1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
------------------------------------
OCTOBER 27, 1997 (OCTOBER 10, 1997)
Date of Report (Date of earliest event reported)
PHILIP SERVICES CORP.
(Exact name of Registrant as specified in its charter)
ONTARIO 1-8368 NOT APPLICABLE
(State or other jurisdiction (Commission File Number) (IRS Employer Identification
of incorporation) No.)
100 KING STREET WEST, P.O. BOX 2440, LCD1, HAMILTON, ONTARIO, CANADA L8N 4J6
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (905) 521-1600
NOT APPLICABLE
(Former name or former address, if changed since last report.)
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EXPLANATORY NOTE
This filing amends the previously filed Form 8-K, dated October 27, 1997
(the "Form 8-K") of Philip Services Corp., an Ontario corporation (the
"Company"), and relates to the acquisition by the Company of all the operating
assets of the Luria Brothers Division of Connell Limited Partnership. As stated
in the Form 8-K, the required financial statements and pro forma financial
information would be filed by amendment not later than December 24, 1997.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE PARTNERS OF CONNELL LIMITED PARTNERSHIP:
We have audited the balance sheet of the Luria Brothers Division ("Luria")
of Connell Limited Partnership as of December 31, 1996, and the related
statements of income, cash flows, and parent investment for the year then ended.
These financial statements are the responsibility of the management of Luria
Brothers Division and Connell Limited Partnership. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As explained in Note 2 of the financial statements, certain of the expenses
presented in the financial statements represent intercompany allocations of the
costs of services provided to Luria by Connell Limited Partnership.
Additionally, the financial statements exclude an allocation of Connell Limited
Partnership's interest cost incurred in connection with its investment in Luria
and the costs of certain services provided Luria by Connell Limited
Partnership's legal and treasury departments. As a result, the financial
statements presented may not be indicative of the financial position or results
of operations that would have been achieved had Luria operated as a
non-affiliated entity.
In our opinion, the financial statements referred to above present fairly,
in all material aspects, the financial position of the Luria Brothers Division
of Connell Limited Partnership as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 12, 1997
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4
LURIA BROTHERS DIVISION OF
CONNELL LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(in thousands of US dollars)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
Net sales (Note 2)............................................... $516,843 $ 377,612
Cost of sales (Note 2)........................................... 497,108 364,667
-------- --------
Gross profit..................................................... 19,735 12,945
General and administrative expenses.............................. 5,037 4,227
-------- --------
Operating income................................................. 14,698 8,718
Other expenses (income) -- net................................... (27) (127)
-------- --------
Division income (Note 2)......................................... $ 14,725 $ 8,845
======== ========
The accompanying notes are an integral part of the financial statements.
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5
LURIA BROTHERS DIVISION OF
CONNELL LIMITED PARTNERSHIP
BALANCE SHEETS
(in thousands of U.S. dollars)
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash........................................................... $ 1,140 $ --
Receivables (less allowance for doubtful accounts of $825 in
1997 and $1,645 in 1996).................................... 55,857 66,824
Inventories, net of adjustments to last-in, first out cost of
$2,531 in 1997 and $2,278 in 1996 (Notes 2 and 3)........... 10,956 7,409
Prepaid expenses and other..................................... 444 428
-------- ---------
Total current assets............................................. 68,397 74,661
Property, plant and equipment (Note 2)
Land........................................................... 1,644 1,990
Building and improvements...................................... 4,181 4,185
Machinery and equipment........................................ 25,073 27,360
Construction in progress....................................... 3,006 12,824
-------- ---------
33,904 46,359
Less: accumulated depreciation and amortization................ 17,173 18,850
-------- ---------
Property, plant and equipment, net............................... 16,731 27,509
-------- ---------
TOTAL ASSETS..................................................... $ 85,128 $ 102,170
======== =========
LIABILITIES AND PARENT INVESTMENT
Current liabilities:
Accounts payable............................................... $ 38,512 $ 42,979
Accrued payroll and benefits................................... 2,100 2,502
Other.......................................................... 2,540 2,633
-------- ---------
Total current liabilities........................................ 43,152 48,114
-------- ---------
Commitments and contingencies (Note 7)
Parent Investment................................................ 41,976 54,056
-------- ---------
TOTAL LIABILITIES AND PARENT INVESTMENT.......................... $ 85,128 $ 102,170
======== =========
The accompanying notes are an integral part of the financial statements.
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LURIA BROTHERS DIVISION OF
CONNELL LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
(UNAUDITED)
Cash flows from operating activities:
Division income............................................ $ 14,725 $ 8,845
Adjustments to reconcile Division income to net cash
provided by operating activities:
Depreciation and amortization.............................. 2,820 2,280
Loss/(gain) on sale of assets.............................. (17) (19)
Provision for doubtful accounts............................ (271)
Changes in operating assets and liabilities:
Receivables................................................ 4,447 (10,967)
Inventories................................................ 1,756 3,547
Prepaid expenses and other................................. 118 16
Accounts payable........................................... 3,342 4,467
Accrued payroll and benefits............................... (814) 402
Other current liabilities.................................. (564) 93
------- -------
Net cash provided by operating activities.................... 25,542 8,664
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment................. (6,651) (13,258)
Proceeds from sale of property, plant and equipment........ 366 219
------- -------
Net cash used by investing activities........................ (6,285) (13,039)
------- -------
Net cash flows before financing activities................... 19,257 (4,375)
------- -------
Cash flows from financing activities:
Net transactions with parent (Note 2)...................... (18,117) 3,235
------- -------
Net cash used by financing activities........................ (18,117) 3,235
------- -------
Net increase in cash......................................... 1,140 (1,140)
Cash, beginning of year...................................... 0 1,140
------- -------
Cash, end of year............................................ $ 1,140 $ 0
======= =======
The accompanying notes are an integral part of the financial statements.
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LURIA BROTHERS DIVISION OF
CONNELL LIMITED PARTNERSHIP
STATEMENTS OF PARENT INVESTMENT
(in thousands of U.S. dollars)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
Parent investment, beginning of year............................. $ 45,368 $41,976
Division income.................................................. 14,725 8,845
Net transactions with parent..................................... (18,117) 3,235
-------- -------
Parent investment, end of year................................... $ 41,976 $54,056
======== =======
The accompanying notes are an integral part of the financial statements.
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8
LURIA BROTHERS DIVISION OF
CONNELL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS:
Luria Brothers Division (the "Division" or "Luria") is a division of
Connell Limited Partnership ("CLP" or "Parent") and is engaged principally in
the business of buying, selling and processing ferrous scrap for its own account
and for the account of others on a national basis, and in providing on-site mill
services to major steel companies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation and Relationship with Connell Limited Partnership
The accompanying financial statements present the Division's results of
operations and its financial condition as it operated within the Connell Limited
Partnership.
Interest expense associated with CLP's general debt used to finance the
acquisitions of all its businesses and interest associated with CLP's additional
investment in Luria have not been allocated to the Division's financial
statements.
Certain expenses associated with insurance, benefit costs and professional
fees represent allocations and management's estimates of costs incurred by CLP
and are included in the financial statements. These costs approximated
$1,600,000 for the nine months ended September 30, 1997 and $2,000,000 for the
year ended December 31, 1996. As the division maintains its own finance,
administrative, human resource, management information systems, and facilities
functions, no allocation of general CLP office functions has been made.
Management of external legal counsel activities and certain legal agreement
preparation and treasury activities have historically been performed by CLP as
the division does not maintain these resources. The accompanying financial
statements do not reflect an allocation of these costs as they are viewed by
management to be immaterial to Luria's financial statements.
Cash and short-term investment activities pertaining to the Division are
included in CLP's centralized cash management system. As such, the Division's
principal operating cash receipts and disbursements are transacted through CLP's
consolidated debt facility and reflected in "net transactions with parent" in
the accompanying financial statements.
These financial statements are intended to present management's estimates
of the results of operations and financial condition of the Division as a
stand-alone entity for the periods presented.
Considering the above factors, the financial statements presented may not
be indicative of the financial position or results of operations that would have
been achieved had Luria operated as a non-affiliated entity.
Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual amounts could differ from those estimates.
Revenue Recognition and Brokerage Transactions
Revenue from steel brokerage and yard sales is recorded as products are
shipped. Mill service revenue is recorded as services are performed.
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9
LURIA BROTHERS DIVISION OF
CONNELL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONT'D)
(INFORMATION AS AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 IS UNAUDITED)
Revenue on steel brokerage transactions is recorded at the contracted
amounts and approximated $261 million for the nine months ended September 30,
1997 and $350 million for the year ended December 31, 1996.
Included in cost of sales are selling, general and administrative expenses
associated with brokerage transactions. These costs approximated $2,668,000 for
the nine months ended September 30, 1997 and $3,320,000 for the year ended
December 31, 1996.
Inventories
Inventories are recorded at the lower of cost or market. The last-in,
first-out (LIFO) method is used to determine the cost of all inventories, except
for supplies for which the first-in, first-out (FIFO) method is used.
Parent Investment
Parent investment includes CLP's equity and debt investment in Luria, cash
activity transacted through CLP's centralized cash management system and
allocations of certain expenses from CLP.
Property, Plant and Equipment
Property, plant and equipment are stated at cost.
Depreciation of property, plant and equipment is computed using the
straight-line method based on estimates of useful lives. Leasehold improvements
are amortized over the lessor of the lease term or their estimated useful lives
using the straight-line method. Additions, improvements and major rebuilds are
capitalized.
Pensions
CLP maintains defined benefit plans and has determined pension expense for
Luria in accordance with the requirements of Statements of Financial Accounting
Standards No. 87 -- "Employers' Accounting for Pensions."
Postretirement Health Care and Life Insurance
The Division provides postretirement health care and life insurance
benefits for certain employees and retirees. Expenses associated with these
benefits have been determined in accordance with Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers's Accounting for Postretirement
Benefits Other Than Pensions".
Income Taxes
No provision for federal and state income taxes has been recorded in the
financial statements as the Division's earnings are generally taxed directly to
the partners of CLP.
Environmental Matters
Remediation costs are accrued based on estimates of known environmental
remediation exposure of known environmental exposure. Such accruals are recorded
even if significant uncertainties exist over the ultimate cost of the
remediation and therefore such estimates are subject to change as additional
information
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10
LURIA BROTHERS DIVISION OF
CONNELL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONT'D)
(INFORMATION AS AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 IS UNAUDITED)
becomes available. Ongoing environmental compliance costs, including maintenance
and monitoring costs, are expensed as incurred (See Note 7).
Concentration of Credit Risk
The financial instruments that potentially subject the Division to credit
risk consist primarily of accounts receivable. Most of the Division's customers
are companies that operate in the steel industry. Credit risk with respect to
trade accounts receivable is generally diversified due to the large number of
entities comprising the customer base and their dispersion across many
geographic areas. Luria performs ongoing credit evaluations of its customers'
financial condition. In addition, during 1997 and 1996, the Division's
receivables were covered under the credit insurance policies maintained by CLP.
3. INVENTORIES:
Inventories consisted of the following at December 31, 1996 and September
30, 1997 ($ in thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Supplies......................................................... $ 631 $ 767
Metals for reprocessing.......................................... 10,325 6,642
------- ------
Total............................................................ $ 10,956 $ 7,409
======= ======
If the FIFO cost method had been used, Division income for the year ended
December 31, 1996 would have been lower by $2,520,000 and for the nine months
ended September 30, 1997 would have been higher by $253,000.
During 1996 certain inventories were reduced, resulting in the liquidation
of LIFO inventory layers carried at lower costs prevailing in prior years as
compared with the current cost of inventory. The effect of this inventory
liquidation was to reduce cost of sales and increase Division income in 1996 by
approximately $276,000.
On a FIFO cost basis, reported year-end inventories would have been higher
by $2,278,000 on December 31, 1996 and $2,531,000 on September 30, 1997.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts reported in the balance sheets for cash, receivables,
accounts payable and certain other current liabilities approximate fair value
because of the immediate or short-term nature of these financial instruments.
5. EMPLOYEE BENEFIT PLANS:
Pension Plans
The Division is part of CLP's defined benefit cash balance pension plan
covering substantially all salaried, non-union employees. CLP's funding policy
is to contribute, at a minimum, the statutory required amounts.
Luria also maintains a defined benefit pension plan for hourly-compensated
employees covered under a collective bargaining agreement. Luria's expense under
these plans approximated $131,000 for the nine months ended September 30, 1997
and approximated $152,000 for the year ended December 31, 1996.
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LURIA BROTHERS DIVISION OF
CONNELL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONT'D)
(INFORMATION AS AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 IS UNAUDITED)
CLP has not performed a separate actuarial calculation of the funded status
of the defined benefit cash balance pension plan for the Division.
Luria also makes contributions to certain multiemployer plans as determined
by various collective bargaining agreements. Luria's expense under these plans
approximated $424,000 for the nine months ended September 30, 1997 and
approximated $554,000 for the year ended December 31, 1996.
Profit-Sharing and Savings, and Management Incentive Plans
The Division also participates in CLP's defined contribution profit-sharing
and savings plan for certain nonunion hourly and all salaried employees, and
incentive compensation plans for certain management personnel. Luria's expense
under these plans approximated $576,000 for the nine months ended September 30,
1997 and approximated $557,000 for the year ended December 31, 1996.
Certain key Division personnel are covered by CLP's long-term management
incentive program. Costs attributed to Luria under this plan approximated
$167,000 for the nine months ended September 30, 1997 and approximated $104,000
for the year ended December 31, 1996 and are excluded from the Division's
financial statements as this liability is retained by CLP.
Postretirement Health Care and Life Insurance Benefits
Luria provides postretirement health care and life insurance benefits for
certain employees and retirees. Postretirement health care and life insurance
expense plan approximated $72,000 for the nine months ended September 30, 1997
and approximated $96,000 for the year ended December 31, 1996.
Accrued postretirement benefit costs under these plans approximated $33,000
for the nine months ended September 30, 1997 and approximated $44,000 for the
year ended December 31, 1996.
Luria's unfunded accumulated postretirement health care and life insurance
benefits obligation approximated $600,000 at September 30, 1997 and December 31,
1996. The accumulated postretirement benefit obligation was determined using a
discount rate of 7.5%. The health care cost trend rates were assumed to be 8.5%,
gradually declining to 5% in 2003. CLP has capped Luria's future contributions
to postretirement benefit costs at the 1993 level. As a result, management
believes that any change in the assumed health care cost trend rate will not
have a material impact on the Division's postretirement benefit costs.
6. LEASES:
The Division leases equipment and real property in the normal course of
business under various operating leases. Lease agreements frequently include
renewal options and require that Luria pay for utilities, taxes, insurance and
maintenance expenses. Rental expense associated with operating leases for the
year ended December 31, 1996 approximated $2,720,000 and for the nine months
ended September 30, 1997 approximated $2,061,000.
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LURIA BROTHERS DIVISION OF
CONNELL LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONT'D)
(INFORMATION AS AT SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1997 IS UNAUDITED)
Minimum rental commitments under leases having an initial or remaining
noncancelable term in excess of twelve months are as follows ($ in thousands):
1998............................................................................ $ 962
1999............................................................................ 766
2000............................................................................ 716
2001............................................................................ 423
2002 and subsequent............................................................. 596
--------
$ 3,463
========
7. COMMITMENTS AND CONTINGENCIES:
The Division is subject to various liabilities resulting from transactions
arising in the ordinary course of business and is involved in claims and legal
proceedings in which damages and other remedies are sought. There are also
potential claims and liabilities under federal and state laws and regulations
related to environmental matters, including Superfund. In the opinion of
management, after review with counsel, the eventual disposition of these matters
will not have a material adverse effect on Luria's financial position.
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(B) PRO FORMA FINANCIAL INFORMATION.
PHILIP SERVICES CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(thousands of dollars, except share and per share amounts)
PRO FORMA
RECLASSIFICATION AS ADJUSTED
HISTORICAL ENTRIES ADJUSTMENTS FOR THE
PHILIP ALLWASTE LURIA (NOTE 4) (NOTE 5) LURIA ACQUISITION
---------- -------------- -------- ---------------- ----------- -----------------
Revenue....................... $1,125,510 $194,485 $377,612 $ (261,000) $ -- $ 1,436,607
Operating expenses............ 910,255 144,239 364,667 (263,160) -- 1,156,001
Selling, general and
administrative.............. 81,848 37,945 4,227 (18,160) -- 105,860
Depreciation and
amortization................ 35,288 -- -- 20,320 7,477 63,085
---------- -------- -------- --------- ---------- ----------
Income from operations........ 98,119 12,301 8,718 -- (7,477) 111,661
Interest expense.............. 27,052 4,947 -- -- 9,300 41,299
Other income and expense --
net......................... (5,341) (1,819) (127) -- -- (7,287)
---------- -------- -------- --------- ---------- ----------
Earnings before tax........... 76,408 9,173 8,845 -- (16,777) 77,649
Income taxes.................. 23,666 4,148 -- -- (4,111) 23,703
Minority interest............. -- 138 -- -- -- 138
---------- -------- -------- --------- ---------- ----------
Net Earnings.................. $ 52,742 $ 4,887 $ 8,845 $ -- ($ 12,666) $ 53,808
========== ======== ======== ========= ========== ==========
Primary earnings per share.... $ 0.68 $ 0.56
========== ==========
Fully diluted earnings per
share....................... $ 0.67 $ 0.55
========== ==========
Weighted average number of
common shares outstanding
(000's) (Note 6)............ 77,844 95,776
========== ==========
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PHILIP SERVICES CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(thousands of dollars, except share and per share amounts)
PRO RECLASSIFICATION
HISTORICAL NOTE FORMA ENTRIES ADJUSTMENTS
PHILIP LUNTZ INSTEL ADJUSTMENTS 2 PHILIP ALLWASTE LURIA (NOTE 4) (NOTE 5)
---------- -------- ------- ----------- ------ -------- -------- -------- ---------------- -----------
Revenue............ $545,344 $123,541 $99,014 $11,133 a $779,032 $383,274 $516,843 $ (350,000) $ --
Operating
expenses.......... 413,013 107,636 84,369 12,153 a,b,d 617,171 287,809 497,108 (352,917) --
Selling, general
and
administrative.... 56,063 8,649 5,485 585 a 70,782 76,200 5,037 (30,699) --
Depreciation and
amortization...... 24,225 2,665 699 1,505 b 29,094 -- -- 33,616 11,675
-------- -------- ------- -------- -------- -------- -------- ---------- --------
Income from
operations........ 52,043 4,591 8,461 (3,110) 61,985 19,265 14,698 -- (11,675)
Interest expense... 16,263 711 -- 6,000 c 22,974 9,505 -- -- 12,400
Other income and
expense -- net.... (3,456) (435) 332 -- (3,559) (3,206) (27) -- --
-------- -------- ------- -------- -------- -------- -------- ---------- --------
Earnings (loss)
from continuing
operations before
tax............... 39,236 4,315 8,129 (9,110) 42,570 12,966 14,725 -- (24,075)
Income taxes....... 10,098 1,796 2,800 (2,814) 11,880 6,313 -- (4,531)
Minority
interest.......... -- -- -- -- -- (101) -- --
-------- -------- ------- -------- -------- -------- -------- ---------- --------
Net Earnings....... $ 29,138 $ 2,519 $ 5,329 $(6,296) $ 30,690 $ 6,754 $ 14,725 $ -- $ (19,544)
======== ======== ======= ======== ======== ======== ======== ========== ========
Primary earnings
per share......... $ 0.58
========
Fully diluted
earnings per
share............. $ 0.51
========
Weighted average
number of common
shares outstanding
(000's) (Note
6)................ 50,073
========
PRO FORMA AS
ADJUSTED FOR
THE
LURIA ACQUISITION
-----------------
Revenue............ $ 1,329,149
Operating
expenses.......... 1,049,171
Selling, general
and
administrative.... 121,320
Depreciation and
amortization...... 74,385
----------
Income from
operations........ 84,273
Interest expense... 44,879
Other income and
expense -- net.... (6,792)
----------
Earnings (loss)
from continuing
operations before
tax............... 46,186
Income taxes....... 13,662
Minority
interest.......... (101)
----------
Net Earnings....... $ 32,625
==========
Primary earnings
per share......... $ 0.43
==========
Fully diluted
earnings per
share............. $ 0.42
==========
Weighted average
number of common
shares outstanding
(000's) (Note
6)................ 75,351
==========
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PHILIP SERVICES CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS AT SEPTEMBER 30, 1997
(thousands of dollars)
ASSETS NET PRO FORMA
PURCHASE LURIA PRO FORMA AS ADJUSTED
LURIA ADJUSTMENTS ASSETS HISTORICAL ADJUSTMENTS FOR THE
DIVISION (NOTE 3(D)) PURCHASED PHILIP (NOTE 3) LURIA ACQUISITION
-------- ----------- -------- ---------- ----------- -----------------
ASSETS
Current assets
Cash and equivalents..... $ -- $(4,765) $ 4,765 $ 58,771 $ -- $ 63,536
Accounts receivable...... 66,824 (720) 67,544 458,779 -- 526,323
Inventory for resale..... 7,409 (1,982) 9,391 300,777 -- 310,168
Other current assets..... 428 207 221 80,343 -- 80,564
-------- ------- -------- ---------- ---------- ----------
74,661 (7,260) 81,921 898,670 -- 980,591
Fixed assets............... 27,509 584 26,925 553,329 7,028 587,282
Goodwill................... -- -- -- 748,232 101,130 849,362
Other assets............... -- -- -- 153,828 2,600 156,428
-------- ------- -------- ---------- ---------- ----------
$102,170 $(6,676) $108,846 $2,354,059 $ 110,758 $2,573,663
======== ======= ======== ========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and
accrued liabilities... $ 48,114 $ 1,979 $ 46,135 $ 339,660 $ 4,236 $ 390,031
Current maturities of
long-term debt........ -- -- -- 11,775 -- 11,775
-------- ------- -------- ---------- ---------- ----------
48,114 1,979 46,135 351,435 4,236 401,806
Long-term debt............. -- -- -- 871,656 161,169 1,032,825
Deferred income taxes...... -- -- -- 29,375 -- 29,375
Other liabilities.......... -- -- -- 78,413 8,064 86,477
Shareholders' Equity....... 54,056 (8,655) 62,711 1,023,180 (62,711) 1,023,180
-------- ------- -------- ---------- ---------- ----------
$102,170 $(6,676) $108,846 $2,354,059 $ 110,758 $2,573,663
======== ======= ======== ========== ========== ==========
14
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PHILIP SERVICES CORP.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share and per share amounts)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated balance sheet and statement of
earnings present the financial position of Philip as at September 30, 1997 and
results of its operations for the nine months ended September 30, 1997 and the
year ended December 31, 1996 as if the acquisitions discussed in Notes 2 and 3
below had occurred at the beginning of the year ended December 31, 1996. These
pro-forma consolidated financial statements have been prepared on the basis of
U.S. GAAP.
The unaudited pro forma statement of earnings for the year ended December
31, 1996 was prepared by combining the following:
- the unaudited pro forma statement of earnings of Philip, which includes
the significant acquisitions completed during the fiscal year ended
December 31, 1996 and the nine months ended September 30, 1997 (Note 2),
and
- the audited statement of earnings of Luria for the year ended December
31, 1996.
The unaudited pro forma statement of earnings for the nine months ended
September 30, 1997 was prepared by combining the following:
- the unaudited pro forma statement of earnings of Philip for the nine
months ended September 30, 1997, which includes the significant
acquisitions completed during the nine months ended September 30, 1997
(Note 2), and
- the unaudited statement of earnings of Luria for the nine months ended
September 30, 1997.
The unaudited pro forma consolidated balance sheet at September 30, 1997
was prepared by combining the unaudited balance sheet of Philip as at September
30, 1997 and the unaudited balance sheet of Luria as at September 30, 1997 as
adjusted for the accounting for the acquisition and the assets not purchased by
Philip.
The pro forma consolidated financial statements should be read in
conjunction with the historical consolidated financial statements of Luria
included elsewhere in this filing and the historical consolidated financial
statements of Philip, Allwaste, Intsel and Luntz included in the S-1 filing
dated November 6, 1997.
Certain figures from the Allwaste, Intsel, Luntz and Luria consolidated
financial statements have been reclassified to conform with the basis of
presentation used by Philip in preparing Philip's Consolidated Financial
Statements.
The acquisition of Luria assets has been accounted for using the purchase
method of accounting.
The pro forma consolidated financial statements do not purport to be
indicative of the financial position of Philip or the results of operations that
might have occurred, had the acquisitions been concluded on January 1, 1996, nor
are they necessarily indicative of future results.
2. ACQUISITIONS PRIOR TO SEPTEMBER 30, 1997
Statement of Earnings:
The audited consolidated statement of earnings of Philip for the year ended
December 31, 1996 and for the nine months ended September 30, 1997, was adjusted
to include the acquisitions of Allwaste, Intsel and Luntz as if they had
occurred on January 1, 1996 as follows:
(i) the results of operations of Luntz for the period from January 1,
1996 to the date of acquisition, which was December 23, 1996, have
been included in the unaudited pro forma consolidated statement of
earnings for the year ended December 31, 1996; and
15
17
PHILIP SERVICES CORP.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share and per share amounts) -- (cont'd)
(ii) the results of operations of Intsel for the period from January 1,
1996 to the date of acquisition, which was September 27, 1996, have
been included in the unaudited pro forma consolidated statement of
earnings for the year ended December 31, 1996; and
(iii) the results of operations of Allwaste for the period from December 1,
1995 to November 30, 1996 have been included in the unaudited pro
forma consolidated statement of earnings for the year ended December
31, 1996 and the results of operations for the period from December
1, 1996 to May 31, 1997 have been included in the unaudited pro forma
consolidated statement of earnings for the nine months ended
September 30, 1997. Actual results of operations of Allwaste have
been included in the historical Philip results of operations since
July 31, 1997, which was the date of the acquisition.
The pro forma consolidated statement of earnings of Philip ("Pro Forma
Philip") incorporates the following pro forma assumptions:
(a) actual revenue and expenses for the month of December 1996 for Luntz
have been recorded as an adjustment in order to reflect a full 12
month period in the pro forma consolidated statement of earnings. The
effect of this adjustment is to record additional revenue of $11,133,
operating expenses of $10,248, and selling, general and administrative
expenses of $585;
(b) the amortization of goodwill and other intangibles and the
depreciation of the incremental fair market value increases relating
to the acquisitions have been included in the pro forma consolidated
statement of earnings from January 1, 1996 at rates consistent with
those disclosed in Note 1 to the Consolidated Financial Statements of
the Company. The amortization of goodwill was increased by
approximately $1,500 for the year ended December 31, 1996 and
operating expenses were increased by approximately $500 as a result of
this adjustment for the year ended December 31, 1996;
(c) interest on increased borrowings necessary to finance the acquisitions
has been included from January 1, 1996 for the acquisitions of Luntz
and Intsel. This adjustment increased interest expense by $6,000 for
the year ended December 31, 1996; and
(d) inventory for resale is valued on the last-in-first-out or "LIFO"
basis of accounting in the historical financial statements of Luntz.
To be consistent with the accounting policies employed by Philip, the
basis of accounting for inventory for resale has been adjusted to
reflect the lower of average cost and net realizable value. As a
result, operating expenses have increased by $1,388 for the year ended
December 31, 1996.
Balance Sheet:
The historical consolidated balance sheet for Philip includes the balance
sheets of Allwaste, Intsel and Luntz as at September 30, 1997 and, therefore,
separate balance sheets for these companies are not included.
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PHILIP SERVICES CORP.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share and per share amounts) -- (cont'd)
3. ACQUISITION OF LURIA
The acquisition of Luria assets has been accounted for using the purchase
method of accounting. The purchase price for the acquisition has been calculated
as follows:
NOTE
----
Cash payment............................................................. $161,169
Accruals for environmental liabilities................................... 8,064 3a
Transaction costs........................................................ 1,019 3b
Other accruals........................................................... 3,217 3b
--------
173,469
Book value of net assets acquired........................................ 62,711
--------
Excess of purchase price over book value................................. $110,758
========
Allocated to:
Fixed assets........................................................... $ 7,028 3a
Non-compete agreements................................................. 2,600 3a
Goodwill............................................................... 101,130
--------
$110,758
========
(a) The fair value of net assets acquired was determined as follows:
(i) Receivables -- were recorded at amounts to be recovered less
allowances for uncollectible amounts;
(ii) Fixed assets -- were recorded at current replacement cost as
determined by an independent expert
(iii) Non-compete agreements (Other assets) -- was recorded at management's
best estimate as to the potential cost of immediate competition
(iv) Inventory -- was valued to reflect the lower of average purchase cost
and net realizable value
(v) Other current assets -- were recorded at cost
(vi) Accounts payable and accrued liabilities -- were recorded at the
present value of amounts to be paid
(vii) Accruals for environmental liabilities -- were recorded at current
cost as determined by an independent expert
(viii)Long-term debt -- was not acquired as part of the purchase
(b) Transaction costs such as fees for financial advisors, registration fees,
printing and travel costs have been included in the purchase price and
recorded in accounts payable and accrued liabilities in the Pro Forma
Balance Sheet. Other accruals for new signage, severance of Luria employees
and other change in ownership related expenditures have been included in the
purchase price and recorded in accounts payable and accrued liabilities in
the Pro Forma Balance Sheet.
17
19
PHILIP SERVICES CORP.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share and per share amounts) -- (cont'd)
(c) The adjustment to record the purchase accounting of Luria as at September
30, 1997 is as follows:
DR(CR)
---------
Fixed assets............................................................... $ 7,028
Goodwill................................................................... 101,130
Other assets............................................................... 2,600
Accounts payable and accrued liabilities................................... (4,236)
Long-term debt............................................................. (161,169)
Other liabilities.......................................................... (8,064)
Share capital.............................................................. 62,711
---------
$ --
=========
(d) The adjustment to record the removal of assets in Luria not purchased by
Philip is as follows:
DR(CR)
-------
Cash and equivalents......................................................... $ 4,765
Accounts receivable.......................................................... 720
Inventory for resale......................................................... 1,982
Other current assets......................................................... (207)
Fixed assets................................................................. (584)
Accounts payable and accrued liabilities..................................... 1,979
Shareholders' Equity......................................................... (8,655)
-------
$ --
=======
4. RECLASSIFICATION ENTRIES
Reclassification entries have been made to disclose information in the
statement of earnings for Luria and Allwaste on a basis consistent with the
historical Consolidated Financial Statements of the Company. Specifically,
brokerage sales in Luria of $350,000 for the year ended December 31, 1996 and
$261,000 for the nine months ended September 30, 1997 have been reclassified
from revenue to operating expenses. Depreciation and amortization expenses
amounting to $33,616 for the year ended December 31, 1996 and $20,320 for the
nine months ended September 30, 1997 have been reclassified from operating
expenses and selling, general and administrative expenses to a separate line
disclosure format. Items such as supervisory wages and benefits, rent,
utilities, business and realty taxes, and repairs of operating facilities which
amounted to $25,968 for the year ended December 31, 1996 and $14,468 for the
nine months ended September 30, 1997 have been reclassified from selling,
general and administrative expenses to operating expenses, consistent with the
Company's historical consolidated statement of earnings.
5. PRO FORMA ADJUSTMENTS
(a) Amortization of goodwill has been recorded in the pro forma statement
of earnings based on the allocation of the purchase price as discussed
in Note 3 above. Goodwill will be amortized on a straight-line basis
over 40 years.
18
20
PHILIP SERVICES CORP.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(thousands of dollars, except share and per share amounts) -- (cont'd)
(b) Depreciation expense in the pro forma statement of earnings is based
on the following estimated useful lives:
Buildings and Improvements........................................... 20-40 years
Machinery and Equipment.............................................. 3-20 years
(c) Interest expense in the pro forma statement of earnings is based on an
assumed cost of funds of 8% on long-term borrowings required to fund
the acquisition.
(d) The provision for income taxes on the adjustments has been calculated
as follows:
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Luria pre-tax income at a rate of 37.5%........................... $ 5,521 $ 3,316
Pre-tax income on adjustments (net of non-taxable goodwill on
Allwaste purchase) at a rate of 37.5%........................... (6,084) (4,563)
Net tax benefit on interest expense incurred in foreign
jurisdictions................................................... (3,968) (2,864)
------- -------
Total............................................................. $ (4,531) $(4,111)
======= =======
6. PRO FORMA WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Pro Forma weighted average number of common shares outstanding has been
computed as follows (in thousands):
Year ended December 31, 1996
Historical Philip weighted number of common shares outstanding..................... 50,073
Effect of recording the equity transactions at the beginning of the period:
Shares issued for acquisitions prior to December 31, 1996.......................... 2,222
Shares issued for Allwaste......................................................... 23,056
------
Pro Forma weighted average number of common shares outstanding..................... 75,351
======
Nine months ended September 30, 1997
Historical Philip weighted number of common shares outstanding..................... 77,844
Effect of recording the equity transactions at the beginning of the period:
Shares issued for Allwaste......................................................... 23,056
Less Allwaste weighting included in September 30, 1997 historical Philip weighted
number of shares outstanding since acquisition on July 31, 1997.................. (5,124)
------
Pro Forma weighted average number of common shares outstanding..................... 95,776
======
7. NON-RECURRING COSTS
Philip expects that it will incur non-recurring costs relating to
severance, relocation and other integration costs. These costs are not
quantifiable at this time.
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21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto authorized.
PHILIP SERVICES CORP.
By: /s/ COLIN SOULE
------------------------------------
Executive Vice President
and General Counsel
Date: December 24, 1997
20