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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 0-20854
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PHILIP SERVICES CORP.
(Exact Name of Registrant as Specified in its Charter)
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ONTARIO N/A
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification Number)
or Organization)
100 KING STREET WEST, HAMILTON, ONTARIO L8N 4J6
(Address of Principal Executive Offices) (Zip Code)
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(905) 521-1600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Shares, No Par Value New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ]. No [X].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of Common Shares on The Toronto Stock
Exchange on April 23, 1999, was approximately CDN$61,637,686 (assumes officers,
directors and all shareholders beneficially owning 5% or more of the outstanding
Common Shares are affiliates).
The number of Common Shares of the Registrant outstanding on April 23, 1999
was 131,144,013.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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INDEX
TO FORM 10-K
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10-K PART AND ITEM NO. PAGE NO.
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
Item 6. Selected Financial Data..................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 39
Item 8. Financial Statements and Supplementary Data................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 67
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 68
Item 11. Executive Compensation...................................... 71
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 75
Item 13. Certain Relationships and Related Transactions.............. 76
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K....................................................... 78
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K under the
captions "Business", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual Report
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. When used in this document, the words
"anticipate," "believe" "estimate" and "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Many factors could cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements that may be expressed or implied by
such forward-looking statements, including, among others, the risks discussed in
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and risks discussed from time to time in the Company's filings
with the Securities and Exchange Commission and other regulatory authorities.
Should one or more of these risks or uncertainties materialize, or should
assumptions underlying the forward-looking statements prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated or expected. Philip does not intend, and does not assume any
obligation, to update these forward-looking statements.
CURRENCY
The Company reports in U.S. dollars and therefore all dollar amounts stated
in this Form 10-K are expressed in U.S. dollars, except where otherwise
indicated.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Philip Services Corp. ("Philip" or the "Company") is an integrated metals
recovery and industrial services company, which provides metals recovery and
processing services, by-products recovery, utilities management and industrial
outsourcing services to major industry sectors from over 280 locations across
North America and Europe. The Company's primary base of operations is in the
United States. See Note 22 to the Company's audited Consolidated Financial
Statements which appears on pages 64 and 65 of this Form 10-K.
Philip is a company amalgamated under the laws of the Province of Ontario
pursuant to a Certificate and Articles of Amalgamation dated April 15, 1991. On
May 22, 1997, a Certificate and Articles of Amendment under the Business
Corporations Act (Ontario) were issued changing the name of the Company from
Philip Environmental Inc. to Philip Services Corp.
The Company's business is organized into two operating divisions, the
Metals Services Group and the Industrial Services Group. The Metals Services
Group's primary business operations are ferrous processing and industrial metals
services. The ferrous metals operations include the collection and processing of
ferrous scrap materials for shipment to steel mills and the provision of
significant brokerage services for scrap materials. The industrial metals
services include engineering and construction management, on-site services,
by-product management and coil processing and distribution services to steel
mills. The Metals Services Group primarily services the steel, foundry and
automotive industries. See Note 22 to the Company's audited Consolidated
Financial Statements which appears on pages 64 and 65 of this Form 10-K for the
revenue, income (loss) from operations and total assets of the Metals Services
Group for the fiscal years ended December 31, 1998, 1997 and 1996.
The Industrial Services Group is an integrated provider of by-products
recovery, industrial outsourcing and utilities management services with a
network of over 250 facilities. By-products recovery includes solvent
distillation, engineered fuel blending, paint overspray recovery, organic and
inorganic waste collection processing and polyurethane recycling. Industrial
outsourcing services include cleaning and maintenance, waste collection and
transportation, container services and tank cleaning, turnaround and outage
services, mechanical contracting, refractory services, decommissioning and
remediation, analytical services and emergency response services. The utilities
management business provides services to industrial and municipal water and
wastewater treatment plants, power plants and related infrastructure. The
Industrial Services Group primarily services the automotive, refining and
petrochemical, oil and gas, pulp and paper, steel, transportation and utilities
industries. See Note 22 to the Company's audited Consolidated Financial
Statements which appears on pages 64 and 65 of this Form 10-K for the revenue,
income (loss) from operations and total assets of the Industrial Services Group
for the fiscal years ended December 31, 1998, 1997 and 1996.
See Note 22 to the Company's audited Consolidated Financial Statements
which appears on pages 64 and 65 of this Form 10-K for a geographic breakdown of
the Company's revenue and long-lived assets.
1998 REVIEW
In 1997, the Company implemented an acquisition program designed to
establish Philip as one of North America's leading metals processing and
industrial services providers. During 1997, the Company acquired over 30
businesses at a cost of approximately $1.3 billion. The Company commenced 1998
with the objective of integrating the businesses it had acquired in 1997. The
integration was interrupted by a series of events which occurred in 1998 that
had a devastating impact on the Company and resulted in it recording a fiscal
1998 loss of $1.6 billion including special charges of $1.2 billion.
The first event was the discovery and announcement in January 1998 of a
discrepancy between the book and physical inventory values in the Company's yard
copper business. The announcement of the discrepancy raised serious questions
about the integrity of the Company's accounting and the effectiveness of its
control
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systems and had a significant negative impact on the Company's business. After
the announcement, numerous class action lawsuits and related claims were
commenced against the Company in the United States and Canada (see Item 3.
"Legal Proceedings"). An exhaustive examination of the discrepancy was conducted
by the Company, its auditors and special counsel to a committee of independent
directors of the Company's Board of Directors. As a result of these
examinations, it was determined that, amongst other things, unrecorded losses
totalling $92 million arising from unauthorized trading of copper outside the
Company's normal business practices had been incurred. The Company commenced a
civil action against the former president of its metals division and others
engaged in the trading in an effort to recover its losses and reported the
activities to criminal and other appropriate authorities. As a result of the
Company's findings, Philip restated its previously reported financial results
for 1997, 1996 and 1995. In addition, the staff of the Securities and Exchange
Commission (the "SEC") is conducting a formal investigation of the circumstances
surrounding the 1997, 1996 and 1995 restatements of the Company's financial
statements. The SEC has advised that its investigation should not be construed
as an indication that any violation of law has occurred, nor should it be
considered a reflection upon any person, entity or security. While the Company
believes it has made all adjustments necessary to its financial statements for
1997, 1996 and 1995, there can be no assurance that additional adjustments will
not be required as a result of the SEC investigation.
To compound matters, starting in late 1997 and continuing throughout 1998,
there was a significant deterioration in the Company's copper and ferrous
processing businesses due to the most significant decline in metals prices in
over 20 years. The Company's Industrial Services Group failed to achieve its
cost reduction objectives and its by-products business performed weakly,
reflecting industry wide competitive conditions. In addition, declining crude
oil prices, which resulted in deferred maintenance spending by customers with
petrochemical refinery operations, negatively impacted the revenue and
profitability of the Industrial Services Group's operations. The Company
reported a first quarter 1998 loss of $565,000 and a second quarter 1998 loss of
$73 million. Various initiatives were implemented throughout the year in an
effort to improve the Company's operating and financial performance. Management
changes were made, including the appointment of a new Chairman, President and
Chief Executive Officer, Chief Financial Officer, Chief Administrative Officer
and Presidents of the Company's Metals Services and Industrial Services Groups.
The deterioration in its principal business segments impaired Philip's
ability to comply with the terms of its then $1.5 billion syndicated credit
agreement (the "Credit Agreement"). In June of 1998, the Company announced its
intention to sell its ferrous and non-ferrous operations and various non-core
assets in order to reduce and restructure its debt. The Company sold its steel
distribution business in July 1998 for $95 million. However, weak ferrous market
conditions lowered the value of the remaining assets and the Company
subsequently determined that it would not proceed with the sale of its ferrous
businesses.
By July of 1998, the Company was not in compliance with the terms of its
Credit Agreement and sought certain amendments from its lending syndicate.
Philip did not reach an agreement with its lenders and accordingly, as at June
30, 1998, $1.04 billion of debt outstanding under the Credit Agreement was
classified as a current liability on the Company's consolidated balance sheet.
As the Company's operating results deteriorated, questions arose as to its
ability to meet its obligations under the Credit Agreement and whether the
Company had sufficient available cash to satisfy its working capital and capital
expenditure needs. In the third quarter of 1998, a number of factors, including
a continuing downturn in metal markets, a permanent decline in the value of
investments held by the Company, and the decision to exit certain activities or
locations and to divest of the Company's aluminum and US ferrous operations
caused the Company to take special charges of $357 million and report a net loss
of $645 million. The Company again made management changes including the
appointment in October 1998 of a new Interim Chief Executive Officer and Chief
Restructuring Officer.
In November 1998, the Company ceased making payments on various debt
obligations including the $1.02 billion outstanding under the Credit Agreement.
Thereafter, Carl Icahn, the Company's largest shareholder and debt holder,
together with another lender, announced that they were considering utilizing
involuntary insolvency proceedings to protect their interests unless the Company
met with them to formulate a pre-packaged plan to transfer the ownership and
control of the business to the Company's lending syndicate.
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The Company commenced negotiations with Mr. Icahn and entered into a standstill
agreement with him and the other lender on November 20, 1998. The agreement
contemplated a restructuring plan whereby the debt outstanding under the Credit
Agreement would be converted into $200 million of new secured debt and the
distribution of 90% of the equity of the restructured entity to the syndicated
debt holders. In accordance with the terms of the standstill agreement, the
Company appointed two new directors nominated by Mr. Icahn to the Company's
Board of Directors. Also, in November 1998, the Company replaced its then acting
Interim Chief Executive Officer and appointed its Executive Vice Chairman, Allen
Fracassi, as Interim Chief Executive Officer.
After discussions with its lending syndicate, the Company determined that
the restructuring plan contemplated by the November 20, 1998 standstill
agreement would not be approved by the required number of lenders. The Company
presented an alternative debt restructuring plan to its lending syndicate on
December 15, 1998 which provided for the conversion of a smaller portion of the
debt outstanding under the Credit Agreement into equity in an amount to be
negotiated with its lending syndicate.
RECENT DEVELOPMENTS
On January 11, 1999, the Company announced that it had negotiated a term
sheet with a sub-committee of the steering committee of its syndicated lenders.
The term sheet set forth the principal terms of restructuring the Company under
a pre-packaged plan of reorganization. Under the January 11, 1999 term sheet,
$550 million of debt outstanding under the Credit Agreement would be
restructured into $350 million of senior secured term debt and $200 million of
secured payment in-kind notes. The balance of the debt outstanding under the
Credit Agreement of approximately $550 million would be exchanged for 90% of the
common shares of the restructured Company. Throughout January and February and
into early March 1999, the Company continued negotiations with its lending
syndicate in an effort to obtain an agreement on a plan to restructure the
Company.
On January 12, 1999, the Company announced that it had closed the sale of
certain of its aluminum operations for $69.5 million.
On March 8, 1999, the Company announced that it had concluded negotiations
with the steering committee of its syndicated lenders on the terms of a lock-up
agreement (the "Lock-Up Agreement"). Members of the steering committee, who held
in excess of 50% of the outstanding syndicated debt, agreed to the form of
Lock-Up Agreement. The agreement provided for the conversion of approximately
$1.02 billion of secured debt outstanding under the Credit Agreement into $300
million of senior secured debt, $100 million in convertible secured payment
in-kind notes and 90% of the common shares of the restructured Company.
On March 26, 1999, the Company announced that it had entered into a
definitive agreement to sell its 68% interest in Philip Utilities Management
Corporation for net proceeds of approximately $67 million in cash.
The proceeds of the disposition will be used to pay down the Company's
outstanding debt under the Credit Agreement. Under the terms of the Lock-Up
Agreement, if the Company completes the sale of Philip Utilities Management
Corporation, the senior secured debt of the restructured Company will be
reduced from $300 million to $250 million.
On April 26, 1999, the Company announced that the terms of the Lock-Up
Agreement had been approved by its lending syndicate. See Note 1 to the
Company's audited Consolidated Financial Statements which appears on pages 45
and 46 of this Form 10-K. The Company will now prepare, in conjunction with its
lending syndicate, a pre-packaged plan of reorganization (the "Plan"). The
Company expects to file the Plan in June 1999 under Chapter 11 of the United
States Bankruptcy Code and in Canada under the Companies Creditors Arrangement
Act, and to emerge from the restructuring process within 60 to 90 days
thereafter. Key to the Plan is the preservation of the value of the Company's
business through the protection of its employees, customers and ongoing trade
suppliers. There can be no assurance that the Plan will be filed and if filed,
that it will be approved by the required stakeholders and the courts having
jurisdiction over such matters. If the Plan is not approved, there can be no
assurance that the Company will continue as a going concern. See "Item 7. Risk
Factors -- Ability to Continue as a Going Concern is Dependent upon
Restructuring" on page 32 of this Form 10-K.
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INDUSTRY OVERVIEW
Manufacturers are seeking to improve competitiveness by focusing on their
core business and by reducing costs in non-core, non-revenue producing
activities. Three key trends that have developed as a result are: (i) increased
outsourcing of non-core services, (ii) a reduction by manufacturers in the
number of vendors from which outsourced services are purchased and (iii)
maximizing resource recovery opportunities from waste and by-product streams.
The Company believes that the industrial services and resource recovery
industries are positioned to benefit from these three major trends.
Many non-core activities can be performed on a more cost effective basis by
specialized industrial service and resource recovery providers that have greater
expertise, technological advantages, access to markets for recovered materials
and economies of scale. As a result, companies which outsource non-core
activities are able to lower operating and capital costs, increase access to new
technologies, enhance by-product recovery and reduce liabilities by redirecting
accountability. In addition, by reducing the number of vendors from which
outsourced activities are purchased, and acquiring services from those suppliers
that can provide a "total service" solution on a national basis, manufacturers
can further lower administrative costs, reduce management overhead and increase
supplier accountability while reducing potential liabilities. Recovery of
resources from waste and by-product streams improves manufacturing efficiency by
reducing and reusing manufacturing residuals and by-products thereby lowering
operating costs, including raw material costs and reducing environmental
liabilities.
BUSINESS DIVISIONS
METALS SERVICES
The Metals Services Group's primary operations are ferrous processing and
industrial metals services. The Company is one of the largest ferrous scrap
processors in North America and in the United Kingdom. The Metals Services Group
has approximately 2,000 employees.
In 1998, the Company conducted a review of its business segments and
strategic alternatives and concluded that it would divest of its ferrous and
non-ferrous metal operations in the United States, Canada and the United
Kingdom. The primary reason for the decision was to generate sufficient proceeds
from the divestitures to allow the Company to substantially pay down and
restructure its indebtedness. In July 1998, the Company's Houston, Texas-based
steel distribution business was sold for $95 million and on May 21, 1998, the
Company sold certain of its spiral weld pipe operations for $9.9 million. In
January 1999, the Company sold its aluminum processing facilities located in
Guelph, Ontario, Syracuse, New York and Bellwood, Virginia for $69.5 million.
Certain copper and non-ferrous operations or assets are expected to be sold
within the next 12 months and the remainder of the operations in these segments
will be closed during 1999. Due to weak ferrous market conditions and
indications of value from offers received, the Company decided not to sell its
ferrous operations.
FERROUS PROCESSING OPERATIONS. The Metals Services Group is a processor
and broker of ferrous scrap to steel mills and foundries located in the lower
Great Lakes region, the Pittsburgh-Ohio corridor, Southeastern United States and
in the United Kingdom. The Company's processing capacity is about ten million
tons annually.
Ferrous scrap is generated as a by-product of automotive stamping and
fabrication and is also derived from post-consumer sources such as cars and
refrigerators. It is processed by baling, separation or shredding during which
time the material is graded and sorted. The primary consumers of ferrous scrap
are the foundry industry and the steel industry which uses electric arc furnace
technology to reduce scrap to molten form in the production of steel. The
Company's operations are regionally concentrated close to industrial scrap
producers and other suppliers and to local steel mills.
The Company's European Division provides a mix of metals recovery and
industrial services to clients in six European countries. In the United Kingdom,
the Company is one of the largest steel scrap processing companies with a
network of twenty facilities including five sites with shredders and two seaport
export
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facilities. The Company operates a heavy media separation facility for the
recovery of non-ferrous metal from shredder residue and is active in mill
services and electric are furnace dust recycling.
The Metals Services Group sets and adjusts its prices for ferrous metals
sold based upon prices set monthly by the major steel producers. The Company
manages its commodity price risk by acquiring ferrous metal scrap as it is
needed for its customers and maintaining relatively low inventories of scrap and
processed metals.
INDUSTRIAL METALS SERVICES. The Metals Services Group, through its
industrial metals services operations, provides a broad range of services to
steel mills. The services include engineering and construction management
services, on-site services such as scrap inventory management, pit cleaning and
charge preparation, by-product management that includes slag management, oil
recovery and electric arc furnace dust management, and processing and
distribution which is comprised of a specialized galvanized steel coil
distribution and slitting operation.
The engineering and construction management services manage projects for
the customer through all phases of activity that include design, procurement,
bidding, construction, start-up and training. The design engineering services
that complement the construction management team include civil, structural,
foundations, mechanical, instrumentation and process control and process and
systems engineering. The group also provides technical operations services
whereby the Company assists clients in the implementation of new technologies.
An example of this is ARC Dust Process Limited which is a patented process
developed to recycle electric arc furnace dust.
DISCONTINUED OPERATIONS -- NON-FERROUS AND COPPER OPERATIONS. During 1998,
the Company engaged in non-ferrous and copper processing operations. The
non-ferrous processing operations included the refining of second grade copper
into prime ingot and the production of deoxidizing products and alloys from
aluminum scrap for use in the steel and automotive industries. The copper
operations processed wire and cable scrap to recover copper.
In December 1998, the Company decided to discontinue its non-ferrous and
copper operations including those described above. In January 1999, the Company
sold its aluminum processing facilities located in Guelph, Ontario, Syracuse,
New York and Bellwood, Virginia. Certain copper and non-ferrous operations or
assets are expected to be sold within 12 months and the remainder of the
operations in these segments will be closed during 1999.
INDUSTRIAL SERVICES GROUP
The Industrial Services Group is an integrated provider of industrial
outsourcing, by-products recovery and utilities management services with over
250 facilities and approximately 11,000 employees, providing a wide range of
services geared towards the industrial customer. The Company operates a network
of solid and liquid industrial by-product recovery facilities in North America.
The Industrial Services Group is headquartered in Houston, Texas.
The Industrial Services Group has a significant presence in the heavily
industrialized regions of the Gulf coast and northeastern, southeastern and
southwestern United States. The Industrial Services Group is organized into four
operating regions: Central, Eastern, Southeast and Western, each with a mandate
to provide a variety of industrial services to customers in that region. In
addition, many of the Company's specialized services are marketed across all
regions. These specialized services include demolition and decommissioning
services, turnaround services, chemical services and products, analytical
laboratories, container services and tank cleaning.
The Company's European Division, which is active in metals recovery and
industrial services, has nine facilities in the United Kingdom, Holland,
Austria, Germany, Portugal and Spain providing a mix of industrial services to
the automotive, steel, chemical and pulp and paper industries.
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In 1998, the Industrial Services Group purchased Industrial Services
Technologies, Inc. of Denver, Colorado, for $13 million. Industrial Services
Technologies, Inc. primarily provides specialized welding services to the
petrochemical industry.
The Industrial Services Group is segmented into three principal operations:
by-products recovery, industrial outsourcing services and utilities management.
BY-PRODUCTS RECOVERY. The Industrial Services Group's by-products recovery
operations apply customized process technologies to recover or create useable
products from liquid and solid industrial by-products (primarily hazardous and
non-hazardous chemical waste) and thereby reduce the cost and quantity of
materials destined for final disposal. The Industrial Services Group collects
organic industrial by-products which are processed into engineered fuels or
distilled into solvents and also provides on-site waste minimization and
inorganic waste processing.
Producing engineered fuels involves the blending of liquid and solid
industrial by-products into a customized fuel for use in industrial furnaces,
principally cement kilns. Distillation of spent solvents occurs through both
simple and fractional methods with recovered solvents either returned to the
generator or sold to the automotive aftermarket. Inorganic processing
capabilities include the treatment of waste waters and cyanide residuals, and
the recovery of metals from sludges, slags and foundry sands. The Industrial
Services Group also provides wastewater treatment, sludge management and paint
overspray recovery services to automotive and parts manufacturers that use paint
spray booth systems.
The Company's network of facilities and application of proprietary
technologies enables Philip to provide its clients with a competitive
alternative to conventional disposal. By developing new technologies or
customizing available technologies, the Company has achieved competitive
processing and recovery efficiencies. For example, the Company has developed a
container processing system which enables it to handle large volumes of drummed
by-products quickly and effectively. The system operates in an inert atmosphere
using automatic control and video monitoring to empty or shred drummed
by-products which are then transferred to feed storage tanks where product
separation is controlled. Supplemental fuels can then be blended from this
material. Philip has also established an engineered fuel processing system
("Super Blender"), which emulsifies solids with liquid chemical by-products and
suspends these solids in a supplemental fuel for industrial use. Through this
process, the Company produces a supplemental fuel that contains up to 50% solids
by weight, providing its customers a more environmentally suitable and lower
cost alternative to the disposal of solid hazardous waste.
Solid and liquid chemical and industrial waste residues constitute the bulk
of materials managed by the by-products recovery operations. The hazardous waste
management industry, which provides disposal services, including incineration
and hazardous waste landfills, is a significant competitor to the Company for
by-product waste streams. As a result of overbuilding and the success of its
customer's waste minimization efforts, significant excess capacity has developed
in the hazardous waste management industry, leading to downward pricing
pressures in the markets served by the Company's by-products operations. To
counter this situation, the Company continues to develop and employ innovative
technologies that minimize on-site waste generation for its customers and
maximize the value and reuse opportunities for industrial by-products. By
developing increasingly value-added applications for the materials it manages,
in partnership with its key industrial customers, the Company maximizes its
profitability and differentiates itself from conventional disposal alternatives.
Examples of this strategy include the patented Emulsion for Paint Overspray
Control ("EPOC") system installed at 19 automotive and equipment manufacturing
facilities in North America and Europe. The EPOC system improves the efficiency
of the painting process and reduces costs by eliminating build up in the paint
booth and decreasing paint usage. A further example of a value-added application
is the Company's association with BASF Company ("BASF") to recycle rigid
polyurethane for the automotive sector. At Philip's Detroit, Michigan facility,
polyurethane scrap is ground, chopped and added to a reactor containing solvents
such as glycol, catalysts and other ingredients. It is then thermally treated
and cooled to ambient temperature. The polyol produced from this process can be
used as a virgin material in rigid polyurethane applications.
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INDUSTRIAL OUTSOURCING SERVICES. The industrial outsourcing services
operations serve the refining, petrochemical, oil and gas, electric utility,
pulp and paper, automotive, paint and coatings and transportation industries,
providing industrial and commercial customers with a range of industrial and
environmental services. These services include cleaning and maintenance
(including hydroblasting, gritblasting, air-moving and liquid vacuuming,
container services, and tank cleaning), waste collection and transportation,
turnaround and outage services, refractory services, decommissioning and
remediation, analytical services, emergency response services, project
management services, inspection and analysis services, electrical and
instrumentation and other general plant support services.
Hydroblasting is performed using high pressure pumps to remove hard
deposits from surfaces such as heat exchangers, boilers, aboveground storage
tanks and pipelines, that may be unsuitable for other conventional cleaning
techniques. Gritblasting utilizes both abrasive and non-abrasive media to clean
surfaces on electrostatic precipitators and boilers and to prepare metal
surfaces for protective coatings and non-destructive testing. Air-moving and
liquid vacuuming remove and handle industrial wastes or salvageable materials
contained in customers' tanks, containers or other process configurations.
Container services include cleaning, inspection and repair of highway
tank-trailers, railcar tanks, intermodal containers and intermediate bulk
containers. Tank cleaning involves the removal of sludge and residual products
from the interior of storage tanks to allow inspection, repair and/or product
changeover.
Waste collection and transportation services provide comprehensive on-site
by-product and waste management programs for facility waste streams. Waste is
tested and classified in order to determine the recyclability of the material
and third party disposal requirements. Manifests and other shipping
documentation are prepared and the waste material is sent to the Company's
recycling and reclamation facilities wherever possible, or to contracted third
party treatment and disposal facilities. The Industrial Services Group operates
a large fleet of collection vehicles.
Turnaround and outage services provide customers in refineries,
petrochemical facilities and power plants a single source integrated package of
turnaround maintenance services and other speciality services for the scheduled
maintenance, repair or replacement of process equipment, operating machinery and
piping systems. Sophisticated maintenance programs play an increasingly
important role in the continuous improvement of performance in plant operations.
Services provided include project management, planning and scheduling,
decontamination, heat exchange maintenance, refactory services and heat treating
services. The Company has a highly experienced and skilled labour force and
patented technologies that reduce the downtime associated with turnaround
projects. These technologies also reduce the safety risks associated with heat
bundle extraction and cleaning.
Industrial outsourcing services also include a broad range of remediation
and environmental services, including strategic resource management, site
remediation, decommissioning and investment recovery, abatement, environmental
consulting and engineering, analytical and emergency response services.
Site remediation includes project management, risk assessment, demolition,
on-site treatment and transportation services to address environmental
contamination problems. Remediation can range from simple soil excavation and
disposal to complex programs that in some cases involve assumption by the
Company of management of all aspects of its customers' environmental and
regulatory programs. Combined with investment recovery, the Company's site
remediation services not only address environmental problems and support the
closure and decommissioning of facilities, they can reduce costs for customers
through the reclamation of ferrous and non-ferrous scrap.
Decommissioning involves the closing down of operations, removal of process
equipment, buildings and structures and site cleanup and remediation. The
Industrial Services Group provides project planning and management, including
design, planning and control, health and safety, waste reduction, demolition,
and final site rehabilitation. The Company's resource and by-products recovery
capabilities enables it to recover value from equipment, building components and
ferrous metals.
The industrial outsourcing services group operates a network of
environmental laboratories in Canada and the United States from which it
provides analytical testing for its customers across North America. The
7
<PAGE> 10
Company provides advanced air quality analysis and dioxin testing. The group
also provides emergency response services, including containment, clean-up,
remediation and disposal of material resulting from the inadvertent release of
dangerous goods or hazardous materials, and wastes or spills of material that
are unusual to the environment in quantity or quality.
The competitive strengths of the Company's industrial outsourcing services
operations include its ability to provide integrated cost competitive "back end"
solutions, such as decommissioning, remediation and investment recovery, to
problems identified through the risk assessment and consulting services phase of
the contract.
Philip owns and operates a solid non-hazardous landfill in Stoney Creek,
Ontario. The site has a total capacity of 11 million tons and an annual fill
rate of 825,000 tons. The site is used for the disposal of solid non-hazardous
residuals from clients and from the Company's by-products recovery operations.
UTILITIES MANAGEMENT. The Company provides turnkey wastewater treatment at
customers' facilities, including design, procurement, installation, start-up and
operation. The Company is able to design and construct economical and efficient
treatment systems while providing a guarantee of performance and assurance of
operability.
The Company's utilities management business is operated through
approximately 68%-controlled Philip Utilities Management Corporation ("PUMC"),
which operates and maintains water and wastewater treatment facilities for
municipal and industrial customers, provides residuals management and sludge
dewatering and disposal services and owns and operates private utilities. PUMC
also provides plant design and construction, project management, process design
and engineering services as well as installation of automated control systems.
PUMC specializes in services relating to the construction, repair and
maintenance of collection and distribution systems or pipes and pumping stations
necessary to convey water and wastewater to and from treatment facilities. These
services are provided both to facilities operated and owned by PUMC and to third
parties. On March 26, 1999, Philip announced that it had entered into an
agreement to sell its 68% interest in PUMC to Azurix Corp., an affiliate of
Enron Corp. of Houston, Texas. The net proceeds to Philip from the sale are
expected to be approximately $67 million in cash.
BACKLOG
Revenue backlog for the Industrial Services Group was $98.9 million as at
December 31, 1998 with all of the work anticipated to be completed in 1999.
Revenue backlog for 1997 and 1996 was $60.4 million and $16.5 million,
respectively. While backlog can be an indication of expected future revenues,
backlog is subject to revisions from time to time due to cancellations,
modifications and changes in the scope of projects or their design and
construction schedules. There can be no assurance whether or when backlog will
be realized as revenue.
IMPACT OF INFLATION, ECONOMIC CONDITIONS AND SEASONALITY
A general economic slowdown over the Christmas holiday period, client year
end shutdowns and weather related circumstances during winter months result in
the Company experiencing lower levels of activity in December and during the
first quarter of its fiscal year. Therefore, first quarter results may not be
indicative of the results that will be achieved during an entire year.
PROPRIETARY TECHNOLOGY
The Company develops and applies proprietary technologies to provide
on-site waste minimization, by-products recovery and industrial services that
reduce customer costs, safety risks and potential environmental liabilities.
In its Metals Services Group, the Company applies processing technologies
to obtain better yields from scrap and by-products and to develop further uses
for material that would otherwise be landfilled. Development and use of these
processes increases margins, reduces environmental risk for the Company and its
8
<PAGE> 11
customers and adds to the integrated package of services provided, making the
Company more attractive as a single source vendor.
The Industrial Services Group applies proprietary technologies to minimize
waste, increase recovery and reuse of industrial by-products and provide on-site
industrial services that minimize downtime and costs associated with industrial
cleaning, maintenance and turnaround projects. These technologies include
engineered fuel blending, using a "Super Blender" to emulsify solid and liquid
by-products into a fuel for cement kilns, the EPOC paint overspray recovery
system that reduces paint usage and eliminates the landfilling of paint sludge
and the Company's association with BASF to recycle rigid polyurethane, primarily
generated from automotive production and automotive scrap, into polyols for
reuse in polyurethane applications. Turnaround technologies primarily used in
refinery and petrochemical turnaround projects include Fast Draw, a remote
control heat exchanger bundle extraction technology, Fast Clean, a semi-robotic
heat exchanger bundle cleaning process, and Life Guard, a technology for
decontaminating hydrocarbons in refinery towers and vessels to reduce potential
health and safety impacts during cleaning and maintenance activities.
Although the Company possesses patents for certain of its technologies, it
relies primarily on trade secret protection and confidentiality to protect its
proprietary technologies. While the time and capital associated with the
development and commercialization of technologies provide a barrier to entry,
there can be no assurance that the Company will be able to maintain the
confidentiality of its technology.
The following table outlines certain of the Company's proprietary
technologies:
<TABLE>
<CAPTION>
TECHNOLOGY APPLICATION COMPETITIVE ADVANTAGE INDUSTRY SERVED
- ---------- ----------- --------------------- ---------------
<S> <C> <C> <C>
Fast Draw...................... Remote control extraction of Reduced turnaround time Petrochemical,
heat exchanger bundles and labor, Hydrocarbon
Enhanced safety processing
Fast Clean..................... Semi-robotic cleaning of Reduced turnaround time Petrochemical,
heat and labor, Hydrocarbon
exchanger bundles Enhanced safety processing
Life Guard..................... Decontamination of Elimination of personal Petrochemical,
hydrocarbons in refinery safety risks, Hydrocarbon
towers and vessels Improved heat transfer processing
performance
WeldSmart...................... Welding, Reduces energy consumption All welding
Heat treatment and increases applications
productivity
EPOC........................... Paint overspray capture Reduces paint usage and Automotive and
and recovery eliminates landfilling of equipment
paint sludge manufacturers
Super Blender.................. Processing of solid and Reduces disposal costs and Petrochemical,
liquid by-products into eliminates landfilling Paint,
engineered fuels Automotive,
Cement
Fuel Smart..................... Computer based method to Optimizes combustion, All industrial
regulate industrial furnaces minimizes the formation furnaces
of pollutants
Rigid Polyurethane Recycling... Thermal/chemical processing Eliminates landfilling, Automotive,
of rigid polyurethane Supports "recyclable car" Polyurethane
automotive parts into objective of automotive applications
virgin polyols manufacturers
</TABLE>
9
<PAGE> 12
SALES AND MARKETING
The Company's sales and marketing strategy is focused on establishing close
working relationships with customers, developing a thorough understanding of
their business, working jointly on research and development to achieve waste
reduction and by-products recovery efficiency and bundling services to achieve
maximum efficiencies and cost reductions for customers. Philip strives to become
an integral part of its customers business through redesigning process
technologies, operating resource recovery facilities and delivering a broad
range of industrial outsourcing services.
The Company's account managers, who are assigned to industrial accounts,
are critical to the success of the sales and marketing program. These
individuals are responsible for ensuring the customer has one point of contact
for information, service and accountability and bringing in other Philip
expertise as required to provide information and implement a broad range of
services.
The Company places less emphasis on traditional sales approaches to capture
new clients and more on cross selling a broad range of services to its existing
large industrial client base. The Company has established a substantial base of
clients which cross all key industrial sectors. The Company identifies services
it is providing these customers and opportunities for additional cross-selling.
This process is carried out in conjunction with the sales or operating personnel
who have relationships with these customers.
In addition, to support many of its industrial services contracts, Philip
dedicates on-site personnel at its clients' facilities to manage said contracts.
These personnel are ideally situated to assess other client needs and integrate
additional services provided by the Company.
The Company also participates in competitive bidding processes to obtain
contracts granted by municipalities, local governments or private enterprises
for services such as site redemption and decommissioning contract services.
Contracts are generally awarded on the basis of sealed bids submitted by
interested bidders and competition for these contracts is generally intense.
CUSTOMERS
Philip provides a broad range of metals recovery and industrial services to
major industry sectors including refining and petrochemical, steel, automotive,
chemical, paint and coatings, oil and gas, utilities, pulp and paper, food and
beverage and transportation.
The Company's Metals Services Group serves customers primarily in the
steel, automotive and foundry industries. The Company's Industrial Services
Group serves a number of industry sectors, primarily automotive, refining and
petrochemical, oil and gas, pulp and paper, steel, transportation and utilities.
Philip seeks to enter into master service agreements with large customers
to establish the Company as an approved national vendor. Master service
agreements are a primary vehicle for large companies to reduce their number of
suppliers and costs, while concurrently establishing high standards of service
delivery so that fewer suppliers that are geographically diverse can provide
more services. In some cases, these agreements approve less than three suppliers
in the area of resource recovery and industrial services, providing the Company
with a strong competitive advantage. In other cases, a number of suppliers are
approved and the master service agreement serves only to assist the Company in
selling its services on a plant-by-plant basis.
COMPETITION
The metals recovery and industrial services industries are highly
competitive and require substantial capital resources. Competition is both
national and regional in nature and the level of competition faced by the
Company in its various lines of business is significant. Potential customers of
the Company typically evaluate a number of criteria, including price, service,
reliability, prior experience, financial capability and liability management. In
servicing its customers, the Company believes its primary competitive strengths
are: (i) that it offers a broad range of metals recovery and industrial
services, (ii) its broad geographic network, (iii) its proprietary technologies,
and (iv) its highly skilled and experienced employee base. The Company competes
with a variety of companies that may be larger in particular business lines in
which the Company operates.
10
<PAGE> 13
The primary competitors of the Metals Services Group are other scrap
processors in regions where the Metals Services Group operates. Although the
Metals Services Group competes in both the purchase and sale sides of its
businesses, competition is primarily on the purchase side for access to scrap
which may become more intense during times of scrap scarcity. Availability
depends upon the level of economic activity in the industries from which the
Company acquires its scrap and market prices. The Company believes that its
longstanding relationship with generators of metal bearing scrap provides it
with increased stability. In its ferrous metals processing operations, the
Company competes for access to scrap with large regional operators as well as
several smaller operators.
The Company seeks to enhance its competitive position by enhancing the
efficiency of its operations through economies of scale and increased recovery
rates, thereby lowering its costs which increases margins and gives it pricing
flexibility. The Company also accompanies its product sales with a broad range
of services, or vertically integrates its operations to provide multiple
services to its clients. The Metals Services Group also competes on the sale
side by offering a secure supply of high quality scrap that is processed
according to client specifications and by providing a broad range of additional
mill services.
The industrial services industry is also highly competitive and fragmented.
The Company competes with numerous local, regional and national companies of
varying sizes and financial resources. Competition for industrial services is
based primarily on hourly rates, productivity, safety, innovative approaches and
quality of service. Philip competes by providing a highly experienced work force
with specialized skills in the application of technologies, by integrating and
offering multiple services, and by maintaining strict adherence to health and
safety policies and compliance with clients' requirements. The hazardous waste
management industry competes with the Company's industrial services operations
by providing a price competitive disposal alternative to a number of the
Company's waste management and by-products recovery services. The Company
competes by developing and employing innovative technologies that minimize
on-site waste generation for its customers and maximize the value and reuse
opportunities for the industrial by-products. Through developing increasingly
value-added applications for the materials it manages, in partnership with its
key industrial customers, the Company maximizes its profitability and
differentiates itself from conventional disposal alternatives. Examples of this
strategy include the patented EPOC system installed at automotive and equipment
manufacturing facilities and the Company's association with BASF to recycle
rigid polyurethane for the automotive sector.
Recently, weak market conditions in the metals recycling and industrial
services industries have had a negative impact on revenue in these areas. For
example, record steel imports have decreased domestic demand and prices for
scrap steel.
GOVERNMENT REGULATION
The Company is subject to government regulation including stringent
environmental laws and regulations. Among other things, these laws and
regulations impose requirements to control air, soil and water pollution, and
regulate health, safety, zoning, land use and the handling and transportation of
industrial by-products and waste materials. This regulatory framework imposes
compliance burdens and costs on the Company. See Item 7, Capital Expenditures in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations which appears on pages 30 and 31 of this Form 10-K for a discussion
of the Company's estimated capital expenditures in relation to environmental
compliance matters. Notwithstanding the burdens of this compliance, the Company
believes that its business prospects are enhanced by the enforcement of laws and
regulations by government agencies.
Applicable federal and state or provincial laws and regulations regulate
many aspects of the resource recovery and industrial services industry. Laws and
regulations typically provide operating standards for treatment, storage,
management and disposal facilities and monitoring and spill containment
requirements and set limits on the release of contaminants into the environment.
Such laws and regulations, among other things, (i) regulate the nature of the
industrial by-products and wastes that the Company can accept for processing at
its treatment, storage and disposal facilities, the nature of the treatment they
can provide at such facilities and the location and expansion of such
facilities, (ii) impose liability for remediation and clean-up of
11
<PAGE> 14
environmental contamination, both on-site and off-site, resulting from past and
present operations at the Company's facilities, and (iii) may require financial
assurance that funds will be available for the closure and post-closure care of
sites. Such laws and regulations also require manifests to be completed and
delivered in connection with any shipment of prescribed materials so that the
movement and disposal of such material can be traced and the persons responsible
for any mishandling of such material identified.
In particular, the regulatory process requires the Company to obtain and
retain numerous governmental approvals, licenses and permits to conduct its
operations, any of which may be subject to revocation, modification or denial.
Operating permits need to be renewed periodically and may be subject to
revocation, modification, denial or non-renewal for various reasons, including
failure of the Company to satisfy regulatory concerns. Adverse decisions by
governmental authorities on permit applications submitted by the Company may
result in abandonment or delay of projects, premature closure of facilities or
restriction of operations, all of which could have a material adverse effect on
the Company's earnings for one or more fiscal quarters or years.
Federal, state, provincial, local and foreign governments have also from
time to time proposed or adopted other types of laws, regulations or initiatives
with respect to the resource recovery and industrial services industry. Included
among them are laws, regulations and initiatives to ban or restrict the
international, interprovincial, intraprovincial, interstate or intrastate
shipment of wastes, impose higher taxes on out-of-state-waste shipments than
in-state shipments, reclassify certain categories of non-hazardous wastes as
hazardous and regulate disposal facilities as public utilities. Certain state
and local governments have promulgated "flow control" regulations which attempt
to require that all waste generated within the state or local jurisdiction must
go to certain disposal sites. From time to time legislation is considered that
would enable or facilitate such laws, regulations or initiatives. Due to the
complexity of regulation of the industry and to public pressure, implementation
of existing or future laws, regulations or initiatives by different levels of
governments may be inconsistent and are difficult to foresee.
Also subject to regulation are spills of certain industrial by-products and
waste materials. While the specific provisions of spills related laws and
regulations vary among jurisdictions, such laws and regulations typically
require that the relevant authorities be notified promptly, that the spill be
cleaned up promptly and that remedial action be taken by the responsible party
to restore the environment to its pre-spill condition. Generally, governmental
authorities are empowered to act to clean up and remediate spills and
environmental damage and to charge the costs of such clean-up to one or more of
the owners of the property, the person responsible for the spill, the generator
of the contaminant and certain other parties. Such authorities may also impose a
tax or other liens to secure such parties' reimbursement obligations.
The Company's facilities are subject to periodic unannounced inspection by
federal, provincial, state and local authorities to ensure compliance with
license terms and applicable laws and regulations. The Company works with such
authorities to remedy any deficiencies found during such inspections. If serious
violations are found or deficiencies, if any, are not remedied, the Company
could incur substantial fines and could be required to close a site.
Environmental laws and regulations impose strict operational requirements
on the performance of certain aspects of hazardous substances remedial work.
These requirements specify complex methods for identification, storage,
treatment and disposal of waste materials managed during a project. Failure to
meet these requirements could result in termination of contracts, substantial
fines and other penalties.
Governmental authorities have a variety of administrative enforcement and
remedial orders available to them to cause compliance with environmental laws or
remedy or punish violations of such laws. Such orders may be directed to various
parties, including present or former owners or operators of the concerned sites,
or parties that have or had control over the sites. In certain instances, fines
may be imposed.
In the event that administrative actions fail to cure the perceived problem
or where the relevant regulatory agency so desires, an injunction or temporary
restraining order or damages may be sought in a court proceeding. In addition,
public interest groups, local citizens, local municipalities and other persons
or organizations may have a right to seek relief from court for purported
violations of law. In some jurisdictions
12
<PAGE> 15
recourse to the courts for individuals under common law principles such as
nuisance have been or may be enhanced by legislation providing members of the
public with statutory rights of action to protect the environment. In such
cases, even if an industrial by-products or waste materials treatment, storage
or disposal facility is operated in full compliance with applicable laws and
regulations, local citizens and other persons and organizations may seek
compensation for damages caused by the operation of the facility.
While, in general, the Company's businesses have benefited substantially
from increased governmental regulation, the resource recovery and industrial
services industries in North America have become subject to extensive and
evolving regulation. The Company makes a continuing effort to anticipate
relevant material regulatory, political and legal developments, but it cannot
predict the extent to which any future legislation or regulation may affect its
operations. The Company believes that with heightened legal, political and
citizen awareness and concerns, all companies in the resource recovery and
industrial services industries may be faced, in the normal course of operating
their businesses, with fines and penalties and the need to expend funds for
capital projects, remedial work and operating activities, such as environmental
contamination monitoring, and related activities. Regulatory or technological
developments relating to the environment may require companies engaged in the
industrial services and resource recovery industries to modify, supplement or
replace equipment and facilities at costs which may be substantial. Because the
businesses in which the Company is engaged are intrinsically connected with the
protection of the environment and the potential discharge of materials into the
environment, a portion of the Company's capital expenditures is expected to
relate, directly or indirectly, to such equipment and facilities. Moreover, it
is possible that future developments, such as increasingly strict requirements
of environmental laws and regulations, and enforcement policies thereunder,
could affect the manner in which the Company operates its projects and conducts
its business, including the handling, processing or disposal of the industrial
by-products and waste materials generated thereby.
HAZARDOUS SUBSTANCES LIABILITY
Canadian and U.S. laws impose liability on the present or former owners or
operators of facilities which release hazardous substances into the environment.
Furthermore, companies may be required by law to provide financial assurances
for operating facilities in order to ensure their performance of obligations
complies with applicable laws and regulations. Similar liability may be imposed
upon the generators and transporters of waste which contain hazardous
substances. All such persons may be liable for waste site investigation costs,
waste site clean-up costs and natural resource damages, regardless of fault, the
exercise of due care or compliance with relevant laws and regulations; such
costs and damages can be substantial.
In the United States, such liability stems primarily from the Comprehensive
Environmental Response Compensation and Liability Act of 1980 ("CERCLA") and its
state equivalents (collectively, "Superfund") and the Resource Conservation and
Recovery Act of 1976 ("RCRA") and similar state statutes. CERCLA imposes joint
and several liability for the costs of remediation and natural resource damages
on the owner or operator of a facility from which there is a release or a threat
of a release of a hazardous substance into the environment and on the generators
and transporters of those hazardous substances. Under RCRA and equivalent state
laws, regulatory authorities may require, pursuant to administrative order or as
a condition of an operating permit, that the owner or operator of a regulated
facility take corrective action with respect to contamination resulting from
past or present operations. Such laws also require that the owner or operator of
regulated facilities provide assurance that funds will be available for the
closure and post-closure care of its facilities. Since the Company has
operations in, and has shipped and continues to ship hazardous waste to disposal
sites in the United States, the Company is exposed to potential liability in the
United States under RCRA, CERCLA and their state law equivalents resulting from
the handling and transportation of such wastes and for alleged environmental
damage associated with past, present and future waste disposal practices.
The Company is aware that hazardous substances are present in some of the
landfills and transfer, storage processing and disposal facilities used by it.
Certain of these sites have experienced environmental problems and clean-up and
remediation is required. The Company has grown in the past by acquiring other
businesses. As a result, the Company has acquired, or may in the future acquire,
landfills and other transfer and processing sites which contain hazardous
substances or which have other potential environmental problems
13
<PAGE> 16
and related liabilities, and may acquire businesses which may in the future
incur substantial liabilities arising out of their respective past practices,
including past disposal practices.
Certain of Philip's subsidiaries' transfer, storage, processing and
disposal facilities are contaminated as a result of operating practices at the
sites and remediation will be required at a substantial cost. Investigations of
these sites have characterized to varying degrees the nature and extent of the
contamination. Philip and these subsidiaries, in conjunction with environmental
regulatory agencies, have in some instances commenced to remediate the sites in
accordance with approved corrective action plans pursuant to permits or other
agreements with regulatory authorities. The Company, in conjunction with an
environmental consultant, has developed or is developing cost estimates for
these sites that are periodically reviewed and updated. Estimated remediation
costs, for individual sites and in the aggregate, are substantial. While the
Company maintains reserves for these matters based upon cost estimates, there
can be no assurance that the ultimate cost and expense of corrective action will
not exceed such reserves and have a material adverse impact on the Company's
operations or financial condition.
The Company is required under certain U.S. and Canadian laws and
regulations to demonstrate financial responsibility for possible bodily injury
and property damage to third parties caused by both sudden and non-sudden
occurrences. The Company is also required to provide financial assurance that
funds will be available when needed for closure and post-closure care at certain
of its treatment, storage and disposal facilities, the costs of which could be
substantial. Such laws and regulations allow the financial assurance
requirements to be satisfied by various means, including letters of credit,
surety bonds, trust funds, a financial (net worth) test and a guarantee by a
parent company. In the United States, a company must pay the closure costs for a
waste treatment, storage or disposal facility owned by it upon the closure of
the facility and thereafter pay post-closure care costs. There can be no
certainty that these costs will not materially exceed the amounts provided
pursuant to financial assurance requirements. In addition, if such a facility is
closed prior to its originally anticipated time, it is unlikely that sufficient
funds will have been accrued over the life of the facility to fund such costs,
and the owner of the facility could suffer a material adverse impact as a
result. Consequently, it may be difficult to close such facilities to reduce
operating costs at times when, as is currently the case in the hazardous waste
services industry, excess treatment, storage or disposal capacity exists.
Certain subsidiaries acquired by Philip have been named as potentially
responsible or liable parties in connection with sites listed on the Superfund
National Priority List ("NPL"). In the majority of cases, the Company's
connection with NPL sites relates to allegations that subsidiaries of Philip (or
their predecessors) transported waste to the sites in question. The Company
routinely reviews the nature and extent of its alleged connection to these
sites, the number, connection and financial ability of the named and unnamed
potentially responsible parties and the nature and estimated cost of the likely
remedy. Based on its review, the Company maintains reserves. There can be no
assurance that the Company will not subsequently incur liabilities at such sites
or at additional sites that materially exceed the amounts reserved.
Estimates of the Company's liability for remediation of a particular site
and the method and ultimate cost of remediation require a number of assumptions
and are inherently difficult, and the ultimate outcome may differ from current
estimates. As additional information becomes available, estimates are adjusted.
While the Company does not anticipate that any such adjustment would be material
to its financial statements, it is possible that technological, regulatory or
enforcement developments, the results of environmental studies or other factors
could alter this expectation and necessitate the recording of additional
liabilities which could be material. Moreover, because Philip and various of its
subsidiaries have disposed of waste materials at more than 200 third-party
disposal facilities, it is possible that Philip and its subsidiaries will be
identified as PRPs at additional sites. The impact of such future events cannot
be estimated at the current time.
The Company may also be required to indemnify customers who incur liability
in connection with the foregoing pursuant to the terms of contracts between such
customers and the subsidiaries involved.
14
<PAGE> 17
EMPLOYEES
As at December 31, 1998, Philip employed over 13,000 people, approximately
2,000 of whom are unionized. Of such employees, approximately 2,000 work in the
Metals Services Group, approximately 11,000 work in the Industrial Services
Group and approximately 100 work in the Company's corporate office.
ITEM 2. PROPERTIES
The Company currently operates from over 280 locations primarily in North
America, with some locations in Europe. The Company believes that its primary
existing facilities are effectively utilized, well maintained and in good
condition. The Company believes that its facilities are adequate for its current
needs and that suitable additional space will be available as required.
The Company's corporate office is located in Hamilton, Ontario and is
comprised of leased premises occupying 46,982 square feet.
The following is a list of the principal sites from which the Company
conducts its operations. Unless otherwise indicated, all of the listed sites are
held in fee by Philip or a wholly-owned subsidiary.
METALS SERVICES GROUP
<TABLE>
<CAPTION>
OWNER LOCATION NATURE OF SERVICES PROVIDED(1)
- ----- -------- ------------------------------
<S> <C> <C>
Philip Metals Inc..................... Chesterton, Indiana metals collection, processing and transfer(2)
St. Louis, Missouri metals collection, processing and transfer
Coatesville, Pennsylvania metals collection, processing and transfer(2)
Nashville, Tennessee metals collection, processing and transfer
Memphis, Tennessee metals collection, processing and transfer(2)
Chattanooga, Tennessee metals collection, processing and transfer
Cleveland, Ohio metals collection, processing and transfer(2)
Canton, Ohio metals collection, processing and transfer(2)
Allied Metals Limited................. Bristol, United Kingdom metals collection, processing and transfer(2)
Philip Enterprises Inc................ Hamilton, Ontario metals collection, processing and transfer
</TABLE>
INDUSTRIAL SERVICES GROUP
<TABLE>
<CAPTION>
OWNER LOCATION NATURE OF SERVICES PROVIDED(1)
- ----- -------- ------------------------------
<S> <C> <C>
Burlington Environmental Inc.......... Kansas City, Missouri by-products collection, processing and transfer
Seattle, Washington by-products collection, processing and transfer
Kent, Washington by-products collection, processing and transfer
Tacoma, Washington by-products collection, processing and transfer
Nortru, Inc........................... Detroit, Michigan by-products collection, processing and transfer
Philip Industrial Services Group,
Inc................................. Detroit, Michigan by-products collection, processing and transfer
Deerpark, Texas service depot(2)
Irving, Texas waste water treatment facility(2)
RMF Global, Inc....................... Toledo, Ohio by-products industrial services contracting(2)
Republic Environmental Systems
(Pennsylvania), Inc................. Hatfield, Pennsylvania by-products collection, processing and transfer
Philip Environmental Services
Limited............................. Etobicoke, Ontario by-products decommissioning service(2)
Philip Enterprises Inc................ Barrie, Ontario by-products collection, processing and transfer
Rexdale, Ontario by-products collection, processing and transfer
Hamilton, Ontario by products collection, processing and transfer
</TABLE>
- ---------------
(1) A number of the Company's subsidiaries operate sites which provide services
in more than one category.
(2) Leased facility.
15
<PAGE> 18
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is named a defendant in legal actions
arising out of the normal course of business. The Company maintains liability
insurance against risks arising out of the normal course of business. There can
be no assurance that such insurance will be adequate to cover all such
liabilities. The following describes pending legal proceedings other than
ordinary, routine litigation incidental to its business.
3(A)
Various class actions have been filed against the Company, certain of its
past and present directors and officers, the underwriters of the Company's 1997
public offering and the Company's auditors. Each action alleges that Philip'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 Philip'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 Company's response. Pre-Trial Order No. 2 appointed
a lead plaintiff and lead counsel. On November 13, 1998, the Company filed a
motion for an order dismissing the class action on the grounds of forum non
conveniens. As of the date hereof, no decision has been rendered on the forum
non conveniens motion.
Similar claims have been asserted against the Company and certain of its
past and present officers and directors by the former shareholders of the
Steiner-Liff Metals group of companies and the Southern-Foundry Supply group of
companies. Philip acquired these companies in October 1997 and issued Philip
common shares in partial payment of the purchase price. The claims allege that
Philip'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.
A claim brought under the Ontario Class Proceedings Act was commenced on
October 26, 1998 against the Company, the underwriters of the Company's 1997
public offering and the Company's auditors. The claim was brought on behalf of
persons in Canada who purchased Philip common shares 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.
The Company has conducted a review of the claims and determined that it is
not feasible to predict or determine the final outcome of these proceedings. The
Company intends to vigorously defend all claims but there can be no assurance
that the outcome of the class actions and related actions will not have a
material adverse effect upon the financial condition or results of operations of
the Company.
3(B)
In January 1997, the State of Missouri brought an enforcement action
against Solvent Recovery Company ("SRC"), an indirect wholly owned subsidiary of
the Company, in state court alleging numerous violations of hazardous waste
regulations at SRC's Kansas City, Missouri facility. Included were allegations
that alterations or additions to the facility's operations had been implemented
without required modification of the facility's hazardous waste permit as well
as allegations of numerous deficiencies under regulations and SRC's permit in
the accumulation, record keeping, inspection, labelling, transportation and
handling of such waste. SRC and the State of Missouri have agreed upon a payment
of $225,000 to be made in two instalments and a payment of approximately
$125,000 which payment is suspended and will be waived if the facility remains
in compliance with applicable federal and state environmental standards for
three years. Philip does not expect that the matter will have a material adverse
effect on its results of operations or financial position.
16
<PAGE> 19
3(C)
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 $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. In addition, in March 1999,
Westlake PetroChemicals Corporation ("Westlake") commenced an action against
Piping Companies, Inc. ("PCI"), an indirect wholly-owned subsidiary of the
Company, alleging that welding work conducted by PCI in December 1995 was
defective and gave rise to a fire which caused considerable damage to Westlake's
Sulfur, Louisiana ethylene plant. 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. The Company intends to vigorously defend
the claims and believes that it has insurance coverage for such claims. There
can be no assurance that the outcome of the claims will not have a material
adverse effect upon the financial condition or results of operations of the
Company.
3(D)
In November 1998, the Company ceased paying interest on its $1.02 billion
in outstanding secured syndicated debt and stopped making payments on certain
other unsecured debt and contractual obligations (the "Unsecured Obligations").
The Company may not have a defense to claims asserted or actions commenced for
the payment of these obligations, or compliance with such contracts. The Company
has reached an agreement with its lending syndicate on the terms of a financial
restructuring of the Company whereby outstanding syndicated debt of $1.02
billion will be converted into $300 million of senior secured debt, $100 million
in convertible secured payment in-kind notes and 90% of the common shares of the
restructured Company. The Company is preparing a pre-packaged plan of
reorganization which it expects to file under Chapter 11 of the United States
Bankruptcy Code and in Canada under the Companies Creditors Arrangement Act. The
filing of a pre-packaged plan of reorganization is subject to the fulfillment of
certain conditions. There can be no assurance that the pre-packaged plan of
reorganization will be filed and if filed, that it will be approved by the
required stakeholders and the courts having jurisdiction over such matters. If
the pre-packaged plan of reorganization is not approved, there can be no
assurance that the Company will continue as a going concern. The Company is
seeking to impair the Unsecured Obligations as part of the US and Canadian
pre-packaged plan of reorganization filings. There can be no assurance that the
Unsecured Obligations will be resolved as part of the Company's pre-packaged
plan of reorganization. If not resolved, Unsecured Obligations could have a
material adverse effect upon the financial condition or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the fourth quarter of the fiscal year ended December 31, 1998.
17
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common shares trade under the symbol "PHV" in Canada on The
Toronto Stock Exchange (the "TSE") and the Montreal Exchange.
The trading of the Company's common shares in the United States on the New
York Stock Exchange (the "NYSE") was halted on January 12, 1999 due to the
Company's failure to meet certain listing criteria of the NYSE. In particular,
the Company's net tangible assets available to common stock was less than $12
million and the Company's three year average net income after taxes was less
than $600,000. On April 23, 1999, the NYSE notified the Company that it will
suspend trading of Philip's common shares and that it will make an application
to the Securities and Exchange Commission to delist the Company's common shares.
The Company intends to request a hearing before the Board of Directors of the
NYSE to appeal the decision.
The following table sets forth for the fiscal periods indicated (based on
the fiscal year ending December 31) the high and low sale prices per share and
trading volume of the Company's common shares as reported by the NYSE and the
TSE, the principal Canadian exchange for the trading of the Company's common
shares.
<TABLE>
<CAPTION>
PRICE RANGE AND TRADING VOLUME OF THE COMMON SHARES
-----------------------------------------------------------------
NYSE TSE
----------------------------- ---------------------------------
HIGH LOW VOLUME HIGH LOW VOLUME
------ ------ ----------- -------- -------- -----------
(US DOLLARS) (CANADIAN DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
1997
First quarter................... $18.38 $13.63 24,863,000 $24.75 $18.50 8,303,000
Second quarter.................. 15.75 12.25 32,959,000 22.10 17.15 8,445,000
Third quarter................... 19.94 14.37 31,765,000 27.90 19.95 16,710,000
Fourth quarter.................. 19.25 11.81 29,761,000 26.75 17.00 11,226,000
1998
First quarter................... $14.31 $ 7.38 112,118,000 $20.80 $10.75 28,188,000
Second quarter.................. 10.63 3.50 82,117,000 15.00 5.10 20,023,000
Third quarter................... 4.25 0.75 52,208,000 6.20 1.18 15,172,000
Fourth quarter.................. 0.94 0.13 55,452,000 1.39 0.25 33,461,000
1999
First quarter................... + + + $ 0.80 $ 0.26 22,455,000
April -......................... + + + 0.70 0.44 3,230,000
(Through April 23, 1999)
</TABLE>
- ---------------
+ not available
On April 23, 1999, the last reported sale price on the TSE of the common
shares was Cdn$0.47. At April 23, 1999, there were 131,144,013 common shares
issued and outstanding and held of record by approximately 1,667 shareholders.
DIVIDEND AND POLICY RECORD
The Company has not declared or paid cash dividends on its common shares
during the last five years. The Company currently intends to retain any earnings
for use in its business and does not anticipate paying any cash dividends on its
common shares in the foreseeable future. Any future declaration and payment of
dividends will be subject to the discretion of the Company's Board of Directors
and to applicable law and will depend upon the Company's results of operations,
earnings, financial condition, contractual limitations, cash
18
<PAGE> 21
requirements, future prospects and other factors deemed relevant by the
Company's Board of Directors. The Company's Credit Facility restricts the
payment of cash dividends.
SALES OF UNREGISTERED SECURITIES
(a) On January 28, 1998, the Company issued 39 common shares in connection
with the acquisition of Intermetco Inc. in 1997. The transaction was
made in reliance on Regulation S under the Securities Act of 1933, as
amended (the "Securities Act").
(b) On February 2, 1998, the Company issued 1,381 common shares in
connection with the conversion of 7.25% Convertible Subordinated
Debentures assumed by Philip pursuant to the Allwaste, Inc.
acquisition in 1997. The transaction was exempt under Section 3(a)(9)
of the Securities Act.
(c) On March 5, 1998, the Company issued 159 common shares in connection
with the acquisition of Intermetco Inc. in 1997. The transaction was
made in reliance on Regulation S under the Securities Act.
(d) On June 18, 1998, the Company issued 79 common shares in connection
with the acquisition of Intermetco Inc. in 1997. The transaction was
made in reliance on Regulation S under the Securities Act.
(e) On July 13, 1998, the Company issued 79 common shares in connection
with the acquisition of Intermetco Inc. in 1997. The transaction was
made in reliance on Regulation S under the Securities Act.
(f) On October 19, 1998, the Company issued 159 common shares in
connection with the acquisition of Intermetco Inc. in 1997 The
transaction was made in reliance on Regulation S under the Securities
Act.
FOREIGN ISSUER
There are no governmental laws, decrees or regulations in Canada relating
to restrictions on the import of capital or affecting the remittance of
interest, dividends or other payments to non-resident holders of the Company's
common shares, except for withholding tax provisions discussed below. There are
no limitations on the right of non-resident or foreign owners to hold or vote
the common shares of the Company except as provided in the Investment Canada Act
(the "Act"). The Act provides for the review and approval by the Canadian
government of direct or indirect acquisitions of control of Canadian businesses
where the investment exceeds specified thresholds and for the divestment of
investments which have not been approved. The Company is not aware of any such
control positions held by U.S. investors.
The following paragraphs summarize certain Canadian federal income tax
considerations in connection with the receipt of dividends paid on common shares
and a disposition of common shares by non-residents of Canada. These tax
considerations are stated in brief and general terms and are based on Canadian
law currently in effect. There are other potentially significant Canadian and
U.S. federal income tax considerations and provincial, state or local income tax
considerations with respect to ownership and disposition of the common shares
which are not discussed herein. The tax considerations relative to ownership and
disposition of the common shares may vary from taxpayer to taxpayer depending on
the taxpayer's particular status.
Generally, under the Income Tax Act (Canada) (the "Tax Act"), dividends
paid or credited or deemed to be paid or credited on common shares of the
Company to a shareholder who is not resident in Canada, and who does not use or
hold and is not deemed to use or hold such shares in or in the course of
carrying on a business in Canada, are subject to a withholding tax of 25% of the
gross amount of such dividends. However, Article X to the Canada-United States
Income Tax Convention, 1980 (the "Convention") reduces to 15% the rate of such
withholding tax where the beneficial owner of the dividends is resident in the
United States for the purposes of the Convention. The rate of such withholding
tax will be further reduced to 5% where the beneficial owner of the dividends
owns at least 10% of the voting stock of the company paying the dividends.
19
<PAGE> 22
A shareholder who is not resident in Canada under the Tax Act and who holds
common shares of the Company as capital property will not be subject to tax in
Canada on capital gains realized on the disposition or deemed disposition of
such common shares unless such common shares are "taxable Canadian property"
within the meaning of the Tax Act at the time of the disposition or deemed
disposition, as the case may be. Common shares are generally not taxable
Canadian property provided such shares are listed on a prescribed stock exchange
(which includes the New York Stock Exchange, The Toronto Stock Exchange and the
Montreal Exchange) and at no time within the five-year period immediately
preceding the disposition or deemed disposition did the shareholder, persons
with whom the shareholder did not deal at arm's length, or the shareholder
together with such persons, own 25% or more of the issued shares (and, in the
view of Revenue Canada, taking into account any interest therein or options in
respect thereof that belonged to the shareholder, persons with whom the
shareholder did not deal at arm's length, or the shareholder and such persons)
of any class or series of the Company's shares. A deemed disposition of common
shares held by a shareholder will arise on the death of that shareholder. If the
common shares are taxable Canadian property to a shareholder who is resident in
the United States for the purposes of the Convention, any capital gain realized
on the disposition or deemed disposition of such shares will generally be exempt
from tax under the Tax Act by virtue of the Convention if the value of such
shares at the time of the disposition or deemed disposition is not derived
principally from real property situated in Canada (as defined by the
Convention).
Common shares of the Company held by a citizen or resident of the United
States would normally be subject to tax on capital gains upon disposition under
the laws of the United States.
NORMAL COURSE ISSUER BID
On March 13, 1998, the Company announced its intention to make a normal
course issuer bid through which Philip could make open market purchases of its
common shares on the NYSE, TSE and the Montreal Exchange. The bid commenced on
March 17, 1998 and ended on March 16, 1999. Philip did not purchase any of its
outstanding common shares pursuant to the bid.
20
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Philip for the
periods indicated, including the accounts of all companies acquired prior to the
end of the respective reporting periods. The companies, all of which were
acquired in transactions accounted for as purchases during the past five years,
are included from their respective dates of acquisition. For all periods
indicated, the selected financial data reflects Philip's Non-Ferrous and Copper
operations which were discontinued in 1998 and the former municipal and
commercial solid waste operations, which were sold in August 1996, as
discontinued operations. See Note 5 to the Company's audited Consolidated
Financial Statements which appears on pages 51 and 52. As at December 31, 1998,
the Company was not in compliance with the provisions of its existing credit
agreement and therefore, certain amounts of debt previously recorded as
long-term have been reclassified as current liabilities. See Note 1 to the
Company's audited Consolidated Financial Statements which appears on pages 45
and 46.
The selected financial data should be read in conjunction with the
accompanying audited Consolidated Financial Statements of the Company and the
related Notes thereto. Philip did not pay any cash dividends during the periods
set forth below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- -------- -------- --------
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue................................. $ 2,000,732 $1,180,946 $333,232 $295,816 $241,059
Operating expenses...................... 1,720,344 932,275 262,040 215,237 178,062
Special charges......................... 1,109,877 135,466 -- -- --
Selling, general and
administrative-costs.................. 283,716 113,628 51,705 46,049 36,320
Depreciation and amortization........... 100,847 55,753 22,863 17,630 14,758
----------- ---------- -------- -------- --------
Income (loss) from operations........... (1,214,052) (56,176) (3,376) 16,900 11,919
Interest expense........................ 77,830 36,136 13,172 18,348 13,602
Other income and expense-net............ (1,648) (14,328) (3,456) (2,688) (1,553)
----------- ---------- -------- -------- --------
Earnings (loss) from continuing
operations before tax................. (1,290,234) (77,984) (13,092) 1,240 (130)
Income taxes (recovery)................. 42,247 (17,462) (10,277) (3,057) (3,117)
----------- ---------- -------- -------- --------
Earnings (loss) from continuing
operations............................ $(1,332,481) $ (60,522) $ (2,815) $ 4,297 $ 2,987
=========== ========== ======== ======== ========
Basic earnings (loss) per
share-continuing...................... $ (10.16) $ (0.69) $ (0.06) $ 0.12 $ 0.08
Diluted earnings (loss) per
share-continuing...................... $ (10.16) $ (0.69) $ (0.06) $ 0.11 $ 0.06
Weighted average number of common shares
outstanding (000s).................... 131,130 88,191 50,073 37,342 36,209
BALANCE SHEET DATA: (END OF PERIOD)
Working capital (deficiency)............ $ (772,168) $ 364,739 $139,326 $ 41,805 $ 63,050
Total assets............................ 1,147,679 2,666,978 819,229 650,040 580,722
Total debt including current
maturities............................ 1,107,778 986,325 300,503 319,261 299,347
Shareholders' equity (deficit).......... (393,125) 1,216,941 379,010 191,109 181,541
OTHER DATA:
Amortization............................ $ 33,033 $ 16,658 $ 7,650 $ 6,789 $ 5,413
Depreciation............................ 67,814 39,095 15,213 10,841 9,345
Additions to property, plant and
equipment............................. 61,918 63,494 41,016 23,594 16,440
</TABLE>
21
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion reviews the Company's operations for the years
ended December 31, 1998, 1997 and 1996 and should be read in conjunction with
the Company's audited Consolidated Financial Statements and related notes
thereto included elsewhere herein. The Company reports in US dollars and in
accordance with US generally accepted accounting principles.
The Company has not been in compliance with the provisions of its credit
agreement since June 30, 1998. On April 26, 1999 the Company's lenders approved
a lock-up agreement ("Lock-up Agreement") which sets forth a new capital
structure for the Company and the conditions that govern the restructuring of
$1.02 billion in secured term loans outstanding under the Credit Facility. As a
result of the financial uncertainty surrounding the Company, the results of
operations for the second half of 1998 were significantly impacted by actions to
retain customers, suppliers' tightening trade terms and employee attrition.
Until this uncertainty is removed and the new capital and debt structure is in
place, the reported financial information discussed herein may not be
necessarily indicative of future operating results or future financial
condition.
INTRODUCTION
The Company is a supplier of metals recovery and industrial services. The
Company has over 280 operating facilities and over 13,000 employees located
throughout North America and Europe, that provide services to more than 45,000
industrial and commercial customers. The Company has achieved its position in
the metals recovery and industrial services market through internal growth and
through the acquisition of over 40 companies since the beginning of 1996. The
Company's primary base of operations is in the United States. For geographical
information, see Note 22 to the Company's audited Consolidated Financial
Statements which appears on pages 64 and 65 of this Form 10-K.
The Company's business is organized into two operating divisions -- the
Metals Services Group and the Industrial Services Group. The Metals Services
Group processes or recycles ferrous scrap materials (the "Ferrous Operations")
and provides mill services and engineering and consulting services ("Industrial
Metals Services" or "IMS"), at multiple locations throughout North America and
Europe. The Ferrous Operations include the collection and processing of ferrous
scrap materials for shipment to steel mills as well as significant brokerage
services for scrap materials. The Metals Services Group primarily services the
steel, foundry and automotive industry sectors. In December 1998, the Company
decided to discontinue the non-ferrous and copper operations of its Metals
Services Group. The non-ferrous operations included the refining of second grade
copper into prime ingot, and the production of deoxidizing products and alloys
from aluminum scrap for use in the steel and automotive industries ("Non-Ferrous
Operations"). The copper operations processed wire and cable scrap to recover
copper ("Copper Operations"). For all periods presented, the consolidated
financial results disclose the Company's Non-Ferrous and Copper Operations as
discontinued operations.
The Industrial Services Group provides industrial outsourcing services,
by-products recovery and utilities management services with a network of over
250 facilities. Industrial outsourcing services include 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. By-products recovery includes solvent
distillation, engineered fuel blending, paint overspray recovery, organic and
inorganic processing and polyurethane recycling. The Utilities Management
business provides services to industrial and municipal water and wastewater
treatment plants, power plants and related infrastructure. The Industrial
Services Group services the automotive, refining and petrochemical, steel, oil
and gas, pulp and paper and transportation sectors, as well as public sector
clients responsible for water and wastewater treatment.
The Company earns revenue by providing industrial services, from the sale
of recovered commodities and from fees charged to customers for by-product
transfer and processing, collection and disposal services. The Company receives
by-products and, after processing, disposes of the residuals at a cost lower
than the fees charged to its customers. Other sources of revenue include fees
charged for environmental consulting and engineering and other services.
22
<PAGE> 25
The Company's operating expenses include direct labour, indirect labour,
payroll related taxes, benefits, fuel, maintenance and repairs of equipment and
facilities, depreciation, property taxes, and accrual for future closure and
remediation costs. Selling, general and administrative expenses include
management salaries, clerical and administrative costs, professional services,
facility rentals and insurance costs, as well as costs related to the Company's
marketing and sales force. Professional fees related to restructuring of the
Company have been included in selling, general and administrative expenses in
1998.
DISCONTINUED OPERATIONS AND DIVESTITURES
In December 1998, the Company made the decision to discontinue the
Non-Ferrous and Copper Operations of its Metals Services business. A sale of
certain of the aluminum operations included in Non-Ferrous Operations closed on
January 11, 1999 for a total consideration of approximately $69.5 million.
Certain copper and non-ferrous operations or assets are anticipated to be sold
in the next twelve months and the remainder of the operations in these segments
will be closed during 1999. Revenue from the Non-Ferrous and Copper Operations,
net of intercompany revenue was $403.3 million, $570.0 million and $199.1
million for the fiscal years ended December 31, 1998, 1997 and 1996,
respectively. A loss on the sale of the aluminum operations recorded in 1998 was
$30.5 million, net of taxes of $3.8 million. The loss on the closure or sale of
the remainder of the Non-Ferrous and Copper Operations, which includes fair
value adjustments, writedowns of goodwill and income tax valuation allowances,
is estimated to be $126.1 million.
Loss from discontinued operations (net of tax) of $17.2 million for the
year ended December 31, 1996 also includes the results of the Company's
municipal and commercial solid waste business. These operations have been
treated as discontinued as a result of the sale of the Company's municipal and
commercial solid waste business in 1996. See Note 5 of the Company's audited
Consolidated Financial Statements which appears on pages 51 and 52 of this Form
10-K. Interest expense has been allocated to the municipal and commercial solid
waste business segment based upon the relationship of the net assets of the
solid waste business to the Company's consolidated net assets.
On July 7, 1998, the Company's Houston, Texas based steel distribution
business was sold for cash proceeds of $95 million, resulting in a gain on sale
of approximately $17 million. The results of operations for the steel
distribution business are included in the Ferrous operations segment of the
Metal Services business. The business generated annual revenue in excess of $130
million and income from operations of $12.5 million in 1997.
The Company continues to review the divestiture of certain of its non-core
businesses or investments. The proceeds which may be raised from these
divestitures are unknown. A gain or loss may be recorded on the divestitures but
the amount cannot be determined until definitive agreements are reached. In
addition, costs with respect to restructuring operations may be necessary but
are not quantifiable at this time.
23
<PAGE> 26
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the results of
operations and the percentage relationships which the various items in the
Consolidated Statements of Earnings bear to the consolidated revenue from
continuing operations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
($ MILLIONS)
--------------------------------------------------
1998 1997 1996
---------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue....................................... $ 2,000.7 100% $1,180.9 100% $333.2 100%
Operating expenses............................ 1,720.3 86% 932.3 79% 262.0 79%
Special charges............................... 1,109.9 55% 135.5 11% -- --
Selling, general and administrative costs..... 283.7 14% 113.6 10% 51.7 15%
Depreciation and amortization................. 100.8 5% 55.7 5% 22.9 7%
--------- ---- -------- ---- ------ ----
Loss from operations.......................... (1,214.0) (60%) (56.2) (5%) (3.4) (1%)
Interest expense.............................. 77.8 4% 36.1 3% 13.2 4%
Other income and expense-net.................. (1.6) -- (14.3) (1%) (3.5) (1%)
--------- ---- -------- ---- ------ ----
Loss from continuing operations before tax.... (1,290.2) (64%) (78.0) (7%) (13.1) (4%)
Income taxes (recovery)....................... 42.3 2% (17.5) (2%) (10.3) (3%)
--------- ---- -------- ---- ------ ----
Loss from continuing operations............... (1,332.5) (66%) (60.5) (5%) (2.8) (1%)
Discontinued operations (net of tax).......... (254.4) (13%) (65.8) (6%) (17.2) (5%)
--------- ---- -------- ---- ------ ----
Net loss...................................... $(1,586.9) (79%) $ (126.3) (11%) $(20.0) (6%)
========= ==== ======== ==== ====== ====
</TABLE>
EARNINGS FROM CONTINUING OPERATIONS
For the year ended December 31, 1998, the Company incurred a loss from
continuing operations of $1,332.5 million or $10.16 per share on a diluted
basis. This compares to a loss of $60.5 million from continuing operations or
$0.69 per share from continuing operations for the year ended December 31, 1997.
For the year ended December 31, 1996, the loss from continuing operations was
$2.8 million and the loss per share was $0.06.
The results of operations for the years ended December 31, 1998 and 1997
were impacted by special charges recorded by the Company amounting to $1,211.1
million and $104.0 million, respectively, see "Special Charges". Excluding these
charges, the Company had a loss from continuing operations of $121.4 million or
$0.93 per share on a diluted basis for the year ended December 31, 1998 and
income from continuing operations of $43.5 million or $0.48 per share on a
diluted basis for the year ended December 31, 1997.
OPERATING RESULTS
The operating results for the Metals Services Group reflect the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 ($ MILLIONS)
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
FERROUS IMS TOTAL FERROUS IMS TOTAL FERROUS IMS TOTAL
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue...................... $ 718.7 $ 41.1 $ 759.8 $ 527.2 $ 21.3 $ 548.5 $ 69.7 $ 6.5 $ 76.2
Income (loss) from
operations................. (498.4) (16.9) (515.3) 34.6 (19.2) 15.4 4.0 1.0 5.0
Income (loss) from operations
excluding special
charges.................... 8.2 (10.8) (2.6) 39.7 3.9 43.6 4.0 1.0 5.0
</TABLE>
The increase in revenue for the ferrous operations of $191.5 million during
1998 and $457.5 million during 1997 was due primarily to the acquisition of
businesses in 1997. In 1998, this increase was offset by lower volume and sale
prices for scrap, largely attributable to reduced shipments of domestic scrap
material to Asian markets and higher imports, causing an oversupply in North
America, and also by the sale of the steel distribution business in July 1998.
In addition, in the second half of fiscal 1998, the ferrous operations'
24
<PAGE> 27
volumes were adversely impacted by the negative financial situation of the
Company. Income from operations excluding special charges as a percentage of
revenue, which was 1.1% for the 1998 fiscal year, as compared to 7.5% for the
fiscal year ended December 31, 1997 and 5.7% for the fiscal year ended December
31, 1996, reflects the change in lower prices and volumes.
The increase in revenue from the Industrial Metals Services operations of
$19.8 million for the year ended December 31, 1998 and $14.8 million for the
year ended December 31, 1997 was due primarily to acquisitions in 1997. Income
(loss) from operations excluding special charges as a percentage of revenue was
(26.3%) for the year ended December 31, 1998, compared to 18.3% for the year
ended December 31, 1997 due to customer cancellation of a large project after
significant costs had already been incurred and the failure to bring to fruition
other development projects due to the Company's financial uncertainty in the
second half of 1998. The results for 1998 were also impacted by a reserve for
outstanding contract claims caused by a reduced expectation of recovery due to a
customer's financial difficulties.
The operating results for the Industrial Services Group reflect the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 ($ MILLIONS)
-------------------------------------------------
INDUSTRIAL
BY-PRODUCTS UTILITIES OUTSOURCING
RECOVERY MANAGEMENT SERVICES TOTAL
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenue........................................ $ 175.7 $ 89.1 $ 976.1 $1,240.9
Income (loss) from operations.................. (59.5) 2.0 (442.2) (499.7)
Income (loss) from operations excluding special
charges...................................... (2.4) 2.0 21.9 21.5
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997 ($ MILLIONS)
-------------------------------------------------
INDUSTRIAL
BY-PRODUCTS UTILITIES OUTSOURCING
RECOVERY MANAGEMENT SERVICES TOTAL
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenue........................................ $ 191.1 $ 28.6 $ 412.7 $ 632.4
Income (loss) from operations.................. (72.6) 1.0 16.7 (54.9)
Income from operations excluding special
charges...................................... 4.8 1.0 40.6 46.4
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1996 ($ MILLIONS)
-------------------------------------------------
INDUSTRIAL
BY-PRODUCTS UTILITIES OUTSOURCING
RECOVERY MANAGEMENT SERVICES TOTAL
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenue........................................ $ 163.5 $ 1.3 $ 92.2 $ 257.0
Income from operations......................... 4.1 -- 2.0 6.1
Income from operations excluding special
charges...................................... 4.1 -- 2.0 6.1
</TABLE>
Revenue from By-Products Recovery decreased by $15.4 million for the year
ended December 31, 1998. Income (loss) from operations excluding special charges
as a percentage of revenue was (1.4%) for the year ended December 31, 1998
compared with 2.5% for each of the years ended December 31, 1997 and 1996. The
By-Product Recovery operations collect and process waste and use third-party
suppliers for ultimate disposal. A reduction in incinerator capacity due to
consolidations in the industry caused the prices of disposal to increase in
1998. In addition, the market for by-product recovery services has been
diminishing in the past three years as customers work to reduce waste quantities
to be disposed and therefore, prices and volumes processed have been negatively
impacted. Both of these factors have caused a reduction in both revenue and
profitability. Revenue from By-Products Recovery increased by $27.6 million for
the year ended December 31, 1997 due primarily to acquisitions.
The increase in revenue from Utilities Management of $60.5 million for the
year ended December 31, 1998 and $27.3 million for the year ended December 31,
1997 was due primarily to acquisitions in 1998 and 1997. Income from operations
excluding special charges as a percentage of revenue was 2.2% for the year
25
<PAGE> 28
ended December 31, 1998 compared to 3.5% for the year ended December 31, 1997
due primarily to the acquisitions in 1997 and 1998 of businesses with lower
margins.
The increase in revenue for the Industrial Outsourcing Services operations
of $563.4 million and $320.5 million in the fiscal years ended December 31, 1998
and 1997, respectively, was due primarily to the acquisition of Allwaste, Inc.
and Serv-Tech, Inc. as well as of other businesses in fiscal 1997. Income from
operations excluding special charges as a percentage of revenue was 2.2% for the
year ended December 31, 1998 compared with 9.8% for the year ended December 31,
1997 due to margin deterioration, given competitive market pressures, a
different mix of business which resulted after the acquisitions in 1997 and the
negative impact of the financial instability of the Company in the last half of
1998. In addition, while oil and gas prices have been depressed in 1998,
customers in this industry have elected to postpone significant maintenance and
capital expenditures, including turnaround projects, which has reduced revenue
and profitability.
SPECIAL CHARGES
1998
The following table summarizes the special charges for continuing
operations recorded by the 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
costs(b).................................................. 63,000
Writedowns of investments recorded as other income and
expenses(c)............................................... 38,250
----------
Pre-tax..................................................... $1,211,127
----------
After tax................................................... $1,211,127
==========
</TABLE>
(a) For the year ended December 31, 1998, the Company recorded a charge of $1.1
billion reflecting the effects of (i) decisions made with respect to the
potential disposition of the US Ferrous and certain Industrial Services
Group operations, (ii) impairments of fixed assets and related goodwill
resulting 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.
Management reviewed the Company's long-lived assets and intangibles such as
goodwill, to assess whether the events and changes in circumstances
described in the Financial Condition section indicated that the carrying
amounts of assets may not be recoverable. In making these estimates,
management utilized the assessments, calculations and determinations made in
preparing the proposed pre-packaged plan of reorganization to be filed with
the appropriate courts in Canada and the United States, including estimates
of overall enterprise value. Where the proposed reorganization plan or
estimates of enterprise value raised doubts as to the recoverability of the
assets, management estimated the future cash flows expected to result from
the proposed use of the asset and its eventual disposition. If these
estimates of future cash flow did not provide a reasonable level of
assurance as to the recoverability of the carrying value of the asset, the
carrying value was written down to its estimated recoverable amount.
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 using a discount
rate of approximately 12%.
26
<PAGE> 29
Special and non-recurring charges relate to the impairment of fixed assets
and related goodwill and 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 impairment....................................... 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>
On June 2, 1998, the Company announced its intention to sell its ferrous and
non-ferrous businesses. During the third and fourth quarter of 1998, certain
businesses were sold, or closed, or are anticipated to be sold or closed in
1999, as described in Notes 4 and 5. Due to weak ferrous market conditions
and indications of value from offers received, the Company decided not to
sell the remainder of its Metals Services operations at this time.
Accordingly, certain amounts disclosed in the third quarter as business
units to be exited are now considered business units to be continued.
(b) Included in selling, general and administrative costs in 1998 are costs of
$28.0 million relating to charges for financing fees and debt restructuring
costs. Deferred financing costs which were previously amortized over the
life of the credit agreement have been expensed as the Credit Facility will
be replaced with a new facility with substantially different terms as
indicated in Note 1 of the audited Consolidated Financial Statements which
appears on pages 45 and 46 of this Form 10-K. The Company's current
financial position, its planned divestitures, litigation with debtors,
unexpected financial difficulties of certain customers and a general
deterioration in customer market conditions have necessitated the recording
of an additional provision for doubtful accounts of $25.0 million. The
remainder of the special charges recorded in selling, general and
administrative costs amounting to $10.0 million related to severance
payments and other costs relating to ongoing cost reduction measures and
restructuring.
(c) The 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
million recognizes a potentially long-term impairment in value which is
reflected by the current market performance of Invatec's shares.
The Company's investment in Strategic Holdings Inc., which was accounted for
at cost, and a long-term note receivable from Strategic Holding Inc., were
divested in the fourth quarter of 1998 for less than their original book
value. Accordingly, a writedown of the investment and the long-term note
receivable in the third quarter of 1998 of $13.3 million was recorded as
part of Other income and expense-net.
1997
As at December 31, 1997, the Company recorded a pre-tax charge of $135.5
million ($104.0 million after tax) reflecting the effects of (i) restructuring
decisions made in its Industrial Services Group following the mergers of
Allwaste, Inc. and Serv-Tech, Inc., (ii) integration decisions in various of its
acquired Metal Services Group businesses, the most significant of which were
acquired in late October 1997 and (iii) impairments of fixed assets and related
goodwill resulting both from decisions to exit various business locations and
dispose of the related assets, as well as assessments of the recoverability of
fixed assets and related goodwill of business units in continuing use.
27
<PAGE> 30
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of revenue
were 14% in fiscal 1998 compared to 10% in fiscal 1997. The majority of this
increase was due to the recording of $63 million in special charges in 1998,
which are detailed in the Special Charges section. Selling, general and
administrative expenses increased by $61.9 million or 120% in fiscal 1997
compared to 1996. The increase was attributable to the full year effect of the
consolidation of selling, general and administrative expenses of companies
acquired in 1997 as well as the addition of sales, marketing and corporate staff
to manage the increased volume of business.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of fixed assets and goodwill in 1998 was
$100.8 million, representing an increase of $45.1 million or 81% over 1997. This
increase was due to the full year effect of acquisitions completed by the
Company in the prior year.
Depreciation and amortization of fixed assets and goodwill in 1997 was
$55.7 million, an increase of $32.8 million over 1996. This increase was due
primarily to acquisitions in the year as well as fixed asset additions in 1997.
INTEREST EXPENSE
Interest expense in 1998 was $77.8 million, representing an increase of
$41.7 million or 116% over 1997. This increase was partially attributable to
increased borrowings to finance the Company's growth by acquisition, fixed asset
expansion and working capital requirements to support the Company's increased
revenue base. Also, a portion of the increase in interest expense can be
attributed to increased borrowing rates in 1998 both from increases in the prime
rate and an increase of 100 basis points in the June 1998 amendment to the
Credit Facility. Although the Company suspended payments of interest under the
Credit Facility in November 1998, all amounts owing were expensed and included
in the balance of the bank term loan as at December 31, 1998.
Aggregate interest expense in 1997 was $36.1 million or $22.9 million
higher than 1996. In May of 1996, the Company issued common shares and used the
proceeds to reduce the amount of long-term debt outstanding. In addition, in
1996, all the remaining 6% convertible subordinated debentures were converted
into Common Shares of the Company, further reducing the Company's outstanding
debt. In 1997, the borrowings were increased to finance the Company's
acquisition and fixed asset expansion programs.
OTHER INCOME AND EXPENSE -- NET
Other income and expense -- net for the year ended December 31, 1998
consists primarily of a net gain of $17.2 million before tax on the sale of the
steel distribution business, writedowns on investments of $38.3 million
described in Special Charges and net proceeds on the termination of the merger
agreement to acquire Safety Kleen Corp. in the first quarter of 1998 of $14.7
million. As well, the Company earned $7.4 million of interest and equity income
on investments during 1998.
Other income and expense -- net for 1997 includes a $2.8 million gain
before tax on the sale of shares received as part of the proceeds on the sale of
the municipal and commercial solid waste business in 1996. The shares which were
restricted at the time of receipt, were sold by the Company in February 1997
following the removal of the restriction. In addition, a gain of $7.6 million
before tax was recorded in 1997 on the cancellation of a derivative instrument
which was put in place in anticipation of a debt offering which was later
abandoned.
INCOME TAXES
The Company is required to record a valuation allowance for deferred tax
assets when management believes it is more likely than not that the asset will
not be realized. In 1998, 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 Company will not realize the benefit of
28
<PAGE> 31
the Canadian and US deferred tax debits which arose in 1998 and the Canadian
deferred tax debits which arose in prior years. The Company's plan to
restructure the secured bank term loans in 1999 in accordance with the Lock-up
Agreement indicated in Note 1 to the audited Consolidated Financial Statements
appearing elsewhere herein, may result in a gain that will be sufficient to
utilize the deferred tax assets. However, given that this gain is contingent on
Court confirmation, the Company has recorded a valuation allowance of $204.5
million for the year ended December 31, 1998.
The Company recorded income taxes recoverable in the years ended December
31, 1997 and 1996. The composition of the income tax recoverable in 1997 and
1996 is discussed in Note 15 to the Company's audited Consolidated Financial
Statements appearing elsewhere herein. In 1997 and 1996, no valuation allowance
was recorded since management believed that at that time it was more likely than
not to realize the benefit of the deferred tax asset based on the level of
historical taxable income and projections for future taxable income over the
periods in which the net operating losses were deductible.
FINANCIAL CONDITION
LIQUIDITY AND CREDIT FACILITY
In August 1997, the Company signed a five year revolving term 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. The Credit Facility originally provided for up to $1.5
billion in borrowings, subject to compliance with specified availability tests.
Borrowings under the Credit Facility are guaranteed by the Company and its
direct and indirect wholly-owned subsidiaries and are secured by a pledge of the
issued and outstanding securities of the Company's direct and indirect
wholly-owned subsidiaries and a charge over the present and future assets of the
Company and its direct and indirect wholly-owned subsidiaries.
At December 31, 1998, the Company was not in compliance with certain
covenants in the Credit Facility, including the financial covenants, which
require the Company to maintain a specified interest coverage ratio, debt to
EBITDA ratio, fixed charge ratio and working capital ratio. As the Company is
not in compliance with the terms of the Credit Facility, the debt outstanding
under the Credit Facility is classified as a current liability on the Company's
December 31, 1998 Consolidated Balance Sheet. In June 1998, the Credit Facility
was reduced from $1.5 billion to $1.2 billion, the interest rate charged was
increased by 100 basis points, the 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 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
Company standstill on certain activities until June 30, 1999. In November 1998,
the Company suspended payments of interest under the Credit Facility.
On April 26, 1999 the Company's lenders approved a Lock-up Agreement which
sets forth a new capital structure for the Company and the conditions that
govern the restructuring of $1.02 billion in secured term loans outstanding
under the Credit Facility. Under the terms of the Lock-up Agreement, the lenders
will convert the outstanding $1.02 billion of secured debt into $300 million of
senior secured debt, $100 million of convertible secured payment in-kind notes
and 90 % of the common shares of the restructured Company. The secured payment
in-kind notes are convertible into 25 % of the common shares of the restructured
Company on a fully diluted basis as of the restructuring date. The senior
secured debt and the secured payment in-kind notes each have a term of five
years. The Lock-up Agreement enables the Company to use $68.5 million in
proceeds from the January 1999 sale of the Company's aluminum assets and allows
access to future asset sale proceeds of up to $24.5 million. The Lock-up
Agreement also provides that the Board of Directors of the restructured Company
will consist of nine directors, who will be nominated by the new 90 %
shareholders (i.e., the lenders). The nominees will include two members of the
existing Board of Directors. The Company has agreed to a reduction in the Credit
Facility from $1.2 billion to the current amount outstanding. A copy of the
Lock-up Agreement is attached as Exhibit 10.9 to this Form 10-K.
29
<PAGE> 32
The Company plans to file a pre-packaged plan of reorganization with the
appropriate courts in Canada and the United States in June 1999. The plan will
include, in addition to the arrangements reached with the Company's lenders
described above, proposals that would adjust the amounts owing to certain
unsecured creditors and the realization value of the Company's assets. Upon
filing the pre-packaged plan of reorganization, the Company will have access to
$100 million of debtor-in-possession financing to support its working capital
requirements during the restructuring process. On the plan implementation date,
the $100 million debtor-in-possession financing will be repaid by a $100 million
working capital facility to be established.
The ability of the Company to continue as a going concern is dependent on
the courts' approval of the pre-packaged plan of reorganization contemplated by
the Lock-up Agreement.
On the acquisition of Allwaste, the Company assumed the indenture with
respect to Allwaste's 7 1/4% Convertible Subordinated Debentures ("debenture")
totalling $25.6 million which are due 2014. Interest is payable semi-annually on
June 1 and December 1. Effective December 1, 1998, the Company suspended
payments of interest on the debenture which created a default under the
indenture. Accordingly, the amount of the debentures outstanding has been
classified as a current liability on the Consolidated Balance Sheet at December
31, 1998.
Unsecured loans relating to certain 1997 acquisitions totalling $16,000 are
in default as at December 31, 1998 since principal repayments required on these
notes in 1998 were not made, and therefore, the loans have been classified as a
current liability on the Company's Consolidated Balance Sheet.
Fixed rate secured loans include industrial development bonds totalling
$7,700 which are in default as at December 31, 1998 since principal repayments
required were not made.
At December 31, 1998, the Company's working capital deficiency was $772
million, representing a decrease in working capital of $1.1 billion from
December 31, 1997. This deficiency is attributable to the fact that the debt
outstanding under the Credit Facility of $1.0 billion was classified as a
current liability at December 31, 1998.
The Company believes that cash generated from operations and the proceeds
from the sale of operations together with amounts available under the debtor-in
possession/working capital facility will be adequate to meet its capital
expenditures and working capital needs, although no assurance can be given in
this regard.
ACQUISITIONS
During 1998, the Company acquired six businesses, five of which were
acquired by Philip Utilities Management Corporation. None of these acquisitions
were significant.
During 1997, the Company concluded a number of acquisitions the most
significant of which were the following:
On July 31, 1997, the shareholders of Allwaste, Inc. and Serv-Tech, Inc.
voted in favour of the mergers which were jointly announced by the companies
earlier in the year. Under the terms of the respective merger agreements, each
share of Allwaste stock was exchanged for 0.611 Philip common shares and each
share of Serv-Tech stock was exchanged for 0.403 Philip common shares.
In October, 1997, the Company acquired the assets of Luria Brothers and all
of the issued and outstanding shares of the Steiner-Liff Metals group of
companies and the Southern Foundry Supply group of companies. The aggregate
purchase price of such acquisitions was $486 million which included the
assumption of $32.6 million in debt. Part of the purchase price was satisfied by
the issuance of 5.6 million Philip common shares.
In addition to the above acquisitions, the Company completed 28 other
acquisitions during the year ended December 31, 1997.
CAPITAL EXPENDITURES
Capital expenditures for continuing operations were $61.9 million during
1998 compared to $63.5 million in 1997 and $41.0 million in 1996.
30
<PAGE> 33
The Company's capital expenditure program for 1999 is expected to be $80
million. Approximately $10 million of the 1999 capital expenditure program is
expected to be spent on environmental compliance matters relating to facilities
operated by the Company.
CAPITAL STRUCTURE
In November 1997, the Company issued 23 million common shares at $16.50 per
share. The net proceeds of $362.5 million were used to repay indebtedness
outstanding under the Credit Facility.
In addition to the equity offering in November of 1997, the Company issued
38.2 million common shares during 1997 for a total consideration of $622.5
million. The common shares were issued primarily as a result of acquisitions or
as the result of the exercise of employee stock options. The share capital of
the Company increased from $363.1 million at December 31, 1996 to $1,348.1
million at December 31, 1997.
YEAR 2000
STATE OF READINESS
The Year 2000 issue affects computer systems that have time sensitive
programs that may not properly recognize the year 2000. The Company is actively
engaged, but has not yet completed, reviewing, correcting and testing all of the
Year 2000 compliance issues. The Company has conducted detailed inventories and
has identified items with potential Year 2000 impact. The Company is in the
process of testing and remediating critical enterprise applications. All other
systems considered to be critical to the operations have been inventoried,
ranked in order of priority, and planning, testing and remediation are in
progress.
The Company's Year 2000 project is divided into four main areas: enterprise
applications, supply chain, site equipment, and computer and network
infrastructure.
Enterprise applications include both purchased and custom developed
software packages that are used at multiple sites within the Company. Supply
chain addresses the Company's customers and suppliers. The Company has developed
and implemented a program to communicate and co-ordinate with key customers,
including responding to several surveys and audits. A program to identify
critical vendors and track their progress towards Year 2000 readiness has been
developed. Site equipment includes industrial equipment, instrumentation,
stand-alone computer hardware, software and building infrastructure at the site
level. Computer and network infrastructure deals with the local area network,
wide area network, file servers and network components that connect the
Company's critical applications.
The Company has largely completed the awareness, inventory, and assessment
phases of the Year 2000 project and initiated the Planning, Remediation,
Testing, and Implementation phases in a parallel manner across all four of the
above areas.
COSTS
The total costs for 1998 for the Year 2000 project was approximately $5
million and all costs were expensed as incurred. Management has estimated the
balance of the costs to complete the project to be approximately $15 million
including approximately $6 million in costs for software and hardware upgrades
based on management's best estimates which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third parties' Year 2000 readiness and other factors.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially or adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, the Company is unable to
determine at this time either whether its Year 2000 plan will be completed on a
timely basis or whether the consequences of the Year 2000 failures will have a
material impact on the results of operations, liquidity and financial condition.
31
<PAGE> 34
CONTINGENCY PLANS
The Year 2000 project will have contingency plans in place for all four
major sections of the project. However, since system testing is not complete, no
Year 2000 specific contingency plans have been developed at this time.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 1999. 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. The effect on the Company of the adoption of this standard has not yet
been determined.
RISK FACTORS
ABILITY TO CONTINUE AS A GOING CONCERN IS DEPENDENT UPON RESTRUCTURING
Since June 1998 and as at December 31, 1998, the Company was not in
compliance with certain covenants of its Credit Facility. The Company stopped
making payments of interest under the Credit Facility in November 1998. As the
Company is not in compliance with the terms of the Credit Facility, the debt
outstanding under the Credit Facility is classified as a current liability on
the Company's December 31, 1998 Consolidated Balance Sheet.
On April 26, 1999, the Company announced that the terms of the Lock-up
Agreement had been approved by its lending syndicate (see Note 1 to the
Company's audited Consolidated Financial Statements). The Company will now
prepare, in conjunction with its lending syndicate, a pre-packaged plan of
reorganization ("the Plan"). The Company expects to file the Plan in June 1999
under Chapter 11 of the United States Bankruptcy Code and in Canada under the
Companies Creditors Arrangement Act, and to emerge from the restructuring
process within 60 to 90 days thereafter. Key to the Plan is the preservation of
the value of the Company's business through the protection of its employees,
clients and ongoing trade suppliers. There can be no assurance that the Plan
will be filed and if filed, that it will be approved by the required
stakeholders and the courts having jurisdiction over such matters. If the Plan
is not approved, there can be no assurance that the Company will continue as a
going concern.
See "Item 1. Recent Developments" for a description of the terms of the
Lock-up Agreement and the Plan.
DISRUPTION OF OPERATIONS DUE TO RESTRUCTURING
The Company's restructuring efforts could adversely affect its relationship
with its customers, suppliers and employees. Employees generally are not party
to employment contracts. Due to uncertainty about the Company's financial
condition, it may be difficult to retain or attract high quality employees. See
"-- Reliance on Key Employees." If the Company's relationships with its
customers, suppliers and employees are adversely affected, its operations could
be materially affected. Weakened operating results could adversely affect the
Company's ability to complete the restructuring.
CONTROL BY LENDERS; ANTI-TAKEOVER CONSEQUENCES
Following the Company's restructuring, the Company's lenders, in the
aggregate, will own 90% of the restructured Company's outstanding common shares
and will control the restructured Company's Board of Directors. Accordingly, the
lenders, if acting together, would be able to exert substantial influence over
the restructured Company and to control effectively most matters requiring
shareholder approval, including all fundamental corporate actions such as
mergers, substantial acquisitions and divestitures. The voting power of these
shareholders under certain circumstances could have the effect of delaying or
preventing a change of control of the Company, the effect of which may be to
deprive the Company's shareholders of a control
32
<PAGE> 35
premium that might otherwise be realized in connection with the acquisition of
the Company. In addition, certain provisions of the Company's Amended Articles
of Amalgamation and By-laws as well as provisions in certain agreements and the
Business Corporations Act (Ontario) may have the effect of delaying, deferring
or preventing a change in control.
FINANCIAL UNCERTAINTY
There is significant financial uncertainty surrounding the Company. The
Company's results of operations for the second half of 1998 were significantly
impacted by actions taken by the Company to retain customers, suppliers'
tightening trade terms and employee attrition. In addition, the results of
operations for the year ended December 31, 1998 were impacted by special charges
recorded by the Company amounting to $1,211.1 million. These charges reflect the
effects of (i) decisions made with respect to the potential disposition of US
Ferrous and certain Industrial Services Group operations, (ii) impairments of
fixed assets and related goodwill resulting from decisions to exit various
business locations or activities and dispose of the related assets, (iii)
assessments of the recoverability of fixed assets and the related goodwill of
business units in continuing use; (iv) charges for financing fees and debt
restructuring costs; (v) severance payments and other costs relating to ongoing
cost reduction measures and restructuring; (vi) the reduction in carrying value
of the Company's investment in Innovative Valve Technologies Inc.; and (vii) a
writedown of the Company's investment in Strategic Holdings Inc. See "Special
Charges."
In December 1998, the Company decided to discontinue the non-ferrous and
copper operations of its Metals Services business. A sale of certain of the
aluminum operations included in the non-ferrous operations closed on January 11,
1999. Certain copper and non-ferrous operations or assets are anticipated to be
sold in the next 12 months and the remainder of the operations in these segments
will be closed during 1999. In addition, the Company sold its Houston, Texas
steel distribution business and certain of its spiral weld pipe operations in
1998. The Company continues to review the divestiture of certain of its non-core
businesses or investments. The proceeds which may be raised from these
divestitures is unknown. A gain or loss may be recorded on the divestitures but
the amount cannot be determined until definitive agreements are reached. In
addition, costs with respect to restructuring operations may be necessary. See
"Discontinued Operations and Divestitures."
Until the financial uncertainty is removed and the new capital and debt
structure is in place, the reported financial information discussed in this
Annual Report on Form 10-K may not be indicative of future operating results or
future financial condition. See Note 1 to the Company's audited Consolidated
Financial Statements.
LEGAL PROCEEDINGS
Various class actions have been filed against the Company, certain of its
past and present directors and officers, the underwriters of the Company's 1997
public offering and the Company's auditors. Each action alleges that Philip'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 Philip's common shares.
Similar claims have been asserted against the Company and certain of its past
and present officers and directors by the former shareholders of the
Steiner-Liff Metals group of companies and the Southern-Foundry Supply group of
companies, which Philip acquired in October 1997. In addition, a claim brought
under the Ontario Class Proceedings Act was commenced in October 1998 against
the Company, the underwriters of the Company's 1997 public offering and the
Company's auditors, on behalf of persons in Canada who purchased the Company's
common shares between May 21, 1996 and April 23, 1998.
The Company has conducted a review of the claims and determined that it is
not feasible to predict or determine the final outcome of these proceedings.
There can be no assurance that the outcome of the class actions and related
actions will not have a material adverse effect upon the financial condition or
results of operations of the Company. See "Item 3. Legal Proceedings".
33
<PAGE> 36
NEW YORK STOCK EXCHANGE HALT
The trading of the Company's common shares in the United States on the New
York Stock Exchange ("NYSE") was halted on January 12 , 1999 due to the
Company's failure to meet certain listing criteria of the NYSE. On April 23,
1999, the NYSE notified the Company that it will suspend trading of Philip's
common shares and that it will make an application to the Securities and
Exchange Commission to delist the Company's common shares. The Company intends
to request a hearing before the Board of Directors of the NYSE to appeal the
decision. However, there can be no assurance that the common shares will not be
delisted. See "Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters."
RISKS ASSOCIATED WITH ACQUISITIONS
Between 1996 and 1998, the Company completed over 40 acquisitions. In
connection with its acquisitions, there may be liabilities that the Company
failed to discover, including liabilities arising from pollution of the
environment or non-compliance with environmental laws by prior owners, and for
which the Company, as a successor owner, may be responsible. Indemnities and
warranties for such liabilities from sellers, if obtained, may not fully cover
the liabilities due to their limited scope, amounts, or duration, the financial
limitations of the indemnitor or warrantor, or other reasons.
There are significant uncertainties and risks relating to the integration
of an acquired company's operations. Whether the anticipated benefits of an
acquisition is ultimately achieved depends on a number of factors, including the
ability of the combined companies to achieve administrative cost savings,
insurance and bonding cost reductions, general economies of scale and,
generally, to capitalize on the combined asset base and strategic position of
the combined companies. The timing and manner of the implementation of decisions
made with respect to the ongoing business of the combined companies following
the acquisition will materially affect the operations of the combined companies.
Given the range of potential outcomes arising from such decisions and the
interrelationships among decisions to be made, it is difficult to quantify with
precision the impact of such decisions on the results of operations and
financial condition of the combined companies. In particular, reserves
established or charges recorded in connection with an acquisition or the
integration thereof may be insufficient and the Company may be required to
establish additional reserves or record additional charges at a later date.
There can be no assurance that any expected synergies will be realized or that
the results of the combined operations will be improved in a timely manner, if
at all. In addition, the process of integrating the acquired company's
operations into those of the Company could cause the interruption of, or the
loss of momentum in, the activities of either or both companies, which could
have an adverse effect on the combined operations.
COMPETITION
The metals and industrial services industries are highly competitive and
require substantial capital resources. Competition is both national and regional
in nature and the level of competition faced by the Company in its various lines
of business is significant. Technology is constantly changing. There can be no
assurance that the Company will be able to keep pace with technological changes,
that a competitor will not develop superior technology or that a well
capitalized competitor will not enter or expand in the areas in which the
Company competes.
The Company's primary competitors in the metals industry are other scrap
processors in regions where its metals operations are located. The Company faces
competition both on the purchase and sales sides of its business; however,
competition is particularly significant on the purchase side for access to
scrap. The Metals Services Group competes on the basis of price, technological
capability and service. The availability of scrap depends on a number of
factors, including the general level of economic activity in the industries
serviced by the Metals Services Group, many of which are cyclical in nature, and
market prices for scrap. Competition for access to scrap may intensify during
periods of scrap scarcity. There can be no assurance that the Company will
continue to have adequate access to scrap supplies at economic prices.
34
<PAGE> 37
The industrial services sector is also highly competitive and fragmented.
The Company competes with numerous local, regional and national companies of
varying sizes and financial resources. Competition for industrial services is
based primarily on hourly rates, productivity, safety, innovative approaches and
quality of service. The hazardous waste management industry competes with the
Company's industrial services operations by providing a price competitive
disposal alternative to a number of the Company's waste management and
by-products recovery services. The hazardous waste management industry currently
has substantial excess capacity caused by overbuilding, continuing efforts by
hazardous waste generators to reduce volume and to manage their waste on-site,
and the uncertain regulatory environment regarding hazardous waste management
and remediation requirements. These factors have led to downward pressure on
pricing in a number of the markets served by the Company's industrial services
operations. The Company expects these conditions to continue for the foreseeable
future.
Recently, weak market conditions in the metals recycling and industrial
services industries have had a negative impact on revenue in these areas. For
example, record steel imports have decreased domestic demand and prices for
scrap steel.
DEPENDENCE ON OUTSOURCING AND VENDOR REDUCTION TRENDS
The Company's growth is dependent on the continuation of outsourcing and
vendor reduction trends within industrial enterprises. As these enterprises
focus on their core business, they are increasingly outsourcing non-core,
non-revenue generating activities in order to reduce costs. Such activities can
generally be performed on a more cost effective basis by specialized industrial
service and resource recovery companies which have greater expertise, technology
advantages and economies of scale. In addition, industrial enterprises are
evidencing a desire to reduce the number of vendors of industrial and resource
recovery services by purchasing services only from those suppliers that can
provide a "total service" solution, thereby providing further administrative and
cost reductions. If the pace of either of these trends slows or reverses, it
could have a material adverse effect on the Company's financial position and
results of operations.
ENVIRONMENTAL AND REGULATORY RISKS
ENVIRONMENTAL REGULATIONS. The Company's operations are subject to various
comprehensive laws and regulations related to the protection of the environment.
Such laws and regulations, among other things, (i) regulate the nature of the
industrial by-products and wastes that the Company can accept for processing at
its treatment, storage and disposal facilities, the nature of the treatment they
can provide at such facilities and the location and expansion of such
facilities; (ii) impose liability for remediation and clean-up of environmental
contamination, both on-site and off-site, resulting from past and present
operations at the Company's facilities; and (iii) may require financial
assurance that funds will be available for the closure and post-closure care of
sites, including acquired facilities. In addition, because the Company provides
its customers with services designed to protect the environment by cleaning and
removing materials or substances from their customers' equipment or sites that
must be properly handled, recycled or removed for ultimate disposal, the
Company's operations are subject to regulations which impose liability on
persons involved in handling, processing, generating or transporting hazardous
materials. These requirements may also be imposed as conditions of operating
permits or licenses that are subject to renewal, modification or revocation.
These laws and regulations have become and are likely to continue to become
increasingly stringent. Existing laws and regulations, and new laws and
regulations, may require the Company to modify, supplement, replace or curtail
its operating methods, facilities or equipment at costs which may be substantial
without any corresponding increase in revenues.
Hazardous substances are present in some of the processing, transfer,
storage, disposal and landfill facilities owned or used by the Company.
Remediation will be required at these sites at substantial cost. For each of
these sites, the Company, in conjunction with an environmental consultant, has
developed or is developing cost estimates that are periodically reviewed and
updated, and the Company maintains reserves for these matters based on such cost
estimates. Estimates of the Company's liability for remediation of a particular
site and the method and ultimate cost of remediation require a number of
assumptions and are inherently difficult. There can be no assurance that the
ultimate cost and expense of corrective action will not
35
<PAGE> 38
substantially exceed such reserves and have a material adverse impact on the
Company's operations or financial condition.
In the normal course of its business, and as a result of the extensive
governmental regulation of industrial and environmental services and resource
recovery, the Company has been the subject of administrative and judicial
proceedings by regulators and has been subject to requirements to remediate
environmental contamination or to take corrective action. There will be
administrative or court proceedings in the future in connection with the
Company's present and future operations or the operations of acquired
businesses. In such proceedings in the past, the Company has been subject to
monetary fines and certain orders requiring the Company to take environmental
remedial action. In the future, the Company may be subject to monetary fines,
penalties, remediation, clean-up or stop orders, injunctions or orders to cease
or suspend certain of its practices. The outcome of any proceeding and
associated costs and expenses could have a material adverse impact on the
operations or financial condition of the Company.
The Company's industrial services businesses are subject to extensive
governmental regulation, and the complexity of such regulation makes consistent
compliance with such laws and regulations extremely difficult. In addition, the
demand for certain of the Company's services may be adversely affected by the
amendment or repeal of federal, state, provincial, or foreign laws and
regulations or by changes in the enforcement policies of the regulatory agencies
concerning such laws and regulations.
PUBLIC CONCERNS. There is a high level of public concern over industrial
by-products recovery and waste management operations, including the siting and
operation of transfer, processing, storage and disposal facilities and the
collection, processing or handling of industrial by-products and waste
materials, particularly hazardous materials. Zoning, permit and licensing
applications and proceedings and regulatory enforcement proceedings are all
matters open to public scrutiny and comment. As a result, from time to time, the
Company has been, and may in the future be, subject to citizen opposition and
publicity which may have a negative effect on its operations and delay or limit
the expansion and development of operating properties and could have a material
adverse effect on its operations or financial condition.
ENVIRONMENTAL INSURANCE COVERAGE. Consistent with industry trends, the
Company may not be able to obtain adequate amounts of environmental impairment
insurance at a reasonable premium to cover liability to third parties for
environmental damages. Accordingly, if the Company were to incur liability for
environmental damage either not provided for under such coverage or in excess of
such coverage, the Company's financial position and results of operations could
be materially and adversely affected.
JURISDICTIONAL RESTRICTIONS ON WASTE TRANSFERS. In the past, various
states, provinces, counties and municipalities have attempted to restrict the
flow of waste across their borders, and various U.S. and Canadian federal,
provincial, state, county and municipal governments may seek to do the same in
the future. Any such border closing may result in the Company incurring
increased third-party disposal costs in connection with alternate disposal
arrangements.
For a more detailed description of the impact of environmental and other
governmental regulation upon the Company, see "Item 1. Government Regulation."
BONDING
The Company is required under certain United States and Canadian laws and
regulations to demonstrate financial responsibility for possible bodily injury
and property damage to third parties caused by both sudden and non-sudden
occurrences. The Company is also required to provide financial assurance that
funds will be available when needed for closure and post-closure care at certain
of its treatment, storage and disposal facilities, the costs of which could be
substantial. Such laws and regulations allow the financial assurance
requirements to be satisfied by various means, including letters of credit,
surety bonds, trust funds, a financial (net worth) test and a guarantee by a
parent company. In the United States, a company must pay the closure costs for a
waste treatment, storage or disposal facility owned by it upon the closure of
the facility and thereafter pay post-closure care costs. There can be no
assurance that these costs will not materially exceed the amounts provided
pursuant to financial assurance requirements. In addition, if such a facility is
closed
36
<PAGE> 39
prior to its originally anticipated time, it is unlikely that sufficient funds
will have been accrued over the life of the facility to fund such costs, and the
owner of the facility could suffer a material adverse impact as a result.
Consequently, it may be difficult to close such facilities to reduce operating
costs at times when, as is currently the case in the industrial services
industry, excess treatment, storage or disposal capacity exists.
RELIANCE ON KEY EMPLOYEES
The Company's successful transition through the restructuring process is
dependent in part on its ability to retain and motivate its officers and key
employees. The Company's current financial difficulties have had a detrimental
effect on its ability to attract and retain key officers and employees. The
Company has experienced over the last year, and continues to experience high
employee turnover. There can be no assurance that the Company will be able to
retain or employ qualified management and technical personnel. While the Company
has entered into employment agreements with certain members of its senior
management, should any of these persons be unable or unwilling to continue their
employment with the Company, the business prospects of the Company could be
materially and adversely affected.
COMMODITY PRICE AND CREDIT RISKS
The Company is exposed to commodity price risk during the period that it
has title to products that are held in inventory for processing and/or resale.
Prices of commodities can be volatile due to numerous factors beyond the control
of the Company, including general economic conditions, labor costs, competition,
import duties, tariffs and currency exchange rates. In an increasing price
environment, competitive conditions will determine how much of the commodity
price increases can be passed on to the Company's customers. There can be no
assurance that the Company will not have a significant net exposure due to
significant price swings or failure of a counterparty to perform pursuant to the
contract.
SEASONALITY AND FLUCTUATIONS IN FINANCIAL RESULTS
A general economic slowdown over the Christmas holiday period, client year
end shutdowns and weather related circumstances during winter months result in
the Company experiencing lower levels of activity in December and during the
first quarter of its fiscal year. Therefore, first quarter results may not be
indicative of the results that will be achieved during an entire year.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT
The Company uses a number of proprietary processes in its operations. The
Company possesses a number of United States patents and various foreign
counterparts of those patents. The Company relies primarily, however, on a
combination of trade secrets, confidentiality procedures and contractual
provisions to protect its intellectual property rights. The Company's patents
may be circumvented or invalidated and afford only limited protection. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to obtain and use information that the Company regards as
confidential and proprietary, and there can be no assurance that the Company's
means of protecting its proprietary rights will be adequate. The Company is not
aware of any material claims that any of its intellectual property infringes on
the proprietary rights of third parties. There can be no assurance, however,
that third parties will not assert infringement claims against the Company,
which may be costly.
VOLATILITY OF STOCK PRICE
The market price of the Company's common shares in the past has been and
may in the future be volatile. A variety of events, including quarter-to-quarter
variations in operating results, news announcements, trading volume, general
market trends and other factors, could result in wide fluctuations in the market
price of the common shares. See "Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters."
37
<PAGE> 40
YEAR 2000 ISSUE
The Year 2000 issue affects computer systems that have time sensitive
programs that may not properly recognize the year 2000. The Company is actively
engaged, but has not yet completed, reviewing, correcting and testing all of the
Year 2000 compliance issues. The failure to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially or adversely affect the
Company's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, the Company is unable to
determine at this time whether the consequences of the Year 2000 failures will
have a material adverse affect, on the Company's results of operations,
liquidity and financial condition. See "Year 2000".
38
<PAGE> 41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial risk resulting from volatility in
foreign exchange rates, interest rates and commodity prices. The Company seeks
to minimize these risks through its regular operating and financing activities
and, when deemed appropriate, through the use of derivative financial
instruments. In 1998, the use of derivative instruments was limited. See Note 11
to the Company's audited Consolidated Financial Statements.
FOREIGN CURRENCY RATE RISK
The revenue and expenses of the Company's Canadian and European
subsidiaries are generally denominated using the local currency. The functional
currency of these subsidiaries is the local currency and therefore, foreign
currency translation adjustments made on consolidation are reflected as a
component of shareholders' equity (deficit) as clearly stated in the Company's
accounting policies. Changes in the foreign exchange rates compared to the
United States dollar can have an effect on the Company's revenue and
profitability. The sensitivity of the net loss from continuing operations before
tax to the changing foreign currency rates is estimated to be approximately $0.4
million for a 1% change in the foreign currencies, based on the 1998 operating
results from foreign subsidiaries.
INTEREST RATE RISK
Substantially all of the Company's long-term debt bears interest at a
floating rate determined based on the US prime lending rate. At December 31,
1998, the Company had $130 million of interest rate swaps outstanding. These
swaps effectively change the floating interest rate on $130 million of long-term
debt to a 6.95% fixed rate through the period ending May 1999. Based on the $1.1
billion of long-term and short-term debt outstanding at December 31, 1998, a 1%
change in the interest rates is estimated to change the loss from continuing
operations before tax by $9.7 million, net of the effect of the interest rate
swap.
The debt structure contemplated by the Lock-up Agreement provides for a
fixed rate of interest to be used on the majority of the debt, effective on the
plan implementation date, which will significantly reduce the Company's exposure
to interest rate risk.
COMMODITY PRICE RISK
In December 1998, the Company made the decision to discontinue the
Non-Ferrous and Copper Operations of its Metals Services group which were the
operations with the most sensitivity to commodity prices for copper and
aluminum. Therefore, for 1999, the commodity price risk for the remaining
operations is not anticipated to be material.
Prices for the Ferrous operations of the Metals Services group are set and
adjusted monthly by the major steel producers. The price of ferrous scrap is a
significant factor influencing the profitability of the Metals Services group.
In 1998, the Company's average selling price of ferrous scrap fell 46% to
approximately $82 per ton at December 31, 1998. The Company manages its
commodity price risk by acquiring ferrous metal scrap as it is needed for its
customers and maintaining relatively low inventories of scrap and processed
materials. Based on results of the Ferrous operations for the fourth quarter of
1998, a 10% change in the price of ferrous scrap is estimated to change the loss
from continuing operations before tax by $3.5 million.
39
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Philip Services Corp.
We have audited the consolidated balance sheets of Philip Services Corp. as
at December 31, 1998 and 1997 and the consolidated statements of earnings,
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1998. Our audits also included the financial schedules
included in the Index at Item 14. These financial statements and financial
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and 1997 and the results of its operations and the cash flows for each of
the three years in the period ended December 31, 1998 in accordance with
generally accepted accounting principles.
Also in our opinion, such financial schedules when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
<TABLE>
<S> <C>
Mississauga, Ontario Deloitte & Touche LLP
March 31, 1999 Chartered Accountants
(April 26, 1999 as to Notes 1 and 10(a))
</TABLE>
COMMENTS FOR US READERS ON CANADA/US REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the company's ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Our report to the shareholders dated March
31, 1999 is expressed in accordance with Canadian reporting standards which do
not permit a reference to such events and conditions in the auditors' report
when these are adequately disclosed in the financial statements.
<TABLE>
<S> <C>
Mississauga, Ontario Deloitte & Touche LLP
March 31, 1999 Chartered Accountants
</TABLE>
40
<PAGE> 43
PHILIP SERVICES CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents...................................... $ 61,564 $ 28,852
Accounts receivable (net of allowance for doubtful
accounts of $24,396; 1997 - $17,651)................... 325,509 441,355
Inventory for resale...................................... 32,633 101,884
Other current assets (Note 6)............................. 181,314 183,228
---------- ----------
601,020 755,319
Fixed assets (Note 7)....................................... 435,164 541,734
Goodwill.................................................... 21,871 1,028,945
Deferred income taxes (Note 15)............................. -- 25,762
Other assets (Note 8)....................................... 89,624 315,218
---------- ----------
$1,147,679 $2,666,978
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 99,293 $ 188,268
Accrued liabilities (Note 9).............................. 188,936 181,577
Current maturities of long-term debt (Note 10)............ 1,084,959 20,735
---------- ----------
1,373,188 390,580
Long-term debt (Note 10).................................... 22,819 965,590
Deferred income taxes (Note 15)............................. 17,349 --
Other liabilities (Note 12)................................. 127,448 93,867
Commitments and Contingencies (Notes 1, 19 and 21)
Shareholders' equity (deficit).............................. (393,125) 1,216,941
---------- ----------
$1,147,679 $2,666,978
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE> 44
PHILIP SERVICES CORP.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS OF US DOLLARS EXCEPT
SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
----------- ---------- --------
<S> <C> <C> <C>
Revenue.............................................. $ 2,000,732 $1,180,946 $333,232
Operating expenses................................... 1,720,344 932,275 262,040
Special charges (Note 3)............................. 1,109,877 135,466 --
Selling, general and administrative costs............ 283,716 113,628 51,705
Depreciation and amortization........................ 100,847 55,753 22,863
----------- ---------- --------
Loss from operations................................. (1,214,052) (56,176) (3,376)
Interest expense..................................... 77,830 36,136 13,172
Other income and expense - net....................... (1,648) (14,328) (3,456)
----------- ---------- --------
Loss from continuing operations before tax........... (1,290,234) (77,984) (13,092)
Income taxes (Note 15)............................... 42,247 (17,462) (10,277)
----------- ---------- --------
Loss from continuing operations...................... (1,332,481) (60,522) (2,815)
Discontinued operations (net of tax) (Note 5)........ (254,391) (65,745) (17,158)
----------- ---------- --------
Net loss............................................. $(1,586,872) $ (126,267) $(19,973)
=========== ========== ========
Basic and diluted earnings (loss) per share (Note 16)
Continuing operations.............................. $ (10.16) $ (0.69) $ (0.06)
Discontinued operations............................ (1.94) (0.74) (0.34)
----------- ---------- --------
$ (12.10) $ (1.43) $ (0.40)
=========== ========== ========
Weighted average number of common shares outstanding
(000's)............................................ 131,130 88,191 50,073
=========== ========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE> 45
PHILIP SERVICES CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
OTHER
RETAINED ACCUMULATED TOTAL
COMMON EARNINGS COMPREHENSIVE SHAREHOLDERS'
STOCK (DEFICIT) LOSS EQUITY (DEFICIT)
---------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995............. $ 153,920 $ 59,966 $(22,777) $ 191,109
Common shares issued................... 209,159 -- -- 209,159
Comprehensive loss:
Net loss............................. -- (19,973) --
Foreign currency translation
adjustments....................... -- -- (1,285)
Total comprehensive loss............... (21,258)
---------- ----------- -------- -----------
Balance, December 31, 1996............. 363,079 39,993 (24,062) 379,010
Common shares issued................... 984,987 -- -- 984,987
Comprehensive loss:
Net loss............................. -- (126,267) --
Foreign currency translation
adjustments....................... -- -- (20,789)
Total comprehensive loss............... (147,056)
---------- ----------- -------- -----------
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)
========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE> 46
PHILIP SERVICES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss from continuing operations................... $(1,332,481) $ (60,522) $ (2,815)
Items included in earnings not affecting cash
Depreciation and amortization....................... 75,937 42,389 17,703
Amortization of goodwill............................ 24,910 13,364 5,160
Deferred income taxes............................... 33,233 6,588 (6,029)
Net gain on sale of assets.......................... (16,843) (2,559) (1,645)
Special charges (net of tax) (Note 3)............... 1,211,127 103,979 --
----------- ----------- ---------
Cash flow from continuing operations.................. (4,117) 103,239 12,374
Changes in non-cash working capital (Note 14)......... (55,855) (135,551) (9,993)
----------- ----------- ---------
Cash provided by (used in) continuing operating
activities.......................................... (59,972) (32,312) 2,381
Cash used in discontinued operating activities........ (2,054) (182,860) (11,426)
----------- ----------- ---------
Cash used in operating activities..................... (62,026) (215,172) (9,045)
----------- ----------- ---------
INVESTING ACTIVITIES
Proceeds from sale of operations (Notes 4 and 5)...... 104,922 19,800 137,632
Acquisitions - including acquired cash (bank
indebtedness)....................................... (26,406) (522,788) (74,436)
Purchase of fixed assets.............................. (59,154) (55,786) (27,092)
Proceeds from sale of fixed assets.................... 25,785 -- --
Other - net........................................... (10,209) (24,912) (28,522)
----------- ----------- ---------
Cash provided by (used in) continuing investing
activities.......................................... 34,938 (583,686) 7,582
Cash used in investing activities of discontinued
operations.......................................... (16,724) (53,484) (56,246)
----------- ----------- ---------
Cash provided by (used in) investing activities....... 18,214 (637,170) (48,664)
----------- ----------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt.......................... 209,293 1,752,907 216,398
Principal payments on long-term debt.................. (105,677) (1,294,122) (187,188)
Common shares issued for cash......................... 566 380,237 61,787
----------- ----------- ---------
Cash provided by continuing financing activities...... 104,182 839,022 90,997
Cash provided by (used in) financing activities of
discontinued operations............................. (27,658) 18,846 (9,962)
----------- ----------- ---------
Cash provided by financing activities................. 76,524 857,868 81,035
----------- ----------- ---------
Net change in cash for the year....................... 32,712 5,526 23,326
Cash and equivalents, beginning of year............... 28,852 23,326 --
----------- ----------- ---------
Cash and equivalents, end of year..................... $ 61,564 $ 28,852 $ 23,326
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE> 47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Philip Services Corp. is an integrated metals recovery and industrial
services company, which provides metal recovery and processing services,
by-products recovery, utilities management, and industrial outsourcing services
to major industry sectors throughout North America and Europe.
The consolidated financial statements include the accounts of Philip
Services Corp., and its subsidiaries (the "Company") and have been prepared in
US dollars using accounting principles generally accepted in the United States.
For all periods presented, the Consolidated Financial Statements and Notes
to the Consolidated Financial Statements disclose the Company's copper and
non-ferrous operations discontinued in 1998 and the municipal and commercial
solid waste business sold in 1996 as discontinued operations, as discussed in
Note 5.
As at December 31, 1998, the Company was not in compliance with the
provisions of its existing credit agreement as amended (the "Credit Facility")
and therefore, certain amounts of debt previously recorded as long-term, have
been reclassified as current liabilities. On April 26, 1999 the Company's
lending syndicate approved a lock-up agreement ("Lock-up Agreement") which sets
forth a new capital structure for the Company and the conditions that govern the
restructuring of $1.02 billion in secured term loans outstanding under the
Credit Facility. Under the terms of the Lock-up Agreement, the lenders will
convert the outstanding $1.02 billion of secured syndicated debt into $300
million of senior secured debt, $100 million of convertible secured payment
in-kind notes and 90% of the common shares of the restructured Company. The
payment in-kind notes are convertible into 25% of the common shares of the
restructured Company on a fully diluted basis as of the restructuring date. The
senior secured debt and the secured payment in-kind notes each have a term of
five years. The Lock-up Agreement enables the Company to use $68.5 million in
proceeds from the January 1999 sale of the Company's aluminum assets and allows
access to future asset sale proceeds of up to $24.5 million. The Lock-up
Agreement also provides that the Board of Directors of the restructured Company
will consist of nine directors, who will be nominated by the new 90%
shareholders (i.e., the lenders). The nominees will include two members of the
existing Board.
The Company plans to file a pre-packaged plan of reorganization with the
appropriate courts in Canada and the United States in June 1999. The plan will
include, in addition to the arrangements reached with the Company's lenders
described above, proposals that would adjust the amounts owing to certain
unsecured creditors and the realization value of the Company's assets. Upon
filing the pre-packaged plan of reorganization, the Company will have access to
$100 million of debtor-in-possession financing to support its working capital
requirements during the restructuring process. On the plan implementation date,
the $100 million debtor-in-possession financing will be repaid by a $100 million
working capital facility to be established.
The ability of the Company to continue as a going concern is dependent on
the courts' approval of the pre-packaged plan of reorganization contemplated by
the Lock-up Agreement.
These consolidated financial statements have been prepared on the basis of
accounting principles applicable to a going concern which, in this situation
assumes that the Company will realize the carrying value of its assets, and
satisfy the obligations and commitments as set forth in the court approved
reorganization plan, in the normal course of operations, after the company
emerges from the creditor protection process. These consolidated financial
statements do not reflect the adjustments and disclosures that would be
necessary if the Company was to be petitioned into involuntary bankruptcy or
liquidation. The preparation of financial statements in conformity with
generally accepted accounting principles requires the 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, which
include assumptions made concerning the court's approval of the proposed
reorganization plan, amounts owing to unsecured creditors and realizable values
of assets.
45
<PAGE> 48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BASIS OF PRESENTATION (continued)
REFLECTING THESE EVENTS IN THE FINANCIAL STATEMENTS
In preparing the Company's financial statements, management has assessed
the degree to which the events or changes in circumstances described above
impact the recoverability of the carrying amount of the Company's assets and the
amounts owing to lenders and creditors.
Generally accepted accounting principles require that the amounts owing to
the Company's secured lenders as at December 31, 1998 not be adjusted to reflect
the Lock-up Agreements described above as the Company continues to be bound by
the provisions of its August 1997 credit agreement, as amended. If the proposed
restructuring plan is approved by the courts, in accordance with the Lock-up
Agreement, the restructuring of debt will give rise to a gain, net of related
non-cash tax effects (Note 15), that will be reported as income in 1999 at the
time of plan implementation, in accordance with US generally accepted accounting
principles. The amount of such gain cannot be predicted with assurance until the
restructuring plan is finalized.
The issuance of shares and restructuring of the Company's shareholders'
equity (deficit) has also not been adjusted at December 31, 1998 to reflect the
terms and conditions of the Lock-up Agreement.
Management has reviewed the Company's long-lived assets and intangibles
such as goodwill, to assess whether the events and changes in circumstances
described above indicate that the carrying amount of an asset may not be
recoverable. In making these estimates, management has utilized the assessments,
calculations and determinations made in preparing the proposed pre-packaged plan
of reorganization to be filed with the appropriate courts in Canada and the
United States, including estimates of overall enterprise value. Where the
proposed reorganization plan or estimates of enterprise value raised doubts as
to the recoverability of the assets, management estimated the future cash flows
expected to result from the proposed use of the asset and its eventual
disposition. If these estimates of future cash flow did not provide a reasonable
level of assurance as to the recoverability of the carrying value of the asset,
the carrying value was written down to its estimated recoverable amount (Note
3).
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and all of its subsidiaries. The equity method of accounting is used for
investment ownership ranging from 20% to 50% and where the Company has the
ability to exercise significant influence over the investee.
REVENUE RECOGNITION
Revenue from industrial services is recorded as the services are performed,
using the percentage of completion basis for fixed rate contracts and as the
related service is provided for time and material contracts. Revenue from
by-product recovery operations is recognized upon receipt and acceptance of
materials for processing since the Company accepts title to the materials at
such time and provides contractual indemnification to customers against future
liability with respect to the materials. Treatment, transportation and disposal
costs are accrued when the related revenue is recognized.
Revenue from the sale of recovered commodities and steel products is
recognized at the time of shipment. For contracts where the Company brokers
materials between two parties, only the commission on the transaction is
recorded.
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.
46
<PAGE> 49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
INVENTORY
Inventory is recorded at the lower of average purchased cost and 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 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.
GOODWILL
Goodwill represents the excess of the purchase price of businesses acquired
over the fair value of the identifiable assets acquired and is amortized over
periods not exceeding 40 years. At each balance sheet date management assesses
the appropriateness of the goodwill balance based on the undiscounted future
cash flow from operating results.
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 Company accrues the estimated costs relating to the closure and
post-closure monitoring of its landfill sites as well as remediation costs
associated with its transfer and processing facilities. The Company charges
earnings with the estimated future costs for its landfill sites based on
engineering estimates over the fill rate of landfill sites. The accrued
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 transfer and processing
facilities are included in accrued liabilities.
INTEREST CAPITALIZATION
The Company includes, as part of the cost of its fixed assets, all
financing costs incurred prior to the asset becoming available for operation.
FOREIGN CURRENCY TRANSLATION
In 1997, the Company changed the designation of the parent company's
functional currency to the US dollar. The Company designates as its functional
currency the Canadian dollar for all its Canadian based operations and the US
dollar for all operations based in the United States. 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. Revenue and expense items are translated at average
47
<PAGE> 50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
exchange rates prevailing during the period. The resulting gains and losses are
accumulated in a separate component of shareholders' equity.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable constitute financial instruments. The
Company's accounts receivable approximated their fair value as at December 31,
1998 and 1997. 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.
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 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 an adjustment to 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.
COMPREHENSIVE INCOME (LOSS)
Effective in 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income". 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. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components, however, adoption of this
statement had no impact on the Company's net loss or shareholders' equity
(deficit).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 1999. 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. The effect on the Company of the adoption of this standard has not yet
been determined.
48
<PAGE> 51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SPECIAL CHARGES (in thousands)
1998
The following table summarizes the special charges for continuing
operations recorded by the 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
costs(b).................................................. 63,000
Writedowns of investments recorded as other income and
expenses(c)............................................... 38,250
----------
Pre-tax..................................................... $1,211,127
----------
After tax................................................... $1,211,127
==========
</TABLE>
(a) For the year ended December 31, 1998, the Company recorded a charge of
$1,109,877 reflecting the effects of (i) decisions made with respect to the
potential disposition of the US Ferrous and certain Industrial Service Group
operations, (ii) impairments of fixed assets and related goodwill resulting
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 (Note
1).
On June 2, 1998, the Company announced its intention to sell its Metals
Services Group. During the third and fourth quarter of 1998, certain
businesses were sold, or closed, or are anticipated to be sold or closed in
1999, as described in Notes 4 and 5. Due to weak ferrous market conditions
and indications of value from offers received, the Company decided not to
sell the remainder of its Metals Services operations at this time.
Accordingly, certain amounts disclosed in the third quarter as business
units to be exited are now considered business units to be continued.
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 using a discount
rate of approximately 12%.
Special and non-recurring charges relate to the impairment of fixed assets
and related goodwill and 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 impairment....................................... 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 have been expensed as the existing credit facility will
be replaced as indicated in Note 1 and costs relating to the continued
negotiations with the lenders are being expensed. The Company's current
financial position, its planned divestitures, litigation with debtors,
unexpected financial difficulties of certain customers and a general
deterioration in customer market conditions have necessitated the recording
of an additional provision for doubtful accounts of $25,000. The remainder
of
49
<PAGE> 52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SPECIAL CHARGES (in thousands) (continued)
the special charges recorded in selling, general and administrative costs
relate to severance payments and other costs relating to ongoing cost
reduction measures and restructuring.
(c) The 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 current market performance of Invatec's shares.
The Company's investment in Strategic Holdings Inc., which was accounted
for at cost, and a long-term note receivable from Strategic Holding Inc.,
were divested in the fourth quarter of 1998 for less than their original
book value. Accordingly, a writedown of the investment and the long-term
note receivable in the third quarter of 1998 of $13,250 was recorded as
part of Other income and expense-net.
1997
As at December 31, 1997, the Company recorded a pre-tax charge of $135,466
($103,979, after tax) reflecting the effects of (i) restructuring decisions made
in its Industrial Services Group following the mergers of Allwaste, Inc.
("Allwaste") and Serv-Tech, Inc., (ii) integration decisions in various of its
acquired Metal Services Group businesses, the most significant of which were
acquired in late October 1997 and (iii) impairments of fixed assets and related
goodwill resulting both from decisions to exit various business locations and
dispose of the related assets, as well as assessments of the recoverability of
fixed assets and related goodwill of business units in continuing use.
All businesses assessed for asset impairment were acquired in purchase
business combinations and, accordingly, the goodwill that arose in those
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.
Special and non-recurring charges relate to the impairment of fixed assets
and related goodwill and are comprised of the following items:
<TABLE>
<S> <C>
Business units, locations or activities to be exited:
Goodwill written off...................................... $ 10,032
Fixed assets written down to estimated net realizable
value of $4,843........................................ 40,716
Unavoidable future lease and other costs associated with
properties............................................. 6,926
Other assets to be disposed, including $5,800 accrued
disposal costs......................................... 8,570
Business units to be continued:
Goodwill impairment....................................... 49,558
Fixed assets written down to estimated net realizable
value of $8,810........................................ 10,984
Severance, $2,000 paid before December 31, 1997............. 2,680
Accrued costs............................................... 6,000
--------
$135,466
========
</TABLE>
4. ACQUISITIONS AND DIVESTITURES (in thousands)
During 1998, the Company acquired six businesses, five of which were
acquired by Philip Utilities Management Corporation. In 1997, the 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. In 1996, the Company acquired eleven
businesses, including
50
<PAGE> 53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. ACQUISITIONS AND DIVESTITURES (in thousands) (continued)
Intsel Southwest Limited Partnership ("Intsel") and Luntz Corporation ("Luntz").
All business combinations have been accounted for using the purchase method of
accounting and are summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------------------------------------------- --------
ALLWASTE LURIA OTHER TOTAL
-------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PURCHASE CONSIDERATION
Cash........................... $ 18,735 $ -- $163,001 $397,488 $ 560,489 $109,301
Company's common shares........ -- 391,719 -- 210,913 602,632 29,571
Deferred payments and long-term
debt........................ 189 -- -- 22,828 22,828 22,373
Acquisition costs and
accruals.................... 1,118 52,047 12,300 19,158 83,505 3,875
-------- -------- -------- -------- ---------- --------
$ 20,042 $443,766 $175,301 $650,387 $1,269,454 $165,120
======== ======== ======== ======== ========== ========
FAIR VALUE OF NET ASSETS ACQUIRED
Cash (bank indebtedness)....... $ (6,553) $ 8,601 $ 688 $ (7,645) $ 1,644 $ 1,849
Long-term debt................. (12,943) (142,363) -- (86,002) (228,365) (14,513)
Assets, excluding cash &
intangibles................. 39,476 267,720 115,556 495,184 878,460 171,861
Liabilities.................... (31,761) (77,318) (44,673) (228,010) (350,001) (63,092)
Goodwill....................... 31,823 387,126 101,130 452,278 940,534 63,535
Other intangibles.............. -- -- 2,600 24,582 27,182 5,480
-------- -------- -------- -------- ---------- --------
$ 20,042 $443,766 $175,301 $650,387 $1,269,454 $165,120
======== ======== ======== ======== ========== ========
</TABLE>
The unaudited pro forma information set forth below assumes the
acquisitions of Allwaste and Luria and the material acquisitions in 1996 of
Luntz and Intsel, occurred at the beginning of 1996. The unaudited pro forma
information is presented for informational purposes only and is not necessarily
indicative of the results of operations that would have resulted if the
acquisitions had occurred on January 1, 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1997 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $1,492,043 $1,117,037
Earnings (loss) from continuing operations.................. $ (59,456) $ 672
Basic earnings per share from continuing operations......... $ (0.56) $ 0.01
</TABLE>
During 1998, the Company divested of two of its Metals Services businesses.
On July 7, 1998, the 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 Company sold certain of its
spiral weld pipe operations for cash proceeds of $9,922, resulting in a loss on
sale of $392.
In November 1995, the Company reached an agreement to sell its Greater
Montreal Area solid waste collection and transfer business (the "Intersan
Business") for $31,685. As part of the sale of the Intersan Business, the
Company entered into a disposal services agreement with the purchaser and
received proceeds of $7,947. The proceeds from the sale of the Intersan
Business, which amounted to $39,632, were received in January 1996.
5. DISCONTINUED OPERATIONS (in thousands)
In December 1998, the 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. Certain of
51
<PAGE> 54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. DISCONTINUED OPERATIONS (in thousands) (continued)
the copper and non-ferrous operations or assets are anticipated to be sold in
the next twelve months and the remainder of the operations in these segments
will be closed during 1999. The loss on the closure of the remainder of the
Non-Ferrous and Copper operations, which includes fair value adjustments,
writedowns of goodwill and income tax valuation allowances, was $126,135.
Revenue from the Non-Ferrous and Copper operations, net of intercompany
revenue, was $403,319, $569,984 and $199,112 for the fiscal years ended December
31, 1998, 1997 and 1996, respectively. Loss from discontinued operations in the
Consolidated Statement of Earnings is presented net of applicable income taxes
of $45,550, $(38,269) and $(9,286) for the fiscal years ended December 31, 1998,
1997 and 1996, respectively. No interest or general corporate overhead was
allocated to these discontinued operations.
In August 1996, the Company sold its municipal and commercial solid waste
business (the "Solid Waste Business") for a total consideration of $115,000 to
USA Waste Services, Inc. ("USA Waste"). The consideration included $60,000 in
cash, $38,000 in unrestricted common shares of USA Waste, and $17,000 in
restricted common shares of USA Waste. The unrestricted common shares of USA
Waste were sold in September 1996 for $39,508, resulting in a gain of $1,508
which is included in Other Income and Expense -net in the Consolidated
Statements of Earnings. The restriction on the $17,000 common shares of USA
Waste was removed in January 1997 and in February 1997, the Company sold these
shares for $19,800, resulting in a further gain before tax of $2,800.
Revenue of the Solid Waste Business, net of intercompany revenue, was
$38,140 for the fiscal year ended December 31, 1996. Loss from discontinued
operations in the Consolidated Statements of Earnings is presented net of
allocated interest expense of $3,768 and net of applicable income taxes of
$3,225 for the fiscal year ended December 31, 1996. Interest was allocated based
upon the ratio of the net assets of the Solid Waste Business to the Company's
consolidated net assets. No general corporate overhead was allocated to the
discontinued operations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
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.................................. (126,135) -- --
Loss from Non-Ferrous and Copper discontinued operations,
net of tax.............................................. (97,738) (65,745) (16,442)
Loss on sale of Solid Waste Business, net of income taxes
recoverable of $2,568................................... -- -- (5,588)
Income from Solid Waste Business discontinued
operations.............................................. -- -- 4,872
--------- -------- --------
$(254,391) $(65,745) $(17,158)
========= ======== ========
</TABLE>
52
<PAGE> 55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. OTHER CURRENT ASSETS (in thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net current assets from discontinued operations(a).......... $ 72,459 $121,293
Restricted cash(b).......................................... 28,423 --
Work in progress............................................ 23,018 25,899
Small parts and supplies.................................... 19,020 14,951
Prepaid expenditures........................................ 14,527 4,404
Other....................................................... 23,867 16,681
-------- --------
$181,314 $183,228
======== ========
</TABLE>
(a) Net assets from discontinued operations for 1998 include proceeds receivable
of approximately $69,500 from the sale of the aluminum operations (Note 5).
(b) Restricted cash represents funds used as collateral for letters of credit.
7. FIXED ASSETS (in thousands)
<TABLE>
<CAPTION>
1998 1997
---------------------------------- ----------------------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
COST DEPRECIATION VALUE COST DEPRECIATION VALUE
-------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Land...................... $ 60,932 $ -- $ 60,932 $ 71,058 $ -- $ 71,058
Landfill sites............ 24,696 4,958 19,738 22,855 2,950 19,905
Buildings................. 124,295 21,789 102,506 113,370 10,873 102,497
Equipment................. 377,662 138,319 239,343 396,652 82,603 314,049
Assets under
development............. 12,645 -- 12,645 34,225 -- 34,225
-------- -------- -------- -------- ------- --------
$600,230 $165,066 $435,164 $638,160 $96,426 $541,734
======== ======== ======== ======== ======= ========
</TABLE>
8. OTHER ASSETS (in thousands)
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Restricted investments(a)................................... $31,016 $ 27,970
Deferred financing costs.................................... 836 19,616
Investments(b).............................................. 18,837 53,685
Other intangibles........................................... 9,052 34,426
Net long-term assets of discontinued operations............. -- 149,640
Other....................................................... 29,883 29,881
------- --------
$89,624 $315,218
======= ========
</TABLE>
(a) Restricted investments support the Company's self-insurance program and are
invested and managed by the Company's wholly-owned insurance subsidiary.
(b) Investments include:
(i) a 24.2% interest in Invatec (Note 3(c)) representing 2,340,717 common
shares amounting to $5.7 million (1997 -- $30.8 million). The Invatec
investment is accounted for using the equity method of accounting.
Invatec is a publicly traded company providing comprehensive
maintenance, repair, replacement and value added distribution
services of industrial valves and process system components. The
quoted market price of the Invatec shares at December 31, 1998 was
$2.56 per share (1997 -- $20.25). On March 9, 1999, Invatec announced
that NASDAQ had asserted that its common stock is no longer eligible
for inclusion on the NASDAQ National Market because the stock had
failed to maintain a closing bid price of $5 per share and the
company had failed to
53
<PAGE> 56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. OTHER ASSETS (in thousands) (continued)
maintain the required level of tangible net assets. As a result,
Invatec's common shares are subject to delisting from the NASDAQ National Market
at any time. However, in the event of delisting, the stock may be
eligible to be quoted and traded on the NASDAQ Small Cap Market. As at
March 31, 1999, Invatec's common stock was trading on the NASDAQ
National Market.
(ii) The Company's investment in Strategic Holdings Inc., (Note 3 (c))
which was accounted for at cost, was divested in the fourth quarter
of 1998. At December 31, 1997, the carrying value of the investment
was $9.7 million.
9. ACCRUED LIABILITIES (in thousands)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Accrued employee compensation and benefit costs............. $ 40,936 $ 34,582
Accrued insurance costs..................................... 32,993 30,551
Accrued purchases........................................... 21,993 25,947
Income taxes payable........................................ 8,500 11,978
Accrued restructuring costs................................. 17,520 21,164
Accrued other............................................... 66,994 57,355
-------- --------
$188,936 $181,577
======== ========
</TABLE>
10. LONG-TERM DEBT (in thousands)
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Bank term loan(a)........................................... $1,025,253 $897,352
Convertible subordinated debentures(b)...................... 25,609 25,625
Loans collateralized by certain assets of subsidiaries of
the Company having a net book value of $26,945 bearing
interest at a weighted average fixed rate of 6.5% (1997 -
6.6%) maturing at various dates up to 2020(d)............. 14,686 19,627
Loans collateralized by certain assets of subsidiaries of
the Company having a net book value of $4,219 bearing
interest at prime plus a weighted average floating rate of
0.8% (1997 - 0.8%) maturing at various dates up to
2008...................................................... 4,037 6,582
Loans unsecured, bearing interest at prime plus a weighted
average floating rate of 7.1% (1997 - 5.4%) maturing at
various dates up to 2005(c)............................... 23,681 21,908
Obligations under capital leases on equipment bearing
interest at rates varying from 6% to 12% maturing at
various dates to 2004..................................... 13,295 13,930
Other....................................................... 1,217 1,301
---------- --------
1,107,778 986,325
Less current maturities of long-term debt (e)............... 1,084,959 20,735
---------- --------
$ 22,819 $965,590
========== ========
</TABLE>
(a) In August 1997, the Company signed a $1.5 billion revolving credit agreement
which was amended in October 1997, February 1998, June 1998, October 1998
and December 1998 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 Company must meet specified interest coverage ratio, debt to EBITDA
ratio, fixed charge ratio and working capital ratio tests, and (b)
acquisitions by the Company are subject to lenders' approval.
54
<PAGE> 57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. LONG-TERM DEBT (in thousands) (continued)
At December 31, 1998 the Company was not in compliance with certain
covenants in the Credit Facility, including the financial covenants, which
require the Company to maintain a specified interest coverage ratio, debt to
EBITDA ratio, fixed charge ratio and working capital ratio. As the Company
is not in compliance with the terms of its Credit Facility, the debt
outstanding under the Credit Facility is classified as a current liability
on the Company's Consolidated Balance Sheet.
Borrowings under the Credit Facility are guaranteed, jointly and severally
by the Company and its direct and indirect wholly-owned subsidiaries and are
secured by a pledge of the issued and outstanding securities of the
Company's direct and indirect wholly-owned subsidiaries, and a charge over
the present and future assets of the Company and its direct and indirect
wholly-owned subsidiaries. The Credit Facility bears interest based on a
moving grid. At December 31, 1998, the interest rate was approximately 9.5%
(1997 -- 7.1%) on these borrowings. In June 1998, the Credit Facility was
reduced from $1.5 billion to $1.2 billion, the interest rate charged was
increased by 100 basis points, the 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
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 Company standstill on certain activities
until June 30, 1999. In November 1998, the Company suspended payments of
interest under the Credit Facility.
On April 26, 1999 the Company's lenders approved a Lock-up Agreement which
sets forth a new capital structure for the Company and the conditions that
govern the restructuring of $1.02 billion outstanding under the Credit
Facility. Under the terms of the Lock-up Agreement, the lenders will convert
the outstanding $1.02 billion of secured debt into $300 million of senior
secured debt, $100 million of convertible secured payment in-kind notes and
90% of the common shares of the restructured Company. The secured payment
in-kind notes are convertible into 25% of the common shares of the
restructured Company on a fully diluted basis as of the restructuring date.
The senior secured debt and the secured payment in-kind notes each have a
term of five years. The Lock-up Agreement enables the Company to use $68,500
in proceeds from the January 1999 sale of the Company's aluminum assets and
allows access to future asset sale proceeds of up to $24,500. The Lock-up
Agreement also provides that the Board of Directors of the restructured
Company will consist of nine directors, who will be nominated by the new 90%
shareholders (i.e., the lenders). The nominees include two members of the
existing Board of Directors. The Company has agreed to a reduction in the
current facility from $1.2 billion to the current amount outstanding.
(b) On the acquisition of Allwaste, the Company assumed the indenture with
respect to Allwaste's 7 1/4% Convertible Subordinated Debentures
("debenture") which are due 2014. At any time up to and including June 1,
2014 the holder of any debenture will have 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 are redeemable for cash at the option of the Company. The
debentures provide for annual mandatory sinking fund payments equal to 5% of
the aggregate principal amount of the debenture issued, commencing June 1,
1999. Interest is payable semi-annually on June 1 and December 1. Effective
December 1, 1998, the Company suspended payments of interest on the
debenture which created a default under the indenture. Accordingly, the
amount of the debentures outstanding has been classified as a current
liability on the Consolidated Balance Sheet at December 31, 1998.
The Company's acquisition of Allwaste in 1997 constituted a "redemption
event" pursuant to the indenture. Accordingly, each holder of the debentures
had the right to require the redemption of all or any portion of such
holder's debenture for cash to the 90th day following the acquisition.
During the 90 day period in 1997, $3.3 million of debentures were redeemed.
55
<PAGE> 58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. LONG-TERM DEBT (in thousands) (continued)
(c) Included in the unsecured loans are promissory notes, relating to certain
1997 acquisitions, totalling $16,000 which are in default as at December 31,
1998 and have been classified as a current liability on the Company's
Consolidated Balance Sheet. Principal repayments which were required on
these notes in 1998 were not made, causing a default under provisions of the
promissory note.
(d) Included in the fixed rate secured loans are industrial development bonds
totalling $7,700 which are in default as at December 31, 1998 since
principal repayments required were not made.
(e) 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>
1999................................................... $1,084,959
2000................................................... 7,326
2001................................................... 3,994
2002................................................... 8,672
2003................................................... 1,027
</TABLE>
11. DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS (in thousands except
rate/strike price and term)
The Company utilizes 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 is mitigated by dealing only with credit worthy major public
financial institutions.
In 1997, the Company hedged the market risk of foreign currency exchange
rate movements on debt denominated in Canadian currency through the forward
purchase of Canadian dollars. At December 31, 1997, the Company had outstanding
31,500 lbs of copper swap contracts entered into in connection with a processing
agreement associated with the monetization of copper inventory. Under these
swaps the Company was obligated to pay the counterparty an average fixed price
of $0.87/lb and received a variable price based upon the market price of copper.
These swaps had no carrying value and resulted in a mark to market loss of
$10,000 at December 31, 1997 which has been recorded in the results of
discontinued operations.
In 1997, the Company entered into copper and aluminum collar and purchased
put option contracts, as well as written covered call option contracts with
major public financial institutions to hedge market price fluctuations in its
copper and aluminum inventories.
As at December 31, 1998, the Company also had forward physical copper sales
commitments to customers totalling 7,500 lbs. (1997 - 22,000 lbs) and copper
futures purchase contracts with major public broker dealers which are,
collectively designated as hedges in its copper processing operations and
inventory.
The following table summarizes outstanding derivative instruments:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- ----------------------------------------------
CONTRACT/ TERM CONTRACT/ TERM
INSTRUMENTS NOTIONAL AMOUNT (YEARS) RATE/STRIKE PRICE NOTIONAL AMOUNT (YEARS) RATE/STRIKE PRICE
- ----------- --------------- ------- ----------------- --------------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate swaps / collars... $ 130,000 0.4 6.95% $319,406 0.7 5.91%
Forward Canadian dollar
purchases..................... -- -- -- $99,393 0.2 Cdn$1.42/$1US
Copper swaps.................... -- -- -- 31,500 lbs. 0.5 $0.87/lb.
Copper price collars............ -- -- -- 45,000 lbs. 0.1 $0.75 to $0.95/lb.
Written copper call options..... -- -- -- 51,750 lbs. 0.2 $0.88/lb.
Purchased copper put options.... -- -- -- 13,500 lbs. 0.5 $0.78/lb.
Aluminum price collars.......... -- -- -- 10,000 lbs. 0.1 $0.65 to $0.74/lb.
Written aluminum call options... -- -- -- 10,000 lbs. 0.2 $0.72/lb.
Copper futures purchases........ 11,575 lbs. 0.3 $0.73/lb. 11,805 lbs. 0.4 $0.89/lb.
</TABLE>
56
<PAGE> 59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS (in thousands except
rate/strike price and term) (continued)
Other than the copper swaps discussed in the above paragraphs, neither the
carrying value nor the related fair value of the instruments summarized in the
above table were individually or collectively material at December 31, 1998 or
1997.
12. OTHER LIABILITIES (in thousands)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Accrued environmental costs................................. $ 76,493 $59,238
Deferred payments(a)........................................ 8,848 11,139
Net long-term liabilities of discontinued operations........ 4,771 --
Other....................................................... 37,336 23,490
-------- -------
$127,448 $93,867
======== =======
</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.
13. SHAREHOLDERS' EQUITY (in thousands except number of shares/options and per
share amounts)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
SHARE CAPITAL CONSISTS OF:
AUTHORIZED
Unlimited number of common shares
ISSUED
Common shares and equivalents
Number...................................................... 131,144,013 131,058,393
Dollars..................................................... $ 1,351,482 $ 1,348,066
</TABLE>
The issued and outstanding share capital of the Company is comprised of the
following:
<TABLE>
<CAPTION>
COMMON SHARES
-------------------------
NUMBER AMOUNT
----------- ----------
<S> <C> <C>
Balance - December 31, 1995................................. 37,453,833 $ 153,920
Shares issued in respect of acquisitions during 1996........ 3,600,102 29,571
Shares issued on conversion of convertible subordinated
debentures................................................ 19,180,000 117,720
Shares issued for cash...................................... 8,625,000 55,345
Share options exercised for cash............................ 953,724 6,159
Other....................................................... 64,209 364
----------- ----------
Balance - December 31, 1996................................. 69,876,868 363,079
Shares issued in respect of acquisitions during 1997........ 35,880,758 602,632
Shares issued on conversion of convertible subordinated
debentures................................................ 129,511 1,550
Shares issued for cash...................................... 23,000,000 362,501
Share options exercised for cash............................ 1,774,414 12,657
Other....................................................... 396,842 5,647
----------- ----------
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................................. 131,144,013 $1,351,482
=========== ==========
</TABLE>
57
<PAGE> 60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. SHAREHOLDERS' EQUITY (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
1994.................................................... 276,588 Cdn $7.50 to 8.00
1995.................................................... 600,410 Cdn $9.88
1996.................................................... 1,008,009 Cdn $8.50 to 11.90
1997.................................................... 3,684,500 Cdn $18.10 to 22.70
1997 Serv-Tech acquisition.............................. 379,457 $7.44 to 22.64
1997 Allwaste acquisition............................... 1,477,742 $6.96 to 10.64
1998.................................................... 2,277,500 Cdn $3.95 to 17.95
Issued in conjunction with the acquisition of Philip
Environmental Corporation(b).......................... 776,386 Cdn $7.05 to 8.00
----------
Total outstanding December 31,1998...................... 10,480,592
==========
</TABLE>
(a) The 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 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 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 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 1998, 1997 and 1996, in accordance with
SFAS No. 123 the Company's net loss would be as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ----------------------- ----------------------
AS REPORTED PROFORMA AS REPORTED PROFORMA AS REPORTED PROFORMA
----------- ----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net loss................... $(1,586,872) $(1,596,472) $(126,267) $(131,311) $(19,973) $(22,210)
Basic and diluted earnings
per share................ $ (12.10) $ (12.17) $ (1.43) $ (1.49) $ (0.40) $ (0.44)
</TABLE>
The weighted average fair value of options granted in 1998, 1997 and 1996
was $1.55, $1.33 and $1.45, respectively. The fair value of each option was
determined using the Black-Scholes option valuation model with the following
assumptions for 1998, 1997 and 1996: (i) risk free interest rate of 5.44, 5.62,
and 6.96%, respectively, (ii) expected volatility of 94.94, 46.28 and 32.74%,
respectively, (iii) expected option life ranging from 5 to 10 years and (iv) no
annualized dividend yield.
58
<PAGE> 61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. CHANGE IN NON-CASH WORKING CAPITAL (in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Accounts receivable..................................... $ 91,548 $ (63,632) $ 6,368
Inventory for resale.................................... 32,462 (20,590) (1,002)
Other................................................... (59,216) (22,960) (9,500)
Accounts payable and accrued liabilities................ (129,448) (30,690) (1,691)
Income taxes............................................ 8,799 2,321 (4,168)
--------- --------- -------
Change in non-cash working capital...................... $ (55,855) $(135,551) $(9,993)
========= ========= =======
</TABLE>
STATEMENTS OF CASH FLOWS
The supplemental cash flow disclosures and non-cash transactions for the
years ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Interest paid........................................... $63,344 $ 45,632 $ 19,476
Income taxes paid....................................... 3,920 4,035 1,119
NON CASH TRANSACTIONS:
Common stock issued on acquisitions..................... -- 602,632 29,571
Capital leases and debt obligations for the purchase of
property and equipment............................... 2,764 7,708 13,924
Debt and liabilities incurred or assumed in
acquisitions......................................... 189 67,064 22,380
Debt converted to common stock.......................... -- 2,130 117,720
Common stock issued for property........................ -- 5,084 --
</TABLE>
15. INCOME TAXES (in thousands)
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". Under SFAS No. 109, the Company provides deferred income taxes
for the tax effects of temporary differences between the financial reporting and
income tax bases of the Company's assets and liabilities.
The Company is organized under the laws of Ontario, Canada and it is
regarded as a Canadian domestic corporation for the purposes of this note.
Federal, provincial and foreign income tax provisions (benefits) are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Canadian - federal and provincial
Current................................................. $ -- $ 702 $ (5,407)
Deferred................................................ 14,770 (10,831) (5,615)
------- -------- --------
14,770 (10,129) (11,022)
Foreign
Current................................................. 9,014 6,735 1,159
Deferred................................................ 18,463 (14,068) (414)
------- -------- --------
$42,247 $(17,462) $(10,277)
======= ======== ========
</TABLE>
59
<PAGE> 62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. INCOME TAXES (in thousands) (continued)
The Company's income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Income tax expense (benefit) based on Canadian Federal
and Provincial effective income tax rates............. $(575,800) $(34,369) $ (5,842)
(Increase) decrease in income tax benefit resulting
from:
Lower income tax rates in the USA and other
jurisdictions...................................... 68,877 (12,507) (4,362)
Manufacturing and processing allowances............... 2,489 6,586 (1,319)
Non-deductible expenses for income tax purposes,
principally goodwill and amortization.............. 13,904 3,618 2,141
Other non-deductible expenses relating to special
charges............................................... 328,627 20,308 --
Valuation allowance..................................... 204,496 -- --
Other................................................... (346) (1,098) (895)
--------- -------- --------
Income tax expense (benefit)............................ $ 42,247 $(17,462) $(10,277)
========= ======== ========
</TABLE>
The net deferred tax (asset) liability consists of the following temporary
differences:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Difference in fixed assets and goodwill basis............... $(42,974) $ 62,474
Net operating loss carryforwards............................ (82,669) (44,754)
Accruals not yet deductible................................. (62,594) (44,044)
Other....................................................... 1,090 562
Valuation allowance......................................... 204,496 --
-------- --------
Net deferred tax (asset) liability.......................... $ 17,349 $(25,762)
======== ========
</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 be
realized. Projected future income tax planning strategies and the expected
reversal of deferred tax liabilities are considered in making this assessment.
In 1998, 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 Company
will not realize the benefits of deferred tax assets. The Company's plan to
restructure the secured bank term loans in 1999 in accordance with the current
agreement indicated in Note 1, may result in a gain that will be sufficient to
utilize the deferred tax assets. However, given that this gain is contingent on
Court confirmation, the Company has recorded a valuation allowance of $204,496
for the year ended December 31, 1998.
60
<PAGE> 63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. INCOME TAXES (in thousands) (continued)
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
----------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Depreciation and amortization.......................... $(112,086) $ (19,409) $ 1,582
Accruals and reserves not deductible until paid........ (21,548) (1,085) --
Deferred revenue....................................... (627) 3,151 --
Losses carried forward................................. (39,986) (5,825) (982)
Other, net............................................. 2,984 (1,731) (6,629)
Valuation allowance.................................... 204,496 -- --
--------- --------- --------
Total deferred income tax expense (benefit)............ $ 33,233 $ (24,899) $ (6,029)
========= ========= ========
</TABLE>
16. COMPUTATION OF EARNINGS PER SHARE (in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- --------
<S> <C> <C> <C>
Net loss for the period -- basic and diluted.......... $(1,586,872) $(126,267) $(19,973)
=========== ========= ========
Number of common shares outstanding................... 131,144 131,058 69,877
Effect of using weighted average number of common
shares outstanding.................................. (14) (42,867) (19,804)
----------- --------- --------
Basic and diluted weighted average number of commons
shares outstanding.................................. 131,130 88,191 50,073
=========== ========= ========
</TABLE>
17. INTEREST CAPITALIZATION (in thousands)
During the years ended December 31, 1998, 1997 and 1996 the Company
included $384, $699, and $2,219, 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 Company:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Advances from (repayments to) directors..................... $(1,400) $ (826) $(2,894)
------- ------ -------
Interest paid to directors.................................. $ -- $ 21 $ 196
------- ------ -------
Services acquired from companies controlled by officers and
directors................................................. $ 3,724 $2,387 $ 839
------- ------ -------
Property purchased from a company partially owned by a
director.................................................. $ -- $5,084 --
------- ------ -------
Unsecured advances to an officer and director -- net........ -- -- $ (38)
------- ------ -------
</TABLE>
(b) An amount due from an officer and a director at December 31, 1998 and 1997
of $481 and $515 respectively has been included in other current assets. The
loan is unsecured, non-interest bearing and payable on demand.
61
<PAGE> 64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. CONTINGENCIES (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 since its business is based on compliance with
environmental laws and regulations.
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 $66,097 (1997 - $59,967).
As well, certain subsidiaries acquired by the Company have been named as a
potentially responsible or liable parties in connection with sites listed on
the Superfund National Priority List ("NPL"). In the majority of the cases,
the Company's connection with NPL sites relates to allegations that its
subsidiaries or their predecessors transported waste to 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 the liability to remediate these sites at $20,827
(1997 - $5,086).
The liabilities discussed above are disclosed in the Consolidated Balance
Sheets as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net current assets from discontinued operations............. $ 1,400 $ --
Net long-term assets from discontinued operations........... 1,980 400
Accrued liabilities......................................... 7,051 5,415
Accrued environmental costs (Note 12)....................... 76,493 59,238
------- -------
$86,924 $65,053
======= =======
</TABLE>
If it is determined that more expensive remediation approaches may be
required in the future, the Company could incur additional obligations of up
to $35,000.
(b) Various class actions have been filed against the Company, certain of its
past and present directors and officers, the underwriters of the Company's
1997 public offering and the Company's auditors. Each action alleges that
Philip'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 Philip'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 Company's response. Pre-Trial Order No. 2 appointed a lead
plaintiff and lead counsel. On November 13, 1998, the Company filed a motion
for an order dismissing the class action on the grounds of forum non
conveniens. As of the date hereof, no decision has been rendered on the
forum non conveniens motion.
Similar claims have been asserted against the Company and certain of its
past and present officers and directors by the former shareholders of the
Steiner-Liff Metals group of companies and the Southern-Foundry Supply
group of companies. Philip acquired these companies in October of 1997 and
issued Philip common shares in partial payment of the purchase price. The
claims allege that Philip's
62
<PAGE> 65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. CONTINGENCIES (in thousands) (continued)
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 US securities laws.
A claim brought under the Ontario Class Proceedings Act was commenced on
October 26, 1998 against the Company, the underwriters of the Company's
1997 public offering and the Company's auditors. The claim was brought on
behalf of persons in Canada who purchased Philip common shares 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 US class action claims.
The Company has conducted a review of the claims and determined that it is
not feasible to predict or determine the final outcome of these
proceedings. The Company intends to vigorously defend all claims but there
can be no assurance that the outcome of the class actions and related
actions will not have a material adverse effect upon the financial
condition or results of operations of the Company.
(c) 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 $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. In addition,
in March 1999, Westlake PetroChemicals Corporation ("Westlake") commenced an
action against Piping Companies, Inc. ("PCI"), an indirect wholly owned
subsidiary of the Company, alleging that welding work conducted by PCI in
December 1995 was defective and gave rise to a fire which caused
considerable damage to Westlake's Sulfur, Louisiana ethylene plant. 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. The Company intends to vigorously defend the claims and
believes that it has insurance coverage for such claims. There can be no
assurance that the outcome of the claims will not have a material adverse
effect upon the financial condition or results of operations of the Company.
(d) In November 1998, the Company ceased paying interest on its $1.02 billion in
outstanding secured syndicated debt and stopped making payments on certain
other unsecured debt and contractual obligations ("the Unsecured
Obligations"). The Company may not have a defense to claims asserted or
actions commenced for the payment of these obligations, or compliance with
such contracts. The Company has reached an agreement with its lending
syndicate on the terms of a financial restructuring of the Company whereby
outstanding syndicated debt of $1.02 billion will be converted into $300
million of senior secured debt, $100 million in convertible secured payment
in-kind notes and 90% of the common shares of the restructured Company. The
Company is preparing a pre-packaged plan of reorganization which it expects
to file under Chapter 11 of the United States Bankruptcy Code and in Canada
under the Companies Creditors Arrangement Act. The filing of a pre-packaged
plan of reorganization is subject to the fulfillment of certain conditions.
There can be no assurance that the pre-packaged plan of reorganization will
be filed and if filed, that it will be approved by the required stakeholders
and the courts having jurisdiction over such matters. If the pre-packaged
plan of reorganization is not approved, there can be no assurance that the
Company will continue as a going concern. The Company is seeking to impair
the Unsecured Obligations as part of the US and Canadian pre-packaged plan
of reorganization filings. There can be no assurance that the Unsecured
Obligations will be resolved as part of the Company's pre-packaged plan of
reorganization. If not resolved, the Unsecured Obligations could have a
material adverse effect upon the financial condition or results of
operations of the Company.
(e) The Company is named as a defendant in several lawsuits which have arisen in
the ordinary course of its business. Management believes that none of these
suits is likely to have a material adverse effect on the
63
<PAGE> 66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. CONTINGENCIES (in thousands) (continued)
Company's business or financial condition and therefore has made no
provision in these financial statements for the potential liability, if
any.
20. 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 Company (Note 1).
21. COMMITMENTS (in thousands)
Future rental payments required under operating leases for premises and
equipment are as follows:
<TABLE>
<S> <C>
1999........................................................ $36,975
2000........................................................ 26,003
2001........................................................ 18,869
2002........................................................ 15,568
2003 and thereafter......................................... 24,354
</TABLE>
Letters of credit issued in relation to various supply contracts and third
party insurance policies amounted to $95,179 as at December 31, 1998 (1997 -
$58,960).
22. SEGMENTED INFORMATION (in thousands)
The Company has two distinct business operations, Metals Services and
Industrial Services. The Industrial Services operations have three business
segments By-Products Recovery, Utilities Management and Industrial Outsourcing
Services. By-Products recovery includes solvent distillation, engineered fuel
blending, paint overspray recovery, organic and inorganic processing and
polyurethane recycling. Utilities management provides services to industrial and
municipal water and wastewater treatment plants, power plants and related
infrastructure. Industrial Outsourcing Services includes 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 refactory services.
The Metals Services operations have two business segments, Ferrous Services
and Industrial Metals Services ("IMS"). Ferrous services include 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 provides mill services and engineering and consulting services.
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------------------------
INDUSTRIAL CORPORATE
BY-PRODUCTS UTILITIES OUTSOURCING FERROUS AND
RECOVERY MANAGEMENT SERVICES SERVICES IMS ELIMINATIONS TOTAL
----------- ---------- ----------- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................ $175,644 $89,094 $ 976,113 $ 718,748 $ 41,133 $ -- $ 2,000,732
Income (loss) from
operations................... (59,505) 1,956 (442,199) (498,405) (16,894) (199,005) (1,214,052)
Income (loss) from operations
excluding special charges.... (2,426) 1,956 21,933 8,151 (10,776) (60,013) (41,175)
Total assets................... 168,659 80,091 1,170,583 279,685 15,043 (566,382) 1,147,679
Depreciation and
amortization................. 8,737 3,607 47,328 31,759 1,133 8,283 100,847
Capital expenditures........... 5,020 3,985 23,306 25,620 3,200 787 61,918
Equity investments............. -- -- 7,766 3,776 -- -- 11,542
</TABLE>
64
<PAGE> 67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
22. SEGMENTED INFORMATION (in thousands) (continued)
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------------------------------
INDUSTRIAL CORPORATE
BY-PRODUCTS UTILITIES OUTSOURCING FERROUS AND
RECOVERY MANAGEMENT SERVICES SERVICES IMS ELIMINATIONS TOTAL
----------- ---------- ----------- ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue......................... $191,099 $28,550 $ 412,739 $ 527,248 $ 21,310 $ -- $1,180,946
Income (loss) from operations... (72,645) 1,034 16,727 34,636 (19,161) (16,767) (56,176)
Income (loss) from operations
excluding special charges..... 4,785 1,034 40,595 39,710 3,933 (10,767) 79,290
Total assets.................... 243,075 51,197 1,578,188 1,002,085 18,809 (226,376) 2,666,978
Depreciation and amortization... 11,778 1,367 21,178 10,356 1,511 9,563 55,753
Capital expenditures............ 8,599 4,049 15,020 15,670 4,696 15,460 63,494
Equity investments.............. -- -- 32,812 2,961 -- -- 35,773
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------------------
INDUSTRIAL CORPORATE
BY-PRODUCTS UTILITIES OUTSOURCING FERROUS AND
RECOVERY MANAGEMENT SERVICES SERVICES IMS ELIMINATIONS TOTAL
----------- ---------- ----------- -------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.............................. $163,488 $ 1,336 $ 92,155 $ 69,720 $6,533 $ -- $333,232
Income (loss) from operations........ 4,050 15 1,956 3,991 1,039 (14,427) (3,376)
Total assets......................... 231,981 22,099 120,041 148,839 4,442 291,827 819,229
Depreciation and amortization........ 10,365 120 4,134 1,110 282 6,852 22,863
Capital expenditures................. 11,345 162 11,657 6,397 812 10,643 41,016
Equity investments................... -- -- -- -- -- -- --
</TABLE>
The geographical segmentation of the Company's business is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ----------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
---------- ---------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Canada.............................. $ 333,338 $157,309 $ 239,505 $164,072 $148,196 $129,152
United States....................... 1,556,962 287,682 839,948 401,333 185,036 101,013
Europe.............................. 110,432 64,713 101,493 74,182 -- 25,830
---------- -------- ---------- -------- -------- --------
$2,000,732 $509,704 $1,180,946 $639,587 $333,232 $255,995
========== ======== ========== ======== ======== ========
</TABLE>
65
<PAGE> 68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23. 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, 1998 and 1997. The quarterly financial
statements have been restated to reflect as discontinued operations, the
Non-Ferrous and Copper operations of the Metals Services business as described
in Note 5.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- ------------------------------------------
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............................ $547,675 $573,598 $ 449,787 $ 429,672 $151,084 $201,173 $351,584 $ 477,105
Operating expenses................. 453,384 479,640 374,380 412,940 123,382 155,033 266,587 387,273
Special charges.................... -- -- 356,633 753,244 -- -- -- 135,466
Selling, general and administrative
costs............................ 50,272 61,288 115,185 56,971 19,472 18,383 30,012 45,761
Depreciation and amortization...... 25,523 26,029 26,839 22,456 7,306 7,969 15,601 24,877
-------- -------- --------- --------- -------- -------- -------- ---------
Income (loss) from operations...... 18,496 6,641 (423,250) (815,939) 924 19,788 39,384 (116,272)
Interest expense................... 15,015 18,633 20,673 23,509 5,771 5,340 10,231 14,794
Other income and expense - net..... (16,129) (2,336) 19,191 (2,374) (3,375) (676) (1,290) (8,987)
-------- -------- --------- --------- -------- -------- -------- ---------
Earnings (loss) from continuing
operations before tax............ 19,610 (9,656) (463,114) (837,074) (1,472) 15,124 30,443 (122,079)
Income taxes....................... 5,389 (7,140) 37,222 6,776 (1,484) 3,687 8,568 (28,233)
-------- -------- --------- --------- -------- -------- -------- ---------
Earnings (loss) from continuing
operations....................... 14,221 (2,516) (500,336) (843,850) 12 11,437 21,875 (93,846)
Discontinued operations (net of
tax)............................. (14,786) (70,497) (145,063) (24,045) 6,376 (3,951) (2,412) (65,758)
-------- -------- --------- --------- -------- -------- -------- ---------
Net earning (loss)................. $ (565) $(73,013) $(645,399) $(867,895) $ 6,388 $ 7,486 $ 19,463 $(159,604)
======== ======== ========= ========= ======== ======== ======== =========
Basic earnings (loss) per share
Continuing operations............ $ 0.11 $ (0.02) $ (3.81) $ (6.44) $ -- $ 0.16 $ 0.24 $ (0.79)
Discontinued..................... $ (0.11) $ (0.54) $ (1.11) $ (0.18) $ 0.09 $ (0.05) $ (0.03) $ (0.55)
-------- -------- --------- --------- -------- -------- -------- ---------
$ -- $ (0.56) $ (4.92) $ (6.62) $ 0.09 $ 0.11 $ 0.21 $ (1.34)
======== ======== ========= ========= ======== ======== ======== =========
Diluted earnings (loss) per share
Continuing....................... $ 0.11 $ (0.02) $ (3.81) $ (6.44) $ -- $ 0.15 $ 0.24 $ (0.79)
Discontinued..................... $ (0.11) $ (0.54) $ (1.11) $ (0.18) $ 0.09 $ (0.05) $ (0.03) $ (0.55)
-------- -------- --------- --------- -------- -------- -------- ---------
$ -- $ (0.56) $ (4.92) $ (6.62) $ 0.09 $ 0.10 $ 0.21 $ (1.34)
======== ======== ========= ========= ======== ======== ======== =========
</TABLE>
24. SUBSEQUENT EVENTS (IN THOUSANDS)
On March 26, 1999, the Company announced that it had entered into a
definitive agreement to sell its 68% interest in Philip Utilities Management
Corporation for net proceeds of approximately $67,000 in cash. The proceeds of
the disposition will be used to pay down the Company's outstanding debt under
the Credit Agreement. Under the terms of Lock-up Agreement, if the Company
completes the sale of Philip Utilities Management Corporation, the senior
secured debt of the restructured Company will be reduced from $300,000 to
$250,000.
66
<PAGE> 69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
67
<PAGE> 70
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age and position of each of the directors and executive officers
of the Company as of the date hereof are as follows:
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF RESIDENCE AGE POSITION WITH PHILIP
- ---------------------------------- --- --------------------
<S> <C> <C>
ROY CAIRNS...................................... 74 Director
St. Catharines, Ontario
HAROLD FIRST.................................... 62 Director
Fairlawn, New Jersey
ALLEN FRACASSI.................................. 46 Interim Chief Executive Officer and Director
Ancaster, Ontario
PETER GREEN..................................... 61 Director
Campbellville, Ontario
WILLIAM E. HAYNES............................... 55 Director
Houston, Texas
ROBERT L. KNAUSS................................ 68 Chairman and Director
Houston, Texas
FELIX PARDO..................................... 61 Director
Cambridge, Massachusetts
HARLAND A. RIKER................................ 70 Director
Cambridge, Massachusetts
DERRICK ROLFE................................... 44 Director
Toronto, Ontario
ARNOLD S. TENNEY................................ 56 Director
Downsview, Ontario
HERMAN TURKSTRA................................. 65 Director
Hamilton, Ontario
AYMAN GABARIN................................... 34 President, Philip Services (Europe) Limited
London, England
WILLIAM HUMENUK................................. 57 Executive Vice President and Chief
Philadelphia, Pennsylvania Administrative Officer
GENE IANNAZZO................................... 52 President, Metals Services Group
Cleveland, Ohio
ANTONIO PINGUE.................................. 49 Executive Vice President, Corporate and
Niagara Falls, Ontario Regulatory Affairs
COLIN SOULE..................................... 43 Executive Vice President, General Counsel and
Toronto, Ontario Corporate Secretary
ALEC THOMAS..................................... 51 President, Industrial Services Group
Houston, Texas
PHILLIP WIDMAN.................................. 44 Executive Vice President and Chief Financial
West Simsbury, Connecticut Officer
</TABLE>
68
<PAGE> 71
MR. CAIRNS has been a director of Philip since December 1990. For more than
five years, Mr. Cairns has been counsel to, and was previously a partner with,
Chown, Cairns, a law firm. Mr. Cairns is a director of Jumbo Video Limited.
MR. FIRST has been a director of Philip since November 1998. From December
1990 to January 1993, Mr. First was the Chief Financial Officer of Icahn Holding
Corp. He is currently on the boards of directors of Tel Save.com, PANACO Inc.
and Cadus Pharmaceuticals Corporation.
MR. FRACASSI was the President and Chief Executive Officer of Philip from
December 1990 until his appointment as Executive Vice Chairman on May 6, 1998.
On November 20, 1998, Mr. Fracassi resigned from the position of Executive Vice
Chairman and was appointed Interim Chief Executive Officer. He has been a
director of Philip since December 1990.
MR. GREEN has been a director of Philip since June 1998. He has served on
27 boards of directors for companies based in Canada, the U.S., the U.K. and
elsewhere. Since 1996, he has been Chairman of Patheon Inc., a pharmaceutical
manufacturing services company and Chairman of the Board of Trustees of the
Superior Propane Income Fund. From 1994 to 1996, Mr. Green was the Chief
Executive Officer of Cuddy International Corporation. Mr. Green is a director of
Arbor Memorials Inc. and Gore Mutual Insurance Company.
MR. HAYNES has been a director of Philip since August 6, 1997 and from June
1996 to July 31, 1997 was a director of Allwaste, Inc. Since 1997, he has been
the Chairman, Chief Executive Officer and director of Innovative Valve
Technologies, Inc. ("Invatec"), a publicly traded industrial valve repair and
distribution company in which Philip owns a minority equity interest. He was the
President and Chief Executive Officer of The Safe Seal Company Inc. from 1996 to
October 1998, a company which merged into a subsidiary of Invatec. He served as
the President and Chief Executive Officer of LYONDELL-CITGO Refining Company
Ltd. from July 1992 to December 1995.
MR. KNAUSS has been a director of Philip since August 6, 1997 and was
appointed Chairman of Philip on May 6, 1998. He was a director of Allwaste, Inc.
from March 1988 to July 1997. Since 1994, he has been the Chief Executive
Officer and Chairman of Baltic International U.S.A., Inc., an aviation
investment company. He is a director of the Mexico Fund, Inc., an investment
fund based in Mexico City, and Equus II, Inc., an investment fund based in
Houston, Texas. Mr. Knauss served for twelve years as the Dean and Distinguished
University Professor at the University of Houston Law Center.
MR. PARDO has been a director of Philip since March 1994. He was the Chief
Operating Officer of the Company from March 5, 1998 until his appointment as
President and Chief Executive Officer of Philip on May 6, 1998 which position he
held until October 1998. From May 1992 to March 1998, Mr. Pardo was the
President and Chief Executive Officer of Ruhr-American Coal Corporation. Mr.
Pardo is a director and Chairman of Dyckerhoff Inc., a building materials
company, and a director of PANACO Inc. and Innovative Value Technologies, Inc.
MR. RIKER has been a director of Philip since June 1998. Since September
1997, he has been a Trustee of the Arthur D. Little School of Management and
since 1988, a Trustee of the Arthur D. Little Employee Shareholders Trust. He
was a Senior Vice President of Arthur D. Little Inc., a management consulting
firm, from 1984 to 1995 and was President and Chairman of Arthur D. Little
International, Inc. from 1984 to 1995 which company oversaw Arthur D. Little,
Inc.'s operations in Europe, the Middle East, Africa, Latin America and Asia.
From 1984 to 1995, Mr. Riker served as Chairman of Cambridge Consultants, Ltd.,
a research, development and technology company.
MR. ROLFE has been a director of Philip since January 1991. Since 1992, Mr.
Rolfe has been the President and Chief Executive Officer of RM Capital
Corporation, an investment company. Mr. Rolfe is a director of Consolidated
Envirowaste Inc., an organic waste processing company.
MR. TENNEY has been a director of Philip since November 1998. For more than
five years, he has been the President, Chief Executive Officer and director of
ARC International Corporation, a company which develops,
69
<PAGE> 72
constructs and operates ice rink facilities. Mr. Tenney is Chairman of
Ballantyne of Omaha, Inc. and Chairman of Cabletel Communications Corp.
MR. TURKSTRA has been a director of Philip since September 1996 and has
been an associate of Turkstra, Mazza, Associates, a law firm, since 1959.
MR. GABARIN has been President, Philip Services (Europe) Limited since
January 1997. Prior to that he was Vice President, Corporate Development of
Philip Services Corp. from 1994 to January 1997.
MR. HUMENUK has been the Executive Vice President and Chief Administrative
Officer of Philip since June 1998. Prior to that, he was a partner with Dechert
Price & Rhoads, a law firm that Mr. Humenuk was a member of from 1967. Mr.
Humenuk is a director of The UAM Fund, Inc., UAM Funds Trust and UAM Funds II,
Inc.
MR. IANNAZZO has been President, Metals Services Group since November 1998.
Prior to that he was the Executive Vice President of Philip's aluminum division
from December 1997. Prior to that he was President and Chief Executive Officer
of Allmet Technologies from September 1994 to September 1997.
MR. PINGUE has been the Executive Vice President, Corporate and Regulatory
Affairs since May 1997. Prior to that he was the Senior Vice President,
Corporate & Government Affairs of Philip from March 1995. Prior to that, he was
the Senior Vice President, Environmental Services and Regulatory Affairs of the
Company from January 1994.
MR. SOULE has been the General Counsel of Philip since October 1991, was
appointed Corporate Secretary of Philip in January 1992, was appointed Senior
Vice President of Philip in May 1994 and Executive Vice President of Philip in
May 1997.
MR. THOMAS has been President, Industrial Services Group since August 1998.
Prior to that he was Chief Operating Officer, Industrial Services Group from
January 1998 and Senior Vice President, Northeast Region from 1997. Prior to
that, he was the Chief Operating Officer of the environmental services division
of the Company from June 1996 and manager of the Company's remediation program
from May 1995. From 1969 to May 1995, he was the President and Chief Executive
Officer of Thomas Environmental Management Inc.
MR. WIDMAN has been the Executive Vice President and Chief Financial
Officer of Philip since July 1998. For eleven years prior to that, he worked
with Asea Brown Boveri Inc. and was the Vice President and Chief Financial
Officer from 1996 to June 1998, the Vice President, Finance and Control, ABB,
Power Plant Business, during 1996 and the Vice President, Finance and Materials
Management for ABB Traction, Inc. from 1994 to 1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, and its rules and
regulations thereunder require the Company's executive officers and directors,
and persons who beneficially own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes of
ownership with the Securities and Exchange Commission. Copies of those reports
are to be furnished to the Company. Based solely on its review of copies of the
reports received by it, or written representations from certain reporting
persons, the Company believes that during 1998 all such filing requirements were
satisfied on a timely basis.
70
<PAGE> 73
ITEM 11. EXECUTIVE COMPENSATION
The table below sets forth the compensation in respect of each of the last
three fiscal years earned by each person that held the position of President and
Chief Executive Officer during 1998, the four other most highly compensated
executive officers of the Company during 1998 and two additional individuals who
served the Company as an executive officer for part of 1998 but were not serving
the Company as executive officers as at December 31, 1998 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------ ------------------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) OPTIONS/SARS COMPENSATION(S)
- --------------------------- ---- ------- ------- --------------- ------------ ---------------
($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
ALLEN FRACASSI(3)........... 1998 539,447 -- 23,612(4) -- 4,552(5)
Interim Chief 1997 559,910 -- 19,438(4) 400,000 4,724(5)
Executive Officer 1996 365,043 584,070 32,590(4) 75,000 3,468(5)
FELIX PARDO(6).............. 1998 421,795 -- -- 700,000 515,625(6)
President and Chief
Executive Officer
JACK McGREGOR(7)............ 1998 -- -- 335,000(8) -- --
Interim Chief Executive
Officer and Chief
Restructuring Officer
AYMAN GABARIN............... 1998 291,025 -- -- -- 19,956(5)
President, Philip Services 1997 206,772 54,000 -- 30,000 270(5)
(Europe) Limited 1996 110,027 18,338 -- 7,500 3,301(5)
COLIN SOULE................. 1998 224,395 150,000 -- 100,000 4,552(5)
Executive Vice President, 1997 216,606 -- -- 250,000 4,874(5)
General Counsel and 1996 154,072 220,054 -- 60,000 4,622(5)
Corporate Secretary
WILLIAM HUMENUK(9).......... 1998 191,154 95,577(9) -- 300,000 --
Executive Vice President and
Chief Administrative Officer
PHILLIP WIDMAN(10).......... 1998 154,167 150,000(10) -- 300,000 --
Executive Vice President and
Chief Financial Officer
PHILIP FRACASSI(11)......... 1998 202,293 -- -- -- 1,218,062(11)
President, Metal Services 1997 419,933 -- -- 300,000 4,724(5)
Group 1996 292,035 438,052 -- 75,000 4,724(5)
ROBERT CHISTE(12)........... 1998 170,284 -- -- 100,000 3,789,034(12)
Executive Vice President 1997 138,262 448,515 -- 100,000 1,824,480(13)
</TABLE>
- ---------------
NOTES:
(1) All amounts not paid in U.S. dollars have been converted to U.S. dollars
based upon the average exchange rates for Canadian dollars per $1.00 for
the years ended December 31, 1998, December 31, 1997 and December 31, 1996
of $1.4833, $1.3850 and $1.3633, respectively.
(2) Except as noted, perquisites and other personal benefits do not exceed the
lesser of $50,000 and 10% of the total annual salary and bonus of the Named
Executive Officers.
71
<PAGE> 74
(3) Allen Fracassi resigned from the position of President and Chief Executive
Officer on May 6, 1998, was appointed Executive Vice Chairman on the same
date and held this position until his appointment as Interim Chief
Executive Officer on November 20, 1998.
(4) Represents imputed interest benefit on housing loan.
(5) Represents Company's contribution to retirement savings plan or registered
pension plan.
(6) Felix Pardo held the position of Chief Operating Officer from March 5, 1998
until his appointment as President and Chief Executive Officer on May 6,
1998. He held that position until his resignation on October 13, 1998. The
Company and Mr. Pardo entered into a severance agreement whereby the
Company agreed to pay Mr. Pardo $1.5 million over time. To the date hereof,
the Company has paid Mr. Pardo $515,625. The Company has ceased making the
required monthly payments under the severance agreement. At no other time
was Mr. Pardo an executive officer or employee of Philip.
(7) Jack McGregor held the position of Interim Chief Executive Officer from
October 13, 1998 to November 20, 1998. He was the Chief Restructuring
Officer of Philip from October 13, 1998 to January 4, 1999. At no other
time was Mr. McGregor an executive officer or employee of Philip.
(8) Represents consulting fees paid to Jay Alix & Associates, Inc. for the
services provided by Jack McGregor to Philip.
(9) William Humenuk commenced employment with Philip on June 15, 1998. Pursuant
to the terms of his employment agreement, Mr. Humenuk received a bonus in
1998 in the amount of $95,577 as an inducement to accept employment with
Philip.
(10) Phillip Widman commenced employment with Philip on July 13, 1998. Pursuant
to the terms of his employment agreement, Mr. Widman received bonuses in
1998 of $150,000 as an inducement to accept employment with the Company and
to compensate Mr. Widman for benefits lost as a result of his terminating
his employment with his former employer.
(11) Philip Fracassi resigned from the position of President, Metals Services
Group, on June 30, 1998. The Company and Mr. Fracassi entered into a
severance agreement and pursuant thereto the Company agreed to pay Mr.
Fracassi $1,213,510 plus approximately $33,709 representing other
obligations of the Company. The Company has paid Mr. Fracassi the amount of
$1,213,510 but has ceased making payments on other amounts due to Mr.
Fracassi. The amount of $4,552 represents the Company's contribution to
retirement savings plan or registered pension plan.
(12) Mr. Chiste commenced employment with Philip effective August 1, 1997 as
President, Industrial Services Group, a position he held until March 16,
1998 when he was appointed Executive Vice President of Philip. He resigned
on May 6, 1998. The Company and Mr. Chiste entered into a severance
agreement whereby the Company agreed to pay Mr. Chiste $1.357 million over
time. To the date hereof, the Company has paid Mr. Chiste $885,294. The
Company has ceased making the required monthly payments under the severance
agreement. Mr. Chiste also received in 1998 a payment of previously
deferred salary in the amount of $1,254,787 and a change of control payment
in the amount of $1,648,953 pursuant to agreements which were triggered by
the acquisition by Philip of Allwaste, Inc.
(13) Represents a change in control payment pursuant to agreements which were
triggered by the acquisition by Philip of Allwaste, Inc.
72
<PAGE> 75
STOCK OPTIONS
The table below sets forth the options granted to the Named Executive
Officers under the Company's stock option plans during the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS GRANTED
SECURITIES UNDERLYING TO EMPLOYEES IN EXERCISE OR GRANT DATE
NAME OPTIONS GRANTED(1) FISCAL YEAR(2) BASE PRICE VALUE(3) EXPIRATION DATE
- ---- --------------------- --------------- --------------- --------------- ---------------
(#) (CDN$/SECURITY) (CDN$/SECURITY)
<S> <C> <C> <C> <C> <C>
ALLEN FRACASSI................ -- -- -- -- --
FELIX PARDO................... 700,000 31.0% (4) (4) (4)
JACK McGREGOR................. -- -- -- -- --
AYMAN GABARIN................. -- -- -- -- --
COLIN SOULE................... 100,000 4.0% 3.97 3.97 Aug. 10, 2008
WILLIAM HUMENUK............... 300,000 13.0% 6.60 5.40 Jun. 2, 2008
PHILLIP WIDMAN................ 300,000 13.0% 6.60 5.40 Jun. 2, 2008
PHILIP FRACASSI............... -- -- -- -- --
ROBERT CHISTE................. 100,000 4.0% 14.65 6.60 Feb. 16, 2008
</TABLE>
- ---------------
NOTES:
(1) The Company's employee stock option plans provide for the granting of stock
options to purchase common shares of the Company to employees and directors
of the Company at the discretion of the Board of Directors. All options are
subject to certain conditions of service and the provision of a non-
competition agreement. Options granted to the Named Executive Officers in
fiscal 1998 vest in equal annual amounts over 3 years from the date they
were granted except for the options granted to Robert Chiste which vested
fully on June 24, 1998, and the options granted to Felix Pardo which fully
vested on October 13, 1998.
(2) A total of 2,277,500 options were granted under the Company's employee stock
option plans during the fiscal year ending December 31, 1998.
(3) The Grant Date Value is equal to the closing price of the Company's common
shares on The Toronto Stock Exchange on the last trading day preceding the
date of grant.
(4) Mr. Pardo received 3 stock option grants during 1998. The number of
securities underlying the grants equal 250,000, 250,000 and 200,000 for a
total of 700,000. The exercise price is Cdn$17.95, Cdn$14.50 and Cdn$6.60
respectively, the grant date value is Cdn$17.95, Cdn$14.50 and Cdn$5.40,
respectively, and the expiration dates are March 1, 2008, March 6, 2008 and
June 2, 2008, respectively.
The table below sets forth each exercise of options during the fiscal year
ended December 31, 1998 by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SECURITIES AGGREGATE UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
NAME ON EXERCISE REALIZED DECEMBER 31, 1998 DECEMBER 31, 1998(1)
- ---- ----------- --------- ------------------------- -----------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(#) (CDN $)
<S> <C> <C> <C> <C>
ALLEN FRACASSI(2)............. -- -- 269,444/205,556 0/0
FELIX PARDO................... -- -- 735,000/0 0/0
JACK McGREGOR................. -- -- 0/0 0/0
AYMAN GABARIN................. -- -- 28,333/21,667 0/0
COLIN SOULE................... -- -- 213,611/231,389 0/0
WILLIAM HUMENUK............... -- -- 0/300,000 0/0
PHILLIP WIDMAN................ -- -- 0/300,000 0/0
PHILIP FRACASSI(3)............ -- -- 375,000/0 0/0
ROBERT CHISTE................. -- -- 748,739/0 0/0
</TABLE>
- ---------------
73
<PAGE> 76
NOTES:
(1) The closing price of the Company's common shares on The Toronto Stock
Exchange on December 31, 1998 was Cdn$0.45.
(2) Allen Fracassi holds an additional 389,031 exercisable options to acquire
common shares of the Company which were granted to him in connection with
his sale to the Company in 1990 of his interest in Philip Environmental
Company.
(3) Philip Fracassi holds an additional 387,355 exercisable options to acquire
common shares of the Company which were granted to him in connection with
his sale to the Company in 1990 of his interest in Philip Environmental
Company.
COMPENSATION OF DIRECTORS
Each director of the Company who is not a salaried officer or employee of
the Company is paid an annual fee of $25,000 and a fee of $1,000 per meeting
(including committee meetings) attended. Historically, each director, when first
appointed to the Board of Directors, receives a one time award of 20,000 options
to acquire common shares of the Company. The options are granted at an exercise
price equal to the closing price of the common shares on The Toronto Stock
Exchange on the last trading day preceding the date of the grant and vest over a
period of three years from the date of the grant. Awards were not made in favour
of Harold First and Arnold S. Tenney upon their respective appointments to the
Board of Directors in November 1998 because no options were available for grant.
For acting as Chairman of the Board of Directors during part of 1998, Howard L.
Beck was paid a fee of $42,144. On May 6, 1998, Mr. Beck resigned from the
position of Chairman and Director of Philip. On May 6, 1998, Robert Knauss was
appointed Chairman of the Board of Directors and with respect thereto, was paid
a fee of $97,885 during 1998. During 1998, the Company engaged Mr. Knauss and
Mr. Rolfe to provide services and advice on the Company's financial
restructuring. For such services, Mr. Knauss was paid $60,000 and Mr. Rolfe was
paid $80,000.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of the Named
Executive Officers who are currently employed by the Company (the "Current Named
Executive Officers"). The agreements set forth the benefits to which a Current
Named Executive Officer would be entitled in the event of termination without
cause before or after an event which gives rise to a change of control of the
Company or in the event of a change in the executive's responsibilities, title,
authority or compensation after an event which gives rise to a change of control
of the Company. In the event of termination without cause prior to a change of
control, Allen Fracassi, Colin Soule and Phillip Widman would be entitled to a
severance payment equal to two times his base salary plus two times the annual
average bonus and cash value of benefits earned by him in the previous two
years. Mr. Humenuk would be entitled to a severance payment equal to the greater
of two times his base salary plus two times his annual average bonus and cash
value of benefits earned by Mr. Humenuk in the previous two years and a payment
equal to the balance of the salary and bonuses he is entitled to for the
remainder of the term of his employment contract which expires on June 14, 2002.
Mr. Gabarin would be entitled to a severance payment equal to two times his base
salary plus two times the annual average bonus and cash value of benefits earned
by him in the previous two years, plus an amount determined pursuant to the
standard employee redundancy policy of Philip Services (Europe) Limited. In the
event of termination without cause after a change of control or in the event of
a change in the Current Named Executive Officer's responsibilities, title,
authority or compensation within two years after a change in control, a Current
Named Executive Officer would be entitled to a severance payment equal to three
times his base salary plus three times the annual average of the bonus and cash
value of benefits earned by the Current Named Executive Officer in the previous
two years. Mr. Gabarin's employment contract does not include a charge of
control provision. In addition, stock options granted to a Current Named
Executive Officer would fully vest on termination and would remain exercisable
until the expiry of the original term of such options.
74
<PAGE> 77
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
The Company provides insurance for the benefit of directors and officers of
the Company against liability incurred by, arising from or against them for
certain of their acts, errors or omissions. These policies provide maximum
coverage in any one policy year of an aggregate of $100,000,000 subject to a
$500,000 deductible. In the last completed fiscal year the total premium for
directors' and officers' liability insurance was $1,009,016. The premiums for
the policy are not allocated between directors and officers as separate groups.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the beneficial
ownership of the common shares of the Company as of April 15, 1999 by (i) each
director of the Company, (ii) the executive officers of the Company, and (iii)
all current directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
DIRECTORS AND EXECUTIVE OFFICERS(1)(2) BENEFICIALLY OWNED BENEFICIALLY OWNED
- -------------------------------------- ------------------ --------------------
<S> <C> <C>
Roy Cairns(3)............................................. 933,889 *
Harold First.............................................. 0 *
Allen Fracassi(4)......................................... 2,589,297 1.9%
Peter Green(5)............................................ 0 *
William E. Haynes(6)...................................... 8,822 *
Robert L. Knauss(7)....................................... 66,459 *
Felix Pardo(8)............................................ 739,000 *
Harland A. Riker(9)....................................... 2,000 *
Derrick Rolfe(10)......................................... 33,889 *
Arnold S. Tenney.......................................... 0 *
Herman Turkstra(11)....................................... 53,548 *
Ayman Gabarin(12)......................................... 33,223 *
William Humenuk(13)....................................... 500 *
Gene Iannazzo(14)......................................... 13,700 *
Antonio Pingue(15)........................................ 280,278 *
Colin Soule(16)........................................... 265,278 *
Alec Thomas(17)........................................... 38,749 *
Phillip Widman(18)........................................ 0 *
All Current Directors and Executive Officers as a Group
(18 persons)............................................ 5,058,632 4%
</TABLE>
- ---------------
* Indicates less than 1.0%.
NOTES:
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from April 15, 1999, whether
pursuant to the exercise of options, conversion of securities or otherwise.
Each beneficial owner's percentage of ownership is determined by assuming
that options to purchase common shares of the Company that are held by such
person and which are exercisable within 60 days of April 15, 1999 have been
exercised. Unless otherwise noted in the footnotes below, the Company
believes all persons named in the table have sole voting power and
investment power with respect to all common shares of the Company
beneficially owned by them. Options to acquire common shares of the Company
which vest after 60 days after April 15, 1999 are indicated separately in
the notes that follow.
(2) The address of each of the directors and executive officers is 100 King
Street West, P.O. Box 2440 LCD1, Hamilton, Ontario, Canada L8N 4J6.
75
<PAGE> 78
(3) Includes 33,889 common shares issuable upon the exercise of employee stock
options. Does not include 6,111 common shares subject to options which are
not exercisable within 60 days.
(4) Includes 737,642 common shares issuable upon the exercise of employee stock
options. Does not include 126,389 common shares subject to options which
are not exercisable within 60 days.
(5) Does not include 20,000 common shares subject to options which are not
exercisable within 60 days.
(6) Includes 6,666 common shares issuable upon the exercise of employee stock
options. Does not include 13,334 common shares subject to options which are
not exercisable within 60 days.
(7) Includes 56,666 common shares issuable upon the exercise of employee stock
options. Does not include 113,334 common shares subject to options which
are not exercisable within 60 days.
(8) Includes 735,000 common shares issuable upon the exercise of employee stock
options.
(9) Does not include 20,000 common shares subject to options which are not
exercisable within 60 days.
(10) Includes 33,889 common shares issuable upon the exercise of employee stock
options. Does not include 6,111 common shares subject to options which are
not exercisable within 60 days.
(11) Includes 32,222 common shares issuable upon the exercise of employee stock
options. Does not include 7,778 common shares subject to options which are
not exercisable within 60 days.
(12) Includes 29,583 common shares issuable upon the exercise of employee stock
options. Does not include 20,417 common shares subject to options which are
not exercisable within 60 days.
(13) Does not include 300,000 common shares subject to options which are not
exercisable within 60 days.
(14) Includes 10,000 common shares issuable upon the exercise of employee stock
options. Does not include 20,000 common shares subject to options which are
not exercisable within 60 days.
(15) Includes 280,278 common shares issuable upon the exercise of employee stock
options. Does not include 79,722 common shares subject to options which are
not exercisable within 60 days.
(16) Includes 265, 278 common shares issuable upon the exercise of employee
stock options. Does not include 179,722 common shares subject to options
which are not exercisable within 60 days.
(17) Includes 31,249 common shares issuable upon the exercise of employee stock
options. Does not include 83,751 common shares subject to options which are
not exercisable within 60 days.
(18) Does not include 300,000 common shares subject to options which are not
exercisable within 60 days.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
Based upon publicly available information filed with the Securities and
Exchange Commission, no person other than those listed below beneficially owns
more than 5% of the outstanding common shares of the Company as of April 15,
1999.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS COMMON SHARES HELD OUTSTANDING COMMON SHARES
- ---------------- ------------------ -------------------------
<S> <C> <C>
Carl C. Icahn, through............................ 18,455,200 14%
High River Limited
Partnership and Riverdale LLC
767 5th Avenue
47th Floor
New York, N.Y. 10153
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the December 1993 acquisition of Nortru, Inc. ("Nortru")
from Norman Foster, a director of the Company from January 17, 1994 to June 25,
1998, the Company entered into a non-competition and retention agreement with
Mr. Foster, pursuant to which the Company agreed to pay Mr. Foster an aggregate
of $7 million. A payment of $1.4 million was made in January 1998 and the final
payment of $1.4 million was due on December 31, 1998. As of the date hereof, the
final payment has not been
76
<PAGE> 79
paid. During 1998, the Company paid $377,000 in rental payments to Mr. Foster or
entities which he controls or has an ownership interest in for properties
utilized by the Company in the operation of its business.
During 1998, the Company paid approximately $1.7 million to Cole Carriers
Corp. ("Coles"), a commercial trucking company owned by Allen Fracassi, an
officer and director of the Company, and Philip Fracassi, a former officer and
director of the Company, for truck transportation services rendered by Coles to
the Company.
The law firm of Turkstra, Mazza, Associates, of which Herman Turkstra, a
director of the Company, is an associate, provided services to the Company in
1998. Fees paid to the firm in 1998 totalled $256,699.
On October 13, 1998, Philip entered into an Agreement with Jay Alix &
Associates, Inc. ("Jay Alix") whereby Jay Alix agreed to provide to Philip
restructuring and financial consulting services. Jack McGregor, the Interim
Chief Executive Officer of Philip from October 13, 1998 to November 20, 1998,
was a partner of Jay Alix. During 1998, Philip paid a total of $847,205 in fees
to Jay Alix of which $335,000 represents services provided by Jack McGregor.
The law firm of Dechert Price & Rhoads, of which William Humenuk was a
partner until his appointment as Executive Vice President and Chief
Administrative Officer of the Company on June 15, 1998, provided services to the
Company in 1998. Fees paid to the firm in 1998 totalled $542,993.
As at April 15, 1999, the aggregate amount of indebtedness due to the
Company from all current or former officers, directors and employees was
$481,830, consisting of the outstanding balance of a loan made to Allen
Fracassi, the Interim Chief Executive Officer of the Company, for the purpose of
purchasing a home. The loan is unsecured, non-interest bearing and payable on
demand.
INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
As at April 15, 1999, the aggregate amount of indebtedness (other than
routine indebtedness) due to the Corporation from all current or former
officers, directors and employees was $481,830.
TABLE OF INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
<TABLE>
<CAPTION>
LARGEST AMOUNT
OUTSTANDING DURING
INVOLVEMENT OF FISCAL YEAR ENDED AMOUNT OUTSTANDING
NAME AND PRINCIPAL POSITION ISSUER OR SUBSIDIARY DECEMBER 31, 1998 AS AT APRIL 15, 1999
- --------------------------- -------------------- ------------------ --------------------
<S> <C> <C> <C>
ALLEN FRACASSI(1)(2).................. Lender $515,000(3) $481,830(3)
Interim Chief Executive Officer
</TABLE>
- ---------------
NOTES:
(1) The loan was made for the purpose of purchasing a home, is unsecured,
non-interest bearing and is due on demand.
(2) Allen Fracassi resigned from the position of President and Chief Executive
Officer on May 6, 1998, was appointed Executive Vice Chairman of Philip on
same date and held that position until his appointment as Interim Chief
Executive Officer on November 20, 1998.
(3) The difference in values as expressed in U.S. dollars between the largest
amount outstanding during 1998 and the amount outstanding as at April 15,
1999 is solely due to the fluctuating exchange rates of the Canadian dollar.
At all times during 1998 and as at April 15, 1999, the loan was Cdn$737,200.
77
<PAGE> 80
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
ITEM 14(A)1. LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are filed as
part of this Form 10-K.
<TABLE>
<CAPTION>
REPORT NAME PAGE NO.
- ----------- --------
<S> <C>
Report of Deloitte & Touche, Independent Auditors........... 40
Consolidated Balance Sheets for the fiscal years ended
December 31, 1998 and 1997................................ 41
Consolidated Statements of Earnings for the fiscal years
ended December 31, 1998, 1997
and 1996.................................................. 42
Consolidated Statements of Shareholders' Equity (Deficit)
for the fiscal years ended December 31, 1998, 1997 and
1996...................................................... 43
Consolidated Statements of Cash Flow for the fiscal years
ended December 31, 1998, 1997
and 1996.................................................. 44
Notes to the Consolidated Financial Statements.............. 45
</TABLE>
ITEM 14(A)2. FINANCIAL STATEMENT SCHEDULE
The Financial Statement Schedule appears on page 82 of this Form 10-K.
ITEM 14(A)3. LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1* Articles of Amalgamation of Lincoln Waste Management Inc.
(previous name of the Registrant) dated April 15, 1991
3.2* Articles of Amendment of the Registrant dated June 26, 1991
3.3* Articles of Amendment of the Registrant dated July 10, 1991
3.4* Articles of Amendment of the Registrant dated May 22, 1997
3.5* Bylaws of Lincoln Waste Management Inc. (previous name of
the Registrant) dated August 16, 1990
4.1* Indenture dated as of June 1, 1989, 7 1/4% Convertible
Subordinated Debentures due 2014 between Allwaste, Inc. and
Texas Commerce Trust Company of New York
4.2 First Supplemental Indenture dated as of July 30, 1997
supplementing and amending the June 1, 1989 Indenture
4.3* Specimen of Common Stock Certificate
10.1* 1991 Stock Option Plan
10.2* 1997 Amended and Restated Stock Option Plan
10.3+ Credit Agreement dated as of August 11, 1997 among Philip
Services Corp., Philip Environmental (Delaware), Inc.,
Canadian Imperial Bank of Commerce, Bankers Trust Company,
Dresdner Bank of Canada, Dresdner Bank AG/New York/New York
Branch), Royal Bank of Canada and the various persons from
time to time subject to the Credit Agreement as Lenders
10.4* Amending Agreement No. 1 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of October 31, 1997
10.5* Amending Agreement No. 2 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of February 19, 1998
10.6** Amending Agreement No. 3 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of June 24, 1998
</TABLE>
78
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.7*** Amending Agreement No. 4 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of October 20, 1998
10.8 Amending Agreement No. 5 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of December 4, 1998
10.9 Lock-up Agreement dated as of April 5, 1999 among Philip
Services Corp. and certain lenders of Philip Services Corp's
lending syndicate.
10.10 Proceeds Agreement dated as of April 5, 1999 among Canadian
Imperial Bank of Commerce, in its capacity as Administrative
Agent, Philip Services Corp. and certain subsidiaries of
Philip Services Corp.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
- ---------------
+ Incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-1 (Registration Statement No. 333-36549).
* Incorporated by reference to the exhibits filed with the Company's Annual
Report on Form 10-K/A Amendment No. 2 for the fiscal year ended December 31,
1997.
** Incorporated by reference to the exhibits filed with the Company's Quarterly
Report for the three months ended June 30, 1998.
*** Incorporated by reference to the exhibits filed with the Company's Quarterly
Report for the three months ended September 30, 1998.
ITEM 14(B).
Form 8-K dated April 24, 1998 relating to the Company's press release in
relation to its financial statements for the fiscal year ended December 31,
1997.
Form 8-K dated November 18, 1998 relating to the Company's press release in
relation to its response to a Schedule 13D filed by Carl Icahn of High River
Limited Partnership.
Form 8-K dated November 23, 1998 relating to the Company's press release in
relation to a Standstill Agreement the Company entered into with High River
Limited Partnership, among others, as well as a Letter of Intent the Company
signed with Soave Enterprises, LLC, among others.
Form 8-K dated January 12, 1999 relating to the Company's press release in
relation to a negotiated term sheet with a sub-committee of the Steering
Committee of the Company's lending syndicate.
79
<PAGE> 82
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company, has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
PHILIP SERVICES CORP.
By: /s/ ALLEN FRACASSI
- --------------------------------------------
Allen Fracassi
Interim Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PHILLIP WIDMAN Executive Vice President April 27, 1999
- --------------------------------------------- and Chief Financial Officer
Phillip Widman
/s/ ALLEN FRACASSI Interim Chief Executive April 27, 1999
- --------------------------------------------- Officer and Director
Allen Fracassi
/s/ ROY CAIRNS Director April 27, 1999
- ---------------------------------------------
Roy Cairns
/s/ HAROLD FIRST Director April 27, 1999
- ---------------------------------------------
Harold First
/s/ PETER GREEN Director April 27, 1999
- ---------------------------------------------
Peter Green
/s/ WILLIAM E. HAYNES Director April 27, 1999
- ---------------------------------------------
William E. Haynes
/s/ ROBERT L. KNAUSS Chairman and Director April 27, 1999
- ---------------------------------------------
Robert L. Knauss
/s/ FELIX PARDO Director April 27, 1999
- ---------------------------------------------
Felix Pardo
/s/ HARLAND A. RIKER Director April 27, 1999
- ---------------------------------------------
Harland A. Riker
/s/ DERRICK ROLFE Director April 27, 1999
- ---------------------------------------------
Derrick Rolfe
</TABLE>
80
<PAGE> 83
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARNOLD S. TENNEY Director April 27, 1999
- ---------------------------------------------
Arnold S. Tenney
/s/ HERMAN TURKSTRA Director April 27, 1999
- ---------------------------------------------
Herman Turkstra
</TABLE>
81
<PAGE> 84
PHILIP SERVICES CORP.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C -- ADDITION COLUMN D COLUMN E
- -------------------------------- ------------ -------------------------- ------------- ------------
BALANCE CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE, END
DESCRIPTION PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) OF PERIOD
- -------------------------------- ------------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 31, 1998............... (17,650,690) (28,826,724) 104,090 21,977,260 (24,396,058)
December 31, 1997............... (5,059,268) (5,050,801) (13,652,894) 6,112,273 (17,650,690)
December 31, 1996............... (3,910,782) (1,239,873) (728,809) 820,196 (5,059,268)
</TABLE>
- ---------------
(1) Opening balances in companies acquired in the year net of closing balances
of companies sold in the year.
(2) Write-off of uncollectible accounts.
82
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
3.1* Articles of Amalgamation of Lincoln Waste Management Inc.
(previous name of the Registrant) dated April 15, 1991......
3.2* Articles of Amendment of the Registrant dated June 26,
1991........................................................
3.3* Articles of Amendment of the Registrant dated July 10,
1991........................................................
3.4* Articles of Amendment of the Registrant dated May 22,
1997........................................................
3.5* Bylaws of Lincoln Waste Management Inc. (previous name of
the Registrant) dated August 16, 1990.......................
4.1* Indenture dated as of June 1, 1989, 7 1/4% Convertible
Subordinated Debentures due 2014 between Allwaste, Inc. and
Texas Commerce Trust Company of New York....................
4.2 First Supplemental Indenture dated as of July 30, 1997
supplementing and amending the June 1, 1989 Indenture.......
4.3* Specimen of Common Stock Certificate........................
10.1* 1991 Stock Option Plan......................................
10.2* 1997 Amended and Restated Stock Option Plan.................
10.3+ Credit Agreement dated as of August 11, 1997 among Philip
Services Corp., Philip Environmental (Delaware), Inc.,
Canadian Imperial Bank of Commerce, Bankers Trust Company,
Dresdner Bank of Canada, Dresdner Bank AG/New York/New York
Branch), Royal Bank of Canada and the various persons from
time to time subject to the Credit Agreement as Lenders.....
10.4* Amending Agreement No. 1 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of October 31, 1997......................................
10.5* Amending Agreement No. 2 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of February 19, 1998.....................................
10.6** Amending Agreement No. 3 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of June 24, 1998.........................................
10.7*** Amending Agreement No. 4 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of October 20, 1998......................................
10.8 Amending Agreement No. 5 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of December 4, 1998......................................
10.9 Lock-up Agreement dated as of April 5, 1999 among Philip
Services Corp. and certain lenders of Philip Services
Corp.'s lending syndicate...................................
10.10 Proceeds Agreement dated as of April 5, 1999 among Canadian
Imperial Bank of Commerce, in its capacity as Administrative
Agent, Philip Services Corp. and certain subsidiaries of
Philip Services Corp........................................
21 Subsidiaries of the Registrant..............................
27 Financial Data Schedule.....................................
</TABLE>
<PAGE> 1
Exhibit 4.2
================================================================================
ALLWASTE, INC.
AND
PHILIP SERVICES CORP.
TO
TEXAS COMMERCE TRUST COMPANY OF NEW YORK
as Trustee
_____________________
FIRST SUPPLEMENTAL INDENTURE
Dated as of July 30, 1997
_____________________
Supplementing and Amending Indenture Dated as of June 1, 1989
================================================================================
<PAGE> 2
THIS FIRST SUPPLEMENTAL INDENTURE, dated as of July 30, 1997 (this
"Supplemental Indenture"), is by and among Allwaste, Inc., a corporation duly
organized and existing under the laws of the State of Delaware (herein called
"Allwaste"), having its principal executive office at 5151 San Felipe Road,
Suite 1600, Houston, Texas 77056, Philip Services Corp., a corporation duly
organized and existing under the laws of the Province of Ontario, Canada (herein
called "Philip"), having its principal executive office at 100 King Street,
P.O. Box 2440, LCD1, Hamilton, Ontario, Canada L8N 4J6, and Texas Commerce Trust
Company of New York, a trust company organized under the laws of the State of
New York, as Trustee (herein called the "Trustee").
RECITALS OF ALLWASTE AND PHILIP
Allwaste has executed and delivered to the Trustee its Indenture, dated as
of June 1, 1989 (herein called the "Indenture"), to provide for the issuance
from time to time of up to $30 million principal amount of 7 1/4% Convertible
Subordinated Debentures due 2014 (the "Debentures"), as provided in the
Indenture.
Pursuant to the Indenture, Allwaste has issued such Debentures,
approximately $28.9 million of which are currently outstanding. No other
securities have been issued pursuant to the Indenture.
Effective as of July 30, 1997 (the "Merger Date"), Philip/Atlas Merger
Corp., a Delaware corporation and a wholly owned subsidiary of Taro Aggregates
Ltd., an Ontario corporation and wholly owned subsidiary of Philip ("Taro"), was
merged with and into Allwaste pursuant to the provisions of the General
Corporation Law of the State of Delaware (the "Merger"), as a result of which
Allwaste became a wholly owned subsidiary of Taro.
Each share of common stock of Allwaste which was issued and outstanding
immediately prior to the Merger was, by virtue of the Merger and without any
action on the part of the holder thereof, converted into 0.611 common shares, no
par value, the Philip ("Philip Shares").
In connection with the Merger, Allwaste and Philip, pursuant to appropriate
resolutions of their respective Boards of Directors, have duly determined to
make, execute and deliver to the Trustee this Supplemental Indenture in order to
reflect the results of the Merger as required by the Indenture and to provide
for Philip to become a co-obligor with respect to certain obligations of
Allwaste arising under the Indenture and the Debentures.
Pursuant to Sections 12.01 and 14.06 of the Indenture, Allwaste, as the
survivor to the Merger, is required to execute and deliver to the Trustee an
indenture supplemental to the Indenture in connection with the Merger.
Section 11.01 of the Indenture provides that, without the consent of any
holders, Allwaste and the Trustee may enter into a supplemental indenture to
make provision with respect
<PAGE> 3
to (i) evidencing the succession of another corporation to Allwaste and an
adjustment in the conversion price pursuant to Section 14.06 of the Indenture
and (ii) to cure any ambiguity, or amend such other provisions in regard to
matters or questions arising under the Indenture, provided such action does not
adversely affect the interests of the holders of the Debentures, and Allwaste
has determined that this Supplemental Indenture may therefore be entered into
without the consent of any holder in accordance with Section 11.01 of the
Indenture.
Allwaste and Philip have duly authorized the execution and
delivery of this Supplemental Indenture and all things necessary have been done
to make this Supplemental Indenture a valid agreement of Allwaste and Philip, in
accordance with its terms.
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises, it is mutually agreed,
for the equal and proportionate benefit of the respective holders from time to
time of the Debentures or of any series thereof, as follows:
ARTICLE ONE
DEFINITIONS
Section 1.01. Definitions.
Capitalized terms used but not defined in this Supplemental
Indenture have the respective meanings assigned to them in the Indenture.
ARTICLE TWO
CONCERNING THE DEBENTURES
Section 2.01. Conversion Privilege.
The holder of each Debenture outstanding on the date hereof shall
have the right from and after the date hereof, during the period such Debenture
shall be convertible as specified in Section 14.01 of the Indenture, to convert
such Debenture only into the number of Philip Shares, and cash in lieu of
fractional Philip Shares, which such holder would been entitled to receive upon
the consummation of the Merger if had held the number of shares of Common Stock
of the Company issuable upon conversion of such Debenture immediately prior to
the Merger, subject to adjustment as provided in Section 2.02 below.
-2-
<PAGE> 4
Section 2.02. Conversion Price.
The price at which Philip Shares shall be delivered upon
conversion of Debentures (herein called the "conversion price") shall be the
price specified in relation to the Debentures pursuant to Section 14.01 of the
Indenture, as adjusted in accordance with Article Fourteen of the Indenture
prior to the Merger. As of the date of this Supplemental Indenture, the
conversion price is $19.5376 per Philip Share. For events subsequent to the
effective date of this Supplemental Indenture, the conversion price shall be
adjusted in a manner as nearly equivalent as may be practical to the
adjustments provided for in Article Fourteen of the Indenture.
Section 2.03. Philip as a Co-Obligor.
Allwaste, Philip and the Trustee hereby agree that as of the
effective date of this Supplemental Indenture, Philip shall become a co-obligor
with Allwaste under the Indenture, as modified by this Supplemental Indenture,
and the Debentures, and shall be jointly and severally liable with Allwaste for
the due and punctual payment of the principal of and premium, if any, and
interest on the Debentures, as fully and effectively as Philip had originally
been an obligor under such Debentures; provided, however, that Philip is not
assuming, or becoming a co-obligor for, the performance of any other covenant
or condition of the Indenture to be performed or observed by Allwaste, or any
other obligation or liability of Allwaste under the Indenture, the Debentures
or any other securities other than such payments and, provided further, that
the obligations of Philip under the Indenture, as supplemented by this
Supplemental Indenture, and the Debentures for the payment of principal of
(including any sinking fund payment) and premium, if any, and interest on each
and all of the Debentures is hereby expressly subordinated, to the extent and
in the manner set forth in Article Three of the Indenture, to prior payment
and/or cancellation (as shall be appropriate) in full of all Senior
Indebtedness, as if the reference to the "Company" in such Article Three and in
the definition of Senior Indebtedness, and in other applicable definitions, as
necessary, were to Philip.
ARTICLE THREE
CONCERNING THE TRUSTEE
Section 3.01. Terms and Conditions.
The Trustee accepts this Supplemental Indenture and agrees to
perform the duties of the Trustee upon the terms and conditions herein and in
the Indenture set forth.
Section 3.02. No Responsibility.
The Trustee shall not be responsible in any manner whatsoever
for or in respect of (i) the validity or sufficiency of this Supplemental
Indenture, the authorization or permissibility of this Supplemental Indenture,
the authorization or permissibility of this Supplemental Indenture pursuant to
the terms of the Indenture or the due execution thereof by Allwaste or Philip
or (ii)the recitals herein contained, all such recitals being made by Allwaste
and
-3-
<PAGE> 5
Philip. The Trustee shall not be responsible in any manner to determine the
correctness of provisions contained in this Supplemental Indenture relating
either to the kind or amount of securities receivable by holders of Debentures
upon the conversion of their Debentures after the Merger or to any adjustment
provided herein.
ARTICLE FOUR
EFFECT OF EXECUTION AND DELIVERY HEREOF
From and after the execution and delivery of this Supplemental
Indenture, (i) the Indenture shall be deemed to be amended and modified as
provided herein, (ii) this Supplemental Indenture shall form a part of the
Indenture, (iii) except as modified and amended by this Supplemental Indenture,
the Indenture shall continue in full force and effect, (iv) the Debentures shall
continue to be governed by the Indenture, as modified and amended by this
Supplemental Indenture and (v) every holder of Debentures heretofore and
hereafter authenticated and delivered under the Indenture shall be bound by this
Supplemental Indenture.
ARTICLE FIVE
MISCELLANEOUS PROVISIONS
Section 5.01. Headings Descriptive.
The headings of the several Articles and Sections of this Supplemental
Indenture are inserted for convenience only and shall not in any way affect the
meaning or construction of any provision of this Supplemental Indenture.
Section 5.02. Rights and Obligations of the Trustee.
All of the provisions of the Indenture with respect to the rights,
privileges, immunities, powers and duties of the Trustee shall be applicable in
respect of this Supplemental Indenture as fully and with the same effect as if
set forth herein in full.
Section 5.03. Successors and Assigns.
This Supplemental Indenture shall be binding upon and inure to the
benefit of and be enforceable by the respective successors and assigns of the
parties hereto and the holders of any Debentures then outstanding.
Section 5.04. Counterparts.
This Supplemental Indenture may be executed in several counterparts,
each of which shall be an original and all of which shall constitute but one and
the same instrument.
-4-
<PAGE> 6
Section 5.05. Governing Law.
THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
-5-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
ALLWASTE, INC.
Attest: By:___________________________________
Name:
Title:
By:_________________________________
Name:
Title:
PHILIP SERVICES CORP.
By: /s/ Marvin Boughton
-----------------------------------
Name: Marvin Boughton
Title: Chief Financial Officer
By: /s/ Colin Soule
-----------------------------------
Name: Colin Soule
Title: Executive Vice-President
TEXAS COMMERCE TRUST COMPANY OF NEW YORK
Attest: By:____________________________________
Name: Terry L. Stewart
Title: Vice President
By:_________________________________
Name:
Title: Vice President
-6-
<PAGE> 8
STATE OF TEXAS Section
HARRIS COUNTY Section
On the ________ day of July, 1997, before me personally came
___________________________, to me known, who, being by me duly sworn, did
depose and say that he is ______________________________ of Allwaste, Inc., one
of the corporations described in and which executed the foregoing instrument;
that he knows the seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by authority of the
Board of Directors of said corporation; and that he signed his name thereto by
like authority.
__________________________________
PROVINCE OF ONTARIO Section
CITY OF HAMILTON Section
On the 25th day of July, 1997, before me personally came Colin Soule
and Marvin Boughton, to me known, who, being by me duly sworn, did depose and
say that they are Executive V.P. and CFO respectively of Philip Services Corp.,
one of the corporations described in and which executed the foregoing
instrument; that they know the seal of said corporation; that the seal affixed
to said instrument is such corporate seal; that it was so affixed by authority
of the Board of Directors of said corporation; and that they signed their names
thereto by like authority.
/s/ Anna Ventresca
----------------------------------
Anna Ventresca
STATE OF ___________________ Section
COUNTY OF __________________ Section
On the ________ day of _______________, 1997, before me personally
came ___________________________, to me known, who, being by me duly sworn, did
depose and say that he is ______________________________ of Texas Commerce Trust
Company of New York, one of the organizations described in and which executed
the foregoing instrument; that he knows the seal of said trust company; that the
seal affixed to said instrument is such corporate seal; that it was so affixed
by authority of the Board of Directors of said trust company; and that he signed
his name thereto by like authority.
__________________________________
-7-
<PAGE> 1
Exhibit 10.8
AMENDING AGREEMENT NO. 5
THIS IS AN AMENDING AGREEMENT made as of December 4 1998 among PHILIP
SERVICES CORP. (the "CDN. BORROWER"), as a borrower in Canada , PHILIP SERVICES
(DELAWARE), INC. (the "U.S. BORROWER"), as a borrower in the United States of
America, and CANADIAN IMPERIAL BANK OF COMMERCE (the "ADMINISTRATIVE AGENT"), as
administrative agent on behalf of itself, the Lenders, the Other Agents and
their respective Eligible Affiliates.
WHEREAS:
A. The Cdn. Borrower and the U.S. Borrower, as borrowers (the
"BORROWERS"), the Persons from time to time parties to such agreement
as lenders (the "LENDERS"), the Administrative Agent, as administrative
agent for the Lenders, Bankers Trust Company, as syndication agent,
Canadian Imperial Bank of Commerce and Bankers Trust Company, as
co-arrangers, and Dresdner Bank Canada and Dresdner Bank AG New York
Branch, as documentation agents, are parties to a credit agreement
dated as of August 11, 1997 as amended by amending agreements dated as
of October 31, 1997, February 19, 1998, June 24, 1998 and October 20,
1998 (the "CREDIT AGREEMENT").
B. The Borrowers have requested that the Required Lenders consent to
certain actions being implemented to address the requirements of
Canadian Imperial Bank of Commerce and Comerica Bank in connection with
making or continuing to make, as the case may be, certain bank account
services available to the Cdn. Borrower and certain of its Subsidiaries
and the Required Lenders, by a written resolution dated November 30,
1998, have consented to such actions being implemented.
C. The Lenders, subject to the terms and conditions set forth in this
amending agreement, have consented to the amendments to the Credit
Agreement effected by this amending agreement and have authorized the
Administrative Agent to execute and deliver this amending agreement to
the Borrowers on behalf of itself, the Lenders, the Other Agents and
their respective Eligible Affiliates.
NOW THEREFORE THIS AMENDING AGREEMENT WITNESSES that, in consideration
of the mutual covenants and agreements contained in this amending agreement and
for other good and valuable consideration, the receipt and sufficiency of which
are acknowledged, the Borrowers and the Administrative Agent, on behalf of
itself, the Lenders, the Other Agents and their respective Eligible Affiliates,
agree as follows:
<PAGE> 2
ARTICLE ONE
INTERPRETATION
SECTION 1.01 ONE AGREEMENT: This amending agreement amends the Credit Agreement.
This amending agreement and the Credit Agreement shall be read, interpreted,
construed and have effect as, and shall constitute, one agreement with the same
effect as if the amendments made by this amending agreement had been contained
in the Credit Agreement as of the date of this amending agreement.
SECTION 1.02 DEFINED TERMS: In this amending agreement, unless something
in the subject matter or context is inconsistent:
(a) terms defined in the description of the parties or in the
recitals have the respective meanings given to them in the
description or recitals, as applicable; and
(b) all other capitalized terms have the respective meanings given
to them in the Credit Agreement as amended by Article Two of
this amending agreement.
SECTION 1.03 HEADINGS: The headings of the Articles and Sections of this
amending agreement are inserted for convenience of reference only and shall not
affect the construction or interpretation of this amending agreement.
SECTION 1.04 REFERENCES: All references to Articles and Sections, unless
otherwise specified, are to Articles and Sections of the Credit Agreement.
ARTICLE TWO
AMENDMENTS
SECTION 2.01 DEFINITIONS: Section 1.01 of the Credit Agreement is amended
by adding the following definitions to be inserted in their correct alphabetical
order:
"BANK ACCOUNT SERVICE LIABILITIES " shall mean the debts, obligations
and liabilities from time to time of the Cdn. Borrower and its
Subsidiaries under or with respect to the Bank Account Services
Guarantees or the Bank Account Services.
"BANK ACCOUNT SERVICES" shall mean the CIBC Bank Account Services and
the Comerica Bank Account Services.
"BANK ACCOUNT SERVICE PROVIDERS" shall mean (a) Canadian Imperial Bank
of Commerce in its individual capacity as the provider of the CIBC Bank
Account Services, and (b) Comerica Bank and its Affiliates in their
respective capacities as the p-oviders of the Comerica Bank Account
Services.
- 2 -
<PAGE> 3
"BANK ACCOUNT SERVICES GUARANTEES" shall have the meaning specified in
paragraph 8.02(a)(x).
"CANADIAN ACCOUNTS RECEIVABLE" shall mean all present and future
accounts receivable of the Cdn. Borrower and its Canadian Subsidiaries
(other than any proceeds from any sale or other disposition of any one
or more Non-Canadian Subsidiaries, any undertaking, property or assets
of any one or more Non-Canadian Subsidiaries or any shares or other
ownership or equity interests in any one or more Non-Canadian
Subsidiaries).
"CANADIAN SUBSIDIARIES" of the Cdn. Borrower shall mean those
Subsidiaries of the Cdn. Borrower incorporated, amalgamated, continued
or otherwise existing under the laws of Canada or under the laws one of
the Provinces or Territories of Canada.
"CIBC BANK ACCOUNT SERVICES" shall have the meaning specified in
paragraph 8.02(a)(x).
"COMERICA BANK ACCOUNT SERVICES" shall have the meaning specified in
paragraph 8.02(a)(x).
"SHI PROCEEDS CASH COLLATERAL SECURITY" shall have the meaning
specified in paragraph (ac) of Schedule 6.
"NON-CANADIAN SUBSIDIARIES" shall mean any Subsidiaries of Philip which
are not Canadian Subsidiaries.
SECTION 2.02 POSTPONEMENT OF SECURITY: Section 6.09 of the Credit Agreement
is revised to read as follows:
"6.09 POSTPONEMENT OF LIEN OF SECURITY
The Lien of the Security in:
(a) any cash collateral (including interest thereon and proceeds
thereof) constituting any Permitted LC Facility Cash
Collateral Security or the SHI Proceeds Cash Collateral
Security will be postponed and subordinated to
(i) the rights of the issuer of the letters of
credit under the applicable Permitted LC
Facility to such cash collateral (including
interest thereon and proceeds thereof) as
security for the liabilities of the Cdn.
Borrower with respect to letters of credit
issued under such Permitted LC Facility
(including fees, interest, reimbursement
amounts and costs); and
- 3 -
<PAGE> 4
(ii) the rights of each of the Bank Account
Service Providers (and any collateral or
security agent acting on behalf of either or
both of them) to such cash collateral
(including interest thereon and proceeds
thereof) as security for Bank Account
Service Liabilities; and
(b) the Canadian Accounts Receivable from time to time will be
postponed and subordinated to the rights of each of the Bank
Account Service Providers (and any collateral or security
agent acting on behalf of either or both of them) to such
Canadian Accounts Receivable as security for the Bank Account
Service Liabilities;
and the Administrative Agent will from time to time execute and
deliver, or cause to be executed and delivered, such acknowledgements
and agreements of postponement and subordination relative to the
Permitted LC Facility Cash Collateral Security, the SHI Proceeds Cash
Collateral Security and the Canadian Accounts Receivable as may from
time to time be necessary or desirable in the opinion of the
Administrative Agent to evidence such postponement and subordination."
SECTION 2.03 POSITIVE COVENANTS - RETAINER FOR ADVISORS' FEES AND DISBURSEMENTS:
Subsections 8.01(ab) and 8.01(ac) of the Credit Agreement are amended by
revising such subsections to read as follows:
"(ab) Establishment of Retainer for Advisors' Fees and
Disbursements. Deliver to Blake, Cassels & Graydon U.S.
$1,000,000 to be titled in Blake, Cassels & Graydon and held
by Blake, Cassels & Graydon in an interest bearing trust
account and used by Blake, Cassels & Graydon to pay the
accounts from time to time rendered by the advisors to the
Administrative Agent and the Lenders and the agents of such
advisors or to finance disbursements (such as registration or
filing fees) to be incurred by any of the advisors to the
Administrative Agent and the Lenders or the agents of such
advisors in the performance of their services for the
Administrative Agent and the Lenders.
(ac) Replenishing Retainer for Advisors' Fees and Disbursements.
Immediately following receipt, at any time and from time to
time, of notice from Blake, Cassels & Graydon that the amount
then held by Blake, Cassels & Graydon in the escrow account
referred to in subsection 8.01(ab) is equal to or less than
U.S. $500,000, deliver to Blake, Cassels & Graydon sufficient
funds to increase the amount in such account to U.S.
$1,000,000 which additional funds shall be titled in Blake,
Cassels & Graydon and held by Blake, Cassels & Graydon in such
- 4 -
<PAGE> 5
account for use by Blake, Cassels & Graydon as provided for in
subsection 8.01(ab)."
SECTION 2.04 NEGATIVE COVENANTS - DEBT: Subsection 8.02(a) of the Credit
Agreement is amended by revising paragraph
8.02(a)(ix) to read as follows:
"(ix) letters of credit in an aggregate amount of not more than U.S.
$27,000,000 (or the Equivalent Amount in any other currency or
currencies) issued for the account of the Cdn. Borrower (to
provide credit support to suppliers of the North American
metals business of the Restricted Parties, or for other proper
purposes in the ordinary course of business of the Restricted
Parties, or to support the payroll and other banking service
requirements of the Restricted Parties) by any one or more
Persons which are at the relevant time Lenders pursuant to a
letter of credit facility (or if there is more than one such
letter of credit issuer, letter of credit facilities)
(collectively, the "PERMITTED LC FACILITIES" and individually
a "PERMITTED LC FACILITY") established outside of this
Agreement, provided that the debts and liabilities of the Cdn.
Borrower under each such Permitted LC Facility are unsecured
except for the Permitted LC Facility Cash Collateral Security
provided to the issuer of the letters of credit under such
Permitted LC Facility."
and by adding the following new paragraph at the end of such subsection:
"(x) a guarantee and indemnity (collectively the "BANK ACCOUNT
SERVICES GUARANTEES") from each of the Cdn. Borrower and its
various Canadian Subsidiaries to either or both of Canadian
Imperial Bank of Commerce and Comerica Bank (or to a
collateral agent or security agent on behalf of either or both
of Canadian Imperial Bank of Commerce and Comerica Bank) in
support of the bank account services (the "CIBC BANK ACCOUNT
SERVICES") provided by Canadian Imperial Bank of Commerce in
Canada to the Cdn. Borrower and certain of its Canadian
Subsidiaries and the bank account and cash management services
(the "COMERICA BANK ACCOUNT SERVICES") provided by Comerica
and its Affiliates in the United Sates of America to the Cdn.
Borrower and certain Subsidiaries of the Cdn. Borrower."
SECTION 2.05 SCHEDULES: Schedule 6 (Permitted Liens) is amended by revising
paragraph (z) of such Schedule to read as follows:
"(z) cash collateral security given to the issuer or issuers from
time to time of the letters of credit under the Permitted LC
Facilities provided that (i) the aggregate principal amount of
such cash collateral security shall not exceed U.S.
- 5 -
<PAGE> 6
$28,000,000 (plus interest thereon and proceeds thereof) ,
(ii) such cash collateral security will only secure the debts
and liabilities of the Cdn. Borrower to the applicable issuer
of such letters of credit with respect to such letters of
credit (including fees, interest, reimbursement obligations
and costs and expenses), (iii) such cash collateral security
will be funded solely from the proceeds of Released Amounts
released to the Borrowers for such purpose pursuant to Section
6.07, the net proceeds payable to the Restricted Parties from
the sale by the Restricted Parties of their
investments/securities in Strategic Holdings, Inc. and, as to
the balance, from the cash resources of the Restricted
Parties, and (iv) the cash collateral held as such cash
collateral security shall be subject to the Lien of the
Security subject only to (A) the Lien of the applicable issuer
of the letters of credit under the applicable Permitted LC
Facility on such cash collateral (including interest thereon
and proceeds thereof), and (B) the Lien of either or both of
the Bank Account Service Providers (or a collateral agent or
security agent on behalf of either or both of the Bank Account
Service Providers) on such cash collateral (including interest
thereon and proceeds thereof) as security for the Bank Account
Service Liabilities (such cash collateral security (including
interest thereon and the proceeds thereof) being collectively
the "PERMITTED LC FACILITIES CASH COLLATERAL SECURITY" and
individually a "PERMITTED LC FACILITY CASH COLLATERAL
SECURITY").
and by adding the following paragraphs at the end of such Schedule:
"(aa) a security interest over all of the Canadian Accounts
Receivable granted by the Cdn. Borrower and its Canadian
Subsidiaries to either or both of the Bank Account Service
Providers (or to a collateral agent or security agent on
behalf of either or both of Bank Account Service Providers) as
security for the Bank Account Service Liabilities.
(ab) a security interest over all of the cash collateral referred
to in paragraph (z) granted by the Cdn. Borrower to either or
both of the Bank Account Service Providers (or to a collateral
agent or security agent on behalf of either or both of the
Bank Account Service Providers) as security for the Bank
Account Service Liabilities.
(ac) a security interest (the "SHI SALE PROCEEDS CASH COLLATERAL
SECURITY") in the proceeds received by the Cdn. Borrower from
the sale to Strategic Holdings, Inc. ("SHI") of all of the
investments/securities of the Restricted Parties in SHI and
such additional funds from the cash resources of the
Restricted Parties necessary to increase such proceeds from
the SHI sale to U.S. $8,000,000 granted by the Cdn. Borrower
to either or both of the Bank Account Service Providers (or to
a collateral agent or security agent on behalf of either or
both of the Bank Account Service Providers) as security for
the Bank Account Service Liabilities."
- 6 -
<PAGE> 7
ARTICLE THREE
GENERAL
SECTION 3.01 CONFIRMATION: The Credit Agreement, as amended by this amending
agreement, is hereby confirmed by the Borrowers and the Administrative Agent, on
behalf of itself, the Lenders, the Other Agents and their respective Eligible
Affiliates.
SECTION 3.02 BINDING NATURE: This amending agreement shall enure to the benefit
of and be binding upon the Borrowers, the Administrative Agent, the Lenders, the
Other Agents, their respective Eligible Affiliates and their respective
successors and permitted assigns.
SECTION 3.03 CONFLICTS: If, after the date of this amending agreement, any
provision of this amending agreement is inconsistent with any provision of the
Credit Agreement, the relevant provision of this amending agreement shall
prevail.
SECTION 3.04 ACKNOWLEDGEMENT AND NO WAIVERS: The Borrowers acknowledge that
Defaults have occurred and are continuing under the Credit Agreement including,
without limitation, (a) an Event of Default under subsection 9.01(b) of the
Credit Agreement because of the default by the Borrowers in the payment of
interest under the Credit Agreement, (b) Events of Default under subsection
9.01(c) of the Credit Agreement because the Cdn. Borrower is not in compliance
with the Interest Coverage Ratio requirements of subsection 8.03(a) of the
Credit Agreement, the Adjusted Debt to EBITDA Covenant Ratio requirements of
subsection 8.03(e) of the Credit Agreement, the Debt to EBITDA Covenant Ratio
requirements of subsection 8.03(b) of the Credit Agreement, and the Working
Capital Ratio requirements of subsection 8.03(d) of the Credit Agreement, and
(c) an Event of Default under subsection 9.01(g) of the Credit Agreement because
of the default by Philip Enterprises Inc. in payment of amounts in aggregate in
excess of U.S. $10,000,000 owed to FP Commodity Master Trust relative to an
inventory monetization program. Nothing in this amending agreement waives or
shall be deemed to waive any Default or Event of Default or any right,
entitlement, privilege, benefit or remedy which the Administrative Agent, the
Other Agents or the Lenders may have now or at any time in the future as a
result of or in connection with any such Default or Event of Default.
SECTION 3.05 LAW OF CONTRACT: This amending agreement shall be governed by and
construed in accordance with the laws of the Province of Ontario and of the laws
of Canada applicable in the Province of Ontario.
SECTION 3.06 COUNTERPART AND FACSIMILE: This amending agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
Delivery of an executed signature page to this amending
- 7 -
<PAGE> 8
SECTION 3.07 agreement by any party by facsimile transmission shall be as
effective as delivery of a manually executed copy of this amending agreement by
such party.
IN WITNESS OF WHICH the Borrowers and the Administrative Agent, on
behalf of itself, the Lenders, the Other Agents and their respective Eligible
Affiliates, have executed this amending agreement as of the date indicated on
the first page of this amending agreement.
<TABLE>
<CAPTION>
PHILIP SERVICES CORP. PHILIP SERVICES (DELAWARE), INC.
<S> <C> <C> <C>
by: by:
------------------------------------------------ ----------------------------------------------
name: name:
title: title:
by: by:
------------------------------------------------ ----------------------------------------------
name: name:
title: title:
CANADIAN IMPERIAL BANK OF COMMERCE (in its capacity as
Administrative Agent)
by:
------------------------------------------------
name:
title:
by:
------------------------------------------------
name:
title:
</TABLE>
ACKNOWLEDGEMENT AND CONFIRMATION
Each of the undersigned consents to the above referenced amendments to
the Credit Agreement and to the Borrowers, the Administrative Agent (on behalf
of itself, the Lenders, the Other Agents and their respective Eligible
Affiliates) entering into this amending agreement and
- 8 -
<PAGE> 9
acknowledges and agrees that all of the guarantees and security delivered by it
to or for the benefit of any one or more of the Administrative Agent and the
Lenders (including any such guarantees and security delivered by it to Canadian
Imperial Bank of Commerce as security agent) in connection with, or otherwise
applicable to, the debts and liabilities of itself or either one or both of the
Borrowers to any one or more of the Administrative Agent, the Lenders, the Other
Agents and their respective Eligible Affiliates under, in connection with or
with respect to any one or more of the Credit Agreement, the other Credit
Documents and the Lender/Borrower Hedging Arrangements are hereby ratified and
confirmed and remain in full force and effect notwithstanding the entering into
of this amending agreement by the Borrowers, the Administrative Agent (on behalf
of itself, the Lenders, the Other Agents and their respective Eligible
Affiliates) and notwithstanding the amendments to the Credit Agreement effected
by this amending agreement.
This acknowledgement and confirmation may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same instrument. Delivery of an executed
signature page to this acknowledgement and confirmation by any party by
facsimile transmission shall be as effective as delivery of a manually executed
copy of this acknowledgement and confirmation by such party.
IN WITNESS OF WHICH each of the undersigned have executed this
acknowledgement and confirmation as of the date referred to on the first page of
this amending agreement.
PHILIP SERVICES (DELAWARE), INC.
LUNTZ CORPORATION
LUNTZ ACQUISITION (DELAWARE) CORPORATION
21ST CENTURY ENVIRONMENTAL MANAGEMENT, INC.
21ST CENTURY ENVIRONMENTAL MANAGEMENT, INC.
OF NEVADA
21ST CENTURY ENVIRONMENTAL MANAGEMENT, INC.
OF PUERTO RICO
21ST CENTURY ENVIRONMENTAL MANAGEMENT, INC.
OF RHODE ISLAND
- 9 -
<PAGE> 10
CHEMICAL POLLUTION CONTROL, INC. OF FLORIDA
- A 21ST CENTURY ENVIRONMENTAL MANAGEMENT
COMPANY
CHEMICAL POLLUTION CONTROL, INC. OF NEW YORK
- A 21ST CENTURY ENVIRONMENTAL MANAGEMENT
COMPANY
NORTHLAND ENVIRONMENTAL, INC.
RESI ACQUISITION (DELAWARE) CORPORATION
CHEM-FREIGHT, INC.
REPUBLIC ENVIRONMENTAL RECYCLING (NEW
JERSEY), INC.
REPUBLIC ENVIRONMENTAL SYSTEMS
(PENNSYLVANIA), INC.
REPUBLIC ENVIRONMENTAL SYSTEMS (TECHNICAL
SERVICES GROUP), INC.
REPUBLIC ENVIRONMENTAL SYSTEMS
(TRANSPORTATION GROUP), INC.
PHILIP ENTERPRISES INC./LES ENTREPRISES
PHILIP INC.
PHILIP ANALYTICAL SERVICES CORPORATION
PHILIP ENVIRONMENTAL (ATLANTIC) LIMITED
PHILIP ENVIRONMENTAL (ELMIRA) INC.
PHILIP ENVIRONMENTAL SERVICES LIMITED
PHILIP INVESTMENT CORP.
PSC/IML ACQUISITION CORP.
RECYCLAGE D'ALUMINIUM QUEBEC INC./QUEBEC
ALUMINUM RECYCLING INC.
- 10 -
<PAGE> 11
1195613 ONTARIO INC.
1233793 ONTARIO INC.
842578 ONTARIO LIMITED
COUSINS WASTE CONTROL CORPORATION
D & L, INC.
INTERMETCO U.S., INC.
BUTCO, INC.
ALLTIFT, INC.
INTERMETCO U.S.A. LTD.
GEORGIA TUBULAR PRODUCTS, INC.
NORTRU, INC.
ALLWORTH, INC.
CHEMICAL RECLAMATION SERVICES, INC.
PHILIP RECLAMATION SERVICES, HOUSTON, INC.
SOUTHEAST ENVIRONMENTAL SERVICES COMPANY,
INC.
CYANOKEM INC.
RHO-CHEM CORPORATION
SESSA, S.A. DE C.V.
THERMALKEM INC.
PEN METALS (DELAWARE), INC.
PHILIP ENVIRONMENTAL OF IDAHO CORPORATION
- 11 -
<PAGE> 12
PHILIP ENVIRONMENTAL (WASHINGTON) INC.
BURLINGTON ENVIRONMENTAL INC. [DELAWARE]
BURLINGTON ENVIRONMENTAL INC. [WASHINGTON]
RESOURCE RECOVERY CORPORATION
TERMCO CORPORATION
GASOLINE TANK SERVICE COMPANY, INC.
UNITED DRAIN OIL SERVICE, INC.
PHILIP ENVIRONMENTAL SERVICES CORPORATION
SOLVENT RECOVERY CORPORATION
PHILIP INDUSTRIAL SERVICES (USA), INC.
PHILIP INDUSTRIAL SERVICES GROUP, INC.
ALRC, INC.
APLC, INC.
ALLWASTE ASBESTOS ABATEMENT HOLDINGS, INC.
ALLWASTE ASBESTOS ABATEMENT, INC.
ALLWASTE ASBESTOS ABATEMENT OF NEW ENGLAND,
INC.
ONEIDA ASBESTOS REMOVAL, INC.
ONEIDA ASBESTOS ABATEMENT INC.
PHILIP ENVIRONMENTAL SERVICES, INC.
ACE/ALLWASTE ENVIRONMENTAL SERVICES OF
INDIANA, INC.
ALL SAFETY AND SUPPLY, INC.
- 12 -
<PAGE> 13
PHILIP SCAFFOLD CORPORATION
ALLSCAFF, INC.
ALLWASTE ENVIRONMENTAL SERVICES/NORTH
CENTRAL, INC.
PHILIP SERVICES/OHIO, INC.
PHILIP WEST INDUSTRIAL SERVICES, INC.
PHILIP TRANSPORTATION AND REMEDIATION, INC.
PHILIP SERVICES/SOUTH CENTRAL, INC.
PHILIP SERVICES/SOUTHWEST, INC.
PHILIP SERVICES HAWAII, LTD.
ALLWASTE SERVICIOS INDUSTRIALES DE CONTROL
ECOLOGICO S.A. DE C.V.
ALLWASTE TANK SERVICES S.A. DE C.V.
ALLWASTE TEXQUISITION, INC.
CALIGO DE MEXICO, S.A. DE C.V.
PHILIP AUTOMOTIVE, LTD.
INDUSTRIAL CONSTRUCTION SERVICES COMPANY,
INC.
J.D. MEAGHER/ALLWASTE, INC.
JAMES & LUTHER SERVICES, INC.
JESCO INDUSTRIAL SERVICES, INC.
PHILIP OIL RECYCLING, INC.
PHILIP INDUSTRIAL SERVICES OF TEXAS, INC.
PHILIP SERVICES/LOUISIANA, INC.
- 13 -
<PAGE> 14
PHILIP MID-ATLANTIC, INC.
PHILIP SERVICES/MISSOURI, INC.
PHILIP SERVICES/MOBILE, INC.
PHILIP SERVICES/NORTH ATLANTIC, INC.
PHILIP SERVICES/NORTH CENTRAL, INC.
PHILIP SERVICES/OKLAHOMA, INC.
PHILIP PLANT SERVICES, INC.
PHILIP SERVICES/ATLANTA, INC.
BEC/PHILIP, INC.
PHILIP/WHITING, INC.
ALLWASTE OF CANADA LTD.
CALIGO RECLAMATION LTD.
ALLWASTE TANK CLEANING, INC.
ALLWASTE RAILCAR CLEANING, INC.
ALLWASTE RECOVERY SYSTEMS, INC.
PSC ENTERPRISES, INC.
ALLIES STAFFING, INC.
ALLIES STAFFING LTD.
ALLQUEST CAPITAL, INC.
PHILIP METALS (DELAWARE), INC.
INTSEL SOUTHWEST LIMITED PARTNERSHIP
PHILIP METALS INC.
PHILIP METALS RECOVERY (USA) INC.
- 14 -
<PAGE> 15
PHILIP SERVICES (PENNSYLVANIA), INC.
PHILIP METALS (NEW YORK), INC.
PHILIP ST, INC.
PHILIP CHEMISOLV HOLDINGS, INC.
PHILIP CHEMI-SOLV, INC.
DM ACQUISITION CORPORATION
DELTA MAINTENANCE, INC.
PHILIP REFRACTORY & CORROSION CORPORATION
HARTNEY CORPORATION
PHILIP REFRACTORY SERVICES, INC.
TOTAL REFRACTORY SYSTEMS, INC.
PHILIP REFRACTORY & CORROSION SERVICES, INC.
UNITED INDUSTRIAL MATERIALS, INC.
INDUSTRIAL SERVICES TECHNOLOGIES, INC.
ADVANCED ENVIRONMENTAL SYSTEMS, INC.
ADVANCED ENERGY CORPORATION
INTERNATIONAL CATALYST, INC.
IST HOLDING CORP.
CHEM-FAB, INC.
PIPING HOLDINGS CORP.
PIPING COMPANIES, INC.
PIPING MECHANICAL CORPORATION
HYDRO-ENGINEERING & SERVICE, INC.
- 15 -
<PAGE> 16
MAC-TECH, INC.
SERV-TECH DE MEXICO S DE R.L. DE C.V.
SERV-TECH MEXICANA S DE R.L. DE C.V.
PETROCHEM FIELD SERVICES DE VENEZUELA
PHILIP ENTERPRISE SERVICE CORPORATION
PHILIP MECHANICAL SERVICES OF LOUISIANA,
INC.
PHILIP ST PIPING, INC.
PHILIP TECHNICAL SERVICES, INC.
PHILIP/SECO INDUSTRIES, INC.
TIPCO ACQUISITION CORP.
PRS HOLDING, INC.
PHILIP PETRO RECOVERY SYSTEMS, INC.
SERV-TECH EPC, INC.
SERV-TECH CONSTRUCTION AND MAINTENANCE, INC.
SERV-TECH ENGINEERS, INC.
PHILIP F.C. SCHAFFER, INC.
SERV-TECH INTERNATIONAL SALES, INC.
SERV-TECH OF NEW MEXICO, INC.
SERV-TECH SERVICES, INC.
SERV-TECH SUDAMERICANA S.A.
SERVTECH CANADA, INC.
ST DELTA CANADA, INC.
- 16 -
<PAGE> 17
TERMINAL TECHNOLOGIES, INC.
RMF GLOBAL, INC.
RMF INDUSTRIAL CONTRACTING, INC.
RMF ENVIRONMENTAL, INC.
PHILIP METALS (USA), INC.
ARC DUST PROCESSING (BARBADOS) LIMITED
PHENCORP INTERNATIONAL FINANCE INC.
PHENCORP INTERNATIONAL B.V.
PHILIP SERVICES (NETHERLANDS) B.V.
PHILIP SERVICES (EUROPE) LIMITED
ALLIED METALS LIMITED
B.M. METALS (RECYCLING) LTD.
BATH RECLAMATION (AVONMOUTH) CO. LIMITED
BLACKBUSHE LIMITED
BLACKBUSHE METALS (WESTERN) LIMITED
ELLIOTT METAL COMPANY LIMITED
SOUTHERN HAULIERS LIMITED
T.C. FRASER (METALS) LIMITED
E. PEARSE (HOLDINGS) LIMITED
E. PEARSE & CO., LIMITED
C. PHILIPP & SONS (BRISTOL) LIMITED
MAYER PEARSE LIMITED
WIDSITE LIMITED
- 17 -
<PAGE> 18
PHILIP METALS (EUROPE) LIMITED
PHENCORP REINSURANCE COMPANY INC.
PHILIP INTERNATIONAL DEVELOPMENT INC.
CECATUR HOLDINGS
PHILIP SERVICES (DELAWARE), L.L.C.
CHEMISOLV LIMITED
PHILIP INTERNATIONAL DEVELOPMENT INC.
PHILIP SERVICES INDUSTRIAIS DO BRAZIL LTDA
SERV-TECH EUROPE GMBH
P.S.P.E. SERVICOS PRESTADOS AS EMPRESAS
UNIPESSOAL LIMITADA
P.S.C. PHILIP SERVICES IBERICA, S.L.
2766906 CANADA INC.
721646 ALBERTA LTD.
800151 ONTARIO INC.
912613 ONTARIO LTD.
PHILIP PLASMA METALS INC.
CALIGO PARTNERSHIP
BY ITS PARTNER ALLWASTE OF CANADA LTD.
DELSAN DEMOLITION LIMITED
NORTRU, LTD.
ALLWASTE PAINT SERVICES S.A. DE C.V.
- 18 -
<PAGE> 19
ALLWASTE SERVICES OF EL PASO, INC.
DEEP CLEAN, INC.
and all other Guarantor Subsidiaries (if any)
in each case by:
Colin Soule
Authorized Signatory
<PAGE> 1
EXHIBIT 10.9
Philip Services Corp.
100 King Street West
P.O. Box 2440, LCD #1
Hamilton, Ontario L8N 4J6
(905) 521-1600
April 5, 1999
Lenders under a Credit Agreement dated as of
August 11, 1997, as amended
c/o Canadian Imperial Bank of Commerce, as
Administrative Agent for the Lenders
6th Floor
Commerce Court West
Toronto, Ontario
M5L 1A2
Dear Sirs:
RE: PHILIP SERVICES CORP.
This letter agreement (this "Agreement") sets out the agreement among
Philip Services Corp ("PSC") on behalf of itself and each of its Affiliates,
and each of the lenders which is a signatory hereto (individually, a
"Consenting Lender" and collectively the "Consenting Lenders") in its capacity
as a lender under a credit agreement dated as of August 11, 1997 among PSC, as
borrower in Canada, Philip Services (Delaware) Inc., as borrower in the United
States, the persons from time to time parties to such agreement as lenders,
Canadian Imperial Bank of Commerce ("CIBC"), as administrative agent for the
lenders (the "Administrative Agent"), Bankers Trust Company ("BTCo"), as
syndication agent, CIBC and BTCo, as co-arrangers, and Dresdner Bank Canada and
Dresdner Bank AG New York Branch, as documentation agents, as amended by
amending agreements dated as of October 31, 1997, February 19, 1998, June 24,
1998, October 20, 1998 and December 4, 1998 (the "Existing Credit Agreement")
regarding the principal terms and conditions of a prearranged plan of
reorganization or arrangement (the "Plan") involving PSC and its Affiliates
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code")
and under the Companies' Creditors Arrangement Act (Canada) (the "CCAA").
<PAGE> 2
LOCKUP AGREEMENT
- 2 -
Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed thereto in the Term Sheet (as defined in Section 1 below) or
the Existing Credit Agreement, as applicable. The Consenting Lenders, PSC and
its Affiliates are collectively referred to as the "Parties".
1. RESTRUCTURING AND SOLICITATION
(a) The principal terms and conditions of the Plan as agreed
among the Parties are set forth in the term sheet attached hereto as
Schedule A (the "Term Sheet"), which is incorporated herein and made
a part of this Agreement. In the case of a conflict between the
provisions contained in the text of this Agreement and Schedule A,
the provisions of this Agreement shall govern. References in this
Agreement to the term "Plan" include revisions thereto approved by
the Consenting Lenders in accordance with the terms of Section 4(a)
hereof.
(b) Acceptances of the Plan shall be solicited and received from
holders of claims arising out of the Existing Credit Agreement prior
to commencement of the Cases and will be solicited from holders (or
representatives of such holders) of all other classes of impaired
claims and interests after the commencement of the Cases.
2. REPRESENTATIONS AND COVENANTS OF EACH PARTY
Each of the Parties hereto represents and warrants to the other Parties
hereto that: (i) it is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization with all requisite power
and authority to carry on the business in which it is engaged, to own its
property, to execute this Agreement and, subject to requisite approvals from
the Bankruptcy Courts in which the Cases are commenced, to consummate the
transactions contemplated hereby; (ii) the execution, delivery and performance
hereof has been duly authorized by all necessary corporate or other actions;
and (iii) no proceeding, litigation or adversary proceeding before any court,
arbitrator or administrative or governmental body is pending against it which
would adversely affect its ability to enter into this Agreement or to perform
its obligations hereunder.
3. CONSENTING LENDER REPRESENTATIONS
Each Consenting Lender represents severally and not jointly to each of the
other Parties that, as of the date of this Agreement:
(a) it is a lender under the Existing Credit Agreement and in
that capacity is owed the principal amount set forth next to such
Consenting Lender's name on Schedule B attached hereto (the
"Consenting Lender's Debt"). The amount of the Consenting Lender's
Debt has been determined without reference to any Participations
granted by such Consenting Lender;
<PAGE> 3
LOCKUP AGREEMENT
- 3 -
(b) it holds its Consenting Lender's Debt free and clear of all
liens, security interests and other encumbrances of any kind and it
has not assigned or transferred, in whole or in part, any portion of
its right, title or interests in the Consenting Lender's Debt other
than by way of Participation in accordance with Section 12.01 of the
Existing Credit Agreement; and
(c) it is a sophisticated party with sufficient knowledge and
experience to evaluate properly the terms and conditions of this
Agreement; it has made its own analysis and decision to enter in
this Agreement and has obtained such independent advice in this
regard as it deemed appropriate; it qualifies as an "accredited
investor" as such term is defined in Rule 501(a) of Regulation D
under the Securities Act of 1933, as amended; and it has not relied
in such analysis or decision on the Administrative Agent or any
other person other than its own independent advisors.
4. CONSENTING LENDER COVENANTS AND CONSENTS
Each Consenting Lender agrees that, subject to Section 6 hereof and, as to
Sections 4(a) and 4(b) hereof, subject to the filing of the Plan and its
receipt of solicitation materials in respect of the Plan that are consistent
with this Agreement:
(a) it will vote its claims in respect of the Consenting Lender's
Debt and any claims under the Existing Credit Agreement it acquires
after the date hereof in favour of the Plan at or prior to the
deadline to be established for voting on the Plan and will not
change or withdraw (or cause to be changed or withdrawn) such
vote(s), provided that the terms of the Plan are consistent with the
terms of the Plan described in the Term Sheet, as modified by any
revisions thereto that have been agreed to in writing by such
Consenting Lender after the date hereof;
(b) it will not oppose the confirmation of the Plan, provided
that the terms of the Plan are consistent with the terms of the Plan
described in the Term Sheet, as modified by any revisions thereto
referred to in Section 4(a);
(c) it will not sell, transfer, pledge, participate or assign any
of the Consenting Lender's Debt or any voting interest therein
during the term of this Agreement, except in accordance with Section
12.01 of the Existing Credit Agreement and then only to an Assignee
that agrees in writing prior to such acquisition, pledge or
participation to be bound by all the terms of this Agreement as if
such Assignee had originally executed this Agreement with respect to
the Consenting Lender's Debt being acquired by such Assignee;
(d) it consents to the incurrence of the debtor-in-possession
financing (the "DIP Financing") on the terms described in the term
sheet attached as Schedule C hereto (the "DIP Term Sheet") and the
granting of the security for the DIP
<PAGE> 4
LOCKUP AGREEMENT
- 4 -
Financing (the "DIP Security") described under the heading
"Security" in the DIP Term Sheet;
(e) it consents to the entry of orders in the Cases effecting the
subordination of any Security delivered pursuant to the Existing
Credit Agreement to the DIP Security as provided in the DIP Term
Sheet, and in particular to the entry of orders in the Cases
effecting the subordination of the Security to:
(i) a priming lien pursuant to Section 364(d)(1) of the
Bankruptcy Code on all of the existing and after-acquired
assets of the Borrowers and the Guarantor Subsidiaries
located in the United States constituting collateral (the
"Pre-Petition Collateral") securing obligations to the
Agents and the lenders under the Existing Credit Agreement;
(ii) a security interest and charge in the Pre-Petition
Collateral located in Canada; and
(iii) the other liens and security interests referred to in the
DIP Term Sheet; and
all as provided in the DIP Term Sheet;
(f) it consents to the subordination of the security for the
Senior Secured Debt to the security for the exit/working capital
financing having the terms disclosed in Section 5 of the Term Sheet.
This Agreement relates only to the rights of the Consenting Lenders in their
capacity as the holders of the Consenting Lender's Debt and does not affect or
limit any rights or claims any Consenting Lender may have in any other
capacity. For greater certainty, nothing in the Term Sheet or this Agreement
affects or limits the priorities of the security of the Bank Account Service
Providers, the security for the Permitted LC Facility or the security held by
the Cdn. LC Issuer pursuant to section 5.06 of the Existing Credit Agreement,
which will rank in priority to the DIP Security and the security for the
exit/working capital facility.
5. PSC COVENANTS
PSC agrees on behalf of itself and its Affiliates that:
(a) it will use its best efforts to (i) comply with the Plan
Timetable set out in the Term Sheet (ii) obtain written agreements
prior to commencing the Cases, to the extent legally permissible,
from holders (or representatives of such holders) of claims of all
classes of impaired claims in terms of amount of claims and number
of holders as required for the approval of the Plan by the relevant
classes of claims under the Bankruptcy Code and the CCAA; and (iii)
to identify to the satisfaction of the Consenting Lenders, prior to
commencing the Cases, those unsecured creditors
<PAGE> 5
LOCKUP AGREEMENT
- 5 -
whose claims will be reinstated under or unaffected by the Plan and
those executory contracts that will be assumed;
(b) PSC and its Affiliates will cooperate fully with the Lenders'
advisors and permit them complete access to PSC, its subsidiaries
and their books and records, officers and personnel throughout the
restructuring process. The Consenting Lenders will work together
with PSC and its Affiliates to coordinate cost-effective performance
of the advisors' work; and
(c) from February 28, 1999, at least 90% of the cash balances and
other near-cash financial instruments of the Restricted Parties
including term deposits and marketable securities will be maintained
with one or more Lenders (subject to exclusions acceptable to the
Majority Lenders (as defined below)).
6. TERMINATION
(a) Upon the occurrence of any Termination Event (as defined
below) this Agreement may be terminated upon the election to do so
by Consenting Lenders holding in the aggregate at least 51% of the
aggregate amount of claims under the Existing Credit Agreement held
by the Consenting Lenders (the "Majority Lenders").
For the purposes hereof, a "Termination Event" shall occur if:
(i) any of the events described under "Plan Timetable" in the
Term Sheet have not occurred within 15 days of the deadline
specified for such event;
(ii) the Bankruptcy Courts have not granted final approval of the
DIP Financing within 30 days following commencement of the
Cases;
(iii) in the opinion of the Majority Lenders PSC has disclaimed
its intention or otherwise acted in a manner materially
inconsistent with an intention to pursue the Plan or has
otherwise breached the Term Sheet or this Agreement;
(iv) in the opinion of the Majority Lenders there is any material
adverse change in the terms or the feasibility of the Term
Sheet or the Plan not previously consented to by the
Majority Lenders, or in the confirmability of the Plan in
the United States or in the likelihood of its approval by
the required creditor majorities in Canada; or
(v) PSC or any of its Affiliates is the subject of a voluntary
or involuntary petition or other proceedings under any
insolvency statute in any jurisdiction (other than the
prepackaged Cases contemplated by the Term Sheet);
provided, however, that the filing of an involuntary
petition
<PAGE> 6
LOCKUP AGREEMENT
- 6 -
under an insolvency statute shall not be deemed to be a
Termination Event if the deadlines referred to in the Plan
Timetable are met within the time permitted by Section
6(a)(i) above.
(b) Upon termination of this Agreement, each Consenting Lender,
in its sole discretion and without limiting its other rights, may
change or withdraw any votes previously cast by it in favour of the
Plan. PSC and its Affiliates will not contest any such decision by
a Consenting Lender to change or withdraw its vote or to oppose
confirmation of the Plan by reason of such termination, and will
consent to any motion filed by a Consenting Lender under Federal
Rule of Bankruptcy Procedure 3018(a) in the U.S. Cases.
(c) This Agreement may be terminated by PSC if one or more Consenting
Lenders have withdrawn or changed their votes pursuant to Section
4(a) or Section 6(b) or have breached the Term Sheet or this
Agreement, and as a result there are no longer sufficient Lenders
holding claims under the Existing Credit Agreement which have agreed
to vote in favour of the Plan to ensure that the majorities of
Lenders in number and amounts of claims required under section
1126(c) of the Bankruptcy Code and section 6 of the CCAA will be
satisfied.
(d) None of the Parties shall have any liability to any other Party in
respect of any termination of this Agreement in accordance with the
terms hereof.
7. CONDITIONS
The respective obligations of the Parties to consummate each of the
transactions contemplated by the Plan are also subject to the satisfaction of
each of the following conditions:
(a) negotiation, preparation and execution of mutually satisfactory
definitive transaction agreements and other documents including
without limitation the Plan and the Disclosure Statement,
incorporating the terms and conditions of each of the transactions
contemplated by the Plan set forth herein and in the Term Sheet and
such other terms and conditions as the Parties may mutually agree;
(b) all authorizations, consents and regulatory approvals required, if
any, in connection with Plan Implementation and the continuation of
the businesses of PSC and its Affiliates as currently conducted shall
have been obtained; and
(c) PSC shall have received commitments from bonding companies which are
sufficient for the reasonable operating requirements of PSC and its
Affiliates both prior to and following Plan Implementation.
<PAGE> 7
LOCKUP AGREEMENT
- 7 -
8. AMENDMENTS
Except as otherwise provided herein, this Agreement may not be modified,
amended or supplemented except in writing signed by each of the signing Parties
or their Assignees.
9. OTHER PROPOSALS
Notwithstanding anything in this Agreement or the Term Sheet to the
contrary, PSC and its Affiliates may at all times (both before and after the
execution of this Agreement and the filing of the Plan) respond to unsolicited
offers (but for greater certainty may not, directly or indirectly, seek,
solicit, encourage or initiate any discussions respecting any offers) relative
to potential transactions which (i) restructure substantially all of the equity
and debt of PSC and its Affiliates, and (ii) are demonstrably more favourable
to the Consenting Lenders and the other stakeholders in PSC than the
transactions set forth in the Term Sheet or in the Plan. Nothing in this
Agreement binds any of the Consenting Lenders to agree to or vote in favour of
any such alternate proposal.
10. INDEMNIFICATION OBLIGATIONS
PSC and its Affiliates jointly and severally agree to fully indemnify each
Consenting Lender, the Administrative Agent, the Other Agents, and their
respective Affiliates, directors, officers, employees, agents or
representatives including counsel (collectively, the "Indemnitees") against any
manner of actions, causes of action, suits, proceedings, liabilities and claims
of any nature, costs or expenses (including reasonable legal fees) which may be
incurred by such Indemnitee or asserted against such Indemnitee arising out of
or during the course of, or otherwise in connection with or in any way related
to, the negotiation, preparation, formulation, solicitation, dissemination,
implementation, confirmation and consummation of the Plan, other than any
liabilities to the extent arising from the gross negligence or wilful or
intentional misconduct of any Indemnitee as determined by a final judgment of a
court of competent jurisdiction. If any claim, action or proceeding is brought
or asserted against an Indemnitee in respect of which indemnity may be sought
from PSC, the Indemnitee shall promptly notify PSC in writing, and PSC may
assume the defense thereof, including the employment of counsel reasonably
satisfactory to the Indemnitee, and the payment of all costs and expenses. The
Indemnitee shall have the right to employ separate counsel in any such claim,
action or proceeding and to consult with PSC in the defense thereof, and the
fees and expenses of such counsel shall be at the expense of PSC unless and
until PSC shall have assumed the defense of such claim, action or proceeding.
If the named parties to any such claim, action or proceeding (including any
impleaded parties) include both the Indemnitee and PSC, and the Indemnitee
reasonably believes that the joint representation of PSC and the Indemnitee may
result in a conflict of interest the Indemnitee may notify PSC in writing that
it elects to employ separate counsel at the expense of PSC, and PSC shall not
have the right to assume the defense of such action or proceeding on behalf of
the Indemnitee. In addition, PSC shall not effect any settlement or release
from liability in connection with any matter for which the Indemnitee would
have the right to indemnification from PSC, unless such settlement contains a
full and
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unconditional release of the Indemnitee, or a release of the Indemnitee
satisfactory in form and substance to the Indemnitee.
11. SEVERAL AND NOT JOINT
Notwithstanding anything herein to the contrary, or in any document or
instrument executed and delivered in connection herewith, the Parties agree
that the representations, warranties, obligations, liabilities and indemnities
of each Consenting Lender hereunder shall be several and not joint, and no
Consenting Lender shall have any liability hereunder for any breach by any
other Consenting Lender of any obligation of such Consenting Lender set forth
herein.
12. PUBLICITY
The Parties agree that all public announcements of the entry into or the
terms and conditions of this Agreement shall be mutually acceptable to the
Administrative Agent and PSC.
13. NO THIRD PARTY BENEFICIARIES; SEPARATE RESPONSIBILITIES
This Agreement is only for the benefit of the undersigned Parties and
nothing in this Agreement, expressed or implied, is intended or shall be
construed to confer upon any person or entity, other than such persons or
entities, any rights or remedies under or by reason of, and no person or
entity, other than such persons or entities, is entitled to rely in any way
upon, this Agreement.
14. GOVERNING LAW; JURISDICTION
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York, without regard to any conflicts of law provision
which would require the application of the law of any other jurisdiction. By
its execution and delivery of this Agreement, each of the Parties hereby
irrevocably and unconditionally agrees for itself that, subject to the
following sentence, any legal action, suit or proceeding against it with
respect to any matter under or arising out of or in connection with this
Agreement or for the recognition or enforcement of any judgment rendered in any
such action, suit or proceeding, may be brought in any state or federal court
of competent jurisdiction in New York County, State of New York, and, by
execution and delivery of this Agreement, each of the Parties hereby
irrevocably accepts and submits itself to the nonexclusive jurisdiction of such
court, generally and unconditionally, with respect to any such action, suit or
proceeding. Nothing in this section shall limit the authority of the
Bankruptcy Courts to hear any matter arising in the Cases.
15. WAIVER OF JURY TRIAL
THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY JURISDICTION
IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE BETWEEN THE
PARTIES UNDER THIS AGREEMENT, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.
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16. SPECIFIC PERFORMANCE
It is understood and agreed by the Parties that money damages would not be
a sufficient remedy for any breach of this Agreement by any of the Parties and
the non-breaching Party shall be entitled to specific performance and
injunctive or other equitable relief as a remedy of any such breach.
17. EFFECT
This Agreement shall become effective and enforceable against each
Consenting Lender and against PSC and its Affiliates when:
(a) it has been executed by PSC and by Consenting Lenders in number and
holding an aggregate amount of claims outstanding under the Existing
Credit Agreement sufficient to satisfy the requirements of Section
1126(c) of the Bankruptcy Code and Section 6 of the CCAA in respect
of such claims; and
(b) PSC and Philip Services (Delaware) Inc. have entered into the
DIP Term Sheet and an agreement with the Administrative Agent,
approved by the Required Lenders, with respect to the terms of
release of the net proceeds of sale of PSC's aluminum division and
other asset sale proceeds referred to in the Term Sheet.
18. CONFIRMATION
Notwithstanding this Agreement, PSC, on behalf of itself and its
Affiliates, acknowledges and agrees that the Existing Credit Agreement and all
of the Security delivered by PSC or any of its Affiliates to any one or more of
the Administrative Agent, the Security Agent, the LC Issuers or the Lenders in
connection with, or otherwise applicable to, the debts or liabilities of PSC or
any of its Affiliates to any one or more of the Administrative Agent, the
Lenders, the Other Agents and their Eligible Affiliates under the Existing
Credit Agreement, are hereby ratified and confirmed and remain in full force
and effect.
19. SURVIVAL
Notwithstanding any assignment or transfer of all or any part of the
Consenting Lender's Debt in accordance with Section 4(c), or the termination of
each Consenting Lender's obligations hereunder in accordance with Section 6
hereof, the agreements and obligations of PSC and its Affiliates in Sections
6(b), 10, 13, 15, 16 and 18 shall survive such termination (other than the
indemnification provided for in Section 10, which shall terminate if this
Agreement is terminated by the Majority Lenders under Section 6) and shall
continue in full force and effect for the benefit of such Consenting Lender in
accordance with the terms hereof.
20. Plan Releases
The Plan shall include releases by PSC and each of its Affiliates which is
included in the Cases, in their individual capacities and as debtors in
possession (collectively, the "Debtors"),
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the Consenting Lenders, and to the fullest extent allowed by applicable law,
all other creditors and shareholders of the Debtors:
(a) in favour of each of the respective present officers,
directors, employees, agents and professionals (other than the
Debtor's auditors) of each of the Debtors ("Debtor Releasees") in
form and substance and on terms satisfactory to PSC and the
Consenting Lenders; and
(b) in favour of each of the Consenting Lenders, the LC Issuers,
the Administrative Agent, the Other Agents, and their respective
Affiliates, officers, directors, employees, agents and professionals
(the "Lender Releasees") from any and all claims or causes of action
existing as of Plan Implementation against any of the Lender
Releasees, including without limitation, statutory claims and causes
of action under the Bankruptcy Code or under similar laws of any
state, of Canada or of any province, and claims and causes of action
relating to, arising out of or in connection with the subject matter
of, or the transaction or event giving rise to the claims of the
releasing party affected by the Plan, the business and affairs of
the Debtors, the Plan and the Cases, including any act, occurrence
or event in any manner related to the claim of the releasing party,
any activities of the members of the informal Lender steering
committee, and any activities prior or subsequent to the filing of
the Cases leading to the promulgation and confirmation of the Plan.
The Plan shall also require the delivery to the Debtor Releasees and the Lender
Releasees of releases to the same effect from each of PSC's Restricted
Subsidiaries which is not a Debtor.
21. HEADINGS
The headings of the Sections, paragraphs and subsections of this Agreement
are inserted for convenience only and shall not affect the interpretation
hereof.
22. SUCCESSORS AND ASSIGNS
This Agreement shall bind and enure to the benefit of the Parties and
their respective successors, assigns, heirs, executors, administrators and
representatives.
23. PRIOR NEGOTIATIONS
This Agreement (including the Term Sheet) constitutes the entire agreement
between the Parties with respect to the subject matter hereof except as
otherwise expressly agreed in writing executed by or on behalf of PSC and the
Consenting Lenders, and supersedes all prior agreements, understandings,
negotiations and discussions with respect to the subject matter hereof. There
are no promises, undertakings, representations or warranties by any of the
Parties not expressly set forth or referred to herein or therein.
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24. COUNTERPARTS
This Agreement (and any modifications, amendments, supplements or waivers
in respect hereof) may be executed in counterparts by manual or facsimile
signature of each undersigned Party, and all such counterparts shall be deemed
to constitute one and the same instrument.
25. NOTICE PROVISIONS
All notices, requests, claims, demands and other communications hereunder
shall be in writing and shall be given (and shall be deemed to have been duly
given upon receipt) by hand delivery, by confirmed facsimile, or by registered
or certified mail (postage prepaid, return receipt requested) to the respective
Parties as follows:
IF TO EACH CONSENTING LENDER:
To the address set forth
For each Consenting Lender on
Schedule B annexed hereto
with copies to:
Canadian Imperial Bank of Commerce
as Administrative Agent
Risk Management Division
6th Floor
Commerce Court West
Toronto, Ontario
M5L 1A2
Attention: Vice-President
Facsimile: (416) 861-3602
Blake, Cassels & Graydon White & Case LLP
Box 25, Commerce Court West 1155 Avenue of the Americas
Suite 2300 New York, New York
Toronto, Ontario 10036-2767 USA
M5L 1A9
Attention.: Susan M. Grundy Attn: Howard S. Beltzer
Facsimile: (416) 863-2653 Facsimile: (212) 354-8113
<PAGE> 12
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IF TO PSC:
Philip Services Corp.
100 King Street West
P.O. Box 2440
LCD #1
Hamilton, Ontario
L8N 4J6
Attn.: Colin Soule
Facsimile: (905) 521-9160
with copies to:
Stikeman Elliott Skadden, Arps, Slate, Meagher
Box 85, Commerce Court West & Flom
Suite 5300 333 West Wacker Drive
Toronto, Ontario Chicago, Illinois
M5L 1B9 60606 U.S.A.
Attn.: Sean Dunphy Attn: David Kurtz
Facsimile: (416) 947-0866 Facsimile: (312) 407-0411
26. FURTHER ASSURANCES
From and after the date hereof, each of the Parties covenants and agrees
to execute and deliver all such agreements, instruments and documents and to
take all such further actions as the Parties may reasonably deem necessary from
time to time (at the requesting Party's expense) to carry out the intent and
purposes of this Agreement and to consummate the transactions contemplated
hereby.
27. CONFIRMATION
Please confirm your agreement with the foregoing by signing and returning
the enclosed copy of this Agreement to the undersigned.
Very truly yours,
PHILIP SERVICES CORP.
By:_______________________________________
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Accepted and Agreed as
of the date first written above
CANADIAN IMPERIAL BANK OF
COMMERCE (in its capacity
as a Lender) CIBC INC.
by:______________________________ by:______________________________
name: name:
title: title:
by:______________________________ by:______________________________
name: name:
title: title:
BANKERS TRUST COMPANY BT BANK OF CANADA
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
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ABN AMRO BANK CANADA ACCORD FINANCIAL
CORPORATION
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
BANCO CENTRAL
AMERICAN REAL ESTATE HISPANOAMERICANO, S.A.
HOLDINGS L.P. MIAMI AGENCY
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
BANQUE NATIONALE DE PARIS BANQUE NATIONALE DE
PARIS (CANADA)
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
<PAGE> 15
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BEAR, STEARNS & CO. INC. CHASE BANK OF TEXAS, N.A.
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
THE CHASE MANHATTAN BANK THE CHASE MANHATTAN BANK OF
CANADA
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
CITIBANK, N.A. COMERICA BANK
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
<PAGE> 16
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CREDIT SUISSE FIRST BOSTON CREDIT SUISSE FIRST
BOSTON CANADA
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
DAI-ICHI KANGYO BANK THE DAI-ICHI KANGYO
(CANADA) BANK, LTD.
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
DEUTSCHE BANK AG, NEW YORK
AND OR CAYMAN ISLAND
BRANCHES DEUTSCHE BANK CANADA
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
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DRESDNER BANK AG NEW
YORK BRANCH AND
DRESDNER BANK AG
GRAND CAYMAN BRANCH DRESDNER BANK CANADA
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
EATON VANCE - SENIOR DEBT PORTFOLIO FERNWOOD ASSOCIATES L.P.
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
FOOTHILL CAPITAL
CORPORATION FUJI BANK CANADA
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
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THE FUJI BANK, LIMITED, NEW YORK GOLDMAN SACHS CANADA
BRANCH CREDIT PARTNERS CO.
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
GOLDMAN SACHS CREDIT HIGH RIVER LIMITED
PARTNERS L.P. PARTNERSHIP
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
KEYBANK NATIONAL
ASSOCIATION MADELEINE CORP.
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
<PAGE> 19
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MADELEINE LLC MELLON BANK CANADA
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
MELLON BANK, N.A. THE MUTUAL LIFE
ASSURANCE COMPANY OF
CANADA
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
MUTUAL SHARES FUND, a
series of FRANKLIN
MUTUAL SERIES FUND
INC. NATIONSBANK, N.A.
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
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PARIBAS PNC BANK, NATIONAL
ASSOCIATION
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
THE ROYAL BANK OF
SCOTLAND PLC SAKURA BANK (CANADA)
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
THE SAKURA BANK, LIMITED SOCIETE GENERALE
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
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SOCIETE GENERALE (CANADA) SUMMIT BANK
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
THE TORONTO-DOMINION BANK TORONTO DOMINION (NEW
YORK), INC.
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
TRANS CANADA CREDIT
CORPORATION INCORPORATED TRI-LINKS INVESTMENT TRUST
by:_____________________________ by:______________________________
name: name:
title: title:
by:_____________________________ by:______________________________
name: name:
title: title:
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WACHOVIA BANK, N.A.
by:_____________________________
name:
title:
by:_____________________________
name:
title:
<PAGE> 23
SCHEDULE A
PHILIP SERVICES CORP.
RESTRUCTURING TERMS
This term sheet sets forth the principal terms and conditions for the
restructuring of Philip Services Corp. ("PSC") and its Affiliates under a
prearranged plan of reorganization (the "Plan") under Chapter 11 of the United
States Bankruptcy Code and under the Companies Creditors Arrangement Act
(Canada).
This term sheet pertains only to the terms of a restructuring in the context of
the prepackaged reorganization plan described in this term sheet and is not an
agreement or commitment to a restructuring on any other terms or in any other
context.
Capitalized terms used in this term sheet and not otherwise defined have the
meanings set forth in the Credit Agreement dated as of August 11, 1997 among
PSC and Philip Services (Delaware) Inc., as borrowers, Canadian Imperial Bank
of Commerce ("CIBC") as Administrative Agent, Bankers Trust Company ("BTCo") as
Syndication Agent, CIBC and BTCo as Co-Arrangers, Dresdner Bank Canada and
Dresdner Bank AG New York Branch as Documentation Agents, and the various
lenders from time to time parties thereto, including all amendments and
modifications thereto (the "Existing Credit Agreement"). All amounts shown are
in US Dollars.
1. EXISTING SENIOR SECURED LENDERS:
The obligations of the Borrowers to the Lenders under the Existing Credit
Agreement (the "Existing Syndicate Debt") will be restructured as of Plan
Implementation as follows:
(A) SENIOR SECURED DEBT: Subject to (vi)(C), $400 million of the Existing
Syndicate Debt will be restructured as senior
secured debt (the "Senior Secured Debt"), in two
tranches. One tranche will be $300 million of
senior secured term debt (the "Senior Secured
Term Debt") and the other tranche will be $100
million of secured convertible payment in kind
notes ("Secured PIK Notes"). PSC shall have the
right to prepay the Senior Secured Term Debt at
any time provided that at the time of such
prepayment PSC also pays all accrued and unpaid
interest, fees and other amounts payable with
respect to the amount prepaid, and any call
premium payable under (iv) (C) below.
<PAGE> 24
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(I) BORROWERS: PSC and Philip Services (Delaware) Inc. (the "US
Borrower").
(II) SENIOR SECURED
TERM DEBT: The terms of the Senior Secured Term Debt
will be set forth in a restatement of the
Existing Credit Agreement (the "Senior Term
Credit Agreement") in form and substance
satisfactory to the Lenders and PSC.
(A) AMOUNT: $300 million.
(B) INTEREST: 9% per annum.
Interest on the Senior Secured Term Debt
will be payable in cash, quarterly in
arrears on the last business day of each
calendar quarter; provided, however, that
during the first 12 months subsequent to
the effective date of the Plan (such
effective date being "Plan
Implementation"), the Borrowers shall pay
interest on the Senior Secured Term Debt to
the extent of the lesser of 9% per annum
and $20,000,000, and accrue the balance
thereof (subject to their mandatory
prepayment obligations described below).
Interest will also be payable at the time
of repayment of any Senior Secured Term
Debt and at maturity of such Senior Secured
Term Debt. All interest calculations shall
be based on a 360-day year and actual days
elapsed.
The Senior Term Credit Agreement shall
include protective provisions for such
matters as default interest, capital
adequacy, increased costs, funding losses,
illegality and withholding taxes.
(C) MATURITY: 5 years from Plan Implementation.
(D) COVENANTS: As in the Existing Credit Agreement on
the date hereof, with revisions as approved by
the Lenders and PSC. Financial covenants will
be as set out in Exhibit 1 hereto.
(III) SECURED PIK NOTES: The Secured PIK Notes will be issued to
the Lenders pro rata in exchange for an equal
amount of the Existing Syndicate Debt.
<PAGE> 25
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(A) AMOUNT: $100 million.
(B) INTEREST: 10% per annum. Subject to (iv)(A) below, interest
will accrue and be paid quarterly in arrears by
the issuance of additional Secured PIK Notes.
All interest calculations shall be based on a
360-day year and actual days elapsed.
(C) CONVERTIBILITY: The Secured PIK Notes exchanged for the
Existing Syndicate Debt will be convertible until
maturity at the option of the holders into 25%
of the common shares of the restructured PSC, in
the aggregate, on a fully diluted basis as of
Plan Implementation. The Secured PIK Notes will
contain the usual anti-dilution provisions
applicable in a public offering of
convertible debt, including giving effect to the
issuance of any common shares under the
shareholder rights plan referred to below. Any
Secured PIK Notes issued in respect of interest
on Secured PIK Notes will not be convertible.
(D) MATURITY: 5 years from Plan Implementation.
(E) REDEMPTION: The Secured PIK Notes will be redeemable by PSC
in the following circumstances:
(i) If (a) an offer is made to the common
shareholders of PSC to acquire all of the
common shares of PSC, or, in the case of an
offer by an existing beneficial owner or
owners of PSC common shares, to acquire all
of the common shares of PSC not already owned
by such owner(s) together with persons acting
in concert (the shares already owned being
the "Offeror's Existing Holdings"), (b) under
the offer the Offeror acquires (1) common
shares which together with the Offeror's
Existing Holdings amount to 67% or more of
the common shares of PSC, or (2) a majority
of the common shares of PSC other than the
Offeror's Existing Holdings, whichever is
greater, and (c) the person or persons making
the offer (the "Offeror") notifies PSC that
it requires PSC to exercise such redemption
right, then, subject to the following
sentence, PSC will have the right to redeem
the Secured PIK Notes for a price (the
"Redemption Price") equal to 115% of the face
amount of such Secured PIK Notes plus all
accrued interest on the Secured PIK Notes.
<PAGE> 26
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If the Offeror has notified PSC that it
requires PSC to exercise the redemption
right and the amount the holders of the
Secured PIK Notes would have received by
converting the convertible Secured PIK
Notes to common shares of PSC and tendering
them to the Offeror under its offer (the
"Tender Price") would be greater than the
Redemption Price of such Notes, any Secured
PIK Note which has not been converted by
the close of business on the day prior to
the redemption date set out in the
redemption notice issued by PSC will be
deemed to have been converted and tendered
to the Offeror's offer, and the holders of
the convertible Secured PIK Notes will be
entitled to receive the Tender Price.
(ii) The Secured PIK Notes may not be redeemed
prior to the end of the first full year
after Plan Implementation except as provided
in (i) above. Commencing in the second year
after Plan Implementation, PSC may redeem
the Secured PIK Notes upon payment of the
following percentage of the face amount of
the Secured PIK Notes during the periods
following Plan Implementation indicated
below, plus all accrued interest on the
Secured PIK Notes:
Year 1 Not redeemable
Year 2 125%
Year 3 125%
Year 4 116 2/3%
Year 5 108 1/3%
Maturity 100%
(F) COVENANTS: To be the same as for the Senior Secured Term Debt.
(IV) MANDATORY PREPAYMENTS:
(A) 75% of Cash Flow Available for Debt Service will
be swept on an annual basis for the first two
years and will be swept each quarter thereafter
based on cumulative quarterly Cash Flow Available
for Debt Service in each subsequent annual
period. The first annual period for the cash
sweep will be the period
<PAGE> 27
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from Plan Implementation until the end of
the fourth full Financial Quarter after
Plan Implementation, the second annual
period for the cash sweep will be the next
four Financial Quarters, and so on.
The cash sweep will be applied in the
following manner: (i) first, to pay any
interest accrued during the first 12 months
subsequent to Plan Implementation with
respect to the Senior Secured Term Debt,
together with accrued interest on any such
deferred interest at the rate of 9% per
annum; (ii) second, (a) to pay accrued but
unpaid interest with respect to the Secured
PIK Notes and (b) to repay Secured PIK
Notes previously issued in respect of
interest on the Secured PIK Notes; and
(iii) third, to repay the Senior Secured
Term Debt.
"Cash Flow Available for Debt Service" will
be defined as PSC's consolidated EBITDA for
the applicable period (excluding asset sale
proceeds and excluding PUMC EBITDA but
including any dividends which are paid or
payable by PUMC) less permitted capital
expenditures and mandatory cash payments of
principal and interest on other permitted
fixed obligations as such amounts become
due and owing pursuant to applicable
agreements, cash taxes and interest on the
Senior Secured Term Debt and on the
exit/working capital financing. "Permitted
capital expenditures" will be defined to
mean capital expenditures paid in cash
during the period plus amounts deposited to
a reserve account to pay known future
capital expenditures, in each case to the
extent of the capital expenditures forecast
for such period in the most recent budget
approved by the Required Lenders.
(B) Subject to (vi)(C) below, the Senior Secured Term
Debt will be repaid from 75% of Net Asset Sale
Proceeds (as defined below), subject to the
following: (i) this repayment formula will apply
to the extent such Net Asset Sale Proceeds
on a cumulative basis, plus the $68,500,000
currently being held by CIBC representing
proceeds of the sale of PSC's Aluminum division
less required
<PAGE> 28
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post-closing adjustments to a maximum of
$4,000,000, exceed $93,000,000; and (ii) if
PSC sells its US Ferrous division the Net
Asset Sale Proceeds of such sale will not
be part of the $93,000,000 referred to in
(i), and the Senior Secured Term Debt will
be repaid to the extent of 66-2/3% of the
first $200,000,000 of Net Asset Sale
Proceeds of such division and then to the
extent of 75% of the balance of the
proceeds, if any.
"Net Asset Sale Proceeds" will be defined
to mean the cash proceeds of asset sales of
PSC and its Affiliates approved by the
Lenders after the date hereof, net only of
reasonable costs and expenses and of
payment of indebtedness secured by such
assets senior to the security for the
Existing Syndicate Debt or the Senior
Secured Term Debt, as the case may be, on
such assets.
(C) At the time of any optional prepayment of any
Senior Secured Term Debt, PSC shall also pay the
Call Premium, if any, on the amount prepaid. The
"Call Premium" on any such repayment under the
Senior Secured Term Debt shall be with
respect to any repayment made during the periods
following Plan Implementation indicated below,
the corresponding percentage of the amount repaid:
0-12 months 5%
13-24 months 4%
25-36 months 3%
37-48 months 2%
49-60 months 1%
(V) SECURITY: The Senior Secured Term Debt and the Secured PIK
Notes will be secured by guarantees and charges
over substantially all of the assets of PSC and
its Affiliates, ranking in priority to
all claims other than the exit/working capital
financing, and existing senior liens as may be
applicable to particular assets (including without
limitation the liens for any Permitted LC
Facility and for the Bank Account Service
Liabilities). The guarantees and security for
the Existing Syndicate Debt will be
retained, with any appropriate modifications so
that they secure the Senior Secured Term Debt and
the Secured PIK
<PAGE> 29
- 7 -
Notes. The Senior Secured Term Debt and
the Secured PIK Notes shall rank pari passu
under such security.
(VI) OTHER TERMS:
(A) Events of default, remedies and other terms
acceptable to the holders of Senior Secured Debt
and PSC.
(B) The $26,600,000 of cash collateral held as part
of the Permitted LC Facility Cash Collateral
Security and as security for the benefit of the
Bank Account Service Providers (the "Cash
Collateral") will be released to PSC as such Cash
Collateral is released by the issuer of letters
of credit under the Permitted LC Facility and
the Bank Account Service Providers following
Plan Implementation.
(C) PSC has advised the Lenders that it intends to
sell its interest in Philip Utilities Management
Corporation ("PUMC"). PSC will actively market
its interest in PUMC and diligently proceed with
such sale.
If PSC sells its interest in PUMC prior to
Plan Implementation pursuant to a sale
approved by the Lenders, $70,000,000 of the
Existing Syndicate Debt will be repaid on
closing of the sale and the Senior Secured
Term Debt to be retained by the Lenders on
Plan Implementation will be reduced to
$250,000,000.
If PSC has not sold its interest in PUMC
prior to Plan Implementation, an additional
$20,000,000 of the Existing Syndicate Debt
will be restructured as senior debt which
will be represented by a non-interest
bearing secured promissory note (the "PUMC
Note") under which the recourse of the
Lenders will be limited to security over
PSC's rights in PUMC. The PUMC Note will
mature on the earlier of the closing of the
sale of PUMC and the maturity of the Senior
Secured Term Debt and will include
covenants relating to the disposition of
PUMC. On closing of a sale of PSC's
interest in PUMC approved by the Lenders,
PSC will repay
<PAGE> 30
- 8 -
the PUMC Note and $50,000,000 of the Senior
Secured Term Debt.
If the Net Asset Sale Proceeds of PUMC
(whether before or after Plan
Implementation) exceed $70,000,000, the
excess will be applied as provided in the
asset sale proceeds formula in (iv)(B)
above.
(D) The treatment in the Plan of undrawn letters of
credit issued under the Existing Credit Agreement
(which for greater certainty does not include
letters of credit issued under the Permitted LC
Facilities) will be as set out in Exhibit 2
hereto.
(b) EQUITY: The balance of the Existing Syndicate Debt will
be exchanged for a number of common shares to
be issued to the Lenders pro rata by PSC
representing 90% of the common shares of
the restructured PSC, subject to dilution, inter
alia, upon the conversion of the Secured PIK
Notes.
All common shares issued will be freely
tradeable. PSC will use its best efforts
to retain the listing of its common shares
on the Toronto, Montreal and New York stock
exchanges.
There will be a shareholder rights plan for
the restructured PSC which will give the
shareholders (other than the Acquiror, as
defined below) rights ("Rights") attached
to the common shares, but redeemable at the
option of PSC's board of directors, to
subscribe at 50% of the then current
trading price for one additional common
share of PSC for each common share held,
but only where a person (together with
those acting in concert with such person)
(collectively, the "Acquiror") acquires
issued common shares which would bring the
Acquiror's beneficial ownership to 20% or
more of the common shares of PSC (a)
through purchases from non-residents of
Canada or from persons whose PSC shares are
registered on PSC's books with a
non-Canadian address, or (b) through
purchases under the exemptions from the
takeover bid requirements of the Securities
Act (Ontario) applicable to purchases (i)
from 5 or fewer persons, or (ii) in
transactions in any twelve months which
<PAGE> 31
- 9 -
aggregate less than 5% of the issuer's
outstanding shares. These Rights will not
be triggered if the acquisition is made
through a takeover bid made to all common
shareholders which must remain open for at
least 45 days and which complies with
Canadian takeover bid regulations and
policies. Holdings of common shares as of
Plan Implementation will be grandfathered.
For greater certainty, the Rights will not
be triggered by acquisitions of authorized
but unissued shares or treasury shares.
Apart from the Rights, there will be no
other provisions of any charter, by-laws or
other agreement by which PSC is bound
(other than existing agreements) which
would provide for or could permit
shareholder rights or rights to the other
party to such agreement as a result of the
ownership or proposed ownership of PSC
common shares by any person or group of
persons or the change of ownership or
proposed change of ownership of PSC common
shares or control of PSC.
The Articles of the restructured PSC will
not limit the number of common shares of
PSC that may be issued from time to time
and will provide that PSC could adopt no
rights plan or other poison pill device
other than as provided herein.
2. EXISTING UNSECURED CLAIMANTS AND SENIOR SECURED CREDITORS:
Senior secured creditors shall be paid in full or have their claims and
liens preserved or reinstated. Furthermore, trade creditors who agree to
conduct ongoing business relationships with PSC upon customary trade
terms shall be paid in full in the ordinary course of business in
accordance with the terms of their respective obligations. Certain other
unsecured creditors identified by PSC (as may be agreed by the Lenders in
their sole discretion) shall have their claims exchanged for a pro rata
share of up to $50 million in unsecured payment in kind notes (the
"Unsecured PIK Notes").
UNSECURED PIK NOTES:
ISSUER: PSC
INTEREST: 6% per annum. Interest on the Unsecured PIK
Notes will accrue and be payable in kind by the
issuance of additional Unsecured PIK Notes.
Provided the Senior Secured Debt is not in
default,
<PAGE> 32
- 10 -
cash interest will be payable on the
Unsecured PIK Notes following repayment in
full of the Secured PIK Notes.
MATURITY: 10 years from Plan Implementation.
AMORTIZATION: Commencing 5 years from Plan Implementation
provided the Senior Secured Debt is not in
default, in equal instalments at the end of
years 6 to 10 after Plan Implementation.
SECURITY: None.
3. CLASS ACTION CLAIMS:
All class action claims against PSC and any of its Affiliates will be
settled in exchange for common shares of the restructured PSC. Any
equity issued to such claimants together with the equity to be retained
by PSC's existing shareholders shall equal 10% of the common shares of
the reorganized PSC, subject to dilution, inter alia, upon any conversion
of Secured PIK Notes.
4. EXISTING EQUITY HOLDERS OF PSC:
The existing shareholders of PSC will retain 10% of the common shares of
the restructured PSC inclusive of any common shares issued to class
action claimants, subject to dilution, inter alia, upon any conversion of
the Secured PIK Notes.
5. EXIT/WORKING CAPITAL FINANCING:
BORROWER: PSC and Philip Services (Delaware) Inc. (others
to be determined).
AMOUNT: $100 million.
If the resolution of the letter of credit
issue described in item (vi)(D) under
"Senior Secured Debt" above results in
undrawn letters of credit being transferred
to the exit facility, the exit lenders will
give consideration, in their sole
discretion, to increasing the facility to
as much as $125 million to provide for such
letters of credit.
PURPOSE: To fund repayment of debtor-in-possession
financing provided to the Borrowers in the Cases
<PAGE> 33
- 11 -
(as defined below), short-term working
capital needs and letters of credit within
a sub-limit of the credit.
SECURITY: Secured by guarantees and charges over the
accounts receivable and inventory and, if
required, substantially all of the other assets,
of PSC and its subsidiaries, senior to
all other security including the security for
the Senior Secured Debt, other than existing
senior liens applicable to particular assets as
provided in 1(a)(v) above.
INTEREST RATE: To be discussed (intended to be a market rate at
the relevant time).
FEES: To be discussed.
MATURITY: Two years from Plan Implementation. The exit
facility may be refinanced in whole but not in
part by a replacement facility with the same
priority as, and in an amount equal to,
the exit facility, and having terms substantially
the same as the exit facility to the extent
commercially available.
OTHER TERMS: To be negotiated.
6. PLAN TIMETABLE:
PSC and its Affiliates will use their best efforts to achieve the
following Plan Timetable:
Execution by April 23, 1999 of a definitive
agreement (the "Lock-Up Agreement") between
the Borrowers, the other Restricted Parties
and the Required Lenders consistent with
this term sheet pursuant to which the
Required Lenders (including a majority in
number of the Lenders) agree to vote for
the Plan.
PSC and its Affiliates in the United States
and Canada will commence, in a venue
mutually agreeable to PSC and the Required
Lenders, voluntary insolvency proceedings
in the United States and Canada (the
"Cases"), including the filing of the Plan
and accompanying disclosure
<PAGE> 34
- 12 -
statement and information circular (the
"Disclosure Statement"), not later than
June 1, 1999.
The Disclosure Statement shall be approved
by the US and Canadian courts presiding
over the Cases (the "Bankruptcy Courts")
not later than July 15, 1999.
The Bankruptcy Courts shall confirm the
Plan not later than August 16, 1999.
Plan Implementation shall occur not later
than September 15, 1999 (the "Plan
Implementation Date").
7. CONDITIONS: [NOTE: TO BE DELETED UPON EXECUTION OF LOCK-UP AGREEMENT
AND DIP TERM SHEET]
(a) Execution of the Lock-Up Agreement.
(b) PSC and Philip Services (Delaware) Inc. shall
have entered into a term sheet, with BTCo as DIP
Agent and BTCo and/or its affiliates and CIBC as
co-arrangers, on or before the date of the
Lock-Up Agreement in form and substance
satisfactory to PSC and the Required DIP Lenders
(as defined in the DIP term sheet) and the
Required Lenders for the provision of up to
$100,000,000 of debtor-in-possession financing in
the Cases or such greater or lesser amount as may
be agreed to by PSC, the Required DIP Lenders and
the Required Lenders.
8. OTHER PLAN TERMS: (a) The Plan will include an employee and management
incentive plan acceptable to PSC and the Lenders
which may include the granting of options, such
incentive plan to be consistent with customary
practices involving restructured companies.
(b) Notwithstanding anything in this term sheet
to the contrary, PSC and its Affiliates may
at all times (both before and after the
execution of the Lock-Up Agreement and the
filing of the Plan) respond to unsolicited
offers (but for greater certainty may not,
directly or indirectly, seek, solicit,
encourage or initiate any discussions
respecting any offers)
<PAGE> 35
- 13 -
relative to potential transactions which (i)
restructure substantially all of the equity and
debt of PSC and its Affiliates, and (ii) are
demonstrably more favourable to the Lenders and
the other stakeholders in PSC than the
transactions set forth in this term sheet or in
the Plan.
(c) The board of directors of the reorganized PSC
will consist of 9 directors, who will be
nominated by the new 90% shareholders, i.e., the
Lenders. The Lenders agree that their nominees
will include two members of the existing PSC
board and will include two members nominated by
High River Limited Partnership ("High River")
provided that High River and Lenders acting in
concert with it beneficially own at least 25% of
the Existing Syndicate Debt. If one or both of
the nominees from the existing board is a nominee
on that board of High River or persons acting in
concert with it, that person will be counted as a
High River nominee on the slate for the new
board.
(d) It shall be a condition to confirmation of the
Plan that (i) the Lock-Up Agreement shall not
have been terminated, and (ii) each of the
conditions set out in Section 7 of the Lock-Up
Agreement shall have been satisfied.
9. PUBLIC ANNOUNCEMENTS: The parties hereto agree that all public
announcements of the entry into or the terms
and conditions of this term sheet shall be
mutually acceptable to the Administrative Agent
and PSC.
DATED this 5th day of April, 1999.
<PAGE> 36
EXHIBIT 1
(Financial Covenants)
1. the ratio of (x) current assets to (y) current liabilities, at all times
from and after the first day of the first Financial Quarter commencing
after Plan Implementation, must be equal to or greater than 1.5 to 1.0.*
2. aggregate EBITDA for the third and fourth Financial Quarters commencing
after Plan Implementation must not be less than 80% of budgeted EBITDA as
approved by the Lenders.
3. the ratio of (x) Non PIK Debt to (y) EBITDA, at all times from and after
December 31, 2000 [INTENDED TO BE END OF FIRST FULL FINANCIAL YEAR AFTER
PLAN IMPLEMENTATION], must be equal to or less than 3.75 to 1.0.
4. the ratio of (x) Total Debt to (y) EBITDA, at December 31, 2000 [INTENDED
TO BE END OF FIRST FULL FINANCIAL YEAR AFTER PLAN IMPLEMENTATION], and
from that date until March 31, 2001, must be equal to or less than 5.5 to
1.0, and at all times thereafter must be equal to or less than 5.0 to 1.0.
5. the ratio of (x) EBITDA to (y) Cash Interest Expense, at all times from
and after December 31, 2000 [INTENDED TO BE END OF FIRST FULL FINANCIAL
YEAR AFTER PLAN IMPLEMENTATION], must be greater than 3.5 to 1.0.
6. the ratio of (x) EBITDA to (y) Total Interest Expense, at all times from
and after December 31, 2000 [INTENDED TO BE END OF FIRST FULL FINANCIAL
YEAR AFTER PLAN IMPLEMENTATION], must be greater than 2.25 to 1.0.
For the purpose of these financial covenants:
(a) EBITDA, Total Interest Expense and Cash Interest Expense are intended to
be calculated on a rolling 4 quarter basis. The calculations of these
items will exclude the periods prior to the commencement of the third full
Financial Quarter following Plan Implementation with EBITDA under
covenants 3 and 4 being annualized until there are four full Financial
Quarters of EBITDA for such calculations.
(b) EBITDA will exclude any net extraordinary, unusual or non recurring gains
or net non cash extraordinary, unusual or non recurring losses, and will
be adjusted as provided in the definition of EBITDA in the Existing Credit
Agreement on any Sale approved by the Lenders.
(c) Total Interest Expense will be the existing definition of "Interest
Expense".
<PAGE> 37
- 2 -
(d) Cash Interest Expense will be Total Interest Expense excluding any
accrued non-cash interest on the Senior Secured Term Debt and any interest
on the Secured PIK Notes or on the Unsecured PIK Notes.
(e) Total Debt will be the existing definition of Debt (which, for greater
certainty, includes contingent liabilities under letters of credit but
excludes contingent liabilities incurred in support of bonds or similar
arrangements delivered in support of goods or services provided by PSC in
the ordinary course of its business until such bonds or similar
arrangements are called upon or are required to be accrued as a charge
against income on PSC's financial statements).
(f) Non PIK Debt will be Total Debt other than Debt owing under the Secured
PIK Notes and the Unsecured PIK Notes.
* If PSC (with the Lenders' approval) makes a significant asset disposition
in any Financial Year after Plan Implementation which could affect its
compliance with the working capital ratio requirements in covenant 1
above, the Lenders in their sole discretion will consider such covenant.
<PAGE> 38
EXHIBIT 2
TREATMENT OF LCS OUTSTANDING UNDER THE EXISTING CREDIT AGREEMENT
1. For the purposes of the Plan, the aggregate claim of the LC Issuers and the
LC Lenders against PSC and the US Borrower with respect to letters of credit
issued under the Existing Credit Agreement ("Existing LCs") will be deemed to
be the greater of:
(a) $20 million; and
(b) the amount actually drawn under the Existing LCs on or before
Plan Implementation.
Letters of credit issued under a Permitted LC Facility are outside the Existing
Credit Agreement and the claims of the issuer(s) of such letters of credit will
not be compromised.
2. For greater certainty, references in this Exhibit to the claims of the LC
Lenders with respect to the Existing LCs are to the reimbursement claims the LC
Lenders would have against PSC or the US Borrower, as applicable, under section
2.06(3) of the Existing Credit Agreement for drawings under an Existing LC,
following the purchase of such claims by the LC Lenders from the LC Issuers
under section 2.06(4) of the Existing Credit Agreement. Each LC Lender's share
of the $20 million referred to in paragraph 1 and of any Unfunded LC Claim (as
defined below) will be its pro rata share of such Claim based on its respective
Cdn. LC Commitment or US LC Commitment as a proportion of the aggregate Cdn. LC
Commitment or US LC Commitment, as the case may be.
3. If the amount drawn under the Existing LCs on or before Plan Implementation
is less than $20 million (such difference being the "Unfunded LC Claim"), this
amount will be funded by the LC Lenders. Each LC Lender will fund its share of
the Unfunded LC Claim either in cash or, to the extent an LC Lender does not
fund its share of the Unfunded LC Claim in cash, by receiving adjusted
distributions under the Plan, as provided in paragraph 5. Subject to paragraph
6, if the distributions an LC Lender would otherwise be entitled to are
insufficient to cover the adjustments provided for in paragraph 5, the LC
Lender will fund its share of the Unfunded LC Claim in cash.
4. Any amount drawn under the Existing LCs on or before Plan Implementation and
any cash paid by an LC Lender on account of its share of the Unfunded LC Claim
will be included in calculating the Existing Syndicate Debt and the pro rata
shares of each Lender in distributions under the Plan will be calculated
accordingly.
5. To the extent an LC Lender has not funded its share of the Unfunded LC Claim
in cash, its percentage share of the distributions under the Plan will be
reduced (or increased, if the difference is a negative number) by a percentage
equal to the difference between:
<PAGE> 39
2
(a) the percentage share of the distributions to Lenders it would
have received if $20 million had been drawn under the Existing LCs
on or before Plan Implementation; and
(b) the percentage share of the distributions to Lenders it would
have received based on the Existing Syndicate Debt (including the
amounts referred to in paragraph 4) outstanding on Plan
Implementation.
There will be an increase in the percentage distributions to other Lenders
corresponding to the decrease in distributions to the LC Lenders.
6. If the distribution entitlement of an LC Lender together with that of any
Lender which is Affiliated with such LC Lender ("Affiliated Lender") would be
sufficient on an aggregate basis to cover the adjustments provided for in
paragraph 5, the LC Lender and its Affiliated Lender may elect to have the
adjustments under paragraph 5 apply to the aggregate distributions to them, and
all references in paragraph 5 to the LC Lender will be deemed to be references
to the LC Lender and its Affiliated Lender.
7. Any cash contribution by the LC Lenders on the Unfunded LC Claim will be
distributed to all of the Lenders on Plan Implementation pro rata, after giving
effect to the applicable adjustments described in paragraphs 4 and 5.
8. The arrangements described in this Exhibit will be the only effect of the
Plan on the respective rights and obligations of the LC Lenders, the LC
Issuers, PSC and the US Borrower in connection with the Existing LCs. The
obligations supported by the Existing LCs will not be impaired or compromised
in the Plan without the consent of the LC Lenders and the LC Issuers. To the
extent the Existing LCs are undrawn on Plan Implementation, they will be
transferred to the exit facility and will be deemed to be outstanding under
that facility on Plan Implementation. The obligations of PSC and the US
Borrower to reimburse the LC Issuers and the LC Lenders under section 2.06(3)
of the Credit Agreement with respect to drawings made under Existing LCs
following Plan Implementation will be unimpaired and will be included in the
exit facility. On Plan Implementation, any cash collateral held under section
5.06 of the Credit Agreement prior to the date of the Lockup Agreement for the
benefit of the LC Lenders in respect of the Existing LCs will be paid to the LC
Lenders, and any cash paid into such cash collateral account after the date of
the Lockup Agreement will be distributed to the Lenders.
9. These arrangements will not in any way limit or discharge any of the present
or future liabilities of the LC Lenders to the LC Issuers. The Plan and the
exit facility will include acknowledgements to this effect.
<PAGE> 40
SCHEDULE B
All amounts stated in United States dollars. For the purposes of this
schedule, outstanding letters of credit and operating lines denominated in
other currencies have been converted to U.S. Dollars at the prevailing rate of
exchange.
The Debt of each LC Lender includes its non-LC Debt together with its rateable
share of the face value of outstanding letters of credit, less its rateable
share of all cash collateral held for application against outstanding letters
of credit. Such amounts are shown in italics.
<TABLE>
<CAPTION>
CONSENTING LENDER ADDRESS CONSENTING LENDER'S DEBT
- ------------------------------------ -------------------------- -----------------------------
<S> <C> <C>
ABN Amro Bank Canada 15th Floor
Aetna Tower
P.O. Box 114
Toronto-Dominion Centre
Toronto, Ontario
M5K 1G8
Attention: Yvon Jeghers
Facsimile: (416) 367-7937 $18,458,771.00
- ------------------------------------ ------------------------- -----------------------------
Accord Financial Corporation 335 Madison Avenue
26th Floor
New York, New York 10017
Attention: Ruth Steinberg
Facsimile: (212) 850-7598 $19,765,804.18
- ------------------------------------ -------------------------- -----------------------------
American Real Estate Holdings L.P. c/o Icahn Associates
Corp.
767 Fifth Avenue
New York, New York 10153
Attention: Martin Hirsch
Facsimile: (212) 750-5841 $82,196,647.08
- ------------------------------------ -------------------------- -----------------------------
Banco Central HispanoAmericano, S.A. 701 Brickell Ave.
Miami Agency Suite 2410
Miami, Florida 33131-2914
Attention: Pierre Dulin
Facsimile: (305) 358-6851 $ 6,794,153.00
- ------------------------------------ -------------------------- -----------------------------
Bankers Trust Company One Bankers Trust Plaza
28th Floor, Mail Stop 2282 $ 8,147,187.76
New York, New York 10006 $8,286,330.20 L/Cs
Attention: Calli Hayes -$139,142.44
Facsimile: (212) 250-6314 L/C cash collat.
- ------------------------------------ -------------------------- -----------------------------
Banque Nationale de Paris 121 King Street
Suite 2130
Toronto, Ontario
M5H 3T9
Attention: Don Lee
Facsimile: (416) 947-3541 $ 0.00
==================================== ========================== =============================
</TABLE>
<PAGE> 41
- 2 -
<TABLE>
<CAPTION>
CONSENTING LENDER ADDRESS CONSENTING LENDER'S DEBT
- ---------------------------------- ------------------------------ -----------------------------
<S> <C> <C>
Banque Nationale de Paris (Canada) 121 King Street
Suite 2130
Toronto, Ontario
M5H 3T9
Attention: Don Lee
Facsimile: (416) 947-3541 $11,134,779.00
- ---------------------------------- ------------------------------ -----------------------------
Bear, Stearns & Co. Inc. 245 Park Avenue $92,394,168.67
New York, New York 10167 $77,872,142.33 non-L/Cs
Attention: Al Mintz + $14,770,042 L/Cs
Facsimile: (212) 272-8102 -$248,015.66 L/C cash collat.
- ---------------------------------- ------------------------------ -----------------------------
BT Bank of Canada Royal Bank Plaza, North Tower
Suite 1700
200 Bay Street
Toronto, Ontario $34,828,810.50
M5J 2J2 $ 32,084,478.00 non-L/Cs
Attention: Philip Hampson + $2,791,201.81 L/Cs
Facsimile: (416) 865-0148 - $46,869.31 L/C cash collat.
- ---------------------------------- ------------------------------ -----------------------------
Canadian Imperial Bank of Commerce Commerce Court West
6th Floor
Toronto, Ontario $50,054,294.89
M5L 1A2 $46,394,914.00 non-L/Cs
Attention: Adam Becker + $3,721,877.94 L/Cs
Facsimile: (416) 861-3602 -$62,497.05 L/C cash collat.
- ---------------------------------- ------------------------------ -----------------------------
Chase Bank of Texas, N.A. 712 Main Street
5 TCBE 78
Houston, Texas 77002
Attention: Ed Stringer
Facsimile: (713) 216-5642 $21,082,701.00
- ---------------------------------- ------------------------------ -----------------------------
The Chase Manhattan Bank c/o Chase Securities Inc.
270 Park Avenue
4th Floor
New York, New York 10017
Attention: Howard Golden
Facsimile: (212) 270-7968 $ 4,602,489.51
================================== ============================== =============================
</TABLE>
<PAGE> 42
- 3 -
<TABLE>
<CAPTION>
CONSENTING LENDER ADDRESS CONSENTING LENDER'S DEBT
- ---------------------------------- -------------------------------- -----------------------------
<S> <C> <C>
The Chase Manhattan Bank of Canada 1 First Canadian Place
100 King Street West
Suite 6900
P.O. Box 106
Toronto, Ontario
M5X 1A4
Attention: Gene Gomes
Facsimile: (416) 216-4161 $13,844,078.00
- ---------------------------------- -------------------------------- -----------------------------
CIBC Inc. Cross Border
425 Lexington Avenue
7th Floor
New York, New York 10017 $10,862,645.45
Attention: Howard A. Palmer $11,048,164.06 L/Cs
Facsimile: (212) 856-3761 -$185,518.61 L/C cash collat.
- ---------------------------------- -------------------------------- -----------------------------
Citibank, N.A. 599 Lexington Avenue
21st Floor
New York, New York 10043
Attention: Harry Vlandis
Facsimile: (212) 793-9470 $ 9,216,531.50
- ---------------------------------- -------------------------------- -----------------------------
Comerica Bank International Finance Department
P.O. Box 7500
Detroit, Michigan 48275-3328
Attention: Darlene Persons
Facsimile: (313) 222-3377 $37,216,888.00
- ---------------------------------- -------------------------------- -----------------------------
Credit Suisse First Boston Eleven Madison Avenue
New York, New York 10010-3629
Attention: David W. Kratovil and
Jan Kofol
Facsimile: (212) 325-7398 and
(212) 325-0304 $ 0.00
- ---------------------------------- -------------------------------- -----------------------------
Credit Suisse First Boston Canada Credit Suisse Centre
525 University Avenue
Suite 1300
Toronto, Ontario
M5G 2K8
Attention: Peter Chauvin
Facsimile: (416) 351-3671 $14,846,373.00
- ---------------------------------- -------------------------------- -----------------------------
Dai-Ichi Kangyo Bank (Canada) Commerce Court West
Suite 5025
P.O. Box 295
Toronto, Ontario
M5L 1H9
Attention: Wayne Shiplo
Facsimile: (416) 365-7314 $ 6,152,924.00
================================== ================================ =============================
</TABLE>
<PAGE> 43
- 4 -
<TABLE>
<CAPTION>
CONSENTING LENDER ADDRESS CONSENTING LENDER'S DEBT
- ------------------------------------ ---------------------------------- -------------------------------
<S> <C> <C>
One World Trade Centre
48th Floor
New York, New York 10048
Attention: Bob Gallagher
The Dai-Ichi Kangyo Bank, Ltd. Facsimile: (212) 524-0579 $16,985,383.00
- ------------------------------------ ---------------------------------- -------------------------------
31 West 52nd Street
New York, New York 10019-6150
Deutsche Bank AG, New York and or Attention: Silvia Spear
Cayman Island Branches Facsimile: (212) 469-8213 $ 0.00
- ------------------------------------ ---------------------------------- -------------------------------
222 Bay Street Fax: (416)
682-8444
Suite 1200
P.O. Box 196
Toronto, Ontario
M5K 1H6
Attention: Tim Leonard
Deutsche Bank Canada Facsimile: (416) 682-8444 $25,981,152.00
- ------------------------------------ ---------------------------------- -------------------------------
75 Wall Street $27,848,028.45
Dresdner Bank AG New York Branch New York, New York 10005 $16,985,383.00Non-L/Cs
and Dresdner Bank AG Grand Cayman Attention: Robert von Finckenstein +$11,048,164.06L/Cs
Branch Facsimile: (212) 429-2781 -$185,518.61 L/C cash collat.
- ------------------------------------ ---------------------------------- -------------------------------
Suite 1700
2 First Canadian Place
P.O. Box 430
Toronto, Ontario $22,753,282.89
M5X 1E3 $19,093,902.00non-L/Cs
Attention: William J. Eeuwes +$3,721,877.94L/Cs
Dresdner Bank Canada Facsimile: (416) 369-8362 -$62,497.05 L/C cash collat.
- ------------------------------------ ---------------------------------- -------------------------------
24 Federal Street
Boston, Massachusetts 02110
Attention: Gretchen Bergstresser
Eaton Vance - Senior Debt Portfolio Facsimile: (617) 695-9594 $ 6,794,152.50
- ------------------------------------ ---------------------------------- -------------------------------
667 Madison Avenue
20th Floor
New York, New York 10021
Attention: Laura Zaki
Fernwood Associates L.P. Facsimile: (212) 832-4997 $22,673,049.15
- ------------------------------------ ---------------------------------- -------------------------------
11111 Santa Monica Blvd.
15th Floor
Santa Monica, California 90025
Attention: Shawn Dickson
Foothill Capital Corporation Facsimile: (310) 479-0461 $ 4,359,446.43
==================================== ================================== ===============================
</TABLE>
<PAGE> 44
- 5 -
<TABLE>
<CAPTION>
CONSENTING LENDER ADDRESS CONSENTING LENDER'S DEBT
- ----------------------------------- ---------------------------- -----------------------------
<S> <C> <C>
BCE Place
Canada Trust Tower
P.O. Box 609
Suite 2800
Toronto, Ontario
Attention: John Bailey
Fuji Bank Canada Facsimile: (416) 865-9618 $ 6,152,923.60
- ----------------------------------- ---------------------------- -----------------------------
1 Houston Centre
Suite 4100
1221 McKinney Street
Houston, Texas 77010
Attention: Charles van
The Fuji Bank, Limited, New York Ravenswaay
Branch Facsimile: (713) 759-0048 $ 0.00
- ----------------------------------- ---------------------------- -----------------------------
85 Broad Street
New York, New York 1004
Goldman Sachs Canada Credit Attention: Yoji Nimura
Partners Co. Facsimile: (212) 357-0271 $ 4,882,369.31
- ----------------------------------- ---------------------------- -----------------------------
85 Broad Street
New York, New York 1004
Attention: James Gillespie
Goldman Sachs Credit Partners L.P. Facsimile: (212) 902-3757 $ 3,367,452.56
- ----------------------------------- ---------------------------- -----------------------------
c/o Icahn Associates Corp.
767 Fifth Avenue
New York, New York 10153
Attention: Russell Glass
High River Limited Partnership Facsimile: (212) 750-5815 $159,619,758.52
- ----------------------------------- ---------------------------- -----------------------------
127 Public Square
Mail Code: OH-01-27-0504
Cleveland, Ohio 44114-1306
Attention: Terry A. Graffis
Keybank National Association Facsimile: (216) 689-8465 $ 13,588,307.00
- ----------------------------------- ---------------------------- -----------------------------
c/o Cerberus Partners, L.P.
450 Park Avenue
28th Floor
New York, New York 10167
Attention: Mike Hisler
Madeleine Corp. Facsimile: (212) 421-2947 $ 19,883,776.56
- ----------------------------------- ---------------------------- -----------------------------
c/o Cerberus Partners, L.P.
450 Park Avenue
28th Floor
New York, New York 10167
Attention: Mike Hisler
Madeleine LLC Facsimile: (212) 421-2947 $ 30,573,691.38
=================================== ============================ =============================
</TABLE>
<PAGE> 45
- 6 -
<TABLE>
<CAPTION>
CONSENTING LENDER ADDRESS CONSENTING LENDER'S DEBT
- ------------------------------ ----------------------------------- ---------------------------
<S> <C> <C>
Mellon Bank Canada One Mellon Bank Center
Suite 1525
Pittsburgh, Pennsylvania 15258
Attention: Gary A. Saul
Facsimile: (412) 236-1174 $14,846,373.00
- ------------------------------ ----------------------------------- ---------------------------
Mellon Bank, N.A. 1 Mellon Bank Centre
#1525
Pittsburgh, Pennsylvania 15258-0001
Attention: Gary Saul
Facsimile: (412) 234-0286 or
(412) 236-1174 $ 0.00
- ------------------------------ ----------------------------------- ---------------------------
The Mutual Life Assurance 227 King Street South
Company of Canada Waterloo, Ontario
N2J 4C5
Attention: Keith Cressman
Facsimile: (519) 888-3666 $15,382,309.00
- ------------------------------ ----------------------------------- ---------------------------
Mutual Shares Fund, a series 51 John F. Kennedy Parkway
of Franklin Mutual Series Short Hill, New Jersey 07078
Fund Inc. Attention: Bradley Takahashi
Facsimile: (973) 912-0646 $11,306,398.97
- ------------------------------ ----------------------------------- ---------------------------
Nationsbank, N.A. 100 North Tyron Street
NC1-007-12-04
Charlotte, North Carolina 28255
Attention: Peter Griffith
Facsimile: (704) 388-9215 $ 47,689.76
- ------------------------------ ----------------------------------- ---------------------------
Paribas 1200 Smith Fax:
Suite 3100
Houston, Texas 77002
Attention: Scott Clingan
Facsimile: (713) 659-5234 $13,588,307.00
- ------------------------------ ----------------------------------- ---------------------------
PNC Bank, National Association One PNC Plaza - 2nd Plaza
249 Firth Avenue & Wood Street
Pittsburgh, Pennsylvania 15265
Attention: Thomas McCool
Facsimile: (412) 762-4157 $33,970,767.00
- ------------------------------ ----------------------------------- ---------------------------
The Royal Bank of Scotland PLC Wall Street Plaza
88 Pine Street
26th Floor
New York, New York 10005-1801
Attention: Evelyn Park
Facsimile: (212) 480-0791 $13,588,307.00
============================== =================================== ===========================
</TABLE>
<PAGE> 46
- 7 -
<TABLE>
<CAPTION>
CONSENTING LENDER ADDRESS CONSENTING LENDER'S DEBT
- ------------------------------------ ---------------------------------- -----------------------------
<S> <C> <C>
Sakura Bank (Canada) Commerce Court West
Suite 3601
P.O. Box 59
Toronto, Ontario
M5J 2S1
Attention: Elwood R. Langley
Facsimile: (416) 369-0268 $22,269,559.00
- ------------------------------------ ---------------------------------- --------------
The Sakura Bank, Limited Commerce Court West
Suite 3601
P.O. Box 59
Toronto, Ontario
M5J 2S1
Attention: Yasumasa Kikuchi
Facsimile: (416) 369-0268 $ 0.00
- ------------------------------------ ---------------------------------- --------------
Societe Generale Asset Recovery Management
560 Lexington Avenue
New York, New York 10022
Attention: Nina Ross
Facsimile: (212) 278-6460 $ 0.00
- ------------------------------------ ---------------------------------- --------------
Societe Generale (Canada) Scotia Plaza
100 Yonge Street
Suite 1002
Toronto, Ontario
M5C 2W1
Attention: Doug Bache
Facsimile: (416) 364-1879 $37,115,932.00
- ------------------------------------ ----------------------------------- -------------
Summit Bank 750 Walnut Avenue
P.O. Box 1200
Cranford, New Jersey 07016-1200
Attention: Rick Sobrevinas
Facsimile: (908) 709-5400 $ 3,997,892.00
- ------------------------------------ ---------------------------------- --------------
The Toronto-Dominion Bank 55 King Street West
8th Floor
Toronto Dominion Tower
Toronto, Ontario
M5K 1S2
Attention: Adam Newman
Facsimile: (416) 944-5630 $37,115,932.00
- ------------------------------------- ---------------------------------- --------------
Toronto Dominion (New York), Inc. 31 West 52nd Street
New York, New York 10019
Attention: Duncan Robertson
Facsimile: (212) 956-6896 $ 0.00
==================================== ================================== ==============
</TABLE>
<PAGE> 47
- 8 -
<TABLE>
<CAPTION>
CONSENTING LENDER ADDRESS CONSENTING LENDER'S DEBT
- ------------------------------------ -------------------------- -----------------------------
<S> <C> <C>
Trans Canada Credit 3 Concorde Gate
Corporation Incorporated 4th Floor
Don Mills, Ontario
M3C 3N7
Attention: Nick Scarfo
Facsimile: (416) 382-5599 $32,938,067.88
- ------------------------------------ --------------------------------- --------------
Tri-Links Investment Trust 2 World Financial Center
17th Floor
New York, New York 10028
Attention: Michael Doyle
Facsimile: (212) 667-1708 $ 4,603,665.94
- ------------------------------------ --------------------------------- --------------
Wachovia Bank, N.A. 191 Peachtreet Street North East
28th Floor
Atlanta, Georgia 30303
Attention: Fitzhogh Wickham
Facsimile: (404) 332-6898 $13,588,307.00
==================================== ================================= ==============
</TABLE>
<PAGE> 48
SCHEDULE C
SUMMARY OF CERTAIN TERMS(1)
DIP Co-Arrangers: Bankers Trust Company ("BTCo") and/or its
affiliates and Canadian Imperial Bank of
Commerce ("CIBC").
DIP Agent: BTCo.
L/C Issuing Bank: BTCo.
DIP Collateral Agents: BTCo for the collateral located in the United
States and CIBC for the collateral located in
Canada.
Borrowers: Philip Services (Delaware), Inc. (the "US
Borrower") and Philip Services Corp. (the
"Canadian Borrower"), as
debtors-in-possession in the Cases, on an
individual basis.
DIP Lenders: All or a sub-group of the lending
institutions parties to the existing Credit
Agreement dated as of August 11, 1997 (the
"Existing Credit Agreement") among the
Borrowers, as Borrowers, CIBC, as
Administrative Agent, BTCo, as Syndication
Agent, CIBC and BTCo, as Co-Arrangers,
Dresdner, as Documentation Agent, and the
various lenders from time to time parties
thereto, which will have executed an Addendum
(in the form attached hereto as Exhibit A)
evidencing such Pre-Petition Lender's consent
to and approval of the terms and conditions
of the financing letter and this term sheet
and each such Pre-Petition Lender's
commitment to make loans and issue or
participate in letters of credit under the
DIP Facility.
Guarantors: The obligations of each Borrower under the
DIP Facility shall be unconditionally
guaranteed by the other Borrower, all
subsidiaries of the Borrowers incorporated in
the United States (together with the US
Borrower, the "US Credit Parties") as
debtors-in-possession in the US Cases, and
all subsidiaries of the Borrowers
incorporated in Canada (together with the
Canadian Borrower, the "Canadian Credit
Parties" and, collectively with the US Credit
Parties,
- ----------------------
(1) Capitalized terms used but not defined herein shall have the meanings
provided in the Existing Credit Agreement.
-1-
<PAGE> 49
the "Credit Parties"), on the same basis as
such entities guaranty the obligations under
the Existing Credit Agreement, provided,
however, that the Guarantors shall not
include the subsidiaries of the Borrowers
incorporated in Canada until such time as the
Canadian Approvals (as described below) have
been obtained.
DIP Facility: Revolving credit and letter of credit
facility of $100,000,000. In addition to
loans (the "Loans"), a portion of the DIP
Facility up to a sublimit of $20,000,000 (the
"LC Sublimit") may be utilized by the
Borrowers for the issuance of standby letters
of credit in support of certain obligations
satisfactory to the DIP Agent (collectively,
the "Letters of Credit"), subject in each
case to the limitations described below.
Maturity: The date (the "Maturity Date") which is the
earliest of (x) October 31, 1999, (y) the
effective date of a plan of reorganization in
the US Cases) (or the equivalent occurrence
in the Canadian Cases) and (z) the date of
substantial consummation of a confirmed plan
of reorganization in the US Cases (or the
equivalent occurrence in the Canadian Cases).
Availability: To the extent the interim order and/or final
order issued by the bankruptcy court (the
"Bankruptcy Court") hearing the US Cases is
limited as to the amount of credit covered by
such order, availability under the DIP
Facility shall be limited to the amount of
credit covered by such order of the
Bankruptcy Court.
In addition, availability under the DIP
Facility will be subject to a borrowing base
(the "Borrowing Base") equal to, on the
Closing Date (defined below), the sum of up
to 80% of the value of the Eligible Accounts
Receivable (to be defined and to include a
reserve in the amount of the Carve-Out and,
with respect to Canadian accounts receivable,
the amount of the Liens on Canadian Accounts
Receivable (as defined below)) of (i) the
Credit Parties constituting part of the
Industrial Services Group plus (ii) the US
Credit Parties constituting part of the US
Ferrous division plus (iii) the US Credit
Parties constituting part of the US Copper
division; provided, however, that (iv) the
DIP Agent may determine or impose eligibility
requirements, impose reserves or reduce the
advance rates described above upon the
exercise of its Permitted Discretion (to be
defined) and (v) the
2
<PAGE> 50
Borrowing Base shall not include assets of
the Canadian Credit Parties until the
Canadian Approvals have been obtained.
Availability in respect of the Borrowing Base
shall be determined on the basis of a
Borrowing Base Certificate delivered
bi-weekly (or more frequently, if required by
the DIP Agent) by the chief financial officer
of the US Borrower.
Notwithstanding the above, the Canadian
Borrower's borrowings under the DIP Facility
will be limited to an amount to be determined
by the DIP Agent from time to time based on
the corporate overhead requirements of the
Canadian Borrower, not to exceed $15,000,000.
Purpose: To pay all professional fees incurred by the
DIP Agent and the DIP Lenders in connection
with the DIP Facility and to provide for
working capital and general corporate
requirements (or in the case of Letters of
Credit issued for the account of the US
Borrower, to support such general corporate
requirements) consistent with the Budget
(described below), including, without
limitation, in the case of the US Borrower
(a) to make investments in and advances to
direct and indirect subsidiaries of the
Canadian Borrower that are not Credit
Parties, subject to an aggregate limitation
of $5,000,000, and (b) after the Canadian
Approvals (as defined below) are obtained, to
make investments in and advances to the
Canadian Credit Parties, through the Maturity
Date. Letters of Credit under the DIP
Facility may only be issued as permitted
under the DIP Facility, and only in an
aggregate amount not to exceed the LC
Sublimit.
Notwithstanding the above, the Loans made to,
and Letters of Credit issued for the account
of, the Canadian Borrower may only be
utilized to provide for the corporate
overhead requirements of the Canadian
Borrower.
The Borrowers and the Guarantors shall waive
any right to commence or prosecute any
defense, action, objection or counterclaim
with respect to the claims, liens or security
interests of the DIP Lenders and/or the DIP
Agent.
-3-
<PAGE> 51
Budget: The Borrowers shall provide to the DIP Agent
and each DIP Lender a copy of a budget (the
"Budget"), in form and substance satisfactory
to the DIP Agent and the Required DIP Lenders
(as defined below), reflecting the projected
cash requirements of the Philip Entities
(including, without limitation, utilization
of the Pre-Petition Lenders' cash collateral)
from the Closing Date through the Maturity
Date, calculated on a monthly basis. The DIP
Lenders shall not be obligated at any time to
advance funds in excess of the then
cumulative monthly projected cash borrowings
indicated in the Budge, plus $10,000,000.
Mandatory Repayments: Except (i) to the extent, if any, otherwise
provided in the DIP Credit Documentation (as
defined below), (ii) with respect to the
repayment of the obligations of the Borrowers
to the Pre-Petition Lenders under the
Existing Credit Agreement upon the sale of
Philip Utilities Management Corporation in
accordance with Section 1(a)(vi)(C) of the
Restructuring Term Sheet, and (iii) (in the
absence of an event of default under the DIP
Credit Documentation) to the extent that
Asset Sale Proceeds (as defined in Proceeds
Agreement dated April , 1999 (the
"Proceeds Agreement")) exceed $93,000,000
(after post-closing adjustments of no more
than $4,000,000 with respect to the Aluminum
Proceeds (as defined in the Proceeds
Agreement)), the Loans will be repaid upon a
sale of any assets of the Borrowers or any of
their subsidiaries, in an amount equal to the
cash proceeds (net of reasonable costs,
payment of senior obligations secured by such
assets, and, unless and until the Bank
Account Service Providers (as defined below)
release their security interest in such
proceeds, the amount of such cash proceeds
constituting proceeds of Canadian Accounts
Receivable (as defined below)) received by
the Borrowers or such subsidiary with respect
to such asset sale. In addition, if the
amount of the Loans and/or Letters of Credit
outstanding at any time is higher than the
amount permitted under the Borrowing Base,
the Borrowers will be required to make
mandatory repayments, and/or to
cash-collateralize Letters of Credit, in an
amount equal to such excess.
Optional Commitment Reductions;
Voluntary Prepayments: At the Borrowers' option, the unutilized
portion of the Total Commitment may be
reduced or terminated at any time without
penalty. Voluntary prepayments may be made at
any time, in whole or in part (subject to
specified
-4-
<PAGE> 52
minimum principal amounts) without premium or
penalty (limited to the last day of the
applicable interest period for Eurodollar
Loans, as defined below).
Termination of Commitment: The commitment hereunder shall terminate on
May 30, 1999 unless a definitive credit
agreement in form and substance satisfactory
to the DIP Agent and related documentation
(the "DIP Credit Documentation") have been
entered into and the conditions to initial
Loans and Letters of Credit set forth therein
have been satisfied on or prior to such date
(the date on which the DIP Credit
Documentation is executed and such conditions
are satisfied, the "Closing Date").
Super-Priority: All the obligations of the Borrowers and the
Guarantors incorporated in the United States
under the DIP Credit Documentation (the "DIP
Obligations") shall constitute an allowed
administrative expense claim in the US Cases
pursuant to Section 364(c)(1) of the
Bankruptcy Code having priority over all
administrative expenses of the kind specified
in Sections 503(b) and 507(b) of the
Bankruptcy Code, subject only to (a) any
allowed super-priority administrative claim
granted by the Bankruptcy Court to the LC
Issuers, the LC Lenders, issuers of letters
of credit under the Permitted LC Facility (as
defined below) and the Bank Account Service
Providers (as defined below), and (b) a
$2,000,000 carve-out (the "Carve-Out") for
the payment of (i) allowed professional fees
and disbursements incurred by the
professionals retained, pursuant to Sections
327 or 1103(a) of the Bankruptcy Code (or,
after such time as the Canadian Approvals
have been obtained, authorized pursuant to
any equivalent orders in the Canadian Cases),
by the Borrowers and the Guarantors and any
statutory committee appointed in the Cases
and (ii) quarterly fees required to be paid
pursuant to 28 U.S.C. Section 1930(a)(6) and
any fees payable to the Clerk of the
Bankruptcy Court (or, after such time as the
Canadian Approvals have been obtained,
authorized pursuant to any equivalent orders
in the Canadian Cases); provided, however,
the Carve-Out shall not include professional
fees and disbursements incurred in connection
with asserting any claims or causes of action
against the Pre-Petition Lenders, the
Pre-Petition Agents, the security agent (the
"Security Agent") under the Security Agency
Agreement dated as of
5
<PAGE> 53
March 16, 1998 among the Borrowers and CIBC
as administrative agent, the DIP Lenders, the
DIP Agent, the DIP Collateral Agents, the DIP
Co-Arrangers, or any DIP Lenders or
Pre-Petition Lenders providing bank account
services for any of the Credit Parties in
their capacity as such bank account service
providers (the "Bank Account Service
Providers") and/or challenging or raising any
defense, objection or counterclaim to any of
the obligations of the Borrowers or the
Guarantors under the Pre-Petition Credit
Agreement or the DIP Credit Agreement or any
claim, lien or security interest of the
Pre-Petition Agents, the Security Agent, the
Pre-Petition Lenders, the DIP Agent, the DIP
Collateral Agents, the DIP Co-Arrangers, the
DIP Lenders and/or the Bank Account Service
Providers.
Security: Subject only to the Carve-Out, cash
collateral held under Section 5.06 of the
Existing Credit Agreement for the benefit of
the LC Lenders under the Existing Credit
Agreement and to liens on Canadian accounts
receivable (the "Canadian Accounts
Receivable") and the proceeds thereof (such
liens, collectively, the "Liens on Canadian
Accounts Receivable") and specified cash
collateral addressed in documentation entered
into in connection with the establishment of
operating accounts of certain of the Canadian
Credit Parties at CIBC and the maintenance of
operating accounts of certain of the US
Credit Parties at Comerica Bank and the
establishment of the Permitted LC Facility
(the "Permitted LC Facility") under Amending
Agreement No. 3 to the Existing Credit
Agreement (which liens shall be senior to the
Carve-Out), all of the DIP obligations shall
be secured by (i) an enforceable first
priority priming lien (the "Priming Lien")
pursuant to Section 364(d)(1) of the
Bankruptcy Code on all of the existing and
after-acquired assets of the Borrowers and
the Guarantors located in the US constituting
collateral (the "US Pre-Petition Collateral")
securing obligations to the Pre-Petition
Agents and the Pre-Petition lenders under the
Existing Credit Agreement, (ii) an
enforceable first priority lien pursuant to
Section 364(c)(2) of the Bankruptcy Code on
all unencumbered assets of the Borrowers and
the Guarantors located in the US, (iii) an
enforceable junior lien pursuant to Section
364(c)(3) of the Bankruptcy Code on all
previously encumbered assets (excluding the
US Pre-Petition Collateral), existing and
after-acquired, of the
6
<PAGE> 54
Borrowers and the Guarantors located in the
US, (iv) an enforceable first priority
security interest and charge on all of the
existing and after-acquired assets of the
Borrowers and the Guarantors located in
Canada (the "Canadian Pre-Petition
Collateral") securing obligations to the
Pre-Petition Agents and the Pre-Petition
Lenders under the Existing Credit Agreement,
ranking in priority to the security of the
Pre-Petition Agents and the Pre-Petition
Lenders in the Canadian Pre-Petition
Collateral, (v) an enforceable first priority
security interest and charge on all
unencumbered assets of the Borrowers and
Guarantors located in Canada, and (vi) an
enforceable junior security interest and
charge on all previously encumbered assets
(excluding the Canadian Pre-Petition
Collateral), existing and after-acquired, of
the Borrowers and the Guarantors located in
Canada (all foregoing liens described in
clauses (i) through (vi), the "Facility
Liens"), whether in existence at the time of
the filing of the Cases or acquired
thereafter.
Interest Rates: All Loans under the DIP Facility shall be
maintained initially as Base Rate Loans,
which shall bear interest at the Applicable
Margin in excess of the Base Rate in effect
from time to time; provided that, commencing
thirty days after the Closing Date, at the
Borrowers' option, Loans may be maintained
from time to time as (i) Base Rate Loans or
(ii) Eurodollar Loans, which shall bear
interest at the Applicable Margin in excess
of the Eurodollar Rate (adjusted for maximum
reserves) as determined by the DIP Agent for
the respective interest period.
"Applicable Margin" shall be 2.5% in the case
of Base Rate Loans and 3.5% in the case of
Eurodollar Loans.
"Base Rate" shall mean the higher of (x) 1/2
of 1% in excess of the Federal Reserve
reported certificate of deposit rate and (y)
the rate that the DIP Agent announces from
time to time as its prime lending rate, as in
effect from time to time.
An interest period of one month shall be
available in the case of Eurodollar Loans.
Interest in respect of Base Rate Loans shall
be payable monthly in arrears on the last
business day of each month.
7
<PAGE> 55
Interest in respect of Eurodollar Loans shall
be payable in arrears at the end of the
applicable interest period or, if shorter, at
the end of each monthly interval of the first
day thereof. Interest will also be payable at
the time of repayment of any Loans and at
maturity of such Loans. All interest and fee
calculations shall be based on a 360-day year
and actual days elapsed.
Upon the occurrence and continuance of any
default in the payment of principal or
interest, all Loans shall bear interest at a
rate per annum equal to the rate which is 2%
in excess of the rate then borne by such
Loans, to the extent permitted by law. Such
interest shall be payable on demand.
The DIP Credit Documentation shall include
protective provisions for such matters as
capital adequacy, increased costs, funding
losses, illegality and withholding taxes.
Fees:
Commitment Fee: 1/2 of 1% per annum on
the average unused
portion of the DIP
Facility for the period
commencing on the Closing
Date and ending on the
date the Total Commitment
is terminated, to be owed
by the Borrowers on a
joint and several basis.
Usage for such purpose
shall include Letter of
Credit usage. Commitment
Fee will be payable
monthly in arrears and on
the date the Total
Commitment is terminated.
L/C Fees: 3.5% per annum on
aggregate outstanding
stated amounts thereof,
plus .25% per annum for
fronting fees, plus
customary issuance and
drawing charges, in each
case payable monthly.
Covenants: Covenants applicable to the Borrowers, the
Guarantors and their subsidiaries shall
include those customary for
debtor-in-possession financings (having
reasonable, customary and appropriate
exceptions), including but not limited to the
following:
Affirmative Covenants: The DIP Credit Documentation shall contain
affirmative
8
<PAGE> 56
covenants required by the DIP Agent,
including without limitation: (i) delivery of
financial statements and reports, the Budget,
Borrowing Base Certificates, bi-weekly
reports containing comparisons of actual to
projected cash flows, descriptions of
proposed asset divestitures and other
significant events and rolling fourteen (14)
week cash flow forecasts, copies of
accountants' letters upon receipt thereof by
the Borrowers or the Guarantors, projections,
officers certificates, monthly reporting
packages and other information requested by
the DIP Agent, (ii) payment of all
postpetition taxes and other obligations,
(iii) continuation of business and
maintenance of existence and material rights
and privileges, (iv) compliance with laws and
material contractual obligations, (v)
maintenance of property and insurance, (vi)
maintenance of books and records, (vii) right
of the DIP Agent and the DIP Lenders to
inspect property and books and records,
(viii) notice of defaults, litigation and
other material events, (ix) compliance with
environmental laws and (x) delivery of the
consultants reports necessary to determine
the value of the collateral of the Credit
Parties, including, without limitation, the
receivables of the Credit Parties that will
be taken into account in the calculation of
the Borrowing Base as described under
"Availability" above.
Negative Covenants: The DIP Credit Documentation shall contain
negative covenants required by the DIP Agent,
with exceptions to be permitted as necessary
to comply with the provisions of the
Pre-Arranged Plan, including, without
limitation, limitations on (i) indebtedness,
(ii) lines, (iii) guarantee obligations, (iv)
mergers consolidations, liquidations and
dissolutions, (v) sales of assets, (vi)
leases, (vii) capital expenditures, (viii)
investments, loans and advances (other than,
in the case of the US Borrower (a)
investments in and advances to direct and
indirect subsidiaries of the Canadian
Borrower that are not Credit Parties, subject
to an aggregate limitation of $5,000,000, and
(b) investments and advances to the Canadian
Credit Parties after the Canadian Approvals
(as defined below) have been obtained), (ix)
payment of prepetition claims or debt, or
amendments thereto, (x) the existence of any
claims (other than any granted to the LC
Issuers, the LC Lenders, issuers of letters
of credit under the Permitted LC Facility,
the Bank Account Service Providers, the DIP
Lenders and the Pre-Petition Lenders)
entitled to a superpriority under Section
364(c)(1)
9
<PAGE> 57
of the Bankruptcy Code or in the Canadian
Cases, (xi) change in business, (xii)
maintenance of financial covenants
satisfactory to the DIP Agent, (xiii)
dividends and other distributions on equity,
(xiv) transactions with affiliates, (xv) the
filing of a plan of reorganization,
disclosure statement or plan of arrangement,
as applicable, in the Cases, other than the
Pre-Arranged Plan and the disclosure
statement approved by the Required DIP
Lenders with respect thereto, without the
consent of the Required DIP Lenders, (xvi)
the amendment, modification or withdrawal of
the Pre-Arranged Plan, or the disclosure
statement approved by the Required DIP
Lenders with respect thereto, without the
consent of the Required DIP Lenders and
(xvii) failure to comply with any material
applicable provisions of the Pre-Arranged
Plan.
Events of Default: The DIP Credit Documentation shall contain
Events of Default required by the DIP Agent
including, without limitation: (i) the entry
of an order dismissing any of the Cases,
converting any of the US Cases to a Chapter 7
case or lifting the stay in the Canadian
Cases to permit the enforcement of any
security against any Credit Party or the
appointment of a receiver, or the making of a
receiving order against any Credit Party,
(ii) the entry of an order appointing a
Chapter 11 trustee in any of the US Cases,
(iii) the entry of an order granting any
other claim superpriority status or a lien
equal or superior to that granted to the DIP
Agent and the DIP Lenders, other than orders
entered in respect of (x) reclamation claims
pursuant to Section 546(c) of the Bankruptcy
Code or (y) the Bank Account Service
Providers, (iv) the entry of an order
staying, reversing, vacating or otherwise
modifying the DIP Credit Documentation, the
Interim Order or the Final Order (as defined
below), or the entry of an order by the
Canadian Court having the equivalent effect,
without the prior written consent of the DIP
Agent and the Required DIP Lenders, (v) the
entry of an order in any of the US Cases
appointing an examiner having enlarged powers
beyond those set forth under Section
1106(a)(3) and (4) of the Bankruptcy Code, or
the entry of an order by the Canadian Court
having a similar effect, (vi) failure of any
Credit Party to pay (A) interest or fees when
due and such default shall continue for two
business days or (B) principal when due,
(vii) failure of any Credit Party to comply
with any negative covenants,
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(viii) failure of any Credit Party to perform
or comply with any other term or covenant and
such default shall continue unremedied for a
period of 20 days, (ix) any representation or
warranty by any Credit Party shall be
incorrect or misleading in any material
respect when made, (x) there shall occur a
material disruption in the senior management
of any Credit Party or a Change of Control
(to be defined) shall occur, (xi) the entry
of any order granting relief from the
automatic stay in the US Cases or lifting the
stay in the Canadian Cases, so as to allow a
third party to proceed against any material
asset of any Credit party, (xii) the filing
of any pleading by any Credit Party, seeking
any of the matters set forth in clauses (i)
through (v) or (xi), (xiii) the entry of the
Final Order shall not have occurred within 30
days after the Closing Date and (xiv) failure
to obtain the confirmation of the
Pre-Arranged Plan and to consummate such plan
by October 31, 1999.
Remedies: Upon the occurrence of an Event of Default,
the Required DIP Lenders may terminate the
Total Commitment (the date of any such
termination, the "Termination Date"), declare
the obligations in respect of the DIP Credit
Documentation to be immediately due and
payable and exercise all rights and remedies
under the DIP Credit Documentation and the
Interim Order or Final Order (and the
equivalent Canadian orders), as applicable.
The DIP Agent and the DIP Lenders shall have
customary remedies under the DIP Credit
Documentation including, but not limited to,
the right to realize on all or part of the
Facility Liens without the necessity of
obtaining further relief or order from the
Bankruptcy Court or the Canadian Court.
Notwithstanding the foregoing, other than
with respect to the termination of the
Commitments, the acceleration of the Loans,
and the imposition of an administrative
freeze or administrative hold with respect to
cash collateral, the DIP Agent, the DIP
Collateral Agents and the DIP Lenders may
only exercise other remedies after providing
three business days' prior written notice to
the Borrowers, the Guarantors, the United
States Trustee and any statutory committee or
monitor appointed in the Cases.
Interim Advances: Upon entry of the Interim Order (described
below) and the
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occurrence of the Closing Date, the Total
Commitment shall be limited to an interim
amount of $30,000,000 pending entry of the
Final Order (described below). If the Final
Order is not entered within 30 days after the
Closing Date, all interim advances made to
the Borrowers shall be due in full and
immediately payable.
Canadian Approvals: The following orders of the Canadian Court
(and together with the consents from the
Pre-Petition Lenders described in paragraph
(B) below, the "Canadian Approvals") shall
have been entered, shall be in full force and
effect and shall not have expired or been
stayed, reversed, vacated or rescinded, and
all such orders shall be satisfactory to the
DIP Agent and the DIP Lenders in order for
(y) the assets of the Canadian Credit Parties
to be taken into account for the calculation
of the Borrowing Base as described under
"Availability" above and (z) the Canadian
Credit Parties to become Guarantors as
described under "Guarantors" above:
(A) The DIP Facility, including the
security interests and charges over
assets in Canada described under
"Security" above, with the priority
described therein, shall have been
approved by an order of the
Canadian Court in the Canadian
Cases, in form and substance
satisfactory to the DIP Agent and
the DIP Lenders, which shall also
contain provisions:
1. authorizing the execution and
delivery by the Canadian
Credit Parties of all
documents, and the granting of
all security, required in
connection with the DIP
Facility, and providing that
such documents or security
shall not be challengeable by
any present or future
creditors of the Canadian
Credit Parties (provided,
however, that such security
shall be junior to the
security granted to the Bank
Account Service Providers),
2. providing that such documents
and security shall be
effective notwithstanding that
the execution of such
documents and the granting of
<PAGE> 60
such security may result in a
breach of any contract or
restriction to which any of
the Canadian Credit Parties is
bound,
3. prohibiting the granting of
any additional security on the
assets of any of the Canadian
Credit Parties,
4. providing that the obligations
of the Canadian Credit Parties
to the DIP Agent, the DIP
Lenders and the Bank Account
Service Providers shall not be
subject to, or compromised or
affected in any way by, any
plan of compromise or
arrangement in the Canadian
Cases, and
5. granting relief from the stay
in the Canadian Cases to
permit enforcement by (a) the
DIP Agent, the DIP Collateral
Agents and the DIP Lenders of
the rights and remedies under
the DIP Facility and their
security and (b) the Bank
Account Service Providers of
their rights and remedies,
upon the occurrence of an
event of default under the DIP
Facility;
(B) The Pre-Petition Lenders shall have
agreed, in a manner acceptable to
the DIP Agent and the DIP Lenders,
to postpone their security in the
Pre-Petition Collateral to the
Facility Liens, and such agreement
and postponement shall be in form
and substance satisfactory to the
DIP Agent and the DIP Lenders;
(C) All orders of the Canadian Court
in form and substance satisfactory
to the DIP Agent and the DIP
Lenders, authorizing the use by the
Borrowers and the Guarantors of (a)
the Pre-Petition Lenders' cash
collateral (other than the cash
collateral of the LC Issuers, the
LC Lenders, issuers of letters of
credit under
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the Permitted LC Facility and the
Bank Account Service Providers) and
(b) the Asset Sale Proceeds
deposited in the Proceeds Account
(as defined in the Proceeds
Agreement) prior to the
commencement of the Cases;
(D) All other "first day" orders in
the Canadian Cases necessary or
appropriate in the judgment of the
DIP Agent and the DIP Lenders;
(E) The orders of the Canadian Court
referred to in clauses (A), (B),
(C) and (D) above shall not have
expired or been stayed, reversed,
vacated or otherwise modified
without the prior written consent
of the DIP Agent and the Required
DIP Lenders; and
(F) The DIP Agent and the DIP Lenders
shall be satisfied that all orders
described above shall be binding on
all existing material creditors (or
other persons described therein) of
the Borrowers and the Guarantors,
and shall be effective to provide
the stay of actions, priorities,
liens and other protections for the
Borrowers, the Guarantors, the DIP
Agent, the DIP Collateral Agents
and the DIP Lenders purported to be
granted thereby.
Conditions Precedent
to Initial Loans and L/Cs: Customary for debtor-in-possession financings
including, without limitation, accuracy of
representations and warranties, absence of
defaults, evidence of authority, legal
opinions, compliance with laws, and receipt
of necessary consents and approvals, and
shall also include, without limitation:
(1) (i) The Borrowers shall have engaged in
negotiations regarding the Pre-Arranged Plan
with the holders (or representatives of such
holders) of claims and interests against the
Borrowers and/or their subsidiaries entitled
to vote on the Pre-Arranged Plan, (ii) the
Borrowers shall have
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<PAGE> 62
used their best efforts to obtain written
agreements, to the extent legally
permissible, from such holders of claims in
terms of amount of claims and number of
holders as required for the approval of the
Pre-Arranged Plan by the relevant classes of
claims under the Bankruptcy Code and the
CCAA, committing such holders (a) to vote in
favor of the Pre-Arranged Plan and (b) not to
sell or assign their claims except to an
entity that agrees in writing to be bound by
the terms of such agreements, (iii) the
Pre-Arranged Plan, and a disclosure statement
approved by the Required DIP Lenders with
respect thereto, shall have been
appropriately filed by the Borrowers in the
Cases, and the Borrowers shall have requested
hearings in respect of approval of such
disclosure statement and confirmation of the
Pre-Arranged Plan, and (iv) the Pre-Arranged
Plan shall be feasible and there shall exist
no known impediment to confirmation of the
Pre-Arranged Plan and consummation thereof by
October 31, 1999;
(2) Execution of the DIP Credit Documentation in
form and substance satisfactory to the DIP
Agent and the DIP Lenders;
(3) Since the date of this letter there shall not
have occurred, and the DIP Agent shall not
have discovered the existence of, (i) facts
(to the extent not previously known) which
constitute any material adverse change in the
business, properties, assets, condition
(financial or otherwise) or prospects of the
Borrowers or the Guarantors, their affiliates
and their subsidiaries, as a whole, from that
set forth in their financial statements dated
as of September 30, 1998, other than as set
forth in their financial statements dated as
of December 31, 1998, or (ii) litigation,
which after giving effect to the commencement
of the Cases, is reasonably likely to be
material and adverse to the Borrowers, the
Guarantors, their affiliates and their
subsidiaries, as a whole;
(4) The following orders of the US Court shall
have been entered, shall be in full force
and effect and shall not have been stayed,
reversed, vacated or rescinded, and all such
orders shall be satisfactory to the DIP Agent
and the DIP Lenders:
(A) All orders authorizing the DIP Facility
(a portion or all of which may be
authorized by entry of an initial
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<PAGE> 63
order to be followed by a final order) and
the Facility Liens. An initial order may be
entered on an emergency and/or interim basis
in the US Cases (the "Interim Order"), after
notice given and a hearing conducted in
accordance with Bankruptcy Rule 4001 (c) no
later than 15 days after the date of the
commencement of the US Cases, authorizing and
approving the transactions contemplated in
the DIP Credit Documentation and finding that
the DIP Lenders are extending credit to the
Borrowers and their affiliates in good faith
within the meaning of Bankruptcy Code Section
364(e), which Interim Order shall (i) approve
the payment by the Borrowers of the fees set
forth in the Fee Letter and the professional
fees of the DIP Agent and the DIP Lenders
referred to herein, (ii) otherwise be in form
and substance satisfactory to the DIP Agent
and the DIP Lenders and (iii) prior to the
entry of the Final Order, be in full force
and effect and not have expired or been
stayed, reversed, vacated or otherwise
modified without the prior written consent of
the DIP Agent and the Required DIP Lenders;
(B) All orders of the US Court (which may be
combined with the Interim Order), in form and
substance satisfactory to the DIP Agent and
the DIP Lenders, pursuant to Section
363(c)(2)(B) of the Bankruptcy Code
authorizing the use by the Borrowers and the
Guarantors incorporated in the United States
of (a) the Pre-Petition Lenders' cash
collateral (other than the cash collateral of
the LC Issuers, the LC Lenders, issuers of
letters of credit under the Permitted LC
Facility and the Bank Account Service
Providers) and (b) the Asset Sale Proceeds
deposited in the Proceeds Account prior to
the commencement of the Cases, which orders
shall not have been stayed, reversed, vacated
or otherwise modified without the prior
written consent of the DIP Agent and the
Required DIP Lenders; and
(C) All other "first day" orders in the US Cases
necessary or appropriate in the judgment of
the DIP Agent and the DIP Lenders, including
without limitation, as to the continued
availability of bid and performance bonding
requirements;
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(5) The DIP Agent shall be satisfied that all
orders described in paragraph (4) above shall
be binding on all existing material creditors
(or other persons described therein) of the
Borrowers and the Guarantors, and shall be
effective to provide the stay of actions,
priorities, liens and other protections for
the Borrowers, the Guarantors, the DIP Agent,
the DIP Collateral Agents and the DIP Lenders
purported to be granted thereby;
(6) Cash management systems, including cash
concentration accounts subject to the
Facility Liens and collection requirements
satisfactory to the DIP Agent and the Bank
Account Service Providers, for the US Credit
Parties shall have been established to the
reasonable satisfaction of the DIP Agent and
the Bank Account Service Providers;
(7) Absence of any material adverse change or
condition with respect to the market for
debtor-in-possession financings, the bank
syndication market or the capital markets
generally;
(8) Payment of all costs, fees and expenses
(including, without limitation, attorneys and
other professional fees) owing to the DIP
Agent and the DIP Lenders as referenced
herein and in the Fee Letter;
(9) Receipt by the DIP Agent and the DIP Lenders
of the Budget covering the period from the
Closing Date through the Maturity Date, and
other cash flow and financial information
that the DIP Agent may request, all in form
and substance satisfactory to the DIP Agent
and, with respect to the Budget, the
Required DIP Lenders;
(10) Satisfactory completion by the DIP Agent and
its professionals of all due diligence deemed
necessary;
(11) Receipt by the DIP Agent of legal opinions of
counsel to the Borrowers and the Guarantors,
in form and substance satisfactory to the DIP
Agent;
(12) Resolutions of the Boards of Directors of
each of the Borrowers and the Guarantors in
form and substance satisfactory to the DIP
Agent, authorizing and approving the
commencement of the Cases and the borrowings
and other transactions contemplated by the
DIP Credit Agreement; and
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<PAGE> 65
(13) Receipt by the DIP Agent of satisfactory
consultants' reports and projections
necessary to determine advance rates and
eligibility requirements to substantiate and
monitor the Borrowing Base with respect to
the Industrial Services Group, the US Ferrous
division, the US Copper division and any
other division of the Borrowers, the accounts
receivable of which are to be included in the
Borrowing Base on the Closing Date.
Conditions Precedent to Each
Loan and L/C: The DIP Credit Documentation shall contain
conditions precedent to each extension of
credit (including the initial extension of
credit) required by the DIP Agent, including,
without limitation:
(a) No Default or Event of Default exists.
(b) All representations and warranties shall be
true and correct in all material respects as
of the date of each extension of credit,
including that there shall not have occurred
any material adverse change since the Closing
Date in the business, properties, assets,
condition (financial or otherwise) or
prospects of the Borrowers, the Guarantors
and their subsidiaries and affiliates taken
as a whole.
(c) The Interim Order shall be in full force and
effect or, if the date of the requested
extension of credit is more than 30 days
after the Closing Date, or if the amount of
such requested extension of credit, together
with the amount of all extensions of credit
under the DIP Credit Documentation then
outstanding shall exceed the maximum amount
authorized pursuant to the Interim Order, an
order of the Bankruptcy Court granting final
approval of the DIP Loan Agreement (the
"Final Order") shall have been entered in
form and substance satisfactory to the DIP
Agent, and shall be in full force and effect
and shall not have been stayed, reversed,
vacated or otherwise modified without the
prior written consent of the DIP Agent and
the Required DIP Lenders.
(d) Receipt by the DIP Agent of a certificate (a
"Borrowing Certificate") executed by an
executive officer of each of the Borrowers
and, to the extent such persons are not
executive officers of each Guarantor, by an
executive officer of each
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<PAGE> 66
Guarantor, to the effect that (i) the
proposed extension of credit and its intended
use are consistent with the terms of the DIP
Credit Documentation and the Budget and is
necessary, after utilization and application
of available cash, in order to satisfy the
obligations of the Borrowers and the
Guarantors in the ordinary course of business
or as otherwise permitted under the DIP
Credit Agreement, (ii) the Borrowers and the
Guarantors have observed or performed all of
their covenants and other agreements and have
satisfied in all material respects every
condition contained in the DIP Credit
Documentation and the Interim Order or the
Final Order (as applicable) to be observed,
performed or satisfied by the Borrowers or
such Guarantor and (iii) such officer has no
knowledge of any Default or Event of Default.
(e) Payment of all fees, costs, expenses and
other amounts then due and payable.
(f) Prior to the first advance, if any, the
proceeds of which shall be used by any US
Credit Party to make a loan, dividend or any
other advance to any Canadian Credit Party
(including any loan, dividend or other
advance to the Canadian Borrower in an amount
in excess of the corporate overhead
requirements of the Canadian Borrower), the
Canadian Approvals shall have been obtained,
and all appeal periods relating thereto shall
have expired.
(g) All funds remaining in the Proceeds Account
on the date that the Cases are commenced
(other than funds subject to the liens of the
Bank Account Service Providers that have not
been released pursuant to the Proceeds
Agreement), shall have been released.
Voting and
Amendments: "Required DIP Lenders" shall mean,
as of any date of determination, the DIP
Lenders who in the aggregate hold at least a
majority in amount of the Total Commitment
(which, if terminated, shall be deemed
outstanding in the amount outstanding
immediately prior to such termination),
subject to customary exceptions.
Assignments/
Participations: Assignments (but not participations) by the
DIP Lenders to financial institutions and
funds will be permitted subject to such
limitations (including minimum amounts and
maximum
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concentration limits) to be imposed by the
DIP Agent. Participation rights will not be
available.
Governing Law: New York, except as governed by the
Bankruptcy Code or the CCAA.
20
<PAGE> 1
EXHIBIT 10.10
PROCEEDS AGREEMENT
THIS AGREEMENT dated as of April 5, 1999 is made by and among PHILIP
SERVICES CORP. ("PSC"), PHILIP SERVICES (DELAWARE), INC. ("PSI" and, together
with PSC, the "Borrowers") and each of the direct and indirect subsidiaries of
PSC which are Restricted Parties (together with the Borrowers, the "Philip
Entities"), and CANADIAN IMPERIAL BANK OF COMMERCE ("CIBC"), solely as
Administrative Agent (the "Administrative Agent"), on behalf of itself, the
Lenders (as defined below), the Agents (as defined below) and their respective
Eligible Affiliates.
WHEREAS:
A. Pursuant to the Credit Agreement dated as of August 11, 1997, as
amended from time to time (the "Credit Agreement") among the Borrowers, the
Administrative Agent, BANKERS TRUST COMPANY ("BTCo"), as Syndication Agent,
CIBC and BTCo, as Co-Arrangers, DRESDNER BANK CANADA and DRESDNER BANK AG NEW
YORK BRANCH (collectively, "Dresdner"), as Documentation Agent (CIBC, BTCo and
Dresdner, collectively, the "Agents"), and the various lenders from time to
time parties thereto (collectively, the "Lenders"), the Lenders have made
financial accommodation (including loans and letters of credit) available to
the Borrowers (such financial accommodation being collectively, the "Loans").
The Restricted Subsidiaries executed guarantees of the obligations of one or
both of the Borrowers under the Credit Agreement.
B. The obligations of PSI and the Restricted Subsidiaries incorporated in
the United States (together with PSI, the "US Entities") under the Credit
Agreement and the guarantees were secured in accordance with those certain U.S.
Security Agreements dated as of March 16, 1998, as supplemented, as well as
various mortgages and other security documents. The obligations of PSC and its
direct and indirect Restricted Subsidiaries incorporated in Canada (together
with PSC, the "Canadian Entities") under the Credit Agreement and the
guarantees were secured in accordance with those certain Canadian Security
Agreements dated as of March 16, 1998, as supplemented, as well as various
mortgages and other security documents (all guarantees and security documents,
collectively with the Credit Agreement, the "Credit Documents"). The
obligations of the Borrowers under the Credit Agreement were also secured
pursuant to Section 6.01 of the Credit Agreement.
C. Events of Default have occurred under the Credit Documents, and the
Philip Entities have negotiated with certain of the Lenders: (i) a term sheet
(the "Restructuring Term Sheet") containing the principal terms and conditions
of a pre-arranged plan of reorganization or arrangement under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") and under the Companies'
Creditors Arrangement Act (Canada) (the "CCAA"), and (ii) an agreement dated as
of April 1, 1999 (the "Lock-Up Agreement") pursuant
<PAGE> 2
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to which such Lenders have agreed, inter alia, to vote their claims as Lenders
in favor of a plan of reorganization reflecting the terms of the attached
Restructuring Term Sheet.
D. The Philip Entities are indebted, jointly and severally, to the
Lenders, in the principal amount of not less than $1,061,421,527.43 (such
amount including issued and outstanding letters of credit having a face value
of $55,387,658.00 less $930,058.73 of letters of credit cash collateral),
together with accrued and unpaid interest and other fees, costs and expenses
(collectively, the "Indebtedness"). The Indebtedness constitutes a legal,
valid and binding obligation of the Philip Entities, enforceable in accordance
with the terms of the Credit Documents and pursuant to applicable law, and no
offsets, defenses or counterclaims to the Indebtedness exist.
E. Except for possible de minimis exceptions not presently known by the
Philip Entities, and subject to the Senior Liens (as defined below) and the
Account Intermediary Liens (as defined below), as applicable, the Indebtedness
is secured by valid and enforceable first-priority liens and security interests
granted by the Philip Entities to CIBC as security agent (in such capacity, the
"Security Agent"), for the Rateable benefit of the Lenders, upon all of the
Philip Entities' present and future undertaking, property and assets of any
kind, including, without limitation, (i) real property, (ii) accounts
receivable, (iii) contracts and contract rights, (iv) inventory, (v) equipment,
including without limitation, vehicles and rolling stock, (vi) trademarks,
service marks and trade names, together with the registrations and right to all
renewals thereof, and the goodwill symbolized by such trademarks, service marks
and trade names, (vii) patents, (viii) copyrights, (ix) computer programs and
all intellectual property rights therein and all proprietary information and
trade secrets, (x) all other goods, general intangibles, chattel paper,
documents, investment property, securities and instruments, and (xi) all
proceeds and products of any of the forgoing (collectively, the "Collateral").
The Lenders' liens and security interests in the Collateral are not subject to
avoidance, defense, objection, action, counterclaim, setoff or subordination,
except (a) to the extent of pre-existing validly perfected and unavoidable
liens and security interests that are senior to the Lenders' liens and security
interests as of the date hereof (the "Senior Liens"), and (b) in regard to
liens on Canadian accounts receivable and specified cash collateral addressed
in documentation entered into in connection with the establishment of operating
accounts of certain of the Canadian Entities at CIBC and the maintenance of
operating accounts of certain of the US Entities at Comerica Bank and the
establishment of the Permitted LC Facility under Amending Agreement No. 3 to
the Credit Agreement (the "Account Intermediary Liens").
F. Except for possible de minimis exceptions not presently known by the
Philip Entities, by reason of the foregoing described liens and security
interests, the Lenders have valid and perfected first-priority liens, subject
to the Senior Liens and the Account Intermediary Liens, as applicable, on the
assets of the Philip Entities, including, without limitation, all of the cash
of the US Entities and the Canadian Entities, including all funds on deposit at
the banks at which the US Entities and the Canadian Entities maintain their
cash, all proceeds of the accounts of the US Entities and the Canadian Entities
and all other "proceeds" (as such term is defined in Section 9-306(1) of the
Uniform Commercial Code as enacted in the State of New York in the
<PAGE> 3
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case of the US Entities and as such term is defined in the Personal Property
Security Act (Ontario) in the case of the Canadian Entities) of the Collateral
(the "Cash Collateral").
G. $68,504,644.00 representing proceeds of the sale of certain assets of
the aluminum division of the Philip Entities (the "Aluminum Proceeds"), are
presently being held by the Administrative Agent in an account titled in the
Administrative Agent for the benefit of the Administrative Agent and the
Lenders, subject to the Account Intermediary Liens. In light of the Events of
Default which have occurred under the Credit Documents, the Lenders are
entitled to apply the Aluminum Proceeds, as well as proceeds of other asset
sales which may be consummated with the consent of the Required Lenders, in
their sole discretion, subsequent to the date hereof and prior to the
occurrence of a Release Termination Event, as defined in Section 3.01 (the
"Other Asset Sales"), to the Indebtedness, subject to the Account Intermediary
Liens, as applicable. However, in connection with the Restructuring Term
Sheet, the Lenders agreed to release specified asset sale proceeds to the
Borrowers in connection with implementation of the pre-arranged plan of
reorganization and arrangement contemplated in the Restructuring Term Sheet.
The Borrowers have subsequently advised the Lenders that the Borrowers will
need access to these proceeds prior to the implementation of such pre-arranged
plan, and even prior to the filing of such pre-arranged proceedings, in order
to meet operating cash requirements. The Lenders have agreed to release such
proceeds under procedures substantially equivalent to a cash collateral
stipulation in formal reorganization or arrangement proceedings, to the extent
that the Borrowers have a demonstrated need for such funds in accordance with a
budget approved by the Required Lenders and have met other terms and
conditions. The Borrowers acknowledge that any proceeds generated from asset
sales and which the Required Lenders agree may be released to the Borrowers on
the terms set forth herein would constitute Cash Collateral.
H. Capitalized terms not defined in this Agreement shall have the meanings
ascribed to such terms in the Credit Documents.
NOW THEREFORE THIS AGREEMENT WITNESSES that, in consideration of the
mutual covenants and agreements contained in this Agreement and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Philip Entities, the Agents and the Lenders agree as follows:
ARTICLE ONE
RETENTION AND DISBURSEMENT OF ASSET SALE PROCEEDS
SECTION 1.01 RELEASE OF SALE PROCEEDS:
(a) The Borrowers will direct that the proceeds of the Other Asset Sales,
including any non-cash proceeds in the form of instruments and bills of
exchange (the "Note Proceeds"), net only of reasonable costs and expenses and
of payment of indebtedness secured by
<PAGE> 4
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Senior Liens on such assets, and exclusive of proceeds from the sale of Philip
Utilities Management Corporation (the "Other Asset Sale Proceeds"), be
delivered directly to the Administrative Agent on the closing dates thereof for
the account of the Administrative Agent and the Lenders, subject to the Account
Intermediary Liens, as applicable. The Administrative Agent will hold the
Aluminum Proceeds and the Other Asset Sale Proceeds (other than the Note
Proceeds) subject to the Account Intermediary Liens, in an interest-bearing
account maintained by and titled in the Administrative Agent, for the benefit
of the Administrative Agent and the Lenders (the "Proceeds Account") under
conditions that such amount will be held and dealt with by the Administrative
Agent in accordance with the provisions of this Agreement. Any Note Proceeds
shall also be delivered to the Administrative Agent, and held by the
Administrative Agent for the benefit of the Lenders and the Administrative
Agent, subject to the Account Intermediary Liens, as applicable, and any
payments in respect of any Note Proceeds shall be deposited into the Proceeds
Account. The amounts held in the Proceeds Account from time to time shall bear
interest upon such terms as are selected by the Administrative Agent from time
to time at the wholesale money market rate of the Administrative Agent for
deposits of similar currency, amount and maturities. Unless and until
delivered to the Borrowers, title to the Aluminum Proceeds and the Other Asset
Sale Proceeds, including the Note Proceeds (the Aluminum Proceeds and the Other
Asset Sale Proceeds, including the Note Proceeds, collectively, the "Asset Sale
Proceeds"), and any payments in respect of or interest thereon, will remain
with the Administrative Agent for the benefit of the Administrative Agent and
the Lenders, subject to the Account Intermediary Liens, as applicable. The
interest of the Philip Entities, if any, in and to the Asset Sale Proceeds, and
any payments in respect of or interest thereon, will at all times continue to
be subject to the liens and security interests and to all of the rights and
remedies of the Agents and the Lenders set forth in the Credit Documents and
this Agreement, and the Account Intermediary Liens, as applicable.
Additionally, the Philip Entities hereby grant a lien and security interest to
the Administrative Agent in all Asset Sale Proceeds for the benefit of the
Administrative Agent, the Security Agent and the Lenders to secure all present
and future indebtedness, liabilities and obligations of the Philip Entities
under the Credit Documents.
(b) Unless and until a Release Termination Event has occurred, and subject
to fulfillment of the conditions precedent referred to in Article 2 hereof, the
Administrative Agent will release from the Proceeds Account, and will deliver
to the Borrowers upon request in accordance with Section 2.01(c) hereof, funds
in accordance with the Budget (as defined below) and to the extent permitted
herein, including, without limitation, (i) the supplemental availability in the
aggregate amount of no more than $10,000,000, and (ii) funds sufficient to
ensure fulfillment by the Borrowers of the conditions precedent referred to in
Sections 2.01(a) and (b) below; provided, however, that the aggregate amount of
funds released from the Proceeds Account and delivered to the Borrowers shall
not exceed $93,000,000. Nothing in this Agreement shall obligate the Lenders
or the Administrative Agent to release any funds or Collateral in excess of the
amount held in the Proceeds Account from time to time. Proceeds from the sale
of Philip Utilities Management Corporation shall be treated in accordance with
Section 1(a)(vi)(C) of the Restructuring Term Sheet. In the event that
aggregate Asset Sale
<PAGE> 5
- 5 -
Proceeds in excess of $93,000,000 are received by the Administrative Agent in
the Proceeds Account (after post-closing adjustments of no greater than
$4,000,000 with respect to the Aluminum Proceeds), such proceeds, and interest
thereon, shall be held in the Proceeds Account (subject to the Account
Intermediary Liens, as applicable,) for application to the Senior Secured Term
Debt (as defined in the Restructuring Term Sheet) upon Plan Implementation (as
defined in the Restructuring Term Sheet) in accordance with paragraph
1(a)(iv)(B) of the Restructuring Term Sheet, or for application pursuant to
Section 3.03 hereof upon the occurrence of a Release Termination Event. On,
but not before, delivery of any funds in the Proceeds Account to the Borrowers,
title to such funds shall pass from the Administrative Agent (for the benefit
of the Administrative Agent and the Lenders) to the Borrowers. Such funds
shall only be available to the Borrowers in amounts set forth in the Budget and
as otherwise provided herein, provided, however, that no funds in the Proceeds
Account which are subject to the Account Intermediary Liens shall be released
without the consent of the holders of the Account Intermediary Liens.
(c) For greater certainty, from and after the occurrence of a Release
Termination Event, no Philip Entity shall be entitled to receive any amounts
then held or thereafter deposited in the Proceeds Account or the Note Proceeds
(other than in connection with a consensual cash collateral arrangement among
the Borrowers and the Required Lenders), all of which shall be retained by and
titled in the Administrative Agent (for the benefit of the Administrative Agent
and the Lenders) subject to the Account Intermediary Liens, as applicable. From
and after the occurrence of a Release Termination Event, any amounts then held
or thereafter deposited in the Proceeds Account and the Note Proceeds, shall,
on the request of the Required Lenders, be paid by the Administrative Agent
Rateably to the Lenders to permanently repay or cash collateralize outstanding
Accommodation in accordance with the Credit Agreement, subject to Section 2.03
hereof, and the limit of the Credit (and all Tranches) shall be permanently
reduced at the time of such repayment by the amount so repaid.
SECTION 1.02 THE BUDGET: A budget dated April 1, 1999 (the "Budget") has
been prepared by PSC and PSI and has been approved in form and substance by the
Required Lenders. The Budget reflects the projected cash requirements,
including utilization of asset sale proceeds, of the Philip Entities from the
date hereof through December 31, 1999, calculated on a monthly basis. The
aggregate amount of funds released to the Borrowers from the Proceeds Account
shall at no time exceed the then cumulative monthly projected utilization of
asset sale proceeds set out in the Budget, plus $10,000,000.
SECTION 1.03 REPORTING REQUIREMENTS: The Borrowers shall continue to
provide (i) monthly financial statements to the Lenders (as required under the
Credit Agreement), and, (ii) bi-weekly reports to the Lenders containing (a)
comparisons of actual to projected cash flows; (b) rolling fourteen (14) week
cash flow forecasts; and (c) descriptions of proposed asset divestitures and
other significant events.
SECTION 1.04 BUDGET MODIFICATIONS: The Borrowers may modify the Budget
only with the consent of the Required Lenders.
<PAGE> 6
- 6 -
SECTION 1.05 COVENANTS: For so long as this Agreement shall remain in
effect, the Borrowers shall (i) ensure that the Philip Entities do not make
capital expenditures except as specifically set out in the Budget and (ii)
comply and cause the Philip Entities to comply with the negative covenants set
out in Subsections 8.02(f) (i.e., Restricted Payments), 8.02(i) (i.e.,
Transactions with Affiliates) and 8.02(v)(vi) (i.e., Investments and Financial
Assistance) of the Credit Agreement, provided that, for the purposes of this
Agreement, the restriction against Investments and Financial Assistance set out
in Subsection 8.02(v)(vi) of the Credit Agreement shall be deemed to extend to
December 31, 1999. Nothing in this Agreement shall serve as a waiver of any
covenant set out in the Credit Agreement or the Lock-Up Agreement.
SECTION 1.07 PROHIBITED USE OF CASH COLLATERAL: Notwithstanding anything
herein to the contrary, no Cash Collateral may be used to object to or contest
in any manner, or raise any objections, counterclaims or defenses to, the
validity, perfection, priority or enforceability of the claims or liens of the
Agents and the Lenders, or to investigate or assert any claims or causes of
action against the Agents or the Lenders. Furthermore, absent the approval of
the Required Lenders, the Philip Entities shall not make any payments outside
the ordinary course of business to any of their officers, directors, employees,
representatives or agents, other than the management retention arrangements
approved by the Required Lenders, or make any other payments outside the
ordinary course of business.
ARTICLE TWO
CONDITIONS PRECEDENT
SECTION 2.01 CONDITIONS PRECEDENT: The Administrative Agent shall not be
obligated to release any funds to the Borrowers from the Proceeds Account under
Section 1.01 unless all of the following shall have occurred and/or are true:
(a) PROFESSIONAL FEES AND DISBURSEMENTS: All of the outstanding accounts
of Blake, Cassels & Graydon (and their agents), White & Case LLP (and their
agents), KPMG Investigation and Security Inc., KPMG Chartered Accountants and
PricewaterhouseCoopers LLP shall have been paid at or prior to the date of such
release of such portion of the Asset Sales Proceeds;
(b) REPLENISHING RETAINER FOR PROFESSIONAL FEES AND DISBURSEMENTS: All
amounts required to be paid to Blake, Cassels & Graydon pursuant to subsection
8.01(ac) of the Credit Agreement for deposit in the escrow account referred to
in such subsection shall have been so paid; and
(c) APPROVED BUDGET: Such funds are to be released only upon a written
request from the Borrowers (each being a "Request"), in the form annexed as
Exhibit A, accompanied by a certificate from the chief financial officer of PSC
(each being a "Certificate"),
<PAGE> 7
- 7 -
in the form annexed as Exhibit B, certifying the availability of the amount
requested pursuant to the Budget and this Agreement and representing that (i)
all conditions precedent hereunder have been satisfied (or will be satisfied in
connection with the release of funds in accordance with the terms of the
corresponding Request), (ii) the Philip Entities are in full compliance with
the provisions of this Agreement, (iii) the Philip Entities require the amount
requested in order to maintain operations as reflected in the Budget and such
funds are not readily available elsewhere, and (iv) no Release Termination
Event has occurred. The Administrative Agent shall be entitled to rely upon
any Certificate believed by it to be genuine, provided that the Administrative
Agent does not have actual knowledge to the contrary with respect to the
matters set out in paragraph 8 of such Certificate. The Administrative Agent
shall not be deemed to have knowledge or notice of the occurrence of any
Release Termination Event unless the Administrative Agent has received written
notice from a Lender specifying such Release Termination Event. Subject to the
preceding two sentences, the Administrative Agent shall not incur any liability
to any Lender as a result of its release of funds from the Proceeds Account in
accordance with a Request and Certificate.
SECTION 2.02 AUTHORIZED PAYMENTS BY ADMINISTRATIVE AGENT: If the
conditions precedent to the release of Asset Sales Proceeds set forth in
Sections 2.01(a) and/or 2.01(b) hereof have not been satisfied at the time of
any request for release of funds delivered pursuant to Section 2.01(c), the
Administrative Agent shall be authorized to release funds from the Proceeds
Account as required to satisfy the conditions precedent set forth in such
Sections 2.01(a) and/or 2.01(b) prior to any such requested release of funds.
Without limiting the forgoing, the Administrative Agent shall also have the
right from time to time to pay from the Proceeds Account any amounts payable by
the Borrowers pursuant to Sections 8.01(s) or 8.01(ac) of the Credit Agreement.
SECTION 2.03 ACCOUNT INTERMEDIARY LIENS: Notwithstanding anything to the
contrary herein, no Cash Collateral or Asset Sale Proceeds subject to the
Account Intermediary Liens shall be released, paid or delivered to the
Borrowers without the prior written consent of the holders of the Account
Intermediary Liens.
ARTICLE THREE
RELEASE TERMINATION EVENTS; REMEDIES
SECTION 3.01 RELEASE TERMINATION EVENTS: For the purposes hereof, a
"Release Termination Event" shall occur if:
(i) in the opinion of the Required Lenders (as evidenced by a
resolution of the Required Lenders), (a) any of the Philip Entities fail
to perform or comply with the provisions of this Agreement in any
respect, or (b) any Certificate contains a misrepresentation;
<PAGE> 8
- 8 -
(ii) (a) a Termination Event (as defined in the Lock-Up Agreement)
has occurred under Section 6(a)(i), (ii), (iii) or (iv) of the Lock-Up
Agreement, and the Majority Lenders (as defined in the Lock-Up Agreement)
have elected to terminate the Lock-Up Agreement, or (b) the Lock-Up
Agreement has been terminated by PSC in accordance with Section 6(c) of
the Lock-Up Agreement; or
(iii) any Philip Entity is the subject of a voluntary or involuntary
petition or other proceedings under any insolvency statute in any
jurisdiction (including, without limitation, the pre-arranged bankruptcy
filings contemplated in the Restructuring Term Sheet and the Lock-Up
Agreement, it being the intention of the parties in the event of such
contemplated filings that this Agreement shall be supplanted by a
Stipulation and Order Authorizing and Restricting Use of Cash Collateral
and Granting Adequate Protection of Secured Claims, and an equivalent
order in the proceedings to be commenced by one or more of the Philip
Entities under the CCAA, to be agreed among the parties hereto).
SECTION 3.02 CONSEQUENCES OF RELEASE TERMINATION EVENT: Upon the
occurrence of a Release Termination Event and without further action by the
Administrative Agent or the Lenders: (i) the Philip Entities' entitlement to
the Cash Collateral or Asset Sale Proceeds shall terminate; and (ii) the
Administrative Agent and Lenders shall be relieved from any further obligation
to disburse funds to the Borrowers from the Proceeds Account pursuant to this
Agreement, provided that where a disbursement is made by the Administrative
Agent in good faith subsequent to the occurrence of a Release Termination Event
but prior to the Administrative Agent having received written notice of such
Release Termination Event, the Administrative Agent shall have no liability to
the Lenders with respect to such disbursement.
SECTION 3.03 REMEDIES: Immediately upon the occurrence of a Release
Termination Event, the Agents and the Lenders may exercise any and all of their
rights and remedies granted under the Credit Documents, this Agreement and
applicable law, including, without limitation, applying (subject to the Account
Intermediary Liens, as applicable) the Note Proceeds and the funds held in the
Proceeds Account for Rateable repayment to the Lenders or cash
collateralization in accordance with the Credit Agreement of all outstanding
Accommodation, in which event the limit of the Credit (and all Tranches) shall
be permanently reduced at the time of such repayment by the amount so repaid.
The Agents and the Lenders shall have the right to exercise such rights and
remedies as to all or such part of the Collateral, the Note Proceeds and the
funds held in the Proceeds Account as the Required Lenders shall, in their sole
discretion, elect. The Philip Entities shall cooperate and comply with the
requests of the Agents and the Lenders in connection with the occurrence and/or
declaration of a Release Termination Event and the exercise of any rights and
remedies in connection therewith. Subject to the Account Intermediary Liens,
as applicable, the Agents and the Lenders shall be entitled to apply the Note
Proceeds, the funds held in the Proceeds Account and the Collateral, including,
without limitation, the Cash Collateral, in accordance with the provisions of
the Credit Documents and this Agreement, and in no event shall the Agents and
the Lenders be subject to
<PAGE> 9
- 9 -
the equitable doctrine of "marshaling" or any other similar doctrine with
respect to the Note Proceeds, the funds held in the Proceeds Account or any of
their Collateral or otherwise. Any failure or delay of the Agents or the
Lenders to enforce their rights under this Section shall not constitute a
waiver of any of their rights.
ARTICLE FOUR
GENERAL
SECTION 4.01 PRIOR NEGOTIATIONS: This Agreement (and the attachments
hereto) constitute the entire agreement between the parties with respect to the
holding and release of Asset Sale Proceeds except as otherwise expressly agreed
in writing executed by or on behalf of PSC, PSI and the Lenders, and supersede
all prior agreements, understandings, negotiations and discussions with respect
to the subject matter hereof. There are no promises, undertakings,
representations or warranties by any of the parties not expressly set forth or
referred to herein or therein.
SECTION 4.02 HEADINGS: The headings in the Articles and Sections of this
Agreement are inserted for convenience of reference only and shall not affect
the construction or interpretation of this Agreement.
SECTION 4.03 SUCCESSORS AND ASSIGNS: This Agreement shall bind and enure
to the benefit of the parties and their respective successors and assigns,
heirs, executors, administrators and representatives. The obligations of the
Philip Entities hereunder shall be joint and several.
SECTION 4.04 LAW OF CONTRACT: This Agreement shall be governed by and
construed in accordance with the laws of the Province of Ontario and the laws
of Canada applicable in the Province of Ontario.
SECTION 4.05 COUNTERPART AND FACSIMILE: This Agreement may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute one and the same
instrument. Delivery of an executed signature page to this Agreement by any
party by facsimile transmission shall be effective as delivery of a manually
executed copy of this Agreement by such party.
SECTION 4.06 NO THIRD PARTY BENEFICIARIES: No rights are intended to be
created hereunder for the benefit of any third party or any direct, indirect or
incidental beneficiary, except as specifically provided herein.
SECTION 4.07 ACKNOWLEDGMENT AND CONFIRMATION: Each of the undersigned
Philip Entities acknowledges and agrees that all of the guarantees and security
provided by it to
<PAGE> 10
- 10 -
or for the benefit of any one or more of the Administrative Agent, the Security
Agent and the Lenders in connection with, or otherwise applicable to, the debts
and liabilities of itself or either one or both of the Borrowers to any one or
more of the Administrative Agent, the Lenders, the other Agents and their
respective Eligible Affiliates under, in connection with or with respect to any
one or more of the Credit Agreement, the other Credit Documents and the
Lender/Borrower Hedging Arrangements are hereby ratified and confirmed and
remain in full force and effect.
SECTION 4.08 NO WAIVER: The execution of this Agreement by the
Administrative Agent is not intended and shall not be deemed to be a waiver of
any of the rights or remedies of the Agents or the Lenders under applicable law
or any of the Credit Documents.
IN WITNESS OF WHICH the Philip Entities and the Administrative Agent, on
its own behalf and on behalf of the Lenders and the other Agents and their
respective Eligible Affiliates have executed this Agreement as of the date
indicated on the first page of this Agreement.
CANADIAN IMPERIAL
BANK OF COMMERCE (in its capacity as
Administrative Agent)
by:_____________________________
name:
title:
by:_____________________________
name:
title:
PHILIP SERVICES CORP.
PHILIP SERVICES (DELAWARE), INC.
LUNTZ CORPORATION
LUNTZ ACQUISITION (DELAWARE)
CORPORATION
<PAGE> 11
- 11 -
21ST CENTURY ENVIRONMENTAL
MANAGEMENT, INC.
21ST CENTURY ENVIRONMENTAL
MANAGEMENT, INC. OF NEVADA
21ST CENTURY ENVIRONMENTAL
MANAGEMENT, INC. OF PUERTO RICO
21ST CENTURY ENVIRONMENTAL
MANAGEMENT, INC. OF RHODE ISLAND
CHEMICAL POLLUTION CONTROL, INC. OF
FLORIDA - A 21ST CENTURY
ENVIRONMENTAL MANAGEMENT COMPANY
CHEMICAL POLLUTION CONTROL, INC. OF
NEW YORK - A 21ST CENTURY
ENVIRONMENTAL MANAGEMENT COMPANY
NORTHLAND ENVIRONMENTAL, INC.
RESI ACQUISITION (DELAWARE)
CORPORATION
CHEM-FREIGHT, INC.
REPUBLIC ENVIRONMENTAL RECYCLING
(NEW JERSEY), INC.
REPUBLIC ENVIRONMENTAL SYSTEMS
(PENNSYLVANIA), INC.
REPUBLIC ENVIRONMENTAL SYSTEMS
(TECHNICAL SERVICES GROUP), INC.
REPUBLIC ENVIRONMENTAL SYSTEMS
(TRANSPORTATION GROUP), INC.
<PAGE> 12
- 12 -
PHILIP ENTERPRISES INC./LES
ENTREPRISES PHILIP INC.
PHILIP ANALYTICAL SERVICES
CORPORATION
PHILIP ENVIRONMENTAL (ATLANTIC)
LIMITED
PHILIP ENVIRONMENTAL (ELMIRA) INC.
PHILIP ENVIRONMENTAL SERVICES
LIMITED
PHILIP INVESTMENT CORP.
PSC/IML ACQUISITION CORP.
RECYCLAGE D'ALUMINIUM QUEBEC
INC./QUEBEC ALUMINUM RECYCLING INC.
1195613 ONTARIO INC.
1233793 ONTARIO INC.
842578 ONTARIO LIMITED
COUSINS WASTE CONTROL CORPORATION
D & L, INC.
INTERMETCO U.S., INC.
BUTCO, INC.
ALLTIFT, INC.
INTERMETCO U.S.A. LTD.
GEORGIA TUBULAR PRODUCTS, INC.
NORTRU, INC.
<PAGE> 13
- 13 -
ALLWORTH, INC.
CHEMICAL RECLAMATION SERVICES, INC.
PHILIP RECLAMATION SERVICES,
HOUSTON, INC.
SOUTHEAST ENVIRONMENTAL SERVICES
COMPANY, INC.
CYANOKEM INC.
RHO-CHEM CORPORATION
SESSA, S.A. DE C.V.
THERMALKEM INC.
PEN METALS (DELAWARE), INC.
PHILIP ENVIRONMENTAL OF IDAHO
CORPORATION
PHILIP ENVIRONMENTAL (WASHINGTON)
INC.
BURLINGTON ENVIRONMENTAL INC.
[DELAWARE]
BURLINGTON ENVIRONMENTAL INC.
[WASHINGTON]
RESOURCE RECOVERY CORPORATION
TERMCO CORPORATION
GASOLINE TANK SERVICE COMPANY, INC.
UNITED DRAIN OIL SERVICE, INC.
PHILIP ENVIRONMENTAL SERVICES
CORPORATION
<PAGE> 14
- 14 -
SOLVENT RECOVERY CORPORATION
PHILIP INDUSTRIAL SERVICES (USA),
INC.
PHILIP INDUSTRIAL SERVICES GROUP,
INC.
ALRC, INC.
APLC, INC.
ALLWASTE ASBESTOS ABATEMENT
HOLDINGS, INC.
ALLWASTE ASBESTOS ABATEMENT, INC.
ALLWASTE ASBESTOS ABATEMENT OF NEW
ENGLAND, INC.
ONEIDA ASBESTOS REMOVAL, INC.
ONEIDA ASBESTOS ABATEMENT INC.
PHILIP ENVIRONMENTAL SERVICES, INC.
ACE/ALLWASTE ENVIRONMENTAL SERVICES
OF INDIANA, INC.
ALL SAFETY AND SUPPLY, INC.
PHILIP SCAFFOLD CORPORATION
ALLSCAFF, INC.
ALLWASTE ENVIRONMENTAL
SERVICES/NORTH CENTRAL, INC.
PHILIP SERVICES/OHIO, INC.
PHILIP WEST INDUSTRIAL SERVICES,
INC.
<PAGE> 15
- 15 -
PHILIP TRANSPORTATION AND
REMEDIATION, INC.
PHILIP SERVICES/SOUTH CENTRAL, INC.
PHILIP SERVICES/SOUTHWEST, INC.
PHILIP SERVICES HAWAII, LTD.
ALLWASTE SERVICIOS INDUSTRIALES DE
CONTROL ECOLOGICO S.A. DE C.V.
ALLWASTE TANK SERVICES S.A. DE C.V.
ALLWASTE TEXQUISITION, INC.
CALIGO DE MEXICO, S.A. DE C.V.
PHILIP AUTOMOTIVE, LTD.
INDUSTRIAL CONSTRUCTION SERVICES
COMPANY, INC.
J.D. MEAGHER/ALLWASTE, INC.
JAMES & LUTHER SERVICES, INC.
JESCO INDUSTRIAL SERVICES, INC.
PHILIP OIL RECYCLING, INC.
PHILIP INDUSTRIAL SERVICES OF TEXAS,
INC.
PHILIP SERVICES/LOUISIANA, INC.
PHILIP MID-ATLANTIC, INC.
PHILIP SERVICES/MISSOURI, INC.
PHILIP SERVICES/MOBILE, INC.
<PAGE> 16
- 16 -
PHILIP SERVICES/NORTH ATLANTIC, INC.
PHILIP SERVICES/NORTH CENTRAL, INC.
PHILIP SERVICES/OKLAHOMA, INC.
PHILIP PLANT SERVICES, INC.
PHILIP SERVICES/ATLANTA, INC.
BEC/PHILIP, INC.
PHILIP/WHITING, INC.
ALLWASTE OF CANADA LTD.
CALIGO RECLAMATION LTD.
ALLWASTE TANK CLEANING, INC.
ALLWASTE RAILCAR CLEANING, INC.
ALLWASTE RECOVERY SYSTEMS, INC.
PSC ENTERPRISES, INC.
ALLIES STAFFING, INC.
ALLIES STAFFING LTD.
ALLQUEST CAPITAL, INC.
PHILIP METALS (DELAWARE), INC.
INTSEL SOUTHWEST LIMITED PARTNERSHIP
PHILIP METALS INC.
PHILIP METALS RECOVERY (USA) INC.
<PAGE> 17
- 17 -
PHILIP SERVICES (PENNSYLVANIA), INC.
PHILIP METALS (NEW YORK), INC.
PHILIP ST, INC.
PHILIP CHEMISOLV HOLDINGS, INC.
PHILIP CHEMI-SOLV, INC.
DM ACQUISITION CORPORATION
DELTA MAINTENANCE, INC.
PHILIP REFRACTORY & CORROSION
CORPORATION
HARTNEY CORPORATION
PHILIP REFRACTORY SERVICES, INC.
TOTAL REFRACTORY SYSTEMS, INC.
PHILIP REFRACTORY & CORROSION
SERVICES, INC.
UNITED INDUSTRIAL MATERIALS, INC.
INDUSTRIAL SERVICES TECHNOLOGIES,
INC.
ADVANCED ENVIRONMENTAL SYSTEMS, INC.
ADVANCED ENERGY CORPORATION
INTERNATIONAL CATALYST, INC.
IST HOLDING CORP.
<PAGE> 18
- 18 -
CHEM-FAB, INC.
PIPING HOLDINGS CORP.
PIPING COMPANIES, INC.
PIPING MECHANICAL CORPORATION
HYDRO-ENGINEERING & SERVICE, INC.
MAC-TECH, INC.
SERV-TECH DE MEXICO S DE R.L. DE
C.V.
SERV-TECH MEXICANA S DE R.L. DE C.V.
PETROCHEM FIELD SERVICES DE
VENEZUELA
PHILIP ENTERPRISE SERVICE
CORPORATION
PHILIP MECHANICAL SERVICES OF
LOUISIANA, INC.
PHILIP ST PIPING, INC.
PHILIP TECHNICAL SERVICES, INC.
PHILIP/SECO INDUSTRIES, INC.
TIPCO ACQUISITION CORP.
PRS HOLDING, INC.
PHILIP PETRO RECOVERY SYSTEMS, INC.
SERV-TECH EPC, INC.
SERV-TECH CONSTRUCTION AND
MAINTENANCE, INC.
<PAGE> 19
- 19 -
SERV-TECH ENGINEERS, INC.
PHILIP F.C. SCHAFFER, INC.
SERV-TECH INTERNATIONAL SALES, INC.
SERV-TECH OF NEW MEXICO, INC.
SERV-TECH SERVICES, INC.
SERV-TECH SUDAMERICANA S.A.
SERVTECH CANADA, INC.
ST DELTA CANADA, INC.
TERMINAL TECHNOLOGIES, INC.
RMF GLOBAL, INC.
RMF INDUSTRIAL CONTRACTING, INC.
RMF ENVIRONMENTAL, INC.
PHILIP METALS (USA), INC.
ARC DUST PROCESSING (BARBADOS)
LIMITED
PHENCORP INTERNATIONAL FINANCE INC.
PHENCORP INTERNATIONAL B.V.
PHILIP SERVICES (NETHERLANDS) B.V.
PHILIP SERVICES (EUROPE) LIMITED
ALLIED METALS LIMITED
<PAGE> 20
- 20 -
B.M. METALS (RECYCLING) LTD.
BATH RECLAMATION (AVONMOUTH) CO.
LIMITED
BLACKBUSHE LIMITED
BLACKBUSHE METALS (WESTERN) LIMITED
ELLIOTT METAL COMPANY LIMITED
SOUTHERN HAULIERS LIMITED
T.C. FRASER (METALS) LIMITED
E. PEARSE (HOLDINGS) LIMITED
E. PEARSE & CO., LIMITED
C. PHILIPP & SONS (BRISTOL) LIMITED
MAYER PEARSE LIMITED
WIDSITE LIMITED
PHILIP METALS (EUROPE) LIMITED
PHENCORP REINSURANCE COMPANY INC.
PHILIP INTERNATIONAL DEVELOPMENT
INC.
CECATUR HOLDINGS
PHILIP SERVICES (DELAWARE), L.L.C.
CHEMISOLV LIMITED
ALLWASTE SERVICES OF EL PASO, INC.
<PAGE> 21
- 21 -
DEEP CLEAN, INC.
2766906 CANADA INC.
721646 ALBERTA LTD.
800151 ONTARIO INC.
912613 ONTARIO LTD.
PHILIP PLASMA METALS INC.
CALIGO PARTNERSHIP
BY ITS PARTNER ALLWASTE OF CANADA
LTD.
DELSAN DEMOLITION LIMITED
NORTRU, LTD.
and all other Guarantor Subsidiaries
(if any)
in each case by:
____________________________________
Colin Soule
Authorized Signatory
<PAGE> 22
Exhibit A
REQUEST AND DIRECTION
TO: Canadian Imperial Bank of Commerce, as Administrative Agent
RE: The agreement authorizing and restricting the use of proceeds of asset
sales (the "PROCEEDS AGREEMENT") dated as of April 5, 1999 among the
Restricted Parties and the Administrative Agent, on its own behalf and on
behalf of the Lenders and the other agents under the Credit Agreement
WHEREAS:
A. The Cdn. Borrower and the U.S. Borrower (collectively the "Borrowers")
would like to request that the Administrative Agent release and deliver to
the Borrowers certain Released Amounts pursuant to Section 2.01(c) of the
Proceeds Agreement.
B. Capitalized terms used but not defined in this Request and Direction have
the meanings given to such terms in the Proceeds Agreement.
THIS REQUEST AND DIRECTION WITNESSES THAT the Borrowers hereby irrevocably
request, acknowledge, authorize and direct as follows:
1. The Borrowers request that the Administrative Agent release $o (the
"Requested Amount") pursuant to Section 2.01 of the Proceeds Agreement.
2. In order to satisfy the conditions precedent set out in Sections 2.01(a)
and (b) of the Proceeds Agreement and, pursuant to Section 2.02 of the
Proceeds Agreement, the Borrowers irrevocably authorize and direct the
Administrative Agent to pay the following amounts from the Requested
Amount:
(a) $o [EG. PAYMENT OF PROFESSIONAL FEES]
and to pay the balance of the Requested Amount to [Philip Services
Corp./Philip Services (Delaware), Inc.]
and this shall be the Administrative Agent's good and sufficient authority for
doing so.
DATED as of o, 1999.
PHILIP SERVICES CORP. PHILIP SERVICES (DELAWARE), INC.
by:_______________________________ by:_______________________________
name: name:
title: title:
<PAGE> 23
Exhibit B
CERTIFICATE
TO: Canadian Imperial Bank of Commerce, as Administrative Agent
RE: The agreement authorizing and restricting the use of proceeds of asset
sales (the "PROCEEDS AGREEMENT") dated as of April 5, 1999 among the
Restricted Parties and the Administrative Agent, on its own behalf and on
behalf of the Lenders and the other agents under the Credit Agreement
I, o, in my capacity as Chief Financial Officer of the Cdn. Borrower,
certify on behalf of the Cdn. Borrower, and without personal liability, as
follows:
1. Capitalized terms used but not otherwise defined in this Certificate have
the respective meanings given to such terms in the Proceeds Agreement.
2. This Certificate is furnished to you pursuant to subsection 2.01(c) of
the Proceeds Agreement in connection with a request and direction (the
"REQUEST AND DIRECTION") delivered today to the Administrative Agent by
the Cdn. Borrower and the U.S. Borrower (collectively the "BORROWERS")
requesting the release and delivery of $o (the "REQUESTED AMOUNT") to the
Borrowers.
3. I have made, or caused to be made, such examinations or investigations as
are, in my opinion, necessary to make the statements of fact contained in
this Certificate and I have furnished this Certificate with the intent
that it may be relied on by the Administrative Agent as a basis for
releasing the Requested Amount in accordance with the Request and
Direction.
4. As of date of this Certificate and to the best of my knowledge, the
Philip Entities are in full compliance with the provisions of the Proceeds
Agreement.
5. As of the date of this Certificate and to the best of my knowledge, no
Release Termination Event has occurred.
6. Upon the release of funds by the Administrative Agent as directed in the
Request and Direction, the conditions precedent set out in Section 2.01 of
the Proceeds Agreement will be satisfied.
7. The Philip Entities require the Requested Amount in order to maintain
operations as reflected in the Budget and such funds are not readily
available elsewhere.
8. The Requested Amount is less than or equal to the amount of funds in the
Proceeds Account available to be released by the Administrative Agent to
the Borrowers as of the
<PAGE> 24
- 2 -
date of this Certificate (the "Available Amount"), such Available Amount
being calculated as follows:
<TABLE>
<S> <C>
Utilization of Asset Sale Proceeds set out in the Budget for all prior calendar
months $-
Utilization of Asset Sale Proceeds set out in the Budget for current calendar month $-
Plus
SUBTOTAL $10,000,000
-----------
Less aggregate funds previously released from Proceeds Account $-
TOTAL $-
-----------
The lesser of (i) funds currently held in Proceeds Account $-
and (ii) Total $-
equals (iii) AVAILABLE AMOUNT $-
</TABLE>
Dated as of ---- day of ----, 1999
---- , in my capacity as Chief Financial Officer of Philip Services Corp.
_______________________________
<PAGE> 1
Exhibit 21
<TABLE>
<CAPTION>
ORGANIZATION CHART - AS AT APRIL 15, 1999
COMPANY OWNERSHIP JURISDICTION
Philip Services Corp. Ontario
<S> <C> <C> <C>
2766906 Canada Inc. 100% Canada
721646 Alberta Ltd. 100% Alberta
Arc Dust Processing (Barbados) Limited 100% Barbados
Allwaste of Canada Ltd. 100% Ontario
Caligo Partnership 90% Ontario
Caligo Reclamation Ltd. 100% Ontario
Caligo Partnership 10% Ontario
Cecatur Holdings 1% Ireland
Philip Services (Delaware) L.L.C. 100% Delaware
Luntz Corporation 80% Delaware
Luntz Acquisition (Delaware) Corporation 100% Delaware
21st Century Environmental Management, Inc. 100% Delaware
21st Century Environmental Management, Inc. of Nevada 100% Nevada
21st Century Environmental Management, Inc. of Puerto Rico 100% Delaware
21st Century Environmental Management, Inc. of Rhode 100% Rhode Island
Island
Chemical Pollution Control, Inc. of Florida 100% Florida
Chemical Pollution Control, Inc. of New York 100% New York
Northland Environmental, Inc. 100% Delaware
RESI Acquisition (Delaware) Corporation 100% Delaware
Chem-Freight, Inc. 100% Ohio
Republic Environmental Recycling (New Jersey), Inc. 100% New Jersey
Republic Environmental Systems (Pennsylvania), Inc. 100% Pennsylvania
Republic Environmental Systems (Technical Services Group), Inc. 100% New Jersey
Republic Environmental Systems (Transportation Group), Inc. 100% Pennsylvania
Philip Enterprises Inc./Les Entreprises Philip Inc. 100% Ontario
1195613 Ontario Limited 100% Ontario
1233793 Ontario Inc. 100% Ontario
2842-7979 Quebec Inc. 100% Quebec
800151 Ontario Inc. 100% Ontario
842578 Ontario Limited 100% Ontario
912613 Ontario Ltd. 100% Ontario
Cecatur Holdings 99% Ireland
Philip Services (Delaware) L.L.C. 100% Delaware
Fercyco & Partners 33%
Fercyco Incorporated 50% Ontario
Fercyco & Partners 33%
Fers et Meteaux Recycles Ltd. 50% Quebec
K-Scrap Resources Inc. 42% Ontario
Luntz Corporation 19% Delaware
Phencorp International Finance Inc. 100% Ireland
Phencorp International B.V. 100% Netherlands
Philip Services (Netherlands) B.V. 100% Netherlands
(formerly Philip Services (Netherlands) B.V.)
P.S.C. Philip Services Iberica, S.L. 100% Spain
Philip Services (Europe) Limited 100% U.K.
Allied Metals Limited 100% U.K.
Arc Dust processing (UK) Limited 33% U.K.
B.M. Metals (Recycling) Ltd. 100% U.K.
Bath Reclamation (Avonmouth) Co. Limited 100% U.K.
Blackbushe Limited 100% U.K.
</TABLE>
- 1 -
<PAGE> 2
<TABLE>
<CAPTION>
ORGANIZATION CHART - AS AT APRIL 15, 1999
COMPANY OWNERSHIP JURISDICTION
<S> <C> <C>
Blackbushe Metals (Western) Limited 100% U.K.
Elliott Metal Company Limited 100% U.K.
Southern Hauliers Limited 100% U.K.
T.C. Fraser Metals Limited 75% U.K.
Cardiff Facility Company Limited 50% U.K.
E. Pearse (Holdings) Limited 100% U.K.
E. Pearse & Co. Limited 100% U.K.
C. Phillip and Sons (Bristol) Limited 100% U.K.
Mayer Pearse Limited 100% U.K.
Widsite Limited 100% U.K.
Philip Cardiff Facility Company Limited 50% U.K.
Philip Metals (Europe) Limited 100% U.K.
Philip Services (Delaware), Inc. 100% Delaware
Philip Industrial Services (USA), Inc. 100% Texas
Cousins Waste Control Corporation 100% Ohio
(formerly Cousins Waste Control Corporation)
Nortru Inc. 100% Michigan
Allworth Inc. 100% Alabama
Chemical Reclamation Service, Inc. 100% Texas
Philip Reclamation Services, Houston, Inc. 100% Texas
(formerly Philip Reclamation Services,
Houston, Inc.)
Southeast Environmental Services, Inc. 100% Texas
CyanoKEM, Inc. 100% Michigan
Nortru, Ltd. 100% Ontario
Philip MPS Industrial Services, L.L.C. 51% Delaware
Rho-Chem Corporation 100% California
Sessa, S.A. de C.V. 100% Mexico
ThermalKEM, Inc. 100% Delaware
Philip Environmental of Idaho Corporation 100% Delaware
(formerly Philip Environmental of Idaho Corporation)
Philip Environmental Washington Inc. 100% Washington
Burlington Environmental Inc. 100% Delaware
Burlington Environmental Inc. 100% Washington
(formerly Chemical Processors Inc.)
Resource Recovery Corporation 100% Washington
Termco Corporation 100% Washington
Gasoline Tank Service Company 100% Washington
Inc.
Philip Environmental Services Corporation 100% Missouri
(formerly Burlington Environmental Inc.)
Solvent Recovery Corporation 100% Missouri
Philip Industrial Services Group, Inc. 100% Delaware
(formerly Allwaste, Inc.)
ALRC, Inc. 100% Delaware
APLC, Inc. 100% Delaware
Allwaste Asbestos Abatement Holdings, Inc. 100% Delaware
(formerly Combined Waste Services, Inc.)
Allwaste Asbestos Abatement, Inc. 100% Delaware
Allwaste Asbestos Abatement of New England, 100% Massachusetts
Inc.
Oneida Asbestos Removal, Inc. 100% New York
Oneida Asbestos Abatement, Inc. 100% Delaware
Allwaste Tank Cleaning, Inc. 100% Georgia
(formerly Atlanta Truck Wash)
Allwaste Railcar Cleaning, Inc. 100% Delaware
</TABLE>
- 2 -
<PAGE> 3
<TABLE>
<CAPTION>
ORGANIZATION CHART - AS AT APRIL 15, 1999
COMPANY OWNERSHIP JURISDICTION
<S> <C> <C>
Allwaste Recovery Systems, Inc. 100% Georgia
(formerly Allwaste Services of Georgia, Inc)
Georgia Recovery Systems 7% Georgia
GRS/Lake Charles, Ltd. 50% Louisiana
Georgia Recovery Systems 92% Georgia
GRS/Lake Charles, Ltd. 50% Louisiana
Georgia Recovery Systems 92% Georgia
Caligo Reinigungages m.b.H. 100% Austria
Philip Environmental Services, Inc. 100% Delaware
(formerly Allwaste Environmental Services, Inc.)
Ace/Allwaste Environmental Services of 100% Illinois
Indiana, Inc.
(formerly Ace Power Rodding Corporation)
All Safety and Supply, Inc. 100% Texas
(formerly Wildwood Sporting Goods &
Taxidermy, Inc.)
AllScaff, Inc. 100% Tennessee
(formerly Southern Scaffold, Inc.)
Allwaste Environmental Services/North 100% Illinois
Central, Inc.(ILLINOIS CORP - FOR UNION
PURPOSES ONLY)
Allwaste Servicios Industriales de Control 60% Mexico
Ecologico S.A. de C.V.
Allwaste Tank Services S.A. de C.V. 60% Mexico
Allwaste Texquisition Inc. 100% Texas
(formerly Allwaste Texquisition, Inc.)
BEC/Philip, Inc. 100% Alabama
(formerly BEC/Philip, Inc.)
Caligo de Mexico, S.A. de C.V. 99% Mexico
Industrial Construction Services Co., Inc. 100% Alabama
(formerly Coal Construction, Inc.)
James & Luther Services, Inc. 100% Delaware
Allwaste Services of El Paso, Inc. 100% Delaware
Jesco Industrial Service, Inc. 100% Kentucky
Philip Automotive, Ltd. 100% Pennsylvania
(formerly Philip Automotive, Ltd.)
Deep Clean, Inc. 100% Michigan
Philip Services Hawaii, Ltd. 100% Hawaii
(formerly Allwaste of Hawaii, Ltd.)
Philip Industrial Services of Texas, Inc. 100% Texas
(formerly Allwaste Services of Port Arthur,
Inc.)
Philip Services/Louisiana, Inc. 100% Louisiana
(formerly Allwaste Services of New Orleans)
Philip Mid-Atlantic, Inc. 100% Maryland
(formerly Clean America, Inc.)
Philip Services/Missouri, Inc. 100% Delaware
(formerly Philip Services/Missouri, Inc.)
Philip Services/Mobile, Inc. 100% Alabama
(formerly Philip Services/Mobile, Inc.)
Philip Services/North Atlantic, Inc. 100% Delaware
(formerly Allwaste Environmental
Services/North Atlantic, Inc.)
Philip Services/North Central, Inc.. 100% Iowa
(formerly Allwaste Environmental
Services/North Central, Inc.)
Philip Services/Ohio, Inc. 100% Ohio
(formerly Allwaste Environmental Services
of Ohio, Inc.)
Philip Oil Recycling, Inc. 100% North Dakota
(formerly Oil Recycling, Inc.)
Philip Services/Oklahoma, Inc. 100% Oklahoma
(formerly Allwaste Environmental Services
of Oklahoma, Inc.)
Philip Plant Services, Inc. 100% Delaware
</TABLE>
- 3 -
<PAGE> 4
<TABLE>
<CAPTION>
ORGANIZATION CHART - AS AT APRIL 15, 1999
COMPANY OWNERSHIP JURISDICTION
(formerly Allwaste Intermountain Plant
Services, Inc.)
<S> <C> <C>
Philip Scaffold Corporation 100% Colorado
(formerly AllScaff, Inc.)
Philip Services/Atlanta, Inc. 100% Georgia
(formerly Philip Services/Atlanta, Inc.)
Philip Services/Southwest, Inc. 100% Arizona
(formerly Philip Services/Southwest, Inc.)
Philip Services South Central, Inc.. 100% Colorado
(formerly Allwaste Environmental
Services/South Central, Inc.)
Philip West Industrial Services, Inc. 100% California
(formerly Industrial Hydro-Chem Services,
Inc.)
Philip Transportation and 100% California
Remediation, Inc.
(formerly Allwaste Transportatin and
Remediation, Inc.)
Philip/J.D. Meagher, Inc. 100% Massachusetts
(formerly Philip/J.D. Meagher, Inc.)
Philip/Whiting, Inc. 100% Delaware
(formerly Philip/Whiting, Inc.)
PSC Enterprises, Inc. 100% Delaware
Allies Staffing, Inc. 100% Delaware
Allies Staffing Ltd. 100% Ontario
Allquest Capital, Inc. 100% Delaware
Allquest Compression Services L.L.C. 50% Delaware
HydroServe Westlake, L.L.C. 50% Delaware
Philip ST, Inc. 100% Texas
(formerly Serv-Tech, Inc.)
Philip Chemisolv Holdings, Inc. 100% Delaware
(formerly Philip Chemisolv Holdings)
Chemisolv Limited 100% U.K.
Nutrisolv Ireland Ltd. 100%
Philip Chemi-Solv, Inc. 100% Texas
(formerly Philip Chemi-Solv, Inc.)
DM Acquisition Corporation 100% Nevada
Delta Maintenance, Inc. 100% Louisiana
Dotspec Ltd. 100% U.K.
Industrial Services Technologies, Inc. 100% Colorado
Advanced Environmental Systems, Inc. 100% Colorado
Advanced Energy Corporation 100% Colorado
International Catalyst, Inc. 100% Nevada
IST Holding Corp. 100% Colorado
Chem-Fab, Inc. 100% Texas
Piping Holdings Corp. 100% Oklahoma
Piping Companies, Inc. 100% Oklahoma
Piping Mechanical Corp. 100% Colorado
Hydro-Engineering & Service, 100% Texas
Inc.
Mac-Tech, Inc. 100% Texas
Serv-Tech de Mexico, S. de R.L. 95% Mexico
Serv-Tech Mexicana, s. de R.L. 95% Mexico
Serv-Tech de Mexico, S. de R.L. 5% Mexico
Petrochem Field Services de Venezuela, S.A. 70% Venezuela
Philip Enterprise Service Corporation 100% North Carolina
(formerly Philip Enterprise Service Corporation)
Philip Mechanical Services of Louisiana, Inc. 100% Louisiana
(formerly Philip Mechanical Services of Louisiana,
Inc.)
Philip Refractory and Corrosion Corporation 100% Nevada
(formerly Hartney Industrial Services Corporation)
</TABLE>
- 4 -
<PAGE> 5
<TABLE>
<CAPTION>
ORGANIZATION CHART - AS AT APRIL 15, 1999
COMPANY OWNERSHIP JURISDICTION
<S> <C> <C>
Hartney Corporation 100% Nevada
Philip Corrision Services, Inc. 100% Nevada
(formerly Philip Refractory
Services, Inc.)
Total Refractory Systems, Inc. 100% Nevada
United Industrial Materials, Inc. 100% Nevada
Philip Refractory Services, Inc. 100% Nevada
(formerly Philip Refractory Services, Inc.)
Philip ST Piping, Inc. 100% Texas
(formerly Philip ST Piping, Inc.)
Philip Technical Services, Inc. 100% Texas
(formerly Philip Technical Services, Inc.)
Philip/SECO Industries, Inc. 100% Louisiana
(formerly Philip/SECO Industries, Inc.)
TIPCO Acquisition Corp. 100% Texas
PRS Holding, Inc. 100% Texas
Philip Petro Recovery Systems, Inc. 100% Texas
(formerly Philip Petro Recovery Systems,
Inc.)
Serv-Tech EPC, Inc. 100% Nevada
Petrochem Field Services de Venezuela, S.A. 30% Venezuela
Serv-Tech Construction and Maintenance, Inc. 100% Texas
(formerly Serv-Tech EPC-Houston, Inc.)
Serv-Tech Engineers, Inc. 100% Louisiana
F.C. Schaffer & Associates, Inc. 100% Louisiana
(formerly F.C. Schaffer &
Associates, Inc.)
Serv-Tech Europe GMBH 100% Germany
Refinery Maintenance International Limited 100% U.K.
Serv-Tech International Sales, Inc. 100% Virgin Islands
Serv-Tech Mexicana, s. de R.L. 5% Mexico
Serv-Tech de Mexico, S. de R.L. 5% Mexico
Serv-Tech of New Mexico, Inc. 100% New Mexico
Serv-Tech Services, Inc. 100% Texas
Serv-Tech Sudamericana, S.A. 98% Venezuela
ServTech Canada, Inc. 100% Canada
ST Delta Canada 100% Ontario
Terminal Technologies, Inc. 100% Texas
RMF Global, Inc. 100% Ohio
(formerly Philip Environmental Services Acquisition
Corporation)
RMF Industrial Contracting, Inc. 100% Michigan
RMF Environmental, Inc. 100% Ohio
Philip Metals (USA), Inc. 100% Ohio
D & L, Inc. 100% Pennsylvania
Intermetco US Inc. 100% Michigan
Butco Inc. 100% New York
Alltift Inc. 50% New York
Intermetco USA Ltd. 100% New York
Cappco Tubular Products USA, Inc. 100% Georgia
(formerly Cappco Tubular Products USA, Inc.)
JW Ventures Inc. 50% Texas
Philip Metals Recovery (USA) Inc. 100% Arizona
(formerly Waxman Resources (USA) Inc.)
Philip Metals (New York), Inc. 100% New York
(formerly Philip Metals (New York), Inc.)
Philip Metals Inc. 100% Ohio
(formerly Philip Metals (Ohio), Inc.)
Philip Services (Pennsylvania), Inc. 100% Pennsylvania
R&R Trucking Inc. 50% Ontario
</TABLE>
- 5 -
<PAGE> 6
<TABLE>
<CAPTION>
ORGANIZATION CHART - AS AT APRIL 15, 1999
COMPANY OWNERSHIP JURISDICTION
<S> <C> <C>
Sablix Inc. 100% Quebec
Phencorp Reinsurance Company Inc. 100% Barbados
Philip Analytical Services Corporation 100% Ontario
(formerly Barringer Laboratories Limited)
Philip Environmental (Atlantic) Limited 100% Nova Scotia
Philip Environmental (Elmira) Inc. 100% Ontario
(formerly 1008746 Ontario Inc.)
Philip Environmental Services Limited 100% Ontario
(formerly Delsan Environmental Group Inc.)
Delsan Aim Environmental Services Inc. 50% Quebec
Delsan Cleveland Environmental Services Inc. 50% Canada
Delsan Demolition Limited 100% Ontario
(formerly Delsan Contracting Limited)
York Thomas Delsan Decommissioning Inc. 33% Ontario
Philip Industries (Europe) Limited 100% U.K.
Philip Industrial Services (Europe) Limited 100% U.K.
Philip International Development Inc. 100% Barbados
Philip Servicos Industriais Do Brasil Ltda 99% Brazil
Recycomb S.A. 24% Argentina
Resicontrol S.A. 25% Brazil
Philip Investment Corp. 100% Ontario
Philip Plasma Metals Inc. 100% Ontario
PSC (Europe) Limited 100% U.K.
PSC/IML Acquisition Corp. 100%
Philip Utilities Management Corporation 70% Ontario
1242204 Ontario Inc. 100% Ontario
Braemar Acres Limited 90% Ontario
Braemar Acres Limited 10% Ontario
Philip Utilities Management (Delaware) Corporation 100% Delaware
Allwaste/NAL, Inc. 100% Arizona
CDM Philip Inc. 80% Washington
Enviroganics of Texas, Inc. 100% Texas
Madsen-Barr/Philip Utilities Management Corporation, Inc. 100% Delaware
(formerly Madsen/Barr-Allwaste, Inc.)
Ridin Pipeline Services, Inc. 100% Florida
Philip Automated Management Controls, Inc. 100% Georgia
(formerly PAMC ANVIC Inc.)
Philip Utilities Management (Indiana) Corporation 100% Indiana
Philip Utilities Management (Maine) Corporation 100% Maine
Philip Utilities Management (Massachusetts) Corporation 100% Massachusetts
Philip Utilities Management (New Jersey) Corporation 100% New Jersey
Utility Management & Engineering, Inc. 100% New Jersey
Philip Utilities Management (Texas) Corporation 100% Texas
Dittman-Merka Enterprises Inc. 75% Texas
Southwest Utilities, Inc. 100% Texas
Walker Water Works, Inc. 100% Texas
Utility Systems, Inc. 100% Texas
Philip Utilities Management (Louisiana)Corporation 100% Louisiana
Magnolia Construction Company, Inc. 100% Louisiana
Trimax Residuals Management (USA), Inc. 100% Delaware
Rockcliffe Research Management Inc. 100% Canada
(formerly Radian Research Management)
Thorburn Penny Limited 100% Ontario
(formerly 675359 Ontario Inc.)
Trimax Residuals Management, Inc. 100% Alberta
</TABLE>
- 6 -
<PAGE> 7
<TABLE>
<CAPTION>
ORGANIZATION CHART - AS AT APRIL 15, 1999
COMPANY OWNERSHIP JURISDICTION
<S> <C> <C>
(formerly Trimax Residuals Management, Inc.)
Uniflo Utilities Management Corporation 100% Canada
Construction et Pavage Nord Americain Ltee 51% Quebec
Canarehab Inc. 100% Quebec
Uniflo Corporation 100% Ontario
(formerly Uniflo Corporation)
Uniflo Pipeliners East Inc. 100% Ontario
Uniflo Sewer Services Inc. 100% Ontario
Uniflow Drain Services, Inc. 100% Ontario
1291063 Ontario Inc. 100% Ontario
Recyclage d'Aluminium Quebec Inc./Quebec Aluminium Recycling Inc. 100% Canada
33% Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 61,564
<SECURITIES> 0
<RECEIVABLES> 349,905
<ALLOWANCES> (24,396)
<INVENTORY> 32,633
<CURRENT-ASSETS> 601,020
<PP&E> 600,230
<DEPRECIATION> (165,066)
<TOTAL-ASSETS> 1,147,679
<CURRENT-LIABILITIES> 1,373,188
<BONDS> 0
<COMMON> 1,351,482
0
0
<OTHER-SE> (1,744,607)
<TOTAL-LIABILITY-AND-EQUITY> 1,147,679
<SALES> 0
<TOTAL-REVENUES> 2,000,732
<CGS> 0
<TOTAL-COSTS> 1,720,344
<OTHER-EXPENSES> 1,494,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,830
<INCOME-PRETAX> (1,290,234)
<INCOME-TAX> 42,247
<INCOME-CONTINUING> (1,332,481)
<DISCONTINUED> (254,391)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,586,872)
<EPS-PRIMARY> (10.16)
<EPS-DILUTED> (10.16)
</TABLE>
