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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission file number 0-30417
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PHILIP SERVICES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 98-0131394
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
5151 SAN FELIPE, HOUSTON 77056
TEXAS (Zip Code)
(Address of Principal Executive Offices)
(713) 623-8777
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ]. No [X].
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ]. No [X].
The number of shares of common stock of the Registrant outstanding at
August 12, 2002 was 27,897,868.
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REPORT INDEX
TO FORM 10-Q
10-Q PART AND ITEM NO. PAGE NO.
- --------------------------------------------------------------------------------------------------------
PART I - Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets of the Company as of June 30, 2002
and December 31, 2001............................................... 3
Consolidated Statements of Earnings of the Company for the Three
Months Ended June 30, 2002 and June 30, 2001........................ 4
Consolidated Statements of Earnings of the Company for the Six
Months Ended June 30, 2002 and June 30, 2001........................ 5
Consolidated Statements of Cash Flows of the Company for the Six
Months Ended June 30, 2002 and June 30, 2001........................ 6
Notes to Consolidated Financial Statements.......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 29
PART II - Other Information
Item 1. Legal Proceedings...................................................... 30
Item 2. Changes in Securities and Use of Proceeds.............................. 30
Item 3. Defaults upon Senior Securities........................................ 30
Item 4. Submission of Matters to a Vote of Security Holders.................... 30
Item 5. Other Information...................................................... 30
Item 6. Exhibits and Reports on Form 8-K....................................... 31
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q 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," "expect", "indicate" 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, 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. These risks and uncertainties
should be considered in evaluating forward-looking statements, and undue
reliance should not be placed on such statements. The Company does not assume
any obligation to update these forward-looking statements.
2
PHILIP SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents ........................ $ 12,164 $ 9,201
Accounts receivable (net of allowance for doubtful
accounts of $20,436 and $36,784, respectively) 229,402 233,494
Inventory for resale ............................. 33,078 33,038
Other current assets ............................. 77,917 50,281
------------ ------------
Total current assets ...................... 352,561 326,014
Property, plant and equipment ...................... 239,446 255,652
Other assets ....................................... 55,218 57,737
------------ ------------
Total assets .............................. $ 647,225 $ 639,403
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable ................................. $ 100,532 $ 102,714
Accrued liabilities .............................. 111,701 115,574
Current borrowings on operating facility ......... 28,712 12,129
Current maturities of long-term debt ............. 2,013 2,692
------------ ------------
Total current liabilities ................. 242,958 233,109
Long-term debt ..................................... 347,942 339,392
Deferred income taxes .............................. 6,382 7,882
Other liabilities .................................. 68,011 70,051
Contingencies (Note 17)
Stockholders' deficit .............................. (18,068) (11,031)
------------ ------------
Total liabilities and stockholders' deficit $ 647,225 $ 639,403
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
3
PHILIP SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001
--------------- ---------------
Revenue .......................................... $ 351,692 $ 391,266
Operating expenses ............................... 291,702 337,868
Special charges (Note 10) ........................ 2,814 3,350
Selling, general and administrative costs ........ 34,314 34,326
Depreciation and amortization .................... 10,447 11,069
--------------- ---------------
Income from operations ........................... 12,415 4,653
Interest expense ................................. 12,897 9,548
Other (income) expense, net ...................... 1,530 (6,180)
--------------- ---------------
Income (loss) before provision for income taxes .. (2,012) 1,285
Provision for income taxes ....................... 572 836
--------------- ---------------
Income (loss) from continuing operations ......... (2,584) 449
Income (loss) from discontinued operations (net of
taxes) ........................................... (3,683) 114
--------------- ---------------
Net income (loss) ................................ $ (6,267) $ 563
=============== ===============
Basic and diluted income (loss) per common share..
Continuing operations ......................... $ (0.09) $ 0.02
Discontinued operations ....................... (0.14) --
--------------- ---------------
Net income (loss) ........................... $ (0.23) $ 0.02
=============== ===============
Basic and diluted common shares outstanding ...... 27,457 24,287
=============== ===============
The accompanying notes are an integral part
of these consolidated financial statements.
4
PHILIP SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001
--------------- ---------------
Revenue .......................................... $ 712,583 $ 799,422
Operating expenses ............................... 603,687 688,579
Special charges (Note 10) ........................ 7,414 6,147
Selling, general and administrative costs ........ 65,979 78,137
Depreciation and amortization .................... 20,769 22,081
--------------- ---------------
Income from operations ........................... 14,734 4,478
Interest expense ................................. 23,373 19,058
Other (income) expense, net ...................... 1,387 (6,885)
--------------- ---------------
Loss before provision for income taxes ........... (10,026) (7,695)
Provision for income taxes ....................... 922 1,345
--------------- ---------------
Loss from continuing operations .................. (10,948) (9,040)
Income (loss) from discontinued operations (net of
taxes) ........................................... (4,051) 396
--------------- ---------------
Net loss ......................................... $ (14,999) $ (8,644)
=============== ===============
Basic and diluted income (loss) per common share..
Continuing operations ......................... $ (0.42) $ (0.38)
Discontinued operations ....................... (0.16) 0.02
--------------- ---------------
Net loss .................................... $ (0.58) $ (0.36)
=============== ===============
Basic and diluted common shares outstanding ...... 25,874 24,045
=============== ===============
The accompanying notes are an integral part
of these consolidated financial statements.
5
PHILIP SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001
--------------- ---------------
CASH FLOW FROM OPERATING ACTIVITIES:
Loss from continuing operations ........................ $ (10,948) $ (9,040)
Items included in loss not affecting cash
Depreciation and amortization ................. 20,769 22,081
Accrued but unpaid interest ................... 8,635 7,599
Deferred income taxes ......................... (1,500) 449
Gain on sale of assets ........................ -- (4,651)
Other, net .................................... 273 (1,583)
--------------- ---------------
Cash flow before changes in assets and liabilities 17,229 14,855
Changes in assets and liabilities ................. (24,915) (58,389)
--------------- ---------------
Cash used in continuing operations ..................... (7,686) (43,534)
Cash provided by (used in) discontinued operations ..... (1,848) 396
--------------- ---------------
Cash used in operating activities ...................... (9,534) (43,138)
--------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sales of operations ................. 5,272 10,491
Purchase of property, plant and equipment ......... (9,087) (25,206)
Proceeds from sales of assets and other ........... -- (1,759)
--------------- ---------------
Cash used in investing activities ...................... (3,815) (16,474)
--------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from short-term and long-term debt ....... 29,596 57,176
Principal payments on short-term and long-term debt (13,284) (36,311)
--------------- ---------------
Cash provided by financing activities .................. 16,312 20,865
--------------- ---------------
Net change in cash for the period ...................... 2,963 (38,747)
Cash and cash equivalents, beginning of period ......... 9,201 38,747
--------------- ---------------
Cash and cash equivalents, end of period ............... $ 12,164 $ --
=============== ===============
The accompanying notes are an integral part
of these consolidated financial statements.
6
PHILIP SERVICES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
These Consolidated Financial Statements contain information relating to Philip
Services Corporation ("PSC"), a Delaware corporation, and its subsidiaries
(collectively, the "Company"), which has been prepared by management. As
described in the Company's Form 8-K filing of July 19, 2002, the Company has
engaged KPMG, LLP ("KPMG") as the Company's independent public accountants. The
independent public accountants have reviewed the Company's financial statements
and Form 10-Q for the period ended June 30, 2002.
The Consolidated Financial Statements herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). As applicable under such regulations, certain
information and footnote disclosures normally included in complete annual
financial statements have been condensed or omitted. The Company believes that
the presentation and disclosures herein are adequate to make the information not
misleading, in any material respect, and the financial statements reflect all
elimination entries and normal adjustments that are necessary for a fair
statement of the results for the three and six months ended June 30, 2002 and
June 30, 2001, respectively. Other than the adoption of Financial Accounting
Standards Board Statement No. 144 discussed in Note 18, there have been no
significant changes in the accounting policies of the Company during the periods
presented. For a description of these policies, see Note 2 of the Notes to the
Company's Consolidated Financial Statements included in the Company's Form 10-K
for the fiscal year ended December 31, 2001.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements. These
estimates and assumptions will also effect the reported amount of certain
revenues and expenses during the reporting period. Actual results could differ
materially based on any changes in estimates and assumptions that the Company
uses in the preparation of its financial statements.
The Company is an industrial services and metals services company that provides
industrial outsourcing, environmental services and metals services to major
industry sectors throughout North America.
CREDIT FACILITIES
The Company has two credit facilities, a $335.8 million term facility with a
syndicate of lenders ("credit facility") and a $195.0 million revolving credit
agreement ("revolving operating facility"). Under the credit facility and
revolving operating facility ("facilities"), more fully described in Note 7, the
Company is required to meet certain financial covenants. During 2001, the
Company was negatively impacted by the general slowdown in the economy, poor
conditions in the steel industry, the bankruptcy of major customers, and the
events of September 11, among other matters. The Company was unable to meet its
EBITDA and interest coverage covenants and as a result sought relief in March
2001, May 2001, November 2001, and April 2002.
Specifically, on April 12, 2002, the revolving operating facility was amended to
provide additional financing for the duration of the facility (the "mezzanine
financing"). The amendments increased the maximum amount that may be borrowed
under the revolving operating facility (exclusive of optional overadvances) to
$195 million from $175 million. In addition, the revolving operating facility
was amended to add a new Tranche Sub-B in the amount of $70 million. Because the
defined borrowing base under Tranche Sub-B is more liberal than under Tranches A
or B-Prime, and because a reserve of $25 million is not deducted from the
borrowing base under Tranche Sub-B as it is under Tranches A and B-Prime, the
net effect is to provide availability under Tranche Sub-B at times when there is
no availability under Tranches A and B-Prime. Approximately $31 million was
borrowed under Tranche Sub-B upon implementation to repay previous "overadvance"
borrowings during the first quarter of 2002. Tranche Sub-B is a revolving
facility, except that any payments of principal as a result of asset sales
(other than in the ordinary course of business) automatically reduce the
availability under Tranche Sub-B.
The covenants under the revolving operating facility were amended to eliminate
the interest coverage ratio, to waive the default under the EBITDA covenant for
the period ended December 31, 2001, and to lower the EBITDA covenant requirement
to $4.6 million, $9.7 million, $14.8 million and $20.4 million for the
cumulative year-to-date periods ending March 31, June 30, September 30, and
December 31, 2002, respectively. The revolving operating facility was also
amended to extend the maturity date of the facility to
7
April 8, 2003 from September 30, 2002. In June 2002, the revolving operating
facility was amended to allow Letters of Credit to be issued with expiration
dates as late as December 31, 2003. On the date of termination or maturity date,
whichever is earlier, the Company must either cash collateralize 105% of the
outstanding letters of credit or cause those letters of credit to be returned to
the agent of the facility. Investors are referred to Note 7(c) herein, as well
as to the full text of the documents filed as exhibits to the Company's periodic
reports with the SEC.
The Company's credit facility and the Intercreditor Agreement among the
Company's lenders were also amended primarily to permit or facilitate the
changes to the revolving operating facility. In addition, the interest coverage
ratio under the credit facility was eliminated, the EBITDA covenant requirements
reduced, and the default under the EBITDA covenant for the period ended December
31, 2001 waived.
At June 30, 2002, the Company was in compliance with the amended covenants under
the facilities. Although the Company intends to extend or replace the revolving
operating facility prior to its maturity on April 8, 2003, the success of such
efforts is uncertain.
RECLASSIFICATION
Certain reclassifications of prior periods' data have been made to conform with
the current period reporting.
(2) ACCOUNTS RECEIVABLE (in thousands)
JUNE 30, DECEMBER 31,
2002 2001
--------------- ---------------
Billed trade receivables ................. $ 213,680 $ 217,069
Accrued revenue not yet billed ........... 36,158 53,209
--------------- ---------------
Total accounts receivable ................ 249,838 270,278
Allowance for doubtful accounts........... (20,436) (36,784)
--------------- ---------------
Net accounts receivable .................. $ 229,402 $ 233,494
=============== ===============
(3) OTHER CURRENT ASSETS (in thousands)
JUNE 30, DECEMBER 31,
2002 2001
------------- --------------
Costs in excess of billings............... $ 12,720 $ 14,939
Non-trade receivables (a) ................ 32,897 15,405
Consumable supplies....................... 9,751 10,616
Other..................................... 22,549 9,321
------------- --------------
$ 77,917 $ 50,281
============= ==============
(a) Non-trade receivables include a $19,812 note receivable from a third-party
insurance company recorded in June 2002, related to a settlement agreement
entered into by the Company and the third-party insurance company in
relation to certain environmental sites involving the Company. Subsequent
to June 30, 2002, and pursuant to the terms of the settlement, $10,000 of
this note receivable was collected with the remaining note receivable due
to be paid on June 30, 2003. The full amount of the settlement has been
included as a reduction in operating expenses in the three and six month
periods ended June 30, 2002.
(4) PROPERTY, PLANT AND EQUIPMENT (in thousands)
JUNE 30, 2002 DECEMBER 31, 2001
------------------------------------- ------------------------------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
COST DEPRECIATION VALUE COST DEPRECIATION VALUE
--------- ------------ ----------- ---------- ------------ -------------
Land........................ $ 35,358 $ -- $ 35,358 $ 37,595 $ -- $ 37,595
Landfill sites............... 10,652 3,731 6,921 11,426 2,774 8,651
Buildings.................... 67,081 12,735 54,346 68,170 9,825 58,345
Equipment.................... 211,945 75,752 136,193 203,860 59,905 143,956
Assets under development..... 6,628 -- 6,628 7,105 -- 7,105
--------- ------------ ----------- ---------- ------------ -------------
$ 331,664 $ 92,218 $ 239,446 $ 328,156 $ 72,504 $ 255,652
========= ============ =========== ========== ============ =============
8
(5) OTHER ASSETS (in thousands)
JUNE 30, DECEMBER 31,
2002 2001
--------------- ---------------
Restricted investments(a) $ 40,201 $ 40,513
Other ................... 15,017 17,224
--------------- ---------------
$ 55,218 $ 57,737
=============== ===============
(a) Restricted investments are controlled by the Company's wholly owned
insurance subsidiary, and, as of June 30, 2002, approximately $38,610
(December 31, 2001 - $38,390) had been pledged as security for the
Company's insurance liabilities. The restricted investments are held
primarily in United States and foreign government and commercial debt
instruments rated AA or better by Moody's and Standard & Poor's.
(6) ACCRUED LIABILITIES (in thousands)
Accrued liabilities consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Insurance claims outstanding (a).......................... $ 47,764 $ 50,476
Accrued employee compensation and benefit costs........... 14,814 15,665
Accrued purchases......................................... 4,062 6,404
Accrued closure costs (b)................................. 9,755 6,155
Billings in excess of costs............................... 4,702 7,209
Accrued waste material disposal costs..................... 3,764 3,942
Accrued environmental costs............................... 5,508 4,582
Accrued other............................................. 20,793 20,707
Income taxes payable...................................... 539 434
------------ ------------
$ 111,701 $ 115,574
============ ============
(a) The Company determines its insurance claims liability using actuarial
principles on an undiscounted basis. The Company retains liability for (i)
workers' compensation claims of up to $1,000 for any one occurrence; (ii)
auto and general liability claims of up to $1,000 for any one occurrence;
and (iii) certain property claims up to $2,000 for any one occurrence. To
the extent that any insurance carrier is unable to meet its obligations
under existing insurance policies, the Company could be liable for the
defaulted amount. From time to time, other retention amounts apply because
claims arise under policies of subsidiary, acquired or predecessor
companies.
(b) Accrued closure costs related to severance, lease and other restructuring
costs are as follows:
BALANCE AT BALANCE AT
12/31/2001 ADDITIONS ADJUSTMENTS SPENDING 6/30/2002
----------- --------- ----------- -------- ----------
Severance $ 910 $ 2,533 $ -- $ (740) $ 2,703
Other exit costs 5,245 2,873 -- (1,065) 7,052
----------- --------- ----------- -------- ----------
$ 6,155 $ 5,406 $ -- $ (1,805) $ 9,755
=========== ========= =========== ======== ==========
Additions and adjustments have been recorded as special charges in the
Consolidated Statements of Earnings (see Note 10).
9
(7) LONG-TERM DEBT (in thousands, except share and per share amounts)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
Credit facility
Term debt(a)........................................................... $ 170,905 $ 170,905
Convertible payment-in-kind debt(a).................................... 125,072 118,997
Unsecured payment-in-kind notes(b)....................................... 46,068 43,508
Revolving operating facility(c).......................................... 28,712 12,129
Loans collateralized by certain assets having a net book
value of $8,040 bearing interest at a weighted average
fixed rate of 5.9% (2001-6.1%) maturing at various
dates up to 2020....................................................... 4,008 4,332
Loans collateralized by certain assets having a net book
value of $2,426 bearing interest at prime plus a weighted
average floating rate of 2% (2001-1.6%) maturing
at various dates up to 2004............................................ 2,151 2,038
Obligations under capital leases on equipment bearing
interest at rates varying from 1% to 22% maturing at
various dates to 2007.................................................. 1,751 2,304
----------- ------------
378,667 354,213
Less current maturities of long-term debt................................ 2,013 2,692
Less current borrowings on revolving operating facility.................. 28,712 12,129
----------- ------------
$ 347,942 $ 339,392
=========== ============
(a) Term Debt and Convertible Payment-In-Kind Debt
As of March 31, 2000, the Company entered into a $335,825 term credit
facility. Concurrently, the Company entered into the revolving operating
facility. See Note 7(c). The credit facility provides term debt of $235,825
("term debt") and $100,000 in convertible payment-in-kind debt ("PIK
debt"). The credit facility matures on March 31, 2005, and bears interest
at a fixed rate of 9% for the term debt and 10% for the PIK debt. Interest
payments on the term debt are due quarterly in arrears, up to a maximum of
$20,000 in the first year, and on the PIK debt, interest is payable in full
on March 31, 2005. The term debt or any part thereof and/or all of the PIK
debt may be prepaid and redeemed by the Company at any time during the
agreement once the revolving operating facility has been terminated. The
Company must pay a redemption premium of between 1% and 3% on the amount of
the term debt being redeemed and between 8.33% and 16.66% on the amount of
the PIK debt being redeemed excluding mandatory prepayments. The PIK debt
is convertible by the lenders at any time into shares of common stock of
PSC at an initial conversion price of $11.72 per share, which was in excess
of the fair market value of PSC on a per share basis determined based upon
an enterprise valuation. The carrying value of the term debt was $170,905
as at June 30, 2002.
The Company generally is required to repay the term debt first and then the
PIK debt in an amount equal to:
(i) 25% of the net asset-sale proceeds from the disposition of assets sold
other than in the ordinary course of business after first paying off
various tranches of senior debt and collateralizing letters of credit;
(ii) the net proceeds from any foreign subsidiary dispositions in excess of
$1,000 annually.
The Company was also required yearly for the first two years and quarterly
after that, to repay the term debt first and then the PIK debt in an amount
equal to 75% of the cash flow available for debt service. Through June 30,
2002, no repayments have been required under this provision.
The credit facility and the revolving operating facility ("facilities") are
guaranteed jointly and severally by PSC and substantially all of its direct
and indirect wholly owned subsidiaries and are collateralized by security
interests in the assets of PSC and substantially all of its direct and
indirect wholly owned subsidiaries and a pledge of securities of
substantially all of its direct and indirect wholly owned subsidiaries.
The facilities contain cross-default provisions as well as certain
restrictive covenants provisions, including limitations on the incurrence
of indebtedness, the sale of assets, the incurrence of liens, the making of
specified investments, and the payment of cash dividends. In addition, the
Company is required to satisfy, among other things, certain financial
covenants, including specified amounts of EBITDA and maximum capital
expenditures. See Note 7(c) for a description of recent amendments to these
covenants and execution of the new mezzanine facility.
10
(b) Unsecured Payment-in-Kind Notes
On April 7, 2000, the Company issued an aggregate amount of $48,000 of
unsecured payment-in-kind notes ("unsecured notes"). The unsecured notes
mature on April 15, 2010 and bear interest at a fixed rate of 6%. The
interest is payable semi-annually on April 15 and October 15, and can be
paid up to April 15, 2005, in cash or additional unsecured notes, at the
option of the Company. The Company had issued an additional $4,678 of
unsecured notes as of June 30, 2002, in payment of interest. If a change in
control occurs, the Company is required to make an offer to purchase an
amount of unsecured notes equal to the present value of the remaining
scheduled payments of principal and interest, discounted at 16%, plus
accrued interest thereon. The unsecured notes will bear interest at a rate
of 12% from the date of a change in control until such time as the
unsecured notes are redeemed. The unsecured notes provide for annual
mandatory sinking fund payments equal to 20% of the aggregate principal
amount of the outstanding unsecured notes at April 15, 2005, plus all
accrued and unpaid interest thereon, commencing April 15, 2006. At June 30,
2002, the unsecured notes were recorded at $40,379 (December 31, 2001 -
$38,129).
On April 7, 2000, the Company issued an aggregate amount of $18,000 of
unsecured convertible payment-in-kind notes ("unsecured convertible
notes"). The unsecured convertible notes mature on April 15, 2020, and bear
interest at a fixed rate of 3% starting April 15, 2003. The interest is
payable semi-annually on April 15 and October 15. The unsecured convertible
notes may be converted at any time into shares of common stock of PSC at an
initial conversion price of $30 per share. If a change in control occurs,
the Company is required to make an offer to purchase an amount of unsecured
convertible notes equal to between 72% and 100% of the principal amount of
unsecured convertible notes outstanding, plus accrued interest thereon. The
unsecured convertible notes will bear interest at a rate of 12% from the
date of a change in control until such time as the unsecured convertible
notes are redeemed. As of June 30, 2002, unsecured convertible notes with a
face value of $695 had been converted into 23,174 shares of common stock
pursuant to the terms of the indenture covering the unsecured convertible
notes. At June 30, 2002, the unsecured convertible notes were recorded at
$5,689 (December 31, 2001 - $5,379).
The unsecured notes contain provisions whereby an acceleration under the
facilities causes a default under the unsecured notes. In addition, the
facilities contain provisions whereby a default under the unsecured notes
causes a default under the facilities.
(c) Revolving Operating Facility
The revolving operating facility provides for a revolving line of credit,
subject to a borrowing base formula calculated on accounts receivable, of
up to $195,000. The revolving operating facility matures on April 8, 2003.
Borrowings under the revolving operating facility bear interest at a rate
equal to the base rate (which is based on the Wells Fargo Bank "prime
rate") plus 1% on Tranche A advances, 3% on Tranche B-Prime advances, and
the greater of 11.5% or the base rate plus 5% on Tranche Sub-B advances or
at the option of the Company on Tranche A advances at a rate equal to the
LIBOR rate plus 3%. A letter of credit issuance fee of .25% plus an annual
fee of 2.75% is charged on the amount of all outstanding letters of credit
issued under Tranche A. Letters of credit issued under Trance Sub-B bear an
interest rate of 10.075%.
The Company is required to pay an annual service/agency fee equal to $900
and a monthly loan servicing fee equal to $20 for Tranches A and B-Prime.
The Tranche Sub-B Agency fee is $10 paid monthly. In addition, the Company
is required to pay monthly an unused line of credit fee equal to 0.375%,
0.75%, and 2.0% per annum on the average unused portion of Tranche A,
Tranche B-Prime, and Tranche Sub-B, respectively, under the revolving
operating facility. At June 30, 2002, the Company's borrowing base formula
limited the availability of the revolving operating facility to $159,934.
The Company had undrawn capacity under the revolving operating facility of
$38,228, net of borrowings of $28,712 and outstanding letters of credit of
$92,994.
The credit facility and the revolving operating facility contain
cross-default provisions as well as certain restrictive covenants,
including limitations on the incurrence of indebtedness, the sale of
assets, the incurrence of liens, the making of specified investments, and
the payment of cash dividends. In addition, the Company is required to
satisfy, among other things, certain financial covenants, including
specified amounts of EBITDA and maximum capital expenditures.
Under the facilities, the Company is required to meet certain financial
covenants. During 2001, the Company was negatively impacted by the general
slowdown in the economy, poor conditions in the steel industry, the
bankruptcy of major customers, and the events of September 11, among other
matters. The Company was unable to meet its EBITDA and interest coverage
covenants and as a result sought relief in March 2001, May 2001, November
2001, and April 2002.
11
During the first quarter of 2002, and pending agreement on permanent
additional financing, the revolving operating facility was amended,
utilizing the optional overadvance provisions, first by $11,000 and then by
an additional $20,000. These advances of $31,000 were repaid when the
mezzanine financing, described below, was put in place.
On April 12, 2002, the revolving operating facility was amended to provide
for the mezzanine financing. The amendments increase the maximum amount
that may be borrowed under the revolving operating facility (exclusive of
optional overadvances) to $195,000 from $175,000. In addition, the
revolving operating facility was amended to add a new Tranche Sub-B in the
amount of $70,000. Because the defined borrowing base under Tranche Sub-B
is more liberal than under Tranches A or B-Prime, and because a reserve of
$25,000 is not deducted from the borrowing base under Tranche Sub-B as it
is under Tranches A and B-Prime, the net effect is to provide availability
under Tranche Sub-B at times when there is no availability under Tranches A
and B-Prime. Tranche Sub-B is a revolving facility, except that any
payments of principal as a result of asset sales (other than in the
ordinary course of business) automatically reduce the availability under
Tranche Sub-B. The covenants under the revolving operating facility were
amended to eliminate the interest coverage ratio, to waive the default
under the EBITDA covenant for the period ended December 31, 2001, and to
lower the EBITDA covenant requirement to $4,600, $9,700, $14,800, and
$20,400 for the cumulative year-to-date periods ending March 31, June 30,
September 30, and December 31, 2002, respectively. The revolving operating
facility was also amended to extend the maturity of the facility to April
8, 2003 from September 30, 2002.
The commitments under Tranche Sub-B have been provided by affiliates of
Carl C. Icahn ($49,000) and affiliates of Stephen Feinberg ($21,000). Mr.
Icahn and Mr. Feinberg and their affiliates are respectively the largest
and second largest stockholders of the Company. Certain fees were incurred
in connection with Tranche Sub-B. Specifically, Tranche Sub-B lenders
received an upfront fee of $6,000. A $2,000 fee that was paid for the
$20,000 interim overadvance was credited against the $6,000 fee for the
mezzanine facility. Tranche Sub-B lenders will receive a fee of 2% per
annum based on the unused portion of the Tranche Sub-B facility. There will
also be a prepayment fee of 3% based upon a termination by the Company of
any or all of Tranche Sub-B.
In addition to those fees, the Company issued to the Tranche Sub-B lenders
3,638,466 shares of the common stock of the Company, amounting to 15% of
the outstanding common stock prior to the issuance, upon payment in cash of
the par value of $0.01 per share. These shares were divided between the
Icahn group and the Feinberg group in proportion to their respective
commitments. In connection with the issuance, the Icahn group and the
Feinberg group have been granted two demand registration rights and an
unlimited number of piggyback registration rights covering both the newly
issued shares and all other shares held by these groups, as well as
pre-emptive rights with respect to future issuances by the Company. A
further fee of $1,000 was paid to the lenders under the revolving operating
facility for the amendment and for resetting the covenants. The
administrative agent under the revolving operating facility, Foothill
Capital Corporation, will receive $10 per month for administering Tranche
Sub-B.
In addition to the foregoing changes, the revolving operating facility was
further amended in a number of sections to facilitate certain transactions
or to effect conforming changes. Among these changes was a provision making
it easier to enter into transactions with affiliates provided that the
transaction in question is on fair and reasonable terms and no less
favorable to the Company than could be achieved in an arm's length
negotiation.
The Company's credit facility and the Intercreditor Agreement among the
Company's lenders were amended primarily to permit or facilitate the
changes to the revolving operating facility. In addition, the interest
coverage ratio under the credit facility was eliminated, the EBITDA
covenant requirements reduced for periods ending March 31, 2002 and
thereafter, and the default under the EBITDA covenant for the period ended
December 31, 2001 was waived. At June 30, 2002, the Company was in
compliance with the amended covenants under the facilities. Although the
Company intends to extend or replace the revolving operating facility prior
to its maturity on April 8, 2003, the success of such efforts is uncertain.
A revolving operating facility is essential to provide funding for the
Company's operating activities and to support classification of the
Company's term debt.
(d) The various components of long-term debt described in Note 7 (a) and (b)
(the "Company's Public Debt Instruments") are financial instruments. The
Company's Public Debt Instruments were discounted from face value to their
fair market value on March 31, 2000. As of December 31, 2000, the carrying
value at that time approximated fair market value. During 2001 and 2002,
there have been changes in market interest rates, a general decline in the
availability of credit, and disappointing financial performance by the
Company. It is likely that these factors have caused the fair market value
of the Company's Public Debt Instruments to be materially less than the
current carrying value. There is no public market in the Company's Public
Debt Instruments, and, therefore, the Company is unable to determine their
fair market value.
12
(8) OTHER LIABILITIES (in thousands)
JUNE 30, DECEMBER 31,
2002 2001
------------ -------------
Accrued environmental costs..................................... $ 66,948 $ 67,821
Other........................................................... 1,063 2,230
------------ -------------
$ 68,011 $ 70,051
============ =============
(9) STATEMENT OF CASH FLOWS (in thousands)
CHANGES IN ASSETS AND LIABILITIES
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001
------------------ ------------------
Accounts receivable........................................ $ 4,092 $ (31,226)
Inventory for resale....................................... (40) (8,334)
Other assets............................................... (21,369) (896)
Accounts payable, accrued liabilities,
and other liabilities.................................... (7,944) (17,412)
Income taxes payable....................................... 346 (521)
------------------ ------------------
$ (24,915) $ (58,389)
================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION
The supplemental cash flow disclosures and non-cash transactions for the six
months ended June 30, 2002 and 2001 are as follows:
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001
------------------ ------------------
Supplemental Disclosures:
Interest paid.............................................. $ 19,694 $ 9,273
Income taxes paid.......................................... 702 1,996
Debt incurred on the purchase of property and equipment... 1,164 1,233
Conversion of unsecured payment-in-kind notes.............. -- 154
Deferred stock compensation costs.......................... 97 107
(10) SPECIAL CHARGES (in thousands)
2002
The special charges are composed of the following:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2002
-------------------- --------------------
Business units, locations or activities to be exited:
Severance costs........................................ $ -- $ 2,533
Other exiting costs.................................... 1,782 2,873
Business units, locations or activities to be continued:
Process re-engineering costs........................... 1,032 2,008
-------------------- --------------------
$ 2,814 $ 7,414
==================== ===================
Asset impairments and other costs recorded as special charges
During 2002, the Company decided to close the corporate headquarters in
Rosemont, Illinois and relocate the corporate governance functions to the shared
service operations in Houston. Included in the special charges is $5,406 in cash
costs for severance and other exit costs to be incurred at these locations.
Approximately 13 employees are expected to be terminated as a result of these
restructurings, of which 11 had been terminated at June 30, 2002.
13
Process re-engineering costs
During 2000, the Company embarked on an initiative, the PSC Way, to standardize
business processes to allow it to operate more efficiently and share information
and best practices. This initiative includes defining common business processes
related to transactional functions as well as client relationships and includes
establishing a common management systems platform. The total cash costs for the
PSC Way initiative in the three and six months ended June 30, 2002, were $1,654
and $3,499, respectively, of which $622 and $1,491 were capitalized to fixed
assets and $1,032 and $2,008 were included in special charges as process
re-engineering costs.
2001
The special charges are composed of the following:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2001
-------------------- --------------------
Business units, locations or activities to be exited:
Severance costs.......................................... $ 309 $ 309
Other exiting costs...................................... 489 489
Business units, locations or activities to be continued:
Process re-engineering costs............................. 2,552 5,349
-------------------- --------------------
$ 3,350 $ 6,147
==================== ===================
Asset impairments and other costs recorded as special charges
During 2001, the Company made the decision in the second quarter of 2001 to
close and consolidate a location in its Environmental Services Group. Included
in special charges is $798 of costs for severance and other exit costs.
Process re-engineering costs
The total cash costs for the PSC Way initiative in the three and six months
ended June 30, 2001, were $4,433 and $7,737, respectively, of which $1,881 and
$2,388 were capitalized to fixed assets and $2,552 and $5,349 were included in
special charges as process re-engineering costs.
(11) STOCKHOLDERS' DEFICIT (in thousands except share and per share amounts)
JUNE 30, DECEMBER 31,
2002 2001
-------------- --------------
Share capital............................................. $ 122,765 $ 118,920
Retained deficit.......................................... (138,643) (123,644)
Cumulative foreign currency translation loss.............. (2,190) (6,307)
-------------- --------------
$ (18,068) $ (11,031)
============== ==============
The outstanding capital of PSC comprised 27,873,598 shares of common stock at
June 30, 2002.
On April 12, 2002, in conjunction with the mezzanine financing discussed in Note
7(c), the Company issued to Tranche Sub-B lenders (affiliates of Carl C. Icahn
and affiliates of Stephen Feinberg) 3,638,466 shares of common stock of the
Company, representing approximately 15% of the outstanding common stock prior to
issuance, upon payment in cash of the par value of $.01 per share. In connection
with the issuance, the Icahn group and the Feinberg group have been granted two
demand registration rights and an unlimited number of piggyback registration
rights covering both the newly issued shares and all other shares held by these
groups, as well as pre-emptive rights with respect to future issuances by the
Company.
On May 9, 2001, the Company reserved 1,000,000 shares of common stock for
issuance under its 2001 Officers' Stock-Based Bonus Plan ("Stock Plan"). Under
the Stock Plan, awards of restricted common stock, options to purchase shares of
common stock, stock appreciation rights and/or phantom stock rights may be
granted. Participation in the Stock Plan is limited to officers of the Company
and its subsidiaries. Generally the awards vest evenly over a four-year period
from the date of grant. As of June 30, 2002, 257,609 shares of restricted stock
had been granted. Officers of the Company who departed prior to or in connection
with the March 2002 restructuring of the corporate office forfeited the 145,871
unvested shares of restricted stock granted to them under the Stock Plan.
14
On May 9, 2001, the Company also reserved 200,000 shares of common stock for
issuance under its 2001 Non-Employee Directors Restricted Stock Plan ("Directors
Stock Plan"). Under the Directors Stock Plan, shares of restricted common stock
with a market value of twenty-five hundred dollars will be granted on the first
business day of each fiscal quarter during the term of the Directors Stock Plan
to each non-employee director. One-quarter of the shares granted as of each
grant date will vest on each of the first four anniversaries of such grant date
except with respect to the initial grant of shares. As of June 30, 2002, 58,274
shares of restricted stock had been granted under the Directors Stock Plan.
(12) EARNINGS PER COMMON SHARE (in thousands)
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001
------------------ ------------------
Net loss for the period-- basic and diluted............................... $ (14,999) $ (8,644)
------------------ ------------------
Number of shares of common stock outstanding.............................. 27,874 24,287
Effect of using weighted average shares of common stock outstanding....... (2,000) (15)
Restricted shares issued - unvested....................................... -- (227)
------------------ ------------------
Basic and diluted weighted average number of shares of
common stock outstanding................................................ 25,874 24,045
================== ==================
(13) COMPREHENSIVE LOSS (in thousands)
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001
------------------ ------------------
Net loss for the period................................................... $ (14,999) $ (8,644)
Other comprehensive income (loss), net of taxes:
Translation adjustments.............................................. 4,117 (936)
------------------ ------------------
Comprehensive loss........................................................ $ (10,882) $ (9,580)
================== ==================
(14) RELATED PARTIES (in thousands)
The Company's two largest stockholders, Carl C. Icahn and Stephen Feinberg, were
involved in providing the Company's mezzanine financing which is described in
detail in Notes 1 and 7. These stockholders also participate through entities
they control in the revolving operating facility described in Note 7(c) and
share interest and fees paid on that facility. Additionally, they are
participants in the Company's PIK and term debt facilities described in Note
7(a). Mr. Icahn controls approximately $184,000 of the Company's debt that for
the six months ended June 30, 2002, was associated with approximately $10,200 in
interest expense and fees. Mr. Feinberg controls approximately $60,000 of the
Company's debt that for the six months ended June 30, 2002 was associated with
approximately $3,700 in interest expense and fees. In addition, entities
controlled by these stockholders received shares of common stock in connection
with the mezzanine financing as described in Note 7(c).
(15) DISCONTINUED OPERATIONS (in thousands)
For the three months ended June 30, 2002 and 2001, the Company recognized
before-tax income (loss) on discontinued operations of $(4,466) and $174,
respectively. The before-tax income (loss) on discontinued operations reflects
the following:
o The Company's closure of its Demolition and Decommissioning ("D&D")
business resulted in operating losses of $3,166 in the three months
ended June 30, 2002, compared with operating income of $174 in the
three months ended June 30, 2001.
o A charge of $1,300 for the impairment of assets held for sale in the
three months ended June 30, 2002. The net book value of the assets was
$1,970 after impairment.
For the six months ended June 30, 2002 and 2001, the Company recognized
before-tax income (loss) on discontinued operations of $(5,669) and $517,
respectively. The before-tax income (loss) on discontinued operations comprises
the following:
15
o The impairment of assets ultimately sold related to the Company's D&D
business resulted in a loss for the six months ended June 30, 2002 of
$2,804, in addition to operating losses posted of $4,109. The D&D
business had operating income of $278 in the six months ended June 30,
2001.
o The sale of certain assets during the six months ended June 30, 2002,
with a net book value of $2,930 generated a gain of $2,341. These
assets generated operating income of $203 and $239 in the six months
ended June 30, 2002 and 2001, respectively.
o A charge of $1,300 for the impairment of assets held for sale in the
six months ended June 30, 2002. The net book value of the assets was
$1,970 after impairment.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------------
2002 2001 2002 2001
----------- ----------- ------------ -----------
Revenue........................ $ 1,197 $ 4,832 $ 3,571 $ 9,696
Income (loss) before income
taxes........................ (4,466) 174 (5,669) 517
Income taxes (benefit)......... (783) 60 (1,618) 121
----------- ----------- ------------ -----------
Net income (loss).............. $ (3,683) $ 114 $ (4,051) $ 396
=========== =========== ============ ===========
(16) SEGMENT INFORMATION (in thousands)
The Company's business operations are organized into the following three
segments:
o Industrial Outsourcing Group, which includes the operations that
perform industrial cleaning and maintenance, mechanical services,
piping and fabrication, turnaround and outage services, electrical
contracting and instrumentation, decommissioning and remediation
services.
o Environmental Services Group, which includes commercial and industrial
by-product collection, processing and disposal, engineered fuel
blending, solvent distillation, analytical services, container and
tank cleaning services, on-site services, lab packing, household
hazardous waste services and emergency response services.
o Metals Services Group, whose primary operations include ferrous and
non-ferrous scrap collection and processing, brokerage and
transportation and on-site mill services.
16
FOR THE SIX MONTHS ENDED JUNE 30, 2002
-----------------------------------------------------------------------------
SHARED
INDUSTRIAL ENVIRONMENTAL METALS SERVICES &
OUTSOURCING SERVICES SERVICES ELIMINATIONS TOTAL
------------ ------------- ------------- ------------ ------------
Revenue................................. $ 326,877 $ 134,550 $ 251,156 $ -- $ 712,583
Income (loss) from operations........... 8,285 17,412 3,921 (14,884) 14,734
Income (loss) from operations
before special charges................. 8,285 17,908 3,921 (7,966) 22,148
Total assets............................ 179,397 190,208 182,009 95,611 647,225
Depreciation and amortization........... 7,933 7,062 4,492 1,282 20,769
Capital expenditures.................... 2,191 4,509 1,417 2,134 10,251
Equity investments...................... -- -- 263 250 513
FOR THE SIX MONTHS ENDED JUNE 30, 2001
------------------------------------------------------------------------------
SHARED
INDUSTRIAL ENVIRONMENTAL METALS SERVICES &
OUTSOURCING SERVICES SERVICES ELIMINATIONS TOTAL
------------ ------------- ---------- ------------ -----------
Revenue................................. $ 386,670 $ 138,866 $ 273,886 $ -- $ 799,422
Income (loss) from operations........... 14,913 4,459 (5,828) (9,066) 4,478
Income (loss) from operations
before special charges................ 14,913 5,069 (5,828) (3,529) 10,625
Total assets............................ 239,542 160,111 255,603 61,325 716,581
Depreciation and amortization........... 9,244 6,275 4,562 2,000 22,081
Capital expenditures.................... 11,954 6,634 4,761 2,978 26,327
Equity investments...................... -- -- 2,906 1,523 4,429
The geographical segmentation of the Company's businesses is as follows:
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001
------------------------------- --------------------------------
LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS
------------- ------------ ------------- -----------
United States............ $ 643,108 $ 212,384 $ 714,739 $ 220,813
Canada................... 69,475 41,974 79,298 60,916
Other.................... 0 40,306 5,385 44,407
------------- ------------ ------------- -----------
$ 712,583 $ 294,664 $ 799,422 $ 326,136
============= ============ ============= ===========
(17) CONTINGENCIES (in thousands)
(a) The Company (together with the industries in which it operates) is subject
to federal, state, local and foreign (particularly Canadian provincial)
environmental laws and regulations concerning discharges to the air, soil,
surface and subsurface waters and the generation, handling, storage,
transportation, treatment and disposal of waste materials and hazardous
substances. The Company and the industries in which it operates are also
subject to other federal, state, local and foreign (particularly Canadian
provincial) laws and regulations including those that require the Company
to remove or mitigate the effects of the disposal or release of certain
materials at various sites.
It is impossible to predict precisely what effect these laws and
regulations will have on the Company in the future. Compliance with
environmental laws and regulations may result in, among other things,
capital expenditures, costs and liabilities. Management believes, based on
past experience and its best assessment of future events, that these
environmental liabilities and costs will be assessed and paid over an
extended period of time. The Company believes that it will be able to fund
such liabilities and costs in the ordinary course of business.
Certain of the Company's facilities are environmentally impaired as a
result of operating practices at the sites prior to their acquisition by
the Company. The Company has established procedures to periodically
evaluate these sites, giving consideration to the nature and extent of the
contamination. The Company has provided for the remediation of these sites
based upon management's judgment and prior experience. The Company has
estimated the liability to remediate these sites to be $57,543 (December
31, 2001 - $55,899).
17
Certain subsidiaries of the Company have been named as potentially
responsible or liable parties under U.S. federal and state superfund laws
in connection with various sites. It is alleged that the Company and its
subsidiaries or their predecessors transported waste to the sites, disposed
of waste at the sites, or operated the sites in question. The Company has
reviewed the nature and extent of the allegations, the number, connection
and financial ability of other named and unnamed potentially responsible
parties and the nature and estimated cost of the likely remedy. Based on
its review, the Company has accrued its estimate of its liability to
remediate these sites at $16,077 (December 31, 2001 - $16,504). If it is
determined that more expensive remediation approaches may be required in
the future, the Company could incur additional obligations, which could be
material.
The liabilities discussed above are disclosed in the Consolidated Balance
Sheets as follows:
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
Accrued liabilities.............. $ 5,508 $ 4,582
Other liabilities................ 66,948 67,821
---------- ------------
$ 72,456 $ 72,403
========== ============
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. It is possible that technological, regulatory or
enforcement developments, the results of environmental studies or other
factors could alter estimates and necessitate the recording of additional
liabilities, which could be material. Moreover, because PSC has disposed of
waste materials at numerous third-party disposal facilities, it is possible
that PSC will be identified as a potentially responsible party at
additional sites. The impact of such future events cannot be estimated at
the current time.
(b) Other than as reported in the Company's 2001 Annual Report on Form 10-K
(the "Form 10-K") under the caption "Legal Proceedings," the Company is not
currently a party to any material pending legal proceedings, other than
routine matters incidental to the business, and no material developments
have occurred in any proceedings described in such Form 10-K except as
described below.
i) In October 1999, Exxon Corporation ("Exxon") commenced an action in
the District Court, Harris County, Texas against International
Catalyst, Inc. ("INCAT"), an indirect wholly owned subsidiary of PSC,
for damages of approximately $38,000 arising from certain work
conducted by INCAT at Exxon's Baytown, Texas chemical plant. Exxon
alleged that INCAT was responsible for the purchase and installation
in 1996 of improper gasket materials in the internal bed piping flange
joints of the Baytown plant which caused damages to the facility and
consequential losses arising from the shutdown of the plant while
repairs were made. The matter was settled in April 2002 and the
Company's liability was covered by insurance, except for a small
deductible.
ii) On September 13, 1999, a lawsuit was filed in state court in Ohio
(Ashtabula County), alleging injury to 130 named plaintiffs resulting
from evacuation due to a fire and shelter-in-place orders with respect
to a sodium filter at an RMI Titanium Company ("RMI") plant in
Ashtabula, Ohio. The plaintiffs alleged negligence on the part of RMI
and the Company in the removal of sodium from the filter on RMI's
premises. Plaintiffs sought actual and punitive damages and their
attorneys applied for class action status to represent 500 people
affected by the evacuation order and the approximately 4,500 people
affected by the shelter-in-place orders. RMI demanded indemnification
from PSC under the terms of the contract pursuant to which the work
was performed. The Company has a significant retained liability before
insurance coverage is triggered. The parties have reached a settlement
in principle, which must be approved by the court after a fairness
hearing in order to become effective. The Company has accrued for the
settlement.
iii) On March 22, 2000, the EPA filed a Complaint and Proposed Compliance
Order against the Paint Services Group of Nortru, Inc. ("Nortru"), an
indirect wholly owned subsidiary of the Company, relating to a
multi-media inspection conducted by the EPA at all Nortru Detroit
facilities in March and April 1999. Violations alleged included a
failure to repair a crack in a secondary containment system and a
failure to engage in proper monitoring of air emissions for certain
equipment as required under regulations applicable to large-quantity
generators of hazardous wastes. Nortru has negotiated a settlement
relating to this complaint that includes payment of a penalty of $53
and compliance with applicable regulations. The Company is negotiating
a consent agreement and final order with the EPA respecting other
alleged violations of the Clean Air Act and the Resource Conservation
and Recovery Act. The EPA currently is proposing a penalty of $225 in
connection with such alleged violations.
iv) On August 6, 2001, Burlington Environmental, Inc. was served with a
Complaint and Compliance Order by the U.S. EPA and similar enforcement
documents from the Washington Department of Ecology ("Ecology")
assessing penalties in excess of $1,000 relating to alleged
non-compliance with regulations at three facilities in Washington
State and a company
18
laboratory located in Renton, Washington. The Complaint alleged
violations of and non-compliance with provisions of the facility RCRA
permits and state and federal regulations relating to the operations
at these facilities. The Company entered negotiations with the EPA
that resulted in the filing of a Consent Agreement and Final Order
("CAFO") on January 17, 2002. Under the terms of the CAFO, the Company
will pay a fine of approximately $136 in six installments over a
six-month period and perform a Supplemental Environmental Project
("SEP") that includes the early closure of one of its Seattle-based
RCRA facilities. The anticipated cost of closure and consolidation of
operations at other regional facilities is approximately $2,100.
Implementation of the SEP will take approximately two years depending
upon the Company's ability to obtain the necessary state and local
permits to perform the work. Concurrent with the EPA negotiations, the
Company settled with Ecology effective June 2002.
v) In December 1998, the Company and other potentially liable parties
("PLPs") completed a remedial investigation of the Pasco Sanitary
Landfill Site in the State of Washington and submitted a feasibility
study to the Washington State Department of Ecology ("Ecology"). In
July 2000, the PLPs commenced cleanup at the Pasco Site under a
seven-year plan outlined in the study (the "Preferred Remedy"). The
PLPs completed the remedial action requirements of the Preferred
Remedy and will continue to operate remedial systems and monitor
groundwater at the site for an additional five years, which is
expected to be followed by post-closure operations, maintenance and
monitoring for approximately 30 years. The total cost of completing
the Preferred Remedy and post-closure operations, maintenance and
monitoring is estimated to be approximately $14.0 million. In June
2002, the Company reached agreement with all PLPs with respect to
allocation of costs for the Preferred Remedy, and no other litigation
is anticipated related to those costs. Allocation of costs among the
PLPs for the post-closure period remains the subject of negotiation.
(c) The Company is a defendant in lawsuits for which the Company has insurance
coverage. Each of these suits is, in the event of an adverse verdict,
subject to a deductible. Although the Company does not believe that the
uninsured liability from any of these suits would be material, it is not
possible to predict the effect of the cumulative deductibles. The Company
is named as a defendant in a number of other lawsuits which have arisen in
the ordinary course of its business. The Company believes that except as
otherwise reported herein, neither the insured litigation nor the other
litigation is likely to have a material adverse effect on its business or
financial condition and, therefore, has made no provision in these
financial statements for the potential liability, if any. The Company is,
however, unable to predict the outcome of certain of the forgoing matters
and cannot provide assurance that these or future matters will not have a
material adverse effect on the results of operations or financial condition
of the Company.
(18) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations." This statement addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations" and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." The provisions of this statement apply
to all business combinations initiated after June 30, 2001. In accordance with
the Statement provisions, the Company adopted Statement 141 on January 1, 2002.
Such adoption did not have a material effect on the Company's consolidated
financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets." This Statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." In accordance with the
Statement provisions, the Company adopted Statement 142 on January 1, 2002. Such
adoption did not have a material effect on the Company's financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations." The statement applies to
legal obligations associated with the retirement of long-lived assets, except
for certain obligations of lessees. The provisions of this statement are
required to be applied for fiscal years beginning after June 15, 2002.
Management is in the process of evaluating the impact of the adoption of
Statement 143, which could have a material effect on the Company's financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supersedes FASB Statement 121. This statement addresses financial
accounting and reporting for long-lived assets impaired or disposed of by sale.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001. The Company adopted
Statement 144 on January 1, 2002. The adoption of Statement 144 has resulted in
the recognition of discontinued operations for disposals subsequent to December
31, 2001, that would not have been recognized as such prior to the adoption.
19
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," which will be effective for the
Company beginning January 1, 2003. Statement 145 rescinds FASB Statement No. 4,
44, 64 and amends SFAS No. 13, "Accounting for Leases", to provide guidance for
income statement classification and gains and losses on extinguishment of debt
and eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The adoption of Statement 145 is not expected to have a material
effect on the Company's consolidated financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities."
Statement 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS No. 146 is effective for the Company in January 2003. The
Company is evaluating the impact of SFAS No. 146.
(19) SUBSEQUENT EVENTS
CHANGES IN CERTIFYING ACCOUNTANT
On April 18, 2002, PricewaterhouseCoopers LLP ("PwC"), the Company's independent
accountants for the year ended December 31, 2001, and the nine months ended
December 31, 2000, resigned. In connection with the audits of the Company's
financial statements for such periods and through April 18, 2002, there were no
disagreements with PwC on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PwC would have caused them
to make reference thereto in their reports on the financial statements for such
periods. PwC's reports on the financial statements for such periods contain no
adverse opinion or disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principle, except that
their report on the December 31, 2000, financial statements included an
explanatory paragraph regarding a potential event of default under the terms of
certain restrictive covenants included in the Company's facilities.
Effective July 17, 2002, the Company engaged KPMG LLP ("KPMG") as its
independent public accountants for the fiscal year ending December 31, 2002.
During the nine months ended December 31, 2000, the year ended December 31, 2001
and the current year through July 17, 2002, the Company did not consult with
KPMG with respect to either (i) the application of accounting principles to a
specified transaction, either completed or proposed or the type of audit opinion
that might be rendered on the Company's consolidated financial statements, in
respect of which either a written report was provided to the Company or oral
advice was provided that KPMG concluded was an important factor considered by
the Company in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was a reportable event, as that term is
defined in Item 304(a)(1)(v) of Regulation S-K promulgated by the SEC.
20
PHILIP SERVICES CORPORATION
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Consolidated Financial Statements herein contain information relating to
Philip Services Corporation ("PSC") and its subsidiaries (collectively, the
"Company"), which has been prepared by management.
The Company is an industrial and metals services company operating in three
segments: (i) the Industrial Outsourcing Group; (ii) the Environmental Services
Group; and (iii) the Metals Services Group. PSC employs more than 10,000 people
at over 140 locations across North America. The Company's operations are based
primarily in the United States.
The Industrial Outsourcing Group's operations include industrial cleaning and
maintenance, refractory, catalyst and mechanical services, piping and
fabrication services, turnaround and outage services, electrical contracting and
instrumentation, decommissioning and remediation services. The Industrial
Outsourcing Group primarily services the refining, petrochemical, utilities, oil
and gas, pulp and paper and automotive industries.
The Environmental Services Group provides commercial and industrial waste
collection, recycling, processing and disposal, as well as laboratory analytical
services, container and tank cleaning and emergency response services primarily
to the manufacturing, automotive, chemical, paint and coatings, transportation,
and aerospace industries, as well as to municipalities and consulting and
engineering firms.
The Metals Services Group's operations include ferrous and non-ferrous scrap
collection and processing services, brokerage, transportation and on-site mill
services as well as end-processing and distribution of steel products. The
Metals Services Group primarily services the steel, foundry, manufacturing and
automotive industries.
The Company earns revenue by providing industrial outsourcing services, from the
sale of recovered metals and from fees charged to customers for by-product
transfer and processing, collection and disposal services. The Company's
operating expenses include direct labor, indirect labor, payroll-related taxes,
benefits, fuel, maintenance and repairs of equipment and facilities,
depreciation, insurance, property taxes, and accrual for future closure and
remediation costs. Selling, general and administrative expenses include
management salaries, clerical and administrative costs, professional services
and facility rentals, as well as costs related to the Company's marketing and
sales force.
21
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: ($ in millions)
FOR THE THREE FOR THE THREE FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
----------------- --------------- ------------------ ------------------
Revenue .................................. $ 351.7 100% $ 391.3 100% $ 712.6 100% $ 799.4 100%
Operating expenses ....................... 291.7 83% 337.9 86% 603.7 85% 688.6 86%
Special charges .......................... 2.8 1% 3.4 1% 7.4 1% 6.1 1%
Selling, general and administrative
Costs .................................. 34.3 10% 34.3 9% 66.0 9% 78.1 10%
Depreciation and amortization ............ 10.5 3% 11.1 3% 20.8 3% 22.1 3%
-------- ---- -------- ---- -------- ---- --------- ----
Income from operations ................... 12.4 4% 4.7 1% 14.7 2% 4.5 1%
Interest expense ......................... 12.9 4% 9.5 2% 23.4 3% 19.1 2%
Other (income) expense, net .............. 1.5 -- (6.2) (2%) 1.4 -- (6.9) (1%)
-------- ---- -------- ---- -------- ---- --------- ----
Income (loss) before provision for income
taxes..................................... (2.0) (1%) 1.3 -- (10.0) (1%) (7.7) (1%)
Provision for income taxes ............... 0.6 -- 0.9 -- 0.9 -- 1.3 --
-------- ---- -------- ---- -------- ---- --------- ----
Income (loss) from continuing operations.. (2.6) (1%) 0.4 -- (10.9) (2%) (9.0) (1%)
Income (loss) from discontinued operations (3.7) (1%) 0.2 -- (4.1) (1%) 0.4 --
-------- ---- -------- ---- -------- ---- --------- ----
Net income (loss) ........................ $ (6.3) (2%) $ 0.6 -- $ (15.0) (2%) $ (8.6) (1%)
======== ==== ======== ==== ======== ==== ========= ====
The operating results reflect the following: ($ in millions)
FOR THE THREE MONTHS ENDED JUNE 30, 2002
-------------------------------------------------------------------------------
SHARED
INDUSTRIAL ENVIRONMENTAL METALS SERVICES &
OUTSOURCING SERVICES SERVICES ELIMINATIONS TOTAL
----------- ------------- ------------ ------------- -----------
Revenue...................................... $ 138.2 $ 71.6 $ 141.9 $ -- $ 351.7
Income (loss) from operations................ (2.5) 16.8 5.2 (7.1) 12.4
Income (loss) from operations excluding
special charges............................ (2.5) 17.3 5.2 (4.8) 15.2
FOR THE THREE MONTHS ENDED JUNE 30, 2001
---------------------------------------------------------------------------------
SHARED
INDUSTRIAL ENVIRONMENTAL METALS SERVICES &
OUTSOURCING SERVICES SERVICES ELIMINATIONS TOTAL
----------- ------------- ------------- ------------ ------------
Revenue...................................... $ 186.2 $ 70.2 $ 134.9 $ -- $ 391.3
Income (loss) from operations................ 7.1 2.0 0.6 (5.0) 4.7
Income (loss) from operations excluding
special charges............................ 7.1 2.6 0.6 (2.2) 8.1
FOR THE SIX MONTHS ENDED JUNE 30, 2002
--------------------------------------------------------------------------------
SHARED
INDUSTRIAL ENVIRONMENTAL METALS SERVICES &
OUTSOURCING SERVICES SERVICES ELIMINATIONS TOTAL
----------- ------------- ------------ ------------ -----------
Revenue...................................... $ 326.9 $ 134.6 $ 251.1 $ -- $ 712.6
Income (loss) from operations................ 8.3 17.4 3.9 (14.9) 14.7
Income (loss) from operations excluding
special charges............................ 8.3 17.9 3.9 (8.0) 22.1
FOR THE SIX MONTHS ENDED JUNE 30, 2001
----------------------------------------------------------------------------------
SHARED
INDUSTRIAL ENVIRONMENTAL METALS SERVICES &
OUTSOURCING SERVICES SERVICES ELIMINATIONS TOTAL
----------- ------------- ----------- ------------ ------------
Revenue...................................... $ 386.6 $ 138.9 $ 273.9 $ -- $ 799.4
Income (loss) from operations................ 14.9 4.5 (5.8) (9.1) 4.5
Income (loss) from operations excluding
special charges............................ 14.9 5.1 (5.8) (3.6) 10.6
INDUSTRIAL OUTSOURCING GROUP
Revenue for the three-month period ending June 30, 2002 was $138.2 million
compared to $186.2 million for the same period in 2001. For the six-month period
ending June 30, 2002, revenue was $326.9 million compared to $386.6 million for
the same period in 2001. The reduction in revenue for the three and six months
ending June 30, 2002, is due primarily to the significant postponement,
rescheduling or reduction in scope of certain large-scale maintenance and
capital projects by the Company's customers. The decline
22
in market conditions surrounding the refining, petrochemical, power and
pulp/paper industries were key contributors. Specifically, the decline in demand
for refined petroleum products, in conjunction with the weak economy, has
influenced a reduction in market pricing for refined petroleum products, in turn
driving a conscious and marked cutback in the amount of maintenance spending by
many clients. In addition, during the first quarter of 2002, certain operations
which produced $8.1 million and $17.2 million in revenue for the three and six
month periods ending June 30, 2001, respectively, were divested.
Income (loss) from operations was ($2.5) million or (1.8%) of revenue for the
three-month period ending June 30, 2002, compared with $7.1 million or 3.8% for
the three-month period ending June 30, 2001. For the six-month period ended June
30, 2002, income from operations was $8.3 million or 2.5% of revenue compared
with $14.9 million or 3.9% of revenue for the same period of 2001. The reduction
in operating income for the three and six months ending June 30, 2002,
respectively, is directly related to the decline in revenue indicated above,
causing certain relatively fixed operating expenses to be unabsorbed and
reducing gross margins. Additionally, a bad debt charge of $2.0 million was
recorded relating to a receivable from a customer that filed for bankruptcy
protection in June 2002.
ENVIRONMENTAL SERVICES GROUP
Revenue for the three-month period ending June 30, 2002 was $71.6 million
compared to $70.2 million for the same period in 2001. For the six-month period
ending June 30, 2002, revenue was $134.6 million compared to $138.9 million for
the same period in 2001. Revenues continue to be affected by the economic
slowdown in the general manufacturing, chemical and waste industries.
Income from operations was $16.8 million or 23.5% of revenue for the three-month
period ending June 30, 2002, compared with $2.0 million or 2.8% of revenue for
the three-month period ending June 30, 2001. For the six-month period ending
June 30, 2002, income from operations was $17.4 million or 12.9% of revenue
compared with $4.5 million or 3.2% of revenue for the same period of 2001.
Income from operations for both the three- and six-month periods ending June 30,
2002, was positively impacted by the settlement of a $19.8 million insurance
litigation matter involving certain environmental sites offset by a $5.0 million
charge for incremental environmental liabilities.
METALS SERVICES GROUP
Revenue was $141.9 million for the three-month period ending June 30, 2002,
compared to $134.9 million for the same period of 2001. The increase in revenue
is due to a 24% improvement in ferrous scrap metal prices for the current period
compared to last year, partially offset by a 4% decrease in the volumes of scrap
managed by the Group compared to the same period last year. The increase in
ferrous scrap metal prices is directly related to the reduction in foreign steel
imports, the improvement in the U.S. steel industry operating rate and the
corresponding increase in demand for ferrous scrap.
Revenue was $251.1 million for the six-month period ending June 30, 2002,
compared to $273.9 million for the same period of 2001. The decline in revenue
is due to a 10% reduction in volumes managed by the Group, partially offset by a
10% increase in ferrous scrap metal prices.
Income from operations was $5.2 million or 3.7% of revenue for the three-month
period ending June 30, 2002, compared to $0.6 million or 0.4% of revenue for the
three-month period ending June 30, 2001. The improvement in income from
operations for the quarter is due to the improved ferrous scrap metal prices,
continued cost reductions and increased demand over the first quarter.
Income from operations was $3.9 million or 1.6% of revenue for the six month
period ending June 30, 2002, compared with a loss of ($5.8) million or (2.1%) of
revenue for the same period of 2001. The increase in income from operations for
the six-month period ending June 30, 2002, is due to the improved ferrous scrap
metal prices and significant bad debt charges in the prior year. In the first
quarter of 2001, income from operations was reduced by $7.6 million as a result
of the bankruptcy of two major steel company customers.
SHARED SERVICES AND ELIMINATIONS
Shared services and eliminations include the administrative costs of the shared
service operations, the retained liabilities of the Company's captive insurance
company and other non-operating entities. Shared services costs increased by
$2.1 million and $5.8 million for the three and six months ended June 30, 2002,
compared to the same periods in 2001 due principally to corporate-level bad debt
charges and special charges associated with the relocation of the corporate
office and business process standardization costs (including expenditures
incurred in connection with the PSC Way project described in Note 10 to the
Consolidated Financial Statements).
23
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs were $34.3 million and $66.0 million
for the three and six months ended June 30, 2002, compared to $34.3 million and
$78.1 million in the same periods in 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property, plant and equipment in the three and
six months ended June 30, 2002, was $10.5 million and $20.8 million. This
represents a decrease of $0.6 million for the three months and $1.3 million for
the six months ended June 30, 2002, compared to the same period in 2001. This
decrease primarily was the result of the Company's closing of certain operations
in late 2001.
INTEREST EXPENSE
Interest expense for the three and six months ended June 30, 2002, was $12.9
million and $23.4 million compared with $9.5 million and $19.1 million for the
same periods in 2001. Interest expense was higher in the three and six months
ended June 30, 2002, due to borrowing costs associated with the mezzanine
facility described in Note 7 to the Consolidated Financial Statements.
OTHER (INCOME) EXPENSE, NET
Other (income) expense, net for the three and six months ended June 30, 2002,
was expense of $1.5 million and $1.4 million, respectively. The expense in both
periods comprised an impairment charge related to an equity investment of
the Company offset by interest income for the periods.
Other (income) expense, net for the three and six months ended June 30, 2001,
was income of $6.2 million and $6.9 million, respectively. The income comprised
gains on sales of certain assets of $4.6 million, recovery of certain
reorganization costs of $0.6 million and interest income and equity income on
investments.
DISCONTINUED OPERATIONS
For the three months ended June 30, 2002 and 2001, the Company recognized
before-tax income (loss) on discontinued operations of $(4.5) million and $0.2
million, respectively. The before-tax income (loss) on discontinued operations
reflects the following:
o The Company's closure of its D&D business resulted in operating losses
of $3.2 million in the three months ended June 30, 2002, compared with
operating income of $0.2 million in the three months ended June 30,
2001.
o A charge of $1.3 million for the impairment of assets held for sale in
the three months ended June 30, 2002. The net book value of the assets
was $2.0 million after impairment.
For the six months ended June 30, 2002 and 2001, the Company recognized
before-tax income (loss) on discontinued operations of $(5.7) million and $0.5
million, respectively. The before-tax income (loss) on discontinued operations
comprises the following:
o The impairment of assets ultimately sold related to the Company's D&D
business resulted in a loss for the six months ended June 30, 2002 of
$2.8 million, in addition to operating losses posted of $4.1 million.
The D&D business had operating income of $0.3 million in the six
months ended June 30, 2001.
o The sale of certain assets during the six months ended June 30, 2002
with a net book value of $2.9 million generated a gain of $2.3
million. These assets generated operating income of $0.2 million and
$0.2 million in the six months ended June 30, 2002 and 2001,
respectively.
o A charge of $1.3 million for the impairment of assets held for sale in
the six months ended June 30, 2002. The net book value of the assets
was $2.0 million after impairment.
INCOME TAXES
In assessing the value of the deferred tax assets, management considered whether
it would be more likely than not that all of the deferred tax assets will be
realized. Projected future income tax planning strategies and the expected
reversal of deferred tax liabilities are considered in making this assessment.
Based on the level of historical taxable income, projections for future taxable
income and subject to the limitation on the utilization of net operating loss
carry-forwards and excess interest deduction carry-forwards, the
24
Company has determined at this time that it is more likely than not that the
Company will not realize the benefits of the U.S. deferred tax assets. At June
30, 2002, the Company has a valuation allowance of $242.7 million.
Certain future events may result in such deferred tax assets being utilized in
the Company's future income tax returns, which the Company will record as a
reduction in the valuation allowance and, in accordance with the principles of
fresh start reporting, a credit to additional paid-in capital.
The tax charge recorded during the current year represents Canadian income taxes
and certain U.S. state income taxes.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company's working capital was $109.7 million, an increase
of $16.7 million since December 31, 2001. The improved working capital position
of the Company is largely attributable to the June 2002 recording of a $19.8
million note receivable related to the settlement of an insurance claim as
described in Note 3 to the Consolidated Financial Statements. Cash used in
operating activities was $9.6 million for the six-month period ended June 30,
2002, compared to cash used by operating activities of $43.1 million for the
comparable period in 2001. The use of cash in the first six months of 2002 as
compared to the same period in 2001 has improved $33.6 million due to improved
working capital management in the areas of inventory and accounts receivable.
However, the Company continues to rely upon borrowings from its revolving
operating facility as its principal source of liquidity to fund cash used in
operating activities.
As of March 31, 2000, the Company entered into a $335.8 million term credit
facility and a revolving operating facility. The credit facility provides term
debt of $235.8 million ("term debt") and $100 million in convertible
payment-in-kind debt ("PIK debt"). The credit facility matures on March 31,
2005, and bears interest at a fixed rate of 9% for the term debt and 10% for the
PIK debt. Interest payments on the term debt are due quarterly in arrears, up to
a maximum of $20 million in the first year, and on the PIK debt, interest is
payable in full on March 31, 2005. The term debt or any part thereof and/or all
of the PIK debt may be prepaid and redeemed by the Company at any time during
the agreement once the revolving operating facility has been terminated. The
Company must pay a redemption premium of between 1% and 3% on the amount of the
term debt being redeemed and between 8.33% and 16.66% on the amount of the PIK
debt being redeemed excluding mandatory prepayments. The PIK debt is convertible
by the lenders at any time into shares of common stock of PSC at an initial
conversion price of $11.72 per share, which was in excess of the fair market
value of PSC on a per share basis. The carrying value of the term debt was
$170.9 million as of June 30, 2002.
The Company generally is required to repay the term debt first and then the PIK
debt in an amount equal to:
(i) 25% of the net asset-sale proceeds from the disposition of assets sold
other than in the ordinary course of business after first paying off
various tranches of senior debt and collateralizing letters of credit;
(ii) the net proceeds from any foreign subsidiary dispositions in excess of $1
million annually.
The Company is also required yearly for the first two years and quarterly after
that, to repay the term debt first and then the PIK debt in an amount equal to
75% of the cash flow available for debt service. Through June 30, 2002, no
repayments have been required under this provision.
The credit facility and the revolving operating facility ("facilities") are
guaranteed jointly and severally by PSC and substantially all of its direct and
indirect wholly owned subsidiaries and are collateralized by security interests
in the assets of PSC and substantially all of its direct and indirect wholly
owned subsidiaries and a pledge of securities of substantially all of its direct
and indirect wholly owned subsidiaries.
The facilities contain cross-default provisions as well as certain restrictive
covenants provisions, including limitations on the incurrence of indebtedness,
the sale of assets, the incurrence of liens, the making of specified
investments, and the payment of cash dividends. In addition, the Company is
required to satisfy, among other things, certain financial covenants, including
specified amounts of EBITDA and maximum capital expenditures. See Note 7(c) to
the Consolidated Financial Statements for a description of recent amendments to
these covenants and execution of the new mezzanine facility.
The revolving operating facility provides for a revolving line of credit,
subject to a borrowing base formula calculated on accounts receivable, of up to
$195 million. The revolving operating facility matures on April 8, 2003.
25
Borrowings under the revolving operating facility bear interest at a rate equal
to the base rate (which is based on the Wells Fargo Bank "prime rate") plus 1%
on Tranche A advances, 3% on Tranche B-Prime advances, and the greater of 11.5%
or the base rate plus 5% on Tranche Sub-B advances or at the option of the
Company on Tranche A advances at a rate equal to the LIBOR rate plus 3%. A
letter of credit issuance fee of .25% plus an annual fee of 2.75% is charged on
the amount of all outstanding letters of credit issued under Tranche A. Letters
of credit issued under Trance Sub-B bear an interest rate of 10.075%.
The Company is required to pay an annual service/agency fee equal to $900,000
and a monthly loan servicing fee equal to $20,000 for Tranches A and B-Prime.
The Tranche Sub-B Agency fee is $10,000 paid monthly. In addition, the Company
is required to pay monthly an unused line of credit fee equal to 0.375%, 0.75%,
and 2.0% per annum on the average unused portion of Tranche A, Tranche B-Prime,
and Tranche Sub-B, respectively, under the revolving operating facility. At June
30, 2002, the Company's borrowing base formula limited the availability of the
revolving operating facility to $160.0 million. The Company had undrawn capacity
under the revolving operating facility of $38.3 million, net of borrowings of
$28.7 million and outstanding letters of credit of $93.0 million.
Under the facilities, the Company is required to meet certain financial
covenants. During 2001, the Company was negatively impacted by the general
slowdown in the economy, poor conditions in the steel industry, the bankruptcy
of major customers, and the events of September 11, among other matters. The
Company was unable to meet its EBITDA and interest coverage covenants and as a
result sought relief in March 2001, May 2001, November 2001, and April 2002.
On April 12, 2002, the revolving operating facility was amended to provide for
the mezzanine financing. The revolving operating facility was amended to add a
new Tranche Sub-B in the amount of $70 million. Because the defined borrowing
base under Tranche Sub-B is more liberal than under Tranches A or B-Prime, and
because a reserve of $25 million is not deducted from the borrowing base under
Tranche Sub-B as it is under Tranches A and B-Prime, the net effect is to
provide availability under Tranche Sub-B at times when there is no availability
under Tranches A and B-Prime. Tranche Sub-B is a revolving facility, except that
any payments of principal as a result of asset sales (other than in the ordinary
course of business) automatically reduce the availability under Tranche Sub-B.
The covenants under the revolving operating facility were amended to eliminate
the interest coverage ratio, to waive the default under the EBITDA covenant for
the period ended December 31, 2001, and to lower the EBITDA covenant requirement
to $4.6 million, $9.7 million, $14.8 million, and $20.4 million for the
cumulative year-to-date periods ending March 31, June 30, September 30, and
December 31, 2002, respectively.
In addition to the foregoing changes, the revolving credit facility was further
amended in a number of sections to facilitate certain transactions or to effect
conforming changes. Among these changes was a provision making it easier to
enter into transactions with affiliates provided that the transaction in
question is at least as fair to the Company as could be achieved in an arm's
length negotiation.
The Company's credit facility and the Intercreditor Agreement among the
Company's lenders were amended primarily to permit or facilitate the changes to
the revolving operating facility. In addition, the interest coverage ratio under
the credit facility was eliminated, the EBITDA covenant requirements reduced for
periods ending March 31, 2002, and thereafter, and the default under the EBITDA
covenant for the period ended December 31, 2001, waived.
At June 30, 2002, the Company was in compliance with the amended covenants under
the facilities. The Company has adequate liquidity in the short term. However,
the Company is obligated to extend or replace the revolving operating facility
prior to maturity on April 8, 2003. Since emerging from bankruptcy in April
2000, the Company has not been able to return to profitability in large measure
because of high debt service costs on its facilities and significant fees
associated with amending these facilities. The Company's businesses also have
not performed as expected. In addition, both because of the Company's financial
condition and because of general economic conditions affecting all companies
that are required to provide surety bonds in connection with their business
activities, the Company is unable to obtain adequate surety bonds and is
frequently required to post letters of credit or cash collateral. This puts
additional strain on the Company's financial resources and liquidity and limits
the Company's available working capital. Moreover, currently, the Company does
not have sufficient working capital to take advantage of growth opportunities,
further limiting its prospects. The Company has engaged in cost cutting efforts
during 2002 and is considering further restructurings. At June 30, 2002, the
Company was in compliance with the amended covenants under the facilities.
Although the Company intends to extend or replace the revolving operating
facility prior to its maturity on April 8, 2003, the success of such efforts is
uncertain. A revolving operating facility is essential to provide funding for
the Company's operating activities and to support classification of the
Company's term debt.
CAPITAL EXPENDITURES
Capital expenditures were $5.6 million and $10.3 million for the three and six
months ending June 30, 2002, compared to $12.6 million and $26.4 million for the
same periods in 2001.
26
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
Financial Reporting Release No. 60 released by the SEC recommends that all
registrants include a discussion of "critical" accounting policies or methods
used in the preparation of the financial statements. The Company's significant
accounting policies are contained in the Notes to the Consolidated Financial
Statements in Form 10-K. The financial statements have been prepared in
conformity with generally accepted accounting principles and, accordingly,
include amounts based upon informed estimates and judgments of management with
due consideration given to materiality. As a result, actual results could differ
from those estimates. The following represents those critical accounting
policies where materially different amounts would be reported under different
conditions or using different assumptions.
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 along with
the related costs of treatment, disposal and transportation at the time of
performance of services. Revenue is recognized at the time of customer
acceptance for the direct sale of recovered commodities and steel products or
for contracts where the Company brokers materials between two parties, takes
title to the product and assumes the risks and rewards of ownership. If the
Company is acting as an agent in those transactions, then only the commission on
the transaction is recorded.
The Company uses the percentage-of-completion basis to account for its
fixed-price contracts. Under this method, the amount of total costs and profits
expected to be realized is estimated, as is the recoverability of costs related
to change orders. Revenue is recognized as work progresses in the ratio that
costs bear to the estimated total costs for each contract. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance. Selling, general and administrative costs are charged to
expense as incurred. Provisions for estimated losses on incomplete contracts are
recorded in the period in which such losses are determined. Changes in estimates
or differences in the actual cost to complete the contract could result in
recognition of differences in earnings.
ENVIRONMENTAL COSTS. At June 30, 2002, the Company had accrued liabilities
of $72.5 million for environmental investigation, compliance, and remediation
costs. The liabilities are based upon estimates with respect to the number of
sites for which the Company may be responsible, the scope and cost of work to be
performed at each site, the portion of costs that will be shared with other
parties, and the timing of remediation work. When timing and amounts of
expenditures can be reliably estimated, amounts are discounted. Where timing and
amounts cannot be reliably estimated, a range is estimated and the best estimate
within the high and low end of the ranges is recognized. Estimates can be
affected by factors including future changes in technology, changes in
regulations or requirements of local governmental authorities, the extent of the
remediation necessary based upon environmental testing, and the actual costs of
disposal.
RECEIVABLES, NET OF VALUATION ALLOWANCES. Accounts receivable at June 30,
2002 were $229.4 million net of a $20.4 million allowance for doubtful accounts.
The valuation allowance was determined based upon the Company's evaluation of
known requirements, aging of receivables, historical experience, and the
economic environment. While the Company believes it has appropriately considered
known or expected outcomes, its customers' ability to pay their obligations
could be adversely affected by contraction in the economy or unexpected changes
in ferrous metals or energy prices. Changes in these estimates of collectability
could have a material impact on earnings.
INVENTORY. Inventories primarily comprise unprepared and prepared ferrous
scrap and are valued at the lower of average purchase cost or market valuation.
Ferrous scrap is a commodity and its price is determined by the market based on
a number of factors including, but not limited to, the demand for ferrous scrap
by the U.S. steel making industry, the level of imports and exports of ferrous
scrap and the regional supply of scrap available. As a result of these factors
the price for ferrous scrap can fluctuate widely from period to period. The
Company manages its commodity price risk by frequently adjusting its purchase
price to reflect current market pricing; managing and turning inventory
frequently; and utilizing its considerable experience in the ferrous scrap
industry to anticipate price movements.
RESTRUCTURING CHARGES. The Company continuously evaluates the productivity
and profitability of individual operating locations and the existing asset base
to identify opportunities to improve its cost structure. Future opportunities
may involve, among other things, adding or closing locations, re-deploying or
disposing of assets, or otherwise restructuring operations. Costs associated
with closures, severances, and asset impairments are estimated and are recorded
in accordance with applicable accounting requirements. Actual costs incurred and
timing could vary based upon many factors outside the Company's control,
including environmental and local governmental requirements.
27
INSURANCE LIABILITIES. Insurance accruals were $47.8 million at June 30,
2002. The Company retains liability for workers' compensation claims, auto, and
general liability, where permitted, for up to $1 million for any single
occurrence and for property claims up to $2 million. The Company purchased
insurance to limit the Company's aggregate exposure through October 1, 2002 to
losses of $1.5 million for auto and general liability, $5 million for
environmental liability and $14 million for workers' compensation claims.
Insurance claims liabilities have been accrued using actuarial principles and
industry standard rates on an undiscounted basis. Third party administrators
estimate the ultimate potential cost for individual claims. Actual development
of individual claims could vary from the estimated amounts due to severity of
injuries, the potential for damage awards, and future changes in medical costs.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations." This statement addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations" and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." The provisions of this statement apply
to all business combinations initiated after June 30, 2001. In accordance with
the Statement provisions, the Company adopted Statement 141 on January 1, 2002.
Such adoption did not have a material effect on the Company's financial
statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets." This Statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, "Intangible Assets." In accordance with the
Statement provisions, the Company adopted Statement 142 on January 1, 2002. Such
adoption did not have a material effect on the Company's financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations." The statement applies to
legal obligations associated with the retirement of long-lived assets, except
for certain obligations of lessees. The provisions of this statement are
required to be applied for fiscal years beginning after June 15, 2002.
Management is in the process of evaluating the impact of the adoption of
Statement 143, which could have a material effect on the Company's financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supersedes FASB Statement 121. This statement addresses financial
accounting and reporting for long-lived assets impaired or disposed of by sale.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001. The Company adopted
Statement 144 on January 1, 2002. The adoption of Statement 144 has resulted in
the recognition of discontinued operations for disposals subsequent to December
31, 2001, that would not have been recognized as such prior to the adoption.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections", which will be effective for the
Company beginning January 1, 2003. Statement 145 rescinds FASB Statement No. 4,
44, 64 and amends SFAS No. 13, "Accounting for Leases", to provide guidance for
income statement classification and gains and losses on extinguishment of debt
and eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The adoption of Statement 145 is not expected to have a material
effect on the Company's consolidated financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities".
Statement 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." SFAS No. 146 is effective for the Company in January 2003. The
Company is evaluating the impact of SFAS No. 146.
28
PART I -- FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial risk resulting from volatility in foreign
exchange rates, interest rates and commodity prices. The Company seeks to
minimize these risks through its regular operating and financing activities and,
when deemed appropriate, through the use of derivative financial instruments.
The Company did not enter into any derivative contracts in 2002 or 2001.
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 stockholders'
deficit as stated in the Company's accounting policies. Changes in the foreign
exchange rates compared to the United States dollar can have an effect on the
Company's revenue and profitability. The sensitivity of the earnings (loss) from
continuing operations before tax to the changing foreign currency rates based on
the operating results from foreign subsidiaries for the three and six months
ended June 30, 2002 is estimated to be immaterial.
INTEREST RATE RISK
Substantially all of the Company's long-term debt at June 30, 2002, bears
interest at a fixed rate. Borrowings under the revolving operating facility
totaled $28.7 million at June 30, 2002, and bear interest at a floating rate -
See Note 7(c) to the Consolidated Financial Statements.
COMMODITY PRICE RISK
The Company is exposed to commodity price risk during the period that it has
title to scrap that is held in inventory for processing and/or resale. Scrap
prices are 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 scrap 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.
29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as reported in the Company's Form 10-K under the caption "Legal
Proceedings," the Company is not currently a party to any material pending legal
proceedings, other than routine matters incidental to the business, and no
material developments have occurred in any proceedings described in such Form
10-K except as described in Note 17 to the Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 12, 2002, in connection with the mezzanine financing, the Company
issued 3,638,466 shares of common stock to entities affiliated with Carl C.
Icahn and Stephen Feinberg, upon payment in cash of the par value of $0.01 per
share. Such shares were placed in reliance on Section 4(2) of the Securities Act
of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Certain material events have occurred since June 30, 2002, of which investors
should be aware in considering the information contained in this Form 10-Q.
CHANGES IN CERTIFYING ACCOUNTANT
On April 18, 2002, PricewaterhouseCoopers LLP ("PwC"), the Company's independent
accountants for the year ended December 31, 2001, and the nine months ended
December 31, 2000, resigned. In connection with the audits of the Company's
financial statements for such periods and through April 18, 2002, there were no
disagreements with PwC on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PwC would have caused them
to make reference thereto in their reports on the financial statements for such
periods. PwC's reports on the financial statements for such periods contain no
adverse opinion or disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principle, except that
their report on the December 31, 2000, financial statements included an
explanatory paragraph regarding a potential event of default under the terms of
certain restrictive covenants included in the Company's facilities.
Effective July 17, 2002, the Company engaged KPMG LLP ("KPMG") as its
independent public accountants for the fiscal year ending December 31, 2002.
During the nine months ended December 31, 2000, the year ended December 31, 2001
and the current year through July 17, 2002, the Company did not consult with
KPMG with respect to either (i) the application of accounting principles to a
specified transaction, either completed or proposed or the type of audit opinion
that might be rendered on the Company's consolidated financial statements, in
respect of which either a written report was provided to the Company or oral
advice was provided that KPMG concluded was an important factor considered by
the Company in reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was a reportable event, as that term is
defined in Item 304(a)(1)(v) of Regulation S-K promulgated by the SEC.
NASDAQ HEARING
On April 16, 2002, the Company was notified by the staff of the Nasdaq Stock
Market, Inc. that it had failed to satisfy the net tangible assets/shareholders'
equity requirements under the applicable Nasdaq Marketplace Rules. On May 7,
2002, the Company requested a hearing with the Nasdaq Listing Qualifications
Panel (the "Panel") to review the staff's position, which stayed the delisting.
On May 13, 2002, the Company filed its Form 10-Q for the quarter ended March 31,
2002, which included a statement indicating that the filing had not been
reviewed by the Company's independent auditors because those auditors had
resigned (not as a result of a dispute with management) and were being replaced.
On May 14, 2002, the Company was notified by the Panel that, based upon the lack
of an
30
independent auditor review of that Form 10-Q filing, the Company was considered
delinquent under the Nasdaq Marketplace Rule requiring timely filing of periodic
reports. On May 30, 2002, the Company was notified that the closing bid price of
its common stock had been below $1.00 per share for 30 consecutive trading days.
On June 13, 2002, the Panel conducted the requested hearing at which the Company
presented its positions as to why the delisting of the Company's securities was
unwarranted. By letter dated July 9, 2002, the Panel notified the Company that
it had determined to delist the Company's securities from the Nasdaq Stock
Market effective with the opening of business on July 10, 2002. As grounds for
its decision, the Panel cited the Company's failure to file a Form 10-Q for the
quarter ended March 31, 2002, that had been reviewed by its independent auditors
and the Company's failure to satisfy the net tangible assets/shareholders'
equity requirements under the Nasdaq Marketplace Rules.
The Company intends to pursue eligibility for its common stock to trade on the
Nasdaq OTC Bulletin Board. The Company's common stock continues to trade on the
Toronto Stock Exchange.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the registrant's Report on Form 10-Q
filed August 14, 2000).
3.2 Amended By-Laws (incorporated by reference to Exhibit 3.2 to the
registrant's Annual Report on Form 10-K filed March 29, 2001).
4 Description of capital stock of the registrant (incorporated by
reference to Exhibit 4 to the registrant's Quarterly Report on Form
10-Q filed May 21, 2001).
10.1 Credit Agreement, dated as of March 31, 2000, between the registrant
and various of its lenders, with Canadian Imperial Bank of Commerce
acting as Administrative Agent (incorporated by reference to Exhibit
99.1 to the registrant's Current Report on Form 8-K filed May 8,
2000).
10.2 Loan Agreement, dated as of March 31, 2000, between the registrant
and certain of its lenders, with Foothill Capital Corporation acting
as Arranger and Administrative Agent (incorporated by reference to
Exhibit 99.2 to the registrant's Current Report on Form 8-K filed
May 8, 2000).
10.3 Registration Rights Agreement, dated as of March 31, 2000 between
the registrant and certain securities holders (incorporated by
reference to Exhibit 99.4 to the registrant's Current Report on Form
8-K filed May 8, 2000).
10.4 Philip Services Corporation Performance Unit Bonus Plan
(incorporated by reference to Exhibit 10.6 to the registrant's
Quarterly Report on Form 10-Q filed August 14, 2001).
10.5 Philip Services Corporation Stock Option Plan (incorporated by
reference to Exhibit 99.7 to the registrant's Current Report on Form
8-K filed May 8, 2000).
10.6 First amendment to Credit Agreement, dated as of March 8, 2001,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.8 to the registrant's
Annual Report on Form 10-K filed March 29, 2001).
10.7 Second amendment to Credit Agreement, dated as of March 28, 2001,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.9 to the registrant's
Annual Report on Form 10-K filed March 29, 2001).
10.8 Amendment Number One, dated March 28, 2001, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.10 to the registrant's
Annual Report on Form 10-K filed March 29, 2001).
10.9 Indenture, dated as of April 7, 2000, relating to the registrant's
6% Subordinated Notes due April 15, 2010 (incorporated by reference
to Exhibit 10.11 to the registrant's Quarterly Report on Form 10-Q
filed May 21, 2001).
10.10 Indenture, dated as of April 7, 2000, relating to the registrant's
3% Convertible Subordinated Notes due April 15, 2020 (incorporated
by reference to Exhibit 10.12 to the registrant's Quarterly Report
on Form 10-Q filed May 21, 2001).
10.11 Third amendment to Credit Agreement, dated as of May 18, 2001,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.13 to the registrant's
Quarterly Report on Form 10-Q filed May 21, 2001).
10.12 Amendment Number Two, dated May 18, 2001, to Loan Agreement between
the registrant and certain of its lenders, with Foothill Capital
Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.14 to the registrant's
Quarterly Report on Form 10-Q filed May 21, 2001).
31
10.13 Philip Services Corporation Non-employee Directors Restricted Stock
Plan (incorporated by reference to the registrant's Definitive Proxy
Statement on Schedule 14A filed March 29, 2001).
10.14 Philip Services Corporation Officers' Stock-Based Bonus Plan
(incorporated by reference to the registrant's Definitive Proxy
Statement on Schedule 14A filed March 29, 2001).
10.15 Fourth amendment to Credit Agreement, dated as of November 19, 2001,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.17 to the registrant's
Quarterly Report on Form 10-Q filed November 19, 2001).
10.16 Amendment Number Three, dated November 19, 2001, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.18 to the registrant's
Quarterly Report on Form 10-Q filed November 19, 2001).
10.17 Amendment Number Four, dated January 29, 2002, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.17 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
10.18 Amendment Number Five, dated February 19, 2002, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.18 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
10.19 Amendment Number Six, dated March 8, 2002, to Loan Agreement between
the registrant and certain of its lenders, with Foothill Capital
Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.19 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
10.20 Fifth amendment to Credit Agreement, dated as of April 12, 2002,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.20 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
10.21 Amendment Number Seven, dated April 12, 2002, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.21 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
10.22 Amended and Restated Registration Rights Agreement, dated as of
April 12, 2002, between the registrant and certain securities
holders (incorporated by reference to Exhibit 10.22 to the
registrant's Annual Report on Form 10-K filed April 15, 2002).
10.23 Employment Agreement with Michael W. Ramirez.
10.24 Amendment Number Eight, dated June 2002, to Loan Agreement between
the registrant and certain of its lenders, with Foothill Capital
Corporation acting as Arranger and Administrative Agent.
10.25 Collateral Agency and Intercreditor Agreement, dated as of March 31,
2000, among the registrant, Foothill Capital Corporation, acting as
Collateral Agents and Revolver Agent, and Canadian Imperial Bank of
Commerce, acting as Secured PIK/Term Agent.
10.26 Amendment Number One to the Collateral Agency and Intercreditor
Agreement, dated as of April 12, 2002 among the registrant, Foothill
Capital Corporation, acting as Collateral Agents and Revolver Agent,
and Canadian Imperial Bank of Commerce, acting as Secured PIK/Term
Agent.
99.1 Certification Pursuant to 18 U.S.C. Section 1350.
99.2 Certification Pursuant to 18 U.S.C. Section 1350.
(b) Current Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated April 18, 2002
announcing the resignation of PricewaterhouseCoopers LLP as its independent
certifying accountant.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2002
PHILIP SERVICES CORPORATION
By: /S/ ROBERT L. KNAUSS
---------------------------------------------
Robert L. Knauss
Chairman of the Board
(Principal Executive Officer)
By: /S/ MICHAEL W. RAMIREZ
---------------------------------------------
Michael W. Ramirez
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
33
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the registrant's Report on Form 10-Q
filed August 14, 2000).
3.2 Amended By-Laws (incorporated by reference to Exhibit 3.2 to the
registrant's Annual Report on Form 10-K filed March 29, 2001).
4 Description of capital stock of the registrant (incorporated by
reference to Exhibit 4 to the registrant's Quarterly Report on Form
10-Q filed May 21, 2001).
10.1 Credit Agreement, dated as of March 31, 2000, between the registrant
and various of its lenders, with Canadian Imperial Bank of Commerce
acting as Administrative Agent (incorporated by reference to Exhibit
99.1 to the registrant's Current Report on Form 8-K filed May 8,
2000).
10.2 Loan Agreement, dated as of March 31, 2000, between the registrant
and certain of its lenders, with Foothill Capital Corporation acting
as Arranger and Administrative Agent (incorporated by reference to
Exhibit 99.2 to the registrant's Current Report on Form 8-K filed
May 8, 2000).
10.3 Registration Rights Agreement, dated as of March 31, 2000 between
the registrant and certain securities holders (incorporated by
reference to Exhibit 99.4 to the registrant's Current Report on Form
8-K filed May 8, 2000).
10.4 Philip Services Corporation Performance Unit Bonus Plan
(incorporated by reference to Exhibit 10.6 to the registrant's
Quarterly Report on Form 10-Q filed August 14, 2001).
10.5 Philip Services Corporation Stock Option Plan (incorporated by
reference to Exhibit 99.7 to the registrant's Current Report on Form
8-K filed May 8, 2000).
10.6 First amendment to Credit Agreement, dated as of March 8, 2001,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.8 to the registrant's
Annual Report on Form 10-K filed March 29, 2001).
10.7 Second amendment to Credit Agreement, dated as of March 28, 2001,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.9 to the registrant's
Annual Report on Form 10-K filed March 29, 2001).
10.8 Amendment Number One, dated March 28, 2001, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.10 to the registrant's
Annual Report on Form 10-K filed March 29, 2001).
10.9 Indenture, dated as of April 7, 2000, relating to the registrant's
6% Subordinated Notes due April 15, 2010 (incorporated by reference
to Exhibit 10.11 to the registrant's Quarterly Report on Form 10-Q
filed May 21, 2001).
10.10 Indenture, dated as of April 7, 2000, relating to the registrant's
3% Convertible Subordinated Notes due April 15, 2020 (incorporated
by reference to Exhibit 10.12 to the registrant's Quarterly Report
on Form 10-Q filed May 21, 2001).
10.11 Third amendment to Credit Agreement, dated as of May 18, 2001,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.13 to the registrant's
Quarterly Report on Form 10-Q filed May 21, 2001).
10.12 Amendment Number Two, dated May 18, 2001, to Loan Agreement between
the registrant and certain of its lenders, with Foothill Capital
Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.14 to the registrant's
Quarterly Report on Form 10-Q filed May 21, 2001).
10.13 Philip Services Corporation Non-employee Directors Restricted Stock
Plan (incorporated by reference to the registrant's Definitive Proxy
Statement on Schedule 14A filed March 29, 2001).
10.14 Philip Services Corporation Officers' Stock-Based Bonus Plan
(incorporated by reference to the registrant's Definitive Proxy
Statement on Schedule 14A filed March 29, 2001).
10.15 Fourth amendment to Credit Agreement, dated as of November 19, 2001,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.17 to the registrant's
Quarterly Report on Form 10-Q filed November 19, 2001).
10.16 Amendment Number Three, dated November 19, 2001, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.18 to the registrant's
Quarterly Report on Form 10-Q filed November 19, 2001).
10.17 Amendment Number Four, dated January 29, 2002, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.17 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
10.18 Amendment Number Five, dated February 19, 2002, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.18 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
34
10.19 Amendment Number Six, dated March 8, 2002, to Loan Agreement between
the registrant and certain of its lenders, with Foothill Capital
Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.19 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
10.20 Fifth amendment to Credit Agreement, dated as of April 12, 2002,
between the registrant and various of its lenders, with Canadian
Imperial Bank of Commerce acting as Administrative Agent
(incorporated by reference to Exhibit 10.20 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
10.21 Amendment Number Seven, dated April 12, 2002, to Loan Agreement
between the registrant and certain of its lenders, with Foothill
Capital Corporation acting as Arranger and Administrative Agent
(incorporated by reference to Exhibit 10.21 to the registrant's
Annual Report on Form 10-K filed April 15, 2002).
10.22 Amended and Restated Registration Rights Agreement, dated as of
April 12, 2002, between the registrant and certain securities
holders (incorporated by reference to Exhibit 10.22 to the
registrant's Annual Report on Form 10-K filed April 15, 2002).
10.23 Employment Agreement with Michael W. Ramirez.
10.24 Amendment Number Eight, dated June 2002, to Loan Agreement between
the registrant and certain of its lenders, with Foothill Capital
Corporation acting as Arranger and Administrative Agent.
10.25 Collateral Agency and Intercreditor Agreement, dated as of March 31,
2000, among the registrant, Foothill Capital Corporation, acting as
Collateral Agents and Revolver Agent, and Canadian Imperial Bank of
Commerce, acting as Secured PIK/Term Agent.
10.26 Amendment Number One to the Collateral Agency and Intercreditor
Agreement, dated as of April 12, 2002 among the registrant, Foothill
Capital Corporation, acting as Collateral Agents and Revolver Agent,
and Canadian Imperial Bank of Commerce, acting as Secured PIK/Term
Agent.
99.1 Certification Pursuant to 18 U.S.C. Section 1350.
99.2 Certification Pursuant to 18 U.S.C. Section 1350.
35