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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
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IN RE :
: CHAPTER 11
PHILIP SERVICES (DELAWARE), INC., ET AL. : CASE NO. 99-02385 (MFW)
- ---------------------------------------- : (JOINTLY ADMINISTERED)
:
DEBTORS. :
:
:
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DISCLOSURE STATEMENT WITH RESPECT TO
JOINT PLAN OF REORGANIZATION OF PHILIP SERVICES (DELAWARE), INC., ET AL.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
David S. Kurtz
Jeffrey W. Linstrom
Timothy R. Pohl
333 W. Wacker Drive
Chicago, Illinois 60606-1285
(312) 407-0700
-and-
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
Gregg M. Galardi (I.D.#2991)
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899-0636
(302) 651-3000
Attorneys for Philip Services (Delaware),
Inc., et al.
Dated:
2
DISCLAIMER
PHILIP SERVICES CORP. ("PSC"), PHILIP SERVICES (DELAWARE), INC. ("PSI")
AND CERTAIN OF THEIR SUBSIDIARIES LISTED ON EXHIBIT A TO THE PLAN (THE
"SUBSIDIARY DEBTORS" AND, TOGETHER WITH PSC AND PSI, THE "DEBTORS") ARE
FURNISHING THIS DISCLOSURE STATEMENT AND THE APPENDICES HERETO, THE
ACCOMPANYING BALLOTS AND THE RELATED MATERIALS DELIVERED HEREWITH PURSUANT TO
SECTION 1125 OF THE UNITED STATES BANKRUPTCY CODE, 11 U.S.C. Section Section
101-1330, AS AMENDED (THE "BANKRUPTCY CODE"), IN CONNECTION WITH THEIR
SOLICITATION (THE "SOLICITATION") FROM HOLDERS OF CERTAIN CLAIMS IN CLASSES 6
AND 7 (THE "HOLDERS OF CLASS 6 AND 7 CLAIMS") OF ACCEPTANCES OF THE PROPOSED
JOINT PLAN OF REORGANIZATION DESCRIBED HEREIN (THE "PLAN," A COPY OF WHICH IS
ANNEXED TO THIS DISCLOSURE STATEMENT AS APPENDIX A). IN THE EVENT THAT HOLDERS
OF CLASS 7 CLAIMS VOTE TO REJECT THE PLAN, THE DEBTORS INTEND TO SEEK
CONFIRMATION OF THE PLAN NOTWITHSTANDING SUCH REJECTION PURSUANT TO THE
CRAMDOWN PROVISION OF SECTION 1129(b) OF THE BANKRUPTCY CODE.
PSC IS A COMPANY AMALGAMATED UNDER THE LAWS OF THE PROVINCE OF ONTARIO AND
WITH PROPERTY IN THE UNITED STATES, CANADA AND OTHER INTERNATIONAL SITES. PSI
IS A CORPORATION ESTABLISHED IN THE UNITED STATES UNDER THE LAWS OF THE STATE
OF DELAWARE.
PSC AND CERTAIN OF ITS OTHER SUBSIDIARIES THAT ARE NOT DEBTORS IN THESE
CHAPTER 11 CASES (THE "CANADIAN DEBTORS") HAVE ALSO COMMENCED CASES IN THE
SUPERIOR COURT OF JUSTICE IN TORONTO, ONTARIO, CANADA UNDER THE COMPANIES'
CREDITORS ARRANGEMENT ACT (THE "CCAA") (THE "CANADIAN CASES"). PSC AND THE
CANADIAN DEBTORS INTEND TO FILE IN THE CANADIAN CASES A PLAN OF COMPROMISE AND
ARRANGEMENT CONSISTENT WITH THE PLAN (THE "CANADIAN PLAN"). THE APPROVAL OF
THE CANADIAN PLAN BY CREDITORS IN THE CANADIAN CASES ENTITLED TO VOTE THEREON
UNDER THE CCAA CAN AFFECT DISTRIBUTIONS TO CLASS 6 UNDER THE PLAN. THE ALLOWED
IMPAIRED UNSECURED CLAIMS UNDER THE CANADIAN PLAN SHARE PRO RATA IN CERTAIN
DISTRIBUTIONS TO CLASS 7 UNDER THE PLAN. THEREFORE, THE AMOUNT OF IMPAIRED
UNSECURED CLAIMS ALLOWED IN THE CANADIAN CASES WILL DIRECTLY AFFECT THE
DISTRIBUTION TO CLASS 7 UNDER THE PLAN. THE CONFIRMATION OF THE CANADIAN PLAN
AND ITS BECOMING EFFECTIVE IN THE CANADIAN CASES OR THE REALIZATION OF THE
LENDERS (AS DEFINED HEREIN) ON THEIR SECURITY OVER SOME OR ALL OF THE CANADIAN
DEBTORS IN A MANNER CONSISTENT WITH THE IMPLEMENTATION OF THE PLAN IS A
CONDITION TO THE EFFECTIVENESS OF THE PLAN.
THIS DISCLOSURE STATEMENT IS TO BE USED BY HOLDERS OF CLASS 6 AND 7 CLAIMS
SOLELY IN CONNECTION WITH THEIR EVALUATION OF THE PLAN; USE OF THE DISCLOSURE
STATEMENT FOR ANY OTHER PURPOSE IS NOT AUTHORIZED.
THIS DISCLOSURE STATEMENT HAS BEEN NEITHER APPROVED NOR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR UNDER ANY STATE SECURITIES OR
"BLUE SKY" LAWS, NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THE
STATEMENTS CONTAINED HEREIN. PERSONS OR ENTITIES TRADING IN OR OTHERWISE
PURCHASING, SELLING OR TRANSFERRING SECURITIES OR CLAIMS OF ANY OF THE DEBTORS
SHOULD EVALUATE THIS DISCLOSURE STATEMENT AND THE PLAN IN LIGHT OF THE PURPOSE
FOR WHICH THEY WERE PREPARED.
IN MAKING A DECISION, HOLDERS OF CLASS 6 AND 7 CLAIMS MUST RELY ON THEIR
OWN EXAMINATION OF THE DEBTORS AND THE TERMS OF THE PLAN, INCLUDING THE MERITS
AND RISKS INVOLVED. HOLDERS OF CLASS 6 AND 7 CLAIMS SHOULD NOT CONSTRUE THE
CONTENTS OF THIS DISCLOSURE STATEMENT AS PROVIDING ANY LEGAL, BUSINESS,
FINANCIAL, OR TAX ADVICE. EACH HOLDER OF CLASS 6 AND 7 CLAIMS SHOULD CONSULT
WITH ITS OWN LEGAL, BUSINESS, FINANCIAL AND TAX ADVISORS WITH RESPECT TO ANY
SUCH MATTERS CONCERNING THIS DISCLOSURE STATEMENT, THE SOLICITATION, THE PLAN
AND THE TRANSACTIONS CONTEMPLATED THEREBY.
THE CONFIRMATION AND EFFECTIVENESS OF THE PLAN ARE SUBJECT TO MATERIAL
CONDITIONS PRECEDENT. SEE SECTION II.N OF THE DISCLOSURE STATEMENT, ENTITLED
"SUMMARY OF THE PLAN OF REORGANIZATION -- CONDITIONS TO CONFIRMATION AND/OR
CONSUMMATION." THERE CAN BE NO ASSURANCE THAT THOSE CONDITIONS WILL BE
SATISFIED.
THIS DISCLOSURE STATEMENT CONTAINS CERTAIN PROJECTED FINANCIAL INFORMATION
RELATING TO THE REORGANIZED DEBTORS, AS WELL AS CERTAIN OTHER STATEMENTS THAT
CONSTI-
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TUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH PROJECTIONS AND STATEMENTS ARE BASED ON
CERTAIN ESTIMATES AND ASSUMPTIONS MADE BY AND INFORMATION AVAILABLE TO THE
DEBTORS. WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE", "BELIEVE",
"ESTIMATE" AND "EXPECT" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE DEBTORS
AND THEIR MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
SUCH PROJECTED FINANCIAL INFORMATION AND OTHER FORWARD-LOOKING STATEMENTS
REFLECT THE CURRENT VIEWS OF THE DEBTORS AND ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS. MANY FACTORS COULD CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE DEBTORS TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS THAT MAY BE EXPRESSED OR IMPLIED BY
SUCH PROJECTED FINANCIAL INFORMATION AND FORWARD-LOOKING STATEMENTS,
INCLUDING, AMONG OTHERS, THE RISKS DISCUSSED IN ARTICLE VII OF THE DISCLOSURE
STATEMENT, ENTITLED "CERTAIN FACTORS TO BE CONSIDERED" AND RISKS DISCUSSED FROM
TIME TO TIME IN FILINGS MADE BY THE DEBTORS WITH THE SEC AND OTHER REGULATORY
AUTHORITIES. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE,
OR SHOULD ASSUMPTIONS UNDERLYING THE PROJECTED FINANCIAL INFORMATION OR OTHER
FORWARD-LOOKING STATEMENTS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY
FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED OR EXPECTED.
THE DEBTORS DO NOT INTEND, AND DO NOT ASSUME ANY OBLIGATIONS, TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
EXCEPT AS SET FORTH IN SECTION XIII.I OF THIS DISCLOSURE STATEMENT,
ENTITLED "THE SOLICITATION; VOTING PROCEDURES -- FURTHER INFORMATION" BELOW, NO
PERSON HAS BEEN AUTHORIZED BY THE DEBTORS IN CONNECTION WITH THE PLAN OR THE
SOLICITATION OF ACCEPTANCES TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS DISCLOSURE STATEMENT AND THE
APPENDICES AND EXHIBITS ANNEXED HERETO OR INCORPORATED BY REFERENCE OR REFERRED
TO HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MAY NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEBTORS.
THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE AS OF THE
DATE HEREOF, AND NEITHER THE DELIVERY OF THIS DISCLOSURE STATEMENT NOR ANY
EXCHANGE OF EXISTING SECURITIES MADE PURSUANT TO THE PLAN WILL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AT ANY TIME SUBSEQUENT TO THE DATE HEREOF. ANY ESTIMATES OF CLAIMS AND
INTERESTS SET FORTH IN THIS DISCLOSURE STATEMENT MAY VARY FROM THE AMOUNTS OF
CLAIMS OR INTERESTS ULTIMATELY ALLOWED BY THE BANKRUPTCY COURT.
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT, INCLUDING, BUT NOT
LIMITED TO, THE INFORMATION REGARDING THE HISTORY, BUSINESSES AND OPERATIONS OF
THE DEBTORS, THE HISTORICAL AND PROJECTED FINANCIAL INFORMATION OF THE DEBTORS
(INCLUDING THE PROJECTED RESULTS OF OPERATIONS OF THE REORGANIZED DEBTORS) AND
THE LIQUIDATION ANALYSIS RELATING TO THE DEBTORS IS INCLUDED HEREIN FOR
PURPOSES OF SOLICITING ACCEPTANCES OF THE PLAN. AS TO CONTESTED MATTERS,
HOWEVER, SUCH INFORMATION IS NOT TO BE CONSTRUED AS ADMISSIONS OR STIPULATIONS
BUT RATHER AS STATEMENTS MADE IN SETTLEMENT NEGOTIATIONS.
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TABLE OF CONTENTS
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TABLE OF APPENDICES.................................................................................................VIII
ARTICLE I. INTRODUCTION................................................................................................1
ARTICLE II. SUMMARY OF THE PLAN OF REORGANIZATION......................................................................1
A. Overall Structure of the Plan....................................................................................2
B. Substantive Consolidation for Purposes of Treating Impaired Claims...............................................3
C. Classification and Treatment of Claims and Interests.............................................................3
1. Classified Claims and Interests.............................................................................4
2. Unclassified Claims.........................................................................................9
D. Effect of Voting on Distribution................................................................................10
E. Summary of Debt to Be Incurred and Securities to Be Issued in Connection with the Plan..........................13
F. Summary of Releases under the Plan..............................................................................16
G. Treatment of Director and Officer Indemnification Obligations under the Plan....................................17
H. Contribution and Indemnity Claims Other Than Assumed Indemnification Obligations................................18
I. Assumed Indemnification Obligations.............................................................................18
J. Post-Consummation Operations of the Debtors.....................................................................18
1. Continued Corporate Existence..............................................................................18
2. Revesting of Assets........................................................................................18
K. Distributions under the Plan....................................................................................18
1. Distributions for Claims Allowed as of the Effective Date..................................................19
2. Resolution and Treatment of Disputed, Contingent, and Unliquidated Claims..................................21
L. Other Matters...................................................................................................21
1. Treatment of Executory Contracts and Unexpired Leases......................................................21
2. Administrative Claims......................................................................................22
3. Professional Fee Claims....................................................................................23
4. Interest on Claims.........................................................................................23
5. Withholding and Reporting Requirements.....................................................................23
6. Setoffs....................................................................................................23
7. Shareholder Rights Plan....................................................................................23
8. Reverse Stock Split........................................................................................24
M. Preservation of Rights of Action................................................................................24
N. Releases Under the Plan.........................................................................................25
1. Releases by Holders of Lender Claims, Claims and Interests.................................................25
O. Conditions to Confirmation and/or Consummation..................................................................26
1. Requirements for Confirmation of the Plan..................................................................26
2. Conditions to Confirmation and Consummation................................................................27
3. Modifications and Amendments...............................................................................29
P. Waiver of Conditions to Confirmation and/or Consummation........................................................29
Q. Effects Of Confirmation.........................................................................................29
1. Binding Effect.............................................................................................29
2. Discharge of the Debtors...................................................................................29
3. Permanent Injunction.......................................................................................30
4. Exculpation and Limitation on Liability; Indemnity.........................................................30
R. Retention of Jurisdiction.......................................................................................31
ARTICLE III. TREATMENT OF TRADE CREDITORS, CUSTOMERS AND EMPLOYEES....................................................31
A. Trade Creditors.................................................................................................31
B. Customers/Clients...............................................................................................31
C. Employees.......................................................................................................31
ARTICLE IV. HISTORY OF THE DEBTORS AND EVENTS LEADING TO CHAPTER 11 FILING AND PLAN...................................32
A. Overview of Business Operations.................................................................................32
1. Business Segments..........................................................................................32
2. Accompanying Financial Data................................................................................32
3. Certain Legal Proceedings..................................................................................32
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B. Capital Structure of the Debtors................................................................................34
1. The Pre-Petition Credit Agreement..........................................................................34
2. Recapitalization/Equity....................................................................................34
3. Debentures.................................................................................................35
C. Events Contributing to the Need for Restructuring...............................................................35
1. Acquisition Strategy and Restatement of Financials.........................................................35
2. Discontinued Operations and Divestitures...................................................................38
3. Employee Retention Program.................................................................................38
4. Negotiations...............................................................................................39
5. Other Pre-petition Settlement Negotiations.................................................................39
ARTICLE V. CORPORATE STRUCTURE AND MANAGEMENT OF THE DEBTORS..........................................................39
A. Current Corporate Structure.....................................................................................39
B. Board of Directors..............................................................................................40
C. Senior Officers.................................................................................................41
D. Directors and Officers of the Reorganized Debtors...............................................................43
E. Unaudited Projected Financial Information and Business and Operating Strategies.................................43
ARTICLE VI. CHAPTER 11 CASES/CCAA.....................................................................................43
A. Commencement of the Chapter 11 Cases............................................................................43
1. First Day Relief Granted by the Bankruptcy Court...........................................................43
B. Post-Petition Operations and Liquidity..........................................................................46
C. The Companies' Creditors Arrangement Act (the "CCAA") of Canada.................................................46
1. Stay of Proceedings........................................................................................46
2. Payment of Trade Creditors.................................................................................46
3. Operations.................................................................................................46
4. Authority to Borrow and Charging of Property...............................................................47
5. Appointment of Ernst and Young Inc. as Monitor.............................................................47
6. Cross-Border Insolvency Protocol...........................................................................47
ARTICLE VII. CERTAIN FACTORS TO BE CONSIDERED.........................................................................47
A. General Considerations..........................................................................................47
B. Certain Bankruptcy/CCAA Considerations..........................................................................47
1. General....................................................................................................47
2. Effect on Non-Filing Subsidiaries..........................................................................47
3. Failure to Confirm the Plan................................................................................48
4. Failure to Consummate the Plan.............................................................................48
C. Certain Tax Considerations......................................................................................48
D. Inherent Uncertainty of Financial Projections...................................................................48
E. Risks Associated with Exit Facility.............................................................................48
F. Risks Associated with New Common Shares; Change in Control......................................................49
G. Risks Associated with New Secured PIK Debt, New Unsecured PIK Notes and New Unsecured Convertible Notes.........50
H. Disruption of Operations Due to Bankruptcy Filing...............................................................50
I. Financial Uncertainty...........................................................................................50
J. Acquisition Strategy; Integration Issues........................................................................50
K. Business and Competition........................................................................................51
L. Environmental Matters...........................................................................................52
M. Claims Estimates................................................................................................53
N. Unimpaired Claims...............................................................................................53
O. Affiliate Status................................................................................................54
P. Reliance on Key Personnel.......................................................................................54
Q. Year 2000 Issue.................................................................................................54
R. Holding Company Structure.......................................................................................54
ARTICLE VIII. NEW DEBT AND SECURITIES TO BE ISSUED AND TRANSFERRED UNDER THE PLAN.....................................55
A. New Common Shares/PSC Common Shares.............................................................................55
B. New Senior Secured Term Debt....................................................................................55
C. New Secured PIK Debt............................................................................................56
D. New Unsecured PIK Notes.........................................................................................57
E. New Unsecured Convertible Notes.................................................................................58
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ARTICLE IX. APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS........................................................59
A. Offer and Sale of New Common Shares, New Secured PIK Debt, New Unsecured PIK Notes and New Unsecured
Convertible Notes Pursuant to the Plan: Bankruptcy Code Exemption from Registration Requirements...............59
B. Subsequent Transfers of New Common Shares, New Secured PIK Debt, New Unsecured PIK Notes and New
Unsecured Convertible Notes.....................................................................................59
1. Federal Securities Laws: Section 1145(c) of the Bankruptcy Code............................................59
2. Subsequent Transfers of New Common Shares, New Secured PIK Debt, New Unsecured PIK Notes and
New Unsecured Convertible Notes Under State Securities Laws.........................................60
C. Registration Rights Agreement...................................................................................60
D. Canadian Securities Laws........................................................................................61
ARTICLE X. CERTAIN UNITED STATES INCOME TAX CONSEQUENCES OF THE PLAN..................................................61
A. Federal Income Tax Consequences to the Debtors..................................................................62
1. Discharge of Indebtedness..................................................................................62
2. Deductions of Accrued Interest and Original Issue Discount by PSI and Affiliates...........................62
B. U.S. Federal Income Tax Consequences to Holders of Allowed Class 6 and Allowed Class 7 Claims...................62
1. Allowed Class 6 Claims.....................................................................................62
2. Allowed Class 7 Claims.....................................................................................65
3. Importance of Obtaining Professional Tax Assistance........................................................68
ARTICLE XI. FEASIBILITY OF THE PLAN AND BEST INTERESTS OF CREDITORS...................................................68
A. Feasibility of the Plan.........................................................................................69
B. Acceptance of the Plan..........................................................................................70
C. Best Interests Test.............................................................................................70
D. Liquidation Analysis............................................................................................70
E. Valuation of the Reorganized Debtors............................................................................71
F. Application of the "Best Interests" Test to the Liquidation Analysis and the Valuation of the
Reorganized Debtors.............................................................................................71
G. Confirmation Without Acceptance of All Impaired Classes: The "Cramdown" Alternative.............................71
ARTICLE XII. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN................................................72
A. Alternative Plan(s) of Reorganization...........................................................................72
B. Liquidation Under Chapter 7 or Chapter 11.......................................................................72
ARTICLE XIII. THE SOLICITATION; VOTING PROCEDURE......................................................................73
A. Solicitation of Votes...........................................................................................73
B. Voting Deadline.................................................................................................73
C. Voting Procedures...............................................................................................74
D. Fiduciaries and Other Representatives...........................................................................74
E. Parties in Interest Entitled To Vote............................................................................74
F. Classes Impaired Under the Plan.................................................................................74
G. Waivers of Defects, Irregularities, Etc.........................................................................74
H. Withdrawal of Ballots; Revocation...............................................................................75
I. Further Information; Additional Copies..........................................................................75
ARTICLE XIV. RECOMMENDATION AND CONCLUSION............................................................................76
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TABLE OF APPENDICES
APPENDIX NAME
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A Joint Plan of Reorganization of Philip Services (Delaware), Inc., et al.
B Corporate Structure of Philip Services Corp., Philip Services (Delaware), Inc. and Subsidiaries
C List of Canadian Debtors
D-1 10-K for Year Ended December 31, 1998
D-2 10-Q for Quarter Ended March 31, 1999
E Liquidation Analysis
F Projected Financial Information
G Valuation Analysis
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ARTICLE I.
INTRODUCTION
This Disclosure Statement sets forth certain information regarding the
Debtors' prepetition operating and financial history, the need to seek Chapter
11 protection, significant events that have occurred or are expected to occur
during the Chapter 11 Cases, and the anticipated organization, operations and
financing of the Debtors upon successful emergence from Chapter 11 (the
"Reorganized Debtors"). This Disclosure Statement also describes terms and
provisions of the Plan, including certain alternatives to the Plan, certain
effects of confirmation of the Plan, certain risk factors associated with
securities to be issued under the Plan, and the manner in which distributions
will be made under the Plan. In addition, this Disclosure Statement discusses
the confirmation process and the voting procedures that holders of Claims
entitled to vote under the Plan must follow for their votes to be counted.
Except as otherwise provided herein, capitalized terms not otherwise
defined in this Disclosure Statement have the meanings ascribed to them in the
Plan. Unless otherwise noted herein, all dollar amounts provided in this
Disclosure Statement and in the Plan are given in United States dollars.
FOR A DESCRIPTION OF THE PLAN AND VARIOUS RISKS AND OTHER FACTORS
PERTAINING TO THE PLAN AS IT RELATES TO HOLDERS OF CLASS 6 AND 7 CLAIMS, PLEASE
SEE ARTICLE II OF THE DISCLOSURE STATEMENT, ENTITLED "SUMMARY OF THE PLAN OF
REORGANIZATION," AND ARTICLE VII OF THE DISCLOSURE STATEMENT, ENTITLED "CERTAIN
FACTORS TO BE CONSIDERED."
THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF THE
PLAN, CERTAIN STATUTORY PROVISIONS, CERTAIN DOCUMENTS RELATING TO THE PLAN,
CERTAIN EVENTS EXPECTED TO OCCUR IN THE CHAPTER 11 CASES AND CERTAIN FINANCIAL
INFORMATION. ALTHOUGH THE DEBTORS BELIEVE THAT THE PLAN AND RELATED DOCUMENT
SUMMARIES ARE FAIR AND ACCURATE, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT
THAT THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS OR STATUTORY
PROVISIONS. FACTUAL INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS
BEEN PROVIDED BY THE DEBTORS' MANAGEMENT, EXCEPT WHERE OTHERWISE SPECIFICALLY
NOTED. THE DEBTORS DO NOT WARRANT OR REPRESENT THAT THE INFORMATION CONTAINED
HEREIN, INCLUDING THE FINANCIAL INFORMATION, IS WITHOUT ANY MATERIAL INACCURACY
OR OMISSION.
THE DEBTORS BELIEVE THAT THE PLAN WILL ENABLE THE DEBTORS TO SUCCESSFULLY
REORGANIZE AND ACCOMPLISH THE OBJECTIVES OF CHAPTER 11 AND THAT ACCEPTANCE OF
THE PLAN IS IN THE BEST INTERESTS OF THE DEBTORS AND THE HOLDERS OF CLASS 6
CLAIMS AND CLASS 7 CLAIMS. THE DEBTORS URGE HOLDERS OF CLASS 6 AND 7 CLAIMS TO
VOTE TO ACCEPT THE PLAN.
THE PLAN PROVIDES THAT IF CLASS 7 VOTES TO REJECT THE PLAN, THEN HOLDERS
OF CLASS 7 CLAIMS WILL RECEIVE NO DISTRIBUTIONS UNDER THE PLAN ON ACCOUNT OF
THEIR CLASS 7 CLAIMS. IN ADDITION, IN SUCH EVENT, THE PLAN PROVIDES THAT NO
DISTRIBUTIONS WILL BE MADE TO CLASSES 8A, 8B OR 8C.
THE DEBTORS BELIEVE THAT THE PLAN AND THIS DISCLOSURE STATEMENT ARE
CONSISTENT WITH THE LETTER AGREEMENT DATED JUNE 21, 1999 (THE "LENDER LOCK-UP
AGREEMENT"), AMONG PSC AND CERTAIN CONSENTING LENDERS PARTY THERETO, AND THAT
THE PLAN IS CONSISTENT WITH THE TERMS OF THE PLAN DESCRIBED IN THE TERM SHEET
TO THE LENDER LOCK-UP AGREEMENT. THEREFORE, IN ACCORDANCE WITH THE TERMS OF THE
LENDER LOCK-UP AGREEMENT THE CONSENTING LENDERS PARTY THERETO HAVE AGREED TO
VOTE TO ACCEPT THE PLAN. THESE CONSENTING LENDERS CONSTITUTE HOLDERS OF
APPROXIMATELY SEVENTY-SIX PERCENT (76%) IN AMOUNT OF CLASS 6 CLAIMS AND ___%
IN AMOUNT OF ESTIMATED CLASS 7 CLAIMS.
FOR FURTHER INFORMATION AND INSTRUCTION ON VOTING TO ACCEPT OR REJECT THE
PLAN, SEE ARTICLE XIII OF THE DISCLOSURE STATEMENT, ENTITLED "THE SOLICITATION;
VOTING PROCEDURES."
ARTICLE II.
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SUMMARY OF THE PLAN OF REORGANIZATION
THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE, CLASSIFICATION,
TREATMENT AND IMPLEMENTATION OF THE PLAN AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PLAN, WHICH ACCOMPANIES THIS DISCLOSURE STATEMENT, AND TO THE
EXHIBITS ATTACHED THERETO.
THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN WILL CONTROL THE
TREATMENT OF CREDITORS AND EQUITY SECURITY HOLDERS UNDER THE PLAN AND WILL,
UPON THE EFFECTIVE DATE, BE BINDING UPON HOLDERS OF CLAIMS AGAINST, OR
INTERESTS IN, THE DEBTORS, THE REORGANIZED DEBTORS AND OTHER PARTIES IN
INTEREST.
A0 OVERALL STRUCTURE OF THE PLAN
Chapter 11 is the principal business reorganization chapter of the
Bankruptcy Code. Under Chapter 11, a debtor is authorized to reorganize its
business for the benefit of its creditors and shareholders. Upon the filing of
a petition for relief under Chapter 11, section 362 of the Bankruptcy Code
provides for an automatic stay of substantially all acts and proceedings
against the debtor and its property, including all attempts to collect claims
or enforce liens that arose prior to the commencement of the Chapter 11 case.
The consummation of a plan of reorganization is the principal objective of
a Chapter 11 case. A plan of reorganization sets forth the means for
satisfying claims against and interests in a debtor. Confirmation of a plan of
reorganization by the Bankruptcy Court makes the plan binding upon the debtor,
any issuer of securities under the plan, any person or entity acquiring
property under the plan, and any creditor of or equity security holder in the
debtor, whether or not such creditor or equity security holder (i) is impaired
under or has accepted the plan or (ii) receives or retains any property under
the plan. Subject to certain limited exceptions and other than as provided in
the plan itself or the confirmation order, the confirmation order discharges
the debtor from any debt that arose prior to the date of confirmation of the
plan and substitutes therefor the obligations specified under the confirmed
plan, and terminates all rights and interests of equity security holders.
The terms of the Plan are based upon, among other things, the Debtors'
assessment of their ability to achieve the goals of their business plan, make
the distributions contemplated under the Plan and pay certain of their
continuing obligations in the ordinary course of the Reorganized Debtors'
businesses as approved by the Bankruptcy Court. Under the Plan, Claims
against, and Interests in, the Debtors are divided into Classes according to
their relative seniority and other criteria.
If the Plan is confirmed by the Bankruptcy Court and consummated, (i) the
Claims in certain Classes will be reinstated or modified and receive
distributions equal to the full amount of such Claims, and (ii) the Claims
and/or Interests in other Classes will be modified and receive distributions
constituting a partial recovery on such Claims and/or Interests. On the
Effective Date and at certain times thereafter, the Reorganized Debtors will
distribute Cash, securities and other property in respect of certain Classes of
Claims as provided in the Plan. The Classes of Claims against the Debtors
created under the Plan, the treatment of those Classes under the Plan and the
securities and other property to be distributed under the Plan are described
below.
As of the Effective Date, if Class 7 votes to accept the Plan and the
Canadian Plan is approved by holders of Canadian Impaired Unsecured Claims, (i)
ninety-one percent (91%) of the common stock of Reorganized PSC (the common
shares of Reorganized PSC as of the Effective Date and after giving effect to
the New Common Shares to be issued under the Plan and a reverse stock split
described below are referred to as "PSC Common Shares") will be owned by the
holders of the Secured Lender Claims, (ii) five percent (5%) of PSC Common
Shares will be owned by the holders of Allowed Class 7 Claims and holders of
Canadian Impaired Unsecured Claims (as defined herein), (iii) two percent (2%)
of PSC Common Shares will be owned by the holders of Interests under Class 8A,
(iv) one-half of one percent (0.5%) of PSC Common Shares will be owned by the
holders of Claims under Class 8C and (v) one and one-half percent (1.5%) will
be owned by the holders of Class 8B Claims. As of the Effective Date, if Class
7 votes to reject the Plan, and the class of holders of Canadian Impaired
Unsecured Claims votes to reject the Plan, 100% of the PSC Common Shares will
be owned by the holders of the Secured Lender Claims. If Class 7 votes to
reject the Plan, but the class of holders of Canadian Impaired Unsecured Claims
votes to accept the Canadian Plan, then the holders of Secured Lender Claims
will receive ninety-five percent (95%) of PSC Common Shares plus the PSC Common
Shares that would have been distributed to holders of Allowed Class 7 Claims
under the Plan if Class 7 had voted to accept the Plan and no PSC Common Shares
will be owned by the holders of Interests in Class 8A, holders of Claims in
Class 8B or the holders of Claims in Class 8C. If Class 7 votes to accept the
Plan, but the class of holders of Canadian Impaired Unsecured Claims votes to
reject the Canadian Plan, then the ownership of the PSC Common Shares will be
as set forth in the second sentence of this paragraph except that the holders
of Secured Lender Claims
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will also receive the PSC Common Shares that would have been received by the
holders of Canadian Impaired Unsecured Claims if such class had voted to accept
the Canadian Plan. All of these percentages of ownership of PSC Common Shares
are subject to dilution subsequent to the Effective Date (a) to the extent
necessary to give effect to the convertibility of the New Secured PIK Debt, the
New Unsecured Convertible Notes and the exercise of the Management Options or
(b) otherwise as a result of the issuance of common shares, implementation of
other management incentive programs or other action taken by the board of
directors of Reorganized PSC.
B0 SUBSTANTIVE CONSOLIDATION FOR PURPOSES OF TREATING IMPAIRED CLAIMS
The Plan is premised upon the substantive consolidation of the Debtors
only for purposes of treating Class 6, 7 and 8 Claims under the Plan, including
voting, confirmation and distribution purposes. The Plan does not contemplate
the substantive consolidation of the Debtors with respect to other Classes of
Claims or Interests set forth in the Plan. On the Effective Date (a) all
guaranties of any Debtor of the payment, performance or collection of another
Debtor with respect to Class 6, 7 and 8 Claims shall be deemed eliminated and
canceled; (b) any obligation of any Debtor and all guaranties with respect to
Class 6, 7 and 8 Claims thereof executed by one or more of the other Debtors
shall be treated as a single obligation and any obligation of two or more
Debtors, and all multiple Impaired Claims against such entities on account of
such joint obligations shall be treated and Allowed only as a single Impaired
Claim against the consolidated Debtors; and (c) each Class 6, 7 and 8 Claim
filed in the Chapter 11 Cases of any Debtors shall be deemed filed against the
consolidated Debtors and shall be deemed one Class 6, 7 and 8 Claim against and
obligation of the consolidated Debtors. Such substantive consolidation shall
not (other than for purposes related to the Plan) (a) affect the legal and
corporate structures of the Reorganized Debtors, subject to the right of the
Debtors or Reorganized Debtors to effect the Restructuring Transactions as
provided in the Plan, (b) cause any Debtor to be liable for any Impaired Claim
or Unimpaired Claim under the Plan, for which it otherwise is not liable and
the liability of any Debtor for any such Claim shall not be affected by such
substantive consolidation, (c) affect Intercompany Claims of Debtors against
Debtors and (d) affect Interests in the Debtors which are Subsidiaries of PSC.
On the Effective Date, except as specifically set forth in the Plan, the
Intercompany Claims of Debtors against Debtors shall be reinstated or
discharged and satisfied, at the option of PSC with the consent of the Required
Lenders, by contributions, distributions or otherwise as determined by PSC. On
the Effective Date, to the extent a Debtor which is a Subsidiary is not
dissolved or merged as part of the Restructuring Transactions, the Interests in
such Debtor which is a Subsidiary of PSC shall remain outstanding.
3. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS
Section 1123 of the Bankruptcy Code provides that a plan of reorganization
must classify the claims and interests of a debtor's creditors and equity
interest holders. In accordance with section 1123, the Plan divides Claims and
Interests into Classes and sets forth the treatment for each Class (other than
DIP Facility Claims, Administrative Claims and Priority Tax Claims which,
pursuant to section 1123(a)(1), do not need to be classified). The Debtors
also are required, under section 1122 of the Bankruptcy Code, to classify
Claims against and Interests in the Debtors into Classes that contain Claims
and Interests that are substantially similar to the other Claims and Interests
in such Class. The Debtors believe that the Plan has classified all Claims and
Interests in compliance with the provisions of section 1122, but it is possible
that a holder of a Claim or Interest may challenge the Debtors' classification
of Claims and Interests and that the Bankruptcy Court may find that a different
classification is required for the Plan to be confirmed. In that event, the
Debtors intend, to the extent permitted by the Bankruptcy Code, the Plan and
the Bankruptcy Court, to make such reasonable modifications of the
classifications under the Plan to permit confirmation and to use the Plan
acceptances received in this Solicitation for purposes of obtaining the
approval of the reconstituted Class or Classes of which each accepting holder
ultimately is deemed to be a member. Any such reclassification could adversely
affect the Class in which such holder initially was a member, or any other
Class under the Plan, by changing the composition of such Class and the vote
required of that Class for approval of the Plan. Furthermore, a
reclassification of a Claim or Interest after approval of the Plan could
necessitate a resolicitation of acceptances of the Plan.
The amount of any Impaired Claim that ultimately is allowed by the
Bankruptcy Court may vary from any estimated allowed amount of such Claim and
accordingly the total Claims ultimately allowed by the Bankruptcy Court with
respect to each Impaired Class of Claims may also vary from any estimates
contained herein with respect to the aggregate Claims in any Impaired Class.
Thus, the value of the property that ultimately will be received by a
particular holder of an Allowed Claim under the Plan may be adversely or
favorably affected by the aggregate amount of Claims ultimately allowed in the
applicable Class. There can be no assurance that the actual aggregate amounts
of Allowed Claims in Impaired Classes will not materially exceed the aggregate
amounts estimated by the Debtors. Thus, no representation can be or is being
made with respect to the accuracy of the expected percentage recovery by the
holder of an Allowed Claim in any particular Class.
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The classification of Claims and Interests and the nature of distributions
to members of each Class are summarized below. The Debtors believe that the
consideration, if any, provided under the Plan to holders of Claims and
Interests reflects an appropriate resolution of their Claims and Interests,
taking into account the differing nature and priority (including applicable
contractual subordination) of such Claims and Interests and the fair value of
the Debtors' assets. In view of the deemed rejection by Class 9, however, as
set forth below, the Debtors will seek confirmation of the Plan pursuant to the
"cramdown" provisions of the Bankruptcy Code. Specifically, section 1129(b) of
the Bankruptcy Code permits confirmation of a Chapter 11 plan in certain
circumstances even if the plan has not been accepted by all impaired classes of
claims and interests. See Section II.N of the Disclosure Statement, entitled
"Summary of the Plan of Reorganization -- Conditions to Confirmation and/or
Consummation." Although the Debtors believe that the Plan could be confirmed
under section 1129(b), there can be no assurance that the requirements of such
section would be satisfied.
1. Classified Claims and Interests
Under the Plan, classified Claims against and Interests in the Debtors are
divided into nine Classes (and three defined subclasses), and are summarized in
the following table.
CLASS DESCRIPTION TREATMENT UNDER PLAN
- ----------------- --------------------
CLASS 1 - OTHER PRIORITY Class 1 consists of all Claims entitled to
CLAIMS priority pursuant to section 507(a) of the
Bankruptcy Code other than DIP Facility Claims,
Priority Tax Claims or Administrative Claims
("Other Priority Claims"). Under the Plan, on,
or as soon as reasonably practicable after, the
latest of (i) the Distribution Date, (ii) the
date such Class 1 Other Priority Claim becomes
an Allowed Class 1 Other Priority Claim, or
(iii) the date such Class 1 Other Priority
Claim becomes payable pursuant to any agreement
between a Debtor and the holder of such Class 1
Other Priority Claim, each holder of an Allowed
Class 1 Other Priority Claim will receive in
full satisfaction, settlement, release and
discharge of and in exchange for such Allowed
Class 1 Other Priority Claim (a) Cash equal to
the unpaid portion of such Allowed Class 1
Other Priority Claim or (b) such other
treatment as to which a Debtor, with the
consent of the Required Lenders, and such
holder shall have agreed upon in writing.
Class 1 Other Priority Claims are Unimpaired
and therefore not entitled to vote on the Plan.
CLASS 2 - OTHER SECURED CLAIMS Class 2 consists collectively of all Claims
that are secured by a Lien upon property in
which the Estate has an interest or that is
subject to setoff under section 553 of the
Bankruptcy Code, to the extent of the value of
the Claim holders' interest in the Estate's
interest in such property or to the extent of
the amount subject to setoff, as applicable,
as determined pursuant to section 506(a) of the
Bankruptcy Code ("Secured Claims") against the
Reorganized Debtors other than the Secured
Claims included in Class 6 below ("Other
Secured Claims"). Each holder of a Class 2
Other Secured Claim shall be treated as a
separate class for all purposes under the Plan
and the Bankruptcy Code, and each holder of an
Allowed Class 2 Other Secured Claim will
receive the treatment summarized below in
Option A or B. Under the Plan, except as to
the Account Intermediaries, the Debtors
specifically reserve all rights to challenge
the validity, nature and perfection of any
purported liens and security interests.
Option A: Allowed Class 2 Other Secured
Claims with respect to which the applicable
Debtor or the applicable Reorganized Debtor selects
Option A, subject to the consent of the
Required Lenders, will be paid in cash, in
full, by the Reorganized Debtors, unless the
holder of such Claim agrees to less favorable
treatment.
------------------------------------------------
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Option B: Allowed Class 2 Other
Secured Claims with respect to
which the applicable Debtor or
Reorganized Debtor selects Option
B will be Reinstated.
The applicable Debtor or
Reorganized Debtor will be deemed
to have elected Option B as to
Allowed Class 2 Other Secured
Claims except those with respect
to which the applicable Debtor or
Reorganized Debtor, with the
consent of the Required Lenders,
elects Option A in writing prior
to the Confirmation Hearing.
Class 2 Other Secured Claims are
Unimpaired and therefore not
entitled to vote on the Plan.
CLASS 3 - GENERAL UNSECURED CLAIMS Class 3 consists of all Claims
against the Debtors that are not
DIP Facility Claims,
Administrative Claims, Priority
Tax Claims, Other Priority
Claims, Other Secured Claims,
Intercompany Claims of
non-Debtors, Lender Claims or
Impaired Unsecured Claims
("General Unsecured Claims").
Under the Plan, each holder of an
Allowed Class 3 General Unsecured
Claim shall, at the option of the
Debtors, with the consent of the
Required Lenders (a) have its
Claim Reinstated or (b) receive
such other treatment as to which
the applicable Debtor or
Reorganized Debtor and such
holder shall have agreed upon in
writing. Class 3 General
Unsecured Claims are Unimpaired
and therefore not entitled to
vote on the Plan.
CLASS 4 - INTERCOMPANY CLAIMS OF NON-
DEBTORS Class 4 consists of all
intercompany claims of
Non-Debtors (the "Intercompany
Claims," as defined in the Plan).
Under the Plan, each holder of
an Allowed Class 4 Intercompany
Claim (except for the
Intercompany Claims of Phencorp
against PSI, Luntz Acquisition
(Delaware) Corporation, and RESI
Acquisition (Delaware)
Corporation, in full
satisfaction, settlement, release
and discharge of and in exchange
for such Allowed Class 4
Intercompany Claim, will, in the
sole discretion of the applicable
Debtor as Reorganized Debtor,
with the consent of the Required
Lenders (a) have its Claim
Reinstated or (b) receive such
other treatment as the applicable
Debtor as Reorganized Debtor and
such holder have agreed upon in
writing. The Intercompany Claims
of Phencorp against PSI, Luntz
Acquisition (Delaware)
Corporation and RESI Acquisition
(Delaware) Corporation), shall
be deemed released and discharged
on the Effective Date and
Phencorp shall not receive or
retain any property under the
Plan on account of such
Intercompany Claims. Phencorp
has agreed to accept the Plan.
Class 4 Intercompany Claims of
Non-Debtors are Unimpaired and
therefore not entitled to vote on
the Plan.
CLASS 5 - SUBSIDIARY INTERESTS Class 5 consists of the issued
and outstanding shares of stock
of the Subsidiaries directly or
indirectly owned by PSC, as of
the Petition Date (the
"Subsidiary Interests"). Under
the Plan, subject to the
Restructuring Transactions, all
Class 5 Subsidiary Interests will
be deemed Allowed Interests and
Reinstated on the Effective Date,
but the holders of Class 5
Subsidiary Interests shall
receive no distribution under the
Plan on account of such
Interests. Class 5 Subsidiary
Interests are Unimpaired and
therefore not entitled to vote on
the Plan.
CLASS 6 - SECURED LENDER CLAIMS Class 6 consists of all Secured
Claims of Lenders (the "Secured
Lender Claims") arising under or
as a result of the Pre-Petition
Credit Agreement, the Credit
Documents and the Lender Lock-up
Agreement (the "Pre-Petition
Credit Facility Agreements").
Notwithstanding anything
contained in the Plan to the
contrary, the Secured Lender
Claims will be deemed Allowed
Class 6 Claims in the aggregate
amount of $____,000,000. Under
the Plan, on the
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Effective Date, the Pre-Petition Credit
Facility Agreements shall be amended
and restated by the Amended and
Restated Term Credit Agreement without
any further action by any party. Each
holder of an Allowed Class 6 Secured
Lender Claim, in full satisfaction,
settlement, release and discharge of
and in exchange for such Allowed Class
6 Secured Lender Claim, will receive on
or as soon as practicable after the
Distribution Date, its Pro Rata share
of (a) the Net Asset Sale Proceeds Pool
(See Section VIII.B "New Debt and
Securities to Be Issued and Transferred
under the Plan - New Senior Secured
Term Debt" (describing the Net Asset
Sale Proceeds Pool)); (b) the New
Secured PIK Debt (See Section VIII.C
"New Debt and Securities to Be Issued
and Transferred under the Plan - New
Secured PIK Debt"); (c) the New Senior
Secured Term Debt (See Section VIII.B
"New Debt and Securities to Be Issued
and Transferred under the Plan - New
Senior Secured Term Debt"); and (d)(i)
if Class 7 votes to accept the Plan and
the class of holders of Canadian
Impaired Unsecured Claims votes to
accept the Canadian Plan, 5,967,052,592
shares of the New Common Shares (See
Section VIII.A "New Debt and Securities
to be Issued and Transferred under the
Plan - New Common Shares") which shall
be ninety-one percent (91%) or
21,840,000 shares of the PSC Common
Shares issued and outstanding as of the
Effective Date, after giving effect to
the Reverse Stock Split, subject to
Dilution; (ii) if Class 7 votes to
reject the Plan, and the class of
holders of Canadian Impaired Unsecured
Claims votes to reject the Canadian
Plan, 24,000,000 shares of the New
Common Shares which shall be one
hundred percent (100%) of the PSC
Common Shares issued and outstanding as
of the Effective Date, subject to
Dilution, and no New Unsecured PIK
Notes or New Unsecured Convertible
Notes will be issued; (iii) if Class 7
votes to reject the Plan but the class
of holders of Canadian Impaired
Unsecured Claims votes to accept the
Canadian Plan, 22,800,000 shares of the
New Common Shares which shall be
ninety-five percent (95%) of the PSC
Common Shares issued and outstanding as
of the Effective Date, subject to
Dilution, plus an amount of the PSC
Common Shares equal to the aggregate
number of the PSC Common Shares that
would have been distributed to Class 7
had Class 7 voted to accept the Plan
(based on the Debtors' estimate of the
aggregate amount of Allowed Class 7
Claims), subject to Dilution, and an
amount of New Unsecured PIK Notes equal
to the amount that would have been
available for distribution to Class 7
had Class 7 voted to accept the Plan
(based on the Debtors' estimate of the
aggregate amount of Allowed Class 7
Claims); or (iv) if Class 7 votes to
accept the Plan, but the class of
holders of Canadian Impaired Unsecured
Claims votes to reject the Canadian
Plan, 5,967,052,592 Shares of New
Common Shares which shall be ninety-one
percent (91%) or 21,840,000 shares of
the PSC Common Shares issued and
outstanding as of the Effective Date,
after giving effect to the Reverse
Stock Split, plus an amount of the New
Common Shares equal to the aggregate
number of New Common Shares that would
have been distributed to the class of
holders of Canadian Impaired Unsecured
Claims had such class voted to accept
the Canadian Plan (based on the
Debtors' estimate of the allowed amount
of such Claims), subject to Dilution.
CLASS 7 - ALL IMPAIRED UNSECURED Class 7 consists collectively of all
CLAIMS Claims as set forth on Exhibit B to the
Plan, the Unsecured Lender Claims, the
Old Debenture Claims, the Impaired
Trade Claims and Claims of parties to
executory contracts and leases that are
rejected in the Chapter 11 Cases (the
"Impaired Unsecured Claims"). Under
the Plan, on, or as soon as reasonably
practicable after, the later of (i) the
Class 7 Distribution
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Date or (ii) the date such Class 7
Claim becomes an Allowed Class 7
Claim, (a) if the holders of
Allowed Class 7 Claims vote to
accept the Plan then each holder of
an Allowed Class 7 Claim shall
receive in full satisfaction,
settlement, release and discharge
of and in exchange for such Allowed
Class 7 Claim, its Pro Rata share
of (i) subject to the Class 7
Election, $60 million of New
Unsecured PIK Notes (See Section
VIII.D "New Debt and Securities to
Be Issued Under the Plan - New
Unsecured PIK Notes") to be issued
pursuant to Section IV.C of the
Plan (to be shared with the class
of holders of Canadian Impaired
Unsecured Claims under the Canadian
Estimated Amount of Plan), and (ii) 327,860,033 shares
Allowed Class 7 Claims of the New Common Shares (See
other than Allowed Amount Section VIII.A "New Debt and
of Unsecured Lender Securities to Be Issued Under the
Claims: $___________ Plan - New Common Shares") which
shall be five percent (5%) or
1,200,000 shares of the PSC Common
Shares issued and outstanding as of
the Effective Date, after giving
Estimated Amount of Allowed Canadian effect to the Reverse Stock Split,
Impaired Unsecured Claims other than subject to Dilution (to be shared
Allowed Amount of Unsecured Lender with the class of holders of
Claims: Canadian Impaired Unsecured Claims
under the Canadian Plan), to be
$___________ issued pursuant to Section IV.C of
the Plan, and the holders of
Unsecured Lender Claims shall be
deemed to have waived any and all
distributions and benefit of any
and all contractual subordination
provisions in respect of the Old
Debentures; or (b) if the holders
of Class 7 Claims vote to reject
the Plan, then the holders of such
Claims shall not receive or retain
any property on account of such
Claims. Qualifying Class 7
Creditors shall have the right to
make the Class 7 Election if Class
7 votes to accept the Plan.
Qualifying Class 7 Creditors are
holders of Impaired Unsecured
Claims that, as of the Voting
Deadline, are Allowed Impaired
Unsecured Claims in a liquidated
amount, excluding by agreement,
CIBC. The Class 7 Election shall
entitle Qualifying Class 7 Holders
to elect to forgo their Pro Rata
distribution of New Unsecured PIK
Notes for New Unsecured Convertible
Notes (See Section VIII.E "New
Debt and Securities to Be Issued
Under the Plan - New Unsecured
Convertible Notes") subject to
certain terms and limitations. If
Class 7 votes to accept the Plan,
Qualifying Class 7 Holders electing
New Unsecured Convertible Notes
shall receive in exchange for every
$1.00 in face amount of New
Unsecured PIK Notes that such
Qualifying Class 7 Creditor would
have received under the Plan, $1.50
in face amount of New Unsecured
Convertible Notes. The aggregate
of New Unsecured Convertible Notes
shall not exceed $18 million. If
Qualifying Class 7 Creditors elect
to convert more than $12 million in
aggregate face amount of New
Unsecured PIK Notes into New
Unsecured Convertible Notes, then
each Qualifying Class 7 Creditor
shall be entitled to its Pro Rata
share of $18 million in face amount
of New Unsecured Convertible Notes
(with such Pro Rata determination
to include only Claims of the
Qualifying Class 7 Creditors
electing New Unsecured Convertible
Notes), and such holders shall be
deemed not to have made the Class 7
Election with respect to the
balance of their Class 7 Claims.
For a hypothetical numerical
example of the effect of the Class
7 Election on distribution of New
Unsecured PIK Notes and New
Unsecured Convertible Notes - See
Section II.D "Summary of the Plan
of Reorganization - Effect of
Voting on Distributions - Numerical
Example." On the Effective Date,
the Old Debentures, the Old
Indenture and any agreement with
respect to Impaired Unsecured
Claims will be terminated
automatically without any further
action by any party and will no
longer be of any force or effect.
FOR PURPOSES OF DISTRIBUTIONS TO
HOLDERS OF CLASS 7 CLAIMS, EXCEPT
AS OTHERWISE SET FORTH ABOVE, THE
PRO RATA CALCULATIONS SHALL INCLUDE
IN THE DETERMINATION OF THE FACE
AMOUNT ALL CLAIMS IN CLASS 7, PLUS
(I) IF THE CLASS OF HOLDERS OF
CANADIAN IMPAIRED UNSECURED CLAIMS
VOTES TO ACCEPT THE
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CANADIAN PLAN, THE AGGREGATE
AMOUNT OF ALL ALLOWED CANADIAN
IMPAIRED UNSECURED CLAIMS, OR (II)
IF THE CLASS OF HOLDERS OF
CANADIAN IMPAIRED UNSECURED CLAIMS
VOTES TO REJECT THE CANADIAN PLAN,
THE DEBTORS' ESTIMATE OF THE
AGGREGATE AMOUNT OF ALL CANADIAN
IMPAIRED UNSECURED CLAIMS.
THEREFORE, THE DISTRIBUTIONS OF
NEW COMMON SHARES AND NEW
UNSECURED PIK NOTES DESCRIBED
ABOVE TO HOLDERS OF ALLOWED CLASS
7 CLAIMS WILL BE REDUCED PRO RATA
BY THE DISTRIBUTIONS ON ACCOUNT OF
THE CANADIAN IMPAIRED UNSECURED
CLAIMS UNDER THE CANADIAN PLAN.
Class 7 Impaired Unsecured Claims
are Impaired and therefore
entitled to vote on the Plan.
Claims under the Canadian Plan
will be converted to USD for
purposes of distributions at a
rate of $1.___ CDN per $1.0 USD.
CLASS 8A - OLD COMMON SHARES Class 8A consists of all Interests
SECURITIES ACTIONS of holders of the common shares of
PSC issued and outstanding as of
the Petition Date (the "Old Common
Shares"). Under the Plan, on the
Effective Date, in full
satisfaction, settlement, release
and discharge of and in exchange
for Class 8A Interests, if Class 7
votes to accept the Plan, holders
of Allowed Class 8A Interests
shall be entitled to retain their
existing shares of Old Common
Shares, which after giving effect
to the New Common Shares to be
issued pursuant to the Plan shall
be two percent (2%) or 480,000
shares of PSC Common Shares issued
and outstanding on the Effective
Date, after giving effect to the
Reverse Stock Split, subject to
Dilution, to be issued pursuant to
Section IV.C of the Plan. If
Class 7 votes to reject the Plan,
then holders of Class 8A Interests
shall not receive or retain any
property under the Plan.
Reorganized PSC will take all such
corporate actions to be required
on or after the Effective Date to
cancel the Old Common Shares and
the holders of Class 8A Interests
will not be entitled to receive
any payment on cancellation of
such shares. Class 8A Interests
are Impaired and therefore
entitled to vote on the Plan,
unless the Bankruptcy Court enters
the Class 8 Solicitation Order.
CLASS 8B - SECURITIES CLAIMS IN THE Class 8B consists of all Claims,
excluding Other Securities Claims,
as to causes of action in the
consolidated, putative class
action entitled In re Philip
Services Corp. Securities
Litigations, 98 CV 835 (MBM),
previously pending in the United
States District Court for the
Southern District of New York and
the putative class action entitled
Menegon v. Philip Services Corp.,
et al., File No. 4166 CP 98
(Ontario Court, General Division)
(collectively the "Securities
Actions") or Claims arising out of
the ownership of Old Common Shares
held by the putative plaintiffs in
the Securities Actions. Under the
Plan, on or as soon as reasonably
practicable after the later of the
Distribution Date or the date such
Class 8B Claim becomes an Allowed
Class 8B Claim, in full
satisfaction, settlement, release
and discharge thereof and in
exchange for Class 8B Claims, if
Class 7 votes to accept the Plan,
each holder of an Allowed Class 8B
Claim will receive its Pro Rata
share of 98,358,010 shares of the
New Common Shares (See Section
VIII.A "New Debt and Securities to
be Issued and Transferred under
the Plan - New Common Shares"),
which shall be one and one-half
percent (1.5%) or 360,000 shares
of the PSC Common Shares issued
and outstanding as of the
Effective Date, after giving
effect to the Reverse Stock Split,
subject to Dilution, to be issued
under Section IV.C of the Plan.
If Class 7 votes to reject the
Plan, then holders of Class 8B
Claims shall not receive or retain
any property under the Plan.
Class 8B Securities Claims in the
Securities Actions are Impaired
and therefore entitled to vote on
the Plan, unless the Bankruptcy
Court enters the Class 8
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Solicitation Order.
CLASS 8C - OTHER SECURITIES Class 8C consists of the Chazen Claims, Liff
CLAIMS Claims, and any and all Claims arising from
the recission or right of recission of a
purchase or sale of a security or Interest
of any Debtor or of an affiliate of any
Debtor, or for damages arising from the
purchase or sale of such a security or
Interest (excluding the Securities Claims
classified in Class 8A) or for
reimbursement, indemnification or
contribution allowed under section 502 of
the Bankruptcy Code on account of such
Claims or on account of the Securities
Actions or any actions initiated after the
Petition Date that may be subordinated
pursuant to section 510(b) of the Bankruptcy
Code (including, without limitation,
Excluded Indemnification Obligations) if not
disallowed pursuant to Section IV.K of the
Plan. Under the Plan, on the Effective
Date, in full satisfaction, settlement,
release and discharge of and in exchange for
Class 8C Claims, if Class 7 votes to accept
the Plan, each holder of an Allowed Class 8C
Claim shall receive its Pro Rata share of
32,786,003 shares of the New Common Shares
(See Section VIII.A "New Debt and Securities
to Be Issued Under the Plan - New Common
Shares") which shall be one-half of one
percent (0.5%) or 120,000 shares of the PSC
Common Shares issued and outstanding as of
the Effective Date, after giving effect to
the Reverse Stock Split, subject to
Dilution, pursuant to Section IV.C of the
Plan. If Class 7 votes to reject the Plan,
then holders of Class 8C Claims shall not
receive or retain any property under the
Plan. Class 8C Other Securities Claims are
Impaired and therefore entitled to vote on
the Plan, unless the Bankruptcy Court enters
the Class 8 Solicitation Order.
CLASS 9 - OTHER EQUITY SECURITIES Class 9 consists of all Other Equity
Securities. Under the Plan, the holders of
Other Equity Securities shall not receive or
retain any property under the Plan on
account of such Interests. On the Effective
Date, all of the Other Equity Securities
shall be deemed cancelled and extinguished.
Class 9 Interests are Impaired and will
receive no distribution under the Plan and
are therefore deemed to reject the Plan and
are not entitled to vote on the Plan.
2. Unclassified Claims
(a) DIP Facility Claims (Unimpaired)
DIP Facility Claims consist of the Claims arising under or as a result of
the debtor-in-possession credit facility (the "DIP Facility") provided to the
Debtors during the Chapter 11 Cases, pursuant to the credit agreement (the "DIP
Facility Agreement"), between PSC and PSI as borrowers, the Subsidiary Debtors
and the Canadian Debtors as subsidiary guarantors, Bankers Trust Company
("BTCo") as DIP agent, Canadian Imperial Bank of Commerce ("CIBC") and BTCo as
co-arrangers (the "DIP Co-Arrangers"), and other various persons from time to
time parties thereto. DIP Facility Claims are Unimpaired under the Plan.
Under the Plan, on the Effective Date or the date such DIP Facility Claim
becomes payable pursuant to any agreement between PSC and the holder of such
DIP Facility Claim, each holder of an Allowed DIP Facility Claim shall receive
in full satisfaction, settlement, release and discharge of and in exchange for
such Allowed DIP Facility Claim (a) Cash equal to the unpaid portion of such
Allowed DIP Facility Claim or (b) such other treatment as to which PSC, with
the consent of the Required Lenders, and such holder shall have agreed upon in
writing.
(b) Administrative Claims (Unimpaired)
The Plan provides that Administrative Claims are Unimpaired.
Administrative Claims consist of the actual and necessary costs and expenses of
the Chapter 11 Cases that are allowed under sections 503(b) and 507(a)(1) of
the Bankruptcy Code. They include, among other things, the cost of operating
the Debtors' businesses following the Petition
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Date (e.g., the post-petition salaries and other benefits for the Debtors'
employees which the Debtors have obtained an order allowing them to pay in the
ordinary course of business, post-petition rent, amounts owed to vendors
providing goods and services to the Debtors during the Chapter 11 Cases, tax
obligations incurred after the Petition Date, certain statutory fees and
charges assessed under 28 U.S.C. Section 1930) and the actual, reasonable fees
and expenses of the professionals retained by the Debtors and the creditors'
committee. All payments to professionals in connection with the Chapter 11
Cases for compensation and reimbursement of expenses and all payments to
reimburse expenses of members of the creditors' committee would be made in
accordance with the procedures established by the Bankruptcy Code and the
Bankruptcy Rules and would be subject to approval of the Bankruptcy Court as
being reasonable.
Except as otherwise provided in and subject to the requirements of the
Plan, the Plan provides that on, or as soon as reasonably practicable after,
the latest of (i) the Distribution Date, (ii) the date such Administrative
Claim becomes an Allowed Administrative Claim, or (iii) the date such
Administrative Claim becomes payable pursuant to any agreement between a Debtor
and the holder of such Administrative Claim, each holder of an Allowed
Administrative Claim will receive in full satisfaction, settlement, release and
discharge of and in exchange for such Allowed Administrative Claim (a) Cash
equal to the unpaid portion of such Allowed Administrative Claim or (b) such
other treatment as to which the applicable Debtor, with the consent of the
Required Lenders, and such holder shall have agreed upon in writing; provided,
however, that Allowed Administrative Claims with respect to liabilities
incurred by a Debtor in the ordinary course of business during the Chapter 11
Cases will be paid in the ordinary course of business in accordance with the
terms and conditions of any agreements relating thereto.
Holders of Administrative Claims based on liabilities incurred by the
Debtors in the ordinary course of their businesses will not be required to file
or serve any request for payment of such Claims, as these liabilities will be
assumed by the applicable Reorganized Debtor and paid, performed or settled
when due in accordance with the terms and conditions of the particular
agreements governing such obligations.
The Debtors therefore anticipate that Administrative Claims against the
Debtors will be paid as they come due during the Chapter 11 Cases and that the
Administrative Claims after the Administrative Bar Date will, for the most
part, consist of the allowed but unpaid fees and expenses incurred by
professionals retained in the Chapter 11 Cases.
(c) Priority Tax Claims (Unimpaired)
Priority Tax Claims are Unsecured Claims asserted by federal and state
governmental authorities for taxes specified in section 507(a)(8) of the
Bankruptcy Code, such as certain income taxes, property taxes, excise taxes,
and employment and withholding taxes. These Unsecured Claims are given a
statutory priority in right of payment. The Plan provides that Priority Tax
Claims, if any, are Unimpaired.
Under the Plan, except to the extent that a holder of an Allowed Priority
Tax Claim has been paid by the Debtors prior to the Distribution Date or has
agreed in writing to a different treatment, each holder of an Allowed Priority
Tax Claim will be paid, at the sole discretion of the Reorganized Debtors, (a)
with the consent of the Required Lenders, Cash equal to the unpaid portion of
such Allowed Priority Tax Claim, (b) Cash payments over time in an aggregate
principal amount equal to the amount of such Allowed Priority Tax Claim plus
simple interest on the unpaid portion thereof at the rate of seven percent (7%)
per annum from the Effective Date through the date of payment thereof, or (c)
such other treatment as to which a Debtor, with the consent of the Required
Lenders, and such holder shall have agreed upon in writing. Cash payments of
principal will be made in annual installments equal to ten percent (10%) of
such Allowed Priority Tax Claim plus accrued and unpaid interest, with the
first payment to be due on or before the first anniversary of the Effective
Date, or as soon thereafter as is practicable, and subsequent payments to be
due on the anniversary of the first payment date or as soon thereafter as is
practicable; provided, however, that any installments remaining unpaid on the
date that is six years after the date of assessment of the tax that is the
basis for the Allowed Priority Tax Claim will be paid on the first Business Day
following such date, or as soon thereafter as is practicable together with any
accrued and unpaid interest to the date of payment; and provided further that
the Debtors reserve the right to pay any Allowed Priority Tax Claim, or any
remaining balance of any Allowed Priority Tax Claim, in full at any time on or
after the Distribution Date without premium or penalty; and provided further
that no holder of an Allowed Priority Tax Claim will be entitled to any
payments on account of any pre-Effective Date interest accrued on or penalty
arising after the Petition Date with respect to or in connection with such
Allowed Priority Tax Claim.
4. EFFECT OF VOTING ON DISTRIBUTIONS
The percentage ownership of PSC Common Shares by holders of Allowed Class
6 Claims as of the Effective Date is affected by whether Class 7 votes to
accept the Plan and/or the class of holders of Canadian Impaired Unsecured
Claims votes to accept the Canadian Plan. Such effect is summarized below:
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20
If Class 7 votes to accept the Plan and the class of holders of Canadian
Impaired Unsecured Claims votes to accept the Canadian Plan, then holders of
Allowed Class 6 Claims shall receive 5,967,052,592 shares of New Common Shares,
which shall be ninety-one percent (91%) or 21,840,000 shares of the PSC Common
Shares issued and outstanding as of the Effective Date, after giving effect to
the Reverse Stock Split, in any case subject to Dilution.
If Class 7 votes to accept the Plan and the class of holders of Canadian
Impaired Unsecured Claims votes to reject the Canadian Plan, then the holders
of an Allowed Class 6 Claims shall receive 5,967,052,592 shares of New Common
Shares, which shall be ninety-one percent (91%) or 21,840,000 shares of the PSC
Common Shares issued and outstanding as of the Effective Date, after giving
effect to the Reverse Stock Split, plus an amount of New Common Shares equal to
the aggregate number of New Common Shares that would have been distributed to
the class of holders of Canadian Impaired Unsecured Claims (based on the
Debtors' estimate of the allowed amount of such Claims) had such class voted to
accept the Canadian Plan, in any case subject to Dilution.
If Class 7 votes to reject the Plan and the class of holders of Canadian
Impaired Unsecured Claims votes to accept the Canadian Plan, then the holders
of an Allowed Class 6 Claims shall receive 22,800,000 shares of PSC Common
Shares, which shall be ninety-five percent (95%) of the PSC Common Shares
issued and outstanding as of the Effective Date, plus an amount of PSC Common
Shares equal to the aggregate number of PSC Common Shares that would have been
distributed to Class 7 if Class 7 voted to accept the Plan, in any case subject
to Dilution.
If Class 7 votes to reject the Plan and the class of holders of Canadian
Impaired Unsecured Claims votes to reject the Plan, then the holders Allowed
Class 6 Claims shall receive 24,000,000 shares of New Common Shares, which
shall be one hundred percent (100%) of the PSC Common Shares issued and
outstanding as of the Effective Date.
If Class 7 votes to reject the Plan, then holders of Class 7 Claims will
receive no distributions under the Plan and additionally, no distributions will
be made to Classes 8A, 8B or 8C.
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21
The following chart sets forth the potential Effective Date percentage of
ownership allocations of PSC Common Shares based upon the votes of Impaired
Unsecured Creditors under the Canadian and US Plans:
EFFECTIVE DATE OWNERSHIP OF PSC COMMON SHARES
BASED ON POTENTIAL IMPAIRED UNSECURED CREDITOR VOTES
UNDER US & CANADIAN PLANS
CANADIAN IMPAIRED UNSECURED CLAIMS ("CIUC")
YES NO
Class 6 - 91% Class 6 - 91% (plus CIUC portion of 5%)
Class 7 and CIUC - 5% Class 7 - 5% (less CIUC portion of 5%)
Class 8A - 2% Class 8A - 2%
Class 8B - 1.5% Class 8B - 1.5%
CLASS 7 YES Class 8C - 0.5% Class 8C - 0.5%
Class 6 - 95% (plus Class 7 portion
of 5%) Class 6 - 100%
CIUC - 5% (less Class 7 portion of 5%) Class 7 & CIUC - 0%
Class 8A - 0% Class 8A - 0%
Class 8B - 0% Class 8B - 0%
NO Class 8C - 0% Class 8C - 0%
The holders of Allowed Class 6 Claims may also receive a distribution of
New Unsecured PIK Notes under the Plan depending upon whether Class 7 votes to
accept the Plan and/or the holders of Canadian Impaired Unsecured Claims vote
to accept the Canadian Plan. Such effect is summarized below:
If Class 7 votes to accept the Plan and the class of holders of Canadian
Impaired Unsecured Claims votes to accept the Canadian Plan, then the holders
of Impaired Lender Claims will waive their rights to receive New Unsecured PIK
Notes in Class 7 and under the Canadian Plan and the holders of Allowed Class 6
Claims shall receive no New Unsecured PIK Notes.
If Class 7 votes to accept the Plan and the class of holders of Canadian
Impaired Unsecured Claims votes to reject the Canadian Plan, then the holders
of Allowed Class 6 Claims shall receive an aggregate amount of New Unsecured
PIK Notes equal to the aggregate amount of New Unsecured PIK Notes that would
have been distributed to the class of holders of Canadian Impaired Unsecured
Claims had such class voted to accept the Canadian Plan.
If Class 7 votes to reject the Plan and the class of holders of Canadian
Impaired Unsecured Claims votes to accept the Canadian Plan, then the holders
of Allowed Class 6 Claims shall receive an aggregate amount of New Unsecured
PIK Notes equal to the aggregate amount of New Unsecured PIK Notes that would
have been distributed to Class 7 had Class 7 voted to accept the Plan.
If Class 7 votes to reject the Plan and the class of holders of Canadian
Impaired Unsecured Claims votes to reject the Canadian Plan, then no New
Unsecured PIK Notes will be issued and the holders of Allowed Class 6 Claims
shall receive no New Unsecured PIK Notes.
NUMERICAL EXAMPLE OF
EFFECT OF HYPOTHETICAL CLASS 7 ELECTIONS
ON DISTRIBUTIONS TO CLASS 7
The following is a numerical example illustrating the effect of a
hypothetical Class 7 Election on distributions of New Unsecured PIK Notes and
New Unsecured Convertible Notes under the Plan, assuming both Class 7 votes to
accept the Plan and the class of holders of Canadian Impaired Unsecured Claims
votes to accept the Canadian Plan. This numerical example is provided for
illustrative purposes only and is not a prediction of any amount that actually
will be used in making, or result from making, any such calculation.
Hypothetical Numbers:
12
22
(i) Aggregate Allowed Amount of Class 7 Claims - $100,000,000
(ii) Aggregate Amount of Canadian Impaired Unsecured Claims -
$30,000,000
(iii) Aggregate Amount of Allowed Class 7 Claims of Qualifying
Creditors - $80,000,000
(iv) Aggregate Amount of Allowed Class 7 Claims of Qualifying
Creditors electing New Unsecured Convertible Notes - $50,000,000
Under this hypothetical example, holders of Allowed Class 7 Claims of
Qualifying Creditors electing the New Unsecured Convertible Notes are entitled
to $23.07 million of New Unsecured PIK Notes. This amount is determined by
multiplying such creditors' pro rata share of aggregate Allowed Amount of Class
7 Claims plus the aggregate Amount of Canadian Impaired Unsecured Claims ($50
million / $130 million) by the maximum amount of New Unsecured PIK Notes to be
issued before taking into consideration the Class 7 Election ($60 million) ($50
million / $130 million x $60 million = $23.07 million). However, such
creditors have elected to forgo $12 million in New Unsecured PIK Notes in favor
of $18 million in New Unsecured Convertible Notes. Therefore, such creditors
have reduced their distribution of New Unsecured PIK Notes to $11.07 million
($23.07 million - $12 million = $11.07 million). Such creditors would share
pro rata as a group in $18 million of the New Unsecured Convertible Notes
(which would be in satisfaction of approximately $26 million in Claims) and
would also be entitled to have the balance of their Claims (approximately $24
million) share in the distribution of $11.07 million of New Unsecured PIK
Notes.
Under the above-described hypothetical numerical example, the holder of an
Allowed Class 7 Claim in the amount of $3,000,000 that is not a Qualifying
Class 7 Creditor or a Qualifying Class 7 Creditor that does not elect the
Unsecured Convertible PIK Notes in the Class 7 Election would receive (i)
24,000 shares of PSC Common Shares (after giving effect to Reverse Stock Split)
(2.3% of the 1,200,000 PSC Common Shares) (2.3% = $3,000,000 / $130,000,000)
(2.3% x 1,200,000 = 27,692); and (ii) $1,384,875 in New Unsecured PIK Notes (to
be rounded to $1,385,000 in New Unsecured PIK Notes). This amount of New
Unsecured PIK Notes is determined as follows: ($130 million (aggregate Allowed
Amount of Class 7 Claims plus aggregate Amount of Canadian Impaired Unsecured
Claims) - $50 million (aggregate Amount of Allowed Class 7 Claims of Qualifying
Creditors electing New Unsecured Convertible Notes claims) = $80 million); such
creditors' pro rata share of $80 million is $3 million/$80 million = .0375;
.0375 x New Unsecured PIK Notes for non-electing creditors ($36,930,000)
($48,000,000 - $11,070,000); .0375 x $36,930,000 = $1,384,875.
Under the above-described hypothetical numerical example, a holder of an
Allowed Class 7 Claim in the amount of $3,000,000 that is a Qualifying Class 7
Creditor and elects the New Unsecured Convertible Notes will receive (i) 24,000
shares of PSC Common Shares (after giving effect to Reverse Stock Split) (2.3%
of the 1,200,000 PSC Common Shares) ($3,000,000 / $130,000,000) (2.3% x
1,200,000 = 27,692); (ii) $664,200 in New Unsecured PIK Notes (to be rounded to
$664,000 in New Unsecured PIK Notes) determined as follows: ($3,000,000 /
$50,000,000= .06; .06 x New Unsecured PIK Notes for electing creditors
($11,070,000) = $664,200); and (iii) $1,080,000 in New Unsecured Convertible
Notes determined as follows: $3,000,000 / $50,000,000 = .06; .06 x $18,000,000
= $1,080,000.
5. SUMMARY OF DEBT TO BE INCURRED AND SECURITIES TO BE ISSUED IN CONNECTION
WITH THE PLAN
The Debtors anticipate that they will finalize the material terms of a new
senior secured facility (the "Exit Facility") prior to the Confirmation Date,
pursuant to which the Reorganized Debtors would have access to sufficient
working capital to maintain their operations, as well as the operations of the
Subsidiaries. Pursuant to the Lender Lock-up Agreement, the credit
availability under the Exit Facility is anticipated to be approximately $125
million. The Exit Facility would be secured by guaranties and charges over the
accounts receivable and inventory and, if required, substantially all other
assets of Reorganized PSC and its subsidiaries, senior to all other security
including the security for the New Senior Secured Term Debt. The Debtors
anticipate that the Exit Facility would be used to (a) fund repayment of the
DIP Facility, (b) provide short-term working capital needs, and (c) fund
letters of credit within a sub-limit of the Exit Facility. The maturity of the
Exit Facility is contemplated as two years from Plan implementation, but may be
refinanced in whole but not in part by a replacement facility with the same
priority. The parties continue to negotiate the terms of the Exit Facility,
and there can be no assurances that the terms of such a Facility will not
differ materially from the description in the Lender Lock-up Agreement or that
the parties will be able to reach a final agreement.
Pursuant to the Plan, on or prior to the Effective Date, PSC would issue
New Common Shares, New Secured PIK Debt and depending upon the votes of Class 7
on the Plan and the class of holders of Canadian Impaired Unsecured Claims on
the Canadian Plan, New Unsecured PIK Notes and, if Class 7 votes to accept the
Plan and a Qualifying Class 7 Creditor elects New Unsecured Convertible Notes
in the Class 7 Election, the New Unsecured Convertible Notes, as described
below.
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NOTES AND SECURITIES ISSUER/ISSUED TO DIVIDENDS VOTING OTHER
- -------------------- ---------------- --------- ------ -----
New Common Shares Between 91% and 100 Authorized but not 1 vote/share Each 273 shares of
% to Class 6 anticipated in the (non-cumulative) New Common Shares
depending on the foreseeable future will be converted
votes of Class 7 into one PSC Common
and the holders of Share in the Reverse
Canadian Impaired Stock Split. If
Unsecured Claims Class 7 votes to
reject the Plan,
there will be no
Reverse Stock Split.
If Class 7 votes to
accept the Plan,
retention of PSC
Common Shares as of
the Effective Date
for the benefit of
Class 8A Old Common
Shares equal to
2.0% of the issued
and outstanding PSC
Common Shares as of
the Effective Date.
If Class 7 votes to
accept the Plan,
32,786,003 shares
of New Common
Shares Pro Rata to
holders of Class 8C
Other Securities
Claims (0.5%).
If Class 7 votes to
accept the Plan,
98,358,010 shares
of New Common
Shares Pro Rata to
Holders of Class 8B
Securities Claims
in the Securities
Actions which shall
be 1.5% of the
issued and
outstanding PSC
Common Shares as of
the Effective Date.
If Class 7 votes to
accept the Plan,
327,860,033 shares
of New Common
Shares Pro Rata to
holders of Allowed
Class 7 Claims
which shall be 5.0%
of the issued and
outstanding PSC
Common Shares as of
Effective Date (the
Pro Rata
calculation
includes allowed
Canadian Impaired
Unsecured Claims
under the Canadian
Plan, i.e., the 5%
is to be shared
among holders of
Allowed Class 7
Claims under the
Plan and holders of
Canadian Impaired
Unsecured Claims
under the Canadian
Plan).
New Secured PIK Debt Pro Rata to Holders Not Applicable Not Applicable Amount: $100 million;
of Class 6 Lender Term of 5 years;
Claims Issued by Interest at 10% per
PSC. annum; the original
amount issued shall
be convertible at
maturity at the
option of the
holders into 25% of
the
14
24
NOTES AND SECURITIES ISSUER/ISSUED TO DIVIDENDS VOTING OTHER
- -------------------- ---------------- --------- ------ -----
New Common Shares, in the
aggregate on a fully
diluted basis as of the
Effective Date,
guaranteed by other
Debtors, Canadian Debtors
and Restricted
Subsidiaries; to contain
the usual anti-dilution
provisions applicable in
a public offering of
convertible debt,
including giving effect
to the issuance of any
PSC Common Shares under
the Shareholder Rights
Plan.
New Senior Secured Pro Rata to Holders Not Applicable Not Applicable Amount: $250 million
Term Debt of Class 6 Lender minus an amount equal to
Claims. To be issued the Net Asset Sale
by PSI. Proceeds Pool; term of 5
years; interest at 9% per
annum; guaranteed by
other Debtors, Canadian
Debtors and Restricted
Subsidiaries.
New Unsecured PIK If Class 7 votes to Not Applicable Not Applicable Amount: Subject to the
Notes accept the Plan, Class 7 Election, between
subject to the Class $48 million and $60
7 Election, Pro Rata million;
to Holders of Class 7 Term of 10 years;
Impaired Unsecured Interest at 6% per annum;
Claims in the amount the pro rata distribution
of between $48 to Lenders holding Class
million and $60 7 Claims will be waived
million, depending if Class 7 votes to
upon the results of accept the Plan.
the Class 7 Election
(the Pro Rata
calculation includes
allowed Canadian
Impaired Unsecured
Claims under the
Canadian Plan; i.e.,
the New Unsecured PIK
Notes are to be
shared among holders
of Allowed Class 7
Claims under the Plan
and holders of
Canadian Impaired
Unsecured Claims
under the Canadian
Plan). The issuer
will be Reorganized
PSC.
As described in
Section II.D above,
if Class 7 rejects
the Plan or the class
of holders of
Canadian Impaired
Unsecured Claims
rejects the Canadian
Plan, certain of the
New Unsecured PIK
Notes will be issued
to holders of Allowed
Class 6 Claims.
New Unsecured Con- As described in Not Applicable Not Applicable Amount: Up to $18 million;
Section II.D above, Term: 20 years from the
if Class 7 votes to
accept the Plan,
holders of Qualifying
Class 7
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25
NOTES AND SECURITIES ISSUER/ISSUED TO DIVIDENDS VOTING OTHER
- -------------------- ---------------- --------- ------ -----
vertible Notes Claims may elect to Effective Date;
receive New Unsecured Interest: 3% per annum
Convertible Notes in commencing on the third
the Class 7 Election. anniversary of the Effective
The issuer will be Date; convertible into PSC
Reorganized PSC. Common Shares at a price of
$30 per share (every $30 of
face amount of notes is
convertible into one PSC
Common Share); subject to a
put right in the event of a
change of control.
Pursuant to the Pre-Petition Credit Agreement, the Lenders have a security
interest in the proceeds from the sale of the assets of PSC and its
Subsidiaries. The proceeds from the sale of certain assets of PSC and its
Subsidiaries were held by CIBC, as Administrative Agent, for the benefit of the
Administrative Agent and the Lenders. Pursuant to a Proceeds Agreement, dated
as of April 5, 1999, between PSC, PSI (and each of the direct and indirect
subsidiaries of PSC) and CIBC and the Lenders (the "Proceeds Agreement"), as
has been supplanted by the provisions of that certain approved Stipulation and
Order Authorizing and Restricting Use of Cash Collateral and Granting Adequate
Protection of Secured Claims (the "Cash Collateral Order"), the Lenders agreed
to release up to $93,000,000 of net proceeds from the sale of certain assets of
PSC and its Subsidiaries to the Debtors in accordance with a budget approved by
the Lenders and subject to certain conditions. CIBC transferred the funds not
released prior to the Petition Date to BTCo, as agent under the DIP Facility,
in accordance with the Cash Collateral Order.
In the event of any sale of the U.S. Ferrous Division of the Debtors (the
"US Ferrous Division"), the proceeds of such sale as well as the net proceeds
from asset sales in excess of the $93,000,000 deposited into the Proceeds
Account, shall be maintained in a separate interest-bearing account (the
"Excess Proceeds Account") during the Chapter 11 Cases. On the Distribution
Date, funds held in the Excess Proceeds Account shall be divided between the
Reorganized Companies and the holders of the Secured Lender Claims. As set
forth in Section III.C of the Plan, on the Distribution Date, the holders of
the Class 6 Secured Lender Claims will receive from any funds in the Excess
Proceeds Account (i) to the extent any funds in the Excess Proceeds Account
represent the net proceeds from any sale of the US Ferrous Division, 66-2/3% of
the first $200,000,000 of such funds, and (ii) 75% of all other funds held in
the Excess Proceeds Account.
On the Effective Date, the Reorganized Debtors (in existence after giving
effect to the Restructuring Transactions) and the other Restricted Subsidiaries
shall also enter into the New Guaranties to guaranty and secure the New Senior
Secured Term Debt and the New Secured PIK Debt.
6.SUMMARY OF RELEASES UNDER THE PLAN
The Plan contains releases of claims and causes of action of various
parties. These releases are described below and set forth in greater detail in
Section II.M of this Disclosure Statement. Pursuant to the Plan, as of the
Effective Date, the Debtors and the Reorganized Debtors will be deemed to have
released all claims and causes of action related to the Debtors and the
Subsidiaries, the Chapter 11 Cases or the Plan (other than the rights of the
Debtors or the Reorganized Debtors to enforce the Plan and all agreements
thereunder) that are based on events occurring on or prior to the Effective
Date against (i) directors, officers and employees of the Debtors or
Subsidiaries in each case as of the Petition Date (subject to revocation as set
forth in Section II.N hereof) and agents and professionals (excluding Deloitte
& Touche and Morgan Stanley & Co., Incorporated) of the Debtors and the
Subsidiaries, (ii) the holders of Lender Claims, (iii) the ad hoc steering
committee and any other committee of holders of Lender Claims, (iv) CIBC, as
administrative agent and co-arranger under the Pre-Petition Credit Agreement,
(v) BTCo as syndication agent and co-arranger under the Pre-Petition Credit
Agreement, (vi) any official committees appointed in the Chapter 11 Cases,
(vii) the DIP Agent, the DIP Co-Arrangers and the holders of DIP Facility
Claims, (viii) the Security Agent (ix) the Account Intermediaries, and (x) the
respective current and former professionals (excluding Deloitte & Touche and
Morgan Stanley & Co., Incorporated) of the entities set forth above.
In addition, as of the Effective Date, the holders of Lender Claims, the
ad hoc steering committee or any other committee of holders of Lender Claims,
CIBC as administrative agent and co-arranger under the Pre-Petition Credit
Agreement, BTCo as syndication agent and co-arranger under the Pre-Petition
Credit Agreement, the DIP Agent, the DIP Co-Arrangers and the holders of DIP
Facility Claims, the Security Agent, the Account Intermediaries , and any
individual,
16
26
corporation or other entity that was at any time formerly one of the foregoing
releasing parties will be deemed to have released all claims and causes of
action (other than the right to enforce the Debtors' or the Reorganized
Debtors' obligations under the Plan and any agreement thereunder) arising from
an event occurring on or prior to the Effective Date relating to the Debtors,
the Subsidiaries, the Reorganized Debtors, the Chapter 11 Cases, the Lender
Lock-up Agreement or the Plan against (i) the Debtors, the Subsidiaries and the
Reorganized Debtors, (ii) the directors, officers and employees of the Debtors
and Subsidiaries in each case as of the Petition Date (subject to revocation as
set forth in Section II.N hereof) and (iii) their professionals (excluding
Deloitte & Touche and Morgan Stanley & Co., Incorporated).
Further, as of the Effective Date, to the fullest extent permitted by law,
all holders of Claims and Interests will be deemed to have released all claims
and causes of action (other than the right to enforce the Debtors' or the
Reorganized Debtors' obligations under the Plan and any agreement thereunder)
arising from an event occurring on or prior to the Effective Date relating to
the Debtors, the Subsidiaries, the Reorganized Debtors, the Chapter 11 Cases,
the Lender Lock-up Agreement or the Plan against (i) the Debtors, the
Subsidiaries and the Reorganized Debtors, (ii) the directors, officers and
employees of the Debtors and Subsidiaries in each case as of the Petition Date,
(iii) their professionals (excluding Deloitte & Touche and Morgan Stanley &
Co., Incorporated) and (iv) the holders of Lender Claims, the ad hoc steering
committee or any other committee of holders of Lender Claims, CIBC as
administrative agent and co-arranger under the Pre-Petition Credit Agreement,
BTCo as syndication agent and co-arranger under the Pre-Petition Credit
Agreement, any official committee appointed in the Chapter 11 Cases, the DIP
Agent, the DIP Co-Arrangers and the holders of DIP Facility Claims, the
Security Agent and the Account Intermediaries.
7.TREATMENT OF DIRECTOR AND OFFICER INDEMNIFICATION OBLIGATIONS UNDER THE
PLAN
Pursuant to the Plan, indemnification obligations as to the Reorganized
Debtors' directors and officers are divided into two categories: (i)
indemnification obligations with respect to current or former directors and
officers as to claims asserted as of the Petition Date in the Securities
Actions, the litigation filed by a group of former shareholders of the
Steiner-Liff Metals group of companies on October 6, 1998, with the American
Arbitration Association captioned In re Liff Arbitration, Case No. 39 Y 168
00112 98 and the litigation styled Liff v.Chodos, Case No. 99 Civ. 1322 (MBM)
(S.D.N.Y.) (dismissed and pending appeal) (the "Liff Litigation"), the
litigation filed by a group of former shareholders of the Southern-Foundry
Supply group of companies captioned Gary D. Chazen, Robert G. Chazen, Julius L.
Chazen and Ruth E. Chazen v. Philip Metals Inc. et al., Case No. 99 Civ. 2797
(MBM) (S.D.N.Y.) (dismissed); and Stephen M. Chazen v. Philip Metals Inc.,
previously known as Philip Metals (Ohio) Inc., Philip Services Corp., Allen
Fracassi, and Robert Waxman, No. CV9801642, in the Circuit Court of Jefferson
County, Alabama (subsequently dismissed in favor of arbitration) (the "Chazen
Litigation"), or claims asserted after the Petition Date in such actions or in
other actions, in each case arising out of the same nucleus of operative facts
alleged in the Securities Actions, the Liff Litigation or the Chazen Litigation
as of the Petition Date (collectively, the "Excluded D&O Indemnification
Obligations") and (ii) all other indemnification obligations of (A) PSC to
current or former directors and officers under section 7.02 of PSC's bylaws, on
the terms and subject to the limitations described therein, if and to the
extent that such indemnification is permissible under the Ontario Business
Corporations Act or such other applicable governing corporate statute and (B)
the Debtors other than PSC under their respective bylaws to the extent such
indemnification obligations are not more expansive than those of PSC under
section 7.02 of its bylaws if and to the extent that such indemnification is
permissible under the applicable governing corporate statute of the applicable
Debtor in each case of (A) or (B) , including any affirmative indemnification
obligations in connection with any governmental, regulatory or enforcement
investigation or action (collectively the "Assumed Indemnification
Obligations"). The Excluded Indemnification Obligations do not include Assumed
Indemnification Obligations in connection with any governmental, regulatory or
enforcement investigation or action or Assumed Indemnification Obligations to
pay the reasonable defense costs of any individual who was a director, officer
or employee of a Debtor as of the Petition Date in connection with any third
party complaint or claim by Deloitte & Touche against such officer, director or
employee in connection with any action commenced by the Debtors, the
Reorganized Debtors or the Lenders against Deloitte & Touche arising out of the
same nucleus of operative facts alleged in the Securities Actions, the Chazen
Actions or the Liff Actions.
Pursuant to the Plan, the Excluded D&O Indemnification Obligations are
being treated as if they are executory contracts that are rejected by PSC as of
the Effective Date, pursuant to section 365 of the Bankruptcy Code. Any Claims
by directors and officers arising from the rejection of the Excluded D&O
Indemnification Obligations will be deemed disallowed under the Plan pursuant
to Section IV.K of the Plan, or, if not so disallowed, will be subordinated
under section 510(b) of the Bankruptcy Code and will share Pro Rata in the
distribution to holders of Class 8C Claims. Therefore, after the Effective
Date, the Reorganized Debtors will have no ongoing obligations to indemnify the
directors and officers as to Excluded D&O Indemnification Obligations.
Pursuant to the Plan, the Assumed Indemnification Obligations (i) as to
PSC, to the extent ratified by the Canadian Bankruptcy Court or other Canadian
court of competent jurisdiction, shall be deemed assumed by PSC and (ii) as to
the
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Debtors other than PSC shall be deemed assumed on the Effective Date without
any further action by any party. Therefore, the Indemnification Obligations
will be unaffected by and survive the Chapter 11 Cases and will be fulfilled by
Reorganized PSC after the Chapter 11 Cases in accordance with their terms.
Any and all rights of the directors and officers to the proceeds of the
Debtors' relevant directors and officers insurance policies whether for
Excluded D&O Indemnification Obligations or Assumed Indemnification Obligations
will be unaffected by and survive the Chapter 11 Cases.
8.CONTRIBUTION AND INDEMNITY CLAIMS OTHER THAN ASSUMED INDEMNIFICATION
OBLIGATIONS
Any Claim (including any Excluded Indemnification Obligation) other than
the Assumed Indemnification Obligations that are not Excluded Indemnification
Obligations against any Debtor for reimbursement, contribution or indemnity on
account of a Claim that is subject to section 510(b) of the Bankruptcy Code,
and any other Excluded Indemnification Obligation, shall be deemed rejected for
all purposes under the Plan and shall be deemed disallowed under the Plan upon
entry of the Confirmation Order pursuant to section 502(e)(1)(B) of the
Bankruptcy Code to the fullest extent permitted by law; provided, however, to
the extent that any such Claim is not so disallowed and becomes an Allowed
Claim against any Debtor, then such Allowed Claim shall be treated as an
Allowed Class 8C Claim pursuant to sections 510(b) and/or 510(c) of the
Bankruptcy Code.
9.ASSUMED INDEMNIFICATION OBLIGATIONS
The Assumed Indemnification Obligations (other than Excluded D&O
Indemnification Obligations) shall be deemed assumed without any further action
by any party.
10.POST-CONSUMMATION OPERATIONS OF THE DEBTORS
1. Continued Corporate Existence
Following confirmation and consummation of the Plan, subject to the
Restructuring Transactions, each of the Debtors and the other Subsidiaries will
continue to exist as separate corporate entities in accordance with the laws of
their respective states of incorporation and pursuant to their respective
certificates or articles of incorporation and bylaws in effect prior to
consummation, except (i) to the extent such certificates or articles of
incorporation and bylaws are amended under the Plan or (ii) Reorganized PSC,
with the consent of the Required Lenders, may be continued under the laws of
the Province of New Brunswick, which continuance is expressly authorized by the
Plan. The certificate or articles of incorporation and bylaws of each of the
Debtors will be amended as necessary to satisfy the provisions of the Plan and
the Bankruptcy Code and will include, among other things, pursuant to section
1123(a)(6) of the Bankruptcy Code, a provision prohibiting the issuance of
non-voting equity securities, but only to the extent required by section
1123(a)(6) of the Bankruptcy Code.
Except as otherwise provided in the Plan, nothing shall affect the
Debtors' rights and defenses both legal and equitable, with respect to any
Unimpaired Claims, including, but not limited to, all rights with respect to
legal and equitable defenses to setoff or recoupments against Unimpaired
Claims. Notwithstanding the limited substantive consolidation of the Debtors
under the terms of the Plan, the Unimpaired Claims of any particular Debtor
shall remain the obligations solely of such Debtor and shall not become
obligations of any other Reorganized Debtor.
2. Revesting of Assets
Pursuant to section 1141(b) of the Bankruptcy Code, all property of each
Debtor's Estate, together with any property of each Debtor that is not property
of its Estate and that is not specifically disposed of pursuant to the Plan,
shall revest in the applicable Reorganized Debtor on the Effective Date.
Thereafter, the Reorganized Debtors may operate their businesses and may use,
acquire and dispose of property free of any restrictions of the Bankruptcy
Code, the Bankruptcy Rules and the Bankruptcy Court. As of the Effective Date,
all property of each Reorganized Debtor shall be free and clear of all Claims
and Interests, except as specifically provided in the Plan or the Confirmation
Order. Without limiting the generality of the foregoing, each Reorganized
Debtor may, without application to or approval by the Bankruptcy Court, pay
fees that it incurs after the Effective Date for professional services and
expenses.
C.DISTRIBUTIONS UNDER THE PLAN
Reorganized PSC or its authorized Disbursing Agent shall make all
distributions required under the Plan (subject to the provisions of Articles
III, VII and IX of the Plan). Distributions provided for in the Plan on
account of Allowed Old
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Debenture Claims shall be made to the indenture trustee, as Disbursing Agent
for Old Debenture Claims, for distribution to holders of Allowed Old Debenture
Claims. Any such distributions shall be made pursuant to the Old Indenture.
If the Disbursing Agent is an independent third party designated by the
Reorganized Debtors to serve in such capacity, such Disbursing Agent shall
receive, without further Bankruptcy Court approval, reasonable compensation for
distribution services rendered pursuant to the Plan and reimbursement of
reasonable out-of-pocket expenses incurred in connection with such services
from the Reorganized Debtors on terms acceptable to the Reorganized Debtors.
No Disbursing Agent shall be required to give any bond or surety or other
security for the performance of its duties unless otherwise ordered by the
Bankruptcy Court.
Cash payments made pursuant to the Plan will be in U.S. funds for
creditors located in the United States and in Canadian funds for creditors
located in Canada, unless such creditors in Canada have previously agreed, or
contracted for, payment in U.S. funds, by means agreed to by the payor and the
payee, including by check or wire transfer, or, in the absence of an agreement,
such commercially reasonable manner as the payor shall determine in its sole
discretion.
Except as otherwise provided in the Plan, any ancillary documents entered
into in connection therewith, or the Confirmation Order, the Debtors, with the
consent of the Required Lenders, shall have the right to prepay, without
penalty, all or any portion of an Allowed Claim at any time; provided, however,
that any such prepayment shall not be violative of, or otherwise prejudice, the
relative priorities among the classes of Claims.
On the Effective Date, Reorganized PSC shall issue or distribute in
accordance with the provisions of the Plan all of the New Secured PIK Debt, New
Unsecured PIK Notes, New Unsecured Convertible Notes and New Common Shares. On
the Effective Date, Reorganized PSC shall take all steps to provide that
holders of Allowed Class 6 Claims are the holders of record on the Effective
Date of the New Common Shares to be distributed to such holders under the Plan.
1. Distributions for Claims Allowed as of the Effective Date
(a Distribution Date
Except as otherwise provided in the Plan or as ordered by the Bankruptcy
Court, distributions to be made on account of Claims that are Allowed Claims as
of the Effective Date shall be made on the Distribution Date, or as soon
thereafter as practicable. Distributions on account of Claims that first
become Allowed Claims after the Effective Date shall be made pursuant to
Articles III, VII and IX of the Plan. Notwithstanding the date on which any
distribution of securities is actually made to a holder of a Claim or Interest
that is an Allowed Claim or Allowed Interest on the Effective Date, as of the
date of the distribution such holder shall be deemed to have the rights of a
holder of such securities distributed as of the Effective Date.
(b Record Date for Distributions to Holders of Lender Claims and Old
Debentures
At the close of business on the Distribution Record Date, the transfer
records for the Lender Claims and Old Debentures shall be closed, and there
shall be no further changes for purposes of the Plan in the record holders of
the Lender Claims or Old Debentures. Reorganized PSC, the Disbursing Agent,
and the Administrative Agent for the Lenders shall have no obligation to
recognize any transfer of such Lender Claims or Old Debentures occurring after
the Distribution Record Date and shall be entitled instead to recognize and
deal for all purposes hereunder with only those record holders as of the close
of business on the Distribution Record Date.
(c Calculation of Distribution Amounts of New Common Shares
No fractional New Common Shares shall be issued or distributed under the
Plan or by Reorganized PSC or the Disbursing Agent. Each Person entitled to
receive New Common Shares will receive the total number of whole New Common
Shares to which such Person is entitled. Whenever any distribution to a
particular Person would otherwise call for distribution of a fraction of a New
Common Share, the actual distribution of shares of such stock shall be rounded
to the next higher or lower whole number as follows: (a) fractions one-half (
1/2) or greater shall be rounded to the next higher whole number, and (b)
fractions of less than one-half ( 1/2) shall be rounded to the next lower whole
number. The total number of New Common Shares to be distributed to a Class of
Claims or Interests shall be adjusted as necessary to account for the rounding
provided for in Section VII.F of the Plan. No consideration shall be provided
in lieu of fractional shares that are rounded down.
(d Calculation of Distribution Amounts of New Debt Securities
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Notwithstanding any other provision of the Plan, New Debt Securities,
other than the New Secured PIK Debt, will be issued in denominations of $1,000
and integral multiples thereof. In the event a Person is entitled to an amount
of such New Debt Securities that is not an integral multiple of $1,000, the
principal amount of such New Debt Securities such holder is entitled to receive
shall be rounded up or down to the nearest integral multiple of $1,000.
(e Delivery of Distributions
Distributions to holders of Allowed Claims shall be made by the Disbursing
Agent (a) at the addresses set forth on the Proofs of Claim filed by such
holders (or at the last known addresses of such holders if no Proof of Claim is
filed or if the Debtors have been notified of a change of address), (b) at the
addresses set forth in any written notices of address changes delivered to the
Disbursing Agent after the date of any related Proof of Claim, (c) at the
addresses reflected in the Debtors books and records if no Proof of Claim has
been filed and the Disbursing Agent has not received a written notice of a
change of address, (d) in the case of the holder of an Allowed Old Debenture
Claim, at the addresses contained in the official records of the indenture
trustee under the Old Indenture, or (e) at the addresses set forth in a
properly completed letter of transmittal accompanying securities properly
remitted to the Debtors. If any holder's distribution is returned as
undeliverable, no further distributions to such holder shall be made unless and
until the Disbursing Agent is notified of such holder's then current address,
at which time all missed distributions shall be made to such holder without
interest. Amounts in respect of undeliverable distributions made through the
Disbursing Agent, shall be returned to the Reorganized Debtors until such
distributions are claimed. All claims for undeliverable distributions must be
made on or before the second anniversary of the Effective Date, after which
date all unclaimed property shall revert to the Reorganized Debtors free of any
restrictions thereon and the claim of any holder or successor to such holder
with respect to such property shall be discharged and forever barred,
notwithstanding any federal or state escheat laws to the contrary. Nothing
contained in the Plan shall require the Debtors, Reorganized Debtors, any
Disbursing Agent or the indenture trustee to attempt to locate any holder of an
Allowed Claim or Allowed Interest.
(f Notes and Old Debentures
Except as provided in the Plan for lost, stolen, mutilated or destroyed
notes or Old Debentures, each holder of an Allowed Claim evidenced by a note or
Old Debenture shall tender such note or Old Debenture to the Disbursing Agent
in accordance with written instructions to be provided in a letter of
transmittal to such holders by the Disbursing Agent as promptly as practicable
following the Effective Date. Such letter of transmittal shall specify that
delivery of such notes or Old Debentures will be effected, and risk of loss and
title thereto will pass, only upon the proper delivery of such notes or Old
Debentures with the letter of transmittal in accordance with such instructions.
Such letter of transmittal shall also include, among other provisions,
customary provisions with respect to the authority of the holder of the
applicable note or Old Debenture to act and the authenticity of any signatures
required on the letter of transmittal. All surrendered notes and Old
Debentures shall be marked as canceled and delivered to Reorganized PSC.
(g Lost, Mutilated or Destroyed Notes or Old Debentures
In addition to any requirements under the applicable certificate or
articles of incorporation or bylaws of the applicable Debtor, any holder of a
Claim or an Interest evidenced by a note or Old Debenture that has been lost,
stolen, mutilated or destroyed shall, in lieu of surrendering such note or Old
Debenture, deliver to the Disbursing Agent (a) evidence satisfactory to the
Disbursing Agent of the loss, theft, mutilation or destruction; and (b) such
indemnity as may be required by the Disbursing Agent to hold the Disbursing
Agent harmless from any damages, liabilities or costs incurred in treating such
individual as a holder of a note or Old Debenture. Upon compliance with
Section VII.H.2 of the Plan by a holder of a Claim or an Interest evidenced by
a note or Old Debenture, such holder shall, for all purposes under the Plan, be
deemed to have surrendered a note or Old Debenture, as applicable.
(h Failure to Surrender Canceled Note or Old Debentures
Any holder of a note or Old Debenture that fails to surrender or be deemed
to have surrendered such note or Old Debenture on or before the second
anniversary of the Effective Date shall have its claim for a distribution
pursuant to the Plan on account of such note or Old Debenture discharged and
shall be forever barred from asserting any such claim against any Reorganized
Debtor or their respective property.
(i Distribution to Holders of Class 8 Claims and Interests
A description of the procedure for the distribution to holders of Class 8
Claims and Interests, as well as the procedure for the establishment of a
reserve for the benefit of holders of Disputed Class 8 Claims and Interests, if
any, after such Claims or Interests become Allowed Claims or Interests will be
included in the Plan Supplement.
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2. Resolution and Treatment of Disputed, Contingent, and Unliquidated
Claims and Disputed Interests
(a Prosecution of Objections
After the Confirmation Date, only the Debtors and the Reorganized Debtors
shall have the authority to file objections, settle, compromise, withdraw or
litigate to judgment objections to Claims and Interests. From and after the
Effective Date, the Reorganized Debtors may settle or compromise any Disputed
Claim or Disputed Interest without approval of the Bankruptcy Court.
(b No Distributions Pending Allowance
Notwithstanding any other provision of the Plan, no payments or
distributions shall be made with respect to all or any portion of a Disputed
Claim unless and until all objections to such Disputed Claim have been settled
or withdrawn or have been determined by Final Order, and the Disputed Claim, or
some portion thereof, has become an Allowed Claim. Disputed Claims are Claims,
or portions of Claims, that are neither Allowed Claims nor Disallowed Claims
and include, but are not limited to, Claims that are the subject of a dispute
as to the nature, amount, or priority of such Claims.
(c Disputed Class 7 Distribution Reserve
On the Effective Date (or as soon thereafter as is practicable) the
Disbursing Agent shall establish the Disputed Class 7 Distribution Reserve by
withholding from distribution an amount of New Unsecured PIK Notes, New Common
Shares and New Unsecured Convertible Notes (if necessary) equal to one hundred
percent (100%) of distributions (i) to which holders of Disputed Class 7 Claims
would be entitled under the Plan as of such date if such Disputed Class 7
Claims were Allowed Claims in their Disputed Class 7 Claim Amount and (ii) to
which holders of disputed Canadian Impaired Unsecured Claims would be entitled
if such disputed Canadian Impaired Unsecured Claims were allowed under the
Canadian Plan in their maximum potential amounts.
(d Distributions After Allowance of Class 7 Claim
The Disbursing Agent shall make payments and distributions from the
Disputed Class 7 Distribution Reserve to each holder of a Disputed Class 7
Claim that has become an Allowed Class 7 Claim in accordance with the
provisions of the Plan. On the next succeeding interim distribution date after
the date that the order or judgment of the Bankruptcy Court allowing such Claim
becomes a Final Order, the Disbursing Agent will distribute to the holder of
such Claim any New Unsecured PIK Notes, New Unsecured Convertible Notes and New
Common Shares held in the Disputed Class 7 Distribution Reserve that would have
been distributed on the Class 7 Distribution Date had such Claim been an
Allowed Class 7 Claim on the Class 7 Distribution Date. After a Final Order
has been entered, or other final resolution has been reached, with respect to
each Disputed Class 7 Claim (i) any New Unsecured PIK Notes, New Unsecured
Convertible Notes and New Common Shares held in the Disputed Class 7
Distribution Reserve will be distributed Pro Rata to holders of Allowed Class 7
Claims entitled thereto under the terms of the Plan and (ii) any Cash or other
property remaining in the Disputed Class 7 Distribution Reserve will become
property of the Reorganized Debtors. All distributions made under Article VII
of the Plan on account of an Allowed Class 7 Claim will be made together with
any payments or other distributions made on account of, as well as any
obligations arising from, the distributed property, as if such Allowed Class 7
Claim had been an Allowed Class 7 Claim on the Class 7 Distribution Date.
Notwithstanding the foregoing, the Disbursing Agent shall not be required to
make distributions under Section IX.D of the Plan more frequently than once
every 180 days or to make any individual payments in an amount less than
$25.00.
D. OTHER MATTERS
1. Treatment of Executory Contracts and Unexpired Leases
Under section 365 of the Bankruptcy Code, the Debtors have the right,
subject to Bankruptcy Court approval, to assume or reject any executory
contracts or unexpired leases. If the Debtors reject an executory contract or
unexpired lease that was entered into before the Petition Date, the contract or
lease will be treated as if it had been breached on the date immediately
preceding the Petition Date, and the other party to the agreement will have an
Impaired Unsecured Claim for damages incurred as a result of the rejection. In
the case of rejection of employment severance agreements and real property
leases, damages are subject to certain limitations imposed by sections 365 and
502 of the Bankruptcy Code.
(a Assumed Contracts and Leases; Related Payments
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Except as otherwise provided in the Plan, or in any contract, instrument,
release, indenture or other agreement or document entered into in connection
with the Plan, as of the Effective Date each of the Debtors will be deemed to
have assumed each executory contract and unexpired lease to which it is a
party, unless such contract or lease (i) was previously assumed or rejected by
one of the Debtors, (ii) previously expired or terminated pursuant to its own
terms, or (iii) as otherwise set forth in the schedule to be provided in the
Plan Supplement as being an executory contract or unexpired lease to reject
which schedule shall be included in the Plan Supplement, provided however, that
the Debtors reserve their right, at any time prior to the Confirmation Date, to
amend the schedule to be provided in the Plan Supplement to delete an unexpired
lease or executory contract therefrom or add any unexpired lease or executory
contract thereto. The Confirmation Order will constitute an order of the
Bankruptcy Court under section 365 of the Bankruptcy Code approving the
contract and lease assumptions described above, as of the Effective Date.
Each executory contract and unexpired lease that is assumed and relates to
the use, ability to acquire, or occupancy of real property will include (a) all
modifications, amendments, supplements, restatements, or other agreements made
directly or indirectly by any agreement, instrument, or other document that in
any manner affect such executory contract or unexpired lease and (b) all
executory contracts or unexpired leases appurtenant to the premises, including
all easements, licenses, permits, rights, privileges, immunities, options,
rights of first refusal, powers, uses, usufructs, reciprocal easement
agreements, vaults, tunnel or bridge agreements or franchises, and any other
interests in real estate or rights in rem related to such premises, unless any
of the foregoing agreements has been rejected pursuant to an order of the
Bankruptcy Court or is the subject of a motion to reject filed on or before the
Confirmation Date.
Any monetary amounts by which each executory contract and unexpired lease
to be assumed pursuant to the Plan is in default will be satisfied, under
section 365(b)(1) of the Bankruptcy Code, at the option of the Debtors, or an
assignee of the Debtors assuming such contract or lease, by Cure. If there is
a dispute regarding (i) the nature or amount of any Cure, (ii) the ability of a
Reorganized Debtor or any assignee to provide "adequate assurance of future
performance" (within the meaning of section 365 of the Bankruptcy Code) under
the contract or lease to be assumed, or (iii) any other matter pertaining to
assumption, Cure will occur following the entry of a Final Order resolving the
dispute and approving the assumption or assumption and assignment, as the case
may be.
(b Rejected Contracts and Leases; Bar to Rejection Damages
Except as otherwise provided in the Plan subject to Section VIII.A thereof
or as otherwise provided in any contract, instrument, release, indenture or
other agreement or document entered into in connection with the Plan, or as
noted on the Impaired Unsecured Claims List, none of the executory contracts
and unexpired leases to which the Debtors, or any of them, are a party shall be
rejected under the Plan.
(c Compensation and Benefit Programs
As noted in Section III.C to this Disclosure Statement, entitled
"Treatment of Trade Creditors, Customers and Employees -- Employees," the
Debtors have obtained the permission of the Bankruptcy Court to honor certain
prepetition employee obligations in the ordinary course of business. Certain
employees may have specific obligations owed to them under individually
negotiated employment contracts. With the exception of those obligations which
may be specifically set forth in Exhibit B to the Plan as Class 7 Impaired
Unsecured Claims under the Plan or as may otherwise be identified by the
Debtors for rejection during the Chapter 11 Cases, the Debtors do not intend to
impair or otherwise affect these obligations.
2. Administrative Claims
The Confirmation Order will establish an Administrative Claims Bar Date
for filing of Administrative Claims that have not been paid, released or
otherwise settled (excluding Administrative Claims arising from the sale of
goods or services to a Debtor, after the Petition Date, in the ordinary course
of business), including Substantial Contribution Claims (but not including
claims for Professional Fees or the expenses of the members of any creditors'
committee), which date will be 45 days after the Confirmation Date. Holders of
asserted Administrative Claims, other than claims for Professional Fees or the
expenses of the members of any creditors' committee, not paid prior to the
Confirmation Date must submit proofs of Administrative Claim on or before such
Administrative Claims Bar Date or forever be barred from doing so. The notice
of Confirmation to be delivered pursuant to Fed. R. Bankr. P. 3020(c) and
2002(f) will set forth such date and constitute notice of this Administrative
Claims Bar Date. The Debtors or Reorganized Debtors, as the case may be, shall
have 45 days (or such longer period as may be allowed by order of the
Bankruptcy Court) following the Administrative Claims Bar Date to review and
object to such Administrative Claims before a hearing for determination of
allowance of such Administrative Claims.
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3. Professional Fee Claims
All final requests for compensation or reimbursement of Professional Fees
pursuant to section 327, 328, 330, 331, 503(b) or 1103 of the Bankruptcy Code
for services rendered to the Debtors or any creditors' committee prior to the
Effective Date (other than Substantial Contribution Claims under section
503(b)(4) of the Bankruptcy Code) must be filed and served on the Reorganized
Debtors and their counsel no later than 45 days after the Effective Date,
unless otherwise ordered by the Bankruptcy Court. Objections to applications
of such Professionals or other entities for compensation or reimbursement of
expenses must be filed and served on the Reorganized Debtors and their counsel
and the requesting Professional or other entity no later than 45 days (or such
longer period as may be allowed by order of the Bankruptcy Court) after the
date on which the applicable application for compensation or reimbursement was
served.
4. Interest on Claims
Interest and fees and expenses, if any, with respect to Class 2 Other
Secured Claims, shall be paid when due under the contract, agreement, or other
instrument governing the terms and conditions of the obligation comprising such
Allowed Claim, together with any additional amounts required to be paid with
respect to Unimpaired Claims pursuant to section 1124 of the Bankruptcy Code.
Except as otherwise specifically provided for in the Plan or Confirmation
Order, or required by applicable bankruptcy law or an order of the Bankruptcy
Court, no holder of an Allowed Claim that is not an Other Secured Claim will be
entitled to interest accruing on or after the Petition Date on account of such
Claim for any purpose. In addition, interest will neither accrue nor be paid
upon any Disputed Claim in respect to the period from the Petition Date to the
date a final distribution is made thereon if and after such Disputed Claim
becomes an Allowed Claim.
5. Withholding and Reporting Requirements
In connection with the Plan and all distributions hereunder, the
Disbursing Agent shall, to the extent applicable, comply with all tax
withholding and reporting requirements imposed by any federal, state,
provincial, local, or foreign taxing authority, and all distributions hereunder
shall be subject to any such withholding and reporting requirements. The
Disbursing Agent shall be authorized to take any and all actions that may be
necessary or appropriate to comply with such withholding and reporting
requirements. Notwithstanding any other provision of the Plan: (i) each
holder of an Allowed Claim or Interest that is to receive a distribution of New
Securities pursuant to the Plan shall have sole and exclusive responsibility
for the satisfaction and payment of any tax obligations imposed by any
governmental unit, including income, withholding and other tax obligations, on
account of such distribution, and (ii) no distribution shall be made to or on
behalf of such holder pursuant to the Plan unless and until such holder has
made arrangements satisfactory to the Disbursing Agent for the payment and
satisfaction of such tax obligations. Any New Securities to be distributed
pursuant to the Plan shall, pending the implementation of such arrangements, be
treated as an undeliverable distribution pursuant to Section VII.G of the Plan.
6. Setoffs
The Reorganized Debtors may, but shall not be required to, set off against
any Claim, and the payments or other distributions to be made pursuant to the
Plan in respect of such Claim, claims of any nature whatsoever that the Debtors
or Reorganized Debtors may have against the holder of such Claim; provided,
however, that neither the failure to do so nor the allowance of any Claim
hereunder shall constitute a waiver or release by the Reorganized Debtors of
any such claim that the Debtors or Reorganized Debtors may have against such
holder. Notwithstanding anything to the contrary, the Debtors and Reorganized
Debtors will not exercise any right of setoff against any Lender or any agents
under the Pre-Petition Credit Agreement or the DIP Facility Agreement, the
Account Intermediaries or the DIP Lenders.
7. Shareholder Rights Plan
On the Effective Date, Reorganized PSC shall implement the Shareholder
Rights Plan. Pursuant to the Shareholder Rights Plan, in the event of a
Flip-in Event (as defined in the Shareholder Rights Plan), each Right will
entitle the registered holder to receive, upon payment of the exercise price
stated in the Shareholder Rights Plan, that number of certain shares that has a
market value at the date of that occurrence equal to twice the Exercise Price.
The Rights are not exercisable prior to the Flip-in Event. The Rights expire on
the termination of the annual meeting of shareholders of Reorganized PSC in the
year 2003 unless terminated earlier by the Board of Directors of Reorganized
PSC.
Until the separation time (as defined in the Shareholder Rights Plan), the
Rights will be evidenced only by outstanding common share certificates. The
Shareholder Rights Plan provides that, until the separation time, the Rights
will be transferred with and only with the associated common shares. Until the
separation time, or earlier termination or expiration of the Rights, each new
share certificate issued after the Record Time (as defined in the Shareholder
Rights
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Plan), upon transfer of existing common shares or the issuance of additional
common shares, will have printed thereon a legend incorporating the terms of
the Shareholder Rights Plan by reference. As soon as practicable following the
separation time, separate certificates evidencing the Rights will be mailed to
the holders of record of common shares as of the close of business at the
separation time, and thereafter the rights certificates alone will evidence the
Rights. The Rights will separate and trade apart from the common shares after
the separation time.
The Board of Directors of Reorganized PSC may, prior to a Flip-in Event,
waive the dilution effects of the Shareholder Rights Plan in respect of a
particular flip-in event that would result from a take-over bid (as defined in
the Shareholder Rights Plan) made by way of a take-over bid circular to all
holders of common shares. In such case, such waiver would be deemed also to be
a waiver, on the same terms and conditions, in respect of any other Flip-in
Event which occurs by reason of another take-over bid made by way of a
take-over bid circular to all holders of common shares and prior to the
expiration of the first take-over bid for which the initial waiver was given.
The Board of Directors of Reorganized PSC may also waive the Shareholder Rights
Plan in respect of a particular Flip-in Event that has occurred through
inadvertence. Additionally, the Board of Directors of Reorganized PSC may, at
its option, redeem all, but not less than all, of the outstanding Rights at a
nominal value at any time.
8. Reverse Stock Split
On the Effective Date, if Class 7 has voted to accept the Plan,
Reorganized PSC will hold a meeting of shareholders at which time, among other
things, Reorganized PSC shall request shareholder approval of the Reverse Stock
Split. The Reverse Stock Split will provide that every 273 shares of New
Common Shares will be exchanged for one PSC Common Share pursuant to an
exchange mechanism to be implemented through Reorganized PSC's stock transfer
agent. The Reverse Stock Split is to be implemented only if Class 7 votes to
accept the Plan. After giving effect to the proposed Reverse Stock Split,
Reorganized PSC will have approximately 24,000,000 shares of PSC Common Shares
issued and outstanding.
As an illustration of the effect of the Reverse Stock Split, set forth
below, is the amount of New Common Shares to be distributed under the Plan for
each Class and the resulting amount of PSC Common Shares for each Class after
giving effect to the Reverse Stock Split. This illustration assumes that Class
7 votes to accept the Plan and the class of holders of Canadian Impaired
Unsecured Claims votes to accept the Canadian Plan.
Class New Common Shares PSC Common Shares
- ----- ----------------------------- -----------------
Class 6 5,967,052,592 21,840,000
Class 7 and the Class of
Canadian Impaired Unsecured
Claims 327,860,033 1,200,000
Class 8A None (Old Common Shares will 480,000
be retained and diluted by
issuance of New Common
Stock)
Class 8B 98,358,010 360,000
Class 8C 32,786,003 120,000
E. PRESERVATION OF RIGHTS OF ACTION
Except as otherwise provided in the Plan or the Confirmation Order, or in
any contract, instrument, release, indenture or other agreement entered into in
connection with the Plan, in accordance with section 1123(b) of the Bankruptcy
Code, the Reorganized Debtors shall retain and may enforce, sue on, settle, or
compromise (or decline to do any of the foregoing) all claims, rights or causes
of action, suits, and proceedings, whether in law or in equity, whether known
or unknown, that the Debtors or the Estates may hold against any Person or
entity. Each Debtor or its successor(s) may pursue such retained claims,
rights or causes of action, suits, or proceedings as appropriate, in accordance
with the best interests of the Reorganized Debtor or its successor(s) who hold
such rights.
The failure of the Debtors to specifically list any claim, right of
action, suit, or proceeding herein or in the Plan does not, and will not be
deemed to, constitute a waiver or release by the Debtors of such claim, right
of action, suit, or proceeding, and the Reorganized Debtors will retain the
right to pursue additional claims, rights of action, suits or
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proceedings. In addition, at any time before the Effective Date,
notwithstanding anything in the Plan to the contrary, the Debtors or the
Reorganized Debtors may settle some or all of the Litigation Claims with the
approval of the Bankruptcy Court pursuant to Fed. R. Bankr. P. 9019.
F. RELEASES UNDER THE PLAN
As of the Effective Date, for good and valuable consideration, the
adequacy of which is hereby confirmed, the Debtors and Reorganized Debtors will
be deemed to release forever, waive and discharge all claims, obligations,
suits, judgments, damages, demands, debts, rights, causes of action and
liabilities whatsoever in connection with or related to the Debtors and the
Subsidiaries, the Chapter 11 Cases or the Plan (other than the rights of the
Debtors or Reorganized Debtors to enforce the Plan and the contracts,
instruments, releases, indentures and other agreements or documents delivered
thereunder) whether liquidated or unliquidated, fixed or contingent, matured or
unmatured, known or unknown, foreseen or unforeseen, then existing or
thereafter arising, in law, equity or otherwise that are based in whole or part
on any act, omission, transaction, event or other occurrence taking place on or
prior to the Effective Date in any way relating to the Debtors, the Reorganized
Debtors or their Subsidiaries, the parties released pursuant to this Section
IV.I.1, the Chapter 11 Cases, the Lender Lock-up Agreement or the Plan, and
that may be asserted by or on behalf of the Debtors or their Estates or the
Reorganized Debtors against (i) the directors, officers and employees of the
Debtors or the Subsidiaries in each case as of the Petition Date and the
Debtors' or Subsidiaries' agents and professionals (excluding Deloitte & Touche
and Morgan Stanley & Co., Incorporated), (ii) the holders of Lender Claims,
(iii) the ad hoc steering committee and any other committee of holders of
Lender Claims, (iv) CIBC, as administrative agent and co-arranger under the
Pre-Petition Credit Agreement, (v) BTCo as syndication agent and co-arranger
under the Pre-Petition Credit Agreement, (vi) any official committees appointed
in the Chapter 11 Cases, (vii) the DIP Agent, the DIP Co-Arrangers and the
holders of DIP Facility Claims, (viii) the Security Agent, (ix) the Account
Intermediaries and (x) the respective current and former professionals
(excluding Deloitte & Touche and Morgan Stanley & Co., Incorporated) (including
the current and former officers, directors, employees, shareholders and
professionals of the released professionals) of the entities released in
subclauses (ii)-(ix) of this Section IV.I.1 acting in such capacity; provided,
however, that the releases provided to any director, officer or employee of the
Debtors described in clause (i) of this Section II.N may be revoked by the
Reorganized Debtors by written notice to such director, officer or employee in
the event that the Reorganized Debtors reasonably determine that such director,
officer or employee has failed to provide assistance as the Reorganized Debtors
reasonably request in connection with any claim against Deloitte & Touche
arising out of the same nucleus of operative facts alleged as of the Petition
Date in the Securities Actions, the Chazen Actions or the Liff Actions,
including, without limitation, providing information and documents, attendance
at meetings and interviews, assisting counsel, attendance at discoveries, if
required, assistance in pre-trial preparation and attendance at trial,
including as a witness, but subject in the case of any person who is at the
relevant time no longer a director, officer or employee of any of the
Reorganized Debtors, to reimbursement of that person's foregone income and
reasonable expenses.
1. Releases by Holders of Lender Claims, Claims and Interests
(a) Holders of Lender Claims.
As of the Effective Date, in consideration for the obligations of the
Debtors and the Reorganized Debtors under the Plan and the Lender Lock-up
Agreement and the Cash, securities, contracts, instruments, releases and other
agreements or documents to be delivered in connection with the Plan, each of
the holders of Lender Claims, the ad hoc steering committee and any other
committee of holders of Lender Claims, CIBC as administrative agent and
co-arranger under the Pre-Petition Credit Agreement, BTCo as syndication agent
and co-arranger under the Pre-Petition Credit Agreement, the DIP Agent, the DIP
Co-Arrangers, the holders of DIP Facility Claims, the Security Agent, the
Account Intermediaries, and any individual, corporation or other entity that
was at any time formerly one of the foregoing releasing parties will be deemed
to forever release, waive and discharge all claims, obligations, suits,
judgments, damages, demands, debts, rights, causes of action and liabilities
(other than the rights to enforce the Debtors' or the Reorganized Debtors'
obligations under the Plan and the securities, contracts, instruments, releases
and other agreements and documents delivered thereunder), whether liquidated or
unliquidated, fixed or contingent, matured or unmatured, known or unknown,
foreseen or unforeseen, then existing or thereafter arising, in law, equity or
otherwise that are based in whole or in part on any act, omission, transaction,
event or other occurrence taking place on or prior to the Effective Date in any
way relating to the Debtors or Subsidiaries, the Reorganized Debtors, the
Chapter 11 Cases, the Lender Lock-up Agreement or the Plan against (i) the
Debtors, Subsidiaries and Reorganized Debtors, (ii) the directors, officers
and employees of the Debtors or Subsidiaries in each case as of the Petition
Date, or (iii) their respective current and former professionals (excluding,
Deloitte & Touche and Morgan Stanley & Co., Incorporated) (including the
current and former officers, directors, employees, shareholders and
professionals of the released professionals), acting in such capacity;
provided, however, that the releases provided to any director, officer or
employee of the Debtors described in clause (ii) of this Section II.N may be
revoked by CIBC, as Administrative Agent and co-arranger under the Pre-Petition
Credit Agreement, or its successor, by written notice to such
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director, officer or employee, in the event that CIBC or its successor
reasonably determines that any such director, officer or employee has failed to
provide assistance as CIBC or its successor reasonably requests in connection
with any claim against Deloitte & Touche arising out of the same nucleus of
operative facts alleged as of the Petition Date in the Securities Actions, the
Chazen Actions or the Liff Actions, including, without limitation, providing
information and documents, attendance at meetings and interviews, assisting
counsel, attendance at discoveries, if required, assistance at pre-trial
preparation and attendance at trial, including as a witness, but subject in the
case of any person who is at the relevant time no longer a director, officer or
employee of any of the Reorganized Debtors, to reimbursement of that person's
foregone income and reasonable expenses.
(b) Holders of Claims and Interests.
As of the Effective Date, to the fullest extent permitted under applicable
law, in consideration for the obligations of the Debtors and the Reorganized
Debtors under the Plan and the Cash, securities, contracts, instruments,
releases and other agreements or documents to be delivered in connection with
the Plan, and the benefits provided by the Lenders and the Account
Intermediaries under the Plan, each present and former holder of a Claim or
Interest will be deemed to release forever, waive and discharge all claims,
obligations, suits, judgments, damages, demands, debts, rights, causes of
action and liabilities (other than the rights to enforce the Debtors' or the
Reorganized Debtors' obligations under the Plan and the securities, contracts,
instruments, releases and other agreements and documents delivered thereunder),
whether liquidated or unliquidated, fixed or contingent, matured or unmatured,
known or unknown, foreseen or unforeseen, then existing or thereafter arising,
in law, equity or otherwise that are based in whole or in part on any act,
omission, transaction, event or other occurrence taking place on or prior to
the Effective Date in any way relating to the Debtors or Subsidiaries, the
Reorganized Debtors, the Chapter 11 Cases, the Lender Lock-up Agreement or the
Plan against (i) the Debtors, Subsidiaries and Reorganized Debtors, (ii) the
holders of Lender Claims, the ad hoc steering committee or any other committee
of holders of Lender Claims, CIBC as Administrative Agent and co-arranger under
the Pre-Petition Credit Agreement, BTCo as Syndication Agent and co-arranger
under the Pre-Petition Credit Agreement, any official committees appointed in
the Chapter 11 Cases, the DIP Agent, the DIP Co-Arrangers and the holders of
DIP Facility Claims, the Security Agent, and the Account Intermediaries, (iii)
the directors, officers and employees of the Debtors or Subsidiaries in each
case as of the Petition Date, or (iv) their respective current and former
professionals (excluding, Deloitte & Touche and Morgan Stanley & Co.,
Incorporated) (including the current and former officers, directors, employees,
shareholders and professionals of the released professionals), acting in such
capacity.
2. Revocation of Certain Releases
The revocation of any release of any director, officer or employee
pursuant to Sections II or II.N.1(b) hereof shall void ab initio to the extent
that a court of competent jurisdiction, including, but not limited to the
Bankruptcy Court, determines that such director, officer or employee has
provided the assistance reasonably requested by the Reorganized Debtors
pursuant to Article II or CIBC or its successor pursuant to Section II.N.1(b).
G. CONDITIONS TO CONFIRMATION AND/OR CONSUMMATION
Described below are certain important considerations under the Bankruptcy
Code in connection with confirmation of the Plan.
1. Requirements for Confirmation of the Plan
The Bankruptcy Court will determine at a hearing on confirmation of the
Plan (the "Confirmation Hearing") whether the following requirements for
confirmation, set forth in section 1129 of the Bankruptcy Code, have been
satisfied:
(a) The Plan complies with the applicable provisions of the Bankruptcy
Code.
(b) The Debtors have complied with the applicable provisions of the
Bankruptcy Code.
(c) The Plan has been proposed in good faith and not by any means
forbidden by law.
(d) Any payment made or promised by the Debtors or by a person issuing
securities or acquiring property under the Plan for services or for costs and
expenses in, or in connection with, the Chapter 11 Cases, or in connection with
the Plan and incident to the Chapter 11 Cases, has been disclosed to the
Bankruptcy Court, and any such payment made before confirmation of the Plan is
reasonable, or if such payment is to be fixed after confirmation of the Plan,
such payment is subject to the approval of the Bankruptcy Court as reasonable.
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(e) The Debtors have disclosed (i) the identity and affiliations of (x)
any individual proposed to serve, after confirmation of the Plan, as a
director, officer, or voting trustee of the Reorganized Debtors, (y) any
affiliate of the Debtors participating in a joint plan with the Debtors, or (z)
any successor to the Debtors under the Plan (and the appointment to, or
continuance in, such office of such individual(s) is consistent with the
interests of Creditors and Interest holders and with public policy), and (ii)
the identity of any insider that will be employed or retained by the Debtors
and the nature of any compensation for such insider.
(f) With respect to each Class of Claims or Interests, each Impaired
Creditor and Impaired Interest holder either has accepted the Plan or will
receive or retain under the Plan on account of the Claims or Interests held by
such entity, property of a value, as of the Effective Date, that is not less
than the amount that such entity would receive or retain if the Debtors were
liquidated on such date under Chapter 7 of the Bankruptcy Code. See Section
XI.C of the Disclosure Statement, entitled "Feasibility of the Plan and the
Best Interest of Creditors -- Best Interests Test."
(g) The Plan provides that Administrative Claims and Priority Claims
other than Priority Tax Claims will be paid in full on the Effective Date and
that Priority Tax Claims will receive on account of such Claims deferred cash
payments, over a period not exceeding six years after the date of assessment of
such Claims, of a value, as of the Effective Date, equal to the Allowed Amount
of such Claims, except to the extent that the holder of any such Claim has
agreed to a different treatment.
(h) If a Class of Claims is Impaired under the Plan, at least one Class
of Impaired Claims has accepted the Plan, determined without including any
acceptance of the Plan by insiders holding Claims in such Class.
(i) Confirmation of the Plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of the Debtors
or any successor to the Debtors under the Plan, unless such liquidation or
reorganization is proposed in the Plan. (See Section XI.A of the Disclosure
Statement, entitled "Feasibility of the Plan and the Best Interest of Creditors
- -- Feasibility of the Plan.")
(j) The Plan provides for the continuation after the Effective Date of
all retiree benefits, if any, at the level established pursuant to section
1114(e)(1)(B) or 1114(g) of the Bankruptcy Code at any time prior to
confirmation of the Plan, for the duration of the period the Debtors have
obligated themselves to provide such benefits.
The Debtors believe that, upon receipt of the votes required to confirm
the Plan, the Plan will satisfy all the statutory requirements of Chapter 11 of
the Bankruptcy Code, that the Debtors have complied or will have complied with
all of the requirements of Chapter 11, and that the Plan has been proposed and
submitted to the Bankruptcy Court in good faith.
2. Conditions to Confirmation and Consummation
(a) Conditions to Confirmation
The following are conditions precedent to the occurrence of the
Confirmation Date: (i) an order finding that the Disclosure Statement
contains adequate information pursuant to section 1125 of the Bankruptcy
Code, and (ii) the proposed Confirmation Order shall be in form and substance
acceptable to the Debtors and the Required Lenders.
(b) Conditions to Consummation
The following are conditions precedent to the occurrence of the
Effective Date, each of which may be satisfied or waived in accordance with
Section X.C of the Plan:
(i) The Confirmation Order confirming the Plan, as such Plan
may have been modified, shall have been entered and become a Final
Order in form and substance reasonably satisfactory to the Debtors
and the Required Lenders and shall provide that:
(1) the Debtors and Reorganized Debtors are authorized
and directed to take all actions necessary or appropriate to
enter into, implement and consummate the contracts,
instruments, releases, leases, indentures and other agreements
or documents created in connection with the Plan or the
Restructuring Transactions;
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(2) the provisions of the Confirmation Order are
nonseverable and mutually dependent;
(3) Reorganized PSC or Reorganized PSI, or both, as
applicable, is authorized to issue the New Unsecured PIK Notes,
New Unsecured Convertible Notes, New Common Shares and
Management Options and to incur the New Senior Secured Term
Debt and New Secured PIK Debt; and
(A) the New Secured PIK Debt, New Unsecured PIK Notes, New
Unsecured Convertible Notes and New Common Shares offered and
sold under the Plan in exchange for Claims against the Debtors
are exempt from registration under the Securities Act of 1933
pursuant to section 1145 of the Bankruptcy Code, except to the
extent that holders of New Secured PIK Debt, New Unsecured PIK
Notes, New Unsecured Convertible Notes and New Common Shares
are "underwriters," as that term is defined in section 1145 of
the Bankruptcy Code.
(2) The Reorganized Debtors shall have credit availability
under the Exit Facility, in amount, form and substance acceptable to
PSC and the Required Lenders, to provide the Reorganized Debtors and
the Subsidiaries with sufficient working capital to meet ordinary and
peak requirements and borrowings to support future projects.
(ii) The following agreements, in form satisfactory to the
Debtors and the Required Lenders, shall have been executed and
delivered, and all conditions precedent thereto shall have been
satisfied:
(A) Amended Certificates of Incorporation and Bylaws of
the Debtors and the other Restricted Subsidiaries;
(A) Amended and Restated Term Credit
Agreement;
(B) New Unsecured PIK Notes Indenture;
(C) New Unsecured Convertible Notes
Indenture;
(D) New Guaranties and related security
documents;
(E) Registration Rights Agreement;
(F) Management Option Plan and Management
Option Agreements;
(G) Exit Facility;
(H) Shareholder Rights Plan; and
(J) Agreements evidencing sufficient bonding to meet the
Debtors' projected bonding requirements.
(iii) The Amended Certificates of Incorporation and Bylaws of the
Reorganized Debtors, as necessary, shall have been filed with the applicable
authority of each entity's jurisdiction of incorporation in accordance with
such jurisdiction's corporation laws.
(iv) All actions, documents and agreements necessary to implement the
Plan shall have been effected or executed.
(v) The Ontario Superior Court of Justice administering the parallel
proceedings under the CCAA shall have (a) entered a final order under the CCAA
sanctioning the Canadian Plan and all conditions to the effectiveness of the
Canadian Plan shall have been satisfied other than the condition that the Plan
shall have become effective or (b) the Lenders shall have realized on security
they hold over some or all the Canadian Subsidiaries, with such approvals by
the Required Lenders and the Canadian Court as the Required Lenders may
require, in a manner consistent with the implementation of the Plan on
substantially the terms set forth therein.
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(vi) The new Board of Directors of Reorganized PSC shall have been
appointed.
(c) Waiver of Conditions
The conditions set forth in Article X of the Plan may be waived in whole
or in part by the Debtors with the written consent of the Required Lenders
without any other notice to parties in interest or the Bankruptcy Court and
without a hearing.
3. Modifications and Amendments
Subject to Article XI of the Plan and the consent of the Required Lenders,
the Debtors may alter, amend, or modify the Plan or any Exhibits thereto under
section 1127(a) of the Bankruptcy Code at any time prior to the Confirmation
Date. After the Confirmation Date and prior to "substantial consummation" of
the Plan, as defined in section 1101(2) of the Bankruptcy Code, the Debtors
may, under section 1127(b) of the Bankruptcy Code, institute proceedings in the
Bankruptcy Court to remedy any defect or omission or reconcile any
inconsistencies in the Plan, the Disclosure Statement approved with respect to
the Plan, or the Confirmation Order, and such matters as may be necessary to
carry out the purpose and effect of the Plan so long as they have obtained
prior approval of the Required Lenders and such proceedings do not adversely
affect the treatment of holders of Claims or Interests under the Plan;
provided, however, that prior notice of such proceedings shall be served in
accordance with the Bankruptcy Rules or order of the Bankruptcy Court.
P. WAIVER OF CONDITIONS TO CONFIRMATION AND/OR CONSUMMATION
Each of the conditions set forth in Article X of the Plan may be waived in
whole or in part by the Debtors with the written consent of the Required
Lenders without any other notice to parties in interest or the Bankruptcy Court
and without a hearing. The failure to satisfy or waive any condition to the
Effective Date may be asserted by the Debtors or Reorganized Debtors regardless
of the circumstances giving rise to the failure of such condition to be
satisfied (including any action or inaction by a Debtor or Reorganized Debtor).
The failure of a Debtor or the Reorganized Debtor to exercise any of the
foregoing rights shall not be deemed a waiver of any other rights, and each
such right shall be deemed an ongoing right that may be asserted at any time.
Q. EFFECTS OF CONFIRMATION
1. Binding Effect
The Plan will be binding upon and inure to the benefit of the Debtors, all
present and former holders of Claims against and Interests in the Debtors,
whether or not such holders will receive or retain any property or interest in
property under the Plan, their respective successors and assigns, including,
but not limited to, the Reorganized Debtors, and all parties-in-interest in the
Chapter 11 Cases.
2. Discharge of the Debtors
Except as otherwise provided in the Plan or in the Confirmation Order, all
consideration distributed under the Plan will be in exchange for, and in
complete satisfaction, settlement, discharge, and release of, all Claims of any
nature whatsoever against the Debtors or any of their assets or properties, and
regardless of whether any property will have been distributed or retained
pursuant to the Plan on account of such Claims, and upon the Effective Date,
the Debtors shall (i) be deemed discharged and released under section
1141(d)(1)(A) of the Bankruptcy Code from any and all Claims, including, but
not limited to, demands and liabilities that arose before the Confirmation
Date, and all debts of the kind specified in sections 502(g), 502(h) or 502(i)
of the Bankruptcy Code, whether or not (a) a Proof of Claim based upon such
debt is filed or deemed filed under section 501 of the Bankruptcy Code, (b) a
Claim based upon such debt is Allowed under section 502 of the Bankruptcy Code,
or (c) the holder of a Claim based upon such debt accepted the Plan and (ii)
terminate all Interests of the holders of (A) Other Equity Securities, and (B)
if Class 7 votes to reject the Plan, Old Common Shares.
As of the Confirmation Date, except as provided in the Plan or the
Confirmation Order, all entities shall be precluded from asserting against the
Debtors, Reorganized Debtors, those individuals who were directors, officers
and employees as of the Petition Date and the professionals (excluding Deloitte
& Touche and Morgan Stanley & Co., Incorporated), their successors or their
property any other or further claims, debts, rights, causes of action,
liabilities or equity interests relating to the Debtors based upon any act,
omission, transaction or other activity of any nature that occurred prior to
the Confirmation Date. In accordance with the foregoing, except as provided in
the Plan or the Confirmation Order, the Confirmation Order shall be a judicial
determination of discharge of all such Claims and other
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debts and liabilities against the Debtors and termination of all Interests of
the holders of (i) Other Equity Securities and (ii) if Class 7 votes to reject
the Plan, Old Common Shares, pursuant to sections 524 and 1141 of the
Bankruptcy Code, and such discharge shall void any judgment obtained against
the Debtors at any time, to the extent that such judgment relates to a
discharged Claim or terminated Interest.
3. Permanent Injunction
Except as provided in the Plan or the Confirmation Order, as of the
Confirmation Date, all entities that have held, currently hold or may hold a
Claim or other debt or liability that is discharged or an Interest or other
right of an equity security holder that is Impaired or terminated pursuant to
the terms of the Plan are permanently enjoined from the taking of any of the
following actions against the Debtors, Reorganized Debtors or their property on
account of any such discharged Claims, debts or liabilities or terminated
interests or rights: (a) commencing or continuing, in any manner or in any
place, any action or other proceeding: (b) enforcing, attaching, collecting or
recovering in any manner any judgment, award, decree or order; (c) creating,
perfecting or enforcing any lien or encumbrance; (d) asserting a setoff, right
of subrogation or recoupment of any kind against any debt, liability or
obligation due to the Debtors and (e) commencing or continuing any action, in
any manner, in any place that does not comply with or is inconsistent with the
provisions of the Plan.
As of the Effective Date, all entities that have held, currently hold or
may hold a claim, demand, debt, right, cause of action or liability that is
released pursuant to Section IV.I or XIV.H of the Plan, are permanently
enjoined from the taking of any of the following actions on account of such
released claims, obligations, suits, judgments, damages, demands, debts,
rights, causes of action or liabilities: (a) commencing or continuing in any
manner any action or other proceeding; (b) enforcing, attaching, collecting or
recovering in any manner any judgment, award, decree or order; (c) creating,
perfecting or enforcing any lien or encumbrance: (d) asserting a setoff, right
of subrogation or recoupment of any kind against any debt, liability or
obligation due to any released entity; and (e) commencing or continuing any
action, in any manner, in any place that does not comply with or is
inconsistent with the provisions of the Plan.
By accepting distribution pursuant to the Plan, each holder of an Allowed
Claim or Allowed Interest receiving distributions pursuant to the Plan will be
deemed to have specifically consented to the injunctions in the Plan.
4. Exculpation and Limitation on Liability; Indemnity
Neither the Debtors, the Subsidiaries, the Reorganized Debtors, the
holders of Lender Claims, the ad hoc steering committee or any other committee
of holders of Lender Claims, CIBC as Administrative Agent and co-arranger under
the Pre-Petition Credit Agreement, BTCo as Syndication Agent and co-arranger
under the Pre-Petition Credit Agreement, any official committees appointed in
the Chapter 11 Cases, the DIP Agent, the DIP Co-Arrangers and the holders of
DIP Facility Claims, the Security Agent, and the Account Intermediaries, or any
of their respective present or former members, officers, directors, employees,
advisors, attorneys, or agents, shall have or incur any liability to any holder
of a Claim or an Interest, or any other party in interest, or any of their
respective agents, employees, representatives, financial advisors, attorneys,
or affiliates, or any of their successors or assigns, for any act or omission
in connection with, relating to, or arising out of, the Chapter 11 Cases,
formulating, negotiating or implementing the Plan or the Lender Lock-up
Agreement, the solicitation of acceptances of the Plan or the Lender Lock-up
Agreement, the pursuit of confirmation of the Plan, the confirmation of the
Plan, the consummation of the Plan, or the administration of the Plan or the
property to be distributed under the Plan, except for their willful misconduct,
and in all respects shall be entitled to rely reasonably upon the advice of
counsel with respect to their duties and responsibilities under the Plan.
Notwithstanding any other provision of the Plan, no holder of a Claim or
Interest, no other party in interest, none of their respective agents,
employees, representatives, financial advisors, attorneys, or affiliates, and
no successors or assigns of the foregoing, shall have any right of action
against any Debtor, Subsidiary or Reorganized Debtor, the holders of Lender
Claims, the ad hoc steering committee or any other committee of holders of
Lender Claims, CIBC as Administrative Agent and co-arranger under the
Pre-Petition Credit Agreement, BTCo as Syndication Agent and co-arranger under
the Pre-Petition Credit Agreement, any official committees appointed in the
Chapter 11 Cases, the DIP Agent, the DIP Co-Arrangers and the holders of DIP
Facility Claims, the Security Agent, and the Account Intermediaries, or any of
their respective present or former members, officers, directors, employees,
advisors, attorneys, affiliates, or agents, for any act or omission in
connection with, relating to, or arising out of, the Chapter 11 Cases,
formulating, negotiating or implementing the Plan or the Lender Lock-up
Agreement, the solicitation of acceptances of the Plan or the Lender Lock-up
Agreement, the pursuit of confirmation of the Plan, the consummation of the
Plan, the confirmation of the Plan, or the administration of the Plan or the
property to be distributed under the Plan, except for their willful misconduct.
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The foregoing exculpation and limitation on liability will not, however,
in any manner limit, abridge or otherwise affect the rights, if any, of the
Reorganized Debtors to enforce, sue on, settle, or compromise the Litigation
Claims retained pursuant to Section IV.F of the Plan.
The Reorganized Debtors and the Subsidiaries jointly and severally under
the Plan fully indemnify each of the holders of Lender Claims, the ad hoc
steering committee or any other committee of holders of Lender Claims, CIBC as
Administrative Agent and co-arranger under the Pre-Petition Credit Agreement,
BTCo as Syndication Agent and co-arranger under the Pre-Petition Credit
Agreement, the DIP Agent, the DIP Co-Arrangers and the holders of DIP Facility
Claims, the Security Agent, and the Account Intermediaries, and their
respective agents, affiliates, directors, officers, employees, and
representatives, including counsel (collectively, the "Indemnitees") against
any manner of actions, causes of action, suits, proceedings, liabilities and
claims of any nature, costs and expenses (including reasonable legal fees)
which may be incurred by such Indemnitee or asserted against such Indemnitee
arising out of or during the course of, or otherwise in connection with or in
any way related to, the negotiation, preparation, formulation, solicitation,
dissemination, implementation, confirmation and consummation of the Plan, other
than any liabilities to the extent arising from the gross negligence or willful
or intentional misconduct of any Indemnitee as determined by a final judgment
of a court of competent jurisdiction. If any claim, action or proceeding is
brought or asserted against an Indemnitee in respect of which indemnity may be
sought from any of the Reorganized Debtors or any of the Subsidiaries, the
Indemnitee shall promptly notify Reorganized PSC in writing, and Reorganized
PSC may assume the defense thereof, including the employment of counsel
reasonably satisfactory to the Indemnitee, and the payment of all costs and
expenses. The Indemnitee shall have the right to employ separate counsel in
any such claim, action or proceeding and to consult with Reorganized PSC in the
defense thereof and the fees and expenses of such counsel shall be at the
expense of Reorganized PSC unless and until Reorganized PSC shall have assumed
the defense of such claim, action or proceeding. If the named parties to any
such claim, action or proceeding (including any impleaded parties) include both
the Indemnitee and any of the Reorganized Debtors or Subsidiaries, and the
Indemnitee reasonably believes that the joint representation of such entity and
the Indemnitee may result in a conflict of interest, the Indemnitee may notify
Reorganized PSC in writing that it elects to employ separate counsel at the
expense of Reorganized PSC, and Reorganized PSC shall not have the right to
assume the defense of such action or proceeding on behalf of the Indemnitee.
In addition, PSC shall not effect any settlement or release from liability in
connection with any matter for which the Indemnitee would have the right to
indemnification from Reorganized PSC, unless such settlement contains a full
and unconditional release of the Indemnitee, or a release of the Indemnitee
satisfactory in form and substance to the Indemnitee.
R. RETENTION OF JURISDICTION
Pursuant to sections 105(a) and 1142 of the Bankruptcy Code, and
notwithstanding entry of the Confirmation Order and occurrence of the Effective
Date, subject to the Protocol, the Bankruptcy Court will, to the fullest extent
permitted by law, retain exclusive jurisdiction over all matters arising out
of, and related to, the Chapter 11 Cases and the Chapter 11 Plan, and the
Ontario Superior Court of Justice administrating the parallel CCAA proceedings
will retain exclusive jurisdiction over all matters arising out of, and related
to, the CCAA cases and the CCAA plan, as more fully set forth in Article XII of
the Plan.
ARTICLE III.
TREATMENT OF TRADE CREDITORS, CUSTOMERS AND EMPLOYEES
A. TRADE CREDITORS
Notwithstanding provisions of the Bankruptcy Code that would otherwise
require payment of such prepetition claims to be deferred until consummation of
the Plan, the Debtors have obtained the approval of the Bankruptcy Court to
make payments on certain prepetition claims of key trade vendors who agree to
provide goods and services on the same terms as those that were in effect prior
to the Petition Date.
B. CUSTOMERS/CLIENTS
It is the intent of the Debtors that the Chapter 11 Cases offer no
disruption of service to the Debtors' customers and clients. The Bankruptcy
Court has authorized the Debtors to honor certain prepetition customer
practices and obligations to customers the Debtors deem necessary, in the same
manner such practices were implemented and such obligations were honored before
the commencement of the Chapter 11 Cases, including but not limited to customer
discounts, credits or deposits, and certain other contractual obligations.
C. EMPLOYEES
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The Debtors intend that salaries, wages, accrued vacation pay,
health-related benefits, and similar employee benefits for current employees
will be unaffected. Employee benefit claims that accrue pre-petition, with the
exception of certain severance obligations identified as Impaired Unsecured
Claims, will be Unimpaired under the terms of the Plan. To ensure the
continuity of the Debtors' work force and to further accommodate the Unimpaired
treatment of employee benefits, the Debtors have obtained the approval of the
Bankruptcy Court to honor payroll checks outstanding as of the Petition Date
(or to issue replacement checks), to permit employees to use their accrued
vacation time (as long as they remain employees of the Debtors) and to continue
paying medical benefits under the Debtors' health plan.
ARTICLE IV.
HISTORY OF THE DEBTORS AND EVENTS LEADING TO CHAPTER 11 FILING AND PLAN
11. OVERVIEW OF BUSINESS OPERATIONS
1. Business Segments
PSC's business is organized into two operating divisions, the Metals
Services Group and the Industrial Services Group. The Metal Services Group's
primary business operations are ferrous processing and industrial metals
services. The ferrous metals operations include the collection and processing
of ferrous scrap materials for shipment to steel mills and the provision of
significant brokerage services for scrap materials. The industrial metals
services include on-site services, by-product management and coil processing
and distribution services to steel mills. The Metals Services Group primarily
services the steel, foundry and automotive industries.
The Debtors believe that their Industrial Services Group is one of the
largest integrated providers of by-products recovery and industrial outsourcing
services in North America, with a network of over 200 facilities. By-products
recovery includes solvent distillation, engineered fuel blending, paint
overspray recovery, organic and inorganic waste collection processing and
polyurethane recycling. Industrial outsourcing services include cleaning and
maintenance, waste collection and transportation, container services and tank
cleaning, turnaround and outage services, mechanical contracting, refractory
services, decommissioning and remediation, analytical services and emergency
response services. The Industrial Services Group primarily services the
automotive, refining and petrochemical, oil and gas, pulp and paper, steel,
transportation and utilities industries.
2. Accompanying Financial Data
The financial data contained in PSC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1999 are attached in Appendix D-1 and D-2 to the
Disclosure Statement, respectively, and are herein incorporated by reference.
3. Certain Legal Proceedings
Certain of the Debtors' facilities are contaminated primarily as a result
of practices at the sites prior to their acquisition by the Debtors. The
Debtors have established procedures to routinely evaluate these sites giving
consideration to the nature and extent of the contamination. The Debtors have
reserved for the remediation of these sites based upon management's judgment
and prior experience. The Debtors have estimated the liability to remediate
these sites to be approximately $68.0 million.
In addition, certain of PSC's subsidiaries have been named as potentially
responsible or liable parties in connection with sites listed on the Superfund
National Priority List ("NPL"). In the majority of situations, PSC's
connection with NPL sites relates to allegations that the Debtors or their
predecessors transported waste to the site in question. PSC has reviewed the
nature and extent of its alleged connection to these sites, the number,
connection and financial ability of the other named and unnamed potentially
responsible parties and the nature and estimated cost of the likely remedy.
Based on its review, PSC has estimated its liability in connection with these
sites to be approximately $20.8 million.
Various class actions have been filed against PSC, certain of its past and
present directors and officers, the underwriters of PSC's 1997 public offering
and PSC's auditors. Each action alleges that PSC's financial disclosures for
various time periods between 1995 and 1997 contained material misstatements or
omissions in violation of U.S. federal securities laws (provisions of the
Securities Act of 1933 and of the Securities Exchange Act of 1934) and seeks to
represent a class of purchasers of PSC's common shares. On June 2, 1998, the
Judicial Panel on Multidistrict Litigation ordered that the class actions be
consolidated and transferred to the United States District Court, Southern
District of New York. On
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July 23, 1998, two pre-trial orders of the District Court were made. Pre-Trial
Order No. 1 dealt with various administrative matters relating to the
consolidation of the actions and a schedule for the plaintiffs to serve and
file a consolidated amended class action complaint and for PSC's response.
Pre-Trial Order No. 2 appointed a lead plaintiff and lead counsel. On November
13, 1998, PSC filed a motion for an order dismissing the class action on the
grounds of forum non conveniens. On May 4, 1999, PSC's motion was granted and
the class action was dismissed on the grounds of forum non conveniens.
A claim brought under the Ontario Class Proceedings Act was commenced on
May 5, 1998 against PSC, the underwriters of PSC's 1997 public offering and
PSC's auditors. The claim was brought on behalf of persons in Canada who
purchased PSC common shares between November 6, 1997 and December 18, 1997, and
also seeks damages on behalf of persons in Canada who purchased common shares
between May 21, 1996 and April 23, 1998. The claim contains various allegations
that are similar in nature to those made in the U.S. class action claims
dismissed on May 4, 1999.
On June 23, 1999, the Debtors entered into a Memorandum of Understanding
(the "MOU") to settle these claims. This settlement is embodied in the Plan
providing a distribution of one and one-half percent (1.5%) of PSC Common
Shares to holders of Allowed Class 8B Claims (if Class 7 votes to accept the
Plan). Additionally, the MOU reflects the Debtors' commitment to support a
joint application for attorneys' fees and reasonable expenses of plaintiff's
counsel not to exceed $575,000, subject to approval by the Bankruptcy Court,
and which shall not be payable until after the Effective Date.
The claims and causes of action against the Debtors described in the
preceding two paragraphs are classified in the Plan as Class 8B Securities
Claims in the Securities Actions. Under the Plan, the Class 8B Securities
Claims in the Securities Actions will be discharged as of the Effective Date.
Therefore, if the Plan is confirmed and consummated, after the Effective Date,
the Securities Claims in the Securities Actions cannot be pursued against the
Reorganized Debtors.
Similar claims have been asserted against PSC and certain of its past and
present officers and directors by the former shareholders of the Steiner-Liff
Metals group of companies and the Southern-Foundry Supply group of companies.
PSC acquired these companies in October 1997 and issued PSC common shares in
partial payment of the purchase price. The claims allege that PSC's financial
disclosures for various time periods between 1995 and 1997 contain material
misstatements or omissions and that these constitute a breach of certain
representations and warranties made to the former shareholders or,
alternatively, a violation of United States securities laws.
Under the Plan, the claims and causes of action described in the paragraph
are classified in Class 8C of the Plan as the Liff Actions and the Chazen
Actions. The Plan provides that the Claims against the Debtors arising from
the Liff Actions and the Chazen Actions will be discharged on the Effective
Date. Therefore, if the Plan is confirmed and consummated, after the Effective
Date, the Claims arising from the Liff Actions and the Chazen Actions cannot be
pursued against the Reorganized Debtors.
Upon the acquisition of Allwaste, Inc. ("Allwaste"), PSC assumed the
pre-existing Indenture with respect to Allwaste's 7 1/4 % Convertible
Subordinated Debentures ("Old Debentures") which are due in 2014. Effective
December 1, 1998, PSC suspended payments of interest on the Old Debentures
which created a default under the Indenture. Following PSC's failure to cure
the payment default within thirty days, on April 22, 1999, First Union National
Bank (the "Indenture Trustee") invoked an acceleration clause and declared the
principal of all the Old Debentures to be immediately due and payable. On
April 27, 1999, the Indenture Trustee filed suit in the 11th Judicial District
Court of Harris County, Texas seeking the full amount due and owing under the
Old Debentures (the "Allwaste Collection Action").
The commencement of the Chapter 11 Cases automatically stayed the further
prosecution of the Allwaste Collection Action pursuant to section 362(a) of the
Bankruptcy Code. Moreover, the Debtors believe that the Bankruptcy Court has
exclusive jurisdiction over the causes of action asserted in the Allwaste
Collection Action and that such matters will be adjudicated in the Chapter 11
Cases by the Bankruptcy Court. Under the Plan, claims arising out of the Old
Debentures are classified as Class 7 Impaired Unsecured Claims and will receive
the treatment afforded such claims and will be discharged under the Plan as of
the Effective Date. Therefore, if the Plan is confirmed and consummated, after
the Effective Date, the Reorganized Debtors will have no liability as to the
Old Debentures and the Allwaste Collection Action will be fully resolved and
will be dismissed with prejudice.
On May 25, 1999, the Indenture Trustee filed suit against PSC and the
Lenders in the 11th Judicial District Court of Harris County, Texas (the
"Allwaste Avoidance Action") alleging that any and all liens, security
interests, and obligations conveyed or transferred by PSC to its Lenders were
avoidable as fraudulent conveyances. The Debtors believe that the commencement
of the Chapter 11 Cases have vested exclusive standing to prosecute avoidance
actions, including those asserted by the Indenture Trustee against the
defendant Lenders in the Allwaste Avoidance Action, in the Debtors
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pursuant to the Bankruptcy Code. Therefore, the Debtors believe that the causes
of action alleged in the Allwaste Avoidance Action are property of the Debtors'
Estates and that further prosecution of the Allwaste Avoidance Action is stayed
pursuant to section 362(a) of the Bankruptcy Code. Under the terms of the
Plan, the causes of action asserted by the Indenture Trustee against the
defendant Lenders will be deemed to be settled and released as a consequence of
the treatment of all Claims and Interests, including the Claims of the Lenders
and the holders of Old Debentures under the Plan. Therefore, if the Plan is
confirmed and consummated, as of the Effective Date, the Allwaste Avoidance
Action will be fully resolved and will be dismissed with prejudice.
In June 1997, pursuant to a Share Purchase Agreement, Republic
Environmental Systems, Inc. ("Republic") sold certain corporate entities to
RESI Acquisition (Delaware), Inc. ("RESI"), for $17 million. As consideration
for the transaction, RESI paid $8 million in cash and executed two promissory
notes in favor of Republic in a combined amount of $9 million.
PSC, the parent of RESI, signed the notes as unconditional guarantor and
also signed a separate Guaranty Agreement. After the notes were executed, the
parties made several modifications to the payment schedule, allowing RESI extra
time to fulfill its obligations. However, RESI eventually defaulted and
Republic thereafter brought an action in the Superior Court of the State of
Delaware against PSC and RESI to collect on the notes (the "Republic Action").
In addition to the note involved in the Republic Action, another note issued by
Philip Enterprises Inc. in conjunction with the RESI acquisition exists and is
the subject of litigation in Canada that has now been stayed in connection with
the filing of the Canadian Cases. PSC filed counterclaims alleging damages
from the 1997 Share Purchase Agreement. On June 3, 1999, the court issued
judgment granting Republic's Motion for Final Judgment on the Pleadings as to
the Notes and Guaranty, and denying PSC's Motion to Dismiss. On June 4, 1999,
RESI filed a petition for relief under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. As a result of
its Chapter 11 filing, the Republic Action against RESI is now stayed pursuant
to section 362(a) of the Bankruptcy Code. The Claims of Republic are classified
under the Plan as Class 7 Impaired Unsecured Claims, will receive the treatment
afforded such claims, and will be discharged under the Plan as of the Effective
Date. Therefore, if the Plan is confirmed and consummated, as of the Effective
Date, the Reorganized Debtors will have no liability as to the Republic Action
and the Republic Action will be fully resolved.
PSC is also named as a defendant in several lawsuits which have arisen in
the ordinary course of business. Management believes that none of these suits
is likely to have a material adverse effect on the Debtors' business or
financial condition.
12. Capital Structure of the Debtors
1. The Pre-Petition Credit Agreement
In August 1997, PSC, PSI and certain of their subsidiaries entered into a
five year term, $1.5 billion revolving credit agreement, which has been
subsequently amended on October 31, 1997, February 19, 1998, June 24, 1998,
October 20, 1998 and December 4, 1998 (as amended, the "Pre-Petition Credit
Agreement" and the credit issued thereunder, the "Pre-Petition Credit
Facility") with the Lenders, a syndicate of international lenders including
CIBC, as administrative agent, BTCo, as syndication agent, CIBC and BTCo as
co-arrangers of credit, Dresdner Bank Canada, Dresdner Bank AG New York Branch
and Royal Bank of Canada as documentation agents, and various other persons
from time to time parties to the Pre-Petition Credit Agreement as lenders. The
Pre-Petition Credit Facility replaced the 1996 revolving term loan agreement,
refinanced certain other long-term debt and was also available for working
capital, capital expenditures and acquisitions. The Pre-Petition Credit
Agreement contained certain restrictive covenants and financial covenants
including that PSC was required to meet specified interest coverage ratio, debt
to EBITDA ratio, fixed charge ratio and working capital ratio tests, and
required PSC to maintain a certain level of working capital.
Borrowings under the Pre-Petition Credit Facility are guaranteed, jointly
and severally by certain of PSC's direct and indirect wholly-owned subsidiaries
and are secured by a pledge of all the issued and outstanding securities of
PSC's direct and indirect wholly-owned subsidiaries, and a charge over
substantially all the present and future assets of PSC and its direct and
indirect wholly-owned subsidiaries. The Pre-Petition Credit Facility bears
interest based on a moving grid.
2. Recapitalization/Equity
Prior to April 30, 1996, PSC's common shares were traded on the Nasdaq
National Market System. Thereafter, PSC's common shares were traded on the New
York Stock Exchange (the "NYSE") under the ticker symbol "PHV" until January
13, 1999, when the common shares were temporarily halted from trading due to
PSC's failure to comply with the NYSE's continued listing criteria. On April
23, 1999, the NYSE announced that due to then recent developments in PSC's
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financial condition, it would suspend the trading of PSC's common shares on the
NYSE prior to the opening on April 26, 1999, and would seek delisting of those
shares. PSC continues to pursue its remedies in regard to the listing of its
common shares on the NYSE, but there can be no assurances that PSC will be able
to retain such a listing. PSC's common shares continue to be listed and posted
for trading on the Toronto Stock Exchange and the Montreal Exchange.
PSC used equity offerings in 1996 and 1997 to fund its acquisition
strategy, as well as pay down the Pre-Petition Credit Facility. In November
1997, PSC issued 23 million common shares at $16.50 per share. The net
proceeds of $362.5 million were used to repay indebtedness outstanding under
the Pre-Petition Credit Facility. In addition, PSC issued 38.2 million common
shares during 1997 for a total consideration of $622.5 million. The common
shares were issued primarily as a result of acquisitions or as the result of
the exercise of employee stock options. The share capital of PSC increased
from $363.1 million at December 31, 1996 to $1,348.1 million at December 31,
1997.
On February 2, 1998, PSC issued 1,381 Common Shares in connection with the
conversion of the Old Debentures assumed by PSC pursuant to the Allwaste, Inc.
acquisition. The transaction was exempt under section 3(a)(9) of the
Securities Act. The number of common shares of PSC outstanding at November 11,
1998 was 131,144,013.
PSC has allotted and reserved 10,257,149 Common Shares under its 1991 and
1997 Employee Stock Option Plans, the Serv-Tech Long Term Incentive Plan, and
Serv-Tech Amended and Restated 1989 Incentive Stock Option Plan and the
Allwaste Amended and Restated 1989 Replacement Non-Qualified Stock Option Plan,
including any supplements thereto. The stock options permit the purchase of
common shares of PSC at the then current market price. These options currently
expire five to ten years from the date of grant. In addition, PSC has allotted
and reserved 776,386 common shares in conjunction with the acquisition of
Philip Environmental Corporation and the stock options issued thereunder.
These options expire on November 26, 2000.
Pursuant to the Plan, all allotted and reserved but not issued Old Common
Shares shall be cancelled and terminated on the Effective Date. In addition,
the Old Options are classified in Class 9 under the Plan and will be cancelled
and terminated on the Effective Date.
3. Debentures
The Old Debentures provided for annual mandatory sinking fund payments
equal to five percent (5%) of the aggregate principal amount of the Old
Debentures issued, commencing June 1, 1999. Interest is payable semi-annually
on June 1 and December 1.
PSC's acquisition of Allwaste constituted a 'redemption event' pursuant to
the Allwaste Indenture. Accordingly, each holder of the Old Debentures had the
right to require the redemption of all or any portion of such holder's Old
Debentures for cash to the 90th day following the acquisition. During the
90-day period, $3.3 million of Old Debentures were redeemed.
In conjunction with the merger, on July 30, 1997, PSC, Allwaste, Inc. and
Texas Commerce Trust Co. of New York executed a supplemental indenture with
respect to the Allwaste Indenture (the "First Supplemental Allwaste
Indenture"). The First Supplemental Allwaste Indenture added PSC as co-obligor
on the Allwaste Indenture and transferred conversion rights of holders of Old
Debentures from Allwaste Common Stock to PSC Common Shares. In addition, the
First Supplemental Allwaste Indenture specified that at any time up to and
including June 1, 2014 the holder of any Debenture will have the right to
convert the principal amount of such Old Debenture into PSC Common Shares equal
to the principal amount of the Old Debenture surrendered for conversion divided
by $19.5376. The Old Debentures are redeemable for cash at the option of PSC
at a variable conversion rate as defined in the indenture. On February 2,
1998, PSC issued 1,381 Common Shares in connection with the conversion of the
Old Debentures. The transaction was exempt under section 3(a)(9) of the
Securities Act. The First Supplemental Allwaste Indenture provides that the
Old Debentures are subordinated in priority of payment to the indebtedness
owing to the Lenders under the Pre-Petition Credit Agreement and related
documents.
13. Events Contributing to the Need for Restructuring
1. Acquisition Strategy and Restatement of Financials
PSC commenced 1998 with the objective of integrating the businesses it had
acquired in 1997. The integration was interrupted by a series of events which
occurred in 1998 that had a material impact on PSC and resulted in it recording
a fiscal loss of $1.6 billion in 1998, including special charges of $1.2
billion.
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The initial event was the discovery and announcement in January 1998 of a
discrepancy between the book and physical inventory values in PSC's yard copper
business. The announcement of the discrepancy raised serious questions about
the integrity of PSC's accounting and the effectiveness of its control systems,
and had a significant negative impact on PSC's business. Shortly after the
announcement, numerous class action lawsuits and related claims were commenced
against PSC in the United States and Canada. An exhaustive examination of the
discrepancy was conducted by PSC, its auditors and special counsel to a
committee of independent directors of PSC's Board of Directors. As a result of
these examinations, it was determined that, among other things, unrecorded
losses totaling $92 million arising from unauthorized trading of copper outside
PSC's normal business practices had been incurred. PSC commenced a civil
action against the former president of its metals division and others engaged
in the trading in an effort to recover its losses and reported the activities
to criminal and other appropriate authorities. In light of PSC's findings, PSC
restated its previously reported financial results for 1997, 1996 and 1995. In
addition, the staff of the SEC initiated a formal investigation of the
circumstances surrounding the 1997, 1996 and 1995 restatements of PSC's
financial statements. The SEC has advised that its investigation should not be
construed as an indication that any violation of law has occurred, nor should
it be considered a reflection upon any person, entity or security. While PSC
believes it has made all adjustments necessary to its financial statements for
1997, 1996 and 1995, there can be no assurance that additional adjustments will
not be required as a result of the SEC investigation.
On February 19, 1998, the Pre-Petition Credit Agreement was amended to add
new covenants regarding adjusted debt and EBITDA ratios and additional events
of default. In connection with the February 1998 amendment to the Pre-Petition
Credit Agreement, on March 16, 1998, PSC and its subsidiaries that guaranteed
the obligations under the Pre-Petition Credit Agreement executed security
agreements whereby each entity granted to the Security Agent for the benefit of
the Lenders a lien upon or security interest in substantially all of their
assets to secure such guarantee obligations and the indebtedness under the
Pre-Petition Credit Agreement.
Starting in late 1997 and continuing throughout 1998, there was a
significant deterioration in PSC's copper and ferrous processing businesses due
to the most significant decline in metals prices in over 20 years. PSC's
Industrial Services Group failed to achieve its cost reduction objectives and
its by-products business performed weakly, reflecting industry wide competitive
conditions. In addition, declining crude oil prices, which resulted in
deferred maintenance spending by customers with petrochemical refinery
operations, negatively impacted the revenue and profitability of the Industrial
Services Group's operations. PSC reported a first quarter 1998 loss of
$565,000 and a second quarter 1998 loss of $73 million. Various initiatives
were implemented throughout the year in an effort to improve PSC's operating
and financial performance. Management changes were made, including the
appointment of a new Chairman, President and Chief Executive Officer, Chief
Financial Officer, Chief Administrative Officer and Presidents of PSC's Metals
Services and Industrial Services Groups.
The deterioration in its principal business segments caused PSC to violate
numerous terms of its then $1.5 billion syndicated Pre-Petition Credit
Agreement. As a result of negotiations with PSC's Lenders, on June 24, 1998,
the Pre-Petition Credit Agreement was further amended to reduce the credit
capacity from $1.5 billion to $1.2 billion and increase the interest charged by
100 basis points. The amendment allowed PSC to access $60 million of the
proceeds arising from asset dispositions (of which $20 million was allocated to
provide collateral for letters of credit) instead of having such proceeds
applied to reduce outstanding debt. In return, PSC agreed to a standstill
until September 30, 1998 respecting the incurrence of additional debt and
occurrence of dispositions or acquisitions. By June 30, 1998, PSC was not in
compliance with certain additional terms in the Pre-Petition Credit Agreement,
including the financial covenants which required PSC to maintain a specified
interest coverage ratio, debt to EBITDA ratio, fixed charge ratio and working
capital ratio. Because PSC was not in compliance with the terms of the
Pre-Petition Credit Agreement, the debt outstanding under the Pre-Petition
Credit Agreement was classified as a current liability on PSC's June 30, 1998
Consolidated Balance Sheet.
As PSC's operating results deteriorated, questions arose as to its ability
to meet its obligations under the Pre-Petition Credit Agreement and whether PSC
had sufficient available cash to satisfy its working capital and capital
expenditure needs. In the third quarter of 1998, a number of factors,
including a continuing downturn in metal markets, a permanent decline in the
value of investments held by PSC, and the decision to exit certain activities
or locations and to divest of PSC's aluminum and US ferrous operations, caused
PSC to take special charges of $357 million and report a net loss of $645
million. PSC again made management changes including the appointment in
October 1998 of a new Interim Chief Executive Officer and Chief Restructuring
Officer.
In connection with the announcement, PSC indicated that its first priority
was to accelerate its ongoing asset disposition and debt restructuring
activities, and refocus its resources on profitable growth. On October 20,
1998, the Pre-Petition Credit Agreement was further amended to permit the use
of letters of credit under the Pre-Petition Letter of Credit Facility for
general corporate and other purposes and to extend PSC's standstill on
incurrence of additional debt until June 30, 1999. On November 13, 1998, the
same day that PSC announced that it was suspending interest payments on its
Pre-
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Petition Credit Facility, Carl Icahn, PSC's largest shareholder and debt
holder, together with another lender, announced that they were considering
utilizing involuntary insolvency proceedings to protect their interests unless
PSC met with them to formulate a pre-packaged plan to transfer the ownership
and control of the business to PSC's Lenders. PSC commenced negotiations with
Mr. Icahn and entered into a standstill agreement with him and the other lender
on November 20, 1998. The agreement contemplated a restructuring plan whereby
the debt outstanding under the Credit Agreement would be converted into $200
million of new secured debt and the distribution of ninety percent (90%) of the
equity of the restructured entity to the Lenders. In accordance with the terms
of the standstill agreement, PSC appointed two new directors nominated by Mr.
Icahn to PSC's Board of Directors. Also, in November 1998, PSC replaced its
then acting Interim Chief Executive Officer and appointed its Executive Vice
Chairman, Allen Fracassi, as Interim Chief Executive Officer.
After discussions with its Lenders, PSC determined that the restructuring
plan contemplated by the November 20, 1998 standstill agreement would not be
approved by the required number of Lenders. PSC presented an alternative debt
restructuring plan to its Lenders on December 15, 1998 which provided for the
conversion of a smaller portion of the debt outstanding under the Pre-Petition
Credit Agreement into equity in an amount to be negotiated with its lending
syndicate.
On January 11, 1999, PSC announced that it had negotiated a term sheet
with a sub-committee of the steering committee of its Lenders. The term sheet
set forth the principal terms of a restructuring under a pre-packaged plan of
reorganization. Under the January 11, 1999 term sheet, $550 million of debt
outstanding under the Credit Agreement would be restructured into $350 million
of senior secured term debt and $200 million of secured payment in-kind notes.
The balance of the debt outstanding under the Credit Agreement of approximately
$550 million would be exchanged for ninety percent (90%) of the common shares
of restructured PSC. The term sheet contemplated the execution of a Lock-up
Agreement with respect to the restructuring. Throughout January, February and
March 1999, PSC continued negotiations with its Lenders in an effort to obtain
an agreement on a plan to restructure PSC.
On April 26, 1999, PSC announced that the terms of the Lock-up Agreement
(the "April Lock-up Agreement") had been approved by its Lenders. Under the
terms of the April Lock-up Agreement, the then outstanding secured debt of
$1.07 billion would be converted into $300 million of senior secured debt, $100
million of convertible secured payment-in-kind notes, and ninety percent (90%)
of the common shares of Reorganized PSC. The sale of PUMC (as defined below)
on May 8, 1999 resulted in a reduction of the restructured senior debt from
$300 million to $250 million. Pursuant to the Lock-up Agreement, the Lenders,
subject to certain conditions, agreed, among other things, (i) to vote their
Lender Claims in favor of the Plan, (ii) not to oppose confirmation of the
Plan, (iii) not to transfer their Lender Claims except subject to the April
Lock-up Agreement, (iv) to consent to the incurrence of the DIP Facility, the
granting of security for the DIP Facility and subordination of their liens to
such security, and (v) to subordinate the security for the New Secured PIK Debt
or New Senior Secured Term Debt to security for the Exit Facility.
The Lenders and PSC also entered into an agreement (the "Proceeds
Agreement") pursuant to which the Lenders agreed to allow PSC access to the
proceeds of certain asset sales for working capital purposes. Between April
1999 and June 1999, PSC worked to document the restructuring contemplated by
the April Lock-up Agreement with its Lenders. These negotiations and efforts
resulted in an amended and restated Lock-up Agreement dated June 21, 1999 (as
defined previously, the "Lender Lock-up Agreement"). The principal amendments
to the Lender Lock-up Agreement were (a) the elimination of the requirement of
a pre-petition solicitation of the Lenders, (b) an increase in the New
Unsecured PIK Notes to be issued to holders of impaired unsecured claims from
$50 million to $60 million, (c) the approval of the Class 7 Election feature of
the Plan, permitting certain holders of Impaired Unsecured Claims to forego
certain of their New Unsecured PIK Notes for up to $18 million in New
Unsecured Convertible Notes, (d) the addition of an equity distribution of up
to five percent (5%) of the common shares of Reorganized PSC to holders of
unsecured claims, (e) the approval of a settlement reached with counsel for the
Securities Claims in the Securities Actions, and (f) an extension of the
timetable to implement the restructuring through bankruptcy proceedings.
Pursuant to the Lender Lock-up Agreement, holders of seventy-six percent (76%)
of the amount of the syndicated lender debt and more than fifty percent (50%)
in number of such Lenders, have agreed, subject to the terms of the agreement,
to vote for and support the Plan and the Canadian Plan. The Lender Lock-up
Agreement contemplates a timely completion of the restructuring in accordance
with the following schedule:
- Approval of a Disclosure Statement for the Plan by August 31, 1999
- Confirmation of the Plan by October 31, 1999; and
- Consummation of the Plan transactions and emergence from Chapter 11 and
CCAA proceedings by November 30, 1999.
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Failure to achieve any of these events within fifteen (15) days of the
specified deadline constitutes a "Termination Event" under the Lender Lock-up
Agreement. Upon the occurrence of any Termination Event, each Lender may
change or withdraw any votes cast in favor of the Plan and the Lender Lock-up
Agreement may be terminated, upon election, by Lenders holding in the aggregate
at least fifty-one percent (51%) of the aggregate amount of claims held by the
Lenders party to the Lender Lock-up Agreement.
2. Discontinued Operations and Divestitures
In 1998, in an effort to further implement the restructuring effort, the
Debtors undertook to review the divestiture of certain of its businesses and
investments. In June of 1998, PSC announced its intention to sell its ferrous
and non-ferrous operations and various non-core assets in order to reduce and
restructure its debt. However, weak ferrous market conditions lowered the
value of the remaining assets and PSC subsequently determined that it would not
proceed with the sale of its ferrous businesses.
On May 21, 1998, PSC sold certain of its spiral weld pipe operation for a
purchase price of $3.9 million.
On July 7, 1998, PSC's Houston, Texas based steel distribution business
was sold for cash proceeds of $95 million, resulting in a gain on sale of
approximately $17 million. The results of operations for the steel distribution
business are included in the Ferrous operations segment of the Metal Services
business. The business generated annual revenue in excess of $130 million and
income from operations of $12.5 million in 1997.
During the fourth quarter of 1998, PSC divested of its minority interest
in Strategic Holdings Inc. for approximately $6.6 million. In December 1998,
PSC made the decision to discontinue the Non-Ferrous and Copper Operations of
its Metals Services business. A sale of certain of the aluminum operations
included in Non-Ferrous Operations closed on January 11, 1999 for a total
consideration of approximately $69.5 million.
On May 18, 1999, PSC announced that it closed the sale of its sixty-eight
percent (68%) interest in Philip Utilities Management Corporation ("PUMC") for
approximately $70 million. The net proceeds of this disposition were used to
pay down existing indebtedness to the Lenders under the Pre-Petition Credit
Agreement in accordance with the terms of the Lock-up Agreement.
On May 26, 1999, PSC closed the sale of its Conversion Resources
operations in Bedford, Ohio for $529,610.
In addition, on May 31, 1999, PSC closed the sale of the operations and
the working capital of its Birmingham Excavation Company Subsidiary,
Philip/BEC, Inc. ("BEC"). The sale generated total proceeds of $20.9 million.
The net proceeds of this disposition were deposited in the Proceeds Account and
were subject to the Proceeds Agreement and are now subject to the Cash
Collateral Order.
On June 1, 1995, Philip Metals, Inc., one of the Debtors, sold certain
real estate owned by it located in Brook Park, Ohio for $8.5 million to Park
Place, Inc. The net proceeds from the sale of this real estate (approximately
$7.9 million) were deposited in the Proceeds Account and were subject to the
Proceeds Agreement and are now subject to the Cash Collateral Order.
On June 8, 1999, Philip Enterprises Inc., a wholly-owned subsidiary of
PSC, entered into an Asset Purchase Agreement whereby it agreed to sell its
Montreal East transfer station and related industrial services operations for a
purchase price of $3.2 million Canadian Dollars, payable forty percent (40%) at
closing, thirty percent (30%) six months post-closing, and thirty percent (30%)
twelve months post-closing.
3. Employee Retention Program
PSC has instituted an employee retention program to allow the Company to
retain approximately 150 of its key employees in light of the restructuring of
PSC this year. PSC examined its employees' contributions to the Company during
the year and determined which employees are invaluable to the Company's
successful restructuring. In order to retain these key employees, PSC has
instituted a bonus program in which the key employees, upon their continued
employment, receive a bonus, depending upon the employee's position in the
company, equal to between 20% to 50% of their base salary. This bonus is
payable in three payments, the last payment occurring in August 1999.
PSC has also established an executive retention bonus program approved by
the Board of Directors on February 12, 1999. The Program divides executives
into two groups. The first group will receive a retention bonus equal to their
current base compensation payable 100% upon Plan implementation, and if Plan
implementation has not occurred by
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August 31, 1999, 50% on August 31 and 50% on the implementation of the Plan.
The second group will receive a bonus of between 40% to 75% of their base
salary payable in three installments: (i) 20% on February 12, 1999; (ii) 30% on
April 15, 1999; and (iii) 50% upon the implementation of the Plan and if Plan
implementation has not occurred by August 31, 1999, 25% on August 31 and 25% on
the implementation of the Plan. In either group, the bonus will be pro-rated
in the event of involuntary termination without cause of the executive between
February 12, 1999 and the bonus payment date.
4. Negotiations with Unsecured Creditors
In February 1999, the Indenture Trustee for the Old Debentures informed
PSC that an ad hoc committee of holders of Old Debentures had formed to
represent the interest of holders of Old Debentures in connection with the
restructuring. The Indenture Trustee retained counsel to represent the
Indenture Trustee in connection with the restructuring. The Company had an
initial meeting with the ad hoc committee of Old Debenture holders and the
Indenture Trustee in February 1999, wherein the Company outlined the proposed
restructuring. After that meeting, the Company entered into confidentiality
agreements with the Indenture Trustee and members of the ad hoc committee and
provided certain requested information relating to the restructuring. The
Indenture Trustee also retained a financial advisor to assist in the
restructuring negotiations.
During April, May and June 1999, the Company had several meetings and
conference calls with the Indenture Trustee, its counsel and financial advisor
in regard to the terms of the restructuring. The Company has also conducted
negotiations with certain other large holders of Impaired Unsecured Claims,
including CIBC and Republic. Those negotiations began in early 1999 and have
continued through June 1999.
The Debtors, the Lender steering committee, and the ad hoc committee of
Old Debenture holders reached an agreement in principle as to the restructuring
and treatment of Impaired Unsecured Claims under the Plan. The Plan
incorporates this agreement in principle. The Debtors have also reached an
agreement with CIBC on the same terms.
5. Other Pre-petition Settlement Negotiations
In connection with the restructuring, prior to the Petition Date, PSC
attempted to resolve various parties' claims. PSC has succeeded in resolving
certain claims including various severance claims in an amount of $290,000 to
three former senior executives to settle severance obligations totaling $1.7
million. In addition, one former senior executive is entitled to receive
bi-weekly severance payments totaling $138,000 over a 30 week period to settle
a severance obligation of $960,000. Of the $10.8 million in current severance
obligations to senior executives, PSC has negotiated settlements totaling
approximately $242,000 with 5 senior executives to reduce the company's
severance obligations by $1.1 million.
On April 16, 1999, PSC settled a lease obligation with Mellon Bank, N.A.
for a payment of approximately $152,000, representing two months rent. The
lease, which would have expired in November 2002, related to vacant office
space in Pennsylvania, which previously held the PSC's U.S. corporate
headquarters.
Certain litigation was settled by PSC over the past year. The
settlements include the case of National Copper & Smelting v. Allworth in which
National Copper claimed that the trichloroethylene it purchased from Allworth
was contaminated causing National Copper's machine damage. The case was
settled in an amount less than expected legal fees for the defense. The second
case settled was U.S. Environmental Protection Agency v. Solvent Recovery
Corporation. This case concerned a June 19, 1998 complaint by the EPA alleging
three violations of federal law. The Company has settled the complaint by
agreement to pay $4,000 in fines. A third settlement concerned Remry v.
Allwaste Environmental Services wherein the Plaintiff, a former PSC employee,
succeeded on his claim of a bonus under the employee incentive program in
effect from September through December 1996.
On June 23, 1999, the Debtors entered into a settlement agreement with
GalvPro L.P. pursuant to which the Debtors agreed to pay $2,000,000 in exchange
for complete, valid and binding mutual releases arising from or in any way
relating to either party's performance under a certain Design/Build Agreement
dated March 9, 1998 and entered into by D&L Corp. and GalvPro.
ACTICLE V.
CORPORATE STRUCTURE AND MANAGEMENT OF THE DEBTORS
A. CURRENT CORPORATE STRUCTURE
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PSC was amalgamated under the laws of the Province of Ontario as Philip
Environmental Inc. pursuant to a Certificate and Articles of Amalgamation dated
April 15, 1991. On May 22, 1997, a Certificate and Articles of Amendment under
the Business Corporations Act (Ontario) were issued changing the name from
Philip Environmental Inc. to Philip Services Corp.
PSC is a holding company with over 200 wholly-owned Subsidiaries in
Canada, the United States, Barbados, and throughout Europe. The Debtors,
together with the aforementioned Subsidiaries, their wholly and majority-owned
Subsidiaries, and their direct and indirect Subsidiaries, consist of over 200
corporations, limited liability companies, partnerships, limited partnerships
and other forms of business entities. The Debtors' primary base of operation
is in the United States.
PSI is a corporation established in the United States under the laws of
the State of Delaware. PSI is a wholly-owned direct subsidiary of Philip
Enterprises Inc., a Canadian company, which in turn is wholly-owned directly by
PSC.
A more complete description of the Debtors' current corporate structure
including the relationship of PSC and PSI to the Subsidiary Debtors, presented
in organizational chart form, is presented in Appendix B to the Disclosure
Statement.
B. BOARD OF DIRECTORS
Following is a list as of April 27, 1999, of the names and ages of each of
the Directors of PSC.
NAME AGE TITLE
- ------------------------ --- --------------------------------------------
Robert L. Knauss
Houston, Texas 68 Chairman and Director
Allen Fracassi
Ancaster, Ontario 46 Interim Chief Executive Officer and Director
Roy Cairns
St. Catharines, Ontario 74 Director
Harold First
Fairlawn, New Jersey 62 Director
Peter Green
Campbellville, Ontario 61 Director
William E. Haynes
Houston, Texas 55 Director
Felix Pardo
Cambridge, Massachusetts 61 Director
Harland A. Riker
Palm Beach, Florida 70 Director
Derrick Rolfe
Toronto, Ontario 44 Director
Arnold S. Tenney
Downsview, Ontario 56 Director
Herman Turkstra
Hamilton, Ontario 65 Director
Mr. Knauss has been a director of PSC since August 6, 1997, and was
appointed Chairman of PSC on May 6, 1998. From March 1988 until July 31, 1997,
he was a director of Allwaste, Inc. He is the Chairman and Chief Executive
Officer of Baltic International U.S.A., Inc., an aviation investment company,
and a director of the Mexico Fund, Inc., an investment fund based in Mexico
City, and Equus II, Inc., an investment fund based in Houston, Texas. Mr.
Knauss
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served for twelve years as the Dean and Distinguished University Professor at
the University of Houston Law Center and Dean of Vanderbilt Law School.
Mr. Fracassi, appointed Executive Vice Chairman of PSC on May 6, 1998, was
the President, Chief Executive Officer and a director of PSC since December
1990. He was appointed Interim Chief Executive Officer of PSC on November 20,
1998 and resigned from the position of Executive Vice Chairman. Mr. Fracassi
is a co-founder of the Company with his brother Philip Fracassi.
Mr. Cairns has been a director of PSC since December 1990. Mr. Cairns has
been counsel to, and was previously a partner with, Chown, Cairns, a law firm.
Mr. Cairns is a director of Jumbo Video Limited.
Mr. First has been a director of Philip since November 1998. From
December 1990 to January 1993, Mr. First was the Chief Financial Officer of
Icahn Holding Corp. He is currently on the boards of directors of Tel
Save.com, PANACO Inc. and Cadus Pharmaceuticals Corporation.
Mr. Green was elected to the Board of Directors on June 25, 1998. He has
more than 25 years of experience as chief executive or chief operating officer
of major companies in North America and Europe. Mr. Green has served on 27
Boards of Directors for companies based in Canada, the U.S., the U.K., and
elsewhere. Mr. Green is Chairman of the Board of Directors of Patheon Inc., a
Canadian public pharmaceutical manufacturing services company, and also
Chairman of the Board of Trustees of the Superior Propane Income Fund. He was
appointed to both positions in 1996.
Mr. Haynes has been a director of PSC since August 6, 1997. From June
1996 until July 31, 1997, Mr. Haynes was a director of Allwaste, Inc. He is
the Chairman, Chief Executive Officer and director of Innovative Valve
Technologies, Inc., a publicly traded industrial valve repair and distribution
company in which Philip owns a minority equity interest. He served as the
President and Chief Executive Officer of Lyondell-Citgo Refining Company Ltd.
from July 1992 to December 1995.
Mr. Pardo has been a director of PSC since March 1994. From May 1992 to
March 1998, Mr. Pardo was the President and Chief Executive Officer of
Ruhr-American Coal Corporation. Until recently he was Chairman of Newalta
Corporation, an oil field waste management company, where he continues to serve
as a director. Mr. Pardo was Chief Executive Officer of Newalta Corporation
during its restructuring and, from 1992, a partner and director of Quorum
Funding, an investment company. Mr. Pardo also serves on the Boards of
Directors of Dyckerhoff Inc., PANACO Inc., and Innovative Valve Technologies,
Inc.
Mr. Riker was elected to the Board of Directors on June 25, 1998. He is a
former Senior Vice President of Arthur D. Little, Inc. and Chairman of Arthur
D. Little International, Inc. He has served as a director of Arthur D. Little
Ltd., and for twenty years was Chairman of Cambridge Consultants, Ltd., the
firm's science and technology affiliate in the UK. He has more than thirty
years of international experience, both as a management consultant in the areas
of management development, organization planning and industrial development,
and as builder and executive manager of the firm's international business.
Mr. Rolfe has been a director of PSC since January 1991. Since 1992, Mr.
Rolfe has been the President and Chief Executive Officer of RM Capital
Corporation, an investment company. Mr. Rolfe is also a director of
Consolidated Envirowaste Inc., an organic waste processing company.
Mr. Tenney has been a director of Philip since November 1998. For more
than five years, he has been the President, Chief Executive Officer and
director of ARC International Corporation, a company which develops,
constructs, and operates ice rink facilities. Mr. Tenney is Chairman of
Ballantyne of Omaha, Inc. and Chairman of Cabletel Communications Corp.
Mr. Turkstra has been a director of PSC since September 1996 and has been
a member of Turkstra, Mazza, Associates, a law firm, since 1959.
C. SENIOR OFFICERS
Following is a list as of April 27, 1999, of the names and ages of the
executive officers and the positions with PSC held by each officer.
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NAME AGE POSITIONS WITH THE DEBTORS
- -------------------------- --- -----------------------------------------------
Allen Fracassi
Ancaster, Ontario 46 Interim Chief Executive Officer and Director
Antonio Pingue Executive Vice-President,
Niagara Falls, Ontario 49 Corporate and Regulatory Affairs
Colin Soule Executive Vice-President, General
Toronto, Ontario 43 Counsel and Corporate Secretary
Phillip C. Widman Executive Vice-President and
West Simsbury, Connecticut 44 Chief Financial Officer
Gene Iannazzo
Cleveland, Ohio 52 President, Metal Services Group
Alec Thomas
Houston, Texas 51 President, Industrial Services Group
William Humenuk Executive Vice President and Chief
Philadelphia, Pennsylvania 57 Administrative Officer
Ayman Gabarin President and Chief Executive Officer,
London, United Kingdom 34 Philip Services (Europe) Ltd.
Mr. Fracassi was the President and Chief Executive Officer of PSC from
December 1990 until his appointment as Executive Vice-Chairman on May 6, 1998.
He was appointed Interim Chief Executive Officer of PSC on November 20, 1998
and resigned from the position of Executive Vice Chairman. Mr. Fracassi has
been a director of PSC since December 1990. Allen Fracassi and Philip
Fracassi, the founders of the Corporation, are brothers.
Mr. Pingue joined PSC in 1990 from the Ministry of the Environment, where
he held various positions beginning in 1973. In 1985 he became part of the
Ministry's newly formed Investigations and Enforcement Branch responsible for
conducting and coordinating investigations involving environmental infractions
and assisting prosecutors at court proceedings. He became Senior Vice
President, Environmental Services and Regulatory Affairs of PSC in 1994, and
was promoted to his current position in 1996. Mr. Pingue is a graduate of
Ryerson Polytechnical Institute's Environmental Health Program.
Mr. Soule joined PSC as General Counsel in October 1991. He was appointed
Corporate Secretary in January 1992 and in this capacity provides
administrative and legal support to PSC's Board of Directors. Mr. Soule was
appointed to the position of Senior Vice President in May 1994 and Executive
Vice President in May 1997. Prior to Philip he served as Legal Counsel for
Laidlaw Inc. Mr. Soule earned his law degree in 1983 from the Osgoode Hall Law
School of York University in Toronto.
Mr. Widman joined PSC as Chief Financial Officer in July 1998, bringing
over 23 years experience in a variety of financial and operational management
positions with two major North American corporations. For the past 11 years he
has worked with Asea Brown Boveri Inc. ("ABB Inc."), the international
electrical engineering company with its United States headquarters in Norwalk,
Connecticut. During the past two years Mr. Widman served as ABB Inc.'s Vice
President and Chief Financial Officer. Prior to ABB Inc., he held various
financial management positions with UNISYS Corporation. Mr. Widman earned an
MBA in Finance from Eastern Michigan University in 1979 and has also completed
Executive Management Programs at Motorola University (1991) and Duke University
(1997).
Mr. Iannazzo joined PSC in 1997 as Executive Vice President of the
Aluminum Division. Prior to PSC he was founder, President and Chief Executive
Officer of Allmet Technologies, a metals recovery business and recycler of
waste oxides for the steel industry. Mr. Iannazzo was Vice President of
Corporate Marketing for EnviroSource, Inc. and Senior Vice President of
International Mill Services, a subsidiary of EnviroSource. He has nearly 30
years of experience in the metals services and recycling industry. Mr.
Iannazzo holds a bachelor of science in business administration from West
Virginia University and completed certificate programs at the American
Management Association and the Wharton School of Finance & Economics.
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Mr. Thomas has 30 years experience in the waste management and industrial
services industries. He has owned and operated a number of industrial and
environmental companies including Thomas Environmental Management Inc. from
1969 to 1995. In 1995 he sold this business to PSC, and joined the Company in
charge of remediation services. He became Chief Operating Officer of PSC's
Environmental Services Group in 1996 and Senior Vice President of the Northeast
Region in charge of environmental and by-products management integration in
1997. Mr. Thomas served as Chief Operating Officer of the Industrial Services
Group from January 1998 until he was appointed its President on August 1, 1998.
He has completed the Executive Management Program at Harvard University.
Mr. Humenuk has been the Executive Vice President and Chief Administrative
Officer of PSC since June 1998. Prior to that he was a partner with Dechert,
Price and Rhoads, a law firm that Mr. Humenuk was a member of from 1967. Mr.
Humenuk is a director of the UAM Fund, Inc., UAM Funds Trust and UAM Funds II,
Inc.
Mr. Gabarin has been with PSC since 1992 when his family's company,
Corundol Environmental Limited, was sold to Philip Services. He had served as
Corundol's President for five years. Mr. Gabarin has held various senior
positions at PSC including Vice President of Operations for the Chemical Group
and Vice President of Research and Development. In 1994 he became Senior Vice
President of Philip Utilities Management Corporation and later Vice President
of Business Development. In December 1996 he relocated to the United Kingdom
when promoted to his current position. Mr. Gabarin holds a bachelor of applied
science degree (mechanical engineering) from the University of Toronto.
D. Directors and Officers of the Reorganized Debtors
The Board of Directors of Reorganized PSC will consist of 9 directors who
will be nominated by the holders of Lender Claims. Two members of the new
Board will be selected from PSC's existing board. Two members will be
nominated by High River Limited Partnership ("High River"), provided that High
River and any holders of Lender Claims acting in concert with it beneficially
own at least twenty-five percent (25%) of the Lender Claims. In addition, in
accordance with the agreements between the Debtors and the Lenders, the present
Board of Directors of PSC has agreed not to appoint a permanent Chief Executive
Officer for PSC without specific Lender approval unless the terms of such
appointment permit such appointment to be terminated at any time by the Board
of Directors of PSC on not more than thirty (30) days' notice without liability
of any kind to PSC or any of its Subsidiaries. The new directors will be
identified by PSC prior to the Confirmation Date.
E. Unaudited Projected Financial Information and Business and Operating
Strategies
The Debtors' new business plan (around which the plan of reorganization
was developed) provides for the Debtors to exit from Chapter 11 with a new
Board of Directors and a revised capital structure. Upon emergence from
Chapter 11, the Reorganized Debtors will be more focused and efficient with an
enhanced balance sheet and access to capital pursuant to the Exit Facility, and
better positioned to meet the needs and expectations of the Reorganized
Debtors' customers going forward.
The terms of the Debtors' new business plan are set forth in greater
detail in the pro forma financial projections contained in Appendix F to the
Disclosure Statement.
ACTICLE VI.
CHAPTER 11 CASES/CCAA
A. Commencement of the Chapter 11 Cases
On June 25, 1999 (the "Petition Date"), the Debtors filed their voluntary
petitions for relief pursuant to Chapter 11 of the Bankruptcy Code. Since the
Petition Date, the Debtors have continued in possession of their property and
are operating and managing their businesses as debtors-in-possession pursuant
to sections 1107 and 1108 of the Bankruptcy Code.
1. First Day Relief Granted by the Bankruptcy Court
(a) Applications for Retention of Debtors' Professionals; Ordinary Course
Professionals
The Bankruptcy Court authorized the Debtors to retain certain
professionals to represent them and assist them in connection with the Chapter
11 Cases. Some of these professionals were intimately involved with the
negotiation and
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development of the Plan and include, among others: (i) Skadden, Arps, Slate,
Meagher & Flom (Illinois) and its affiliated law practices, as United States
counsel for the Debtors; and (ii) Logan & Company, Inc., as solicitation and
noticing agents for the Debtors. Additionally, the Bankruptcy Court authorized
the Debtors to retain, employ and pay certain professionals, including a number
of attorneys, accountants, consultants, financial advisors, investment bankers
and brokers, who have rendered services to the Debtors unrelated to the Chapter
11 Cases (collectively defined in the Motion as the "Ordinary Course
Professionals"), to assist with the operations of their businesses in the
ordinary course.
(b) Motion to Continue Using Existing Cash Management Systems
The Bankruptcy Court authorized the Debtors to continue to utilize their
existing centralized cash management systems, bank accounts, business forms and
to engage in intercompany transactions in the ordinary course of the Debtors'
businesses.
(c) Motion for Authority to Pay Pre-Petition Employee Wages, Salaries and
Benefits and Directing All Banks to Honor Prepetition Checks for Payment of
Prepetition Employee Obligations
The Bankruptcy Court authorized the Debtors to pay or otherwise honor the
prepetition wages, salaries and employee benefits earned or arising before the
Petition Date of all currently active employees and independent contractors,
and the Court directed all banks to honor prepetition checks for payment of all
such prepetition employee obligations.
(d) Motion to Enter Workers' Compensation Insurance Program and Related
Agreements
The Bankruptcy Court authorized the Debtors to enter into their workers'
compensation insurance program and related agreements, to pay all obligations
due under the insurance program and related program documents and to provide
all cash and letters of credit required under the insurance program in the
ordinary course of their businesses.
(e) Motion Prohibiting Utilities From Altering, Refusing or Discontinuing
Services and Establishing Procedures for Determining Requests for Additional
Adequate Assurance
The Bankruptcy Court granted the Debtors' request and prohibited the
Debtors' utility service providers from altering, refusing or discontinuing
services on account of prepetition invoices. In addition, the Bankruptcy Court
approved the Debtors' proposed procedures for determining requests by the
utility service providers for additional adequate assurance.
(f) Motion Confirming Authority to Pay Prepetition Sales, Use and Other
Taxes
The Bankruptcy Court confirmed the Debtors' authority to pay prepetition
sales, use and other taxes collected by the Debtors from their customers or
incurred in the ordinary course of their businesses to the appropriate taxing
authorities.
(g) Motion for Authority to Pay Certain Prepetition Shipping, Warehousing
and Distribution Charges and Brokers' Fees
The Bankruptcy Court authorized the Debtors to pay certain prepetition
shipping, warehousing and distribution charges and broker's fees as the Debtors
determine, in the exercise of their business judgment, are necessary or
appropriate to obtain and/or ensure the transport, delivery or release of the
Debtors' goods and to satisfy the liens, if any, held by the shippers,
warehouses, distributors or brokers, in respect of such goods.
(h) Motion Confirming Grant of Administrative Expense Status to
Obligations Arising From Postpetition Delivery of Goods and For Certain Holders
of Valid Reclamation Claims, Prohibiting Third Parties from Interfering with
Delivery of Goods to Debtors, and for Authority to Pay Certain Expenses in the
Ordinary Course of Business
The Bankruptcy Court granted the Debtors' request for an order confirming
that the Debtors' undisputed obligations (arising directly and indirectly from
the shipment or delivery by suppliers and vendors of scrap metals, chemical
by-products, and related items accepted by the Debtors postpetition) will have
administrative expense priority status, granting administrative expense
treatment for certain holders of valid reclamation claims, and establishing
authority to pay certain expenses in the ordinary course of business.
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(i) Motion for Authority to Honor Certain Prepetition Obligations to
Customers and to Continue Customer Programs and Practices
The Bankruptcy Court authorized the Debtors to honor certain prepetition
customer practices and obligations to customers the Debtors deem necessary, in
the same manner such practices were implemented and such obligations were
honored before the commencement of the Chapter 11 Cases, including but not
limited to customer discounts, credits or deposits, and certain other
contractual obligations.
(j) Motion for Authority to Pay Certain Contractors in Satisfaction of
Perfected or Potential Mechanics', Materialmen's, or Similar Liens and
Interests in the Ordinary Course of Business
The Bankruptcy Court authorized the Debtors to pay certain prepetition
obligations owed to mechanics, materialmen and other such entities potentially
holding liens that the Debtors deem necessary, including but not limited to
certain contractors in satisfaction of perfected or potential liens and
interests.
(k) Motion Authorizing Payment of Certain Prepetition Claims of Key Trade
Vendors
The Bankruptcy Court authorized the Debtors, as may be appropriate, to pay
prepetition claims of vendors who agree to provide continuing trade credit on
the terms provided prepetition to the Debtors.
(l) Motion Authorizing Debtors to Obtain Postpetition Surety Bonds and to
Enter Indemnity Agreement and Inter-Creditor Agreement
The Debtors sought and obtained a stipulation and order from the
Bankruptcy Court authorizing the Debtors to obtain postpetition surety bonds
and to enter an approved indemnity agreement dated as of June 28, 1999 and an
approved inter-creditor agreement dated June 28, 1999 regarding the treatment
of the obligations of the Debtors with respect to post-petition bonds. The
indemnity agreement generally provides that the Debtors shall indemnify the
parties to the indemnity agreement from any loss, cost, and damage from the
failure of the Debtors to perform obligations, including reimbursement
obligations, and grants security interests in assets related to bonded
projects.
(m) Motion Approving Stipulation and Order Authorizing and Restricting
Debtors' Use of Cash Collateral and Granting Adequate Protection
The Bankruptcy Court granted the Debtors' request for an order approving a
stipulation and order authorizing and restricting the Debtors' use of cash
collateral and granting adequate protection of certain secured claims.
Pursuant to the terms of the stipulation and order, the Debtors were granted
permission to use the cash collateral on a consensual and negotiated basis, and
adequate protection was granted to prepetition lenders and holders of certain
liens.
(n) Motion Approving Cross-Border Insolvency Protocol
The Bankruptcy Court approved the Debtors' proposed protocol between the
United States Bankruptcy Court for the District of Delaware and the Ontario
Superior Court of Justice to govern the resolution of administrative issues
anticipated to arise in coordinating the insolvency proceedings. This protocol
is designed to coordinate activities in the two insolvency proceedings, protect
the rights of parties thereto, and ensure the maintenance of each court's
jurisdiction and comity.
(o) Motion Establishing Disclosure Statement Hearing Date, a Confirmation
Hearing Date, and Certain Other Critical Dates
The Bankruptcy Court granted the Debtors' request for an expeditious
confirmation timetable, scheduling hearings on the approval of the Disclosure
Statement for August 23, 1999 and confirmation of the Plan on October 13, 1999
respectively.
(p) Motion Establishing Bar Date for Filing Proofs of Impaired Unsecured
Claims and Approving Forms and Manner of Notice Thereof
The Bankruptcy Court approved the Debtors' proposed form and manner of
notice of the Bar Date and authorized the Debtors to provide such notice, along
with a Proof of Claim form, to all parties listed on a certain impaired
unsecured creditors list.
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B. Post-Petition Operations and Liquidity
On June 28, 1999, the Bankruptcy Court entered an interim order
authorizing the Debtors to obtain secured postpetition financing up to an
aggregate principal amount not to exceed $100 million from certain lenders, to
obtain on an interim basis $12 million in letter of credit capacity pending
final relief, granting the lenders security interests in all the Debtors'
presently owned and after-acquired property to secure the Debtors' obligations
under the DIP Credit Agreement subject to a carve-out, and granting the lenders
priority with respect to the Debtors' obligations over any and all
administrative expenses of the kinds specified in sections 503(b) and 507(b) of
the Bankruptcy Code, subject to a carve-out and certain other superpriority
claims expressly set forth in the DIP Credit Agreement.
C. The Companies' Creditors Arrangement Act (the "CCAA") of Canada
As previously stated, PSC is amalgamated under the laws of the Province of
Ontario and PSI is a corporation established in the United States under the
laws of the State of Delaware.
On June 25, 1999, PSC and twenty-five of its Canadian subsidiaries (the
"Canadian Debtors") commenced a case under the Companies' Creditors Arrangement
Act (the "CCAA") of Canada in the Ontario Superior Court of Justice (the
"Ontario Court"). The CCAA is intended to facilitate the reorganization of
major public companies with complicated public debt structures and is the most
effective framework for financial restructuring in Canada.
CCAA protection is not automatic but depends on the discretion of the
court. Where the court grants protection under the CCAA, a general stay of
proceedings normally is imposed against any and all proceedings and claims. An
initial stay of proceedings is restricted by statute to a maximum period of 30
days. The applicant may apply to extend the stay of proceedings and the court
normally will extend the stay if the court is satisfied that constructive
negotiations for the reorganization are taking place.
The purpose of the commencement of the Canadian Cases for PSC and the
Canadian Debtors was to obtain a stay of proceedings in order to permit the
restructuring contemplated by the Plan. The Debtors intend to seek court
approval in the Canadian Cases of the Canadian Plan. Except as provided in the
Canadian Plan, all Claims and Interests against PSC will be governed by the
Plan.
The confirmation and satisfaction of all conditions to the effectiveness
of the Canadian Plan is a condition precedent to the Effective Date of the
Plan. For the Canadian Plan to be confirmed, the Canadian Plan must receive
the affirmative vote of two-thirds in value of proven claims and a majority in
number of creditors holding proven claims in each class of creditors entitled
to vote. Holders of Lender Claims against the Canadian Debtors, and the class
of holders of Canadian Impaired Unsecured Claims (similar to Class 7 of the
Plan) will have the right to vote on the Canadian Plan. Subject to the terms
of the Lender Lock-up Agreement, the Lenders have agreed to vote in favor of
the Canadian Plan. If the class of holders of Canadian Impaired Unsecured
Claims votes to reject the Canadian Plan, then the Canadian Plan cannot be
confirmed in the Canadian Proceeding and a condition to the Effective Date of
the Plan will not be met unless the Lenders effectuate a realization on their
security over some or all of the Canadian Debtors in a manner consistent with
the implementation of the Plan.
On June 25, 1999, the Ontario Court issued an initial order (the "Initial
Order") in connection with the Canadian Cases. The following provides a
summary of certain of the matters addressed in the Initial Order:
1. Stay of Proceedings
The Ontario Court ordered that until Friday, July 23, 1999, all
proceedings against the Canadian Debtors are stayed and suspended and all
persons with contractual arrangements with the Canadian Debtors for the supply
of goods and services are restrained from asserting remedies contractual or
otherwise, against the Canadian Debtors.
2. Payment of Trade Creditors
The Ontario Court ordered that the Canadian Debtors shall be authorized to
continue to pay claims of trade creditors, whether incurred before or after the
Initial Order provided that with respect to claims in excess of $2,000, such
trade creditors continue to supply trade credit to the Canadian Debtors on
terms at least as favorable as those currently extended.
3. Operations
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The Ontario Court ordered that the Canadian Debtors remain in possession
and control of their property and to carry on business in a manner consistent
with the preservation of the Canadian Debtors' business and property and to
continue to engage advisors in the ordinary course of business or in connection
with the CCAA restructuring.
4. Authority to Borrow and Charging of Property
The Ontario Court ordered that the Canadian Debtors are authorized and
directed to enter into the DIP Facility and the matters referred to above in
sections VI.A.1(l) and (m).
5. Appointment of Ernst and Young Inc. as Monitor
The Ontario Court ordered that Ernst & Young Inc. (the "Monitor") is
appointed as the Monitor to monitor the business and affairs of the Canadian
Debtors during the Canadian Proceedings in accordance with the statutory rights
and obligations of monitors set forth in the CCAA and the specific rights and
obligations set forth in the Initial Order.
6. Cross-Border Insolvency Protocol
The Ontario Court approved the Canadian Debtors' proposed protocol between
the United States Bankruptcy court for the District of Delaware and the Ontario
Superior Court of Justice referred to above in section VI.A.1(n).
ACTICLE VII.
CERTAIN FACTORS TO BE CONSIDERED
Holders of Class 6 and 7 Claims should carefully consider the following
factors, as well as the other information set forth in this Disclosure
Statement (and the documents delivered together herewith and/or incorporated by
reference herein), before deciding whether to vote to accept or to reject the
Plan.
A. GENERAL CONSIDERATIONS
The formulation of a plan of reorganization is the principal purpose of
the Chapter 11 Cases. The Plan sets forth the means for satisfying the Claims
against the Debtors. Certain Claims and Interests receive no distributions
pursuant to the Plan. See Section II.C of the Disclosure Statement, entitled
"Summary of the Plan of Reorganization -- Classification and Treatment of
Claims and Interests." Reorganization of the Debtors' businesses and
operations under the proposed Plan also avoids the potentially adverse impact
of a liquidation on the Debtors' employees, and many of their customers, trade
creditors and lessors.
B. CERTAIN BANKRUPTCY/CCAA CONSIDERATIONS
1. General
The filing of bankruptcy petitions by the Debtors and the publicity
attendant thereto may adversely affect the Debtors' businesses. The Debtors
believe that any such adverse effects may be diminished by the support of the
Consenting Lenders for the Plan pursuant to the terms of the Lender Lock-up
Agreement and the proposed timetable for the cases. However, such adverse
affects are likely to be experienced during the pendency of a protracted
bankruptcy case.
2. Effect on Non-Filing Subsidiaries
Together, the Chapter 11 Cases and the CCAA proceedings have captured
most, but not all of PSC's Subsidiaries in North America. For complete lists
of entities seeking Chapter 11 and CCAA relief, see Exhibit A to the Plan and
Appendix C hereto. There are, however, certain United States, Canadian, and
other international Subsidiaries that have not sought either Chapter 11 or CCAA
protection.
The filing of the Chapter 11 Cases by the Debtors and the publicity
attendant thereto might also adversely affect the businesses of any non-filing
Subsidiaries. Because the business of PSC is closely related to the businesses
of all its Subsidiaries, any downturn in the businesses of non-filing
Subsidiaries could affect PSC's prospects also. Although PSC does not believe
that the commencement of these Chapter 11 Cases will adversely affect the
businesses of any non-filing
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Subsidiaries, if the Chapter 11 Cases become protracted, the possibility of
adverse effects on such non-filing Subsidiaries may increase. If this were to
occur, the affected Subsidiaries would not have the benefit of the "automatic
stay."
3. Failure to Confirm the Plan
Even if all Impaired voting classes vote in favor of the Plan and, with
respect to any Impaired Class deemed to have rejected the Plan the requirements
for "cramdown" are met, the Bankruptcy Court, which, as a court of equity may
exercise substantial discretion, may choose not to confirm the Plan. Section
1129 of the Bankruptcy Code requires, among other things, a showing that
confirmation of the Plan will not be followed by liquidation or the need for
further financial reorganization of the Debtors, see Section XI.A of the
Disclosure Statement, entitled "Feasibility of the Plan and the Best Interests
of Creditors Test -- Feasibility of the Plan," and that the value of
distributions to dissenting holders of Claims and Interests may not be less
than the value such holders would receive if the Debtors were liquidated under
Chapter 7 of the Bankruptcy Code. (See Section XI.C of the Disclosure
Statement, entitled "Feasibility of the Plan and the Best Interests of
Creditors Tests -- Best Interests Test.") Although the Debtors believe that
the Plan will meet such tests, there can be no assurance that the Bankruptcy
Court will reach the same conclusion.
4. Failure to Consummate the Plan
The Plan provides for certain conditions that must be fulfilled prior to
confirmation of the Plan and the Effective Date. As of the date of this
Disclosure Statement, there can be no assurance that any or all of the
conditions in the Plan will be met (or waived) or that the other conditions to
consummation, if any, will be satisfied. Accordingly, even if the Plan is
confirmed by the Bankruptcy Court, there can be no assurance that the Plan will
be consummated and the restructuring completed.
5. Certain Provisions of the Amended Certificate of Incorporation, the
By-Laws and Other Agreements
The Amended Certificate of Incorporation, the By-Laws and certain other
agreements contain provisions that may have the effect of delaying, deferring
or preventing a change in control of the Reorganized Debtors.
C. CERTAIN TAX CONSIDERATIONS
THERE ARE A NUMBER OF MATERIAL INCOME TAX CONSIDERATIONS, RISKS AND
UNCERTAINTIES ASSOCIATED WITH CONSUMMATION OF THE PLAN. INTERESTED PARTIES
SHOULD READ CAREFULLY THE DISCUSSION SET FORTH IN ARTICLE X OF THE DISCLOSURE
STATEMENT, ENTITLED "CERTAIN UNITED STATES INCOME TAX CONSEQUENCES OF THE PLAN"
FOR A DISCUSSION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES AND RISKS FOR
HOLDERS OF CLAIMS AND THE DEBTORS RESULTING FROM THE TRANSACTIONS OCCURRING IN
CONNECTION WITH THE PLAN.
D. INHERENT UNCERTAINTY OF FINANCIAL PROJECTIONS
The Projections set forth in Appendix F hereto cover the Debtors'
operations through the period ending December 31, 2001. These Projections are
based on numerous assumptions that are an integral part of the Projections,
including confirmation and consummation of the Plan in accordance with its
terms, realization of the operating strategy of the Reorganized Debtors,
industry performance, no material changes in applicable legislation or
regulations, exchange rates, or generally accepted accounting principles,
general business and economic conditions, competition, adequate financing,
absence of material contingent or unliquidated litigation or indemnity claims,
and other matters, many of which are beyond the control of the Reorganized
Debtors and some or all of which may not materialize. In addition,
unanticipated events and circumstances occurring subsequent to the date of this
Disclosure Statement may affect the actual financial results of the Reorganized
Debtors' operations. Because the actual results achieved throughout the
periods covered by the Projections may vary from the projected results, the
Projections should not be relied upon as a guaranty, representation, or other
assurance of the actual results that will occur. (See Section XI.A of the
Disclosure Statement, entitled "Feasibility of the Plan and Best Interests of
Creditors -- Feasibility of the Plan.")
E. RISKS ASSOCIATED WITH EXIT FACILITY
The Debtors' operations are dependent on the availability and cost of
working capital financing and may be adversely affected by any shortage or
increased cost of such financing. Among the aspects of the Lender Lock-up
Agreement between the Debtors and the Lenders is the provision for the Exit
Facility. It is anticipated that the Exit Facility will provide credit
availability of up to $125 million. The Exit Facility would be secured by
guaranties and charges
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over the accounts receivable and inventory and, if required, substantially all
other assets of Reorganized PSC and its subsidiaries, senior to all other
security including the security for the New Senior Secured Term Debt. The
Debtors anticipate that the Exit Facility would be used to (a) fund repayment
of the DIP Facility, (b) provide short-term working capital needs, and (c) fund
letters of credit within a sub-limit of the Exit Facility. The maturity of the
Exit Facility is contemplated as two years from Plan implementation, but may be
refinanced in whole but not in part by a replacement facility with the same
priority. The parties continue to negotiate the terms of the Exit Facility,
and there can be no assurances that the terms of such a Facility will not
differ materially from the terms described herein.
The Debtors believe that substantially all of their needs for funds
necessary to consummate the Plan and for post-Effective Date working capital
financing will be met by projected operating cash flow and the Exit Facility.
The proposed Exit Facility contains certain conditions and covenants that the
Debtors may not be able to meet, however. Moreover, if the Debtors require
working capital greater than that provided by the Exit Facility, they may be
required either to (a) seek to increase the availability under the Exit
Facility, (b) obtain other sources of financing or (c) curtail their
operations. Some of the factors which may affect the amount of financing
required to consummate the Plan include, without limitation, a delay in
consummating the Plan, and whether the Debtors' cash flow prior to the
Effective Date is more than budgeted. The Debtors believe that the
recapitalization to be accomplished through the Plan will facilitate the
Debtors' ability to obtain additional or replacement working capital financing.
No assurance can be given, however, that any additional replacement financing
will be available on terms that are favorable or acceptable to the Debtors.
Moreover, there can be no assurance that the Debtors will be able to obtain an
acceptable credit facility upon expiration of the Exit Facility.
F. RISKS ASSOCIATED WITH NEW COMMON SHARES; CHANGE IN CONTROL
PSC's common shares traded under the symbol "PHV" in the United States on
the New York Stock Exchange (the "NYSE") until January 13, 1999, when the
common shares were temporarily halted from trading due to the Company's failure
to comply with the NYSE's continued listing criteria. On April 23, 1999, the
NYSE announced that due to then recent developments in PSC's financial
condition, it would suspend the trading of PSC's common shares on the NYSE
prior to the opening on April 26, 1999, and would seek delisting of those
shares. PSC continues to pursue its remedies in regard to the listing of its
common shares on the NYSE, but there can be no assurances that PSC will be able
to retain such a listing. PSC common shares are listed and posted for trading
on the Toronto Stock Exchange and the Montreal Exchange.
Pursuant to the Plan, New Common Shares will be issued in partial
satisfaction of the Class 6 Secured Lender Claims, and if Class 7 votes to
accept the Plan, the Class 7 Impaired Unsecured Claims and in full satisfaction
of the Class 8 Claims and Interests, provided, however, that if the holders of
Allowed Class 7 Claims vote to reject the Plan, no New Common Shares will be
issued to holders of Class 7, 8A, 8B or 8C Claims. In any case, distribution
of New Common Shares shall be subject to dilution on or after the Effective
Date (a) to the extent necessary to give effect to the convertibility of the
New Secured PIK Debt and the New Unsecured Convertible Notes and the exercise
of the Management Options or (b) otherwise as a result of the issuance of
common shares, implementation of other management incentive programs or other
action taken by the board of directors of Reorganized PSC (the "Dilution").
The Plan contemplates certain management stock options and the issuance of New
Secured PIK Debt and, subject to the Class 7 Election, New Unsecured
Convertible Notes which will be convertible into PSC Common Shares. To the
extent such equity interests are issued after the Effective Date, the
percentage ownership of PSC Common Shares of the holders of Class 6, Class 7
and Class 8 Claims and Interests will be diluted on a pro rata basis. In
addition, the market price of the PSC's common shares in the past has been and
may in the future be volatile. A variety of events, including
quarter-to-quarter variations in operating results, news announcements, trading
volume, general market trends and other factors could result in wide
fluctuations in the market price of the PSC Common Shares.
If PSC is delisted and is unable to obtain a relisting on the NYSE in
connection with its restructuring, then it will seek to have PSC Common Shares
listed on the NASDAQ or AMEX exchanges. There can be no assurances that
Reorganized PSC will be able to obtain such a listing.
Following the Debtors' restructuring, the Lenders, in the aggregate, will
own at least ninety-one percent (91%) of Reorganized PSC's outstanding common
shares and will control Reorganized PSC's Board of Directors. Accordingly, the
Lenders, if acting together, would be able to exert substantial influence over
the Reorganized Debtors and to control effectively most matters requiring
shareholder approval, including all fundamental corporate actions such as
mergers, substantial acquisitions and divestitures. The voting power of these
shareholders under certain circumstances could have the effect of causing,
delaying or preventing a change of control of the Debtors, the effect of which
may be to deprive the Debtors' shareholders of a control premium that might
otherwise be realized in connection with the acquisition of the Debtors. In
addition, certain provisions of the PSC's Amended Articles of Amalgamation and
Bylaws as well as provisions in certain agreements and the Business
Corporations Act (Ontario) may have the effect of delaying, deferring or
preventing a change in control.
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G. RISKS ASSOCIATED WITH NEW SECURED PIK DEBT, NEW UNSECURED PIK NOTES AND
NEW UNSECURED CONVERTIBLE NOTES
There can be no assurance that the Debtors will generate sufficient cash
from operations described in the Projections, see Appendix F to the Disclosure
Statement, to repay the debt and notes being issued under the Plan at maturity,
or that the Debtors will not use cash in excess of the amounts set forth in the
Projections and, accordingly, satisfaction of the New Secured PIK Debt, New
Senior Secured Term Debt, New Unsecured PIK Notes, and New Unsecured
Convertible Notes at their respective maturity dates may be dependent upon the
ability of the Reorganized Debtors to refinance the indebtedness thereunder at
maturity or to raise sufficient capital to make such payments.
H. DISRUPTION OF OPERATIONS DUE TO BANKRUPTCY FILING
As noted in Article III of the Disclosure Statement, entitled "Treatment
of Trade Creditors, Customers and Employees," as a part of the first day relief
sought in the Chapter 11 Cases the Debtors obtained orders from the Bankruptcy
Court allowing them to pay prepetition employee obligations and certain
prepetition key vendor trade claims in the ordinary course of business. The
Debtors therefore believe that the Solicitation with respect to the Plan will
not materially adversely affect the Debtors' relationships with customers,
employees, and suppliers, provided that the Debtors demonstrate (i) sufficient
liquidity to continue to operate their businesses and (ii) a likelihood of
emergence from Chapter 11 by November 30, 1999.
The Debtors believe that relationships with their customers, suppliers and
employees will be maintained if the Chapter 11 process continues in a timely
fashion. However, if there is a protracted Chapter 11 process, and if the
Debtors' relationships with their customers, suppliers and employees are
adversely affected, the Debtors' operations could be materially affected.
Weakened operating results could adversely affect the Debtors' ability to
complete the solicitation of acceptances of the Plan or, if such solicitation
is successfully completed, to obtain confirmation of the Plan. In the event
that the Debtors fail to confirm the Plan, the risks associated with a
protracted Chapter 11 process or a liquidation must also be considered (See
Article XII of the Disclosure Statement, entitled "Alternatives to the
Confirmation and Consummation of the Plan"). The Debtors anticipate, however,
that they will have sufficient cash generated from current operations and
provided under the DIP Facility and the Exit Facility to service the
obligations that they intend to pay during the period prior to and at
consummation.
I. FINANCIAL UNCERTAINTY
The Debtors' results of operations for the second half of 1998 were
significantly impacted by actions taken by the Debtors to retain customers,
suppliers' tightening trade terms and employee attrition. In addition, the
results of operations for the year ended December 31, 1998 were impacted by
special charges recorded by PSC amounting to $1.211 billion. These charges
reflect the effects of (i) decisions made with respect to the potential
disposition of U.S. ferrous and certain Industrial Services Group operations;
(ii) impairments of fixed assets and related goodwill resulting from decisions
to exit various business locations or activities and dispose of the related
assets; (iii) assessments of the recoverability of fixed assets and the related
goodwill of business units in continuing use; (iv) charges for financing fees
and debt restructuring costs; (v) severance payments and other costs relating
to ongoing cost reduction measures and restructuring; (vi) the reduction in
carrying value of PSC's investment in Innovative Valve Technologies Inc. and
(vii) a writedown of PSC's investment in Strategic Holdings Inc.
In December 1998, the Debtors decided to discontinue the non-ferrous and
copper operations of their Metals Services business. A sale of certain of the
aluminum operations included in the non-ferrous operations closed on January
11, 1999. Certain copper and non-ferrous operations or assets are anticipated
to be sold in the next 12 months and the remainder of the operations in these
segments will be closed during 1999. In addition, the Debtors sold their
Houston, Texas steel distribution business in 1998. The Debtors continue to
review the divestiture of certain non-core businesses or investments. The
proceeds which may be raised from these divestitures is unknown. A gain or
loss may be recorded on the divestitures but the amount cannot be determined
until definitive agreements are reached.
J. ACQUISITION STRATEGY; INTEGRATION ISSUES
From 1992 to 1997, PSC deployed an aggressive strategy of growth through
acquisitions. In 1997 alone, PSC acquired over 30 businesses. In connection
with these acquisitions, there may be liabilities that PSC failed to discover,
including liabilities arising from pollution of the environment or
non-compliance with environmental laws by prior owners, and for which PSC, as a
successor owner, may be responsible and that are not being discharged under the
Plan.
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Indemnities and warranties for such liabilities from sellers, if obtained, may
not fully cover the liabilities due to their limited scope, amounts, or
duration, the financial limitations of the indemnitor or warrantor, or other
reasons.
There are significant uncertainties and risks relating to the integration
of an acquired company's operations. Whether the anticipated benefits of an
acquisition are ultimately achieved depends on a number of factors, including
the ability of the combined companies to achieve administrative cost savings,
insurance and bonding cost reductions, general economies of scale and,
generally, to capitalize on the combined asset base and strategic position of
the combined companies. The timing and manner of the implementation of
decisions made with respect to the ongoing business of the combined companies
following the acquisition will materially affect the operations of the combined
companies.
Given the range of potential outcomes arising from such decisions and the
interrelationships among decisions to be made, it is difficult to quantify with
precision the impact of such decisions on the results of operations and
financial condition of the combined companies. In particular, reserves
established or charges recorded in connection with an acquisition or the
integration thereof may be insufficient and the Debtors may be required to
establish additional reserves or record additional charges at a later date.
There can be no assurance that any expected synergies will be realized or that
the results of the combined operations will be improved in a timely manner, if
at all. In addition, the process of integrating the acquired company's
operations into those of the Debtors could cause the interruption of, or the
loss of momentum in, the activities of either or both companies, which could
have an adverse effect on the combined operations.
K. BUSINESS AND COMPETITION
The metals and industrial services industries are highly competitive and
require substantial capital resources. Competition is both national and
regional in nature and the level of competition faced by the Debtors in their
various lines of business is significant. Technology is constantly changing.
There can be no assurance that the Debtors will be able to keep pace with
technological changes, that a competitor will not develop superior technology
or that a well capitalized competitor will not enter or expand in the areas in
which the Debtors compete.
The Debtors' primary competitors in the metals industry are other scrap
processors in regions where its metals operations are located. The Debtors
face competition both on the purchase and sales sides of its business; however,
competition is particularly significant on the purchase side for access to
scrap. The Metals Services Group competes on the basis of price, processing
capability and service. The availability of scrap depends on a number of
factors, including the general level of economic activity in the industries
serviced by the Metals Services Group, many of which are cyclical in nature,
and market prices for scrap. Competition for access to scrap may intensify
during periods of scrap scarcity. There can be no assurance that the Debtors
will continue to have adequate access to scrap supplies at economic prices.
The industrial services sector is also highly competitive and fragmented.
The Debtors compete with numerous local, regional and national companies of
varying sizes and financial resources. Competition for industrial services is
based primarily on hourly rates, productivity, safety, innovative approaches
and quality of service. The hazardous waste management industry competes with
the Debtors' industrial services operations by providing a price competitive
disposal alternative to a number of the Debtors' waste management and
by-products recovery services. The hazardous waste management industry
currently has substantial excess capacity caused by overbuilding, continuing
efforts by hazardous waste generators to reduce volume and to manage their
waste on-site, and the uncertain regulatory environment regarding hazardous
waste management and remediation requirements. These factors have led to
downward pressure on pricing in a number of the markets served by the Debtors'
industrial services operations. The Debtors expect these conditions to continue
for the foreseeable future.
Recently, weak market conditions in the metals recycling and industrial
services industries have had a negative impact on revenue in these areas. For
example, record steel imports have decreased domestic demand and prices for
scrap steel. These conditions have had an effect on the entire market. In
addition, the Debtors' Industrial Services Group tends to follow seasonal
patterns, with higher levels of activity during the period from April through
November and lower levels during the adverse weather conditions of winter and
early spring. These operations are also affected by the spending decisions of
the Debtors' customers, which in turn are influenced by general economic
conditions and other factors. As a result of all these factors, the Debtors'
financial performance can vary significantly from period to period.
The Debtors use a number of proprietary processes in their operations and
possess a number of United States patents and various foreign counterparts of
those patents. The Debtors rely primarily, however, on a combination of trade
secrets, confidentiality procedures and contractual provisions to protect their
intellectual property rights. The patents may be circumvented or invalidated
and afford only limited protection. Despite the Debtors' efforts to protect
their proprietary rights, unauthorized parties may attempt to obtain and use
information that the Debtors regard as confidential and proprietary, and there
can be no assurance that the Debtors' means of protecting their proprietary
rights will be adequate.
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The Debtors are not aware of any material claims that any of their intellectual
property infringes on the proprietary rights of third parties. There can be no
assurance, however, that third parties will not assert infringement claims
against the Debtors, which may be costly.
The Debtors' growth also is dependent on the continuation of outsourcing
and vendor reduction trends within industrial enterprises. As these enterprises
focus on their core business, they are increasingly outsourcing non-core,
non-revenue generating activities in order to reduce costs. Such activities can
generally be performed on a more cost effective basis by specialized industrial
service and resource recovery companies which have greater expertise,
technology advantages and economies of scale. In addition, industrial
enterprises are evidencing a desire to reduce the number of vendors of
industrial and resource recovery services by purchasing services only from
those suppliers that can provide a "total service" solution, thereby providing
further administrative and cost reductions. If the pace of either of these
trends slows or reverses, it could have a material adverse effect on the
Debtors' financial position and results of operations.
L. ENVIRONMENTAL MATTERS
Environmental Regulations. The Debtors' operations are subject to various
comprehensive laws and regulations related to the protection of the
environment. Such laws and regulations, among other things, (i) regulate the
nature of the industrial by-products and wastes that the Debtors can accept for
processing at its treatment, storage and disposal facilities, the nature of the
treatment they can provide at such facilities and the location and expansion of
such facilities; (ii) impose liability for remediation and clean-up of
environmental contamination, both on-site and off-site, resulting from past and
present operations at the Debtors' facilities; and (iii) may require financial
assurance that funds will be available for the closure and post-closure care of
sites, including acquired facilities. In addition, because the Debtors provide
their customers with services designed to protect the environment by cleaning
and removing materials or substances from their customers' equipment or sites
that must be properly handled, recycled or removed for ultimate disposal, the
Debtors' operations are subject to regulations which impose liability on
persons involved in handling, processing, generating or transporting hazardous
materials. These requirements may also be imposed as conditions of operating
permits or licenses that are subject to renewal, modification or revocation.
These laws and regulations have become and are likely to continue to become
increasingly stringent. Existing laws and regulations, and new laws and
regulations, may require the Debtors to modify, supplement, replace or curtail
their operating methods, facilities or equipment at costs which may be
substantial without any corresponding increase in revenues.
Hazardous substances are present in some of the processing, transfer,
storage, disposal and landfill facilities owned or used by the Debtors.
Remediation will be required at these sites at substantial cost. For each of
these sites, the Debtors, in conjunction with an environmental consultant, have
developed or are developing cost estimates that are periodically reviewed and
updated, and the Debtors maintain reserves for these matters based on such cost
estimates. Estimates of the Debtors' liability for remediation of a particular
site and the method and ultimate cost of remediation require a number of
assumptions and are inherently difficult. There can be no assurance that the
ultimate cost and expense of corrective action will not substantially exceed
such reserves and have a material adverse impact on the Debtors' operations or
financial condition.
In the normal course of business, and as a result of the extensive
governmental regulation of industrial and environmental services and resource
recovery, the Debtors have been the subject of administrative and judicial
proceedings by regulators and have been subject to requirements to remediate
environmental contamination or to take corrective action. There will be
administrative or court proceedings in the future in connection with the
Debtors' present and future operations or the operations of acquired
businesses. In such proceedings in the past, the Debtors have been subject to
monetary fines and certain orders requiring the Debtors to take environmental
remedial action. In the future, the Debtors may be subject to monetary fines,
penalties, remediation, clean-up or stop orders, injunctions or orders to cease
or suspend certain of their practices. The outcome of any proceeding and
associated costs and expenses could have a material adverse impact on the
operations or financial condition of the Debtors.
The Debtors' industrial services businesses are subject to extensive
governmental regulation, and the complexity of such regulation makes consistent
compliance with such laws and regulations extremely difficult. In addition,
the demand for certain of the Debtors' services may be adversely affected by
the amendment or repeal of federal, state, provincial, or foreign laws and
regulations or by changes in the enforcement policies of the regulatory
agencies concerning such laws and regulations.
Public Concerns. There is a high level of public concern over industrial
by-products recovery and waste management operations, including the siting and
operation of transfer, processing, storage and disposal facilities and the
collection, processing or handling of industrial by-products and waste
materials, particularly hazardous materials. Zoning, permit and licensing
applications and proceedings and regulatory enforcement proceedings are all
matters open to public
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scrutiny and comment. As a result, from time to time, the Debtors have been,
and may in the future be, subject to citizen opposition and publicity which may
have a negative effect on their operations and delay or limit the expansion and
development of operating properties and could have a material adverse effect on
their operations or financial condition.
Environmental Insurance Coverage. Consistent with industry trends, the
Debtors may not be able to obtain adequate amounts of environmental impairment
insurance at a reasonable premium to cover liability to third parties for
environmental damages. Accordingly, if the Debtors were to incur liability for
environmental damage either not provided for under such coverage or in excess
of such coverage, the Debtors' financial position and results of operations
could be materially and adversely affected.
Jurisdictional Restrictions on Waste Transfers. In the past, various
states, provinces, counties and municipalities have attempted to restrict the
flow of waste across their borders, and various United States and Canadian
federal, provincial, state, county and municipal governments may seek to do the
same in the future. Any such border closing may result in the Debtors
incurring increased third-party disposal costs in connection with alternate
disposal arrangements.
The Debtors are required under certain United States and Canadian laws and
regulations to demonstrate financial responsibility for possible bodily injury
and property damage to third parties caused by both sudden and non-sudden
occurrences. The Debtors are also required to provide financial assurance that
funds will be available when needed for closure and post-closure care at
certain of its treatment, storage and disposal facilities, the costs of which
could be substantial. Such laws and regulations allow the financial assurance
requirements to be satisfied by various means, including letters of credit,
surety bonds, trust funds, a financial (net worth) test and a guarantee by a
parent company. In the United States, a company must pay the closure costs for
a waste treatment, storage or disposal facility owned by it upon the closure of
the facility and thereafter pay post-closure care costs. There can be no
assurance that these costs will not materially exceed the amounts provided
pursuant to financial assurance requirements. In addition, if such a facility
is closed prior to its originally anticipated time, it is unlikely that
sufficient funds will have been accrued over the life of the facility to fund
such costs, and the owner of the facility could suffer a material adverse
impact as a result. Consequently, it may be difficult to close such facilities
to reduce operating costs at times when, as is currently the case in the
industrial services industry, excess treatment, storage or disposal capacity
exists.
M. CLAIMS ESTIMATES
There can be no assurance that the estimated Claim amounts set forth
herein for Class 7 are correct, and the actual Allowed amount of Claims in
Class 7 may differ from the estimates. Estimated amounts are subject to
certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, the actual Allowed amount of Claims in Class 7 may vary from those
estimated herein, and the pro rata distribution of New Unsecured PIK Notes, New
Common Shares and New Unsecured Convertible Notes to holders of Impaired
Unsecured Claims is subject to such variation. In addition, the distributions
to holders of Allowed Class 7 Claims is dependent upon the aggregate amount of
the Canadian Impaired Unsecured Claims allowed in the Canadian Cases. There
can be no assurance that the estimated amount of the Canadian Impaired
Unsecured Claims is correct, and the actual amount of such claims allowed in
the Canadian Cases may differ from the estimates. The estimated amounts are
subject to risks, uncertainties and assumptions, which if the risks or
uncertainties materialize, or underlying assumptions prove incorrect, the
actual amount of Canadian Impaired Unsecured Claims may vary from the estimates
and the prorata distribution to holders of Class 7 Claims is also subject to
such variation.
N. UNIMPAIRED CLAIMS
The Plan provides that the only claims against the Debtors that are
Impaired are the claims set forth in Classes 6, 7 and 8. All other claims
against the Debtors are being left Unimpaired under the Plan. The Unimpaired
Claims include, but are not limited to, claims relating to environmental
liability, certain claims of employees for severance/retirement obligations,
contingent liabilities relating to indemnification obligations arising out of
the sale and acquisition of businesses or assets, certain indemnification
claims of current and former directors and officers assumed pursuant to the
Plan, certain litigation claims, certain claims arising out of services
rendered and goods sold and certain other contingent and unliquidated
obligations. To the extent that such claims are required to be reflected on
financial statements, the Debtors believe that their financial statements and
projected financial statements properly reflect these claims in accordance with
generally accepted accounting principles. However, the actual amount of such
claims may materially differ from those set forth in the financial statements
and projections. Moreover, many Unimpaired Claims are of an off-balance sheet
nature and the Debtors' liability as to such claims cannot be and has not been
estimated. Further, there are likely to be Unimpaired Claims that exist which
the Debtors are not aware of at this time. The Debtors are taking no action in
the Chapter 11 Cases to estimate, disallow, liquidate or otherwise cap or
quantify any Unimpaired Claims. The liability of the Debtors as to the
Unimpaired Claims after their emergence from Chapter 11 will not have been
reduced or otherwise
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affected by the Chapter 11 Cases or the Plan. There can be no assurance that
the Debtors' financial position and results of operations after emergence from
Chapter 11 pursuant to the Plan could not be materially and adversely affected
by the Unimpaired Claims.
O. AFFILIATE STATUS
To the extent that Persons deemed to be "underwriters" receive New Common
Shares, New Secured PIK Debt, New Unsecured PIK Notes or New Unsecured
Convertible Notes issued pursuant to the Plan, such Persons do not receive the
exemption from the securities laws under section 1145 of the Bankruptcy Code.
Whether or not any particular person would be deemed to be an "underwriter"
with respect to any security to be issued pursuant to the Plan would depend
upon various facts and circumstances applicable to that person. Accordingly,
the Debtors express no view as to whether any person would be an "underwriter"
with respect to any security to be issued pursuant to the Plan. Given the
complex, subjective nature of the question of whether a particular person may
be an underwriter, the Debtors make no representations concerning the right of
any person to trade in the New Securities to be transferred pursuant to the
Plan. The Debtors recommend that holders of Claims receiving New Securities
pursuant to the Plan consult their own counsel concerning whether they may
freely trade such securities.
Persons that are "affiliates" of the Reorganized Debtor but are not
otherwise "underwriters" within the meaning of section 1145(b) of the
Bankruptcy Code, may be able to sell the New Common Shares, New Secured PIK
Debt, New Unsecured PIK Notes and New Unsecured Convertible Notes without
registration, pursuant to the exemption from registration provided by Rule 144
under the Securities Act. Rule 144 permits "affiliates" of the issuer to sell,
within any three-month period, the greater of one percent (1%) of the shares or
other units of the class outstanding, or the average weekly trading volume in
such securities on all national securities exchanges or automated quotation
systems, during the four calendar weeks preceding the date on which notice of
such sale was filed pursuant to Rule 144, subject to the satisfaction of
certain other requirements of Rule 144 regarding the manner of sale, notice
requirements and the availability of current public information regarding the
issuer.
P. RELIANCE ON KEY PERSONNEL
One of the Debtors' primary assets is their highly skilled personnel, who
have the ability to leave the Debtors and so deprive them of the skill and
knowledge essential for performance of new and existing contracts. The Debtors
operate a service business which is highly dependent on their customers' belief
that the Debtors will perform tasks of the highest standards over an extended
period of time. Continued deterioration of the Debtors' business, or loss of a
significant number of key personnel, will have a material adverse effect on the
Debtors and may threaten their ability to survive as going concerns.
The Debtors' successful transition through the restructuring process is
dependent in part on their ability to retain and motivate their officers and
key employees. The Debtors' current financial difficulties have had a
detrimental effect on their ability to attract and retain key officers and
employees. There can be no assurance that the Debtors will be able to retain
or employ qualified management and technical personnel. While the Debtors have
entered into employment agreements with certain members of their senior
management, should any of these persons be unable or unwilling to continue
their employment with the Debtors, the business prospects of the Debtors could
be materially and adversely affected.
Q. YEAR 2000 ISSUE
The Year 2000 issue affects computer systems that have time sensitive
programs that may not properly recognize the year 2000. The Debtors are
actively engaged, but have not yet completed, reviewing, correcting and testing
all of the Year 2000 compliance issues. The failure to correct a material Year
2000 problem could result in an interruption in, or a failure of, certain
normal business activities or operations. Such failures could materially or
adversely affect the Debtors' results of operations, liquidity and financial
condition. Due to the general uncertainty inherent in the Year 2000 problem,
the Debtors are unable to determine at this time whether the consequences of
the Year 2000 failures will have a material adverse affect on the results of
operations, liquidity and financial condition of the Debtors.
R. HOLDING COMPANY STRUCTURE
The New Unsecured PIK Notes and the New Unsecured Convertible Notes will
be issued by Reorganized PSC. Reorganized PSC will be a holding company. The
ability of Reorganized PSC to meet its obligations as to the New Unsecured PIK
Notes and the New Unsecured Convertible Notes will be determined by the
financial performance of Reorganized PSC's subsidiaries and their ability to
upstream funds to Reorganized PSC by dividend or otherwise.
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ARTICLE VIII.
NEW DEBT AND SECURITIES TO BE ISSUED AND TRANSFERRED UNDER THE PLAN
The following discussion summarizes the material provisions of the New
Common Shares, New Senior Secured Term Debt, New Secured PIK Debt, New
Unsecured PIK Notes and New Unsecured Convertible Notes. This summary does not
purport to be complete and is qualified in its entirety by reference to the
Articles of Incorporation and ByLaws of the Reorganized Debtor, the form of the
Amended and Restated Term Credit Agreement, the form of New Unsecured PIK Notes
Indenture, the form of the New Unsecured Convertible Notes Indenture and the
Shareholder Rights Plan, to be appended in the Plan Supplement.
A. NEW COMMON SHARES/PSC COMMON SHARES
The New Common Shares will be issued Pro Rata to the various classes
according to the terms set forth above in Section II.C.1 and II.D above. The
effects of the Reverse Stock Split on the New Common Shares and the resulting
PSC Common Shares are described above. Following the continuance of
Reorganized PSC in New Brunswick, the rights of holders of the PSC Common
Shares will be governed by the laws of the Province of New Brunswick, as well
as by the Reorganized Debtor Articles of Incorporation and the Reorganized
Debtor Bylaws. Under the Reorganized Debtor Articles of Incorporation, the
holders of PSC Common Shares will be entitled to one vote for each share held
of record on all matters submitted to a vote of shareholders, including the
election of directors. The PSC Common Shares will not have cumulative voting
rights. As a result, the holders of more than fifty percent (50%) of PSC
Common Shares will be able to elect one hundred percent (100%) of the directors
to be elected if they choose to do so. In such event, the holders of the
remaining PSC Common Shares will not be able to elect any directors. Holders
of PSC Common Shares will be entitled to participate equally in such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. However, it is not anticipated that dividends will be paid on the
PSC Common Shares in the foreseeable future. In the event of a liquidation,
dissolution or winding up of the Reorganized Debtor, holders of PSC Common
Shares will be entitled to participate equally in all assets remaining after
payment of liabilities and the liquidation preference of any preferred shares
of the Reorganized Debtor. Holders of PSC Common Shares will have no
preemptive rights. Holders of PSC Common Shares will have no rights to convert
their PSC Common Shares into any other securities and will have no redemption
provisions or sinking fund provisions with respect to such shares. The
registrar and transfer agent for the PSC Common Shares will be selected prior
to the Effective Date.
B. NEW SENIOR SECURED TERM DEBT
The New Senior Secured Term Debt of Reorganized PSI will be governed by
the terms of the Amended and Restated Term Credit Agreement and will be in the
aggregate principal amount of $250 million minus an amount equal to the Net
Asset Sale Proceeds Pool (the amount the Lenders receive from the proceeds in
partial satisfaction of their Secured Lender Claims). Reorganized PSI shall
have the right to prepay the New Senior Secured Debt subject to a prepayment
premium. Interest on the New Senior Secured Term Debt will be nine percent
(9%) per annum payable quarterly in arrears on the first business day of each
financial quarter, provided that during the first 12 months subsequent to the
Effective Date of the Plan, Reorganized PSI shall pay interest on the New
Senior Secured Term Debt to the extent of the lesser of nine percent (9%) per
annum and $20,000,000, and accrue the balance thereof subject to the mandatory
prepayment obligations in effect for the New Senior Secured Term Debt. In
addition, the New Senior Secured Term Debt, as well as the New Secured PIK
Debt, will be secured by guaranties and charges over substantially all of the
assets of the Reorganized Debtors, ranking in priority to all claims other than
the Exit Facility, and existing Liens, ranking in priority to the Liens of the
Lenders under the Pre-Petition Credit Agreement, as may be applicable to
particular assets. The New Senior Secured Term Debt will mature five (5) years
from the Effective Date of the Plan and shall be governed by the terms of the
Amended and Restated Term Credit Agreement.
The covenants for the New Senior Secured Term Debt will be substantially
similar to those in the Pre-Petition Credit Agreement and the financial
covenants are set forth below:
1. the ratio of (x) current assets to (y) current liabilities, at
all times from and after the first day of the first Financial Quarter
commencing after the Effective Date, must be equal to or greater than
1.5 to 1.0.
2. the aggregate EBITDA for the third and fourth Financial Quarters
commencing after the Effective Date must not be less than 80% of
budgeted EBITDA as approved by the Lenders.
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3. the ratio of (x) Non PIK Debt to (y) EBITDA, at all times from
and after December 31, 2000 (intended to be end of first full
Financial Year after the Effective Date), must be equal to or less
than 3.75 to 1.0.
4. the ratio of (x) Total Debt to (y) EBITDA, at December 31, 2000
(intended to be end of first Full Financial Year after the Effective
Date), and from that date until March 31, 2001, must be equal to or
less than 5.5 to 1.0, and at all times thereafter must be equal to or
less than 5.0 to 1.0.
5. the ratio of (x) EBITDA to (y) Cash Interest Expense, at all
times from and after December 31, 2000 (intended to be end of first
full Financial Year after the Effective Date), must be greater than
3.5 to 1.0.
6. the ratio of (x) EBITDA to (y) Total Interest Expense, at all
times from and after December 31, 2000 (intended to be end of first
full Financial Year after Plan Implementation), must be greater than
2.25 to 1.0.
For the purpose of these financial covenants:
(a) EBITDA, Total Interest Expense and Cash Interest Expense are
intended to be calculated on a rolling 4 quarter basis. The
calculations of these items will exclude the periods prior to the
commencement of the third full Financial Quarter following the
Effective Date with EBITDA under covenants 3 and 4 being annualized
until there are four full Financial Quarters of EBITDA for such
calculations.
(b) EBITDA will exclude any net extraordinary, unusual or non
recurring gains or net non cash extraordinary, unusual or non
recurring losses, and will be adjusted as provided in the definition
of EBITDA in the Pre-Petition Credit Agreement on any Sale approved
by the Lenders.
(c) Total Interest Expense will be the existing definition of
"Interest Expense".
(d) Cash Interest Expense will be Total Interest Expense excluding
any accrued non cash interest on the New Senior Secured Term Debt and
any interest on the New Secured PIK Debt or on the New Unsecured PIK
Notes.
(e) Total Debt will be the existing definition of Debt (which, for
greater certainty, includes contingent liabilities under letters of
credit but excludes contingent liabilities incurred in support of
bonds or similar arrangements in support of goods or services
provided by PSC in the ordinary course of its business until such
bonds or similar arrangements are called upon or are required to be
accrued as a charge against income on PSC's financial statements).
(f) Non PIK Debt will be Total Debt other than Debt owing under the
New Secured PIK Debt (among the New Unsecured PIK Notes) and for the
first three years after the Effective Date, the New Unsecured
Convertible Notes.
(g) If PSC (with the Lenders' approval) makes a significant asset
disposition in any Financial Year after the Effective Date which
could affect its compliance with the working capital ratio
requirements in covenant 1 above, the Lenders in their sole
discretion will consider such covenant.
Prior to maturity, the Senior Secured Term Debt will be repaid from 75% of
Net Asset Sale Proceeds. There will also be mandatory prepayments from the
cash sweep described below.
C. NEW SECURED PIK DEBT
The New Secured PIK Debt will be issued to holders of Class 6 Secured
Lender Claims. The New Secured PIK Debt will be issued by Reorganized PSC
under the Amended and Restated Term Credit Agreement between Reorganized PSC
and Reorganized PSI and holders of Secured Lender Claims.
The New Secured PIK Debt will mature five years after the Effective Date.
The New Secured PIK Debt will have a rate of interest of ten percent (10%) per
annum. Subject to the terms of Mandatory Prepayments described in the second
succeeding sentence, interest will compound and be paid quarterly in arrears by
the issuance of additional New Secured PIK Debt. All interest shall be based
on a 360-day year and actual days elapsed. The Mandatory Prepayments require
that proceeds from an annual cash sweep for the first two years and a
cumulative quarterly cash sweep thereafter will be applied in the following
manner: (i) first, to pay any interest accrued during the first twelve months
subsequent to the Effective Date with respect to New Senior Secured Term Debt,
together with accrued interest on any such deferred interest at the rate of
nine
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percent (9%) per annum; (ii) second, to pay accrued but unpaid interest with
respect to the New Secured PIK Debt and (iii) third, to repay New Senior
Secured Term Debt.
The New Secured PIK Debt will be convertible until maturity at the option
of the holders into twenty-five percent (25%) of the PSC Common Shares, in the
aggregate, on a fully-diluted basis as of the Effective Date. The New Secured
PIK Debt will contain anti-Dilution provisions applicable in a public offering
of convertible debt, including giving effect to the issuance of any PSC Common
Shares under the Shareholder Rights Plan. Interest on New Secured PIK Debt
will not be convertible.
The New Secured PIK Debt will be redeemable by Reorganized PSC in the
following circumstances: If (a) an offer is made to holders of PSC Common
Shares to acquire all of the New Common Shares, or, in the case of an offer by
an existing beneficial owner or owners of PSC Common Shares, to acquire all of
the PSC Common Shares not already owned by such owner(s) together with persons
acting in concert (the shares already owned being the "Offeror's Existing
Holdings"), (b) under the offer the Offeror acquires (1) PSC Common Shares
which together with the Offeror's Existing Holdings amount to sixty-seven
percent (67%) or more of the PSC Common Shares, or (2) a majority of the PSC
Common Shares other than the Offeror's Existing Holdings, whichever is greater,
and (c) the person or persons making the offer (the "Offeror") notifies
Reorganized PSC that it requires Reorganized PSC to exercise such redemption
right, then, subject to the following sentence, Reorganized PSC will have the
right to redeem the New Secured PIK Debt for a price (the "Redemption Price")
equal to one hundred and fifteen percent (115%) of the face amount of such
notes plus all accrued interest on the New Secured PIK Debt. If the Offeror
has notified Reorganized PSC that it requires Reorganized PSC to exercise the
redemption right and the amount the holders of the New Secured PIK Debt would
have received by converting the convertible New Secured PIK Debt to PSC Common
Shares and tendering them to the Offeror under its offer (the "Tender Price")
would be greater than the Redemption Price of such Notes, any New Secured PIK
Note which has not been converted by the close of business on the day prior to
the redemption dates set out in the redemption notice issued by Reorganized PSC
will be deemed to have been converted and tendered to the Offeror's offer, and
the holders of the convertible New Secured PIK Debt will be entitled to receive
the Tender Price.
The New Secured PIK Debt may not be redeemed prior to the end of the first
full year after the Effective Date except as provided above. Commencing in the
second year after the Effective Date, PSC may redeem the New Secured PIK Debt
upon payment of the following percentage of the face amount of the New Secured
PIK Debt during the periods following the Effective Date indicated below, plus
all accrued interest on the New Secured PIK Debt:
Year 1 Not redeemable
Year 2 125%
Year 3 125%
Year 4 116 2/3 %
Year 5 108 1/3%
Maturity 100%
The New Secured PIK Debt will be secured by guaranties and charges over
substantially all of the assets of the Reorganized Debtors and their
affiliates, will rank pari passu with the New Senior Secured Term Debt, ranking
in priority to all claims other than the exit/working capital financing, and
existing senior liens ranking in priority to the Liens of the Lenders under the
Pre-Petition Credit Agreement, as may be applicable to particular assets.
Covenants
The covenants of the New Secured PIK Debt will be stated in the Amended
and Restated Credit Agreement. So long as the Amended and Restated Credit
Agreement is in effect, there are restrictions on the creation, incurrence or
existence of debt; the creation, incurrence or existence of liens; the
disposition of property; transactions with affiliates; acquisitions; capital
expenditures; and the treatment of the New Unsecured PIK Notes. Additionally,
the financial covenants governing the New Senior Secured Term Debt and
described above also apply to the New Secured PIK Debt.
D. NEW UNSECURED PIK NOTES
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The New Unsecured PIK Notes will be issued by Reorganized PSC to holders
of Allowed Class 7 Impaired Unsecured Claims, holders of Canadian Impaired
Unsecured Claims, and, if Class 7 votes to reject the Plan or the class of
Canadian Impaired Unsecured Creditors votes to reject the Canadian Plan,
holders of Allowed Class 6 Claims, provided, however, that if Class 7 votes to
reject the Plan and the class of holders of Canadian Impaired Unsecured Claims
votes to reject the Canadian Plan, no New Unsecured PIK Notes will be issued.
The amount of the New Unsecured PIK Notes to be distributed under the U.S. Plan
will be the balance of between $48 million and $60 million, depending upon the
Class 7 Election, minus the amount of the New Unsecured PIK Notes to be
allocated under the Canadian Plan. The New Unsecured PIK Notes will be issued
by Reorganized PSC under the New Unsecured PIK Notes Indenture between the
Reorganized Debtor and a trustee to be selected by the Reorganized Debtor. The
New Unsecured PIK Notes Indenture shall be substantially in the form included
in the Plan Supplement. The New Unsecured PIK Notes Indenture shall meet the
requirements of the Trust Indenture Act of 1939, as amended.
The New Unsecured PIK Notes will mature ten (10) years from the Effective
Date. The New Unsecured PIK Notes will have a rate of interest at six percent
per annum. Interest will accrue and be paid in arrears by the issuance of
additional New Unsecured PIK Notes, provided that, if the New Secured PIK Debt
is not in default, cash interest will be payable on the New Unsecured PIK Notes
following repayment in full of the New Secured PIK Debt. All interest shall be
based on a 360-day year and actual days elapsed. Commencing five (5) years from
the Effective Date, provided the New Senior Secured Term Debt is not in
default, the New Unsecured PIK Notes will be amortized in equal installments at
the end of years six (6) to ten (10).
In the event the New Unsecured PIK Notes are not paid when due, the
holders thereof will be entitled to exercise their rights and remedies pursuant
to the New Unsecured PIK Notes Indenture and applicable law.
E. NEW UNSECURED CONVERTIBLE NOTES
The New Unsecured Convertible Notes will be issued by Reorganized PSC in
an aggregate face amount not to exceed $18 million. The terms of the New
Unsecured Convertible Note will be governed by the New Unsecured Convertible
Notes indenture. The New Unsecured Convertible Notes Indenture shall meet the
requirements of the Trust Indenture Act of 1939 as amended.
The New Unsecured Convertible Notes shall have an interest rate of 3% per
annum commencing on the third anniversary of the Effective Date, mature on the
20th anniversary of the Effective Date and are convertible into PSC Common
Shares at a price of $30 per share (every $30 of face amount of New Unsecured
Convertible Notes is convertible into one share of PSC Common Shares).
PSC will use its reasonable best efforts to list the New Unsecured
Convertible Notes on the same stock exchange as the PSC Common Shares are
listed. The holders of the New Unsecured Convertible Notes shall have the
right upon a "Change of Control" to choose to put the New Unsecured Convertible
Notes to Reorganized PSC in exchange for the amounts specified in the schedule
below or to accept new convertible notes issued by the acquiring entity with
terms economically comparable to the New Unsecured Convertible Notes prior to
the Change of Control. "Change of Control" shall mean an acquisition by a
person or persons acting in concert of ownership of more than 50% of the common
shares of Reorganized PSC excluding changes in ownership resulting from
transactions by parties owning greater than ten percent (10%) of the common
shares of Reorganized PSC as of the Effective Date.
If Class 7 votes to reject the Plan, no New Unsecured Convertible Notes
will be issued. Moreover, if no Qualifying Class 7 Creditors choose New
Unsecured Convertible Notes in the Class 7 Election, no New Unsecured
Convertible Notes will be issued.
The following is a schedule of the amounts at which the holders of the
convertible notes will be entitled to demand redemption upon a change of
control:
Timeframe Calculation and Amount
Anytime from issuance to 1st Anniversary 18,000 (1.06)-5 (1.03)-5=$11,602,646
1st Anniversary to 2nd Anniversary 18,000 (1.06)-4 (1.03)-5=$12,298,805
2nd Anniversary to 3rd Anniversary 18,000 (1.06)-3 (1.03)-5=$13,036,733
3rd Anniversary to 4th Anniversary 18,000 (1.06)-2 (1.03)-5=$13,818,937
4th Anniversary to 5th Anniversary 18,000 (1.06)-1 (1.03)-5=$14,648,074
5th Anniversary to 6th Anniversary 18,000 (1.03)-5=$15,526,958
6th Anniversary to 7th Anniversary 18,000 (1.03)-4=$15,992,767
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7th Anniversary to 8th Anniversary 18,000 (1.03)-3=$16,472,550
8th Anniversary to 9th Anniversary 18,000 (1.03)-2=$16,966,726
9th Anniversary to 10th Anniversary 18,000 (1.03)-1=$17,475,728
after 10th Anniversary (i.e. post the 10th year) $18,000,000
Plus in each event accrued but unpaid interest at
the time of redemption
ARTICLE IX.
APPLICABILITY OF FEDERAL AND OTHER SECURITIES LAWS
No registration statement will be filed under the Securities Act or any
state securities laws with respect to the offer of the New Common Shares1, the
New Secured PIK Debt, the New Unsecured PIK Notes or the New Unsecured
Convertible Notes pursuant to this solicitation, issuance or subsequent
transfer of such securities under the Plan. The Debtors believe that, subject
to certain exceptions described below, various provisions of the Securities
Act, the Bankruptcy Code and state securities laws exempt from federal and
state securities registration requirements (i) the offer and the sale of such
securities pursuant to the Plan; and (ii) subsequent transfers of such
securities.
A. OFFER AND SALE OF NEW COMMON SHARES, NEW SECURED PIK DEBT, NEW UNSECURED
PIK NOTES AND NEW UNSECURED CONVERTIBLE NOTES PURSUANT TO THE PLAN:
BANKRUPTCY CODE EXEMPTION FROM REGISTRATION REQUIREMENTS
Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of
securities under a plan of reorganization from registration under both the
Securities Act and state securities laws, if three principal requirements are
satisfied: (i) the securities must be issued "under a plan" of reorganization
by the debtor or its successor under a plan or by an affiliate participating in
a joint plan of reorganization with the debtor; (ii) the recipients of the
securities must hold a pre-petition or administrative expense claim against the
debtor or an interest in the debtor; and (iii) the securities must be issued
entirely in exchange for the recipient's claim against or interest in the
debtor, or "principally" in such exchange and "partly" for cash or property.
The Debtors believe that the offer and sale of the New Common Shares, New
Secured PIK Debt, New Unsecured PIK Notes and New Unsecured Convertible Notes
under the Plan satisfies the requirements of section 1145(a)(1) of the
Bankruptcy Code and is, therefore, exempt from registration under the
Securities Act and state securities laws.
B. SUBSEQUENT TRANSFERS OF NEW COMMON SHARES, NEW SECURED PIK DEBT, NEW
UNSECURED PIK NOTES AND NEW UNSECURED CONVERTIBLE NOTES
1. Federal Securities Laws: Section 1145(c) of the Bankruptcy Code
Section 1145(c) of the Bankruptcy Code deems any offer or sale of
securities of the kind and in the manner specified in section 1145(a)(1) of the
Bankruptcy Code to have been a public offering. Accordingly, the New Common
Shares, New Secured PIK Debt, New Unsecured PIK Notes and New Unsecured
Convertible Notes generally will be freely transferable by holders of Impaired
Claims and Interests under the Securities Act unless the Holder is deemed, by
section 1145(b) of the Bankruptcy Code, to be an "underwriter" for purposes of
section 2(11) of the Securities Act with respect to such securities. Section
1145(b) of the Bankruptcy Code deems any entity to be an "underwriter" under
section 2(11) of the Securities Act, if such entity:
(1) purchases a claim against, interest in, or claim for an
administrative expense in the case concerning, the debtor, if such
purchase is with a view to distributing any security received in
exchange for such a claim or interest;
(2) offers to sell securities offered or sold under a plan for the
holders of such securities;
(3) offers to buy securities offered or sold under the plan
from the holders of such securities, if the offer to buy is: (A)
with view to distribution of such securities; and (B) under an
agreement made in connection with the plan, with the consummation of
the plan, or with the offer or sale of securities under the plan; or
1 The discussion in Articles IX-X as to "New Common Shares" is equally
applicable to "PSC Common Shares."
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(4) is an "issuer" with respect to the securities, as the term
"issuer" is defined in section 2(11) of the Securities Act.
Under section 2(11) of the Securities Act, an "issuer" includes any person
directly or indirectly controlling or controlled by the issuer, or any person
under direct or indirect common control with the issuer.
To the extent that holders of Impaired Claims or Interests who receive New
Common Shares, New Secured PIK Debt, New Unsecured PIK Notes, New Unsecured
Convertible Notes or other securities pursuant to the Plan are deemed to be
"underwriters," such securities may not be resold by such persons unless such
securities are registered under the Securities Act or an exemption from such
registration requirements is available. However, it is anticipated that
holders of a portion of the New Common Shares will be entitled to demand that
the Reorganized Debtor register the resale of such shares under the Securities
Act and that such holders of New Common Shares will be permitted to obtain
registration of the sale of their New Common Shares in certain circumstances in
connection with certain registered offerings of New Common Shares by
Reorganized PSC. (See Section IX.C "Registration Rights Agreement").
Whether or not any particular person would be deemed to be an
"underwriter" with respect to the New Common Shares, New Secured PIK Debt, New
Unsecured PIK Notes, New Unsecured Convertible Notes or other security to be
issued pursuant to the Plan would depend upon various facts and circumstances
applicable to that person. Accordingly, the Debtors express no view as to
whether any particular person receiving New Common Shares, New Secured PIK
Debt, New Unsecured PIK Notes, and/or New Unsecured Convertible Notes under the
Plan would be an "underwriter" with respect to the New Common Shares, New
Secured PIK Debt, New Unsecured PIK Notes, and/or New Unsecured Convertible
Notes.
GIVEN THE COMPLEX AND SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A
PARTICULAR HOLDER MAY BE AN UNDERWRITER, THE DEBTORS MAKE NO REPRESENTATION
CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN THE NEW COMMON SHARES, NEW
SECURED PIK DEBT, NEW UNSECURED PIK NOTES AND NEW UNSECURED CONVERTIBLE NOTES.
THE DEBTORS RECOMMEND THAT POTENTIAL RECIPIENTS OF THE NEW COMMON SHARES, NEW
SECURED PIK DEBT, NEW UNSECURED PIK NOTES AND NEW UNSECURED CONVERTIBLE NOTES
CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE NEW COMMON
SHARES, NEW SECURED PIK DEBT, NEW UNSECURED PIK NOTES, AND NEW UNSECURED
CONVERTIBLE NOTES WITHOUT COMPLIANCE WITH THE SECURITIES ACT OR THE EXCHANGE
ACT.
Persons that are "affiliates" of the Reorganized Debtors but are not
otherwise "underwriters" within the meaning of section 1145(b) of the
Bankruptcy Code, may be able to sell the New Common Shares, New Secured PIK
Debt, New Unsecured PIK Notes and New Unsecured Convertible Notes without
registration, pursuant to the exemption from registration provided by Rule 144
under the Securities Act. Rule 144 permits "affiliates" of the issuer to
publicly sell, within any three-month period, the greater of one percent (1%)
of the shares or other units of the class outstanding, or the average weekly
trading volume in such securities on all national securities exchanges or
automated quotation systems, during the four calendar weeks preceding the date
on which notice of such sale was filed pursuant to Rule 144, subject to the
satisfaction of certain other requirements of Rule 144 regarding the manner of
sale, notice requirements and the availability of current public information
regarding the issuer.
2. Subsequent Transfers of New Common Shares, New Secured PIK Debt, New
Unsecured PIK Notes and New Unsecured Convertible Notes Under State Securities
Laws
If the New Common Shares are listed on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market, the New Common Shares,
New Secured PIK Debt, New Unsecured PIK Notes, and New Unsecured Convertible
Notes will be generally freely tradeable under state securities laws. If the
New Common Shares are not listed on any of the above exchanges or the Nasdaq
National Market, the New Common Shares, New Secured PIK Debt, New Unsecured
PIK Notes and New Unsecured Convertible Notes will not be freely tradeable
under state securities laws unless there is an available exemption from
registration under such laws. A majority of states provide an exemption from
registration for secondary market transactions under the so-called "manual
exemption" if financial and other information about an issuer is published in
certain manuals published by Moody's Investor Service, Inc. or Standard &
Poor's. If the New Common Shares are not listed on one of the above exchanges
or the Nasdaq National Market, the Reorganized Debtors intend to provide the
necessary information in order to be able to take advantage of such manual
exemptions.
C. REGISTRATION RIGHTS AGREEMENT
On or before the Effective Date, Reorganized PSC will enter into a
"Registration Rights Agreement" between Reorganized PSC and certain holders of
Allowed Lender Claims (the "Relevant Holders") with respect to rights of
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registration as to the New Common Shares. The execution and delivery of such
agreement is a condition precedent to the Effective Date.
Under the Registration Rights Agreement, each Relevant Holder will have
the right to require on one occasion Reorganized PSC to file a registration
statement in the United States with respect to an offering of such Relevant
Holder's shares of New Common Stock. Such right is subject to a number of
exceptions and limitations, including with regard to the number of shares to be
registered and with regard to the aggregate number of registration statements
Reorganized PSC must file. In addition, Relevant Holders will have the right
to participate, subject to certain limitations, in registrations of offerings
of New Common Stock demanded by other Relevant Holders or in certain public or
private sales by Reorganized PSC of its common stock. The Registration Rights
Agreement will contain customary representations and warranties of Reorganized
PSC and the Relevant Holders, and will also provide for mutual indemnification
of the parties.
D. CANADIAN SECURITIES LAWS
The issuance by PSC of the New Common Shares, New Secured PIK Debt, New
Unsecured PIK Notes and New Unsecured Convertible Notes will be subject to the
Securities Act (Ontario) and to the applicable securities laws of such other
provinces of Canada in which persons entitled to receive such securities
reside. The issuance and subsequent transfer of such securities will be made
pursuant to an exemption from applicable dealer registration and prospectus
requirements of applicable Canadian securities laws or pursuant to
discretionary orders and/or rulings from applicable Canadian provincial
securities regulatory authorities. Based on relief granted in connection with
similar CCAA restructurings in the past to other public companies, PSC believes
that such discretionary relief is obtainable.
If at the time of any subsequent transfer in Canada of New Common Shares,
New Secured PIK Debt, New Unsecured PIK Debt or New Unsecured Convertible
Notes, the seller holds a sufficient number of any securities of PSC to affect
materially its control, a prospectus will be required to be delivered to the
purchaser(s). For these purposes, the holding by any person or combination of
persons of more than 20 percent of the voting securities of a company is deemed
to affect materially the control of the company. The Shareholder Rights Plan
contains additional provisions which would apply in the case of such a
transfer.
ARTICLE X.
CERTAIN UNITED STATES INCOME TAX CONSEQUENCES OF THE PLAN
THE DISCUSSION BELOW, WHICH WAS PREPARED BY THE DEBTORS AFTER CONSULTATION
WITH THEIR U.S. COUNSEL, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, IS A GENERAL
SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO THE
DEBTORS AND THEIR CREDITORS HOLDING ALLOWED CLASS 6 CLAIMS AND ALLOWED CLASS 7
CLAIMS WHO ARE SUBJECT TO U.S. FEDERAL INCOME TAXATION ON A NET BASIS.
DUE TO THE UNSETTLED AND COMPLEX NATURE OF SOME OF THE TAX ISSUES, AS WELL
AS THE POSSIBILITY THAT DEVELOPMENTS SUBSEQUENT TO THE DATE HEREOF COULD AFFECT
THE TAX CONSEQUENCES OF THE PLAN, THE FOLLOWING DISCUSSION SHOULD NOT BE
REGARDED AS DEFINITIVE OR AS COVERING ALL POSSIBLE TAX CONSEQUENCES.
ADDITIONALLY, THIS SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR CREDITOR IN LIGHT OF ITS SPECIFIC
INVESTMENT CIRCUMSTANCES OR TO CERTAIN CREDITORS SUBJECT TO SPECIAL TREATMENT
UNDER THE U.S. FEDERAL INCOME TAX LAWS (INCLUDING BUT NOT LIMITED TO, FOREIGN
CORPORATIONS AND INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES, FINANCIAL INSTITUTIONS, BANKS, LIFE INSURANCE COMPANIES, AND TAX-EXEMPT
ORGANIZATIONS) AND DOES NOT DISCUSS ANY ASPECT OF STATE, LOCAL OR FOREIGN
TAXATION. FURTHER, THE DISCUSSION WITH RESPECT TO CREDITORS OF THE DEBTORS IS
LIMITED TO PERSONS WHO HOLD DEBT CLAIMS OF THE DEBTORS AS "CAPITAL ASSETS" AND
WHO WILL HOLD THE NEW SENIOR SECURED TERM DEBT, NEW SECURED PIK DEBT, NEW
UNSECURED PIK NOTES, NEW UNSECURED CONVERTIBLE NOTES AND NEW COMMON SHARES AS
"CAPITAL ASSETS" (GENERALLY, PROPERTY HELD FOR INVESTMENT) WITHIN THE MEANING
OF SECTION 1221 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "TAX
CODE"). FOR THE FOREGOING REASONS, HOLDERS OF CLAIMS AND HOLDERS OF INTERESTS
ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES (FOREIGN, FEDERAL, STATE AND LOCAL) TO THEM OF THE PLAN. THE
DEBTORS ARE NOT MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX
CONSEQUENCES OF THE CONFIRMATION AND CONSUMMATION OF THE PLAN AS TO ANY HOLDER
OF CLAIMS
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OR HOLDER OF INTERESTS, NOR ARE THE DEBTORS RENDERING ANY FORM OF LEGAL OPINION
AS TO SUCH TAX CONSEQUENCES.
This summary is based upon the laws, regulations, rulings and decisions in
effect on the date hereof and upon proposed regulations, all of which are
subject to change (possibly with retroactive effect) by legislation,
administrative action or judicial decision. Moreover, due to a lack of
definitive judicial or administrative authority and interpretation, substantial
uncertainties exist with respect to various tax consequences of the Plan as
discussed herein. No rulings have been or are expected to be requested from
the Internal Revenue Service (the "Service") concerning any of the tax matters
described herein and there can be no assurance that the Service will not
challenge the positions taken by the Debtors or their affiliates with respect
to any of the issues addressed herein or that a court would not sustain such a
challenge.
14. Federal Income Tax Consequences to the Debtors
1. Discharge of Indebtedness
Under the Tax Code, a taxpayer generally must include in gross income the
amount of any discharged indebtedness realized during the taxable year, except
to the extent payment of such indebtedness would have resulted in a tax
deduction. Section 108 of the Tax Code provides, however, that when the
discharge of indebtedness occurs in a case under the Bankruptcy Code, gross
income does not include any amount that otherwise would be included in gross
income by reason of the discharge of indebtedness. Instead, the discharged
indebtedness in a bankruptcy case will generally be applied to reduce certain
tax attributes of the taxpayer, including net operating losses ("NOLs"),
investment tax credit carryforwards ("ITCs") and tax basis in property. (NOLs,
ITCs and tax basis in property of PSI, the common parent of the Debtors' U.S.
consolidated group for U.S. federal income tax purposes, are referred to
collectively as "Tax Attributes.")
Satisfaction of Allowed Class 6 Claims, Allowed Class 7 Claims and
cancellation of other indebtedness pursuant to the Plan will result in a
discharge of indebtedness and a corresponding reduction in PSI's Tax Attributes
in an amount equal to the difference between the consideration transferred in
satisfaction of the discharged Claims and the amount of the discharged
indebtedness. For these purposes, the amount of consideration transferred will
be the sum of (i) any cash, and (ii) the "issue price" of any debt instruments
exchanged for Claims. Based on its intended reporting positions, PSI expects
the amount of discharged indebtedness under the Plan to result in a significant
reduction in PSI's Tax Attributes, including the elimination of PSI's NOLs.
2. Deductions of Accrued Interest and Original Issue Discount by PSI and
Affiliates
To the extent a portion of the consideration issued to Creditors pursuant
to the Plan is attributable to accrued and unpaid interest on their claims, PSI
would be entitled to interest deductions in the amount of such accrued
interest, to the extent it has not already deducted such amounts. Although the
amount of consideration allocable to accrued interest where Creditors are
receiving less than the full principal amount of their claims is unclear under
present law, PSI intends to allocate the amount of the consideration
transferred to Creditors pursuant to the Plan first to accrued and unpaid
interest on such Creditors' claims.
E. U.S. FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF ALLOWED CLASS 6 AND
ALLOWED CLASS 7 CLAIMS
1. Allowed Class 6 Claims
The U.S. federal income tax consequences of the Plan to a Class 6 Creditor
receiving New Senior Secured Term Debt, New Secured PIK Debt and New Common
Shares will depend on a number of factors, including whether the New Senior
Secured Term Debt and New Secured PIK Debt are properly classified as debt or
equity for U.S. federal income tax purposes, whether the exchanged claim, the
New Senior Secured Term Debt and New Secured PIK Debt are "securities" for U.S.
federal income tax purposes (a "Tax Security"), and whether any of the New
Senior Secured Term Debt, New Secured PIK Debt, or the debt under the
Pre-Petition Credit Agreement (the "Old Senior Secured Term Debt") are
considered traded on an established securities market ("publicly traded") for
purposes of the original issue discount rules. PSI's intended position with
respect to each of these factors is briefly discussed below; however, Class 6
Creditors are urged to consult their tax advisors with respect to these
factors.
Although the matter is not free from doubt, PSI intends (i) to treat the
New Senior Secured Term Debt and New Secured PIK Debt as debt for U.S. federal
income tax purposes, (ii) to take the position that the Class 6 Claims are not
Tax Securities and (iii) to take the position that the Old Senior Secured Term
Debt, the New Senior Secured Term Debt and the New Secured PIK Debt are not
publicly traded for purposes of the original issue discount rules. Since the
determination of whether a debt obligation is publicly traded depends on the
nature of the trading in such debt obligation once issued, the
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determination of whether the New Senior Secured Term Debt and New Secured PIK
Debt are publicly traded cannot be made with certainty at this time.
(a) General
Pursuant to the Plan, holders of Allowed Class 6 Claims will exchange the
Old Senior Secured Term Debt for the New Senior Secured Term Debt, New Secured
PIK Debt and New Common Shares. Based on the intended position that the Old
Senior Secured Term Debt is not a Tax Security, a Class 6 Creditor generally
should recognize gain or loss on the exchange of the Old Senior Secured Term
Debt for the New Senior Secured Term Debt, New Secured PIK Debt and New Common
Shares equal to the difference between (A) (i) the sum of the issue price of
the New Senior Secured Term Debt, the issue price of the New Secured PIK Debt
and the fair market value of the New Common Shares received less (ii) any
amounts attributable to accrued and unpaid interest on the Old Senior Secured
Term Debt and (B) the holder's tax basis in the Old Senior Secured Term Debt.
The characterization of such gain or loss will depend on the holder's tax
position and circumstances, including whether the Class 6 Claim is a "market
discount" obligation. Class 6 Creditors are strongly urged to consult their
tax advisors regarding the characterization of any gain or loss recognized as a
result of the Plan.
PSI believes that the issue prices of the New Senior Secured Term Debt and
New Secured PIK Debt should be determined under section 1274(a) of the Tax Code
and should equal their stated principal amounts. The holder of an Allowed
Class 6 Claim generally should have an initial tax basis in the New Senior
Secured Term Debt and New Secured PIK Debt equal to their respective issue
prices and an initial tax basis in the New Common Shares equal to its fair
market value. The holding period with respect to each instrument should begin
on the day following the day on which the Creditor has the right to receive it.
(b) Accrued Interest on the Old Senior Secured Term Debt
As discussed above, although the manner in which consideration is to be
allocated between accrued unpaid interest and principal of the Old Senior
Secured Term Debt is unclear, PSI intends to take the position that the
consideration distributed to the Class 6 Creditors pursuant to the Plan is
allocable first to accrued and unpaid interest on the Old Senior Secured Term
Debt.
If a Class 6 Creditor previously included in income accrued but unpaid
interest attributable to Old Senior Secured Term Debt, it should recognize an
ordinary loss to the extent that such previously included accrued interest
exceeds the amount of consideration received by the Creditor which is
attributable to accrued interest for U.S. federal income tax purposes. To the
extent a portion of the consideration received by a Class 6 Creditor which it
has not previously included in its income as accrued but unpaid interest
attributable to the Old Senior Secured Term Debt is treated for U.S. federal
income tax purposes as attributable to accrued but unpaid interest, the
Creditor will recognize ordinary income in the amount of such interest,
regardless of whether the Creditor realizes an overall gain or loss upon the
surrender of its claim or whether such gain or loss is recognized.
Notwithstanding the general discussion above, a Class 6 Creditor's basis
in the portion of the consideration received which is treated as received in
satisfaction of accrued interest on the Old Senior Secured Term Debt, if any,
should be equal to the amount of interest income treated as satisfied by the
receipt of such consideration. Additionally, a Creditor's tax holding period
in such consideration should begin on the day following the date on which it
has a right to receive such consideration.
(c) Original Issue Discount on the New Senior Secured Term Debt
Assuming that the New Senior Secured Term Debt is properly characterized
as debt for U.S. federal income tax purposes, it would be treated as issued
with original issue discount ("OID") to the extent its "stated redemption price
at maturity" exceeds its "issue price." An instrument's stated redemption
price at maturity includes all payments required to be made over the term of
the instrument other than payments of "qualified stated interest," defined as
interest payments required to be made at fixed periodic intervals of one year
or less. The interest payments on the New Senior Secured Term Debt should
constitute qualified stated interest only to the extent of $20 million (i.e.,
the amount required to be made each year over the term of the debt instrument).
Accordingly, the stated redemption price at maturity of the New Senior Secured
Term Debt should equal its stated principal amount plus all interest payments
(other than payments of qualified stated interest) required to be made under
the New Senior Secured Term Debt.
The determination of the "issue price" of the New Senior Secured Term Debt
depends on whether either the Old Senior Secured Term Debt or the New Senior
Secured Term Debt is publicly traded for purposes of the OID rules. As stated
above, although the matter is not free from doubt, PSI believes that the issue
price of the New Senior Secured Term
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Debt would be determined by reference to the rules applicable to debt that is
not traded on an established securities market. Accordingly, the issue price
of the New Senior Secured Term Debt generally would be their stated principal
amount under section 1274(a) of the Tax Code.
A holder of a debt instrument that bears OID is required to include in
gross income an amount equal to the sum of the daily portions of OID for each
day during the taxable year in which the debt instrument is held. The daily
portions of OID are determined by allocating to each day in an accrual period
the pro rata portion of the OID that is considered allocable to the accrual
period. The amount of OID that is allocable to an accrual period is generally
equal to (A) the product of the adjusted issue price of the New Senior Secured
Term Debt at the beginning of the accrual period (the issue price of the New
Senior Secured Term Debt increased by prior accruals of OID and decreased by
prior cash payments other than payments of qualified stated interest) and its
yield-to-maturity (the discount rate, which when applied to all payments under
the New Senior Secured Term Debt, results in a present value equal to the issue
price of the New Senior Secured Term Debt) less (B) the amount of qualified
stated interest allocable to that accrual period.
The general effect of the OID rules is that holders, including holders
that use a cash-basis method of accounting, will be required to accrue OID as
interest income with respect to the New Senior Secured Term Debt over the life
of the New Senior Secured Term Debt based on its yield-to-maturity. Cash
payments (other than payments of qualified stated interest) on the New Senior
Secured Term Debt are not separately included in a holder's income as interest,
but rather are treated first as payments of previously accrued OID and then as
payments of principal.
(d) Original Issue Discount on the New Secured PIK Debt
Assuming that the New Secured PIK Debt is properly characterized as debt
instruments for U.S. federal income tax purposes, it would be treated as issued
with OID to the extent their "stated redemption price at maturity" exceeds
their "issue price." An instrument's stated redemption price at maturity
includes all payments required to be made over the term of the instrument other
than payments of "qualified stated interest," defined as interest payments
required to be made at fixed periodic intervals of one year or less (other than
payments in debt instruments of the issuer). The interest payments on the New
Secured PIK Debt should not constitute qualified stated interest because they
are payments in debt instruments of the Debtor. Accordingly, the stated
redemption price at maturity of the New Secured PIK Debt should equal its
stated principal amount plus all interest payments required to be made under
the New Secured PIK Debt.
The determination of the "issue price" of the New Secured PIK Debt depends
on whether either the Old Senior Secured Term Debt or the New Secured PIK Debt
are publicly traded for purposes of the OID rules. As discussed above,
although the matter is not free from doubt, PSC believes that the issue price
of the New Secured PIK Debt would be determined by reference to the rules
applicable to debt that is not traded on an established securities market. As
non-publicly traded property, the issue price of the New Secured PIK Debt
generally would be equal to its stated principal amount.
A holder of a debt instrument that bears OID is required to include in
gross income an amount equal to the sum of the daily portions of OID for each
day during the taxable year in which the debt instrument is held. The daily
portions of OID are determined by allocating to each day in an accrual period
the pro rata portion of the OID that is considered allocable to the accrual
period. The amount of OID that is allocable to an accrual period is generally
equal to the product of the adjusted issue price of the New Secured PIK Debt at
the beginning of the accrual period (the issue price of the New Secured PIK
Debt increased by prior accruals of OID and decreased by prior cash payments)
and its yield-to-maturity (the discount rate, which when applied to all
payments under the New Secured PIK Debt, results in a present value equal to
the issue price of the New Secured PIK Debt).
The general effect of the OID rules is that holders, including holders
that use a cash-basis method of accounting, will be required to accrue OID as
interest income with respect to the New Secured PIK Debt over the life of the
New Secured PIK Debt based on their yield-to-maturity (which may differ from
the stated interest rate of the New Secured PIK Debt).
As noted above, the issuance of additional New Secured PIK Debt will not
be treated as a payment of interest. Instead, the underlying New Secured PIK
Debt and any additional New Secured PIK Debt that may be issued thereon are
treated as a single debt instrument under the OID rules. Moreover, the
issuance of any additional New Secured PIK Debt should be treated simply as a
division of the underlying New Secured PIK Debt, so that the holder's tax basis
and adjusted issue price in the underlying New Secured PIK Debt should be
allocated among underlying New Secured PIK Debt and the additional New Secured
PIK Debt in proportion to their relative principal amounts.
(e) Adjustment of Conversion Price of New Secured PIK Debt
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The conversion ratio of the New Secured PIK Debt is subject to adjustment
under certain circumstances. Section 305 of the Tax Code, and the Treasury
Regulations issued thereunder, may treat holders of New Secured PIK Debt as
having received a constructive distribution, resulting in ordinary income to
the extent of the Debtor's current and accumulated earnings and profit (as
determined for U.S. federal income tax purposes), if, and to the extent that,
certain adjustments of the conversion ratio increase the proportionate interest
of a holder in the fully diluted share ownership of the Debtor, whether or not
such holder exercises the conversion privilege. Moreover, if there is not a
full adjustment of the conversion ratio of the New Secured PIK Debt to reflect
a stock dividend or other event that increases the proportionate interest of
holders of outstanding New Common Shares in the assets or earnings and profits
of the Debtor, then such increase in the proportionate interest of holders of
New Common Shares generally will be treated as a taxable distribution to such
holders with respect to their New Common Shares.
(f) Conversion of New Secured PIK Debt into New Common Shares
In general, no gain or loss will be recognized for U.S. federal income tax
purposes upon a conversion of the New Secured PIK Debt into New Common Shares.
However, cash paid in lieu of a fractional share of New Common Shares will
result in taxable gain (or loss) to the extent that the amount of such cash
exceeds (or is exceeded by) the portion of the adjusted tax basis of the New
Secured PIK Debt allocable to such fractional share. The initial tax basis of
New Common Shares received on conversion of the New Secured PIK Debt will equal
the adjusted tax basis of the converted New Secured PIK Note on the date of
conversion, reduced by the portion of such adjusted tax basis allocated to any
fractional share of New Common Shares considered to be exchanged for cash. The
holding period for New Common Shares received on conversion will include the
period during which the converted New Secured PIK Debt was held.
(g) Sale, Exchange or Redemption of New Common Shares, New Senior
Secured Term Debt, and New Secured PIK Debt
The sale or exchange of New Common Shares generally should result in
capital gain or loss equal to the difference between the amount realized and
the holder's tax basis in such New Common Shares. Depending upon the
circumstances, a redemption by the issuer of New Common Shares may result in
capital gain or loss to the holder of such security, or may be treated as a
dividend, generally taxable as ordinary income to the holder to the extent of
the issuer's earnings and profits (as determined for U.S. federal income tax
purposes) at the time of the redemption.
In general, the sale, exchange or redemption of the New Senior Secured
Term Debt and New Secured PIK Debt by a Class 6 Creditor (except for exchanges
of New Secured PIK Debt for New Common Stock as discussed above) would result
in capital gain or loss equal to the difference between the amount realized and
the holder's tax basis in such New Senior Secured Term Debt or New Secured PIK
Debt.
2. Allowed Class 7 Claims
The U.S. federal income tax consequences of the Plan to a Class 7 Creditor
receiving New Unsecured PIK Notes and/or New Unsecured Convertible Notes (the
New Unsecured and New Unsecured Convertible Notes, as applicable, are referred
to as the "New Notes") and New Common Shares will depend on a number of
factors, including whether the New Notes are properly classified as debt or
equity for U.S. federal income tax purposes, whether the exchanged claim and
New Unsecured PIK Notes are "securities" for U.S. federal income tax purposes
(a "Tax Security"), and whether the exchanged claims or New Notes are
considered traded on an established securities market ("publicly traded") for
purposes of the original issue discount rules. PSI's intended position
regarding the New Unsecured PIK Notes with respect to each of these factors is
briefly discussed below; however, Class 7 Creditors are urged to consult their
tax advisors with respect to these factors. Additionally, whether any of the
exchanged claims is a Tax Security or publicly traded depends on the facts and
circumstances of each exchanged claim, and Class 7 Creditors are urged to
consult their tax advisors with respect to these factors.
Although the matter is not free from doubt, PSI intends (i) to treat the
New Notes as debt for U.S. federal income tax purposes, (ii) to take the
position that the New Notes are Tax Securities and (iii) to take the position
that the New Notes are publicly traded for purposes of the original issue
discount rules. Since the determination of whether a debt obligation is
publicly traded depends on the nature of the trading in such debt obligation
once issued, the determination of whether the New Notes are publicly traded
cannot be made with certainty at this time.
(a) General
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Pursuant to the Plan, holders of Allowed Class 7 Claims will exchange
their claims for the New Unsecured PIK Notes and/or New Unsecured Convertible
Notes and New Common Shares. Generally, a Class 7 Creditor will not recognize
gain or loss on its exchange if the Creditor's exchanged claim is a Tax
Security. Whether an instrument constitutes a Tax Security is determined based
on all the facts and circumstances. Certain authorities have held that the
length of the term of a debt instrument is a factor in determining whether such
instrument is a Tax Security for U.S. federal income tax purposes. These
authorities have indicated that a term of less than five years is evidence that
the instrument is not a Tax Security, whereas a term of ten years or more is
evidence that it is a Tax Security. In addition, claims in the nature of a
legal action, account receivable or bank loan generally are not treated as Tax
Securities; whereas, bonds, notes or other evidences of indebtedness issued to
investors with a term of at least ten years generally are treated as Tax
Securities.
Holders of Allowed Class 7 Claims whose exchanged claims are Tax
Securities generally should not recognize gain or loss with respect to the
exchange of such claims for New Notes and New Common Shares because such
exchanges should constitute a recapitalization pursuant to a plan of
reorganization within the meaning of section 368(a)(1)(E) of the Tax Code.
Accordingly, with respect to such exchanges, such holders should (i) allocate
their basis in their exchanged claims to the New Notes and New Common Shares
based on the relative fair market value of such securities, and (ii) have tax
holding periods for the New Notes and New Common Shares received in exchange
for their exchanged claims (except to the extent such securities are
attributable to accrued interest) that include their tax holding periods for
such exchanged claims.
Holders of Allowed Class 7 Claims whose exchanged claims are not Tax
Securities generally should recognize gain or loss on the exchange of such
claims for the New Notes and New Common Shares equal to the difference between
(A) (i) the sum of the issue price of the New Notes and the fair market value
of the New Common Shares received less (ii) any amounts attributable to accrued
and unpaid interest on the exchanged claims and (B) the holder's tax basis in
the exchanged claims. Accordingly, with respect to such exchanges, such
holders should have an initial tax basis in the New Notes equal to their issue
price and an initial tax basis in the New Common Shares equal to its fair
market value. The holding period with respect to each instrument should begin
on the day following the day on which the creditor has the right to receive it.
The characterization of such gain or loss will depend on the holder's tax
position and circumstances, including whether the Class 7 Claim is a "market
discount" obligation. Class 7 Creditors are strongly urged to consult their
tax advisors regarding the characterization of any gain or loss recognized as a
result of the Plan.
The determination of the "issue price" of the New Notes depends on whether
the New Notes are publicly traded for purposes of the OID rules. As stated
above, although the matter is not free from doubt, PSI believes that the New
Notes will be publicly traded for purposes of the OID rules. Accordingly, the
issue price of the New Notes will be equal to their fair market value on the
issue date as determined under section 1273 of the Tax Code.
If the New Notes are not publicly traded for purposes of the OID rules
(and a "substantial amount" of the exchanged claims are not publicly traded for
purposes of the OID rules, which the issuer believes to be the case) then the
issue price of the New Notes would be their stated principal amount under
section 1274(a) of the Tax Code.
(b) Accrued Interest on Unsecured Claims
Although the manner in which consideration is to be allocated between
accrued unpaid interest and principal of the unsecured claims for U.S. federal
income tax purposes is unclear, the issuer intends to take the position that
the consideration distributed to Class 7 Creditors pursuant to the Plan is
allocable first to accrued and unpaid interest on the unsecured claims.
A Class 7 Creditor that previously included in income accrued but unpaid
interest attributable to its unsecured claims should recognize an ordinary loss
to the extent that such previously included accrued interest exceeds the amount
of consideration received by the creditor which is attributable to accrued
interest for U.S. federal income tax purposes. To the extent a portion of the
consideration received by a Class 7 Creditor which it has not previously
included in its income as accrued but unpaid interest attributable to its
unsecured claims is treated for U.S. federal income tax purposes as
attributable to accrued but unpaid interest, such creditor will recognize
ordinary income in the amount of such interest, regardless of whether the
creditor realizes an overall gain or loss upon the surrender of its claim or
whether such gain or loss is recognized.
A Class 7 Creditor's basis in New Notes treated as received in
satisfaction of accrued interest on the unsecured claims, if any, should be
equal to the amount of interest income treated as satisfied by the receipt of
such instruments. Additionally, a creditor's tax holding period in the New
Notes should begin on the day following the date on which it has a right to
receive them.
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(c) Original Issue Discount on the New Unsecured PIK Notes
Assuming that the New Notes are properly characterized as debt instruments
for U.S. federal income tax purposes, they would be treated as issued with OID
to the extent their "stated redemption price at maturity" exceeds their "issue
price." An instrument's stated redemption price at maturity includes all
payments required to be made over the term of the instrument other than
payments of "qualified stated interest," defined as interest payments required
to be made at fixed periodic intervals of one year or less (other than debt
instruments of the issuer). The interest payments on the New Notes should not
constitute qualified stated interest because they are payments in debt
instruments of the Debtor (in the case of the New Unsecured PIK Notes) and
payments in cash which are not made at least yearly. Accordingly, the stated
redemption price at maturity of the New Notes should equal their stated
principal amount plus all interest payments required to be made under the New
Notes.
As discussed above, the determination of the "issue price" of the New
Unsecured PIK Notes depends on whether the New Notes are publicly traded for
purposes of the OID rules. As discussed above, although the matter is not free
from doubt, PSI intends to take the position that the New Notes will be
publicly traded for purposes of the OID rules. Consequently, the issue price
of the New Notes will be equal to their fair market value on the issue date.
If, contrary to the issuer's intended position, the issue price of the New
Notes was ultimately determined to be determined by reference to the rules
governing non-publicly traded debt instruments, the issue price of the New
Notes would be their stated principal amount, and the amount of OID and other
consequences to holders would likely differ from those resulting from the
application of section 1273 of the Tax Code. Class 7 Creditors are urged to
consult their own tax advisors regarding these issues.
A holder of a debt instrument that bears OID is required to include in
gross income an amount equal to the sum of the daily portions of OID for each
day during the taxable year in which the debt instrument is held. The daily
portions of OID are determined by allocating to each day in an accrual period
the pro rata portion of the OID that is considered allocable to the accrual
period. The amount of OID that is allocable to an accrual period is generally
equal to the product of the adjusted issue price of the New Notes at the
beginning of the accrual period (the issue price of the New Notes increased by
prior accruals of OID and decreased by prior cash payments) and its
yield-to-maturity (the discount rate, which when applied to all payments under
the New Notes, results in a present value equal to the issue price of the New
Notes).
The general effect of the OID rules is that holders, including holders
that use a cash-basis method of accounting, will be required to accrue OID as
interest income with respect to the New Notes over the life of the New Notes
based on their yield-to-maturity (which may differ from the stated interest
rate of the New Notes).
As noted above, the issuance of additional New Unsecured PIK Notes will
not be treated as a payment of interest. Instead, the underlying New Unsecured
PIK Notes and any additional New Unsecured PIK Notes that may be issued thereon
are treated as a single debt instrument under the OID rules. Moreover, the
issuance of any additional New Unsecured PIK Notes should be treated simply as
a division of the underlying New Unsecured PIK Notes, so that the holder's tax
basis and adjusted issue price in the underlying New Unsecured PIK Notes should
be allocated among underlying New Unsecured PIK Notes and the additional New
Unsecured PIK Notes in proportion to their relative principal amounts.
(d) Bond Premium on New Notes
A holder that has a tax basis in its New Notes in excess of the issue
price of such bonds should be permitted to reduce its original issue discount
income with respect to such bonds by a ratable portion of such excess. Class 7
Creditors having a relatively high basis in their unsecured claims should be
able to offset a substantial portion of their original issue discount income
with respect to the New Notes by amortizing this premium. Additionally, in
general, if the tax basis of New Notes in the hands of a Class 7 Creditor
exceeds the stated redemption price at maturity of such New Notes (which may
occur for Class 7 Creditors who receive recapitalization treatment in the
exchange because they hold exchanged claims which are Tax Securities), the New
Unsecured PIK Notes will be considered to be issued with "bond premium". To
amortize bond premium, the holder must make an election that applies to all
debt instruments it holds or subsequently acquires. A holder that elects to
amortize bond premium must reduce its tax basis in the New Notes by an amount
equal to the amortized premium.
(e) Market Discount on New Notes
The Tax Code generally requires holders of debt instruments with "market
discount," (generally, the amount by which the "revised issue price" of a debt
instrument (i.e., the sum of its issue price plus accrued original issue
discount)
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exceeds the holder's adjusted tax basis in such debt instrument), to treat as
ordinary income any gain realized on the disposition of such debt instruments
to the extent of the market discount accrued during the holder's period of
ownership. Holders should consult their own tax advisors as to the potential
application of the market discount rules to them in light of their individual
circumstances, and the advisability of making an election to accrue market
discount on a current basis.
(f) Adjustment of Conversion Price of New Unsecured Convertible Notes
The conversion ratio of the New Unsecured Convertible Notes is subject to
adjustment under certain circumstances. Section 305 of the Tax Code, and the
Treasury Regulations issued thereunder, may treat holders of New Unsecured
Convertible Notes as having received a constructive distribution, resulting in
ordinary income to the extent of the Debtor's current and accumulated earnings
and profit (as determined for U.S. federal income tax purposes), if, and to the
extent that, certain adjustments of the conversion ratio increase the
proportionate interest of a holder in the fully diluted share ownership of the
Debtor, whether or not such holder exercises the conversion privilege.
Moreover, if there is not a full adjustment of the conversion ratio of the New
Unsecured Convertible Notes to reflect a stock dividend or other event that
increases the proportionate interest of holders of outstanding New Common Stock
in the assets or earnings and profits of the Debtor, then such increase in the
proportionate interest of holders of New Common Stock generally will be treated
as a taxable distribution to such holders with respect to their New Common
Stock.
(g) Conversion of New Unsecured Convertible Notes into New Common Stock
In general, no gain or loss will be recognized for U.S. federal income tax
purposes upon a conversion of New Unsecured Convertible Notes into New Common
Stock. However, cash paid in lieu of a fractional share of New Common Stock,
if any, will result in taxable gain (or loss) to the extent that the amount of
such cash exceeds (or is exceeded by) the portion of the adjusted tax basis of
the New Unsecured Convertible Note allocable to such fractional share. The
initial tax basis of New Common Stock received on conversion of the New
Unsecured Convertible Notes will equal the adjusted tax basis of the converted
New Unsecured Convertible Note on the date of conversion, reduced by the
portion of such adjusted tax basis allocated to any fractional share of New
Common Stock considered to be exchanged for cash. The holding period for New
Common Stock received on conversion will include the period during which the
converted New Unsecured Convertible Notes were held.
(h) Sale, Exchange or Redemption of New Common Shares and New Unsecured
PIK Notes
The sale or exchange of New Common Shares generally should result in
capital gain or loss equal to the difference between the amount realized and
the holder's tax basis in such New Common Shares. Depending upon the
circumstances, a redemption by the issuer of New Common Shares may result in
capital gain or loss to the holder of such security, or may be treated as a
dividend, generally taxable as ordinary income to the holder to the extent of
the issuer's earnings and profits (as determined for U.S. federal income tax
purposes) at the time of the redemption.
In general, assuming the New Unsecured PIK Notes are properly treated as
debt for U.S. federal income tax purposes, and subject to the market discount
rules discussed above, the sale, exchange or redemption of the New Unsecured
PIK Notes would result in capital gain or loss equal to the difference between
the amount realized and the holder's tax basis in such New Unsecured PIK Notes.
3. Importance of Obtaining Professional Tax Assistance
THE FOREGOING IS INTENDED TO BE ONLY A GENERAL SUMMARY OF CERTAIN OF THE
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN, AND IS NOT A SUBSTITUTE FOR
CAREFUL TAX PLANNING WITH A TAX PROFESSIONAL. THE U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN WHICH ARE DESCRIBED HEREIN AND THE STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF THE PLAN WHICH ARE NOT ADDRESSED HEREIN, ARE
COMPLEX AND, IN SOME CASES, UNCERTAIN. SUCH CONSEQUENCES MAY ALSO VARY
SIGNIFICANTLY BASED ON THE INDIVIDUAL CIRCUMSTANCES OF EACH HOLDER OF A CLAIM.
ACCORDINGLY, EACH HOLDER OF A CLAIM IS STRONGLY URGED TO CONSULT WITH ITS TAX
ADVISOR REGARDING THE SPECIFIC U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE PLAN TO IT.
ARTICLE XI.
FEASIBILITY OF THE PLAN AND BEST INTERESTS OF CREDITORS
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A. FEASIBILITY OF THE PLAN
In connection with confirmation of the Plan, the Bankruptcy Court will
have to determine that the Plan is feasible pursuant to section 1129(a)(11) of
the Bankruptcy Code, which means that the confirmation of the Plan is not
likely to be followed by the liquidation or the need for further financial
reorganization of the Debtors.
To support their belief in the feasibility of the Plan, the Debtors have
relied upon Pro Forma Financial Projections for Fiscal Years 1999 through 2001,
as set forth in Appendix F annexed to this Disclosure Statement.
The Projections indicate that the Reorganized Debtors should have
sufficient cash flow to pay and service their debt obligations, including the
Exit Facility, and to fund their operations as contemplated by the Business
Plan. Accordingly, the Debtors believe that the Plan complies with the
financial feasibility standard of section 1129(a)(11) of the Bankruptcy Code.
The Projections were not prepared with a view toward compliance with the
published guidelines of the American Institute of Certified Public Accountants
or any other regulatory or professional agency or body or generally accepted
accounting principles. Furthermore, the Debtors' independent certified public
accountants have not compiled or examined the Projections and accordingly do
not express any opinion or any other form of assurance with respect thereto and
assume no responsibility for the Projections.
The Projections assume that (i) the Plan will be confirmed and consummated
in accordance with its terms, (ii) there will be no material change in
legislation or regulations, or the administration thereof, including
environmental legislation or regulations, that will have an unexpected effect
on the operations of the Reorganized Debtors, (iii) there will be no change in
United States generally accepted accounting principles that will have a
material effect on the reported financial results of the Reorganized Debtors,
and (iv) there will be no material contingent or unliquidated litigation or
indemnity claims applicable to the Reorganized Debtors. To the extent that the
assumptions inherent in the Projections are based upon future business
decisions and objectives, they are subject to change. In addition, although
they are presented with numerical specificity and considered reasonable by the
Debtors when taken as a whole, the assumptions and estimates underlying the
Projections are subject to significant business, economic and competitive
uncertainties and contingencies, many of which will be beyond the control of
the Reorganized Debtors. Accordingly, the Projections are only an estimate
that are necessarily speculative in nature. It can be expected that some or
all of the assumptions in the Projections will not be realized and that actual
results will vary from the Projections, which variations may be material and
are likely to increase over time. The Projections should therefore not be
regarded as a representation by the Debtors or any other person that the
results set forth in the Projections will be achieved. In light of the
foregoing, readers are cautioned not to place undue reliance on the
Projections. The Projections should be read together with the information in
Article VII of the Disclosure Statement entitled "Certain Factors to be
Considered", which sets forth important factors that could cause actual results
to differ from those in the Projections.
PSC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files periodic
reports and other information with the SEC relating to its business, financial
statements and other matters. Such filings will not include projected
financial information. The Debtors do not intend to update or otherwise revise
the Projections, including any revisions to reflect events or circumstances
existing or arising after the date of this Disclosure Statement or to reflect
the occurrence of unanticipated events, even if any or all of the underlying
assumptions do not come to fruition. Furthermore, the Debtors do not intend to
update or revise the Projections to reflect changes in general economic or
industry conditions.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995: The Projections contain statements which constitute "forward-looking
statements" within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934, as amended by the Private Securities Litigation Reform
Act of 1995. "Forward-looking statements" in the Projections include the
intent, belief or current expectations of the Debtors and members of their
management team with respect to the timing of, completion of and scope of the
current restructuring, reorganization plan, strategic business plan, bank
financing, and debt and equity market conditions and the Debtors' future
liquidity, as well as the assumptions upon which such statements are based.
While the Debtors believe that the expectations are based on reasonable
assumptions within the bounds of their knowledge of their business and
operations, parties in interest are cautioned that any such forward-looking
statements are not guarantees of future performance, and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. Important factors currently
known to management that could cause actual results to differ materially from
those contemplated by the forward-looking statements in the Projections
include, but are not limited to, further adverse developments with respect to
the Debtors' liquidity position or operations of the Debtors' various
businesses, adverse developments in the Debtors' efforts to renegotiate their
funding and adverse developments in the bank financing or public
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or private markets for debt or equity securities, or adverse developments in
the timing or results of the Debtors' strategic business plan (including the
time line to emerge from Chapter 11), the difficulty in controlling industry
costs and integrating new operations, the ability of the Debtors to realize the
anticipated general and administrative expense savings and overhead reductions
presently contemplated, the ability of the Debtors to return the Debtors'
operations to profitability, the level and nature of any restructuring and
other one-time charges, the difficulty in estimating costs relating to exiting
certain markets and consolidating and closing certain operations, and the
possible negative effects of a change in applicable legislation.
B. ACCEPTANCE OF THE PLAN
As a condition to confirmation, the Bankruptcy Code requires that each
Class of Impaired Claims vote to accept the Plan, except under certain
circumstances.
Section 1126(c) of the Bankruptcy Code defines acceptance of a plan by a
class of impaired claims as acceptance by holders of at least two-thirds (2/3)
in dollar amount and more than one-half ( 1/2) in number of claims in that
class, but for that purpose counts only those who actually vote to accept or to
reject the Plan. Thus, Class 6 and 7 will have voted to accept the Plan only
if two-thirds (2/3) in amount and a majority in number actually voting in each
Class cast their Ballots in favor of acceptance. Holders of Claims who fail to
vote are not counted as either accepting or rejecting a plan.
C. BEST INTERESTS TEST
As noted above, even if a plan is accepted by the holders of each class of
Claims and Interests, the Bankruptcy Code requires a bankruptcy court to
determine that the plan is in the best interests of all holders of Claims or
Interests that are impaired by the plan and that have not accepted the plan.
The "best interests" test, as set forth in section 1129(a)(7) of the Bankruptcy
Code, requires a bankruptcy court to find either that all members of an
impaired class of claims as interests have accepted the plan or that the plan
will provide a member who has not accepted the plan with a recovery of property
of a value, as of the effective date of the plan, that is not less than the
amount that such holder would recover if the debtor were liquidated under
Chapter 7 of the Bankruptcy Code.
To calculate the probable distribution to holders of each impaired class
of Claims and Interests if the debtor were liquidated under Chapter 7, a
bankruptcy court must first determine the aggregate dollar amount that would be
generated from a debtor's assets if its Chapter 11 Cases were converted to
Chapter 7 cases under the Bankruptcy Code. This "liquidation value" would
consist primarily of the proceeds from a forced sale of the debtor's assets by
a Chapter 7 trustee.
The amount of liquidation value available to unsecured creditors would be
reduced by, first, the claims of secured creditors to the extent of the value
of their collateral, and, second, by the costs and expenses of liquidation, as
well as by other administrative expenses and costs of both the Chapter 7 cases
and the Chapter 11 Cases. Costs of liquidation under Chapter 7 of the
Bankruptcy Code would include the compensation of a trustee, as well as of
counsel and other professionals retained by the trustee, asset disposition
expenses, all unpaid expenses incurred by the debtor in its Chapter 11 Cases
(such as compensation of attorneys, financial advisors and accountants) that
are allowed in the Chapter 7 cases, litigation costs, and claims arising from
the operations of the debtor during the pendency of the Chapter 11 Cases. The
liquidation itself would trigger certain priority payments that otherwise would
be due in the ordinary course of business. Those priority claims would be paid
in full from the liquidation proceeds before the balance would be made
available to pay general claims or to make any distribution in respect of
equity interests. The liquidation would also prompt the rejection of a large
number of executory contracts and unexpired leases and thereby create a
significantly higher number of unsecured creditors.
Once the court ascertains the recoveries in liquidation of secured
creditors and priority claimants, it must determine the probable distribution
to general unsecured creditors and equity security holders from the remaining
available proceeds in liquidation. If such probable distribution has a value
greater than the distributions to be received by such creditors and equity
security holders under the Plan, then the Plan is not in the best interests of
creditors and equity security holders. The Debtors believe that the members of
each Class of Impaired Claims and Interests will receive more under the Plan
than they would receive if the Debtors were liquidated.
D. LIQUIDATION ANALYSIS
The Debtors believe that the Plan meets the "best interests of creditors"
test of section 1129(a)(7) of the Bankruptcy Code. The Debtors believe that
the members of each Impaired Class will receive greater value under the Plan
than they would in a liquidation. The liquidation analysis (the "Liquidation
Analysis") for consolidated PSC, including the
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Debtors, the Canadian Debtors and the non-filing Subsidiaries (collectively,
"Consolidated PSC") is annexed as Appendix E to this Disclosure Statement.
The Liquidation Analysis presumes the liquidation of Consolidated PSC
under the law of the respective jurisdictions of incorporation/amalgamation for
each individual Subsidiary. The Liquidation Analysis relies on certain
projected future events and necessarily relies on certain estimates and
assumptions in order to arrive at a hypothetical liquidation value for
Consolidated PSC.
The Liquidation Analysis provides that in the event of a liquidation as
described therein, the proceeds available to satisfy Class 6 Secured Lender
Claims would be approximately $___ million, leaving a shortfall to satisfaction
of Lender Claims of approximately $___ million. The Liquidation Analysis
provides that no distribution would be available to holders of Class 7 Impaired
Unsecured Claims or holders of Class 8A Interests, Class 8B Claims or Class 8C
Claims. Therefore, because the Plan provides for distributions or retention of
interests for Classes 7, 8A, 8B and 8C, if Class 7 votes to accept the Plan,
such holders of Impaired Claims and Interests in such classes will receive a
greater recovery under the Plan than they would in a liquidation. The Plan
also meets the "best interests test" with respect to Lender Claims. In a
liquidation, the distributions on account of Lender Claims is shown in the
Liquidation Analysis to be significantly less than the value of distributions
provided under the Plan. Although the Company believes that the Plan meets the
"best interests test" of section 1129(a)(7) of the Bankruptcy Code, there can
be no assurance that the Bankruptcy Court will determine that the Plan meets
this test.
E. VALUATION OF THE REORGANIZED DEBTORS
In conjunction with formulating the Plan, the Debtors determined that it
was necessary to estimate a post-confirmation going concern enterprise value
for the Reorganized Debtors. Accordingly, the Debtors directed
Ernst & Young Corporate Finance Inc. ("EYCF") to prepare such a valuation. A
summary of the valuation prepared by EYCF is attached with Appendix G to the
Disclosure Statement.
As shown in the valuation, EYCF has determined pursuant to various
well-accepted valuation techniques that the enterprise value of Reorganized PSC
and its Subsidiaries is in a range of $605 million to $735 million. The
mid-point range of this range of value is $670 million.
15. Application of the "Best Interests" Test to the Liquidation Analysis and
the Valuation of the Reorganized Debtors
It is impossible to determine with any specificity the value each creditor
will receive as a percentage of its Allowed Claim. This difficulty in
estimating the value of such recoveries is due to, among other things, the
inherent uncertainty with respect to future performance and the question of a
public market for the New Common Shares, New Secured PIK Debt, New Unsecured
PIK Notes and New Unsecured Convertible Notes. Such a valuation is made even
more difficult because the analysis regarding the amount of Class 7 Claims that
will ultimately be Allowed is preliminary and subject to change.
After considering the effects that a Chapter 7 liquidation would have on
the ultimate proceeds available for the distribution to Creditors in the
Chapter 11 Cases versus the valuation of the of the Reorganized Debtors as a
going concern, each as set forth above, the Debtors have determined that the
confirmation of the Plan will provide each holder of an Allowed Class 6 Secured
Lender Claim and each holder of Allowed Class 7 Impaired Unsecured Claim with a
recovery that is not less than such holder would receive pursuant to a
liquidation under Chapter 7.
F. CONFIRMATION WITHOUT ACCEPTANCE OF ALL IMPAIRED CLASSES: THE "CRAMDOWN"
ALTERNATIVE
In view of the deemed rejection by Class 9, the Debtors will seek
confirmation of the Plan pursuant to the "cramdown" provisions of the
Bankruptcy Code. Specifically, section 1129(b) of the Bankruptcy Code provides
that a plan can be confirmed even if the plan is not accepted by all impaired
classes, as long as at least one impaired class of Claims has accepted it. The
Bankruptcy Court may confirm a plan at the request of the debtors if the plan
"does not discriminate unfairly" and is "fair and equitable" as to each
impaired class that has not accepted the plan. A plan does not discriminate
unfairly within the meaning of the Bankruptcy Code if a dissenting class is
treated equally with respect to other classes of equal rank.
A plan is fair and equitable as to a class of secured claims that rejects
such plan if the plan provides (a)(i) that the holders of Claims included in
the rejecting class retain the liens securing those claims whether the property
subject to those liens is retained by the debtor or transferred to another
entity, to the extent of the allowed amount of such claims, and (ii)
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that each holder of a claim of such class receives on account of that claim
deferred cash payments totaling at least the allowed amount of that claim, of a
value, as of the effective date of the plan, of at least the value of the
holder's interest in the estate's interest in such property; (b) for the sale,
subject to section 363(k) of the Bankruptcy Code, of any property that is
subject to the liens securing the claims included in the rejecting class, free
and clear of the liens, with the liens to attach to the proceeds of the sale,
and the treatment of the liens on proceeds under clause (a) or (c) of this
paragraph; or (c) for the realization by such holders of the indubitable
equivalent of such claims.
A plan is fair and equitable as to a class of unsecured claims which
rejects a plan if the plan provides (a) for each holder of a claim included in
the rejecting class to receive or retain on account of that claim property that
has a value, as of the effective date of the plan, equal to the allowed amount
of such claim; or (b) that the holder of any claim or interest that is junior
to the claims of such class will not receive or retain on account of such
junior claim or interest any property at all.
A plan is fair and equitable as to a class of equity interests that
rejects a plan if the plan provides (a) that each holder of an interest
included in the rejecting class receive or retain on account of that interest
property that has a value, as of the effective date of the plan, equal to the
greatest of the allowed amount of any fixed liquidation preference to which
such holder is entitled, any fixed redemption price to which such holder is
entitled, or the value of such interest; or (b) that the holder of any interest
that is junior to the interests of such class will not receive or retain under
the plan on account of such junior interest any property at all.
The Debtors also will seek confirmation of the Plan pursuant to the
"cramdown" provisions of the Bankruptcy Code if the holders of Allowed Class 7
Claims vote to reject the Plan.
ARTICLE XII.
ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN
The Debtors believe that the Plan affords Holders of Class 6 and 7 Claims
the potential for the greatest realization on the Debtors' assets and,
therefore, is in the best interests of such holders. The Plan as presented is
the result of considerable negotiations between PSC and an ad hoc steering
committee of Lenders, as well as significant unsecured creditors.
If, however, the requisite acceptances are not received, or the Plan is
not confirmed and consummated, the theoretical alternatives include: (a)
formulation of an alternative plan or plans of reorganization, or (b)
liquidation of the Debtors under Chapter 7 or 11 of the Bankruptcy Code.
A. ALTERNATIVE PLAN(S) OF REORGANIZATION
If the requisite acceptances are not received or if the Plan is not
confirmed, the Debtors (or, if the Debtors' exclusive periods in which to file
and solicit acceptances of a plan of reorganization have expired, any other
party-in-interest) could attempt to formulate and propose a different plan or
plans of reorganization. Such a plan or plan(s) might involve either a
reorganization and continuation of the Debtors' businesses or an orderly
liquidation of assets.
Additionally, it is not clear whether the Debtors could survive as going
concerns in a protracted alternative plan of reorganization. They could have
difficulty sustaining operations in the face of high costs, erosion of customer
confidence, and liquidity difficulties that could well result if they remained
Debtors for any length of time.
With respect to an alternative plan, the Debtors have explored various
other alternatives in connection with the extensive negotiation process
involved in the formulation and development of the Plan. The Debtors believe
that the Plan, as described herein, the result of extensive negotiations
between the Debtors and various creditor constituencies, enables creditors to
realize the greatest possible value under the circumstances, and, that as
compared to any alternative plan of reorganization, the Plan has the greatest
chance to be confirmed and consummated.
B. LIQUIDATION UNDER CHAPTER 7 OR CHAPTER 11
If no plan is confirmed, the Chapter 11 Cases may be converted to cases
under Chapter 7 of the Bankruptcy Code, pursuant to which a trustee would be
elected or appointed to liquidate the Debtors' assets for distribution to
creditors in accordance with the priorities established by the Bankruptcy Code.
It is impossible to predict precisely how the proceeds of the liquidation
would be distributed to the respective holders of Claims against or Interests
in the Debtors.
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The Debtors believe that in a liquidation under Chapter 7, before
creditors received any distribution, additional administrative expenses
involved in the appointment of a trustee or trustees and attorneys, accountants
and other professionals to assist such trustees would cause a substantial
diminution in the value of the Debtors' Estates. The assets available for
distribution to Creditors would be reduced by such additional expenses and by
Claims, some of which would be entitled to priority, which would arise by
reason of the liquidation and from the rejection of leases and other executory
contracts in connection with the cessation of operations and the failure to
realize the greater going concern value of the Debtors' assets.
The Debtors could also be liquidated pursuant to the provisions of a
Chapter 11 plan of reorganization. In a liquidation under Chapter 11, the
Debtors' assets could be sold in an orderly fashion over a more extended period
of time than in a liquidation under Chapter 7. Thus, a Chapter 11 liquidation
might result in larger recoveries than in a Chapter 7 liquidation, but the
delay in distributions could result in lower present values received and higher
administrative costs. Because a trustee is not required in a Chapter 11 case,
expenses for professional fees could be lower than in a Chapter 7 case, in
which a trustee must be appointed. Any distribution to the holders of Claims
under a Chapter 11 liquidation plan probably would be delayed substantially.
Although preferable to a Chapter 7 liquidation, the Debtors believe that
any alternative liquidation under Chapter 11 is a much less attractive
alternative to creditors than the Plan because of the greater return the
Debtors anticipate is provided by the Plan.
ARTICLE XIII.
THE SOLICITATION; VOTING PROCEDURE
A. SOLICITATION OF VOTES
This Disclosure Statement, including all Appendices hereto, together with
the related materials included herewith, is being furnished to the Holders of
Class 6 and 7 Claims for the purposes of voting on the Plan. As a condition to
confirmation, the Bankruptcy Code requires that each Class of Impaired Claims
vote to accept the Plan, except under certain circumstances.
The Debtors may alter, amend, or modify the Plan or any Exhibits thereto
under section 1127(a) of the Bankruptcy Code at any time prior to the
Confirmation Date, subject to the approval of the Required Lenders. After the
Confirmation Date and prior to substantial consummation of the Plan, as defined
in section 1101(2) of the Bankruptcy Code, the Reorganized Debtors may, under
section 1127(b) of the Bankruptcy Code, institute proceedings in the Bankruptcy
Court to remedy any defect or omission or reconcile any inconsistencies in the
Plan, the Disclosure Statement, or the Confirmation Order, and such matters as
may be necessary to carry out the purposes and effects of the Plan so long as
such proceedings do not materially adversely affect the treatment of holders of
Claims or Interests under the Plan; provided, however, that prior notice of
such proceedings shall be served in accordance with the Bankruptcy Rules or
order of the Bankruptcy Court.
B. VOTING DEADLINE
All votes to accept or reject the Plan must be cast by using the ballot
(the "Ballot") enclosed with this Disclosure Statement. No other votes will be
counted. Ballots must be RECEIVED by the Voting Agent no later than 5:00 p.m.
(Prevailing Eastern Time) on the Voting Deadline or if the date is extended as
set forth below, the period during which Ballots will be accepted will
terminate at 5:00 p.m. (Prevailing Eastern Time) on such extended date (in
either case, the "Voting Deadline").
The Debtors reserve the absolute right to extend, by oral or written
notice to the Voting Agent, the period of time (on a daily basis, if necessary)
during which Ballots will be accepted for any reason including, but not limited
to, determining whether or not the Requisite Acceptances have been received, by
making a public announcement of such extension no later than 9:00 a.m.
(Prevailing Eastern Time) on the first Business Day next succeeding the
previously announced Voting Deadline. Without limiting the manner in which the
Debtors may choose to make any public announcement, the Debtors will not have
any obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by issuing a news release through the Dow Jones News
Service. There can be no assurance that the Debtors will exercise their right
to extend the solicitation period for the receipt of Ballots.
Except to the extent requested by the Debtors or as permitted by the
Bankruptcy Court, Ballots received after the Voting Deadline will not be
counted or otherwise used in connection with the Debtors' request for
confirmation of the Plan (or any permitted modification thereof).
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C. VOTING PROCEDURES
The failure of a Holder of Class 6 or 7 Claim to deliver a duly executed
Ballot will be deemed to constitute an abstention by such Lender with respect
to voting on the Plan and such abstentions will not be counted as votes for or
against the Plan.
You should provide all of the information requested by the Ballots you
receive. You should complete and return all Ballots that you receive in the
return envelope provided with each such Ballot. IN NO CASE SHOULD A BALLOT BE
DELIVERED TO ANY ENTITY OTHER THAN THE VOTING AGENT.
D. FIDUCIARIES AND OTHER REPRESENTATIVES
If a Ballot is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, or another acting in a fiduciary or
representative capacity, such person should indicate such capacity when signing
and, unless otherwise determined by the Debtors, must submit proper evidence
satisfactory to the Debtors of authority to so act. Authorized signatories
should submit the separate Ballot of each beneficial owner for whom they are
voting.
E. PARTIES IN INTEREST ENTITLED TO VOTE
Under section 1124 of the Bankruptcy Code, a class of claims or interests
is deemed to be "impaired" under a plan unless (i) the plan leaves unaltered
the legal, equitable, and contractual rights to which such claim or interest
entitles the holder thereof or (ii) notwithstanding any legal right to an
accelerated payment of such claim or interest, the plan cures all existing
defaults (other than defaults resulting from the occurrence of events of
bankruptcy) and reinstates the maturity of such claim or interest as it existed
before the default.
In general, a holder of a claim or interest may vote to accept or to
reject a plan if (i) the claim or interest is "allowed," which means generally
that no party in interest has objected to such claim or interest, and (ii) the
claim or interest is impaired by the Plan. If, however, the holder of an
impaired claim or interest will not receive or retain any distribution under
the plan on account of such claim or interest, the Bankruptcy Code deems such
holder to have rejected the plan, and, accordingly, holders of such claims and
interests do not actually vote on the Plan. If a claim or interest is not
impaired by the Plan, the Bankruptcy Code deems the holder of such claim or
interest to have accepted the plan and, accordingly, holders of such claims and
interests are not entitled to vote on the Plan.
F. CLASSES IMPAIRED UNDER THE PLAN
The Allowed Secured Claims of Lenders are Impaired under the Plan, and
thus are entitled to vote on the Plan. In addition, Allowed Class 7 Impaired
Unsecured Claims are Impaired under the Plan and are entitled to vote on the
Plan. Class 8A Old Common Shares, Class 8B Securities Claims in the Securities
Actions and Class 8C Other Securities Claims are Impaired under the Plan.
Unless the Bankruptcy Court enters the Class 8 Solicitation Order as set forth
above, holders of Allowed Class 8A Interests and Allowed Class 8B and 8C Claims
are entitled to vote on the Plan. Class 9 Other Securities Claims receive no
distribution under the Plan, are therefore Impaired and by operation of law,
holders of Class 9 Claims are therefore deemed to have rejected the Plan and
are not entitled to vote on the Plan.
G. WAIVERS OF DEFECTS, IRREGULARITIES, ETC.
Unless otherwise directed by the Bankruptcy Court, all questions as to the
validity, form, eligibility (including time of receipt), acceptance, and
revocation or withdrawal of Ballots will be determined by the Voting Agent and
the Debtors in their sole discretion, which determination will be final and
binding. As indicated below under "Withdrawal of Ballots; Revocation,"
effective withdrawals of Ballots must be delivered to the Voting Agent prior to
the Voting Deadline. The Debtors reserve the absolute right to contest the
validity of any such withdrawal. The Debtors also reserve the right to reject
any and all Ballots not in proper form, the acceptance of which would, in the
opinion of the Debtors or their counsel, be unlawful. The Debtors further
reserve the right to waive any defects or irregularities or conditions of
delivery as to any particular Ballot. The interpretation (including the Ballot
and the respective instructions thereto) by the Debtors, unless otherwise
directed by the Bankruptcy Court, will be final and binding on all parties.
Unless waived, any defects or irregularities in connection with deliveries of
Ballots must be cured within such time as the Debtors (or the Bankruptcy Court)
determine. Neither the Debtors nor any other person will be under any duty to
provide notification of defects or irregularities with respect to deliveries of
Ballots nor will any of them incur any liabilities for failure to provide such
notification. Unless otherwise directed by the Bankruptcy Court, delivery of
such Ballots will not be deemed to have been
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made until such irregularities have been cured or waived. Ballots previously
furnished (and as to which any irregularities have not theretofore been cured
or waived) will be invalidated.
H. WITHDRAWAL OF BALLOTS; REVOCATION
Any party who has delivered a valid Ballot for the acceptance or rejection
of the Plan may withdraw such acceptance or rejection by delivering a written
notice of withdrawal to the Voting Agent at any time prior to the Voting
Deadline. A notice of withdrawal, to be valid, must (i) contain the
description of the Claim(s) to which it relates and the aggregate principal
amount represented by such Claim(s), (ii) be signed by the withdrawing party in
the same manner as the Ballot being withdrawn, (iii) contain a certification
that the withdrawing party owns the Claim(s) and possesses the right to
withdraw the vote sought to be withdrawn and (iv) be received by the Voting
Agent in a timely manner at the address set forth in Article XIII below. The
Debtors intend to consult with the Voting Agent to determine whether any
withdrawals of Ballots were received and whether the Requisite Acceptances of
the Plan have been received. As stated above, the Debtors expressly reserve
the absolute right to contest the validity of any such withdrawals of Ballots.
Unless otherwise directed by the Bankruptcy Court, a purported notice of
withdrawal of Ballots which is not received in a timely manner by the Voting
Agent will not be effective to withdraw a previously cast Ballot.
Any party who has previously submitted to the Voting Agent prior to the
Voting Deadline a properly completed Ballot may revoke such Ballot and change
his or its vote by submitting to the Voting Agent prior to the Voting Deadline
a subsequent properly completed Ballot for acceptance or rejection of the Plan.
In the case where more than one timely, properly completed Ballot is received,
only the Ballot which bears the latest date will be counted for purposes of
determining whether the Requisite Acceptances have been received.
I. FURTHER INFORMATION; ADDITIONAL COPIES
If you have any questions or require further information about the voting
procedure for voting your Claim or about the packet of material you received,
or if you wish to obtain an additional copy of the Plan, the Disclosure
Statement, or any exhibits or appendices to such documents (at your own
expense, unless otherwise specifically required by Bankruptcy Rule 3017(d)),
please contact the Voting Agent:
Philip Services Corp.
c/o
Logan & Company, Inc.
615 Washington Street
Hoboken, New Jersey 07030
(201) 798-1031
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ARTICLE XIV.RECOMMENDATION AND CONCLUSION
For all of the reasons set forth in this Disclosure Statement, the Debtors
believe that confirmation and consummation of the Plan is preferable to all
other alternatives. Consequently, the Debtors urge all Holders of Class 6 and
7 Claims to vote to ACCEPT the Plan, and to complete and return their ballots
so that they will be RECEIVED by the Voting Agent on or before 5:00 p.m.
Prevailing Eastern Time on the Voting Deadline.
Dated: Hamilton, Ontario
July ____, 1999
PHILIP SERVICES CORP.
(for itself and on behalf of the Debtors)
By: _________________________________
Name: Phillip C. Widman
Title: Chief Financial Officer
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SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
David S. Kurtz
Jeffrey W. Linstrom
Timothy R. Pohl
333 W. Wacker Drive
Chicago, Illinois 60606-1285
(312) 407-0700
-and-
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
By:________________________________________
Gregg M. Galardi (I.D. #2991)
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899-0636
(302) 651-3000
Attorneys for Philip Services (Delaware), Inc., et al.
87
APPENDIX A
TO
DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN
OF REORGANIZATION OF PHILIP SERVICES (DELAWARE), INC., ET AL.
JOINT PLAN OF REORGANIZATION OF
PHILIP SERVICES (DELAWARE), INC., ET AL.
88
APPENDIX B
TO
DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN
OF REORGANIZATION OF PHILIP SERVICES (DELAWARE), INC., ET AL.
CORPORATE STRUCTURE OF PHILIP SERVICES CORP.,
PHILIP SERVICES (DELAWARE), INC. AND SUBSIDIARY DEBTORS
89
APPENDIX C
TO
DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN
OF REORGANIZATION OF PHILIP SERVICES (DELAWARE), INC., ET AL.
LIST OF CANADIAN DEBTORS
90
APPENDIX D-1
TO
DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN
OF REORGANIZATION OF PHILIP SERVICES (DELAWARE), INC., ET AL.
PHILIP SERVICES (DELAWARE) INC., ET AL.'S 10-K FOR YEAR ENDED DECEMBER 31, 1998
91
APPENDIX D-2
TO
DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN
OF REORGANIZATION OF PHILIP SERVICES (DELAWARE), INC., ET AL.
PHILIP SERVICES (DELAWARE) INC., ET AL.'S 10-Q FOR QUARTER ENDED MARCH 31, 1999
92
APPENDIX E
TO
DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN
OF REORGANIZATION OF PHILIP SERVICES (DELAWARE), INC., ET AL.
LIQUIDATION ANALYSIS
93
APPENDIX F
TO
DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN
OF REORGANIZATION OF PHILIP SERVICES (DELAWARE), INC., ET AL.
PROJECTED FINANCIAL INFORMATION
[TO BE FILED AT A LATER DATE.]
94
APPENDIX G
TO
DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN
OF REORGANIZATION OF PHILIP SERVICES (DELAWARE), INC., ET AL.
VALUATION ANALYSIS
[TO BE FILED AT A LATER DATE.]