 (22,988)
--------- -----------
Cash provided by (used in) financing activities............. (73,398) 76,524
--------- -----------
Net change in cash for the year............................. (12,411) 33,336
Cash and equivalents, beginning of year..................... 60,727 27,391
--------- -----------
Cash and equivalents, end of year........................... $ 48,316 $ 60,727
========= ===========
</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 and for the fiscal year
ended December 31, 1999 and 1998 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)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(UNAUDITED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
OTHER
RETAINED ACCUMULATED TOTAL
COMMON EARNINGS COMPREHENSIVE SHAREHOLDERS'
STOCK (DEFICIT) EARNINGS (LOSS) EQUITY (DEFICIT)
----------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997......... $ 1,348,066 $ (86,274) $(44,851) $1,216,941
Common shares issued............... 566 -- -- 566
Tax benefit on stock option
exercise......................... 2,850 -- -- 2,850
Comprehensive loss:
Net loss......................... -- (1,586,872) --
Foreign currency translation
adjustments................... -- -- (26,610)
Total comprehensive loss........... (1,613,482)
----------- ----------- -------- ----------
Balance, December 31, 1998......... 1,351,482 (1,673,146) (71,461) (393,125)
Comprehensive loss:
Net loss......................... -- (252,643) --
Foreign currency translation
adjustments................... -- -- 4,635
Total comprehensive loss........... (248,008)
----------- ----------- -------- ----------
Balance, December 31, 1999......... $ 1,351,482 $(1,925,789) $(66,826) $ (641,133)
=========== =========== ======== ==========
</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 and for the fiscal year
ended December 31, 1999 and 1998 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.
9
<PAGE> 10
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 and for the fiscal year
ended December 31, 1999 and 1998 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.
These 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,
by-products recovery and industrial outsourcing services to major industry
sectors throughout North America and Europe.
The consolidated financial statements have been prepared in U.S. 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 of the
U.S. Court and Canadian Court (collectively the "Courts"). Under these
proceedings, substantially all
10
<PAGE> 11
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(1) BASIS OF PRESENTATION (continued)
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 also 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 of December 31, 1999, the Predecessor
Company had drawn $77.5 million of these asset sale proceeds and except for up
to $15 million in letters of credit, no amounts could be drawn on the DIP
facility until all of the asset proceeds were utilized.
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
11
<PAGE> 12
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(1) BASIS OF PRESENTATION (continued)
was confirmed in the U.S. Court. On March 8, 2000, the Canadian Plan Supplement
was amended to permit the sale of the UK Metals business and certain tax
restructuring issues. On March 20, 2000, a similar hearing was held in 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 were to
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 owned at least 25% of the syndicated
debt.
REFLECTING THESE EVENTS IN THE FINANCIAL STATEMENTS
The Predecessor Company's financial statements as of December 31, 1999 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%.
12
<PAGE> 13
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION
Revenue from industrial services is recorded as the services are performed,
using the percentage of completion basis for fixed price contracts and as the
related service is provided for time and material contracts. Revenue from
by-product recovery operations is recognized upon receipt and acceptance of
materials for processing since the 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.
13
<PAGE> 14
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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
December 31, 1999 and 1998. 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.
DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS
Costs of interest rate swaps and collars when designated as hedges are
accrued as an adjustment to interest expense. Derivative commodity futures and
collars are designated as hedges when the Predecessor Company can establish a
high degree of inverse correlation between changes in the market value of
inventory being hedged and the market value of the derivative instrument. Such
instruments are marked to market with unrealized gains and losses deferred and
reflected in the balance sheet as a basis adjustment of inventory. Upon
settlement or termination, gains and losses on these hedge instruments are
recorded in the statement of earnings as operating expenses. Premiums paid for
purchased commodity put options are amortized over the life of the options with
any gains on settlement recorded as an adjustment to the basis of inventory.
Changes in the market value of written commodity call options are accrued as
operating expenses. Derivative instruments and contracts not qualifying for
hedge accounting are marked to market and recorded in the statement of earnings.
14
<PAGE> 15
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
(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 $74,682, and $492,413 for the fiscal years
ended December 31, 1999 and 1998 respectively. Net earnings from discontinued
operations in the Consolidated Statement of Earnings is presented net of
applicable income tax provision of $674 and $46,354 for the fiscal years ended
December 31, 1999 and 1998 respectively.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1999 1998
--------- -----------
<S> <C> <C>
Gain on sale of Utilities Management operations net of
income taxes of nil....................................... $39,115 $ --
Loss from discontinued operations, net of tax............... (5,947) (100,292)
Loss on sale of Non-Ferrous operations, net of income taxes
of $3,757................................................. -- (30,518)
Loss on closure of remainder of Non-Ferrous and Copper
operations, net of tax.................................... (3,725) (126,135)
------- ---------
$29,443 $(256,945)
======= =========
</TABLE>
15
<PAGE> 16
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) ACQUISITIONS AND DIVESTITURES (in thousands)
In 1999, no businesses were acquired. During 1998, the Predecessor Company
acquired six businesses, five of which were acquired by Philip Utilities
Management Corporation. In 1997, the Predecessor Company acquired over 30
businesses, including Allwaste and Luria Brothers ("Luria"). Allwaste, an
integrated provider of industrial and environmental services based in Houston,
Texas was acquired on July 31, 1997 for a total consideration of $443.8 million,
paid for by the issuance of approximately 23 million common shares. Luria, based
in Cleveland, Ohio was acquired on October 10, 1997 for total cash consideration
of $175.3 million. All business combinations have been accounted for using the
purchase method of accounting and are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ----------
<S> <C> <C> <C>
PURCHASE CONSIDERATION
Cash...................................................... $ -- $18,735 $ 560,489
Company's common shares................................... -- -- 602,632
Deferred payments and long-term debt...................... -- 189 22,828
Acquisition costs and accruals............................ -- 1,118 83,505
------- ------- ----------
$ -- $20,042 $1,269,454
======= ======= ==========
FAIR VALUE OF NET ASSETS ACQUIRED
Cash (bank indebtedness).................................. $ -- $(6,553) $ 1,644
Long-term debt............................................ -- (12,943) (228,365)
Assets, excluding cash & intangibles...................... -- 39,476 878,460
Liabilities............................................... -- (31,761) (350,001)
Goodwill.................................................. -- 31,823 940,534
Other intangibles......................................... -- -- 27,182
------- ------- ----------
$ -- $20,042 $1,269,454
======= ======= ==========
</TABLE>
In June 1999, the Predecessor Company sold its Birmingham, Alabama based
civil construction and maintenance business for $23,085 resulting in a gain on
sale of $688. The business, whose results are included in the Industrial
Services Group, generated annual revenue of approx. $70,000 and income from
operations of approx. $4,500 in 1998.
During 1998, the Predecessor Company divested of two of its Metals Services
businesses. On July 7, 1998, the Predecessor Company's Houston, Texas based
steel distribution business was sold for cash proceeds of $95,000, resulting in
a gain on sale of approximately $17,000 and on May 21, 1998, the Predecessor
Company sold certain of its spiral weld pipe operations for cash proceeds of
$9,922, resulting in a loss on sale of $392.
16
<PAGE> 17
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) OTHER CURRENT ASSETS (in thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Restricted cash(a).......................................... $ 48,028 $ 28,423
Costs in excess of billings................................. 12,568 17,209
Consumable supplies......................................... 15,890 18,128
Non-trade receivables....................................... 13,676 9,911
Other....................................................... 17,526 27,201
Net current assets from discontinued operations(b).......... -- 84,518
-------- --------
$107,688 $185,390
======== ========
</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.
(b) Net current assets from discontinued operations for December 31, 1998
include proceeds receivable of approximately $69,500 from the sale of the
aluminum operations (Note 3).
(6) FIXED ASSETS (in thousands)
<TABLE>
<CAPTION>
1999 1998
---------------------------------- ----------------------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
COST DEPRECIATION VALUE COST DEPRECIATION VALUE
-------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Land............................ $ 53,317 $ -- $ 53,317 $ 60,809 $ -- $ 60,809
Landfill sites.................. 15,995 5,543 10,452 24,696 4,958 19,738
Buildings....................... 99,723 24,915 74,808 123,437 21,554 101,883
Equipment....................... 334,243 172,226 162,017 355,358 133,497 221,861
Assets under development........ 3,045 -- 3,045 12,645 -- 12,645
-------- -------- -------- -------- -------- --------
$506,323 $202,684 $303,639 $576,945 $160,009 $416,936
======== ======== ======== ======== ======== ========
</TABLE>
(7) OTHER ASSETS (in thousands)
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Restricted investments(a)................................... $33,412 $ 31,016
Deferred financing costs.................................... -- 836
Investments................................................. 12,262 18,810
Other....................................................... 11,882 37,135
Net long-term assets of discontinued operations............. -- 13,170
------- --------
$57,556 $100,967
======= ========
</TABLE>
(a) Restricted investments are controlled by the Predecessor Company's
wholly-owned insurance subsidiary, and are pledged as security for
insurance liabilities.
17
<PAGE> 18
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) ACCRUALS (in thousands)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued employee compensation and benefit costs............. $ 26,745 $ 40,537
Insurance claims outstanding................................ 34,278 32,678
Accrued purchases........................................... 16,523 20,062
Income taxes payable........................................ -- 8,058
Accrued closure costs....................................... 13,956 17,520
Billings in excess of cost.................................. 10,304 11,564
Accrued waste material disposal costs....................... 4,205 6,518
Accrued environmental costs................................. 6,143 7,051
Accrued other............................................... 24,102 38,719
-------- --------
$136,256 $182,707
======== ========
</TABLE>
(9) LIABILITIES SUBJECT TO COMPROMISE
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Bank term loan(a)........................................... $1,004,086 $ --
Convertible subordinated debentures(b)...................... 27,609 --
Other long-term debt(c)..................................... 25,910 --
Accrued liabilities......................................... 26,317 --
Other long-term liabilities................................. 28,068 --
Liabilities of discontinued operations...................... 24,478 --
---------- ----------
$1,136,468 $ --
========== ==========
</TABLE>
(a) In August 1997, the Predecessor Company signed a $1.5 billion revolving
credit agreement which was amended in October 1997, February 1998, June
1998, October 1998 and December 1998 (the "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. As the Predecessor Company was not in compliance
with the terms of its Credit Facility, the debt outstanding under the
Credit Facility was classified as a current liability on the Predecessor
Company's Consolidated Balance Sheet at December 31, 1998.
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
18
<PAGE> 19
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) LIABILITIES SUBJECT TO COMPROMISE (continued)
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
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 interest expense that would have accrued since the filing on the
outstanding Credit Facility for the fiscal year ended December 31, 1999 was
$48.0 million.
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 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. The interest expense that would
have accrued since the filing on the outstanding debenture for the fiscal
year ended December 31, 1999 was $1.0 million. The amount of the debentures
outstanding was classified as a current liability on the Consolidated
Balance Sheet at December 31, 1998.
(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. At December 31, 1998, $11,000
of these notes were in default and therefore were classified as a current
liability on the Predecessor Company's Consolidated Balance Sheet.
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.
19
<PAGE> 20
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(10) LONG-TERM DEBT (in thousands)
<TABLE>
<CAPTION>
1999 1998
------- ----------
<S> <C> <C>
Bank term loan (Note 9a).................................... $ -- $1,025,253
Convertible subordinated debentures (Note 9b)............... -- 25,609
Secured loans bearing interest at a weighted average fixed
rate of 5.6% (1998 -- 6.5%) maturing at various dates up
to 2020(a)................................................ 9,712 12,431
Secured loans bearing interest at prime plus a weighted
average floating rate of 0.5% (1998 -- 0.8%) maturing at
various dates up to 2001.................................. 1,279 3,100
Loans unsecured, bearing interest at a weighted average
fixed rate of 7.1% (Note 9c).............................. -- 17,136
Obligations under capital leases on equipment bearing
interest at rates varying from 6% to 12% maturing at
various dates to 2004..................................... 6,194 12,800
Other....................................................... -- 1,217
------- ----------
17,185 1,097,546
Less current maturities of long-term debt................... 11,917 1,083,831
------- ----------
$ 5,268 $ 13,715
======= ==========
</TABLE>
(a) Included in the fixed rate secured loans are industrial development bonds
totaling $7,700 which were in default as at December 31, 1998, and 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.
(11) OTHER LIABILITIES (in thousands)
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Accrued environmental costs................................. $78,772 $ 76,493
Deferred payments(a)........................................ 902 7,439
Other....................................................... 17,347 25,231
------- --------
$97,021 $109,163
======= ========
</TABLE>
(a) Deferred payments relate to acquisitions (see Note 4), whereby the former
owners of the businesses have agreed to accept part of their payment over
future periods of time. All such amounts are non-interest bearing and are
unsecured.
(12) DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS (in thousands except
rate/strike price and term)
The Predecessor Company utilized interest rate swaps and collars to fix the
interest rate on a portion of its floating rate debt and thereby manage the
interest rate risk associated therewith. The credit risk of counterparty
fulfillment on all such contracts was mitigated by dealing only with credit
worthy major public financial institutions.
20
<PAGE> 21
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(12) DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS (in thousands except
rate/strike price and term) (continued)
The following table summarizes the outstanding derivative instruments at
December 31:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- ----------------------------------------
CONTRACT/ TERM RATE/ CONTRACT/ TERM RATE/
INSTRUMENTS NOTIONAL AMOUNT (YEARS) STRIKE PRICE NOTIONAL AMOUNT (YEARS) STRIKE PRICE
----------- --------------- ------- ------------ --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate swaps/collars..... $ -- -- -- $ 130,000 0.4 6.95%
Copper futures purchases........ 3,250 lbs. 0.2 $0.81/lb. 11,575 lbs. 0.3 $0.73/lb.
</TABLE>
The Predecessor Company has forward physical copper sales commitments to
customers totalling 7,157 lbs. and 7,500 lbs. at December 31, 1999 and 1998,
respectively and copper futures purchase contracts with major public broker
dealers which were, collectively designated as hedges for its copper processing
operations and inventory.
(13) SHAREHOLDERS' EQUITY (DEFICIT) (in thousands except number of
shares/options and per share amounts)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
SHARE CAPITAL CONSISTS OF:
AUTHORIZED
Unlimited number of common shares
ISSUED
Common shares and equivalents
Number...................................................... 131,144,013 131,144,013
Dollars..................................................... $ 1,351,482 $ 1,351,482
</TABLE>
The issued and outstanding share capital of the Predecessor Company is
comprised of the following:
<TABLE>
<CAPTION>
COMMON SHARES
-------------------------
NUMBER AMOUNT
----------- ----------
<S> <C> <C>
Balance -- December 31, 1997................................ 131,058,393 1,348,066
Shares options exercised for cash........................... 83,724 472
Other....................................................... 1,896 94
Tax benefit on stock option exercise........................ -- 2,850
----------- ----------
Balance -- December 31, 1998 and 1999....................... 131,144,013 $1,351,482
=========== ==========
</TABLE>
21
<PAGE> 22
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(13) SHAREHOLDERS' EQUITY (DEFICIT) (in thousands except number of
shares/options and per share amounts) (continued)
STOCK OPTIONS
Common share options issued and outstanding are as follows:
<TABLE>
<CAPTION>
NUMBER $/SHARE
--------- --------------------
<S> <C> <C>
Employee stock option plans(a)
Year of grant
1995........................................................ 575,104 Cdn $9.88
1996........................................................ 968,300 Cdn $8.50 to 11.90
1997........................................................ 3,576,000 Cdn $18.10 to 22.75
1997 Serv-Tech acquisition.................................. 246,981 $7.44 to 22.64
1997 Allwaste acquisition................................... 1,283,961 $6.96 to 10.64
1998........................................................ 2,277,500 Cdn $3.95 to 22.85
Issued in conjunction with the acquisition of Philip
Environmental Corporation(b).............................. 776,386 Cdn $7.05 to 8.00
---------
Total outstanding December 31,1999.......................... 9,704,232
=========
</TABLE>
On the effective date of the reorganization, all options were cancelled.
(a) The Predecessor Company has allotted and reserved 10,257,149 common shares
under its 1991 and 1997 Employee Stock Option Plans, the Serv-Tech Long
Term Incentive Plan, the Serv-Tech Amended and Restated 1989 Incentive
Stock Option Plan and the Allwaste Amended and Restated 1989 Replacement
Non-Qualified Stock Option Plan and any supplements thereto. Under the
stock option plans, options may be granted to purchase common shares of the
Predecessor Company at the then current market price. All options currently
expire five to ten years from the date of grant. All the options
outstanding were issued at the then current market price.
(b) These options expire on November 26, 2000.
SFAS No. 123 "Accounting for Stock Based Compensation", issued in October
1995, defines a fair value based method of accounting for employee stock
options. Under this fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
exercise period. However, SFAS No. 123 allows an entity to continue to measure
compensation cost in accordance with Accounting Principle Board Statement No. 25
("APB 25"). The Predecessor Company has elected to measure compensation costs
related to stock options in accordance with APB 25 and recognizes no
compensation expense for stock options granted. Accordingly, the Predecessor
Company has adopted the disclosure only provisions of SFAS No. 123.
If compensation costs were measured using the fair value of the stock
options on the date of grant, during 1999 and 1998, in accordance with SFAS No.
123 the Predecessor Company's net loss would be as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -------------------------
AS REPORTED PROFORMA AS REPORTED PROFORMA
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss.................................... $(252,643) $(261,144) $(1,586,872) $(1,596,472)
Basic and diluted loss per share............ $ (1.93) $ (1.99) $ (12.10) $ (12.17)
</TABLE>
22
<PAGE> 23
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(13) SHAREHOLDERS' EQUITY (DEFICIT) (in thousands except number of
shares/options and per share amounts) (continued)
The weighted average fair value of options granted in 1999 and 1998 was nil
and $1.55 respectively. The fair value of each option was determined using the
Black-Scholes option valuation model with the following assumptions for 1998:
(i) risk free interest rate of 5.44 (ii) expected volatility of 94.94, (iii)
expected option life ranging from 5 to 10 years and (iv) no annualized dividend
yield.
(14) CHANGES IN NON-CASH WORKING CAPITAL (in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1999 1998
--------- ----------
<S> <C> <C>
Accounts receivable......................................... $(19,523) $ 97,579
Inventory for resale........................................ (6,223) 31,338
Other....................................................... 80,991 (58,883)
Accounts payable and accrued liabilities.................... 10,090 (130,690)
Income taxes................................................ (8,714) 8,911
-------- ---------
$ 56,621 $ (51,745)
======== =========
</TABLE>
STATEMENTS OF CASH FLOWS
The supplemental cash flow disclosures and non-cash transactions for the
years ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Interest paid............................................... $2,464 $63,344
Income taxes paid........................................... 7,687 3,920
NON CASH TRANSACTIONS:
Capital leases and debt obligations for the purchase of
property and equipment.................................... -- 2,764
Debt and liabilities incurred or assumed in acquisitions.... -- 189
Notes receivable for the sale of equipment.................. 1,875 --
</TABLE>
(15) INCOME TAXES (in thousands)
The Predecessor Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, the Predecessor Company
provides deferred income taxes for the tax effects of temporary differences
between the financial reporting and income tax bases of the Predecessor
Company's assets and liabilities.
The Predecessor Company is organized under the laws of Ontario, Canada and
it is regarded as a Canadian domestic corporation for the purposes of this note.
23
<PAGE> 24
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(15) INCOME TAXES (in thousands) (continued)
Federal, provincial and foreign income tax provisions (benefits) are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Canadian -- federal and provincial
Current................................................... $ 667 $ --
Deferred.................................................. -- 14,769
------- -------
667 14,769
------- -------
Foreign
Current................................................... (6,283) 8,211
Deferred.................................................. -- 18,463
------- -------
(6,283) 26,674
------- -------
$(5,616) $41,443
======= =======
</TABLE>
The Predecessor Company's income tax expense (benefit) is comprised of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Income tax expense (benefit) based on Canadian Federal and
Provincial effective income tax rates..................... $(128,373) $(575,112)
(Increase) decrease in income tax benefit resulting from:
Lower income tax rates in the USA and other
jurisdictions.......................................... (2,066) 68,809
Manufacturing and processing allowances................... 6,679 2,489
Non-deductible expenses for income tax purposes,
principally goodwill and amortization.................. 2,618 13,597
Other non-deductible expenses relating to special charges... 15,685 329,598
Valuation allowance......................................... 104,924 202,408
Other....................................................... (5,083) (346)
--------- ---------
Income tax expense (benefit)................................ $ (5,616) $ 41,443
========= =========
</TABLE>
The net deferred tax (asset) liability consists of the following temporary
differences:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1999 1998
---------- ---------
<S> <C> <C>
Difference in fixed assets and goodwill basis............... $ (41,052) $(27,008)
Net operating loss carryforwards............................ (142,785) (96,471)
Accruals not yet deductible................................. (98,983) (62,594)
Other....................................................... (19,492) (353)
Valuation allowance......................................... 307,332 202,408
--------- --------
Net deferred tax liability.................................. $ 5,020 $ 15,982
========= ========
</TABLE>
The net operating loss carryforwards expire between the years 2001 and
2012. 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
24
<PAGE> 25
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(15) INCOME TAXES (in thousands) (continued)
be realized. Projected future income tax planning strategies and the expected
reversal of deferred tax liabilities are considered in making this assessment.
In 1999, based on the level of historical taxable income and projections for
future taxable income over the periods in which the net operating losses are
deductible, it was determined that it is more likely than not that the
Predecessor Company will not realize the benefits of deferred tax assets. The
Predecessor Company has recorded a valuation allowance of $104,924 for the year
ended December 31, 1999.
The deferred income tax expense (benefit) results principally from the use
of different revenue and expense recognition methods for tax and financial
accounting purposes, the deferral of loss carryforwards for tax purposes and the
recording of a valuation allowance relating to deferred tax assets. The sources
of these temporary differences and related tax effects are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Depreciation and amortization............................... $ (33,206) $(108,011)
Accruals and reserves not deductible until paid............. (18,219) (21,548)
Deferred revenue............................................ -- (627)
Losses carried forward...................................... (46,314) (39,986)
Others, net................................................. (7,185) 996
Valuation allowance......................................... 104,924 202,408
--------- ---------
Total deferred income tax expense (benefit)................. $ -- $ 33,232
========= =========
</TABLE>
(16) COMPUTATION OF EARNINGS PER SHARE (in thousands)
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Net loss for the period -- basic and diluted................ $(252,643) $(1,586,872)
========= ===========
Number of common shares outstanding......................... 131,144 131,144
Effect of using weighted average number of common shares
outstanding............................................... -- (14)
--------- -----------
Basic and diluted weighted average number of commons shares
outstanding............................................... 131,144 131,130
========= ===========
</TABLE>
(17) INTEREST CAPITALIZATION (in thousands)
During the years ended December 31, 1999 and 1998, the Predecessor Company
included nil and $384, respectively of financing costs as part of the cost of
assets under development.
(18) RELATED PARTIES (in thousands)
(a) The following transactions were recorded with the directors and officers of
the Predecessor Company:
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Repayments from (to) directors.............................. $ 53 $(1,400)
------ -------
Services acquired from companies controlled by officers and
directors................................................. $2,124 $ 3,724
------ -------
</TABLE>
(b) An amount due from an officer and a director at December 31, 1999 and 1998
of $428 and $481 respectively has been included in other current assets.
The loan is unsecured, non-interest bearing and payable on demand.
25
<PAGE> 26
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(19) SPECIAL CHARGES (in thousands)
The following table summarizes the special charges recorded by the
Predecessor Company in 1998 and identifies where they are disclosed in the
Consolidated Statements of Earnings:
<TABLE>
<S> <C>
Asset impairments and other costs recorded as special
charges(a)................................................ $1,109,877
Costs recorded as selling, general and administrative
expenses(b)............................................... 61,014
Writedowns of investments recorded as other income and
expenses(c)............................................... 38,250
----------
Pre-tax..................................................... $1,209,141
----------
After tax................................................... $1,209,141
==========
</TABLE>
(a) For the year ended December 31, 1998, the Predecessor Company recorded a
charge of $1,109,877 reflecting the effects of (i) decisions made with
respect to the potential disposition of certain operations, (ii)
impairments of fixed assets and related goodwill resulting both from
decisions to exit various business locations or activities and dispose of
the related assets, and (iii) assessments of the recoverability of fixed
assets and the related goodwill of business units in continuing use as a
result of the significant deterioration in metal markets and business
operations of the Predecessor Company during 1998.
All businesses assessed for asset impairment were acquired in purchase
business combinations and, accordingly, the goodwill that arose in the
transactions was included in the tests for recoverability. Assets to be
disposed of were valued at their estimated net realizable value while the
value of the assets of the business units to be continued were assessed at
fair value principally using discounted cash flow methods.
The special charges related to asset impairments and other costs are
comprised of the following items:
<TABLE>
<S> <C>
Business units, locations or activities to be exited:
Goodwill written off...................................... $ 40,000
Fixed assets written down to estimated net realizable
value of $6,500........................................ 18,863
Future lease and other exiting costs...................... 24,254
Business units to be continued:
Goodwill written off...................................... 951,660
Fixed assets written down to estimated net realizable
value of $99,816....................................... 52,360
Other intangibles impairment.............................. 22,740
----------
$1,109,877
==========
</TABLE>
(b) Included in selling, general and administrative costs are costs of $28,000
relating to charges for financing fees and debt restructuring costs.
Deferred financing costs which were previously amortized over the life of
the credit agreement were written off as the existing credit agreement will
be replaced. The Predecessor Company's financial position, its planned
divestitures, litigation with debtors, unexpected financial difficulties of
certain customers and a general deterioration in customer market conditions
necessitated the recording of an additional provision for doubtful accounts
of $25,000. The remainder of the charges recorded in selling, general and
administrative costs related to severance payments and other costs relating
to ongoing cost reduction measures and restructuring.
(c) The Predecessor Company's 24.2% investment in Innovative Valve Technologies
Inc. ("Invatec"), is accounted for using the equity method of accounting.
Invatec is a publicly traded company which provides comprehensive
maintenance repair, replacement and value-added distribution services of
industrial valves and process system components. The reduction in carrying
value of $25,000 recognizes a potentially long-term impairment in value
which is reflected by the market performance of Invatec's shares.
26
<PAGE> 27
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(19) SPECIAL CHARGES (in thousands) (continued)
The Predecessor Company's investment in Strategic Holdings Inc., which was
accounted for at cost, was divested in the fourth quarter of 1998 for less
than its book value. Accordingly, a writedown of the investment of $13,250
was recorded in the three months ended September 30, 1998 as part of Other
income and expense-net.
(20) 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 has changed its acounting policy for
contracts where it brokers material between two parties. The revenue and
operating expenses are now 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 to the 1998
fiscal year. Revenues and operating expenses have been increased by $498 million
and $213 million in 1998 and 1999, respectively.
(21) REORGANIZATION COSTS (in thousands)
The expense 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>
1999
--------
<S> <C>
Assets & liabilities adjusted to net realizable value....... $118,137
Professional fees........................................... 20,127
Employee severance and retention costs...................... 12,563
Provision for litigation claims............................. 6,360
Provision for future lease rejections....................... 6,164
Other....................................................... 854
--------
$164,205
========
</TABLE>
(22) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of long-term debt is significantly more than fair value
as evidenced by the anticipated financial restructuring of the Predecessor
Company (Note 1).
27
<PAGE> 28
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(23) COMMITMENTS (in thousands)
Future rental payments required under operating leases for premises and
equipment are as follows:
<TABLE>
<S> <C>
2000........................................................ $23,974
2001........................................................ 18,843
2002........................................................ 15,957
2003........................................................ 11,747
2004 and thereafter......................................... 18,046
</TABLE>
Letters of credit issued amounted to $88,235 as at December 31, 1999 (1998
-- $95,179). The Predecessor Company guaranteed a loan of approximately $2,000
for a minority investee.
(24) SEGMENTED INFORMATION (in thousands)
The Predecessor Company had two distinct business operations, Metals
Services and Industrial Services. The Industrial Services operations had two
business segments, By-Products Recovery and Industrial Outsourcing Services.
By-Products recovery included solvent distillation, engineered fuel blending,
paint overspray recovery, organic and inorganic processing and polyurethane
recycling. Industrial Outsourcing Services included cleaning and maintenance,
waste collection and transportation, decommissioning and remediation, analytical
services, emergency response services, container services and tank cleaning,
turnaround and outage services, mechanical contracting and refractory services.
The Metals Services operations had two business segments, Ferrous Services and
Industrial Metals Services ("IMS"). Ferrous services included the collection and
processing of ferrous scrap materials for shipment to steel mills as well as
significant brokerage services for scrap materials and primary metals. The IMS
group provided mill services and engineering and consulting services.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------
INDUSTRIAL CORPORATE
BY-PRODUCTS OUTSOURCING FERROUS AND
RECOVERY SERVICES SERVICES IMS ELIMINATIONS TOTAL
----------- ----------- -------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue........................ $148,695 $786,222 $665,938 $20,246 $ -- $1,621,101
Income (loss) from
operations................... (2,994) (34,302) 11,062 (6,978) (39,740) (72,952)
Total assets................... 93,217 323,225 281,652 11,866 151,619 861,579
Depreciation and
Amortization................. 7,723 28,814 14,116 387 2,746 53,786
Capital expenditures........... 4,100 17,950 6,127 1,001 135 29,313
Equity investments............. -- 2,728 5,348 -- -- 8,076
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------
INDUSTRIAL CORPORATE
BY-PRODUCTS OUTSOURCING FERROUS AND
RECOVERY SERVICES SERVICES IMS ELIMINATIONS TOTAL
----------- ----------- ---------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue...................... $175,644 $ 976,113 $1,216,787 $41,133 $ -- $2,409,677
Loss from operations......... (59,505) (442,199) (498,405) (16,894) (196,697) (1,213,700)
Income (loss) from operations
excluding special charges.. (2,426) 21,933 8,151 (10,776) (59,691) (42,809)
Total assets................. 168,659 1,170,583 279,685 15,043 (535,113) 1,098,857
Depreciation and
Amortization............... 8,737 47,328 31,759 1,133 8,272 97,229
Capital expenditures......... 5,020 23,306 25,620 3,200 1,907 59,053
Equity investments........... -- 7,766 3,776 -- -- 11,542
</TABLE>
28
<PAGE> 29
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(24) SEGMENTED INFORMATION (in thousands) (continued)
The geographical segmentation of the Predecessor Company's business is as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Canada...................................... $ 212,067 $ 74,936 $ 290,854 $144,301
United States............................... 1,308,159 219,471 2,008,391 281,024
Other....................................... 100,875 60,471 110,432 64,713
---------- -------- ---------- --------
$1,621,101 $354,878 $2,409,677 $490,038
========== ======== ========== ========
</TABLE>
(25) 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 $63,782 (December 31, 1998 --
$66,097).
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 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 $22,519 (December 31,
1998 -- $20,827). 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>
1999 1998
------- -------
<S> <C> <C>
Accrued liabilities......................................... $ 6,143 $ 7,051
Other long-term liabilities................................. 78,772 76,493
Liabilities subject to compromise........................... 1,386 --
Net current assets from discontinued operations............. -- 1,400
Net long-term assets of discontinued operations............. -- 1,980
------- -------
$86,301 $86,924
======= =======
</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
29
<PAGE> 30
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(25) CONTINGENCIES (in thousands) (continued)
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 a
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.
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.
30
<PAGE> 31
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(25) CONTINGENCIES (in thousands) (continued)
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 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
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<PAGE> 32
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(25) CONTINGENCIES (in thousands) (continued)
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 of
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.
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<PAGE> 33
PHILIP SERVICES CORP.
(PREDECESSOR COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(26) UNAUDITED QUARTERLY FINANCIAL DATA (in thousands except per share amounts)
The table below sets forth consolidated operating results by fiscal quarter
for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ -------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............................. $415,544 $397,012 $383,413 $ 425,132 $727,704 $690,934 $ 531,024 $ 460,015
Operating expenses................... 362,587 352,941 350,287 396,533 635,846 603,112 460,380 447,339
Special charges...................... -- -- -- -- -- -- 356,633 753,244
Selling, general and
administrative..................... 49,669 50,408 36,167 41,675 48,542 57,896 110,014 53,142
Depreciation and amortization........ 14,717 13,688 13,259 12,122 24,979 24,799 25,886 21,565
-------- -------- -------- --------- -------- -------- --------- ---------
Income (loss) from operations........ (11,429) (20,025) (16,300) (25,198) 18,337 5,127 (421,889) (815,275)
Interest expense..................... 26,524 25,375 591 284 14,866 18,156 20,275 23,135
Other income and expense -- net...... (742) (686) (1,981) (363) (15,964) (2,501) 19,191 (2,374)
Cumulative effect of change in
accounting principle............... 1,543 -- -- -- -- -- -- --
-------- -------- -------- --------- -------- -------- --------- ---------
Income (loss) from continuing
operations before tax and
reorganization costs............... (38,754) (44,714) (14,910) (25,119) 19,435 (10,528) (461,355) (836,036)
Reorganization costs................. -- 14,324 64,032 85,849 -- -- -- --
Income taxes......................... 1,700 2,650 1,237 (11,203) 5,271 (7,488) 37,224 6,436
-------- -------- -------- --------- -------- -------- --------- ---------
Income (loss) from continuing
operations......................... (40,454) (61,688) (80,179) (99,765) 14,164 (3,040) (498,579) (842,472)
Discontinued operations.............. (1,443) 39,175 (3,064) (5,225) (14,729) (69,973) (146,820) (25,423)
-------- -------- -------- --------- -------- -------- --------- ---------
Net loss............................. $(41,897) $(22,513) $(83,243) $(104,990) $ (565) $(73,013) $(645,399) $(867,895)
======== ======== ======== ========= ======== ======== ========= =========
Basic and diluted earnings per share
Continuing operations.............. $ (0.31) $ (0.47) $ (0.61) $ (0.76) $ 0.11 $ (0.02) $ (3.80) $ (6.42)
Discontinued Operations............ (0.01) 0.30 (0.02) (0.04) (0.11) (0.54) (1.12) (0.19)
-------- -------- -------- --------- -------- -------- --------- ---------
$ (0.32) $ (0.17) $ (0.63) $ (0.80) -- $ (0.56) $ (4.92) $ (6.62)
======== ======== ======== ========= ======== ======== ========= =========
</TABLE>
(27) 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 convertible 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 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
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.
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<PAGE> 34
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
34
