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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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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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ITEM 5: OTHER EVENTS
This Form 8-K contains the fresh start audited balance sheet of Philip
Services Corporation (the "Company"). The Company came into existence in
conjunction with the financial restructuring of Philip Services Corp., an
Ontario corporation (the "Predecessor Company").
On June 25, 1999, the Predecessor Company (Commission File No. 0-20854) 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 in Canada in the Ontario Superior Court of Justice (the
"Canadian Court") on the same date.
On July 12, 1999, the U.S. Debtors filed a Joint Plan of Reorganization
(the "U.S. Plan") with the U.S. Court and on July 15, 1999, the Canadian Debtors
filed a Plan of Compromise and Arrangement (the "Canadian Plan") with the
Canadian Court. In August 1999, a number of motions were brought before the
Canadian Court challenging the fairness of the Canadian Plan. As a result the
Predecessor Company filed an amended plan in the U.S. Court on September 21,
1999 (the "Amended U.S. Plan") and an amended plan in the Canadian Court on
September 24, 1999 (the "Amended Canadian Plan"). On November 2, 1999, the
Predecessor Company filed a Supplement to the Amended Canadian Plan (the
"Canadian Plan Supplement"). The Canadian Plan Supplement amended and restated
the Amended Canadian Plan and provided that substantially all of the assets of
the Canadian debtors be transferred to new companies that, on the implementation
of the Amended U.S. Plan became wholly-owned subsidiaries of the Company. All
the shares held by the Predecessor Company in the Company were cancelled under
the Amended U.S. Plan. On November 5, 1999, the Predecessor Company's lenders
voted to approve the Canadian Plan Supplement. On November 26, 1999 a hearing
was held in the Canadian Court at which the Canadian Plan Supplement was
sanctioned. On November 30, 1999 the Amended U.S. Plan was confirmed in the U.S.
Court. On March 8, 2000, the Canadian Plan Supplement was amended to permit the
sale of the UK Metals business and certain tax restructuring issues. On March
20, 2000, a similar amendment was made by the U.S. Court with respect to the
Amended U.S. Plan. The Amended U.S. Plan and the Canadian Plan Supplement
(collectively the "Plan") became effective on April 7, 2000. Under the Plan, the
Company emerged from bankruptcy protection as a new public entity.
Under the Plan, syndicate debt of the Predecessor Company of $1 billion has
been converted into $250 million of senior secured debt, $100 million of
convertible secured payment in-kind debt and 91% of the common shares of the
Company. The secured payment in-kind debt is convertible into 25% of the common
shares of the Company on a fully diluted basis as of the Plan effective date.
The Plan also provided for the conversion of certain specified impaired
unsecured claims, into $60 million of unsecured payment in-kind notes and 5% of
the common shares of the Company as of the Plan effective date. The Plan allowed
certain holders of the unsecured claims to receive $1.50 in face amount of
unsecured convertible notes in exchange for every $1.00 in unsecured payment
in-kind notes that such holder would have received under the Plan. The aggregate
amount of unsecured convertible notes issued was $16 million. The Company also
issued 1.5% of its common shares to Canadian and U.S. class action plaintiffs to
settle all class action claims. Other potential equity claimants received 0.5%
of the common shares of the Company and the shareholders of the Predecessor
Company received 2% of the common shares of the Company.
2
<PAGE> 3
FRESH START REPORTING
The Company has adopted fresh start reporting in accordance with the
AICPA's Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." For financial reporting purposes, the
effective date of the Plan was considered to be March 31, 2000. The effect of
the Plan and the implementation of fresh start reporting on the Company's
Consolidated Balance Sheet as at March 31, 2000 were as follows: (in thousands)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY REORGANIZED
PHILIP SERVICES NET ASSETS DEBT UK METALS PHILIP SERVICES
CORP. NOT DISCHARGE BUSINESS CORPORATION
MARCH 31, 2000 ACQUIRED UNDER PLAN SOLD MARCH 31, 2000
--------------- ---------- ---------- --------- ---------------
NOTE A NOTE B NOTE C
<S> <C> <C> <C> <C> <C>
Current Assets
Cash.............................. $ 36,454 $ -- $ -- $ (4,338) $ 32,116
Accounts receivable............... 327,458 -- -- (15,880) 311,578
Inventory for resale.............. 40,440 -- -- (3,659) 36,781
Other current assets.............. 104,956 (4,509) (14,175) 44,523 130,795
---------- --------- --------- -------- --------
509,308 (4,509) (14,175) 20,646 511,270
Fixed assets........................ 297,976 (59) -- (16,505) 281,412
Other assets........................ 60,471 (5,821) -- -- 54,650
---------- --------- --------- -------- --------
$ 867,755 $ (10,389) $ (14,175) $ 4,141 $847,332
========== ========= ========= ======== ========
Current Liabilities
Accounts payable.................. $ 105,967 $ -- $ -- $(11,570) $ 94,397
Accrued liabilities............... 151,218 (4,286) -- (3,875) 143,057
Current maturities of long-term
debt........................... 11,333 (6,000) -- (172) 5,161
---------- --------- --------- -------- --------
268,518 (10,286) -- (15,617) 242,615
Long-term debt...................... 4,235 8,619 371,820 (134) 384,540
Deferred income taxes............... 6,886 -- -- (306) 6,580
Other long-term liabilities......... 96,373 -- -- (1,070) 95,303
Liabilities subject to compromise... 1,136,468 (726,451) (410,017) -- --
Shareholders' equity................ (644,725) 717,729 24,022 21,268 118,294
---------- --------- --------- -------- --------
$ 867,755 $ (10,389) $ (14,175) $ 4,141 $847,332
========== ========= ========= ======== ========
</TABLE>
Notes:
A. Certain assets and liabilities of the Predecessor Company were not acquired
by the Company, which includes syndicate debt of the Predecessor Company of
$657,286.
B. To record the discharge of debt of the Company and the issuance of $250
million of senior secured debt, $100 million of convertible secured payment
in-kind debt and the repayment on Plan implementation of $14,175 of term
debt from the proceeds of asset sales, which were previously held as
restricted cash.
C. The UK Metals business was sold effective April 7, 2000. The net proceeds of
$47,684 represents the fair value of the net assets of the UK Metals
business and has been recorded in Other Current Assets at March 31, 2000. On
May 25, 2000 the Canadian Court ordered the distribution of approximately
$44,587 of the net proceeds which will reduce the term debt of the Company.
3
<PAGE> 4
REPORT OF THE INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Philip Services Corporation:
In our opinion, the accompanying consolidated balance sheet presents
fairly, in all material respects, the financial position of Philip Services
Corporation as at March 31, 2000 in conformity with accounting principles
generally accepted in the United States. This financial statement is the
responsibility of the Company's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our audit
of this statement in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall balance sheet presentation. We believe that our audit of the balance
sheet provides a reasonable basis for the opinion expressed above.
As discussed in note 1 in the consolidated balance sheet, the Company
emerged from bankruptcy protection on April 7, 2000. The effects from the
adoption of fresh start reporting and the forgiveness of debt are reported
therein.
PricewaterhouseCoopers LLP
Chartered Accountants
Hamilton, Ontario
June 2, 2000
4
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PHILIP SERVICES CORPORATION
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000
(AUDITED)
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and equivalents...................................... $ 32,116
Accounts receivable (net of allowance for doubtful
accounts of $23,412)................................... 311,578
Inventory for resale...................................... 36,781
Other current assets (Note 3)............................. 130,795
--------
511,270
Fixed assets (Note 4)....................................... 281,412
Other assets (Note 5)....................................... 54,650
--------
$847,332
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 94,397
Accrued liabilities (Note 6).............................. 143,057
Current maturities of long-term debt (Note 7)............. 5,161
--------
242,615
Long-term debt (Note 7)..................................... 384,540
Deferred income taxes (Note 8).............................. 6,580
Other liabilities (Note 9).................................. 95,303
Commitments and contingencies (Notes 12 and 13)
Shareholders' equity (Note 10).............................. 118,294
--------
$847,332
========
</TABLE>
The accompanying notes are an integral part of this balance sheet
5
<PAGE> 6
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET
(1) BASIS OF PRESENTATION
Philip Services Corporation is an integrated metals recovery and industrial
services company, which provides metal recovery and processing services and
industrial outsourcing services to major industry sectors throughout North
America.
The consolidated balance sheet includes the accounts of Philip Services
Corporation, and its subsidiaries (the "Company") and has been prepared in US
dollars using accounting principles generally accepted in the United States. The
Company and its subsidiaries represent substantially the same businesses as
Philip Services Corp. and its subsidiaries (the "Predecessor Company") with the
exception of the UK Metals business, which was sold on April 7, 2000. The
Company will retain a fiscal accounting year of December 31.
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect reported amounts of assets, liabilities and disclosures of
contingencies. Actual results could differ from the estimates and judgments made
in preparing this balance sheet.
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 in Canada
in the Ontario Superior Court of Justice (the "Canadian Court") on the same
date.
On July 12, 1999, the U.S. Debtors filed a Joint Plan of Reorganization
(the "U.S. Plan") with the U.S. Court and on July 15, 1999, the Canadian Debtors
filed a Plan of Compromise and Arrangement (the "Canadian Plan") with the
Canadian Court. In August 1999, a number of motions were brought before the
Canadian Court challenging the fairness of the Canadian Plan. As a result the
Predecessor Company filed an amended plan in the U.S. Court on September 21,
1999 (the "Amended U.S. Plan") and an amended plan in the Canadian Court on
September 24, 1999 (the "Amended Canadian Plan"). On November 2, 1999, the
Predecessor Company filed a Supplement to the Amended Canadian Plan (the
"Canadian Plan Supplement"). The Canadian Plan Supplement amended and restated
the Amended Canadian Plan and provided that substantially all of the assets of
the Canadian debtors be transferred to new companies that, on the implementation
of the Amended U.S. Plan became wholly-owned subsidiaries of the Company. All
the shares held by the Predecessor Company in the Company were cancelled under
the Amended U.S. Plan. On November 5, 1999, the Predecessor Company's lenders
voted to approve the Canadian Plan Supplement. On November 26, 1999 a hearing
was held in the Canadian Court at which the Canadian Plan Supplement was
sanctioned. On November 30, 1999 the Amended U.S. Plan was confirmed in the U.S.
Court. On March 8, 2000, the Canadian Plan Supplement was amended to permit the
sale of the UK Metals business and certain tax restructuring issues. On March
20, 2000, a similar amendment was made by the U.S. Court with respect to the
Amended U.S. Plan. The Amended U.S. Plan and the Canadian Plan Supplement
(collectively the "Plan") became effective on April 7, 2000. Under the Plan, the
Company emerged from bankruptcy protection as a new public entity.
Under the Plan, syndicate debt of the Predecessor Company of $1 billion has
been converted into $250 million of senior secured debt, $100 million of
convertible secured payment in-kind debt and 91% of the common shares of the
Company. The secured payment in-kind debt is convertible into 25% of the common
shares of the Company on a fully diluted basis as of the Plan effective date.
The Plan also provided for the conversion of certain specified impaired
unsecured claims, into $60 million of unsecured payment in-kind notes and 5% of
the common shares of the Company as of the Plan effective date. The Plan allowed
certain holders of the unsecured claims to receive $1.50 in face amount of
unsecured convertible notes in exchange for every $1.00
6
<PAGE> 7
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(1) BASIS OF PRESENTATION (continued)
in unsecured payment in-kind notes that such holder would have received under
the Plan. The aggregate amount of unsecured convertible notes issued was $16
million. The Company also issued 1.5% of its common shares to Canadian and U.S.
class action plaintiffs to settle all class action claims. Other potential
equity claimants received 0.5% of the common shares of the Company and the
shareholders of the Predecessor Company received 2% of the common shares of the
Company.
FRESH START REPORTING
The Company has adopted fresh start reporting in accordance with the
AICPA's Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." For financial reporting purposes, the
effective date of the Plan was considered to be March 31, 2000. Under the
principles of fresh start reporting, the Company is required to determine its
reorganization value. The reorganization value of the Company was determined
with the assistance of independent advisors. The methodology employed involved
the estimation of an enterprise value (i.e. the fair market value of the
Corporation's debt and shareholders' equity) which was approximately $500
million. The significant factors used in the determination of the reorganization
value were the industries in which the Company operates, the general economic
conditions which impact the Company and the application of certain valuation
methodologies which included a discounted cash flow analysis based on two years
cashflow projections prepared by management with discount rates of between 11%
to 12% and an analysis of comparable publicly traded company multiples and sales
transactions. The reorganization value was then allocated to the Company's
assets and liabilities based on their fair values. No significant adjustments
were made to the Company's assets and liabilities under fresh start reporting as
their fair values approximated recorded amounts at March 31, 2000.
As a result of the consummation of the Plan and the application of fresh
start reporting, the financial statements of the Company issued subsequent to
Plan implementation will not be comparable with the financial statements issued
by the Predecessor Company prior to Plan implementation.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and all of its subsidiaries. All intercompany transactions have been eliminated
on consolidation. The equity method of accounting is used for investment
ownership ranging from 20% to 50%.
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
In accordance with fresh start reporting, fixed assets are reflected at
their fair market values as of March 31, 2000. Fixed assets are depreciated over
their estimated useful lives generally on the following basis: buildings 2.5% to
5% straight-line; equipment 5% to 30% straight-line. Landfill sites and
improvements thereto are recorded at cost and amortized over the life of the
landfill site based on the estimated landfill capacity utilized during the year.
Operating costs associated with landfill sites are charged to operations as
incurred. Assets under
7
<PAGE> 8
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
development include the direct cost of land, buildings and equipment acquired
for future use together with engineering, legal and other costs incurred before
the assets are brought into operation.
The Company includes, as part of the cost of its fixed assets, all
financing costs incurred prior to the asset becoming available for operation.
CONTRACT ACCOUNTING
The Company uses the percentage of completion basis to account for its
fixed price contracts. Under this method, revenue is recognized as work
progresses in the ratio that costs 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.
ENVIRONMENTAL LIABILITY
The Company accrues environmental remediation costs associated with
identified sites where an assessment has indicated that cleanup costs are
probable and can be reasonably estimated. Such accruals are undiscounted and are
based on currently available information, estimated timing of remedial actions
and related inflation assumptions, existing technology and presently enacted
laws and regulations. The liability for environmental and closure costs is
disclosed in the consolidated balance sheet under accrued liabilities and other
liabilities. Amounts required to dispose of waste materials located at the
Company's industrial services facilities are included in accrued liabilities.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities denominated in a foreign currency for foreign
operations, all of which are self-sustaining, are translated at exchange rates
in effect at the balance sheet date. The resulting gains and losses are
accumulated in a separate component of shareholders' equity.
FINANCIAL INSTRUMENTS
The Company's accounts receivable, accounts payable and long-term debt
constitute financial instruments. The Company's accounts receivable, accounts
payable and long-term debt approximated their fair value as at March 31, 2000.
Concentration of credit risk in accounts receivable is limited, due to the large
number of customers the Company services throughout North America. The Company
performs ongoing credit evaluations of its customers, but does not require
collateral to support customer accounts receivable. The Company establishes an
allowance for doubtful accounts based on the credit risk applicable to
particular customers, historical and other information.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities and requires that an entity recognize these
items as assets or liabilities in the statement of financial position and
measure them at fair value. Changes in fair value of the derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction,
and if it is, the type of hedge transaction. The impact on the Company's
financial position will be dependent on the level and types of derivative
instruments the Company will have entered into at the time SFAS No. 133 is
implemented.
8
<PAGE> 9
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 1999, FASB issued SFAS No. 137 to defer the effective date of SFAS
No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. As a result, the standard will be adopted by the Company in its interim
period ended September 30, 2000.
(3) OTHER CURRENT ASSETS (in thousands)
<TABLE>
<S> <C>
Restricted cash(a).......................................... $ 20,937
Proceeds receivable on sale of UK Metals business(b)........ 47,684
Costs in excess of billings................................. 15,384
Consumable supplies......................................... 15,844
Non-trade receivables....................................... 15,298
Other....................................................... 15,648
--------
$130,795
========
</TABLE>
(a) Restricted cash represents funds used as collateral for letters of credit,
and proceeds from the sale of assets which were held by the Predecessor
Company's lenders. These funds were released to the Company in April, 2000.
(b) On April 7, 2000, the Predecessor Company sold its metals recycling and
mill services business in the United Kingdom for net proceeds of $47,684.
The net proceeds represent the fair value of the net assets, and is
reflected as a receivable by the Company on March 31, 2000. On May 25,
2000, the Canadian Court ordered the distribution of approximately $44,587
of the net proceeds was used to pay down the term debt of the Company.
(4) FIXED ASSETS (in thousands)
<TABLE>
<S> <C>
Land........................................................ $ 47,062
Landfill sites.............................................. 10,972
Buildings................................................... 71,072
Equipment................................................... 150,094
Assets under development.................................... 2,212
--------
$281,412
========
</TABLE>
(5) OTHER ASSETS (in thousands)
<TABLE>
<S> <C>
Restricted investments(a)................................... $39,025
Other....................................................... 15,625
-------
$54,650
=======
</TABLE>
(a) Restricted investments are controlled by the Company's wholly-owned
insurance subsidiary, and approximately $28,500 has been pledged as
security for the Company's insurance liabilities.
9
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PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(6) ACCRUALS (in thousands)
Accrued liabilities consist of the following:
<TABLE>
<S> <C>
Accrued employee compensation and benefit costs............. $ 33,025
Insurance claims outstanding................................ 31,758
Accrued purchases........................................... 26,498
Accrued closure costs....................................... 13,189
Billings in excess of costs................................. 7,528
Accrued waste material disposal costs....................... 6,208
Accrued environmental costs................................. 6,161
Accrued other............................................... 16,976
Income taxes payable........................................ 1,714
--------
$143,057
========
</TABLE>
(7) LONG-TERM DEBT (in thousands, except per share amounts)
<TABLE>
<S> <C>
Credit Facility
Term debt(a).............................................. $235,825
Convertible Payment in-kind debt(a)....................... 100,000
Unsecured Payment in-kind notes(b).......................... 36,000
Secured loans bearing interest at a weighted average fixed
rate of 5.5% maturing at various dates up to 2020......... 9,551
Secured loans bearing interest at prime plus a weighted
average floating rate of 0.5% maturing at various dates up
to 2001................................................... 1,048
Obligations under capital leases on equipment bearing
interest at rates varying from 6% to 12% maturing at
various dates to 2004..................................... 7,277
--------
389,701
Less current maturities of long-term debt................... 5,161
--------
$384,540
========
</TABLE>
(a) Term Debt and Convertible Payment in-kind Debt
On March 31, 2000 the Company entered into a $335,825 term credit agreement
("credit facility") with a syndicate of international lenders.
Concurrently, on March 31, 2000 the Company entered into a revolving credit
agreement ("exit facility") see Note 7(c). The credit facility provides a
term debt of $235,825 ("term debt") and $100,000 in convertible payment
in-kind debt ("PIK debt"). The credit facility matures on March 31, 2005
and bears interest at a fixed rate of 9% for the term debt and 10% for the
PIK debt. Interest payments on the term debt are due quarterly in arrears,
up to a maximum of $20,000 in the first year, and on the PIK debt interest
is payable in full on March 31, 2005. The term debt or any part thereof
and/or all of the PIK debt may be prepaid and redeemed by the Company at
any time during the agreement once the exit facility has been terminated.
The Company must pay a redemption premium of between 1% to 5% on the amount
of the term debt being redeemed and between 8 1/3% to 25% on the amount of
the PIK debt being redeemed. The PIK debt is convertible by the lenders at
any time into common shares of the Company at a conversion price of $11.72
per common share, which was higher than the current market price of the
common shares when the PIK debt was issued.
10
<PAGE> 11
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(7) LONG-TERM DEBT (in thousands, except per share amounts) (continued)
The Company is required to repay the term debt first and then the PIK debt
in an amount equal to,
i) the net asset sale proceeds, and once the exit facility is terminated
75% of the net asset sale proceeds, from the disposition of assets
sold not in the ordinary course of business
ii) the net proceeds from any foreign subsidiary dispositions and
iii) the net proceeds from the sale of the UK Metals business
The Company is also required yearly for the first two years and quarterly
after that to repay the term debt first and then the PIK debt in an amount
equal to 75% of the cash flow available for debt service.
The credit facility contains certain restrictive covenants, including
limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of specified investments, and the payment
of cash dividends. In addition, the Company is required to satisfy, among
other things, certain financial covenants including specified interest
coverage ratio, minimum amount of EBITDA, and maximum capital expenditures.
The credit facility, subject first to the exit facility, is guaranteed,
jointly and severally by the Company and its direct and indirect
wholly-owned subsidiaries and is collateralized by a pledge of the issued
and outstanding securities and assets of the Company and its direct and
indirect wholly-owned subsidiaries.
(b) Unsecured Payment in-kind Notes
Under the Plan, the Company issued an aggregate amount of $49,157 of
unsecured payment in-kind notes ("unsecured notes"). The unsecured notes
mature on April 15, 2010 and bear interest at a fixed rate of 6%. The
interest is payable semi-annually on April 15 and October 15, and can be
paid up to April 15, 2005 in cash or additional unsecured notes, at the
option of the Company. In the event of a change in control the unsecured
notes will bear interest at 12%. The Company is required to make an offer
to purchase the unsecured notes if a change in control occurs equal to the
present value of the remaining scheduled payments of principal and interest
discounted at 16% plus accrued interest thereon. The unsecured notes
provide for annual mandatory sinking fund payments equal to 20% of the
aggregate principal amount of the outstanding unsecured notes at April 15,
2005 plus all accrued and unpaid interest thereon commencing April 15,
2006. The unsecured notes are recorded at their fair value of $31,841 based
on a discount rate of 12%.
Under the Plan, the Company issued an aggregate amount of $16,265 of
unsecured convertible payment in kind notes ("unsecured convertible
notes"). The unsecured convertible notes mature on April 15, 2020 and bear
interest at a fixed rate of 3% starting April 15, 2003. The interest is
payable semi-annually on April 15 and October 15. In the event of a change
in control the unsecured convertible notes will bear interest at 12%. The
unsecured convertible notes may be converted at any time into common shares
of the Company at a conversion price of $30 per common share. The Company
is required to make an offer to purchase the unsecured convertible notes if
a change of control occurs equal to between 64% to 100% of the principal
amount of unsecured convertible notes outstanding plus accrued interest
thereon. The unsecured convertible notes are recorded at their fair value
of $4,159 based on a discount rate of 12%.
(c) Exit Facility
The exit facility provides for a revolving line of credit, subject to a
borrowing base formula calculated on accounts receivable, of up to $175,000
divided into Tranche A for $100,000 and Tranche B for $75,000. The exit
facility matures on September 30, 2002. If the Company elects to terminate
the exit facility within eighteen months after April 7, 2000 then it must
pay a termination fee during the first year equal to 0.75%
11
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PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(7) LONG-TERM DEBT (in thousands, except per share amounts) (continued)
and during the next 6 months equal to 0.375% times the sum of the Tranche A
advances and letters of credit outstanding.
Borrowings under the exit facility bear interest at a rate equal to the
base rate (which is based on the Wells Fargo Bank "prime rate") plus 1% on
Tranche A advances and 3% on Tranche B advances or at the option of the
Company on Tranche A advances at a rate equal to the Libor rate plus 3%. A
letter of credit fee of 2.75% is charged on the amount of all outstanding
letters of credit.
The Company is required to pay annually an agency fee and an annual fee
equal to $150 and $750 respectively. In addition, the Company is required
to pay monthly an unused line of credit fee equal to 0.375% and 0.75% per
annum on the average unused portion under Tranche A and Tranche B,
respectively, under the exit facility.
The exit facility contains certain restrictive covenants, including
limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of specified investments, and the payment
of cash dividends. In addition, the Company is required to satisfy, among
other things, certain financial covenants including specified interest
coverage ratio, minimum amount of EBITDA, and maximum capital expenditures.
The exit facility is guaranteed, jointly and severally by the Company and
its direct and indirect wholly-owned subsidiaries and is collateralized by
a pledge of the issued and outstanding securities and assets of the Company
and its direct and indirect wholly-owned subsidiaries.
At March 31, 2000, the Company had undrawn credit capacity under the exit
facility of approximately $97,801, net of outstanding letters of credit of
approximately $77,199.
(d) The aggregate amount of payments required to meet long-term debt
installments in each of the next five years is as follows:
<TABLE>
<S> <C>
2001........................................................ $ 5,161
2002........................................................ 4,186
2003........................................................ 2,681
2004........................................................ 2,275
2005........................................................ 337,014
Thereafter.................................................. 38,384
</TABLE>
(8) DEFERRED INCOME TAXES (in thousands)
The Company has net operating loss carryforwards in the US and in Canada of
approximately $137,000 and nil, respectively. The US net operating loss
carryforwards expire between the years 2001 and 2019. The Company has
approximately $86,000 in excess interest deductions carryforwards which carry
forward indefinitely.
Distribution of the new common stock of the Company to the Company's
creditors pursuant to the Plan has resulted in an ownership change as defined in
Section 382 of the Internal Revenue Code. This ownership change limits the
Company's ability to utilize its net operating loss carryforwards and excess
interest deduction carryforwards.
Certain future events may result in such benefits being utilized in the
Company's future income tax returns, which the Company will record as a
reduction in the valuation allowance, and, in accordance with the principles of
fresh start reporting, a credit to additional paid-in capital.
12
<PAGE> 13
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(8) DEFERRED INCOME TAXES (in thousands) (continued)
The net deferred tax liability consists of the following temporary
differences:
<TABLE>
<S> <C>
Net operating losses carried forward........................ $(51,538)
Excess interest deductions carried forward.................. (32,108)
Accruals not yet deductible for tax and asset basis
differences............................................... (37,618)
Other....................................................... 6,580
Valuation allowance......................................... 121,264
--------
$ 6,580
========
</TABLE>
In assessing the value of the deferred tax assets, management considers
whether it is more likely than not that all of the deferred tax assets will be
realized. Projected future income tax planning strategies and the expected
reversal of deferred tax liabilities are considered in making this assessment.
Based on the level of historical taxable income, projections for future taxable
income and subject to the limitation on the utilization of net operating loss
carryforwards and excess interest deduction carryforwards, the Company has
determined that it is more likely than not that the Company will not realize the
benefits of the deferred tax assets. The Company has recorded a valuation
allowance of $121,264 at March 31, 2000.
(9) OTHER LIABILITIES (in thousands)
<TABLE>
<S> <C>
Accrued environmental costs................................. $77,053
Other....................................................... 18,250
-------
$95,303
=======
</TABLE>
(10) SHAREHOLDERS' EQUITY (in thousands except number of shares/options and per
share amounts)
<TABLE>
<S> <C>
Share capital............................................... $ 118,294
Retained earnings........................................... --
-----------
$ 118,294
===========
SHARE CAPITAL CONSISTS OF:
AUTHORIZED
90,000,000 common shares
10,000,000 preferred shares
ISSUED
Common shares
Number...................................................... 24,000,000
Dollars..................................................... $ 118,294
</TABLE>
STOCK OPTIONS
On the effective date, the Company issued 1,000,000 common share options to
a director and officer at exercise prices ranging from $5.96 to $8.69 per common
share which was in excess of the Company's fair market value on a per share
basis, determined based on an enterprise valuation as discussed in Note 1. The
options are exercisable evenly over the next four years and expire on April 6,
2010.
The Company has allotted and reserved 1,040,000 common shares under its
2000 Stock Option Plan ("Option Plan") Under the Option Plan, options may be
granted to purchase common shares of the Company at the then current market
price. The options have a term of not more than ten years from the date of
grant. Options granted under the Option Plan may be either incentive stock
options, which are intended to meet the requirement
13
<PAGE> 14
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(10) SHAREHOLDERS' EQUITY (in thousands except number of shares/options and per
share amounts) (continued)
of Section 422 of the Internal Revenue Code, or non qualified stock options. As
of March 31, 2000 no options had been issued under this plan.
The Company has allotted and reserved 9,132,423 common shares issuable
under the PIK debt and the unsecured convertible notes.
(11) SEGMENTED INFORMATION (in thousands)
The Company's business operations are organized into the following
segments:
- Metal Services which has primarily three businesses, ferrous scrap,
commercial and mill services. The ferrous scrap operations collect and
process scrap for shipment to steel mills, the commercial business
provides brokerage services for scrap material and primary metals and
mill services provide on-site mill services including the sale of
secondary materials.
- Industrial Outsourcing Services which includes the operations which
perform cleaning and maintenance, mechanical, turnaround and outage
services, remediation, paint overspray recovery and refractory services.
- Specialty Businesses which perform analytical services, container and
tank cleaning services, demolition and decommissioning and electrical
installations.
- By-Products Management which includes hazardous and non-hazardous waste
collection, transportation, processing, disposal and related field
services.
The segmentation of the Company's assets is as follows:
<TABLE>
<S> <C>
Metal Services.............................................. $243,249
Industrial Outsourcing Services............................. 219,756
Specialty Businesses........................................ 80,706
By-Products Management...................................... 118,902
Shared Services and Eliminations............................ 184,719
--------
$847,332
========
</TABLE>
The geographical segmentation of the Company's long-lived assets is as
follows:
<TABLE>
<S> <C>
United States............................................... $215,656
Canada...................................................... 66,127
Other....................................................... 48,002
--------
$329,785
========
</TABLE>
(12) COMMITMENTS (in thousands)
Future rental payments required under operating leases for premises and
equipment are as follows:
<TABLE>
<S> <C>
2001........................................................ $22,691
2002........................................................ 18,121
2003........................................................ 14,904
2004........................................................ 11,127
2005 and thereafter......................................... 15,729
</TABLE>
Letters of credit issued amounted to $84,899. The Company has guaranteed a
loan of approximately $2,000 for a minority investee.
14
<PAGE> 15
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(13) CONTINGENCIES (dollars in thousands)
(a) The Company in the normal course of its business expends funds for
environmental protection and remediation but does not expect these
expenditures to have a materially adverse effect on its financial condition
or results of operations.
Certain of the Company's facilities are contaminated primarily as a result
of operating practices at the sites prior to their acquisition by the
Company. The Company has established procedures to routinely evaluate these
sites giving consideration to the nature and extent of the contamination.
The Company has provided for the remediation of these sites based upon
management's judgement and prior experience. The Company has estimated the
liability to remediate these sites to be $60,536.
As well, certain subsidiaries of the Company have been named as potentially
responsible or liable parties under U.S. federal and state superfund laws
in connection with various sites. The Company's connection with these sites
relates to allegations that its subsidiaries or their predecessors
transported waste to the site, disposed of waste at the site, or operated
the site in question. The Company has reviewed the nature and extent of its
alleged connection to these sites, the number, connection and financial
ability of other named and unnamed potentially responsible parties and the
nature and estimated cost of the likely remedy. Based on its review, the
Company has accrued its estimate of its liability to remediate these sites
at $22,678. If it is determined that more expensive remediation approaches
may be required in the future, the Company could incur additional
obligations which could be material but cannot be estimated.
The liabilities discussed above are disclosed in the Consolidated Balance
Sheet as follows:
<TABLE>
<S> <C>
Accrued liabilities......................................... $ 6,161
Other long-term liabilities................................. 77,053
-------
$83,214
=======
</TABLE>
(b) In January 1999, Exxon Chemical Company ("Exxon") asserted a claim against
International Catalyst, Inc. ("INCAT"), an indirect wholly-owned subsidiary
of the Company, for damages of approximately $32,000 arising from certain
work conducted by INCAT at Exxon's Baytown, Texas chemical plant. Exxon
alleges that INCAT was responsible for the purchase and installation in
1996 of improper gasket materials in the internal bed piping flange joints
of the Baytown plant which caused damages to the facility and consequential
losses arising from the shutdown of the plant while repairs were made. The
Company has conducted a preliminary review of these claims and determined
that it is not feasible to predict or determine the final outcome of these
proceedings. INCAT intends to vigorously defend the claims and believes
that it may have insurance coverage for such claims. There can be no
assurance, though, that the outcome of the claims will not have a material
adverse effect upon the financial condition or results of operations of the
Company.
(c) On April 14, 2000, Maxus Energy Corporation et al. ("Maxus") commenced an
action in the United States District Court for the Northern District of
Ohio against various parties including the Predecessor Corporation. The
Company anticipates that Maxus will amend its action to name a subsidiary
of the Company. The action is brought under the Comprehensive Environmental
Response, Compensation and Liability Act for the recovery of costs incurred
and to be incurred in responding to the releases and threatened releases of
hazardous substances at the Diamond Shamrock Painesville Works site located
in Painesville, Ohio. The site is approximately 1100 acres in size and has
been used for various purposes since 1912. The plaintiffs allege that they
have incurred more than $19,500 in response costs in connection with the
site. Since July of 1996, a subsidiary of the Company has operated a
secondary aluminum smelter on approximately 24 acres of property within the
site. The Company has conducted a preliminary review of the claim and
determined that it is not feasible to predict or determine the final
outcome of these proceedings.
15
<PAGE> 16
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET (CONTINUED)
(13) CONTINGENCIES (dollars in thousands) (continued)
The Company intends to vigorously defend the claim but there can be no
assurance that the outcome of the claim will not have a material adverse
effect upon the financial condition or results of operations of the
Company.
(d) The Company is named as a defendant in several lawsuits which have arisen
in the ordinary course of its business. Management believes that none of
these suits is likely to have a material adverse effect on the Company's
business or financial condition and therefore, has made no provision in
these financial statements for the potential liability, if any.
16
<PAGE> 17
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
17
