-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TuafHAp2UappiRxYtbmqsuJvXV5v9sinml3dy+a5deiAXGUl3QPYZ5XTc+wZHMSl mI2fWsWfzK46fR960XEdaQ== 0000950150-97-001360.txt : 19970929 0000950150-97-001360.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950150-97-001360 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970926 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIP SERVICES CORP CENTRAL INDEX KEY: 0000894076 STANDARD INDUSTRIAL CLASSIFICATION: SANITARY SERVICES [4950] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-36549 FILM NUMBER: 97686615 BUSINESS ADDRESS: STREET 1: 100 KING ST W STREET 2: P O BOX 2440 LCD1 CITY: HAMILTON ONTARIO CAN STATE: A6 BUSINESS PHONE: 9055211600 MAIL ADDRESS: STREET 1: 100 KING STREET W STREET 2: PO BOX 2440 LCD1 CITY: HAMILTON ONTARIO FORMER COMPANY: FORMER CONFORMED NAME: PHILIP ENVIRONMENTAL INC/ DATE OF NAME CHANGE: 19950823 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ PHILIP SERVICES CORP. (Exact name of Registrant as specified in its charter) ONTARIO (Province, state or other jurisdiction of incorporation or organization) 4953 (Primary Standard Industrial Classification Code Number) NOT APPLICABLE (I.R.S. Employer Identification No.) 100 KING STREET WEST, P.O. BOX 2440, LCD1 HAMILTON, ONTARIO, CANADA L8N 4J6 (905) 521-1600 (Address (including postal or zip code) and telephone number (including area code) of registrant's principal executive offices) PHILIP ENVIRONMENTAL (NEW YORK) INC. C/O CT CORPORATION SYSTEM 1633 BROADWAY NEW YORK, NEW YORK 10010 (212) 664-1666 (Name, address (including zip code) and telephone number (including area code) of agent for service) ------------------------------------ COPIES TO: ROBERT M. CHILSTROM, ESQ. EDWIN L. MILLER, JR., ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP TESTA, HURWITZ & THIBEAULT, LLP 919 THIRD AVENUE 125 HIGH STREET NEW YORK, NEW YORK 10022 BOSTON, MASSACHUSETTS 02110 (212) 735-3000 (617) 248-7000
------------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------------------ CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE AMOUNT OF OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE - -------------------------------------------------------------------------------------------------- Common Shares, no par value................... 23,000,000 shares US$19.29 US$443,670,000 US$134,446
- -------------------------------------------------------------------------------- (1) Includes Common Shares that (i) are to be offered and sold in the United States, (ii) are to be offered outside the United States but that may be resold from time to time in the United States during the distribution and (iii) may be purchased by the Underwriters pursuant to over-allotment options and resold in the United States. (2) Estimated solely for purposes of determining the registration fee in accordance with Rule 457. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been fixed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Subject to Completion September 26, 1997 PROSPECTUS [LOGO] 20,000,000 SHARES PHILIP SERVICES CORP. COMMON SHARES (NO PAR VALUE) All of the common shares (the "Common Shares") offered hereby are being issued and sold by Philip Services Corp. ("Philip" or the "Company"). Of the Common Shares offered, Common Shares are being offered by the U.S. Underwriters (as defined herein) in the United States (the "U.S. Offering") and Common Shares are being offered by the International Underwriters (as defined herein) in a concurrent offering outside the United States (the "International Offering" and, together with the U.S. Offering, the "Offerings"), subject to transfers between the U.S. Underwriters and the International Underwriters (collectively, the "Underwriters"). The public offering price and the underwriting commission per share will be identical for the U.S. Offering and the International Offering. The closing of each of the U.S. Offering and the International Offering is conditioned upon the other. See "Underwriting." The outstanding Common Shares are listed on the New York Stock Exchange (the "NYSE"), The Toronto Stock Exchange (the "TSE") and the Montreal Exchange (the "ME") under the symbol "PHV." On September 23, 1997, the last reported sale price of the Common Shares on the NYSE, the TSE and the ME was US$19.31, Cdn$26.90 and Cdn$26.60, respectively. See "Price Range and Trading Volume of the Common Shares." See "Risk Factors" commencing on page 14 for a discussion of certain factors that should be considered by potential investors. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC COMMISSION COMPANY(1) Per Share................................... US$ US$ US$ Total(2).................................... US$ US$ US$
- -------------------------------------------------------------------------------- (1) Before deducting expenses payable by the Company estimated at US$2,500,000. (2) The Company has granted to the U.S. Underwriters and the International Underwriters 30-day options to purchase up to and additional Common Shares, respectively, at the Price to Public, solely to cover over-allotments, if any. If the Underwriters exercise such options in full, the total Price to Public, Underwriting Commission and Proceeds to Company will be US$ , US$ and US$ , respectively. See "Underwriting." The Common Shares are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the Common Shares will be made at the office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or through the facilities of The Depository Trust Company, on or about , 1997. SALOMON BROTHERS INC MERRILL LYNCH & CO. The date of this Prospectus is , 1997. 3 INSIDE FRONT COVER [MAP OF FACILITIES] [THE FOLLOWING NAMES APPEAR IN AN ORGANIZATIONAL CHART OF THE COMPANY'S BUSINESS UNITS:] Philip Services Corp. Metals Recovery Group (Steel, Copper, Aluminum) Industrial Services Group (On-Site Services, By-Products Recovery, Environmental Services, Utilities Management) CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON SHARES PRIOR TO THE PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON SHARES AND THE PURCHASE OF COMMON SHARES FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 4 GATEFOLD 1 Photograph: Shot of steel scrap bundles Caption STEEL Philip's facilities can annually process over 4 million tons of ferrous scrap, a significant raw material in steel manufacturing. Photograph: Cable and wire scrap being loaded onto conveyor by bobcat. Caption: COPPER Philip is the largest processor of cable and wire scrap in North America, recovering copper, aluminum and plastics. Photograph: Man in white hardhat ladling molten aluminum into ingots to produce deoxidizing products. Caption: ALUMINUM Deoxidizing products processed from aluminum scrap are supplied to steel mills and are used to eliminate gas bubbles in molten steel. Photograph: Worker welding pipes at refinery. Caption: INDUSTRIAL SERVICES Philip provides integrated maintenance services for refineries, petrochemical facilities and power plants, including specialized welding services. Photograph: Two men in yellow suits in front on CN train. Caption: INDUSTRIAL SERVICES Philip provides single vendor on-site industrial cleaning and waste management services to CN Rail facilities.
5 GATEFOLD 2 [DESCRIPTION OF BACKGROUND FOR GATEFOLD SPREAD: THREE PHILIP EMPLOYEES IN COMPLETE PROTECTIVE CLOTHING LEANING ON SHOVELS AND STANDING IN FRONT OF ELECTRIC ARC FURNACE AT STEEL MILL.] [PHILIP LOGO] 6 ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES Philip is a corporation existing under the laws of the Province of Ontario, Canada. A majority of Philip's current directors and officers, and certain experts named herein, are residents of Canada, and all or a substantial portion of the assets of such persons and a substantial part of the assets of Philip are located outside the United States. Consequently, it may be difficult for United States investors to effect service of process within the United States on such persons, or to realize, in the United States, upon judgments rendered against Philip or such persons predicated upon the civil liability provisions of the U.S. Federal securities laws. In addition, there is substantial doubt as to the enforceability in Canada against Philip or such persons, in original actions or in actions for enforcement of judgments of United States courts, of liabilities predicated solely upon the U.S. Federal securities laws. FORWARD-LOOKING STATEMENTS This prospectus contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the results of operations and businesses of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include, among others, the following possibilities: (1) heightened competition, including the intensification of price competition and the entry of new competitors; (2) adverse state, federal and Canadian legislation and regulation; (3) failure to obtain new customers or retain existing customers; (4) inability to carry out marketing and/or expansion plans; (5) failure to successfully integrate acquired businesses and/or to acquire additional businesses on favorable terms; (6) loss of key executives; (7) changes in interest rates; (8) general economic and business conditions which are less favorable than expected and (9) unanticipated changes in industry trends. See "Risk Factors." PRESENTATION OF FINANCIAL INFORMATION The historical consolidated financial statements of Philip contained in this Prospectus are reported in Canadian dollars and have been prepared in accordance with generally accepted accounting principles in Canada ("Canadian GAAP"). These principles conform in all material respects with accounting principles generally accepted in the United States ("U.S. GAAP"), except as described in Note 18 to the audited historical consolidated financial statements of Philip (the "Consolidated Financial Statements of the Company") included elsewhere in this Prospectus. Except for the Consolidated Financial Statements of the Company and except where otherwise indicated, all dollar amounts in this Prospectus are expressed in U.S. dollars. References to $ are to U.S. dollars, and references to Cdn$ are to Canadian dollars. 5 7 EXCHANGE RATE INFORMATION The following table sets forth, for each period indicated, the high and low exchange rates for Canadian dollars expressed in U.S. dollars, the average of such exchange rates on the last day of each month during such period, and the exchange rate at the end of such period, based on the inverse of the noon buying rate in The City of New York for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate"):
SIX MONTHS ENDED JUNE 30, FISCAL YEARS ENDED DECEMBER 31, -------------------- ----------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- ------- ------- Low.............. 0.7145 0.7235 0.7235 0.7023 0.7103 0.7439 0.7761 High............. 0.7487 0.7391 0.7513 0.7527 0.7632 0.8046 0.8757 End.............. 0.7241 0.7322 0.7301 0.7323 0.7128 0.7544 0.7865 Average.......... 0.7269 0.7310 0.7330 0.7307 0.7302 0.7733 0.8242
On September 23, 1997, the inverse of the Noon Buying Rate was $0.7193 per Cdn$1.00. ------------------------------------ Fast Draw(R), Fast Clean(R), Life Guard(R), WeldSmart (R) and EPOC(R) are trademarks, trade names or servicemarks of the Company or its subsidiaries that are registered or otherwise protected under laws of various jurisdictions. 6 8 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. In this Prospectus, the terms "Company" or "Philip" mean Philip Services Corp., its predecessors and its direct and indirect subsidiaries, unless the context otherwise indicates. Prospective investors should carefully consider the factors set forth herein under "Risk Factors" and are urged to read this Prospectus in its entirety. Unless otherwise specifically indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment options. All dollar references ($) in this Prospectus are to U.S. dollars unless otherwise specifically indicated. References to Cdn$ are to Canadian dollars. THE COMPANY The Company is one of North America's leading suppliers of resource recovery and industrial services. The Company has the largest integrated network of metals recovery and industrial services operations in North America, servicing over 50,000 industrial and commercial customers from over 300 locations. The Company applies proprietary technologies to reduce the cost and downtime associated with industrial cleaning and plant turnaround activities, and to recover value from industrial by-products and metal bearing residuals. The Company has achieved its leading position in the metals recovery and industrial services markets through internal growth and through the acquisition and integration of 40 companies since the beginning of 1996. As a result, the Company is viewed as a leading consolidator in the metals recovery and industrial services industries. The Company's primary base of operations is in the United States, with over 70% of the Company's worldwide revenue generated in U.S. dollars in the six months ended June 30, 1997. At September 23, 1997, the aggregate market value of the outstanding Common Shares was $1.974 billion. The Company's business is organized into two operating divisions -- the Metals Recovery Group and the Industrial Services Group. The Metals Recovery Group's three primary business operations are ferrous (steel), copper and aluminum processing and recycling. The ferrous metals operations include the collection and processing of ferrous scrap materials for shipment to steel mills and the provision of related mill services. Ferrous operations also include steel service centers that process and distribute structural steel products. Copper operations are comprised of cold process mechanical recovery facilities, scrap management, the management of material recycling centers for the telecommunications industry, and copper refining. The group's aluminum recycling operations process aluminum dross, a by-product of primary aluminum production, and produce aluminum deoxidizing products and alloys from aluminum scrap. Both the ferrous and non-ferrous operations of Philip provide significant brokerage capabilities for scrap materials and primary metals, including steel, copper, aluminum and tin. The Company services the steel, telecommunications, aluminum, wire and cable and automotive industries, as well as utilities. Major customers for the Company's ferrous processing operations include Armco, ASW, Copperweld, Dofasco, Republic Engineered Steels, Stelco and Timken. Major customers for the Company's non-ferrous processing operations include AK Steel, Bethlehem Steel, Chrysler Canada, Noranda and Southwire. The Industrial Services Group is the largest integrated provider of on-site industrial services, by-products recovery and environmental services in North America, with a network of over 250 facilities. The Industrial Services Group's operations are divided into four main activities: on-site industrial services, by-products recovery, environmental services and utilities management. On-site industrial services include industrial cleaning and maintenance, waste collection and transportation, container services and tank cleaning, turnaround and outage services, mechanical contracting and refractory services. By-products recovery includes distillation, engineered fuel blending, paint overspray recovery, organic and inorganic processing and polyurethane recycling. Environmental services include strategic resource management, decommissioning, remediation, environmental consulting and engineering, and analytical and emergency response services. Major clients include BASF, Boise Cascade, Chevron, Conoco, Dupont, Ford, General Electric, General Motors, Monsanto, PPG and Shell. 7 9 According to industry sources, the North American market for resource recovery and industrial services is estimated to be a $50 billion market growing at over 10% annually. The market is driven by manufacturers' desire to increase efficiency and enhance competitiveness through increased outsourcing of non-core services, a reduction in the number of vendors from which outsourced services are purchased, and by maximizing resource recovery opportunities from waste and by-products streams. The market for industrial services and resource recovery is fragmented and primarily served by small, specialized regional service providers. Resource recovery and industrial services are prime candidates for outsourcing as neither are core activities and both benefit from the expertise and economies of scale an outside supplier can provide. The Company believes that it has developed a strategy to enhance its leadership position by capitalizing on these industry trends. Key elements of the Company's strategy include the following: - Increase sales to existing customers by cross-selling services; - Pursue strategic acquisitions that will broaden the Company's services to existing customers or in key geographic regions with significant industrial activity; - Continue to vertically integrate its collection, processing and distribution network; and - Continue to develop and apply innovative process and service technologies. COMPETITIVE STRENGTHS The Company believes the following competitive strengths enhance its leadership position in the resource recovery and industrial services sectors: Broadest Range of Integrated Services: Philip offers the broadest range of metals recovery, by-products recovery and industrial and environmental services in the industry. The Company believes it can better assist its clients achieve lower costs and improve operating efficiencies by providing single source solutions. Broad Geographic Network: The Company's broad geographic network, unlike its regional competitors, can support the requirements of its customers throughout North America. This network enables the Company to effectively package and cross-sell services to large North American accounts. Proprietary Technologies: The Company has developed a series of proprietary waste minimization, recovery and industrial cleaning and turnaround processes. These proprietary technologies enable the Company to recover a higher percentage of usable components and reduce both disposal costs and downtime associated with turnaround operations. Leading Consolidator: The industrial services sector is highly fragmented and is undergoing rapid consolidation in response to market demands for vendor reduction and broad geographic service capabilities. Philip is a leading consolidator in the industry as a result of its financial strength, focused strategy and multi-service capabilities. RECENT ACQUISITIONS Over the past five years, the Company has focused on increasing its revenue base, its range of services and its geographic network of facilities throughout North America through a series of strategic acquisitions. The Company intends to continue to selectively pursue acquisitions in the United States and Canada in the resource recovery and industrial services industries. The Company also intends to pursue international markets by expanding its ferrous operations in the United Kingdom and by supporting the European operations of its North American clients. The following are the principal acquisitions completed by the Company since June 30, 1997. Since revenues reported by the acquired businesses were in certain instances prepared on a different basis of presentation than those of the Company, such reported revenues are not necessarily indicative of the revenues that would have been recognized by the Company on a pro forma basis or that will be recognized by the Company in future periods. 8 10 METALS RECOVERY Intermetco. In August 1997, Philip completed the acquisition of Intermetco Limited ("Intermetco"), a Canadian corporation, for a total consideration of Cdn$66 million, including the assumption of Cdn$8 million in debt. The acquisition price was paid with Cdn$4.7 million in cash and by the issuance of approximately 2.7 million Common Shares. Intermetco is a scrap and recycling processor which also manufactures and distributes pipe and tubular products. Intermetco reported sales of Cdn$194.9 million for the fiscal year ended December 31, 1996. The acquisition enhances Philip's ability to supply its steel industry clients with fully integrated services, from raw materials to by-products processing and distribution services. The Company believes that significant synergies will be realized through the increased tonnage processed at the Company's existing facilities, and through the integration of Intermetco's pipe and tubular products operations into Philip's southwestern and southeastern steel processing and distribution networks. Roth. In July 1997, Philip purchased Roth Bros. Smelting Corp. ("Roth"), a private company based in Syracuse, New York, for a total consideration of approximately $52 million, including the assumption of $6.7 million in debt. The acquisition price was paid with $37.5 million in cash and by the issuance of approximately 422,000 Common Shares. Roth is a manufacturer of secondary aluminum alloy products for the automotive and other industrial manufacturing industries which recorded sales of approximately $94 million for the fiscal year ended December 31, 1996. The Company believes the acquisition of Roth expands its aluminum alloy operations and will result in greater market penetration of the automotive manufacturers that are heavily concentrated in the Great Lakes region. INDUSTRIAL SERVICES Allwaste. In July 1997, Philip acquired Allwaste, Inc. ("Allwaste") for a total consideration of $502 million, including the assumption of $142 million in debt. The acquisition price was paid by the issuance of approximately 23 million Common Shares. Allwaste is an integrated provider of industrial and environmental services which reported revenues of $382.2 million for the fiscal year ended August 31, 1996. The Company believes the acquisition of Allwaste significantly broadens the Company's service offerings, expands its geographical presence in the United States and significantly increases its customer list. In addition, Allwaste is expected to provide the Company with opportunities to rationalize operations, to enhance revenues through the cross-selling of services and to improve asset utilization. Serv-Tech. In July 1997, Philip completed the acquisition of Serv-Tech Inc. ("Serv-Tech") for a total consideration of $58 million, including the assumption of $15 million in debt. The acquisition price was paid by the issuance of approximately 2.7 million Common Shares. Serv-Tech is an integrated provider of specialty services and products, including turnaround project management services, electrical and instrumentation management services, and specialty chemicals products. Serv-Tech reported revenues of $142.4 million for the fiscal year ended December 31, 1996. The Company believes the acquisition will strengthen its position in industrial maintenance and turnaround services. In addition, the acquisition will broaden the Company's customer base in the petrochemical and oil and gas utility industries. CREDIT FACILITY On August 11, 1997, the Company and Philip Environmental (Delaware) Inc. ("PEI"), a wholly owned subsidiary of the Company, entered into a Credit Agreement with a group of Canadian and United States financial institutions, providing for a revolving credit facility (the "Credit Facility") up to a maximum amount of $1.5 billion. The Credit Facility, which is secured by a pledge of all securities held by the Company and PEI in all of their material subsidiaries has a five-year term. Borrowings under the Credit Facility bear interest at varying rates, depending on the nature of the loan and the Company's compliance with certain financial ratios. See "Description of Certain Indebtedness -- Credit Facility." ------------------------------------ Philip is a corporation existing under the laws of the Province of Ontario. The Company's head office is located at 100 King Street West, P.O. Box 2440, LCD1, Hamilton, Ontario, Canada, L8N 4J6 and its telephone number is (905) 521-1600. 9 11 THE OFFERINGS COMMON SHARES OFFERED: U.S. OFFERING............... Shares INTERNATIONAL OFFERING...... Shares ------------------- TOTAL.................... 20,000,000 Shares -------------------
COMMON SHARES TO BE OUTSTANDING AFTER THE OFFERINGS................ 122,214,491 shares(1) USE OF PROCEEDS............ Net proceeds of the Offerings in the amount of approximately $369.22 million will be used to repay indebtedness outstanding under the Company's Credit Facility. See "Use of Proceeds." NYSE, TSE AND ME STOCK EXCHANGE SYMBOL.......... "PHV" - --------------- (1) Based on 102,214,491 Common Shares outstanding as of September 23, 1997. Excludes options outstanding at September 23, 1997 to purchase up to 9,198,690 Common Shares, of which options to acquire 4,232,871 Common Shares were then exercisable, at prices ranging from Cdn$6.75 to Cdn$26.75. 10 12 SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA The following table presents summary historical consolidated financial data of Philip for the periods indicated, including the accounts of all companies acquired prior to the end of the respective reporting periods. These companies, all of which were acquired in transactions accounted for as purchases, are included from their respective dates of acquisition. The selected historical consolidated financial data for Philip as of and for the three years ended December 31, 1996 is derived from the audited Consolidated Financial Statements of Philip and as of and for the six months ended June 30, 1996 and 1997 is derived from the unaudited interim consolidated financial statements of Philip, which in the opinion of management include all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial information for such periods. Interim results are not necessarily indicative of the results which may be expected for any other interim period or for a full year. For all periods indicated, the selected historical consolidated financial data reflects Philip's former municipal and commercial solid waste operations, which were sold in August 1996, as a discontinued operation. Philip prepares its Consolidated Financial Statements in accordance with Canadian GAAP. The summary historical consolidated financial data set forth below is presented in both Canadian GAAP and U.S. GAAP. Canadian GAAP conforms in all material respects with U.S. GAAP, except as described in Note 18 to the Consolidated Financial Statements of the Company included elsewhere in this Prospectus. The selected historical consolidated financial data should be read in conjunction with the accompanying Consolidated Financial Statements of the Company and the related Notes thereto included elsewhere in this Prospectus. Selected historical consolidated financial data of the Company presented in U.S. GAAP (in U.S. dollars) is disclosed in this Prospectus following the Consolidated Financial Statements of the Company. Philip did not pay any cash dividends during the periods set forth below.
SIX MONTHS ENDED JUNE 30, FISCAL YEARS ENDED DECEMBER 31, -------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) CANADIAN GAAP: STATEMENTS OF EARNINGS DATA: Revenue.............................................. $ 856,629 $ 323,397 $ 802,490 $ 648,311 $ 489,740 Operating expenses................................... 701,300 251,586 615,462 489,569 366,649 Selling, general and administrative.................. 63,461 33,445 78,053 66,563 51,216 Depreciation and amortization........................ 24,148 15,438 33,966 25,510 21,354 --------- --------- --------- --------- --------- Income from operations............................... 67,720 22,928 75,009 66,669 50,521 Interest expense..................................... 19,212 15,023 24,598 28,187 21,750 Other income and expense-net......................... (5,522) (2,459) (4,782) (3,689) (2,122) --------- --------- --------- --------- --------- Earnings from continuing operations before tax....... 54,030 10,364 55,193 42,171 30,893 Income taxes......................................... 16,392 2,707 15,180 12,354 8,769 --------- --------- --------- --------- --------- Earnings from continuing operations.................. 37,638 7,657 40,013 29,817 22,124 Discontinued operations (net of tax)................. -- 7,234 (1,005) 2,894 2,502 --------- --------- --------- --------- --------- Net earnings......................................... $ 37,638 $ 14,891 $ 39,008 $ 32,711 $ 24,626 ========= ========= ========= ========= ========= Basic earnings per share: Continuing operations.............................. $ 0.53 $ 0.19 $ 0.79 $ 0.80 $ 0.61 Discontinued operations............................ -- 0.18 (0.02) 0.08 0.07 --------- --------- --------- --------- --------- $ 0.53 $ 0.37 $ 0.77 $ 0.88 $ 0.68 ========= ========= ========= ========= ========= Fully diluted earnings per share: Continuing operations.............................. $ 0.52 $ 0.19 $ 0.72 $ 0.68 $ 0.55 Discontinued operations............................ -- 0.14 (0.01) 0.05 0.05 --------- --------- --------- --------- --------- $ 0.52 $ 0.33 $ 0.71 $ 0.73 $ 0.60 ========= ========= ========= ========= ========= Weighted average number of common shares outstanding (000s)............................................. 70,970 40,586 50,632 37,342 36,209 ========= ========= ========= ========= ========= BALANCE SHEET DATA (END OF PERIOD): Working capital...................................... $ 526,982 $ 156,563 $ 347,501 $ 106,604 $ 88,269 Total assets......................................... 1,694,437 1,030,988 1,345,719 1,002,912 860,583 Total debt(1)........................................ 692,280 404,282 414,768 421,355 400,251 Shareholders' equity................................. 692,383 420,842 623,351 312,102 277,882 OTHER DATA: Amortization......................................... $ 7,055 $ 5,188 $ 11,720 $ 9,798 $ 7,869 Depreciation......................................... 17,093 10,250 22,246 15,712 13,485 Additions to property, plant & equipment............. 44,539 22,810 59,847 37,016 29,910
11 13
SIX MONTHS ENDED JUNE 30, FISCAL YEARS ENDED DECEMBER 31, ---------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- ----------- --------- --------- (THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) U.S. GAAP: STATEMENTS OF EARNINGS DATA: Revenue....................................... $ 856,629 $ 323,397 $ 742,975 $ 648,311 $ 489,740 Operating expenses............................ 701,300 251,586 563,393 489,569 366,649 Selling, general and administrative........... 63,461 33,445 75,674 66,563 51,216 Depreciation and amortization................. 24,148 15,438 33,006 25,510 21,354 --------- -------- --------- --------- -------- Income from operations........................ 67,720 22,928 70,902 66,669 50,521 Interest expense.............................. 19,212 15,023 22,157 25,557 19,339 Other income and expense-net.................. (5,522) (2,459) (4,708) (3,689) (2,122) --------- -------- --------- --------- -------- Earnings from continuing operations before tax......................................... 54,030 10,364 53,453 44,801 33,304 Income taxes.................................. 16,392 2,707 13,755 12,354 8,769 --------- -------- --------- --------- -------- Earnings from continuing operations........... 37,638 7,657 39,698 32,447 24,535 Discontinued operations (net of tax).......... -- 7,234 (1,005) 2,894 2,502 --------- -------- --------- --------- -------- Net earnings.................................. $ 37,638 $ 14,891 $ 38,693 $ 35,341 $ 27,037 ========= ======== ========= ========= ======== Primary earnings per share: Continuing operations....................... $ 0.53 $ 0.19 $ 0.79 $ 0.87 $ 0.68 Discontinued operations..................... -- 0.18 (0.02) 0.08 0.07 --------- -------- --------- --------- -------- $ 0.53 $ 0.37 $ 0.77 $ 0.95 $ 0.75 ========= ======== ========= ========= ======== Fully diluted earnings per share: Continuing operations....................... $ 0.52 $ 0.19 $ 0.69 $ 0.68 $ 0.55 Discontinued operations..................... -- 0.14 (0.01) 0.05 0.02 --------- -------- --------- --------- -------- $ 0.52 $ 0.33 $ 0.68 $ 0.73 $ 0.57 ========= ======== ========= ========= ======== Weighted average number of common shares outstanding (000s).......................... 70,970 40,586 50,073 37,342 36,209 ========= ======== ========= ========= ======== BALANCE SHEET DATA (END OF PERIOD): Working capital............................... $ 526,982 $ 156,563 $ 347,501 $ 106,604 $ 88,269 Total assets.................................. 1,687,430 1,026,211 1,338,692 998,135 855,681 Total debt(1)................................. 692,280 418,645 414,768 437,100 419,082 Shareholders' equity.......................... 685,376 401,702 616,324 291,580 254,150 OTHER DATA: Amortization.................................. $ 7,055 $ 5,188 $ 11,016 $ 9,798 $ 7,869 Depreciation.................................. 17,093 10,250 21,990 15,712 13,485 Additions to property, plant and equipment.... 44,539 22,810 59,847 37,016 29,910
- --------------- (1) Total debt includes the current portion of long-term debt. 12 14 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA The summary unaudited pro forma consolidated financial data set forth below should be read in conjunction with the Unaudited Pro Forma Consolidated Financial Information and related Notes included elsewhere in this Prospectus. The summary unaudited pro forma financial information is presented as if the acquisitions of Allwaste (completed on July 31, 1997), Intsel Southwest Limited Partnership (completed on September 27, 1996) ("Intsel") and Luntz Corporation (completed on December 23, 1996) ("Luntz") had occurred on January 1, 1996 (for Statements of Earnings purposes) and as if the acquisition of Allwaste had occurred on June 30, 1997 (for Balance Sheet purposes). The summary unaudited pro forma statement of earnings data and balance sheet data do not take into consideration other acquisitions completed by Philip in 1996 and 1997, which acquisitions are not sufficiently material, either individually or in the aggregate, to require pro forma disclosure under applicable disclosure rules. The summary unaudited pro forma financial information is presented in U.S. dollars and on the basis of U.S. GAAP, and excludes Philip's former municipal and commercial solid waste operations and Allwaste's former glass recycling operations since they are discontinued operations. This pro forma financial information does not purport to represent what Philip's results of operations or financial position would have been had the acquisitions of Allwaste, Intsel and Luntz occurred on the dates indicated or for any future period or at any future date.
PRO FORMA ------------------------------------------------------ SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 --------------- ----------------- (thousands of dollars, except share and per share amounts) U.S. GAAP STATEMENTS OF EARNINGS DATA: Revenue................................................ $ 817,843 $ 1,162,306 Operating expenses..................................... 656,721 907,915 Selling, general and administrative.................... 66,536 113,251 Depreciation and amortization.......................... 37,003 67,740 ---------- ---------- Income from operations................................. 57,583 73,400 Interest expense....................................... 18,926 32,479 Other income and expense-net........................... (5,870) (6,765) ---------- ---------- Earnings from continuing operations before tax......... 44,527 47,686 Income taxes........................................... 16,071 18,193 ---------- ---------- Minority interest...................................... 138 (101) ---------- ---------- Earnings from continuing operations.................... $ 28,318 $ 29,594 ========== ========== Primary earnings per share............................. $ 0.30 $ 0.38 ---------- ---------- Fully diluted earnings per share....................... $ 0.29 $ 0.36 ========== ========== Weighted average number of common shares outstanding (000s)................................... 94,026 77,284 ========== ========== OTHER DATA: Amortization........................................... 10,655 15,795 Depreciation........................................... 26,348 51,945 Additions to property, plant and equipment............. 50,254 66,677
JUNE 30, 1997 ------------------------------- PRO FORMA PRO FORMA AS ADJUSTED(1) ----------- -------------- (thousands of dollars) BALANCE SHEET DATA (END OF PERIOD): Working capital................................................................. $ 364,424 $ 364,424 Total assets.................................................................... 1,886,500 1,886,500 Total debt(2)................................................................... 607,396 238,178 Shareholders' equity............................................................ 888,617 1,257,835
- --------------- (1) As adjusted for the Offerings and the application of the estimated net proceeds therefrom, at an assumed public offering price of $19.31 (based on the last reported sale price of the Common Shares on the NYSE on September 23, 1997). See "Use of Proceeds." (2) Total debt includes the current portion of long-term debt. 13 15 RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Common Shares. RISKS ASSOCIATED WITH ACQUISITIONS The Company's consolidation strategy depends on its ability to identify and acquire appropriate businesses for its industrial services and metals recovery operations and to integrate the acquired operations effectively. There can be no assurance that the Company will be able to locate acquisition candidates in markets or on terms the Company deems attractive or that any identified candidates will be acquired. The completion of acquisitions requires the expenditure of sizeable amounts of capital, and the competition among companies pursuing similar acquisition strategies may increase such capital requirements. In order to finance any such acquisitions, it may be necessary for the Company to raise additional funds either through public or private financings. Any necessary equity or debt financing, if available at all, may be on terms that are not favorable to the Company and may result in dilution to its shareholders. In connection with its acquisitions, there may be liabilities that the Company fails or is unable to discover, including liabilities arising from pollution of the environment or non-compliance with environmental laws by prior owners, and for which the Company, as a successor owner, may be responsible. Indemnities and warranties for such liabilities from sellers, if obtained, may not fully cover the liabilities due to their limited scope, amounts, or duration, the financial limitations of the indemnitor or warrantor, or other reasons. Although the Company pursues its consolidation strategy with the expectation that its acquisitions will result in beneficial synergistic effects for the combined companies, there are significant uncertainties and risks relating to the integration of an acquired company's operations. Whether the anticipated benefits of the Company's acquisitions are ultimately achieved will depend 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. There can be no assurance that any expected synergies will be realized or that the results of the combined operations will be improved in a timely manner, if at all. In addition, the process of integrating the acquired company's operations into those of the Company could cause the interruption of, or the loss of momentum in, the activities of either or both companies, which could have an adverse effect on the combined operations. The Company believes that consolidation within its industry will continue to occur and that, to be a leader, its strategy must take account of this trend. The Company expects to continue to evaluate acquisition opportunities on a regular basis, including opportunities involving companies offered for sale in a public auction process, and expects to pursue those situations which it believes are in its long term best interests. The Company is currently engaged in discussions concerning a number of possible acquisitions some of which, if they are completed, would have a significant impact on the financial position (including level of debt), results of operations and cash flows of the Company. The terms of the Company's Credit Facility may restrict the Company's ability to consummate certain acquisitions. There can be no assurance that any such discussions will result in definitive agreements or completed transactions. COMPETITION The resource recovery and industrial services industries are highly competitive and require substantial capital resources. Competition is both national and regional in nature and the level of competition faced by the Company in its various lines of business is significant. Technology in the resource recovery 14 16 and industrial services businesses is constantly changing. There can be no assurance that the Company will be able to keep pace with technological changes, that a competitor will not develop superior technology or that a well capitalized competitor will not enter or expand in the areas in which the Company competes. The Company's primary competitors in the metals recovery industry are other scrap processors in regions where its metals recovery operations are located. The Company faces competition both on the purchase and sales sides of its business; however, competition is particularly significant on the purchase side for access to scrap. The Metals Recovery Group competes on the basis of price, technological capability and service. The availability of scrap depends on a number of factors, including the general level of economic activity in the industries serviced by the Metals Recovery Group, many of which are cyclical in nature, and market prices for scrap. Competition for access to scrap may intensify during periods of scrap scarcity. There can be no assurance that the Company will continue to have adequate access to scrap supplies at economic prices. The industrial services sector is also highly competitive and fragmented. The Company competes with numerous local, regional and national companies of varying sizes and financial resources. Competition for industrial services is based primarily on hourly rates, productivity, safety, innovative approaches and quality of service. The hazardous waste management industry competes with the Company's industrial services operations by providing a price competitive disposal alternative to a number of the Company's waste management and by-products recovery services. The hazardous waste management industry currently has substantial excess capacity caused by overbuilding, continuing efforts by hazardous waste generators to reduce volume and to manage their waste on-site, and the uncertain regulatory environment regarding hazardous waste management and remediation requirements. These factors have led to downward pressure on pricing in a number of the markets served by the Company's industrial services operations. The Company expects these conditions to continue for the foreseeable future. Competition could have a material adverse effect on the Company's results of operations and financial condition by depressing prices or by causing waste to be diverted to competitors. In addition, such competition could materially affect the Company's ability to service its customers profitably, to attract new customers and to retain such customers upon the expiration of existing contracts. DEPENDENCE ON OUTSOURCING AND VENDOR REDUCTION TRENDS The Company's growth is dependent on the continuation of outsourcing and vendor reduction trends within industrial enterprises. As these enterprises focus on their core business, they are increasingly outsourcing non-core, non-revenue generating activities in order to reduce costs. Such activities can generally be performed on a more cost effective basis by specialized industrial service and resource recovery companies which have greater expertise, technology advantages and economies of scale. In addition, industrial enterprises are evidencing a desire to reduce the number of vendors of industrial and resource recovery services by purchasing services only from those suppliers that can provide a "total service" solution, thereby providing further administrative and cost reductions. If the pace of either of these trends slows or reverses, it could have a material adverse effect on the Company's financial position and results of operations. MANAGEMENT OF GROWTH The Company expects its business to continue to experience growth in revenues, employees and customers. This growth is expected to place significant and increasing demands on the Company's management and operational resources. The Company's future performance will depend, in part, on its ability to manage expanding operations. The failure of the Company to manage its growth could have a material adverse effect on the financial position and results of operations of the Company. ENVIRONMENTAL AND REGULATORY RISKS Environmental Regulations. The Company's operations are subject to various comprehensive laws and regulations related to the protection of the environment. Such laws and regulations, among other things, (i) regulate the nature of the industrial by-products and wastes that the Company can accept for 15 17 processing at its treatment, storage and disposal facilities, the nature of the treatment they can provide at such facilities and the location and expansion of such facilities; (ii) impose liability for remediation and clean-up of environmental contamination, both on-site and off-site, resulting from past and present operations at the Company's facilities; and (iii) may require financial assurance that funds will be available for the closure and post-closure care of sites, including acquired facilities. In addition, because the Company provides its customers with services designed to protect the environment by cleaning and removing materials or substances from their customers' equipment or sites that must be properly handled, recycled or removed for ultimate disposal, the Company's operations are subject to regulations which impose liability on persons involved in handling, processing, generating or transporting hazardous materials. These requirements may also be imposed as conditions of operating permits or licenses that are subject to renewal, modification or revocation. These laws and regulations have become and are likely to continue to become increasingly stringent. Existing laws and regulations, and new laws and regulations, may require the Company to modify, supplement, replace or curtail its operating methods, facilities or equipment at costs which may be substantial without any corresponding increase in revenues. Hazardous substances are present in some of the processing, transfer, storage, disposal and landfill facilities owned or used by the Company. Remediation will be required at these sites at substantial cost. For each of these sites, the Company, in conjunction with an environmental consultant, has developed or is developing cost estimates that are periodically reviewed and updated, and the Company maintains reserves for these matters based on such cost estimates. Estimates of the Company's liability for remediation of a particular site and the method and ultimate cost of remediation require a number of assumptions and are inherently difficult. There can be no assurance that the ultimate cost and expense of corrective action will not substantially exceed such reserves and have a material adverse impact on the Company's operations or financial condition. In the normal course of its business, and as a result of the extensive governmental regulation of industrial and environmental services and resource recovery, the Company has been the subject of administrative and judicial proceedings by regulators and has been subject to requirements to remediate environmental contamination or to take corrective action. There will be administrative or court proceedings in the future in connection with the Company's present and future operations or the operations of acquired businesses. In such proceedings in the past, the Company has been subject to monetary fines and certain orders requiring the Company to take environmental remedial action. In the future, the Company may be subject to monetary fines, penalties, remediation, clean-up or stop orders, injunctions or orders to cease or suspend certain of its practices. The outcome of any proceeding and associated costs and expenses could have a material adverse impact on the operations or financial condition of the Company. The Company's industrial services businesses are subject to extensive governmental regulation, and the complexity of such regulation makes consistent compliance with such laws and regulations extremely difficult. In addition, the demand for certain of the Company's services may be adversely affected by the amendment or repeal of federal, state, provincial, or foreign laws and regulations or by changes in the enforcement policies of the regulatory agencies concerning such laws and regulations. Public Concerns. There is a high level of public concern over industrial by-products recovery and waste management operations, including the siting and operation of transfer, processing, storage and disposal facilities and the collection, processing or handling of industrial by-products and waste materials, particularly hazardous materials. Zoning, permit and licensing applications and proceedings and regulatory enforcement proceedings are all matters open to public scrutiny and comment. As a result, from time to time, the Company has been, and may in the future be, subject to citizen opposition and publicity which may have a negative effect on its operations and delay or limit the expansion and development of operating properties and could have a material adverse effect on its operations or financial condition. Environmental Insurance Coverage. Consistent with industry trends, the Company may not be able to obtain adequate amounts of environmental impairment insurance at a reasonable premium to cover liability to third parties for environmental damages. Accordingly, if the Company were to incur liability for 16 18 environmental damage either not provided for under such coverage or in excess of such coverage, the Company's financial position and results of operations could be materially and adversely affected. Jurisdictional Restrictions on Waste Transfers. In the past, various states, provinces, counties and municipalities have attempted to restrict the flow of waste across their borders, and various U.S. and Canadian federal, provincial, state, county and municipal governments may seek to do the same in the future. Any such border closing may result in the Company incurring increased third-party disposal costs in connection with alternate disposal arrangements. For a more detailed description of the impact of environmental and other governmental regulation upon the Company, see "The Company -- Government Regulation." RELIANCE ON KEY PERSONNEL The Company's operations are dependent on the abilities, experience and efforts of its senior management. While the Company has entered into employment agreements with certain members of its senior management, should any of these persons be unable or unwilling to continue his employment with the Company, the business prospects of the Company could be materially and adversely affected. COMMODITY PRICE AND CREDIT RISKS The Company is exposed to commodity price risk during the period that it has title to products that are held in inventory for processing and/or resale. Prices of commodities can be volatile due to numerous factors beyond the control of the Company, including general economic conditions, labor costs, competition, import duties, tariffs and currency exchange rates. In an increasing price environment, competitive conditions will determine how much of the commodity price increases can be passed on to the Company's customers. There can be no assurance that the Company will not have a significant net exposure due to significant price swings or failure of a counterparty to perform pursuant to the contract. SEASONALITY AND FLUCTUATIONS IN FINANCIAL RESULTS The Company's 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 Company's customers, which in turn are influenced by general economic conditions and other factors. As a result of all these factors, the Company's financial performance can vary significantly from period to period. ONGOING CAPITAL REQUIREMENTS AND LIQUIDITY It is likely that the Company will need access to greater amounts of financing or capital as its business continues to grow, particularly in connection with future acquisitions. There can be no assurance that the Company will be able to obtain additional financing when needed to develop further its business or fund its operations or that, if available, such financing would be on terms acceptable to it. Certain of the Company's loan agreements may restrict the Company's ability to finance such expansion and capital expenditures with borrowed funds. LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT The Company uses a number of proprietary processes in its operations. The Company possesses a number of United States patents and various foreign counterparts of those patents. The Company relies primarily, however, on a combination of trade secrets, confidentiality procedures and contractual provisions to protect its intellectual property rights. The Company's patents may be circumvented or invalidated and afford only limited protection. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to obtain and use information that the Company regards as confidential and proprietary, and there can be no assurance that the Company's means of protecting its proprietary rights will be adequate. The Company is not aware of any material claims that any of its intellectual property infringes on the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against the Company, which may be costly. 17 19 USE OF PROCEEDS The net proceeds from the sale of the Common Shares offered hereby, estimated to be $369.22 million (or $424.98 million if the over-allotment options are exercised in full), assuming a public offering price of $19.31 per share (based on the last reported sale price of the Common Shares on the NYSE on September 23, 1997) and after deducting the estimated underwriting commission and estimated offering expenses payable by the Company, will be used to repay indebtedness outstanding under the Company's Credit Facility (described below), a substantial portion of which was incurred to retire an existing credit facility and repay approximately $130 million of the bank debt of Allwaste and Serv-Tech after consummation of the acquisition of each of these companies. The Company's Credit Facility provides for an aggregate maximum borrowing of up to $1.5 billion. Borrowings under the Credit Facility bear interest at varying rates, depending on the nature of the loan and the Company's compliance with certain financial ratios. From August 11, 1997 through September 23, 1997, interest rates under the Credit Facility ranged from prime plus 0.25% to prime plus 1.25%. The Credit Facility terminates on August 12, 2002. As of August 31, 1997, the Company had borrowed an aggregate of $817 million under the Credit Facility. See "Description of Certain Indebtedness -- Credit Facility" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity." The reduction in indebtedness will provide the Company with renewed borrowing capacity for capital expenditures, future acquisitions and general corporate purposes. DIVIDEND POLICY AND RECORD The Company has not declared or paid cash dividends on its Common Shares during the last five years. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends on its Common Shares in the foreseeable future. Any future declaration and payment of dividends will be subject to the discretion of the Company's Board of Directors and to applicable law and will depend upon the Company's results of operations, earnings, financial condition, contractual limitations, cash requirements, future prospects and other factors deemed relevant by the Company's Board of Directors. The Company's Credit Facility restricts the payment of cash dividends. 18 20 PRICE RANGE AND TRADING VOLUME OF THE COMMON SHARES The Company's Common Shares trade in the United States on the NYSE, and in Canada on the TSE and the ME, under the symbol "PHV." The Company's Common Shares traded in the United States on the Nasdaq National Market System ("Nasdaq") prior to April 30, 1996. The following tables set forth for the fiscal periods indicated (based on the fiscal year ending December 31) the high and low sale prices per share and trading volume of the Company's Common Shares as reported by the NYSE, Nasdaq and the TSE, the principal Canadian exchange for the trading of the Company's Common Shares. For current price information, shareholders are encouraged to consult publicly available sources.
PRICE RANGE AND TRADING VOLUME OF THE COMMON SHARES -------------------------------------------------------------------- NYSE & NASDAQ TSE --------------------------------- ------------------------------- HIGH LOW VOLUME HIGH LOW VOLUME ------- ------- ----------- ------- ------- --------- (U.S. Dollars) (Canadian Dollars) 1995 First quarter.................. $ 6.13 $ 5.13 90,500 $ 8.50 $ 7.25 4,418,600 Second quarter................. 7.30 6.00 76,000 10.13 8.25 5,832,400 Third quarter.................. 7.50 6.38 50,100 10.25 8.25 6,078,700 Fourth quarter................. 7.25 6.00 1,481,300 9.75 7.88 4,777,400 1996 First quarter.................. $ 6.88 $ 6.13 368,900 $ 9.38 $ 8.00 3,399,100 Second quarter................. 8.88 6.50 29,040,400 12.00 8.75 1,760,100 Third quarter.................. 9.75 6.63 8,773,100 13.20 9.25 5,580,800 Fourth quarter................. 15.75 9.38 19,652,000 21.50 12.75 2,781,100 1997 First quarter.................. $ 18.38 $ 13.63 26,356,700 $ 24.75 $ 18.50 8,232,300 April.......................... 15.75 12.25 8,234,400 21.50 17.25 1,304,700 May............................ 15.88 12.38 15,886,900 22.00 17.15 4,340,000 June........................... 16.00 14.00 11,561,000 22.10 19.45 2,858,000 July........................... 15.88 14.38 9,147,200 21.90 19.95 2,918,868 August......................... 18.38 14.94 15,292,900 25.50 20.60 8,323,303 September (through September 23, 1997).................... 19.94 17.81 6,450,700 27.90 24.65 4,333,208
On September 23, 1997, the last reported sale price on the NYSE of the Common Shares was $19.31 and the last reported sales price on the TSE was Cdn$26.90. On September 23, 1997, there were 102,214,491 Common Shares issued and outstanding and held of record by approximately 2,333 shareholders. 19 21 CONSOLIDATED CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as at the dates indicated and as adjusted to give effect to the Offerings and the application of the net proceeds therefrom, assuming a public offering price of $19.31 per share in the Offerings (based on the last reported sale price of the Common Shares on the NYSE on September 23, 1997). See "Use of Proceeds." This table has been presented in U.S. dollars and in accordance with U.S. GAAP. This table should be read in conjunction with the Consolidated Financial Statements of the Company, the notes thereto and the other financial data included elsewhere in this Prospectus.
JUNE 30, 1997 AUGUST 31, 1997 ---------------------------------------- -------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED ACTUAL AS ADJUSTED --------- ------------ ----------- ----------- ----------- (thousands of dollars) SHORT-TERM DEBT: Current portion of long-term debt...................... $ 7,956 $ 12,016 $ 12,016 $ 12,273 $ 12,273 ======== ======== ======== LONG-TERM DEBT: Bank debt and other long-term debt...................... 493,948 675,268 306,050 764,279 395,061 -------- -------- -------- SHAREHOLDERS' EQUITY: Common Shares(2)(3).......... 383,824 905,863 1,275,081 912,443 1,281,661 Retained earnings(4)......... 138,338 138,338 138,338 138,338 138,338 Cumulative foreign currency translation account....... (25,264) (25,264) (25,264) (25,264) (25,264) -------- -------- -------- Total shareholders' equity... 496,898 1,018,937 1,388,155 1,025,517 1,394,735 -------- -------- -------- Total consolidated capitalization............ $ 990,846 $ 1,694,205 $ 1,694,205 $ 1,789,796 $ 1,789,796 ======== ======== ========
- --------------- (1) The pro forma column at June 30, 1997 is pro forma for the acquisitions of Allwaste and Serv-Tech in July 1997, in which an aggregate of 25,819,903 Common Shares were issued; completion of the takeover bid for Intermetco in August 1997 and subsequent compulsory acquisition in which an aggregate of 2,684,371 Common Shares were issued; completion of the acquisition of Roth in July 1997, in which an aggregate of 422,331 Common Shares were issued; and completion of the acquisition of D&L, Inc. in July 1997, in which an aggregate of 286,418 Common Shares were issued. All of such increases occurred prior to August 31, 1997. The pro forma number of Common Shares issued and outstanding at June 30, 1997 is 100,682,388. (2) An unlimited number of Common Shares are authorized. There were 71,469,365 Common Shares issued and outstanding at June 30, 1997 and 101,603,942 Common Shares issued and outstanding at August 31, 1997. (3) Excludes (i) options outstanding at June 30, 1997 to purchase up to 5,867,729 Common Shares, of which options to acquire 2,500,386 Common Shares were then exercisable, at prices ranging from Cdn$6.75 to Cdn$21.75, and (ii) options outstanding at August 31, 1997 to purchase up to 9,427,644 Common Shares, of which options to acquire 4,245,676 Common Shares were then exercisable, at prices ranging from Cdn$6.75 to Cdn$26.75. (4) Retained earnings are stated as at June 30, 1997. 20 22 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The accompanying unaudited pro forma consolidated balance sheet of Philip includes the June 30, 1997 historical consolidated balance sheet of Philip and the May 31, 1997 historical consolidated balance sheet of Allwaste as if the acquisition of Allwaste had been consummated on June 30, 1997. The unaudited pro forma combined statement of earnings of Philip for the fiscal year ended December 31, 1996 combines the historical consolidated statement of earnings of Philip for the fiscal year ended December 31, 1996 and the historical consolidated statement of operations of Allwaste for the twelve months ended November 30, 1996 as if the acquisition of Allwaste had occurred on January 1, 1996. The unaudited pro forma consolidated statement of earnings of Philip for the six months ended June 30, 1997 combines the historical consolidated statement of earnings of Philip for the six months ended June 30, 1997 and the historical consolidated statement of operations of Allwaste for the six months ended May 31, 1997 as if the acquisition of Allwaste had occurred on January 1, 1997. The financial information relating to Philip has been presented in U.S. dollars and in accordance with U.S. GAAP. The unaudited pro forma consolidated statement of earnings for the year ended December 31, 1996 also includes the pro forma effects of the acquisitions by Philip of Intsel (completed on September 27, 1996) and Luntz (completed on December 23, 1996) as if such acquisitions had occurred on January 1, 1996. The historical consolidated statements of earnings of Philip include operating results of such acquired businesses subsequent to the respective dates of their acquisitions. The unaudited pro forma consolidated statement of earnings for the year ended December 31, 1996 includes the historical operating results of such acquired businesses from January 1, 1996 to the respective dates of such acquisitions. The unaudited pro forma consolidated financial statements give effect to the acquisitions of Allwaste, Intsel and Luntz using the purchase method of accounting and include the adjustments described in the notes thereto. The unaudited pro forma consolidated financial statements also give effect to the issuance of Common Shares in exchange for the Allwaste common stock. The unaudited pro forma consolidated financial statements do not take into consideration other acquisitions completed by Philip in 1996 and 1997. See "Recent Acquisitions" and "Risk Factors -- Risks Associated with Acquisitions." The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and do not purport to represent what Philip's results of operations or financial position would have been had the acquisitions of Allwaste, Intsel or Luntz occurred on the dates indicated or for any future period or at any future date, and are therefore qualified in their entirety by reference to and should be read in conjunction with the historical consolidated financial statements of Philip and the historical consolidated financial statements of Allwaste, Intsel and Luntz contained elsewhere in this Prospectus. 21 23 PHILIP SERVICES CORP. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (thousands of dollars, except share and per share amounts)
PRO FORMA AS ADJUSTED FOR HISTORICAL RECLASSIFICATION THE PHILIP ALLWASTE ENTRIES (NOTE 4) ADJUSTMENTS NOTE ALLWASTE MERGER ---------- --------- ---------------- ----------- ---- --------------- Revenue................ $ 623,358 $ 194,485 $ -- $ -- $ 817,843 Operating expenses..... 510,282 144,239 2,200 -- 656,721 Selling, general & administrative....... 46,254 37,945 (17,663) -- 66,536 Depreciation and amortization......... 17,590 -- 15,463 3,950 5 37,003 -------- -------- -------- -------- -------- Income from operations........... 49,232 12,301 -- (3,950) 57,583 Interest expense....... 13,979 4,947 -- -- 18,926 Other income and expense -- net....... (4,051) (1,819) -- -- (5,870) -------- -------- -------- -------- -------- Earnings before tax.... 39,304 9,173 -- (3,950) 44,527 Income taxes........... 11,923 4,148 -- -- 16,071 Minority interest...... -- 138 -- -- 138 -------- -------- -------- -------- -------- Net Earnings........... $ 27,381 $ 4,887 $ -- $ (3,950) $ 28,318 ======== ======== ======== ======== ======== Primary earnings per share................ $ 0.39 $ 0.30 ======== ======== Fully diluted earnings per share............ $ 0.38 $ 0.29 ======== ======== Weighted average number of common shares outstanding (000s) (Note 6)............. 70,970 94,026 ======== ========
The accompanying notes are an integral part of these pro forma consolidated financial statements. 22 24 PHILIP SERVICES CORP. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1996 (thousands of dollars, except share and per share amounts)
RECLASSIFICATION HISTORICAL NOTE PRO FORMA ENTRIES PHILIP LUNTZ INTSEL ADJUSTMENTS 2 PHILIP ALLWASTE (NOTE 4) ---------- --------- -------- ----------- ----- --------- --------- ---------------- Revenue............ $ 545,344 $ 123,541 $ 99,014 $ 11,133 a $ 779,032 $ 383,274 $ -- Operating expenses.......... 413,013 107,636 84,369 12,153 a,b,d 617,171 287,809 2,935 Selling, general & administrative.... 56,063 8,649 5,485 585 a 70,782 76,200 (33,731) Depreciation and amortization...... 24,225 2,665 699 1,505 b 29,094 -- 30,796 ---------- --------- -------- ----------- --------- --------- -------- Income from operations........ 52,043 4,591 8,461 (3,110) 61,985 19,265 -- Interest expense... 16,263 711 -- 6,000 c 22,974 9,505 -- Other income and expense -- net.... (3,456) (435) 332 -- (3,559) (3,206) -- ---------- --------- -------- ----------- --------- --------- -------- Earnings (loss) from continuing operations before tax............... 39,236 4,315 8,129 (9,110) 42,570 12,966 -- Income taxes....... 10,098 1,796 2,800 (2,814) 11,880 6,313 -- Minority interest.......... -- -- -- -- -- (101) -- ---------- --------- -------- ----------- --------- --------- -------- Earnings (loss) from continuing operations........ $ 29,138 $ 2,519 $ 5,329 $ (6,296) $ 30,690 $ 6,754 $ -- =========== ========== ========= ============== ========== ========== ================== Primary earnings per share......... $ 0.58 =========== Fully diluted earnings per share............. $ 0.51 =========== Weighted average number of common shares outstanding (000s) (Note 6)... 50,073 =========== PRO FORMA AS ADJUSTED FOR THE ALLWASTE ADJUSTMENTS NOTE MERGER ----------- ----- ----------- Revenue............ $ -- $ 1,162,306 Operating expenses.......... 907,915 Selling, general & administrative.... 113,251 Depreciation and amortization...... 7,850 5 67,740 ----------- ----------- Income from operations........ (7,850) 73,400 Interest expense... -- 32,479 Other income and expense -- net.... -- (6,765) ----------- ----------- Earnings (loss) from continuing operations before tax............... (7,850) 47,686 Income taxes....... -- 18,193 Minority interest.......... -- (101) ----------- ----------- Earnings (loss) from continuing operations........ $ (7,850) $ 29,594 ============== ============ Primary earnings per share......... $ 0.38 ============ Fully diluted earnings per share............. $ 0.36 ============ Weighted average number of common shares outstanding (000s) (Note 6)... 77,284 ============
The accompanying notes are an integral part of these pro forma consolidated financial statements. 23 25 PHILIP SERVICES CORP. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1997 (thousands of dollars)
PRO FORMA AS ADJUSTED FOR THE PHILIP ALLWASTE ADJUSTMENTS NOTE ALLWASTE MERGER ----------- --------- ----------- ----- --------------- ASSETS Current assets Cash and equivalents........... $ 7,602 $ 2,017 $ -- $ 9,619 Accounts receivable............ 257,088 86,326 -- 343,414 Inventory for resale........... 239,312 -- -- 239,312 Other current assets........... 36,862 17,313 -- 54,175 ----------- --------- ----------- --------------- 540,864 105,656 -- 646,520 Fixed assets, net................ 341,494 126,056 -- 467,550 Goodwill......................... 261,929 85,529 301,843 3 649,301 Other assets..................... 79,100 32,029 12,000 123,129 ----------- --------- ----------- --------------- $ 1,223,387 $ 349,270 $ 313,843 $ 1,886,500 ========== ========= ========== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities................. $ 150,846 $ 59,070 $ 61,777 3 $ 271,693 Current maturities of long-term debt........................ 7,956 2,447 -- 10,403 ----------- --------- ----------- --------------- 158,802 61,517 61,777 282,096 Long-term debt................... 493,948 103,045 -- 596,993 Deferred income taxes............ 33,714 12,090 -- 45,804 Other liabilities................ 40,025 706 -- 40,731 Convertible subordinated debt.... -- 32,259 -- 32,259 Shareholders' equity............. 496,898 139,653 252,066 3 888,617 ----------- --------- ----------- --------------- $ 1,223,387 $ 349,270 $ 313,843 $ 1,886,500 ========== ========= ========== =============
The accompanying notes are an integral part of these pro forma consolidated financial statements. 24 26 PHILIP SERVICES CORP. NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. BASIS OF PRESENTATION The unaudited pro forma consolidated balance sheet and statement of earnings present the financial position of Philip as at June 30, 1997 and results of its operations for the six months ended June 30, 1997 and the year ended December 31, 1996, as if the acquisitions discussed in Notes 2 and 3 below had occurred at the beginning of the year ended December 31, 1996. These pro forma consolidated financial statements have been prepared on the basis of U.S. GAAP. The unaudited pro forma consolidated statement of earnings for the year ended December 31, 1996 was prepared by combining the following: - the unaudited pro forma consolidated statement of earnings of Philip, which includes the significant acquisitions completed during the fiscal year ended December 31, 1996 (Note 2), and - the unaudited consolidated statement of earnings for Allwaste for the twelve months ended November 30, 1996. The unaudited pro forma consolidated statement of earnings for the six months ended June 30, 1997 was prepared by combining the following: - the unaudited historical consolidated statement of earnings of Philip for the six months ended June 30, 1997. - the unaudited consolidated statement of earnings for Allwaste for the six months ended May 31, 1997. The unaudited pro forma consolidated balance sheet at June 30, 1997 was prepared by combining the unaudited balance sheet of Philip as at June 30, 1997 and the unaudited balance sheet of Allwaste as at May 31, 1997. The pro forma consolidated financial statements should be read in conjunction with the historical consolidated financial statements of Philip, Allwaste, Intsel and Luntz included elsewhere in this Prospectus. Certain figures from the Allwaste, Intsel and Luntz consolidated financial statements have been reclassified to conform with the basis of presentation used by Philip in preparing Philip's Consolidated Financial Statements. The acquisition of Allwaste has been accounted for using the purchase method of accounting. The pro forma consolidated financial statements do not purport to be indicative of the financial position of Philip or the results of operations that might have occurred, had the acquisitions been concluded on January 1, 1996, nor are they necessarily indicative of future results. 2. ACQUISITIONS PRIOR TO DECEMBER 31, 1996 Statement of Earnings: The audited consolidated statement of earnings of Philip for the year ended December 31, 1996 as translated above, was adjusted to include the acquisitions of Intsel and Luntz as if they had occurred on January 1, 1996 as follows: (i) the results of operations of Luntz for the period from January 1, 1996 to the date of acquisition, which was December 23, 1996, have been included in the unaudited pro forma consolidated statement of earnings; and 25 27 PHILIP SERVICES CORP. NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED) 2. ACQUISITIONS PRIOR TO DECEMBER 31, 1996 (CONTINUED) (ii) the results of operations for Intsel for the period from January 1, 1996 to the date of acquisition, which was September 27, 1996, have been included in the unaudited pro forma consolidated statement of earnings. The pro forma consolidated statement of earnings of Philip ("Pro Forma Philip") incorporates the following pro forma assumptions: (a) actual revenue and expenses for the month of December 1996 for Luntz have been recorded as an adjustment in order to reflect a full 12 month period in the pro forma consolidated statement of earnings. The effect of this adjustment is to record additional revenue of $11,133, operating expenses of $10,248, and selling, general and administrative expenses of $585; (b) the amortization of goodwill and other intangibles and the depreciation of the incremental fair market value increases relating to the acquisitions have been included in the pro forma consolidated statement of earnings from January 1, 1996 at rates consistent with those disclosed in Note 1 to the Consolidated Financial Statements of the Company. The amortization of goodwill was increased by approximately $1,500 and the operating expenses were increased by approximately $500 as a result of this adjustment; (c) interest on increased borrowings necessary to finance the acquisitions has been included from January 1, 1996 for the acquisitions of Intsel and Luntz. This adjustment increased interest expense by $6,000; and (d) inventory for resale is valued on the last-in-first-out or "LIFO" basis of accounting in the historical financial statements of Luntz. To be consistent with the accounting policies employed by Philip, the basis of accounting for inventory for resale has been adjusted to reflect the lower of average purchase cost and net realizable value. As a result, operating expenses have been increased by $1,388. Balance Sheet: The historical consolidated balance sheet for Philip includes the balance sheets of Intsel and Luntz as at June 30, 1997 and, therefore, separate balance sheets for these companies are not included. 3. ACQUISITION OF ALLWASTE The acquisition of Allwaste has been accounted for using the purchase method of accounting. The pro forma consolidated statement of earnings of Allwaste for the twelve months ended November 30, 1996 used in the December 31, 1996 pro forma consolidated statement of earnings, was determined by subtracting the results for fiscal quarter ended November 30, 1995 from the annual audited financial statements of Allwaste for the fiscal year ended August 31, 1996 and adding the financial results for the fiscal quarter ended November 30, 1996. 26 28 PHILIP SERVICES CORP. NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED) 3. ACQUISITION OF ALLWASTE (CONTINUED) The purchase price for the acquisition of Allwaste has been calculated as follows:
NOTE ---- Value of Philip common shares issued................... $360,388 3a Value of options issued by Philip...................... 31,331 3b Severance accruals..................................... 16,500 3c Site rationalization accruals.......................... 6,800 3c Transaction bonuses.................................... 1,000 8 Transaction costs...................................... 16,320 3c Costs for new signage and repainting equipment......... 4,495 3c Other accruals......................................... 6,941 3c --- 443,775 Book value of net assets acquired -- May 31, 1997...... $139,653 Adjust book value of net assets to July 31, 1997....... (9,721) 129,932 3d -------- --- Excess purchase price over book value.................. $313,843 === Allocated to: Investments....................................... $ 12,000 3d Goodwill.......................................... 301,843 --- $313,843 ===
(a) The calculation of the value of Philip common shares is based on the following: Number of Allwaste common shares outstanding.............................. 37,735 Conversion ratio.......................................................... 0.611 Number of Philip common shares issued..................................... 23,056 Adjusted weighted average market price of Philip common shares............ $ 15.631 Value of Philip common shares............................................. $ 360,388
The number of Philip common shares above issued in connection with the Merger was determined based upon the number of shares of Allwaste common stock outstanding as of July 30, 1997, the last business day preceding the effective time of the Allwaste Merger. The weighted average market price of Philip common shares above was determined based on the average trading activity of Philip common shares on the NYSE for the 10 day period before and after March 6, 1997, which was the date of the announcement of the acquisitions. The weighted average market price was then reduced for transaction costs that would have been incurred if these common shares had been issued for cash. 27 29 PHILIP SERVICES CORP. NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED) 3. ACQUISITION OF ALLWASTE (CONTINUED) (b) Under the Allwaste Merger agreement, Philip assumed the employee stock options of Allwaste. The value of outstanding options as at July 30, 1997 for Allwaste is as follows: Allwaste options outstanding.............................................. 4,388,063 ========= Fair value of Philip options.............................................. $ 11.69 Exchange ratio............................................................ 0.611 --------- Fair value of equivalent Philip options................................... $ 7.14 ========= Fair value of options to be included in the purchase price................ $ 31,331 =========
The fair value of the options was determined using the Black-Scholes option valuation model with the following assumptions: (i) risk free rate of 6.96%, (ii) expected volatility of 32.74% for Philip, (iii) expected option life of ranging from 5 to 10 years for Philip and (iv) no annualized dividend yield. (c) Transaction costs such as fees for legal, accounting and other financial advisors, registration fees, printing and travel costs have been included in the purchase price and recorded in accounts payable and accrued liabilities in the Pro Forma Balance Sheet. Accruals for site rationalization costs of Allwaste facilities of $6,800, accruals for severance of Allwaste employees of $16,500, accruals for new signage and repainting of Allwaste equipment to reflect the name change of $4,495, and other accruals for unfavorable lease contracts, environmental liabilities, self-insurance reserves and income taxes of $6,941 have been included in the purchase price and recorded in accounts payable and accrued liabilities in the Pro Forma Balance Sheet. (d) The fair value of net assets acquired was determined as follows: (i) Receivables -- were recorded at amounts to be recovered less allowances for uncollectible amounts; (ii) Fixed assets -- were assessed to be recorded at current replacement costs since approximately 90% of the fixed assets were purchased in the last three years; (iii) Other assets (other than the investment in Safe Seal Company, Inc.) -- were recorded at cost; and (iv) Accounts payable and accrued liabilities and long-term debt -- were recorded at the present value of amounts to be paid. Allwaste has a 36.5% investment in Safe Seal Company, Inc. ("Safe Seal") with a book value of $7,000 at July 31, 1997. Safe Seal, along with six other arms-length companies have agreed to merge to form a company called Innovative Value Technologies, Inc., subject to the completion of an initial public offering (the "IPO"). The registration statement related thereto is currently under review by the Securities and Exchange Commission (the "Commission"). As a result of this pending transaction, the Allwaste investment has an estimated value of $19,000, and therefore, the value of the investment has been increased by $12,000. If the IPO is not successful or the value of the investment changes upon completion of the IPO, the amount allocated to the Safe Seal investment and goodwill will be adjusted accordingly. As a result of the Allwaste Merger, certain assets of Allwaste were determined to be redundant such as computer software and hardware and deferred financing costs and therefore were written off in the July 31, 1997 financial statements. 28 30 PHILIP SERVICES CORP. NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED) 3. ACQUISITION OF ALLWASTE (CONTINUED) (e) The adjustment to record the purchase accounting of Allwaste as at June 30, 1997 is as follows:
DR (CR) --------- Investment in Safe Seal................................................... $ 12,000 Goodwill.................................................................. 301,843 Shareholders' equity...................................................... 139,653 Accounts payable and accrued liabilities.................................. (61,777) Share capital............................................................. (391,719) ------- $ -- =======
4. RECLASSIFICATION ENTRIES Reclassification entries have been made to disclose information in the statement of earnings for Allwaste on a basis consistent with the historical Consolidated Financial Statements of the Company. Specifically, items such as supervisory wages and benefits, rent, utilities, business and realty taxes, and repairs of operating facilities which amounted to approximately $29,000 for the year ended December 31, 1996 and approximately $14,500 for the six months ended June 30, 1997, have been reclassified from selling, general and administrative expenses to operating expenses. Depreciation and amortization expenses amounting to $30,796 for the year ended December 31, 1996 and $15,463 for the six months ended June 30, 1997 have been reclassified from operating expenses and selling, general and administrative expenses to a separate line disclosure format, consistent with the Company's historical consolidated statement of earnings. 5. PRO FORMA ADJUSTMENTS (a) Amortization of goodwill has been recorded in the pro forma statement of earnings based on the allocation of the purchase price as discussed in Note 3 above. Goodwill will be amortized on a straight-line basis over 40 years. (b) Depreciation expense in the pro forma statement of earnings is based on the following estimated useful lives: Buildings and Improvements........................................... 20-40 years Machinery and Equipment.............................................. 3-20 years
No adjustment to depreciation expense is required. 29 31 PHILIP SERVICES CORP. NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) -- (CONTINUED) 6. PRO FORMA WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Pro Forma weighted average number of common shares outstanding has been computed as follows (in thousands): Year ended December 31, 1996: Historical Philip weighted average number of common shares outstanding....... 50,073 Effect of recording the equity transactions at beginning of the period: Shares issued for acquisitions prior to December 31, 1996.................... 2,222 Shares issued for Allwaste (Note 3).......................................... 23,056 ------ Pro forma weighted average number of common shares outstanding............... 75,351 ====== Six months ended June 30, 1997: Historical Philip weighted average number of common shares outstanding....... 70,970 Effect of recording the equity transactions at beginning of the period: Shares issued for Allwaste (Note 3).......................................... 23,056 ------ Pro forma weighted average number of common shares outstanding............... 94,026 ======
7. NON-RECURRING COSTS Philip expects that it will incur non-recurring costs relating to severance, relocation and other integration costs. These costs are not quantifiable at this time. 8. RELATED PARTY TRANSACTIONS (a) Certain of the Allwaste executive officers are parties to executive severance agreements with Allwaste. Under these severance agreements, the executive officers were entitled to receive payment if they were employed by Allwaste on the effective date of the Allwaste Merger or if they were terminated. On the date of the Allwaste Merger and on the six month anniversary date of the Allwaste Merger, severance payments amounting to approximately $3.0 million are required; total severance is approximately $6.0 million. In addition, the Company will pay an additional $2.6 million to compensate the executive officers for related excise taxes. The severance agreements also provide that, in connection with the Allwaste Merger, certain accelerations will occur in the dates on which: (i) unexercised portions of an Allwaste executive officer's option granted would become vested and exercisable and (ii) the restrictions applicable to any restricted shares of Allwaste common stock issued to any Allwaste executive officer under any Allwaste stock plan would lapse or be deemed satisfied in full. If an Allwaste executive officer becomes entitled to any payment or benefit pursuant to the severance agreements which is subject to excise tax, Philip will pay the Allwaste executive officer an additional amount such that the net amount retained by the Allwaste executive officer will be equal to the severance payment. The amount of excise tax due under these amounts is approximately $3.0 million. The total of the amounts due to Allwaste executive officers is approximately $11.6 million, which was included in the severance accruals amount in the calculation of the purchase price. (b) Transaction Bonuses Pursuant to the Allwaste Merger Agreement, a retention bonus totalling $1.0 million will be paid to the Allwaste executive officers. Each Allwaste executive officer was entitled to receive one-half of the retention bonus payment on the effective date of the Allwaste Merger and will be entitled to the remaining portion on the three month anniversary of such date. These amounts have been included in the calculation of the purchase price. 30 32 SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA The following table presents selected historical consolidated financial data of Philip for the periods indicated, including the accounts of all companies acquired prior to the end of the respective reporting periods. These companies, all of which were acquired in transactions accounted for as purchases during the past five years, are included from their respective dates of acquisition. The selected historical consolidated financial data for Philip as of and for the five years ended December 31, 1996 is derived from the audited Consolidated Financial Statements of Philip and as of and for the six months ended June 30, 1996 and 1997 is derived from the unaudited interim consolidated financial statements of Philip, which in the opinion of management include all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial information for such periods. Interim results are not necessarily indicative of the results which may be expected for any other interim period or for a full year. For all periods indicated, the selected historical consolidated financial data reflects Philip's former municipal and commercial solid waste operations, which were sold in August 1996, as a discontinued operation. Philip prepares its Consolidated Financial Statements in accordance with Canadian GAAP and the summary historical consolidated financial data set forth below is presented in Canadian GAAP. Canadian GAAP conforms in all material respects with U.S. GAAP, except as described in Note 18 to the Consolidated Financial Statements of the Company included elsewhere in this Prospectus. The selected historical consolidated financial data should be read in conjunction with the accompanying Consolidated Financial Statements of the Company and the related Notes thereto included elsewhere in this Prospectus. Selected historical consolidated financial data of the Company presented in U.S. GAAP (in U.S. dollars) is disclosed in this Prospectus following the Consolidated Financial Statements of the Company. Philip did not pay any cash dividends during the periods set forth below.
SIX MONTHS ENDED JUNE 30, FISCAL YEARS ENDED DECEMBER 31, ------------------------- ------------------------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- --------- --------- -------- (THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) CANADIAN GAAP: STATEMENTS OF EARNINGS DATA: Revenue............................... $ 856,629 $ 323,397 $ 802,490 $ 648,311 $ 489,740 $ 170,283 $ 60,401 Operating expenses.................... 701,300 251,586 615,462 489,569 366,649 108,331 27,165 Selling, general and administrative... 63,461 33,445 78,053 66,563 51,216 27,228 12,783 Depreciation and amortization......... 24,148 15,438 33,966 25,510 21,354 10,339 3,212 ----------- ----------- ----------- ----------- --------- --------- -------- Income from operations................ 67,720 22,928 75,009 66,669 50,521 24,385 17,241 Interest expense...................... 19,212 15,023 24,598 28,187 21,750 9,092 2,197 Other income and expense-net.......... (5,522) (2,459) (4,782) (3,689) (2,122) (1,888) (491) ----------- ----------- ----------- ----------- --------- --------- -------- Earnings from continuing operations before tax.......................... 54,030 10,364 55,193 42,171 30,893 17,181... 15,535 Income taxes.......................... 16,392 2,707 15,180 12,354 8,769 1,689 6,191 ----------- ----------- ----------- ----------- --------- --------- -------- Earnings from continuing operations... 37,638 7,657 40,013 29,817 22,124 15,492 9,344 Discontinued operations (net of tax)................................ -- 7,234 (1,005) 2,894 2,502 3,780 8,929 ----------- ----------- ----------- ----------- --------- --------- -------- Net earnings.......................... $ 37,638 $ 14,891 $ 39,008 $ 32,711 $ 24,626 $ 19,272 $ 18,273 ========== ========== ========== ========== ========= ========= ======== Basic earnings per share: Continuing operations............... $ 0.53 $ 0.19 $ 0.79 $ 0.80 $ 0.61 $ 0.47 $ 0.31 Discontinued operations............. -- 0.18 (0.02) 0.08 0.07 0.11 0.29 ----------- ----------- ----------- ----------- --------- --------- -------- $ 0.53 $ 0.37 $ 0.77 $ 0.88 $ 0.68 $ 0.58 $ 0.60 ========== ========== ========== ========== ========= ========= ======== Fully diluted earnings per share: Continuing operations............... $ 0.52 $ 0.19 $ 0.72 $ 0.68 $ 0.55 $ 0.43 $ 0.29 Discontinued operations............. -- 0.14 (0.01) 0.05 0.05 0.09 0.28 ----------- ----------- ----------- ----------- --------- --------- -------- $ 0.52 $ 0.33 $ 0.71 $ 0.73 $ 0.60 $ 0.52 $ 0.57 ========== ========== ========== ========== ========= ========= ======== Weighted average number of common shares outstanding (000s)........... 70,970 40,586 50,632 37,342 36,209 32,827 30,377 ========== ========== ========== ========== ========= ========= ======== BALANCE SHEET DATA (END OF PERIOD): Working capital....................... $ 526,982 $ 156,563 $ 347,501 $ 106,604 $ 88,269 $ 20,566 $ 9,969 Total assets.......................... 1,694,437 1,030,988 1,345,719 1,002,912 860,583 717,925 348,101 Total debt(1)......................... 692,280 404,282 414,768 421,355 400,251 303,654 111,035 Shareholders' equity.................. 692,383 420,842 623,351 312,102 277,882 243,675 171,008 OTHER DATA: Amortization.......................... $ 7,055 $ 5,188 $ 11,720 $ 9,798 $ 7,869 $ 2,620 $ 1,095 Depreciation.......................... 17,093 10,250 22,246 15,712 13,485 7,719 2,117 Additions to property, plant & equipment........................... 44,539 22,810 59,847 37,016 29,910 31,320 14,329
31 33
SIX MONTHS ENDED JUNE 30, FISCAL YEARS ENDED DECEMBER 31, ---------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- ----------- --------- --------- (THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) U.S. GAAP: STATEMENTS OF EARNINGS DATA: Revenue....................................... $ 856,629 $ 323,397 $ 742,975 $ 648,311 $ 489,740 Operating expenses............................ 701,300 251,586 563,393 489,569 366,649 Selling, general and administrative........... 63,461 33,445 75,674 66,563 51,216 Depreciation and amortization................. 24,148 15,438 33,006 25,510 21,354 --------- -------- --------- --------- -------- Income from operations........................ 67,720 22,928 70,902 66,669 50,521 Interest expense.............................. 19,212 15,023 22,157 25,557 19,339 Other income and expense-net.................. (5,522) (2,459) (4,708) (3,689) (2,122) --------- -------- --------- --------- -------- Earnings from continuing operations before tax......................................... 54,030 10,364 53,453 44,801 33,304 Income taxes.................................. 16,392 2,707 13,755 12,354 8,769 --------- -------- --------- --------- -------- Earnings from continuing operations........... 37,638 7,657 39,698 32,447 24,535 Discontinued operations (net of tax).......... -- 7,234 (1,005) 2,894 2,502 --------- -------- --------- --------- -------- Net earnings.................................. $ 37,638 $ 14,891 $ 38,693 $ 35,341 $ 27,037 ========= ======== ========= ========= ======== Primary earnings per share: Continuing operations....................... $ 0.53 $ 0.19 $ 0.79 $ 0.87 $ 0.68 Discontinued operations..................... -- 0.18 (0.02) 0.08 0.07 --------- -------- --------- --------- -------- $ 0.53 $ 0.37 $ 0.77 $ 0.95 $ 0.75 ========= ======== ========= ========= ======== Fully diluted earnings per share: Continuing operations....................... $ 0.52 $ 0.19 $ 0.69 $ 0.68 $ 0.55 Discontinued operations..................... -- 0.14 (0.01) 0.05 0.02 --------- -------- --------- --------- -------- $ 0.52 $ 0.33 $ 0.68 $ 0.73 $ 0.57 ========= ======== ========= ========= ======== Weighted average number of common shares outstanding (000s).......................... 70,970 40,586 50,073 37,342 36,209 ========= ======== ========= ========= ======== BALANCE SHEET DATA (END OF PERIOD): Working capital............................... $ 526,982 $ 156,563 $ 347,501 $ 106,604 $ 88,269 Total assets.................................. 1,687,430 1,026,211 1,338,692 998,135 855,681 Total debt(1)................................. 692,280 418,645 414,768 437,100 419,082 Shareholders' equity.......................... 685,376 401,702 616,324 291,580 254,150 OTHER DATA: Amortization.................................. $ 7,055 $ 5,188 $ 11,016 $ 9,798 $ 7,869 Depreciation.................................. 17,093 10,250 21,990 15,712 13,485 Additions to property, plant & equipment...... 44,539 22,810 59,847 37,016 29,910
- --------------- (1) Total debt includes the current portion of long-term debt. 32 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company is one of North America's leading suppliers of resource recovery and industrial services. The Company has an integrated network of metals recovery and industrial services operations in North America, servicing over 50,000 industrial and commercial customers from over 300 locations. The Company applies proprietary technologies to reduce the cost and downtime associated with industrial cleaning and turnaround activities, and to recover value from industrial by-products and metal bearing residuals. The Company's business is organized into two operating divisions -- the Metals Recovery Group and the Industrial Services Group. The Metals Recovery Group's three primary business operations are ferrous (steel), copper, and aluminum processing and recycling. The Industrial Services Group is a fully integrated provider of on-site industrial services, by-products recovery and environmental services in North America, with a network of over 250 facilities. The Industrial Services Group's operations are divided into four main activities: on-site industrial services, by-products recovery, environmental services and utilities management. The Company has, through acquisitions, as well as internal growth, substantially increased the revenue from its metals recovery and industrial services operations. In the metals recovery operations, the Company's acquisitions include Waxman Resources Inc. ("Waxman") in 1993, and Luntz Corporation ("Luntz") of Canton, Ohio, the aluminum alloy processing assets formerly owned by Alcan in Guelph, Ontario ("Alloys") and Intsel Southwest Limited Partnership ("Intsel") of Houston, Texas in 1996. Luntz is a provider of ferrous scrap and mill services in the United States. Alloys expands the Company's ability to recover and process aluminum and aluminum alloy products. Intsel is a distributor of a broad range of heavy carbon steel products. In 1997 the Company acquired Allied Metals Limited in the United Kingdom, the Reynolds Metals Bellwoods facility and Intermetco Limited, one of Canada's largest recyclers and processors of scrap metal products. Since the acquisition of Waxman in 1993, the Company has been able to renew many contracts with existing customers and enter into contracts with new customers for the processing of copper, aluminum and ferrous materials. This, together with acquisitions, has increased the annual revenue of the Company's metals recovery business from approximately Cdn$50 million in 1993 to approximately Cdn$634 million in the first six months of 1997. Industrial services acquisitions include Nortru, Inc. and Burlington Environmental in 1993, and RMF Global, Inc. and Serv-Tech Inc. in 1997. In July 1997, the Company also acquired Allwaste, Inc., which provides integrated industrial and environmental services and acts as an outsourcing provider of on-site facility processes and services, primarily in North America. Allwaste reported $382.2 million in revenues for the fiscal year ended August 31, 1996, and Serv-Tech reported revenues of $142.4 million for the fiscal year ended December 31, 1996. The annual revenue of Philip's industrial services business has grown from Cdn$160.1 million in the first six months of 1996 to Cdn$210 million in the first six months of 1997. As a result of the Company's significant expansion in recent years, the comparison set forth below may not be a meaningful indicator of the future growth or performance of the Company. In 1996, the Company disposed of its municipal and commercial solid waste business in Ontario, Quebec and Michigan. The Consolidated Financial Statements of the Company therefore disclose the results of this business as "discontinued operations". Management's discussion and analysis of financial condition and results of operations gives retroactive effect to discontinued operations as discussed in Note 4 to the Consolidated Financial Statements of the Company. Income from discontinued operations was Cdn$6.8 million in 1996, Cdn$2.9 million in 1995 and Cdn$2.5 million in 1994. Interest expense has been allocated to the municipal and commercial solid waste business segment based upon the relationship of the net assets of the solid waste business to the Company's consolidated net assets. The Company earns revenue from the delivery of on-site industrial services, the sale of recovered commodities and from fees charged to customers for by-product transfer and processing, collection and disposal services. The Company receives by-products and, after processing, disposes of the residuals at a cost lower than the fees charged to its customers. Other sources of revenue include fees charged for environmental consulting and engineering and other services, and revenue from the sale of steel 33 35 products. In its metals recovery operations, the Company is exposed to commodity price risk during the period that it has title to products that are held in inventory for processing and/or resale. Depending on the commodity, the Company attempts to reduce its commodity price risk through various methods, including partially matching purchases of recoverable materials with current and future physical sales and the limited use of certain financial instruments. Revenue by geographic segment is as follows:
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------------------------ -------------------------------------------------------- 1997 1996 1996 1995 1994 ---------------- ---------------- ---------------- ---------------- ---------------- (Canadian dollars in millions) United States....... $ 514.7 60.1% $ 99.4 30.7% $ 373.4 46.5% $ 213.4 32.9% $ 166.7 34.0% Canada.............. 277.4 32.4 224.0 69.3 429.1 53.5 434.9 67.1 323.0 66.0 Other............... 64.5 7.5 -- -- -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ $ 856.6 100.0% $ 323.4 100.0% $ 802.5 100.0% $ 648.3 100.0% $ 489.7 100.0% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
The increase in revenue generated in the United States is a direct result of the Company acquiring more businesses located in the United States and the continuing expansion of business by subsidiary companies located in the United States. In October 1996, Philip entered into an agreement with the Ontario Teachers' Pension Plan Board ("Teachers"'), whereby Teachers' acquired a 30% equity interest in Philip Utilities Management Corporation ("PUMC"). Effective from November 1, 1996, Philip's investment in PUMC has been recognized using the proportionate consolidation method. Therefore, Philip's share of PUMC revenue has been described as "utilities management" revenue. Operating expenses include direct and indirect labor and the related taxes and benefits, fuel, maintenance and repairs of equipment and facilities, depreciation, property taxes, and accruals for future closure costs. Selling, general and administrative expenses include management salaries, clerical and administrative costs, professional services, facility rentals and insurance costs, as well as costs related to the Company's marketing and sales force. The resource recovery and industrial services businesses are highly competitive. Price competition in the metals recovery and industrial services business is significant. Competition comes directly from companies in the recovery and recycling business and indirectly from waste disposal companies that charge competitive rates for disposal of waste products. The Company's industrial services business is also sensitive to a broad range of competition as customers seek out those firms with the reputation of having the best industrial cleaning, maintenance and turnaround services and the processing and transportation of industrial products and wastes. Competition could have a material adverse effect on the Company's results of operations and financial condition by depressing prices or by causing waste to be diverted to competitors. In addition, such competition could materially affect the Company's ability to service its customers profitably, to attract new customers and to retain such customers upon the expiration of existing contracts. Impact of Inflation, Economic Conditions and Seasonality As a result of weather related circumstances during the winter months, and a general economic slowdown over the Christmas holiday period, the Company experiences lower levels of activity in December and during the first quarter of its fiscal year. Therefore, the first quarter results may not be indicative of the results that will be achieved during the entire year. Impact of Political and Social Climate The Company believes that public awareness of the need to handle and dispose of by-product waste materials properly, and increasingly strict regulatory controls affecting the treatment and handling of such waste, affect the resource recovery and industrial services industry by increasing the demand for the 34 36 Company's services and reliance on experienced and licensed operators of transfer, processing and disposal facilities. In addition, since the Company places heavy emphasis on reuse and recycling as part of its overall operating strategy, the Company is benefiting and expects to continue to benefit from the increasing use of recycled products as raw materials. Nevertheless, the demand for certain of the Company's services may be adversely affected by the amendment or repeal of federal, state, provincial or foreign laws and regulations or by changes in the enforcement policies of the regulating agencies concerning such laws and regulations. RESULTS OF OPERATIONS The following table presents, for the periods indicated, the results of operations and the percentage relationships which the various items in the Consolidated Statements of Earnings bear to the consolidated revenue from continuing operations:
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------------------------- ---------------------------------------------------------- 1997 1996 1996 1995 1994 ---------------- ---------------- ---------------- ---------------- ---------------- (Canadian dollars in millions) Revenue Metals recovery......... $ 634.4 74.1% $ 163.3 50.5% $ 452.4 56.4% $ 308.8 47.6% $ 217.5 44.4% Industrial services..... 210.4 24.5% 160.1 49.5% 348.3 43.4% 339.5 52.4% 272.2 55.6% Utilities management.... 11.8 1.4% -- -- 1.8 0.2% -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ 856.6 100.0% 323.4 100.0% 802.5 100.0% 648.3 100.0% 489.7 100.0% Operating expenses........ 701.3 81.9% 251.6 77.8% 615.5 76.7% 489.6 75.5% 366.6 74.8% Selling, general and administrative.......... 63.5 7.4% 33.5 10.3% 78.1 9.7% 66.5 10.3% 51.2 10.5% Depreciation and amortization............ 24.1 2.8% 15.4 4.8% 33.9 4.2% 25.5 3.9% 21.4 4.4% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Income from operations.... 67.7 7.9% 22.9 7.1% 75.0 9.4% 66.7 10.3% 50.5 10.3% Interest expense.......... 19.2 2.2% 15.0 4.6% 24.6 3.1% 28.2 4.3% 21.7 4.4% Other income and expense- net..................... (5.5) (0.6)% (2.5) (0.7)% (4.8) (0.6)% (3.7) (0.5)% (2.1) (0.4)% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Earnings from continuing operations before tax... 54.0 6.3% 10.4 3.2% 55.2 6.9% 42.2 6.5% 30.9 6.3% Income taxes.............. 16.4 1.9% 2.7 0.8% 15.2 1.9% 12.4 1.9% 8.8 1.8% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Earnings from continuing operations.............. 37.6 4.4% 7.7 2.4% 40.0 5.0% 29.8 4.6% 22.1 4.5% Discontinued operations (net of tax)............ -- -- 7.2 2.2% (1.0) (0.1)% 2.9 0.4% 2.5 0.5% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Net earnings.............. $ 37.6 4.4% $ 14.9 4.6% $ 39.0 4.9% $ 32.7 5.0% $ 24.6 5.0% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 Revenue. Consolidated revenue in the first half of 1997 of Cdn$856.6 million represented an increase of Cdn$533.2 million or 165% over the first half of 1996. The increase was attributable to internal growth in revenue of approximately Cdn$52.7 million and Cdn$480.5 million from acquisitions. The increase in metals recovery revenue in the first half of 1997 compared to the first half of 1996 was Cdn$471.2 million or 288.5%. The acquisition of two new businesses in the first half of 1997 and four new businesses in late 1996 in the metals recovery group contributed 94% of the increase. Industrial services revenue increased Cdn$50.2 million in the first half of 1997, or 31.4% over the first half of 1996. This increase was generally attributable to higher volumes of waste material being processed by Philip's by-products recovery facilities, although market prices for these services were generally flat compared to the prior year period, and the acquisition of one new environmental service business in the first half of 1997. Operating Expenses. Operating expenses for the first half of 1997 were Cdn$701.3 million, an increase of Cdn$449.7 million or 179% over the same period in 1996. The increase in costs is due mainly to the acquisition of new businesses in late 1996 and the first half of 1997, the results of which were 35 37 consolidated with other Philip operations for the first time in the first half of 1997. As a percentage of revenues, operating expenses increased from 77.8% in the first half of 1996 to 81.9% in the first half of 1997. This increase is the result of newly acquired businesses in the Metals Recovery Group which generally have higher operating expense margins than other service categories. Approximately Cdn$480.5 million of Philip's revenue generated in the first half of 1997 came from these newly acquired businesses which had an operating margin of approximately 7.0%. Selling, General and Administrative Expenses. Selling, general and administrative expenses were Cdn$63.5 million for the first half of 1997, representing an increase of Cdn$30.0 million or 89.7% over the first half of 1996. The increase is attributable to the consolidation for the first time of selling, general and administrative expenses of companies acquired in late 1996 and in the first half of 1997 and to the addition of selling and corporate staff to manage the increased volume of business. However, as a percentage of revenue, selling, general and administrative expenses decreased to 7.4% of revenue in the first half of 1997 compared to 10.3% in the first half of 1996 because the selling, general and administrative costs associated with companies acquired, as a percentage of revenue, were lower than these same costs for existing businesses. Depreciation and Amortization. Depreciation and amortization of fixed assets in the first half of 1997 was Cdn$17.1 million, representing an increase of Cdn$6.8 million or 66.0% over the first half of 1996. This increase was due to acquisitions, to a continued high level of fixed asset additions, and to the full year effect of acquisitions completed by the Company in the prior year. Interest Expense. Interest expense for the first half of 1997 was Cdn$19.2 million, representing an increase of Cdn$4.2 million or 28% over the first half of 1996. This increase was primarily attributable to the increased borrowing to finance the Company's growth by acquisition and fixed asset expansion, together with working capital requirements to support the Company's increased revenue base. Other Income and Expense -- Net. Other income and expense -- net for the first half of 1997 included a Cdn$3.8 million gain before tax on the sale of USA Waste shares received as part of the proceeds on the sale of the municipal and commercial solid waste business. The shares, which were restricted at the time of receipt, were sold by Philip in February 1997 following the removal of the restriction. Income Taxes. Philip's effective income tax rate increased to 30.3% in the first half of 1997 from 26.0% in the first half of 1996, due to a shift in business to higher income tax rate jurisdictions. This effective income tax rate was lower than the Canadian statutory federal rate due to the effect of Philip's significant business in other jurisdictions where rates are generally lower than income tax rates in Canada. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenue. Consolidated revenue in 1996 of Cdn$802.5 million represented an increase of Cdn$154.2 million or 23.8% over 1995. The increase was attributable to internal growth of approximately Cdn$3.2 million and approximately Cdn$151.0 million from acquisitions. The increase in metals recovery revenue in 1996 was Cdn$143.6 million or 46.5%. The acquisition of four new businesses in the metals recovery group contributed approximately Cdn$127.8 million of the increase. The remainder of the increase, or approximately Cdn$15.8 million, came from new contracts or the renewal of existing contracts for the receipt and processing of additional materials. Industrial services revenue increased by approximately Cdn$8.8 million in 1996, or 2.6% over 1995 as a result of higher volumes of material processed by the industrial services group and the acquisition of two businesses that added Cdn$23.2 million compared to the prior year, offset by lower pricing levels generally for this group compared to the prior year and a decline in environmental services revenues of Cdn$15.1 million due to the closing of non-contributing offices in the United States. In addition, a delay in the licensing approval process for the continued use of the Taro landfill site resulted in a decrease in revenue of approximately Cdn$13 million from 1995 levels. The approval was received in the fourth quarter of 1996. 36 38 Operating Expenses. Operating expenses in 1996 were Cdn$615.5 million, an increase of Cdn$125.9 million or 25.7% over 1995. These increased costs resulted from the increased level of business activity in 1996 and from acquisitions completed during the year. Operating expenses as a percentage of revenue increased to 76.7% in 1996 as compared to 75.5% in 1995. The higher operating expenses are a direct result of generally higher expenses in each of metals recovery and industrial services during 1996 and a further shift in the Company's business mix to include a higher percentage of metals recovery business which typically has higher operating expenses. Selling, General and Administrative Expenses. Selling, general and administrative expenses in 1996 were Cdn$78.1 million, representing an increase of Cdn$11.5 million or 17.3% over 1995. The increase in 1996 is in part attributable to the addition of selling and administrative costs of companies acquired during the year and the full year effect of acquisitions completed in the prior year, as well as to an increase in the general sales staff and a general increase in costs over the prior year. As a percentage of revenue, selling, general and administrative expenses decreased to 9.7% in 1996, largely as a result of the increase in revenue. Depreciation and Amortization. Depreciation and amortization of fixed assets in 1996 was Cdn$22.2 million, representing an increase of Cdn$6.5 million or 42% over 1995. This increase was due to acquisitions, to a continued high level of fixed asset additions, and to the full year affect of acquisitions completed by the Company during the prior year. Interest Expense. Aggregate interest expense in 1996 was Cdn$24.6 million, representing a decrease of Cdn$3.6 million or 12.7% over 1995. In May of 1996, the Company issued common shares and used the proceeds to reduce the amount of long-term debt outstanding. In addition, in 1996, all the remaining 6% convertible subordinated debentures were converted into common shares of the Company, further reducing the Company's outstanding debt. Both these factors contributed to a lowering of interest expense in 1996. Income Taxes. For the year ended December 31, 1996, the effective income tax rate for the Company was approximately 28% as compared to an effective income tax rate of 29% in 1995. This effective income tax rate reflects the Company's significant business in other jurisdictions where rates are generally lower than income tax rates in Canada. Income from Discontinued Operations. Income from discontinued operations increased in 1996 to Cdn$6.8 million, principally as a result of the Company having been awarded several new contracts for municipal solid waste collection and disposal which commenced January 1,1996. In 1995, income from discontinued operations was Cdn$2.9 million, compared to the Cdn$2.5 million earned for the year ended December 31, 1994. FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1994 Revenue. Consolidated revenue in 1995 of Cdn$648.3 million represented an increase of Cdn$158.6 million or 32.4% over 1994. The increase was attributable to internal growth in revenue of approximately Cdn$105.6 million and Cdn$53.0 million from acquisitions. The increase in metals recovery revenue in 1995 was Cdn$91.3 million or 42.0%. The acquisition of major new contracts for the receipt and processing of additional materials added approximately Cdn$66.0 million to 1995 revenue, by increasing the volume of copper and brass materials available for processing and sale. Approximately Cdn$10.0 million of the increased revenue was attributable to a 25% increase in production capacity which resulted from the Company opening a wire and cable processing plant in the United States in June 1995. Lastly, an increase in the volume of ferrous scrap sales produced Cdn$9.4 million in additional 1995 revenue. The increase in industrial services revenue in 1995 of Cdn$67.3 million was attributable in part to Cdn$52.0 million in revenue generated by four new businesses acquired in 1995 which were consolidated with the revenue of the Company for the first time. The remainder of the increase was attributable to the full year's consolidation of businesses acquired in the prior year, including Cdn$21.0 million of additional revenue generated by the Delsan group, a company acquired in late 1994, and the increased 37 39 volume of materials handled by and the increased level of other business services provided by this group in 1995. Pricing levels for services rendered by this group were low throughout 1995 reflecting, in part, the over-capacity of processing facilities in the chemical waste disposal market throughout North America. Operating Expenses. Operating expenses in 1995 were Cdn$489.6 million, an increase of Cdn$122.9 million or 33.5% over 1994. These increased costs resulted from the increased level of business activity in 1995, from acquisitions completed in that year and the consolidation for a full year of acquisitions completed in 1994, as well as internal growth. Operating expenses as a percentage of revenue increased from 74.8% of revenue in 1994 to 75.5% of revenue in 1995, due in part to the higher percentage of metals recovery business and lower margins in industrial services than in the prior year. Selling General and Administrative Expenses. Selling general and administrative expenses in 1995 were Cdn$66.5 million, representing an increase of Cdn$15.4 million or 30.0% over 1994. The increase in 1995 is in part attributable to the addition of selling and administrative costs of companies acquired during the year and the full year effect of acquisitions completed in the prior year as well as to an increase in the general sales staff and a general increase in costs over the prior year. As a percentage of revenue, selling, general and administrative expenses decreased to 10.3% in 1995 from 10.5% in 1994, largely as a result of the increase in revenue. Depreciation and Amortization. Depreciation and amortization of fixed assets in 1995 was Cdn$15.7 million, representing an increase of Cdn$2.2 million or 16.5%. This increase was due to acquisitions, a continued high level of fixed asset additions, and to the full year effect of acquisitions completed by the Company during the prior year. Interest Expense. Aggregate interest expense in 1995 was Cdn$28.2 million, representing an increase of Cdn$6.4 million or 29.6% over 1994. This increase was primarily attributable to the increased level of borrowing to finance the Company's growth by acquisition and fixed asset expansion, together with working capital requirements to support the Company's increased revenue base. Income Taxes. For the year ended December 31, 1995, the effective income tax rate for the Company was approximately 29% as compared to an effective income tax rate of 28% in 1994. This effective income tax rate reflects the Company's significant business in other jurisdictions where rates are generally lower than income tax rates in Canada. LIQUIDITY At June 30, 1997, Philip's working capital was Cdn$527.0 million, representing an increase of Cdn$179.5 million over December 31, 1996. Inventory for resale was a significant component of Philip's working capital at June 30, 1997 and increased Cdn$82.0 million over December 31, 1996. Of this increase, Cdn$47.0 million was added through companies acquired since December 31, 1996, Cdn$6.0 million was added by reason of new plant facilities opened since December 31, 1996 and the remainder resulted from inventories acquired in connection with new contracts or renewed contracts entered into by the Metals Recovery Group. In addition, accounts receivable at June 30, 1997 increased by Cdn$80.7 million from December 31, 1996. Accounts receivable acquired as part of new business acquisitions in the first half of 1997 were Cdn$93.3 million while accounts receivable for existing business have decreased due to collection efforts. At June 30, 1997, Philip had long-term debt outstanding of Cdn$692.3 million, which represented 50% of Philip's total capitalization. This compares to Cdn$414.8 million in long-term debt at December 31, 1996, which represented 40% of Philip's total capitalization. In August 1997 Philip entered into a credit facility with a syndicate of lenders which provides for aggregate borrowings of up to US$1.5 billion, which was used to retire an existing credit facility and repay approximately US$130 million of bank debt of Allwaste and Serv-Tech after consummation of the acquisition of each of these companies. As of August 31, 1997, a total of US$817 was drawn under this facility. The Company believes that cash generated from operations, together with amounts available under the Credit Facility will be adequate to meet its capital expenditures and working capital needs for the foreseeable future, although no assurance can be given in this regard. 38 40 The Company's future operating performance will be subject to future economic conditions and to financial, business and other factors that are beyond the Company's control. CAPITAL EXPENDITURES The following table describes the major components of the Company's capital expenditures:
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ------------------ ----------------------------- 1997 1996 1996 1995 1994 ------- ------- ------- ------- ------- (THOUSANDS OF CANADIAN DOLLARS) Equipment additions and replacements........ $33,300 $18,300 $42,800 $28,300 $17,000 Facilities acquisitions..................... 7,500 1,700 3,200 3,600 10,000 Landfill.................................... 3,700 2,800 13,800 5,100 2,900 ------- ------- ------- ------- ------- $44,500 $22,800 $59,800 $37,000 $29,900 ======= ======= ======= ======= =======
The Company's capital expenditure program for the second half of fiscal 1997 is expected to be approximately Cdn$30 million. The Company expects to fund these expenditures by utilizing cash flow generated from continuing operations or by drawing down more funds from the Company's Credit Facility. 39 41 BUSINESS INTRODUCTION The Company is one of North America's leading suppliers of resource recovery and industrial services. The Company has the largest integrated network of metals recovery and industrial services operations in North America, servicing over 50,000 industrial and commercial customers from over 300 locations. The Company applies proprietary technologies to reduce the cost and downtime associated with industrial cleaning and plant turnaround activities, and to recover value from industrial by-products and metal bearing residuals. The Company has achieved its leading position in the metals recovery and industrial services markets through internal growth and through the acquisition and integration of 40 companies since the beginning of 1996. As a result, the Company is viewed as a leading consolidator in the metals recovery and industrial services industries. The Company's primary base of operations is in the United States, with over 70% of the Company's worldwide revenue generated in U.S. dollars for the six months ended June 30, 1997. At September 23, 1997, the aggregate market value of the outstanding Common Shares was $1.974 billion. The Company's business is organized into two operating divisions -- the Metals Recovery Group and the Industrial Services Group. The Metals Recovery Group's three primary business operations are ferrous (steel), copper and aluminum processing and recycling. The ferrous metals operations include the collection and processing of ferrous scrap materials for shipment to steel mills and the provision of related mill services. Ferrous operations also include steel service centers that process and distribute structural steel products. Copper operations are comprised of cold process mechanical recovery facilities, scrap management, management of material recycling centers for the telecommunications industry, and copper refining. The group's aluminum recycling operations process aluminum dross, a by-product of primary aluminum production, and produce aluminum deoxidizing products and alloys from aluminum scrap. Both the non-ferrous and ferrous operations of Philip provide significant brokerage capabilities for scrap materials and primary metals, including steel, copper, aluminum and tin. The Company services the steel, telecommunications, aluminum, wire and cable and automotive industries, as well as utilities. Major customers for the Company's ferrous processing operations include Armco, ASW, Copperweld, Dofasco, Republic, Stelco and Timken. Major customers for the Company's non- ferrous processing operations include AK Steel, Bethlehem Steel, Chrysler Canada, Noranda and Southwire. The Industrial Services Group is the largest integrated provider of on-site industrial services, by-products recovery and environmental services in North America, with a network of over 250 facilities. The Industrial Services Group's operations are divided into four main activities: on-site industrial services, by-products recovery, environmental services and utilities management. On-site industrial services include industrial cleaning and maintenance, waste collection and transportation, container services and tank cleaning, turnaround and outage services, mechanical contracting and refractory services. By-products recovery includes distillation, engineered fuel blending, paint overspray recovery, organic and inorganic processing and polyurethane recycling. Environmental services include strategic resource management, decommissioning, remediation, environmental consulting and engineering, and analytical and emergency response services. Major clients include BASF, Boise Cascade, Chevron, Conoco, Dupont, Ford, General Electric, General Motors, Monsanto, PPG and Shell. For the six months ended June 30, 1997 and 1996 and each of the years in the three year period ended December 31, 1996, the Company's revenue from continuing operations by service category, as well as the percentage of total revenue, was as follows:
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, --------------------------------- --------------------------------------------------- 1997 1996 1996 1995 1994 --------------- --------------- --------------- --------------- --------------- (MILLIONS OF CANADIAN DOLLARS) Metals Recovery...... $634.4 74.1% $163.3 50.5% $452.4 56.4% $308.8 47.6% $217.5 44.4% Industrial Services(1)........ 222.2 25.9 160.1 49.5 350.1 43.6 339.5 52.4 272.2 55.6 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ $856.6 100.0% $323.4 100.0% $802.5 100.0% $648.3 100.0% $489.7 100.0% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
- --------------- (1) Industrial Services revenues include utilities management revenues which, as a percentage of aggregate revenues were 1.4%, 0.0% and 0.2% for the six months ended June 30, 1997, the six months ended June 30, 1996 and the fiscal year ended December 31, 1996, respectively. No revenues were recorded in prior years. 40 42 INDUSTRY OVERVIEW Manufacturers are seeking to improve competitiveness by focusing on their core business and by reducing costs in non-core, non-revenue producing activities. Three key trends that have developed as a result are: (i) increased outsourcing of non-core services, (ii) a reduction by manufacturers in the number of vendors from which outsourced services are purchased and (iii) maximizing resource recovery opportunities from waste and by-product streams. The Company believes that the industrial services and resource recovery industries are positioned to benefit from these three major trends. Many non-core activities can be performed on a more cost effective basis by specialized industrial service and resource recovery providers that have greater expertise, technology advantages, access to markets for recovered materials and economies of scale. As a result, companies which outsource non-core activities are able to lower operating and capital costs, increase access to new technologies, enhance by-product recovery and reduce liabilities by redirecting accountability. In addition, by reducing the number of vendors from which outsourced activities are purchased, and acquiring services from those suppliers that can provide a "total service" solution on a national basis, manufacturers can further lower administrative costs, reduce management overhead, and increase supplier accountability while reducing potential liabilities. Recovery of resources from waste and by-product streams improves manufacturing efficiency by reducing and reusing manufacturing residuals and by-products, thereby lowering operating costs, including raw material costs, and reducing environmental liabilities. As industries continue to outsource additional non-core services and develop close relationships with outside service providers to deliver these on-site services, the result is often a seamless integration between customer and supplier. Companies which can deliver bundled services to these customers realize significant competitive advantages through economies of scale and the opportunity to share research and development and capital costs associated with by-product recovery and outsourcing. According to industry sources, the industrial services and resource recovery market in North America is estimated to be a $50 billion market growing at 10% annually. Metals recovery accounts for 44% of the services to this market, 38% for in-plant services, 10% for chemical recovery and 8% for disposal. The market is fragmented with industry participants ranging from several large companies to thousands of small local companies. Few competitors in the industry offer a full range of resource recovery and industrial services. Most of the almost 20,000 companies supplying this market are specialized regional service providers, often with limited financial resources. In response to the demand for integrated services, the industrial services and resource recovery industry is expected to consolidate rapidly over the next few years. STRATEGY The Company's strategies to realize continued growth from the outsourcing, vendor reduction and resource recovery trends are as follows: Increase sales to existing customers by cross-selling services. The Company's customer base has grown significantly over the last few years, as a result of both internal growth and acquisitions. As a result, the Company possesses a large customer base across diverse industries. However, Philip's metals and by-products recovery operations have historically been concentrated in the steel, telecommunications, automotive, aluminum, chemical and paint industries, whereas many of its newer industrial services customers are in the refining, petrochemical, electric utility, pulp and paper and food processing industries. The Company believes significant growth can be achieved by realizing upon the resultant opportunities to cross-sell its additional service capabilities to its significantly expanded customer base. For instance, the Company foresees that its refinery turnaround services may be sold to the steel, chemical, paint and other process industries. Also, Philip has historically provided paint booth overspray recovery services to the automotive industry, whereas Allwaste provided paint booth cleaning and management services. Pursue strategic acquisitions that will broaden the Company's services to existing customers or in key geographic regions with significant industrial activity. The Company's geographic and service breadth strategy is designed not only to provide a broad range of services nationally, but also to establish 41 43 a leadership position for certain areas of its business in key geographic markets. The Company intends to pursue strategic acquisitions to implement this strategy. For instance, the Company recently acquired Intermetco, the largest ferrous metals recycler in Canada. The acquisition enhances Philip's ability to meet its clients' raw material requirements and deliver additional industrial services and establishes Philip as the largest provider of ferrous scrap to the concentration of steel mills in the Great Lakes region. Continue to vertically integrate its collection, processing and distribution network. Through the acquisition and integration of new businesses, Philip is creating vertically integrated collection, processing and distribution networks in its Metals Recovery and Industrial Services Groups. Such vertical integration of services expands the Company's services package and provides multiple entry points for the sale of services to customers and results in expanded markets for sale of recovered or recycled products. For instance, the acquisitions of Luntz and Intsel added collection and processing of steel scrap, and processing and distribution of finished steel products. These activities add to the Company's integrated services package for the steel industry and provide additional sales entry points to customers. The Allwaste acquisition provides the Company's by-products recovery operations with additional waste and by-product streams that had previously been delivered to third parties for processing and disposal. Consequently, Allwaste can reduce disposal costs for its industrial cleaning and maintenance customers through by-products recovery and recycling. Another recently acquired company, Warrenton Resources Inc. ("Warrenton"), refines copper scrap produced by the Company, thereby enabling the Company to sell its processed scrap into the lower grade commodity markets or refine it and sell it into higher value added markets. Continue to develop and apply innovative process and service technologies. The Company will continue to work in partnership with its customers to develop and apply innovative applied technologies that minimize waste generation, maximize the value of industrial by-products generated and reduce the cost of services provided to customers. Examples of such innovative solutions include: the EPOC paint overspray recovery program for the automotive industry; cryogenic processing of polyvinyl chloride ("PVC") and polyethylene ("PE") plastic residue from cable and wire scrap for recycling; the polyurethane recycling facility developed in association with the BASF Corporation; and the Fast Draw and Fast Clean technologies, which provide remote control extraction and semi-robotic cleaning of heat exchanger bundles, thereby lowering cost and improving safety. COMPETITIVE STRENGTHS The Company believes the following competitive strengths enhance its leadership position in the resource recovery and industrial services sectors: Broadest Range of Integrated Services: Philip offers the broadest range of metals recovery, by-products recovery and industrial and environmental services in the industry. The Company believes it can better assist its clients achieve lower costs and improve operating efficiencies by providing single source solutions. Broad Geographic Network: The Company's broad geographic network, unlike its regional competitors, can support the requirements of its customers throughout North America. This network enables the Company to effectively package and cross-sell services to large North American accounts. Proprietary Technologies: The Company has developed a series of proprietary waste minimization, recovery and industrial cleaning and turnaround processes. These proprietary technologies enable the Company to recover a higher percentage of usable components and reduce both disposal costs and downtime associated with turnaround operations. Leading Consolidator: The industrial services sector is highly fragmented and is undergoing rapid consolidation in response to market demands for vendor reduction and broad geographic service capabilities. Philip is a leading consolidator in the industry as a result of its financial strength, focused strategy and multi-service capabilities. 42 44 BUSINESS UNITS METALS RECOVERY The Company's Metals Recovery Group applies customized process technologies to recover metals from industrial by-products. The group's three primary businesses include ferrous (steel), copper and aluminum processing and recycling. The Company is North America's leading recycler of cable and wire scrap, is the most fully integrated provider of services to the steel industry in North America and is the largest producer of aluminum deoxidizing products, an essential element in the manufacture of steel, in the northeastern United States. The Company is also one of the largest ferrous scrap processors in the United Kingdom. The Metals Recovery Group has approximately 2,000 employees and is headquartered in Hamilton, Ontario. The ferrous metals operations include the collection and processing of ferrous scrap materials for shipment to steel mills and the provision of mill services. Ferrous operations also include steel service centers that process and distribute structural and flat rolled steel products. Copper operations are comprised of cold process mechanical recovery facilities, scrap management and copper refining. The group's aluminum recycling operations produce aluminum deoxidizing products and alloys from aluminum scrap and process aluminum dross, a by-product of primary aluminum production. Both the non-ferrous and ferrous operations of Philip provide significant brokerage capabilities for scrap materials and primary metals, including steel, copper, aluminum and tin. The Company services the steel, telecommunications, aluminum, wire and cable, and automotive industries, as well as utilities. The Company intends to become the North American market leader in delivering integrated metals recovery and related services through regional concentration of its services in areas of high industrial activity, through continued integration of its collection, processing and distribution capabilities and through the development and use of proprietary technology. Set forth below is a description of the operations of the Company's Metals Recovery Group. Ferrous Processing Operations. The Metals Recovery Group is a processor and broker of ferrous scrap to steel mills and foundries located in the lower Great Lakes region, the Pittsburgh-Ohio corridor and in the United Kingdom. As a result of recent acquisitions and capital improvements, the Company's processing capacity has grown from 450,000 tons annually in 1995 to more than four million tons annually. The Company is also the most fully integrated service provider to the North American steel industry, supplying scrap steel, deoxidizing product, electric arc furnace dust management and other services such as mill scale recovery, industrial vacuum, slag recovery, wastewater treatment, decommissioning, and analytical and emergency response services. Ferrous scrap is generated as a by-product of automotive stamping and fabrication and is also derived from post-consumer sources (cars, refrigerators, etc.). It is processed by baling, separation, or shredding during which time the material is graded and sorted. The primary consumer of ferrous scrap is the mini-mill steel industry, which uses electric arc furnace technology to reduce scrap to molten form to produce steel. Production capacity in the mini-mill steel industry is expected to continue to increase and to account for a rising share of overall steel production in North America. This is expected to result in increased demand for high quality ferrous scrap. The Company's operations are regionally concentrated close to industrial scrap producers and other suppliers and to local steel mills. Unlike many of the Company's competitors that secure their supply of ferrous scrap indirectly through ferrous scrap dealers, the Metals Recovery Group obtains most of its ferrous scrap directly from industrial scrap producers pursuant to long standing relationships. Accordingly, the Metals Recovery Group has access to consistent volumes of high quality ferrous scrap from which it can supply the necessary grades and mixtures required by the steel industry. As production capacity of the mini-mill industry continues to increase, the Company believes that its ability to consistently supply required volumes of quality scrap will make it the supplier of choice in the regions it serves, and that the resulting relationships will provide opportunities to sell additional services to such customers. 43 45 The Metals Recovery Group also processes and distributes a broad range of heavy carbon steel products through distribution and processing facilities located in Houston, Texas, and five additional distribution centers located across the southwestern and southeastern United States. The Company is one of the largest distributors of structural steel products in these regions. Through its acquisition of Intermetco, the Company also provides processing of steel coils and produces spiral weld pipe. These operations enable the Company to provide further services to the steel industry through bulk purchases that are inventoried and further processed, cut or formed, for resale to steel purchasers. This service expands the Company's package of integrated services to the steel industry and provides the Company with another entry point through which to sell additional services. The Company has also established itself in the European scrap processing and mill services industry with its recent acquisition of Allied Metals Limited ("Allied Metals") from ASW Holdings PLC ("ASW"). Allied Metals is one of the largest steel scrap processing and mill services companies in the United Kingdom. Allied Metals' principal business involves the collection of post-consumer scrap and the sale of processed metal as a raw material to steel mills and foundries that use electric arc furnace technology. In 1996, Allied Metals processed approximately 670,000 tons of scrap steel. At its heavy media separation facility, Allied Metals uses a proprietary process to recover copper, aluminum and zinc from the residue of its auto shredding operations. Allied Metals' facilities are concentrated in Southwest England and South Wales, from which it supplies local steel mills and foundries and the export market through its two seaport facilities. Approximately two thirds of Allied Metals' sales are domestic and one third to foreign markets, primarily Europe and Asia. The Company also provides on-site slag management and electric arc furnace dust recycling at ASW's steel mill. The Metals Recovery Group sets and adjusts its prices for ferrous metals sold based upon prices set monthly by the major steel producers. The Company manages its commodity price risk by acquiring ferrous metal scrap as it is needed for its customers and maintaining relatively low inventories of scrap and processed metals. Copper Processing Operations. The Metals Recovery Group is North America's leading processor of wire and cable scrap, recycling over 400 million pounds annually. The primary metal recovered is copper. The wire and cable manufacturing industry is the largest generator of scrap wire and cable in North America. Other principal generators include the telecommunications industry (through the dismantling and regeneration of telecommunications lines), utilities and the automotive industry. The availability of wire and cable scrap depends upon a number of factors, including the general level of economic activity in the industries served by the Metals Recovery Group, many of which are cyclical in nature, and market prices for copper and the other metals recovered. The Metals Recovery Group has not historically had difficulties in obtaining volumes of wire and cable scrap. The Metals Recovery Group operates eleven wire and cable scrap processing lines located in Hamilton, Ontario (four lines), Kendallville, Indiana (two lines), Orangeburg, New York (two lines), Ashland Virginia (one line) and Phoenix, Arizona (two lines). Through a proprietary granulation and separation system, the Metals Recovery Group recovers copper and in some cases, aluminum, as well as PVC and PE plastics from wire and cable insulation. Scrap is first chopped into fine pieces and the metallic particles are physically separated from the plastic insulation through a mechanical density process and a proprietary second stage electrostatic separation system. The plastics are separated into PVC and PE polymer streams through water-based separation and a proprietary cryogenic process. The separate polymers are sold to plastic and resin manufacturers instead of being disposed of in landfills, thereby reducing the customer's disposal cost and risk. Through its use of proprietary technology and expertise, the Company believes that its Metals Recovery Group is able to recover more components and generate higher yields from wire and cable scrap than its competitors. Depending on the grade of the material, recovered copper is either sold as #1 or #2 scrap, or refined into prime ingots for sale to brass mills or rod mills, or to copper smelters throughout North America. The Metals Recovery Group also negotiates toll and conversion contracts for its wire and cable manufacturing customers through which scrap materials are exchanged for new raw materials. Under tolling contracts, the Metals Recovery Group receives a fee for processing scrap and returning the 44 46 recovered metals to the customer. Under conversion contracts, the Metals Recovery Group acquires wire and cable scrap from the customer and delivers back, directly or through secondary metals processors, specified amounts of merchant copper and other metals. The Metals Recovery Group also enters into brokerage contracts to supply merchant copper and other metals to significant customers where quantities required exceed the amounts recovered from the scrap supplied. This service results in the customer having to deal with fewer suppliers. The Metals Recovery Group also manages recycling centers for four regional Bell operating companies under multi-year contracts. Under these contracts, the Company collects scrap from the dismantling and regeneration of telecommunications lines, categorizes it, and prepares the scrap for resale. In certain cases, the Company has the first right to purchase the wire and cable scrap, and in other cases the Company is paid a fee for collecting the material and may also bid for the scrap once it is collected. Through recently acquired Conversion Resources Inc. of Cleveland, Ohio ("Conversion Resources"), the Metals Recovery Group also provides resource recovery programs that separate and process copper, brass and aluminum from scrap produced by industrial clients. These metals are then sold to tube mills, brass mills, foundries, specialty consumers and copper refineries. Through recently acquired Warrenton Resources Inc. of Warrenton Missouri ("Warrenton"), the Metals Recovery Group refines copper scrap into copper ingots and other customer specified shapes and is the sole manufacturer of fire-refined copper ingot in North America. Warrenton uses #2 copper scrap as input for the production of its ingots, which is generated from the Company's copper cable and wire chopping operations. As a result of this acquisition, cable and wire scrap processing is vertically integrated to include collection, processing and refining. This integration permits the Company to maximize the value of recovered copper by enabling it to sell either into the lower grade commodity markets or into the higher value added refined copper markets, as market conditions vary. The Company is exposed to commodity price risk during the period that it has title to materials that are held in inventory for processing and/or resale. The Company attempts to reduce its commodity price risk through various methods, including partially matching purchases of recoverable materials with current and future physical sales and the limited use of certain financial instruments. Aluminum Processing Operations. Through its Guelph, Ontario and Syracuse, New York plants, the Company is a leading producer of aluminum alloys for the automotive industry situated in the Great Lakes region. The Company operates furnaces for the production of foundry alloys, primarily from aluminum scrap. The facilities have an annual capacity of 280 million pounds. The use of lightweight aluminum in automotive production continues to increase as manufacturers comply with increasingly stringent fuel consumption and air emission guidelines. The Company's alloys facilities also provide molten aluminum to its customers, primarily automotive parts manufacturers. The Company is one of a small number of molten aluminum suppliers, which requires the use of high cost "crucibles" and specialized vehicles to transport the molten aluminum. This also requires that the Company's facilities be close to those of its customers, which proximity provides a competitive advantage. The Company is also a major producer of aluminum deoxidizing product for the steel industry at facilities located in Painesville, Ohio and Richmond, Virginia. Aluminum deoxidizing product is used in the manufacture of steel to eliminate gas bubbles during the production process. The Company's aluminum deoxidizing product is marketed to over 30 major North American steel mills and provides another essential product offering to steel mills. Production of the aluminum deoxidizing product also supports the vertical integration of the Company's aluminum operations since aluminum recovered from dross provides a raw material for aluminum deoxidizing production. The Metals Recovery Group aluminum processing operations also recover aluminum from dross, a by-product formed in the primary smelting of aluminum. Aluminum producers deliver dross to the Company's rotary kiln furnaces where it is melted and processed to produce aluminum ingots that are returned to the customer for a tolling fee. The Metals Recovery Group operates three rotary kiln furnaces in two locations in the province of Quebec which service the major aluminum producers located within the province. Transportation costs associated with aluminum dross recycling require that the Metals 45 47 Recovery Group's recycling operations be located closely to the primary smelters served. The proximity of the Metals Recovery Group's Quebec operations to the aluminum smelters, in combination with its contractual relationships with the smelters, has resulted in the absence of significant competitors for the Metals Recovery Group's aluminum dross recycling operations. The Metals Recovery Group is the largest recycler of aluminum dross in Canada. INDUSTRIAL SERVICES Through its Industrial Services Group, the Company is the single largest integrated industrial services provider in North America with over 250 locations, over 9,000 employees and a wide range of services geared towards the industrial customer. The Company is the leading provider of on-site industrial services and operates the largest network of solid and liquid industrial by-product recovery facilities. The Industrial Services Group is headquartered in Houston, Texas. The increasing focus by industrial enterprises on their core competencies has led to greater outsourcing of 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 companies which have greater expertise, technology advantages and economies of scale. Such activities include industrial cleaning and maintenance, waste management and transportation, demolition and remediation, and resource recovery. In addition, industrial customers are evidencing a desire to reduce the number vendors of industrial services and to acquire services from those suppliers that can provide a "total service" solution on a national basis, thereby providing further administrative and cost reductions. The Company has expanded rapidly through acquisitions to provide it with the range of products and services and the geographic coverage necessary to respond to these trends. The acquisitions of Allwaste and Serv-Tech have resulted in a significant expansion of Philip's historical by-products recovery and environmental services businesses by adding industrial cleaning and maintenance, container services, waste transportation, refinery turnaround and refactory services. This broader range of services better positions the Company to take advantage of the vendor reduction trend. It has also provided the Company with significant cross selling opportunities to the customer base of each company, since Philip has historically been strong in the steel, telecommunications, automotive, aluminum, chemical and paint industries, whereas Allwaste and Serv-Tech serve the refining, petrochemical, electric utility, pulp and paper and food processing industries. In addition, Allwaste and Serv-Tech were previously reliant upon third parties for processing and disposal of wastes generated from their industrial cleaning and turnaround projects. These waste streams may now be processed at Philip's network of by-product recovery facilities. This integration of on-site cleaning and maintenance with transportation, processing and disposal allows the Company to provide to its customers single source environmental accountability and competitive pricing. The acquisitions of Allwaste and Serv-Tech have also given the Company a significant presence in the heavily industrialized regions of the Gulf coast and southeastern and southwestern United States, which complements Philip's concentration in the Great Lakes and industrial northeast regions. The Industrial Services Group is now organized into five operating regions: Central, Midwest, Northeast, Southeast and Western, each with a mandate to provide the complement of industrial services to customers in that region. In addition, many of the Company's specialized services are marketed across all regions by specialized groups through the coordination of sales, analysis, delivery and execution, and technical support. These specialized services include demolition and decommissioning services, turnaround services, chemical services and products, analytical laboratories, container services and tank cleaning. The Industrial Services Group is divided into four principal segments: on-site industrial services, by-products recovery operations; environmental services and utilities management. On-Site Industrial Services. The Industrial Services Group is a leading provider of on-site industrial services throughout North America. Industries served include the refining, petrochemical, oil and gas, electric utility, pulp and paper, automotive, food processing, paint and coatings, and transportation industries. The Industrial Services Group provides industrial and commercial customers with a range of 46 48 industrial and environmental services, including on-site industrial cleaning and maintenance (including hydroblasting, gritblasting, air-moving and liquid vacuuming and container services, and tank cleaning); waste collection and transportation; turnaround and outage services; refactory services; project management services; inspection and analysis services; electrical and instrumentation; and other general plant support services. Hydroblasting is performed using high pressure pumps to remove hard deposits from surfaces, such as heat exchangers, boilers, aboveground storage tanks and pipelines, that may be unsuitable for other conventional cleaning techniques. Gritblasting utilizes both abrasive and non-abrasive media to clean surfaces on electrostatic precipitators and boilers and to prepare metal surfaces for protective coatings and non-destructive testing. Air-moving and liquid vacuuming remove and handle industrial wastes or salvageable materials contained in customers' tanks, containers or other process configurations. Container services include cleaning, inspection and repair of highway tank-trailers, railcar tanks, intermodal containers and intermediate bulk containers. The Industrial Services Group also inspects all cleaned containers, in accordance with applicable governmental regulations, to ensure no product or moisture remains in the cleaned container. The Company believes that its container cleaning and repair service business is the largest noncarrier operation in the industry in terms of total revenues and number of containers serviced. Tank cleaning involves the removal of sludge and residual products from the interior of storage tanks to allow inspection, repair and/or product changeover. The Industrial Services Group is the largest cleaner of above ground storage tanks in North America. The Company believes that the Industrial Services Group has the most comprehensive mix of tank cleaning technologies and service capabilities of any contractor in North America. Waste collection and transportation services provide comprehensive on-site by-product and waste management programs for facility waste streams. Waste is tested and classified in order to determine the recyclability of the material and third party disposal requirements. Manifests and other shipping documentation are prepared and the waste material is sent to the Company's recycling and reclamation facilities wherever possible, or to contracted third party treatment and disposal facilities. The Industrial Services Group operates a large fleet of collection vehicles. Turnaround and outage services provide customers in refineries, petrochemical facilities and power plants a single source integrated package of turnaround maintenance services and other specialty services for the scheduled maintenance, repair or replacement of process equipment, operating machinery and piping systems. Sophisticated maintenance programs play an increasingly important role in the continuous improvement of performance in plant operations. Services provided include project management, planning and scheduling, decontamination, heat exchange maintenance, refactory services and heat treating services. The Company is a North American leader in providing turnaround services to the petrochemical industry. This is largely due to its patented technologies that reduce labor costs and turnaround costs, including those associated with the cost of down-time. These technologies also significantly reduce the safety risks associated with heat bundle extraction and cleaning. The Company intends to expand the application of these technologies to other key industry sectors, including steel, chemicals and utilities. By-Products Recovery. The Industrial Services Group's by-products recovery operations apply customized process technologies to recover or create useable products from liquid and solid industrial by-products (primarily hazardous and non-hazardous chemical waste) and thereby reduce the cost and quantity of materials destined for final disposal. The Industrial Services Group collects organic industrial by-products which are processed into engineered fuels or distilled into solvents and also provides on-site waste minimization and inorganic waste processing. Producing engineered fuels involves the blending of liquid and solid industrial by-products into a customized fuel for use in industrial furnaces, principally cement kilns. Distillation of spent solvents occurs through both simple and fractional methods with recovered solvents either returned to the generator or sold to the automotive aftermarket. Inorganic processing capabilities include the treatment of waste waters and cyanide residuals, and the recovery of metals from sludges, slags and foundry 47 49 sands. The Industrial Services Group also provides wastewater treatment, sludge management and paint overspray recovery services to automotive and parts manufacturers that use paint spray booth systems. The revenue of the by-products recovery operations is derived from the fees paid to the Company by generators of industrial by-products or waste, from the sale of recovered materials or from tolling fees charged to customers for services rendered. The operations provide services to in excess of 15,000 customers, primarily from the automotive, petrochemical, paint and coatings and aviation industries and the military. Company activities include the following:
INDUSTRY SERVED BY-PRODUCT KEY REUSABLE PRODUCT REUSE APPLICATION - ------------------- ---------------------- --------------------- ------------------------------ Air pollution Baghouse dust Iron, calcium Cement component control.......... After-automotive Oil filters and oily Oil, steel, metals Fuel supplement; oil recovery; and industrial water secondary metals recovery; markets.......... steel production Automotive Grinding swarf Steel Steel production Paint overspray Solvents, resin Adhesives; fuel recovery Polyurethane Polyols Automotive parts scrap Automotive, Solvent-laden Solvents/high Engineered fuel chemical sludges and BTU material supplement; solvent recovery industries and solids small quantity generators Chemical industry Off-spec carbon Carbon black Fuel supplement; reducing black agent for pyrol processing Commercial and Spent chlorinated Solvents Commercial and industrial industrial solvents cleaning; cement component cleaning Plating industry Inorganic sludges Zinc phosphate, Fertilizer; secondary metals non-ferrous recovery metals Steel industry Steel sludges, Ferrous metal, iron, Steel production; cement and mill scale, silica, brass aggregate component foundry sands
The Company's network of facilities and application of proprietary technologies enables Philip to process higher volumes of by-products at reduced cost. By developing new technologies or customizing available technologies, the Company has achieved competitive processing and recovery efficiencies. For example, the Company has developed a container processing system which enables it to handle large volumes of drummed by-products quickly and effectively. The system operates in an inert atmosphere using automatic control and video monitoring to empty or shred drummed by-products, which are then transferred to feed storage tanks where product separation is controlled. Supplemental fuels can then be blended from this material. By using this technology, the by-products recovery facilities in Detroit and South Carolina can each process approximately 15,000 drums of material per month. Philip has also established an engineered fuel processing system ("Super Blender"), which emulsifies solids with liquid chemical by-products and suspends these solids in a supplemental fuel for industrial use. Through this process, the Company produces a supplemental fuel that contains up to 50% solids by weight, providing its customers a more environmentally suitable and lower cost alternative to the disposal of solid hazardous waste. Super Blenders are located at the Company's Detroit, Kansas City and South Carolina facilities. 48 50 Solid and liquid chemical and industrial waste residues constitute the bulk of materials managed by the by-products recovery operations. The hazardous waste management industry, which provides disposal services, including incineration and hazardous waste landfills, is a significant competitor to the Company for by-product waste streams. As a result of overbuilding and the success of its customer's waste minimization efforts, significant excess capacity has developed in the hazardous waste management industry, leading to downward pricing pressures in the markets served by the Company's by-products operations. To counter this situation, the Company continues to develop and employ innovative technologies that minimize on-site waste generation for its customers and maximize the value and reuse opportunities for industrial by-products. By developing increasingly value-added applications for the materials it manages, in partnership with its key industrial customers, the Company maximizes its margins and differentiates itself from conventional disposal alternatives. Examples of this strategy include the patented Emulsion for Paint Overspray Control ("EPOC") system installed at automotive and equipment manufacturing facilities. In consultation with automotive manufacturers, the Industrial Services Group developed the EPOC system for paint overspray recovery. This technology eliminates the need to landfill paint sludge, a significant waste stream and production bottleneck in automotive manufacturing. The system captures paint overspray in an emulsion and then recovers for reuse the active ingredient in the emulsion, together with the residual paint, at the Company's dedicated processing facility. The EPOC system improves the efficiency of the painting process and reduces costs by eliminating build up in the paint booth and decreasing paint usage. The EPOC system is used in over 20 parts manufacturing and automotive assembly plants throughout the United States, including automotive production facilities where the Company provides on-site operating personnel. A further example is the Company's association with BASF Corporation ("BASF") to recycle rigid polyurethane for the automotive sector. Approximately 2.5 million tons of polyurethanes are produced annually in North America. The majority are used in flexible foam systems of which approximately 800 million pounds are recycled. Molded parts made from rigid polyurethanes such as bumpers, interior panels and steering wheels are not recycled and are disposed of in landfills. Philip has been chosen by BASF to build and operate the first polyurethane recycling facility in North America, using BASF technology. This Detroit based facility has an initial processing capacity of 10 million pounds per year. At the facility, polyurethane scrap is ground, chopped and added to a reactor containing solvents such as glycol, catalysts and other ingredients. It is then thermally treated and cooled to ambient temperature. The polyol produced from this process can be used as a virgin material in rigid polyurethane applications. Philip also owns a rock quarry covering approximately 190 acres in Stoney Creek, Ontario ("Taro-East"). Philip has received regulatory authority to utilize the Taro-East site as an industrial non-hazardous landfill with a total capacity of 11 million tons and an annual fill rate of 825,000 tons. The site is used for the disposal of solid non-hazardous residuals from the Company's by-products management and recovery operations located in Hamilton, Ontario. Environmental Services. The Company's environmental services operations include a broad range of remediation and environmental services, including strategic resource management, site remediation, decommissioning and investment recovery, abatement, environmental consulting and engineering, and analytical and emergency response services. Site remediation includes project management, risk assessment, demolition, on-site treatment and transportation services to address environmental contamination problems. Remediation can range from simple soil excavation and disposal to complex programs that in some cases involve assumption by the Company of management of all aspects of its customers' environmental and regulatory programs. Combined with investment recovery, the Industrial Services Group's site remediation services not only address environmental problems and support the closure and decommissioning of facilities, they can generate revenue for customers. Decommissioning involves the closing down of operations, removal of process equipment, buildings and structures and site cleanup and remediation. The Industrial Services Group provides project planning and management, including design, planning and control, health and safety, waste reduction, demolition, and final site rehabilitation. All decommission projects start with an investment recovery audit. The 49 51 Company's extensive resource and by-products recovery capabilities enables it to recover value from process equipment, building components, and ferrous and non ferrous metals. Proceeds from the sale of these materials reduce the cost of demolition and decommissioning for its customers. The Industrial Services Group operates the largest network of environmental laboratories in Canada, from which it provides analytical testing for its customers across North America and from as far away as Japan. The Company provides advanced air quality analysis and dioxin testing. The Industrial Services Group also provides emergency response services, including containment, clean-up, remediation and disposal of material resulting from the inadvertent release of dangerous goods, hazardous materials, wastes or spills of material that are unusual to the environment in quantity or quality. The Company is the largest emergency response provider in Canada and is the designated responder for its U.S. customers which bring material into Canada for processing disposal. The competitive strengths of the Company's environmental services operations include its ability to provide integrated cost competitive "back end" solutions, such as decommissioning, remediation and investment recovery, to problems identified through the risk assessment and consulting services phase of the contract. Remediation services focus on proven technical solutions, such as the treatment of solvent contamination by methane injection, and other acquired or developed technologies. Utilities Management. The Company provides turnkey wastewater treatment at customers' facilities, including design, procurement, installation, start-up and operation. The Company is able to design and construct economical and efficient treatment systems and provide a guarantee of performance and assurance of operability. The Company has operational responsibility for over 30 industrial wastewater treatment facilities. A portion of the Company's utilities management business is operated through 70%-owned Philip Utilities Management Corporation ("PUMC"), which designs, builds, operates and manages municipal water and wastewater treatment facilities. PUMC has contracts with eight Ontario municipalities to operate and manage their water and wastewater treatment facilities. PUMC has a 51% interest in Southwest Utilities Inc., the sole provider of water services to a number of communities located within a 75-mile radius of Houston, Texas, and an operator of two wastewater treatment plants. PUMC also designs and installs supervisory control and data acquisition systems which increase operating efficiencies of water and wastewater treatment plants and reduce emergency maintenance and overtime costs. The Company also specializes in water and sewer pipeline rehabilitation and maintenance and services the rapidly growing North American market for trenchless technologies. Trenchless technologies allow pipeline repairs to take place through entry and exit points, rather than excavation of entire pipelines. This results in lower costs and reduces interruption of services. The Company holds eight trenchless technology licenses that cover locations throughout North America. The Company also cleans commercial and industrial pipelines using high-pressure water systems and provides pipeline inspection, survey and mapping services using closed-circuit television and licensed asset management software. CDM Philip, a joint venture owned 80% by PUMC and 20% by Camp Dresser & McKee Inc., a large U.S. engineering firm, recently announced that it had signed a twenty-five year contract to design, build and operate a water treatment facility for the city of Seattle. The Seattle contract is the largest water treatment design, build and operate contract in North America. The design and build component of the project is valued at $68 million and is expected to take three years to complete. PROPRIETARY TECHNOLOGY The Company develops and applies proprietary technologies to provide on-site waste minimization, by-products recovery and industrial services that reduce customer costs, safety risks and potential environmental liabilities. In its Metals Recovery Group, the Company applies proprietary technology to obtain better yields from scrap and by-products and to develop further uses for material that would otherwise be landfilled. Development and use of this technology increases margins, reduces environmental risk for the Company and its customers and adds to the integrated package of services provided by the Company, making it 50 52 more attractive as a single source vendor. For example, the Company's second stage electrostatic separator used in its copper recovery operations increases the percentage of copper or aluminum recovered from cable and wire scrap. This results in a higher yield of both the metal and plastics streams. The Company's cryogenic process for separating plastics resins is also proprietary and further increases margins. As this material is regulated as a hazardous waste in the United States, the reduction of landfill volumes also represents a reduction of the disposal cost and liability for the generator. Through a joint venture with Harbison Walker Refactories, the Company has developed a technology to process the residual material from its dross operations into calcium aluminate, which acts as a slag conditioner in steel production. This process increases yield and margin from the dross operations, provides an alternative to disposal for its customers in the aluminum industry and adds to the Company's integrated steel services portfolio. The Company's Industrial Services Group applies proprietary technologies to minimize waste, increase recovery and reuse of industrial by-products and provide on-site industrial services that minimize downtime and costs associated with industrial cleaning, maintenance and turnaround projects. These technologies include engineered fuel blending, using a "Super Blender" to emulsify solid and liquid chemical by-products into a fuel for cement kilns; the EPOC paint overspray recovery system that reduces paint usage and eliminates the landfilling of paint sludge; and the Company's association with BASF to recycle rigid polyurethane, primarily generated from automotive production and automotive scrap, into polyols for reuse in polyurethane applications. Turnaround technologies primarily for the petrochemical and oil and gas industries include Fast Draw, a remote control heat exchanger bundle extraction technology; Fast Clean, a semi-robotic heat exchanger bundle cleaning process, and Life Guard, a technology for decontaminating hydrocarbons in refinery towers and vessels to reduce potential health and safety impacts during cleaning and maintenance activities. 51 53 The following table outlines certain of the Company's proprietary technologies.
TECHNOLOGY APPLICATION COMPETITIVE ADVANTAGE INDUSTRY SERVED - --------------------- -------------------- ----------------------- ---------------------- Fast Draw Remote control Reduced turnaround Petrochemical; extraction of heat time and labor; Hydrocarbon exchanger bundles Enhanced safety processing Fast Clean Semi-robotic Reduced turnaround Petrochemical; cleaning time and labor; Hydrocarbon of heat exchanger Enhanced safety processing bundles Life Guard Decontamination of Elimination of personal Petrochemical; hydrocarbons in safety risks; Hydrocarbon refinery towers and Improved heat transfer processing vessels performance WeldSmart Welding; Reduces energy All welding Heat treatment consumption and applications increases productivity EPOC Paint overspray Reduces paint usage Automotive and capture and and eliminates equipment recovery landfilling of paint manufacturers sludge Super Blender Processing of solid Reduces disposal costs Petrochemical; and liquid by- and eliminates Paint; products into landfilling; Automotive; engineered fuels Low cost fuel to cement Cement industry Plastics Recycling Cryogenic processing Alternative to disposal Cable and wire; to separate PVC of cable and wire Telecommunications and PE polymer insulation streams Calcium Aluminate Processes aluminum Eliminates landfilling; Aluminum; Recovery dross residuals for Raw material for steel Steel reuse manufacturing Electric Arc Furnace Thermal treatment of Eliminates landfilling Steel ("EAF") Dust EAF to produce and reduces disposal Recycling zinc concentrate costs Rigid Polyurethane Thermal/chemical Eliminates landfilling; Automotive; Recycling processing of rigid Supports "recyclable Polyurethane polyurethane car" objective of applications automotive parts automotive into virgin polyols manufacturers
Although the Company possesses patents for certain of the above technologies, it relies primarily on trade secret protection and confidentiality to protect its proprietary technology. While the time and capital investment associated with these technologies provide a barrier to entry, there can be no assurance that the Company will be able to maintain the confidentiality of this technology. 52 54 SALES AND MARKETING The Company's sales and marketing strategy is focused on establishing close working relationships with customers, developing a thorough understanding of their business, working jointly on research and development to achieve waste reduction and by-products recovery efficiency, and bundling services to achieve maximum efficiencies and cost reductions for customers. Philip strives to become an integral part of its customers business through redesigning process technologies, operating resource recovery facilities and delivering a broad range of industrial outsourcing services. The Company's relationship managers, who are assigned to industrial accounts, are critical to the success of the sales and marketing program. These individuals are responsible for managing all aspects of service delivery to that customer, ensuring the customer has one point of contact for information, service and accountability. This individual then consults other Company specialists drawing upon their expertise as required to provide information and implement a broad range of services. The Company places less emphasis on traditional sales approaches, and more on cross selling a broad range of services to its existing large industrial customer base. Through its acquisition program, the Company has established a large customer base in all key industrial sectors. Through the integration process, the Company identifies services it is providing these customers and opportunities for additional cross-selling. This process is carried out in conjunction with the sales or operating personnel in the acquired company who have relationships with these customers. The Company also participates in competitive bidding processes to obtain contracts granted by municipalities, local governments or private enterprises for services such as site redemption and decommissioning contract services. Contracts are generally awarded on the basis of sealed bids submitted by interested bidders, and competition for these contracts is generally intense. CUSTOMERS Philip provides a broad range of metals recovery and industrial services to major industry sectors including aluminum, automotive, chemical, food and beverage, oil and gas, paint and coatings, petrochemical, pulp and paper, steel, telecommunications, transportation, utilities, and wire and cable. The Company's steel scrap processing and mill services operations serve customers in the steel industry, while the processing and distribution operations primarily serve industrial and commercial construction clients and manufacturing industries such as barge and ship building; copper processing operations purchase materials from the cable and wire, automotive and telecommunications sectors and provide processed copper and materials management services to brass and copper mills, and the cable and wire, automotive and telecommunications industries; and aluminum processing operations purchase materials from primary smelters and industrial aluminum scrap generators and supply aluminum deoxidizing product, secondary aluminum alloys and recovered aluminum ingots to the steel, automotive and aluminum industries, respectively. The Company's industrial services cross a number of industry sectors, primarily automotive, refining and petrochemical, oil and gas, pulp and paper, steel, transportation and utilities. Major clients for the Company's ferrous processing operations include Armco, ASW, Copperweld, Dofasco, Republic Engineered Steels, Stelco and Timken. Major customers for the Company's non-ferrous processing operations include AK Steel, Bethlehem Steel, Chrysler Canada, Noranda and Southwire. Major customers for the Company's industrial services include BASF, Boise Cascade, Chevron, Conoco, Dupont, Ford, General Electric, General Motors, Monsanto and Shell. No customer accounts for more than 5% of the Company's consolidated revenue. Philip seeks to enter into Master Service Agreements with large customers to establish the Company as an approved vendor. Master Service Agreements are a primary vehicle for large companies to reduce their suppliers, while concurrently establishing high standards of service delivery with fewer suppliers which can provide more services, and which are financially strong and geographically diverse. In some cases, these agreements approve less than three suppliers in the area of resource recovery and industrial services, providing the Company with a strong competitive advantage. In other cases, a number of 53 55 suppliers are approved and the Master Service Agreement serves only to assist the Company in selling its services on a plant by plant basis. Philip has entered into twenty-four national Master Service Agreements to date with such companies as ARCO, BASF, Canadian National Railways, Dupont, General Electric, Northrop-Grumman, Valspar and Weyerhauser. These Master Service Agreements provide the Company with significant opportunity to package and cross-sell a number of services to large national accounts. COMPETITION The resource recovery and industrial services industries are highly competitive and require substantial capital resources. Competition is both national and regional in nature and the level of competition faced by the Company in its various lines of business is significant. Potential customers of the Company typically evaluate a number of criteria, including price, service, reliability, prior experience, financial capability and liability management. In servicing its customers, the Company believes its primary competitive strengths are: (i) that it offers the broadest range of metals recovery, by-products recovery and industrial and environmental services in the industry; (ii) its broad geographic network; (iii) its proprietary technologies; and (iv) the fact that it is a leading consolidator in the industry due to its financial strength, focused strategy, and multi-service capabilities. Although the Company believes it is the leading integrated provider of metals recovery and industrial services in North America, it competes with a variety of companies that may be larger in particular business lines in which the Company operates. The primary competitors of the Metals Recovery Group are other scrap processors in regions where the Metals Recovery Group operates. Although the Metals Recovery Group competes in both the purchase and sale sides of its businesses, competition is primarily on the purchase side for access to scrap, which may become more intense during times of scrap scarcity. Availability depends upon the level of economic activity in the industries from which the Company acquires its scrap, and market prices. The Company believes that its longstanding relationship with generators of metal bearing scrap give it an advantage over its competitors, a majority of which purchase scrap from dealers. In its ferrous metals processing operations, the Company competes for access to scrap with a small number of larger regional operators as well as a large number of smaller operators. In its copper operations the Metals Recovery Group competes for scrap with a limited number of regional competitors in the regions that it serves. The Company enhances its competitive position through the use of proprietary technology to separate and recycle the polymer streams, thereby providing additional service and reducing landfilling costs and liability for the scrap producing customer. The Company's aluminum dross recycling operations face limited competition due to their geographic proximity to the primary aluminum refiners. In its aluminum alloys business, the Company faces substantial competition for aluminum scrap from a number of larger competitors, including primary refiners. One advantage the Company has is that it generates substantial amounts of aluminum scrap internally through its ferrous operations (e.g., automobile engine blocks). In the Company's aluminum deoxidizing product business, the Company competes for scrap supply with a number of smaller regional competitors. On the sales side of the Metals Recovery Group, the Company seeks to enhance its competitive position by enhancing the efficiency of its operations through economies of scale and increased recovery rates, thereby lowering its costs, which increase margins and give it pricing flexibility. The Company also accompanies its product sales with a broad range of services, or vertically integrates its operations to gain access to multiple markets. In its ferrous operations, the Company's acquisitions have resulted in economies of scale that generate efficiencies in its delivery capabilities. The Company has constructed a shredder with an annual capacity of 750,000 tons in Hamilton, Ontario which enables the Company to process volumes faster and process especially heavy steel that traditional shredders cannot handle. The Metals Recovery Group also competes on the sale side by offering a more secure supply of high quality scrap than a majority of its competitors and by providing a broad range of additional mill services. In its copper operations, the Metals Recovery Group's products are generally sold into commodity markets where prices are set by the marketplace. However, the Company competes through its use of proprietary technology to maximize yield and margins. In addition, through the recent acquisition of Warrenton, the Company now has the alternative of selling its processed scrap into the lower grade commodity markets 54 56 or refining it and selling it into the higher value added markets, as market conditions vary. In the Company's alloys business, the Company competes against two competitors whose alloy operations are larger than those of the Company. The Company differentiates itself through its ability to supply molten aluminum and a broad range of alloy types. In the aluminum deox business, the Company competes against a number of smaller regional competitors. The Company believes that the size of its operations and the broad range of aluminum deoxidizing products it supplies provide it with a competitive advantage. The industrial services sector is also highly competitive and fragmented. The Company competes with numerous local, regional and national companies of varying sizes and financial resources. Competition for industrial services is based primarily on hourly rates, productivity, safety, innovative approaches and quality of service. The hazardous waste management industry competes with the Company's industrial services operations by providing a price competitive disposal alternative to a number of the Company's waste management and by-products recovery services. The hazardous waste management industry currently has substantial excess capacity caused by overbuilding, continuing efforts by hazardous waste generators to reduce volumes and to manage their waste on-site, and the uncertain regulatory environment regarding hazardous waste management and remediation requirements. These factors have led to downward pressure on pricing in a number of the markets served by the Company's industrial services operations. The Company expects these conditions to continue for the foreseeable future. The Company competes by developing and employing innovative technologies that minimize on-site waste generation for its customers and maximize the value and reuse opportunities for the industrial by-products. Through developing increasingly value-added applications for the materials it manages, in partnership with its key industrial customers, the Company maximizes its margins and differentiates itself from conventional disposal alternatives. Examples of this strategy include the patented EPOC system installed at automotive and equipment manufacturing facilities, and the Company's association with BASF to recycle rigid polyurethane for the automotive sector. GOVERNMENT REGULATION The Company is subject to government regulation including stringent environmental laws and regulations. Among other things, these laws and regulations impose requirements to control air, soil and water pollution, and regulate health, safety, zoning, land use and the handling and transportation of industrial by-products and waste materials. This regulatory framework imposes compliance burdens and costs on the Company. Notwithstanding the burdens of this compliance, the Company believes that its business prospects are enhanced by the enforcement of laws and regulations by government agencies. Applicable federal and state or provincial laws and regulations regulate many aspects of the resource recovery and industrial services industry. Laws and regulations typically provide operating standards for treatment, storage, management and disposal facilities and monitoring and spill containment requirements and set limits on the release of contaminants into the environment. Such laws and regulations, among other things, (i) regulate the nature of the industrial by-products and wastes that the Company can accept for processing at its treatment, storage and disposal facilities, and the nature of the treatment they can provide at such facilities and the location and expansion of such facilities; (ii) impose liability for remediation and clean-up of environmental contamination, both on-site and off-site, resulting from past and present operations at the Company's facilities; and (iii) may require financial assurance that funds will be available for the closure and post-closure care of sites. Such laws and regulations also require manifests to be completed and delivered in connection with any shipment of prescribed materials so that the movement and disposal of such material can be traced and the persons responsible for any mishandling of such material identified. In particular, the regulatory process requires the Company to obtain and retain numerous governmental approvals, licenses and permits to conduct its operations, any of which may be subject to revocation, modification or denial. Operating permits need to be renewed periodically and may be subject to revocation, modification, denial or non-renewal for various reasons, including failure of the Company to satisfy regulatory concerns. Adverse decisions by governmental authorities on permit applications submitted by the Company may result in abandonment or delay of projects, premature closure of facilities 55 57 or restriction of operations, all of which could have a material adverse effect on the Company's earnings for one or more fiscal quarters or years. Federal, state, provincial, local and foreign governments have also from time to time proposed or adopted other types of laws, regulations or initiatives with respect to the resource recovery and industrial services industry. Included among them are laws, regulations and initiatives to ban or restrict the international, interprovincial, intraprovincial, interstate or intrastate shipment of wastes, impose higher taxes on out-of-state-waste shipments than in-state shipments, reclassify certain categories of non-hazardous wastes as hazardous and regulate disposal facilities as public utilities. Certain state and local governments have promulgated "flow control" regulations, which attempt to require that all waste generated within the state or local jurisdiction must go to certain disposal sites. From time to time legislation is considered that would enable or facilitate such laws, regulations or initiatives. Due to the complexity of regulation of the industry and to public pressure, implementation of existing or future laws, regulations or initiatives by different levels of governments may be inconsistent and are difficult to foresee. Also subject to regulation are spills of certain industrial by-products and waste materials. While the specific provisions of spills related laws and regulations vary among jurisdictions, such laws and regulations typically require that the relevant authorities be notified promptly, that the spill be cleaned up promptly and that remedial action be taken by the responsible party to restore the environment to its pre-spill condition. Generally, the governmental authorities are empowered to act to clean up and remediate spills and environmental damage and to charge the costs of such clean-up to one or more of the owners of the property, the person responsible for the spill, the generator of the contaminant and certain other parties. Such authorities may also impose a tax or other liens to secure such parties' reimbursement obligations. The Company's facilities are subject to periodic unannounced inspection by federal, provincial, state and local authorities to ensure compliance with license terms and applicable laws and regulations. The Company works with the authorities to remedy any deficiencies found during such inspections. If serious violations are found or deficiencies, if any, are not remedied, the Company could incur substantial fines and could be required to close a site. See "Business -- Legal Proceedings." Environmental laws and regulations impose strict operational requirements on the performance of certain aspects of hazardous substances remedial work. These requirements specify complex methods for identification, storage, treatment and disposal of waste materials managed during a project. Failure to meet these requirements could result in termination of contracts, substantial fines and other penalties. Governmental authorities have a variety of administrative enforcement and remedial orders available to them to cause compliance with environmental laws or remedy or punish violations of such laws. Such orders may be directed to various parties, including present or former owners or operators of the concerned sites, or parties that have or had control over the sites. In certain instances, fines may be imposed. In the event that administrative actions fail to cure the perceived problem or where the relevant regulatory agency so desires, an injunction or temporary restraining order or damages may be sought in a court proceeding. In addition, public interest groups, local citizens, local municipalities and other persons or organizations may have a right to seek relief from court for purported violations of law. In some jurisdictions recourse to the courts for individuals under common law principles such as nuisance have been or may be enhanced by legislation providing members of the public with statutory rights of action to protect the environment. In such cases, even if an industrial by-products or waste materials treatment, storage or disposal facility is operated in full compliance with applicable laws and regulations, local citizens and other persons and organizations may seek compensation for damages caused by the operation of the facility. While, in general, the Company's businesses have benefited substantially from increased governmental regulation, the resource recovery and industrial services industry in North America has become subject to extensive and evolving regulation. The Company makes a continuing effort to anticipate 56 58 relevant material regulatory, political and legal developments, but it cannot predict the extent to which any future legislation or regulation may affect its operations. The Company believes that with heightened legal, political and citizen awareness and concerns, all companies in the resource recovery and industrial services industry may be faced, in the normal course of operating their businesses, with fines and penalties and the need to expend funds for capital projects, remedial work and operating activities, such as environmental contamination monitoring, and related activities. Regulatory or technological developments relating to the environment may require companies engaged in the industrial services and resource recovery industry to modify, supplement or replace equipment and facilities at costs which may be substantial. Because the businesses in which the Company is engaged are intrinsically connected with the protection of the environment and the potential discharge of materials into the environment, a substantial portion of the Company's capital expenditures is expected to relate, directly or indirectly, to such equipment and facilities. Moreover, it is possible that future developments, such as increasingly strict requirements of environmental laws and regulations, and enforcement policies thereunder, could affect the manner in which the Company operates its projects and conducts its business, including the handling, processing or disposal of the industrial by-products and waste materials generated thereby. HAZARDOUS SUBSTANCES LIABILITY Canadian and U.S. laws impose liability on the present or former owners or operators of facilities which release hazardous substances into the environment. Furthermore, companies may be required by law to provide financial assurances for operating facilities in order to ensure their performance of obligations complies with applicable laws and regulations. Similar liability may be imposed upon the generators and transporters of waste which contain hazardous substances. All such persons may be liable for waste site investigation costs, waste site clean-up costs and natural resource damages, regardless of fault, the exercise of due care or compliance with relevant laws and regulations; such costs and damages can be substantial. In the United States, such liability stems primarily from CERCLA and its state equivalents (collectively, "Superfund") and RCRA and similar state statutes. CERCLA imposes joint and several liability for the costs of remediation and natural resource damages on the owner or operator of a facility from which there is a release or a threat of a release of a hazardous substance into the environment and on the generators and transporters of those hazardous substances. Under RCRA and equivalent state laws, regulatory authorities may require, pursuant to administrative order or as a condition of an operating permit, that the owner or operator of a regulated facility take corrective action with respect to contamination resulting from past or present operations. Such laws also require that the owner or operator of regulated facilities provide assurance that funds will be available for the closure and post-closure care of its facilities. Since the Company has operations in, and has shipped and continues to ship hazardous waste to disposal sites in the United States, the Company is exposed to potential liability in the United States under RCRA, CERCLA and their state law equivalents resulting from the handling and transportation of such wastes and for alleged environmental damage associated with past, present and future waste disposal practices. The Company is aware that hazardous substances are present in some of the landfills and transfer, storage processing and disposal facilities used by it. Certain of these sites have experienced environmental problems and clean-up and remediation is required. The Company has grown in the past (and expects to continue to grow in part in the future) by acquiring other businesses. As a result, the Company has acquired, or may in the future acquire, landfills and other transfer and processing sites which contain hazardous substances or which have other potential environmental problems and related liabilities, and may acquire businesses which may in the future incur substantial liabilities arising out of their respective past practices, including past disposal practices. Certain of Philip's and its U.S. subsidiaries' transfer, storage, processing and disposal facilities are contaminated as a result of operating practices at the sites, and remediation will be required at a substantial cost. Investigations of these sites have characterized to varying degrees the nature and extent of the contamination. Philip and these subsidiaries, in conjunction with environmental regulatory 57 59 agencies, have in some instances commenced to remediate the sites in accordance with approved corrective action plans, pursuant to permits or other agreements with regulatory authorities. For each of these sites, the Company, in conjunction with an environmental consultant, has developed or is developing cost estimates that are periodically reviewed and updated. Estimated remediation costs, for individual sites and in the aggregate, are substantial. While the Company maintains reserves for these matters based upon cost estimates, there can be no assurance that the ultimate cost and expense of corrective action will not exceed such reserves and have a material adverse impact on the Company's operations or financial condition. The Company is required under certain U.S. and Canadian laws and regulations to demonstrate financial responsibility for possible bodily injury and property damage to third parties caused by both sudden and non-sudden occurrences. The Company is also required to provide financial assurance that funds will be available when needed for closure and post-closure care at certain of its treatment, storage and disposal facilities, the costs of which could be substantial. Such laws and regulations allow the financial assurance requirements to be satisfied by various means, including letters of credit, surety bonds, trust funds, a financial (net worth) test and a guarantee by a parent corporation. In the United States, a company must pay the closure costs for a waste treatment, storage or disposal facility owned by it upon the closure of the facility and thereafter pay post-closure care costs. There can be no certainty that these costs will not materially exceed the amounts provided pursuant to financial assurance requirements. In addition, if such a facility is closed prior to its originally anticipated time, it is unlikely that sufficient funds will have been accrued over the life of the facility to fund such costs, and the owner of the facility could suffer a material adverse impact as a result. Consequently, it may be difficult to close such facilities to reduce operating costs at times when, as is currently the case in the hazardous waste services industry, excess treatment, storage or disposal capacity exists. Subsidiaries acquired by Philip have been named as potentially responsible or liable parties ("PRPs") under U.S. federal and state Superfund laws, with respect to several sites. These proceedings are based principally on allegations that subsidiaries of Philip (or their predecessors) disposed of hazardous substances at the sites in question. The Company routinely reviews and evaluates its potential liability at third-party sites based upon its judgment and experience at similar sites and the advice of environmental consultants and maintains reserves based upon such review and evaluation. There can be no assurance that the Company will not subsequently incur liabilities at such sites or at additional sites that materially exceed the amounts reserved. Estimates of the Company's liability for remediation of a particular site and the method and ultimate cost of remediation require a number of assumptions and are inherently difficult, and the ultimate outcome may differ from current estimates. As additional information becomes available, estimates are adjusted. While the Company does not anticipate that any such adjustment would be material to its financial statements, it is possible that technological, regulatory or enforcement developments, the results of environmental studies or other factors could alter this expectation and necessitate the recording of additional liabilities which could be material. Moreover, because the Philip and various of its subsidiaries have disposed of waste materials at more than 200 third-party disposal facilities, it is possible that Philip and its subsidiaries will be identified as PRPs at additional sites. The impact of such future events cannot be estimated at the current time. The Company may also be required to indemnify customers who incur liability in connection with the foregoing pursuant to the terms of contracts between such customers and the subsidiaries involved. EMPLOYEES As of August 31, 1997, Philip employed over 11,000 people, approximately 1,400 of whom are unionized. Of such employees, over 2,000 work in the Metals Recovery Group, over 9,000 work in the Industrial Services Group and approximately 120 work in the Company's corporate office. 58 60 PROPERTIES The Company currently operates approximately 300 facilities throughout North America, South America and Western Europe. The Company believes that its primary existing facilities are effectively utilized, well maintained, and in good condition. The Company believes that its facilities are adequate for its current needs and that suitable additional space will be available as required. LEGAL PROCEEDINGS From time to time, the Company is named a defendant in legal actions arising out of the normal course of business. The Company is not a party to any pending legal proceeding the resolution of which the management of the Company believes will have a material adverse effect on the Company's results of operations or financial condition or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business. The Company maintains liability insurance against risks arising out of the normal course of business. In January 1997, the State of Missouri brought an enforcement action against Solvent Recovery Corporation and the Company in state court alleging numerous violations of hazardous waste regulations at the Company's Kansas City, Missouri facility. Included were allegations that alterations or additions to the facility's operations had been implemented without required modification of the facility's hazardous waste permit as well as allegations of numerous deficiencies under regulations and the permit in the accumulation, record keeping, inspection, labeling, transportation and handling of such waste. Through subsequent meetings and correspondence, the state has required (1) submittal of a comprehensive application for permit modification; (2) submittal of a plan for achieving and maintaining compliance with respect to operations; and (3) payment of a penalty of approximately $560,000. The Company has submitted permit application documents and a compliance plan and is negotiating with the State for resolution of this matter. While settlement may require payment of a substantial penalty, the Company does not expect that the matter will have a material adverse effect on the Company's results of operations or financial position. 59 61 RECENT ACQUISITIONS Over the past five years, the Company has focused on increasing its revenue base, its range of services and its geographic network of facilities throughout North America through a series of strategic acquisitions. The Company intends to continue to selectively pursue acquisitions in the United States and Canada in the resource recovery and industrial services industries. The Company also intends to pursue international markets through its expanding ferrous operations in the United Kingdom and by supporting the European operations of its North American clients. The following table sets forth acquisitions since January 1996 for which the purchase price, including debt assumed, was in excess of $10 million.
COMPANY OR CLOSING DATE ASSETS ACQUIRED PRIMARY LOCATION BUSINESS UNIT - -------------------------------- -------------------- ------------------- -------------------- August 1997..................... Intermetco Limited Hamilton, Ontario Metals Recovery (Ferrous) July 1997....................... Allwaste, Inc. Houston, Texas Industrial Services July 1997....................... Serv-Tech, Inc. Houston, Texas Industrial Services July 1997....................... Roth Bros. Smelting Syracuse, New York Metals Recovery Corp. (Aluminum) July 1997....................... 21st Century Providence, Rhode Industrial Services Environmental Island Management Inc. July 1997....................... International Hatfield, Industrial Services Alliance Pennsylvania Services, Inc. May 1997........................ Reynolds Metals' Bellwood, Virginia Metals Recovery Bellwood, Virginia (Aluminum) facility February 1997................... RMF Global, Inc. Toledo, Ohio Industrial Services February 1997................... Conversion Cleveland, Ohio Metals Recovery Resources, Inc. (Copper) February 1997................... Warrenton Warrenton, Missouri Metals Recovery Resources, Inc. (Copper) January 1997.................... Allied Metals Great Britain Metals Recovery Limited (Ferrous) January 1997.................... Luntz Corporation Canton, Ohio Metals Recovery (Ferrous) December 1996................... Alcan Aluminum's Guelph, Ontario Metals Recovery Guelph Alloy Plant (Aluminum) September 1996.................. Reclaimers Inc. Kendalville, Metals Recovery Indiana (Copper) September 1996.................. Intsel Southwest LP Houston, Texas Metals Recovery (Ferrous)
The following are the principal acquisitions completed by the Company since June 30, 1997. Since revenues reported by the acquired businesses were in certain instances prepared on a different basis of presentation than those of the Company, such reported revenues are not necessarily indicative of the revenues that would have been recognized by the Company on a pro forma basis or that will be recognized by the Company in future periods. Intermetco. In August 1997, Philip completed the acquisition of the outstanding shares of Intermetco, a Canadian corporation, for a total consideration of Cdn$66 million, including the assumption of Cdn$8 million in debt. The acquisition price was paid with Cdn$4.7 million in cash and by the issuance of approximately 2.7 million Common Shares. In addition to its core recycling and scrap processing operations, Intermetco is also a manufacturer and distributor of pipe and tubular products. Intermetco 60 62 employs approximately 250 people at its 12 North American facilities. For the fiscal year ended December 31, 1996, Intermetco reported Cdn$194.9 million in revenues. The acquisition enhances Philip's ability to supply its steel industry clients with fully integrated services, from raw materials to by-product processing and distribution services. The Company believes that synergies will be realized through the increased tonnage processed at the Company's existing facilities, and through the integration of Intermetco's pipe and tubular products operations into Philip's southwestern and southeastern steel processing and distribution networks. Allwaste. In July 1997, Philip acquired Allwaste in a stock-for-stock transaction for a total consideration of $502 million, including the assumption of $142 million in debt. The acquisition price was paid by the issuance of approximately 23 million Common Shares. Allwaste is an integrated provider of industrial and environmental services and acts as an outsourcing provider of on-site facility processes and services primarily in the United States, Canada, and Mexico. Allwaste operates 180 facilities throughout North America and has approximately 3,800 employees. For the fiscal year ended August 31, 1996, Allwaste reported $382.2 million in revenues. The acquisition of Allwaste significantly broadens the Company's industrial service offerings, expands its geographical presence in the United States and significantly increases its customer base. In addition, Allwaste is expected to provide the Company with opportunities to rationalize operations, to enhance revenues through the cross-selling of services and to improve asset utilization. Serv-Tech. In July 1997, Philip acquired Serv-Tech in a stock-for-stock transaction for a total consideration of $58 million, including the assumption of $15 million in debt. The acquisition price was paid by the issuance of approximately 2.7 million Common Shares. Serv-Tech is an integrated provider of specialty services and products, including turnaround project management services, electrical and instrumentation management services, and specialty chemicals products primarily to the refinery and petrochemical industries. As of December 31, 1996, the Company had 969 full-time employees and a total of 23 operating facilities located in California, Georgia, Louisiana and Texas. For the fiscal year ended December 31, 1996, Serv-Tech reported $142.4 million in revenues. The Company believes the acquisition will strengthen its position in industrial maintenance and turnaround services. In addition, the acquisition broadens the Company's customer base in the petrochemical and oil and gas utility industries. Roth. In July 1997, Philip acquired Roth, a private company based in Syracuse, New York, for a total consideration of approximately $52 million, including the assumption of $6.7 million in debt. The acquisition price was paid with $37.5 million in cash and by the issuance of approximately 422,000 Common Shares. Roth is a manufacturer of secondary aluminum alloy products for the automotive and other industrial manufacturing industries which recorded sales of approximately $94 million for the fiscal year ended December 31, 1996. The Company believes the acquisition of Roth expands its aluminum alloy operations and will result in greater market penetration of the automotive manufacturers that are heavily concentrated in the Great Lakes region. 61 63 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The name, age and position of each of the directors and executive officers of Philip as of September 23, 1997, are as follows:
NAME AND MUNICIPALITY OF RESIDENCE AGE POSITION WITH PHILIP - --------------------------------- ---- ------------------------------------------------ ALLEN FRACASSI................... 44 President, Chief Executive Officer and Director Ancaster, Ontario PHILIP FRACASSI.................. 38 Executive Vice-President, Chief Operating Ancaster, Ontario Officer and Director HOWARD BECK...................... 64 Chairman and Director Toronto, Ontario ROY CAIRNS....................... 72 Director St-Catharines, Ontario DERRICK ROLFE.................... 43 Director Toronto, Ontario NORMAN FOSTER.................... 59 Director Bloomfield Hills, Michigan FELIX PARDO...................... 60 Director Cambridge, Massachusetts HERMAN TURKSTRA.................. 63 Director Hamilton, Ontario WILLIAM E. HAYNES................ 54 Director Houston, Texas ROBERT L. KNAUSS................. 66 Director Hanover, New Hampshire ROBERT WAXMAN.................... 42 President, Metals Recovery Group and Director Ancaster, Ontario MARVIN BOUGHTON.................. 57 Executive Vice-President and Chief Financial Burlington, Ontario Officer ROBERT M. CHISTE................. 50 President, Industrial Services Group Houston, Texas PETER CHODOS..................... 46 Executive Vice-President, Corporate Development Toronto, Ontario ANTONIO PINGUE................... 48 Executive Vice-President, Corporate & Government Niagara Falls, Ontario Affairs COLIN SOULE...................... 41 Executive Vice-President, General Counsel and Toronto, Ontario Corporate Secretary JOHN WOODCROFT................... 38 Executive Vice-President, Operations Dundas, Ontario
MR. ALLEN FRACASSI has been the President, Chief Executive Officer and a director of Philip since December 1990. Allen Fracassi and Philip Fracassi, the founders of the Company, are brothers. MR. PHILIP FRACASSI has been the Executive Vice-President, Chief Operating Officer and a director of Philip since December 1990. Philip Fracassi and Allen Fracassi, the founders of the Company, are brothers. 62 64 MR. BECK was appointed Chairman of Philip on March 9, 1994 and has been a director of Philip since December 1990. From 1991 to 1993, he was Vice-Chairman of Barrick Gold Corporation (formerly American Barrick Gold Corporation), an integrated gold mining company, and of The Horsham Corporation, a holding company. MR. CAIRNS has been a director of Philip since December 1990. Mr. Cairns has been counsel to, and was previously a partner with, Chown, Cairns, a law firm. MR. ROLFE has been a director of Philip since January 1991. Since 1992, Mr. Rolfe has been the President and Chief Executive Officer of RM Capital Corporation, an investment company. MR. FOSTER has been a director of Philip since January 1994. Mr. Foster was the President, By-Products Recovery Group, of Philip from February 1996 to July 1997. Mr. Foster was President and Chief Executive Officer of Nortru, Inc. from prior to 1991 to July 1997 and President and Chief Executive Officer of Burlington Environmental Inc. from December 1993 to July 1997. MR. PARDO has been a director of Philip since March 1994. Since May 1993, Mr. Pardo has been President and Chief Executive Officer of Ruhr-American Coal Corporation. From 1992, Mr. Pardo was Chairman of Newalta Corporation, an oil field waste management company and a partner and director of Quorum Funding, an investment company. MR. TURKSTRA has been a member of Turkstra, Mazza, Shinehoft, Mihailovich, Associates, a law firm, since 1959. MR. HAYNES has been a director of Philip since August 6, 1997, and until July 31, 1997 was a director of Allwaste from June 1996. He is the Chairman, President and Chief Executive Officer of Innovative Valve Technologies, Inc., an 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. KNAUSS has been a director of Philip since August 6, 1997, and until July 31, 1997 was a director of Allwaste from March 1988. He is the President 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 served for 12 years as the Dean and Distinguished University Professor of the University of Houston Law Center. MR. WAXMAN has been a director of Philip since January 1994. Mr. Waxman has been the President, Metals Recovery Group, since February 28, 1996. Since September 1993, Mr. Waxman has been President and Chief Executive Officer of Waxman Resources Inc. From 1989 to 1993, Mr. Waxman was Chief Operating Officer of I. Waxman & Sons Limited. MR. BOUGHTON has been the Executive Vice-President and Chief Financial Officer of Philip since January 1994 and May 1992, respectively. He was Vice-President, Finance of Philip from September 1991 to December 1993. MR. CHISTE became President of the Company's Industrial Services Group upon completion of the Allwaste Merger. Prior to that he was President and Chief Executive Officer of Allwaste from 1994. Prior to that he was Chief Executive Officer of American National Power, Inc., a successor to Transco Energy Company focused on the power generation business in North and South America, from 1984 to 1986. MR. CHODOS has been Executive Vice-President, Corporate Development, of Philip since June 1996. Prior to that time, he was Vice President and Director of BZW Canada, an investment bank, from May 1992 to June 1996 and was Managing Partner of Loewen, Ondaatje, McCutcheon & Company Limited, an investment bank, from May 1983 to April 1992. MR. PINGUE has been Executive Vice-President, Corporate and Government Affairs since May 1997. Prior to that he was Senior Vice-President, Corporate & Government Affairs, of Philip from March 1995. Prior to that, he was Senior-Vice President, Environmental Services and Regulatory Affairs of the Company from January 1994, and was Vice-President, Environmental and Regulatory Affairs, of the Company from 1991 to December 1993. 63 65 MR. SOULE has been the General Counsel of Philip since October 1991, was appointed Corporate Secretary of Philip in January 1992, was appointed Senior Vice-President of Philip in May 1994 and Executive Vice-President of Philip in May 1997. MR. WOODCROFT has been Executive Vice-President, Operations since May 1997. Prior to that he was Senior Vice President, Operations, of Philip from January 1994 and was Vice-President, Acquisitions and Development, of Philip from May 1991 to December 1993. The Directors of Philip are elected annually by the shareholders and serve until the next annual meeting. DIRECTORS' COMPENSATION Each director of the Company who is not a salaried officer or employee of the Company is paid an annual fee of Cdn$25,000 and a fee of Cdn$1,000 per meeting (including committee meetings) attended, and receives a one time award of 20,000 options to acquire common shares of the Company. The options are granted at an exercise price equal to the closing price of the Common Shares on The Toronto Stock Exchange on the last trading day preceding the date of the grant and vest over a period of three years from the date of the grant. EXECUTIVE COMPENSATION The table below sets forth the compensation in respect of each of the last three fiscal years earned by the President and Chief Executive Officer and the four other most highly compensated executive officers of the Company (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE(1)
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------------------------- ------------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) OPTIONS/SARS COMPENSATION(4) - --------------------------- ---- ------- ------- ---------------- ------------ ---------------- ($) ($) ($) (#) ($) ALLEN FRACASSI............. 1996 366,757 586,800 32,743(3) 75,000 3,484 President and 1995 364,299 404,007 45,285(3) -- 5,100 Chief Executive Officer 1994 366,300 401,099 34,733(3) -- 5,128 PHILIP FRACASSI............ 1996 293,406 440,100 -- 75,000 4,309 Executive Vice-President and...................... 1995 291,439 312,113 -- -- 5,282 Chief Operating Officer 1994 293,040 309,982 -- -- 4,945 JOHN WOODCROFT............. 1996 201,716 330,075 -- 60,000 5,043 Executive Vice-President, 1995 163,934 98,361 -- 30,000 4,918 Operations 1994 135,531 33,883 -- 30,000 4,066 MARVIN BOUGHTON............ 1996 194,381 256,725 -- 60,000 4,520 Executive Vice-President and...................... 1995 193,078 96,539 -- 30,000 5,255 Chief Financial Officer 1994 194,139 87,363 -- 30,000 4,945 COLIN SOULE................ 1996 154,038 220,050 -- 60,000 4,621 Executive Vice-President,.......... 1995 145,719 72,860 -- 30,000 4,372 General Counsel & 1994 135,531 33,883 -- 30,000 4,066 Corporate Secretary
- --------------- (1) All amounts have been converted to U.S. dollars based upon average exchange rates of Canadian dollars per $1.00 of 1.3633, 1.3725 and 1.3650 for 1996, 1995, and 1994, respectively. (2) Except as noted, perquisites and other personal benefits do not exceed the lesser of $50,000 or 10% of the total annual salary and bonus for the Named Executive Officers. (3) Represents imputed interest benefit on housing loan. (4) Represents Company's contribution to a retirement savings plan. 64 66 STOCK OPTIONS The table below sets forth the options granted to the Named Executive Officers under the Company's stock option plans during the fiscal year ended December 31, 1996. OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1996(1)
POTENTIAL % OF REALIZABLE VALUE AT TOTAL OPTIONS ASSUMED ANNUAL SECURITIES GRANTED TO EXERCISE RATES OF STOCK UNDER OPTIONS EMPLOYEES IN OR PRICE APPRECIATION NAME GRANTED FISCAL YEAR(2) BASE PRICE(3) FOR OPTION TERM EXPIRATION DATE - --------------------- ------------- --------------- -------------- -------------------- --------------- (#) ($/Share) 5% ($) 10% ($) Allen Fracassi....... 75,000 6% 8.00 377,337 956,245 August 6, 2006 Philip Fracassi...... 75,000 6% 8.00 377,337 956,245 August 6, 2006 John Woodcroft....... 60,000 5% 8.00 301,869 764,996 August 6, 2006 Marvin Boughton...... 60,000 5% 8.00 301,869 764,996 August 6, 2006 Colin Soule.......... 60,000 5% 8.00 301,869 764,996 August 6, 2006
- --------------- (1) The Company's employee stock option plans provide for the granting of stock options to purchase common shares of the Company to employees and directors of the Company at the discretion of the Board of Directors. All options are subject to certain conditions of service and the provision of a non-competition agreement. Options granted to Named Executive Officers in fiscal 1996 vest in equal monthly amounts over 36 months from the date they were granted. (2) A total of 1,220,000 options were granted under the Company's employee stock option plans during the fiscal year ending December 31, 1996. (3) Amounts have been converted to U.S. dollars based upon an average exchange rate of Canadian dollars per $1.00 of 1.3633. The table below sets forth each exercise of options during the fiscal year ended December 31, 1996 by the Named Executive Officers. AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY SECURITIES AGGREGATE OPTIONS AT OPTIONS AT ACQUIRED VALUE DECEMBER 31, 1996 DECEMBER 31, 1996 NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ------------------------- ----------- --------- -------------------------- -------------------------- (#) ($) (#) ($) Allen Fracassi(1)........ -- -- 18,320/66,680 430,743/139,512 Philip Fracassi(2)....... -- -- 18,320/66,680 430,743/139,512 John Woodcroft........... 27,500 111,740 55,552/74,448 429,474/502,826 Marvin Boughton.......... 20,000 47,850 65,552/74,448 515,240/502,826 Colin Soule.............. 7,500 30,750 75,552/74,448 583,671/502,826
- --------------- (1) Allen Fracassi holds an additional 389,031 exercisable options to acquire Common Shares which were granted to him in connection with his sale to the Company in 1990 of his interest in Philip Environmental Corporation. (2) Philip Fracassi holds an additional 387,355 exercisable options to acquire Common Shares which were granted to him in connection with his sale to the Company in 1990 of his interest in Philip Environmental Corporation. (3) The closing price of the Common Shares on The Toronto Stock Exchange on December 31, 1996 was Cdn$19.75. All amounts have been converted to U.S. dollars based upon an exchange rate of Canadian dollars per $1.00 of 1.3700 as of December 31, 1996. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with each of the Named Executive Officers. The agreements set forth the benefits to which a Named Executive Officer would be entitled in the event of termination without cause before or after an event which gives rise to a change of control of the Company or in the event of a change in the executive's responsibilities, title, authority or compensation 65 67 after an event which gives rise to a change of control of the Company. In the event of termination without cause prior to a change of control, a Named Executive Officer would be entitled to a severance payment equal to two times his base salary plus two times the annual average bonus and cash value of benefits earned by the Named Executive Officer in the previous two years. In the event of termination without cause after a change of control or in the event of a change in the executive's responsibilities, title, authority or compensation within two years of a change in control, a Named Executive Officer would be entitled to a severance payment equal to three times his base salary plus three times the annual average of the bonus and cash value of benefits earned by the Named Executive Officer in the previous two years. In addition, stock options granted to the Named Executive Officer will fully vest on termination and will remain exercisable until the expiry of the original term of such options. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors has a Compensation Committee comprised of Howard L. Beck, Derrick Rolfe and Roy Cairns, all of whom are outside directors. The Compensation Committee meets as required to consider the compensation packages of the President and Chief Executive Officer, the Executive Vice Presidents and the Chief Operating Officer. The Compensation Committee also makes recommendations to the full Board of Directors with respect to the remuneration of directors. CERTAIN TRANSACTIONS In connection with the December 1993 acquisition of Nortru, Inc. ("Nortru") from Norman Foster, the Company guaranteed a $5,950,000 note payable by a wholly-owned subsidiary of the Company to Mr. Foster. The note, which was unsecured, bore interest at U.S. prime plus 2% and was payable in equal monthly installments of $165,000 plus interest maturing on May 20, 1997. The outstanding balance of the note was paid in full by the Company on May 21, 1997. Upon consummation of the acquisition of Nortru, Mr. Foster became a director of the Company. In addition, the Company entered into a non-competition and retention agreement with Mr. Foster, pursuant to which the Company agreed to pay Mr. Foster an aggregate of $7 million in consideration for certain non-compete and employment covenants from Mr. Foster. Payments of $1.4 million are due under this agreement on December 31, 1997 and 1998. As at September 23, 1997, the aggregate amount of indebtedness due to the Company from all current or former officers, directors and employees was Cdn$737,200, consisting of the outstanding balance of a loan made to Allen Fracassi, the President and Chief Executive Officer of the Company, for the purpose of purchasing a home. The loan is unsecured, non-interest bearing and matures on September 30, 1997. The largest aggregate amount outstanding under the loan during the fiscal year ended December 31, 1996 was Cdn$787,200. The law firm of Turkstra, Mazza, Shinehoft, Mihailovich Associates, of which Herman Turkstra is of counsel, provided services to the Company in 1995, 1996 and 1997. Fees paid to Mr. Turkstra's firm in 1995, 1996 and through September 23, 1997 totalled Cdn$769,160, Cdn$921,456 and Cdn$516,713, respectively. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS According to information supplied to the Company by the beneficial owner listed below, the following person beneficially owned more than 5% of the outstanding Common Shares as of December 31, 1996:
PERCENTAGE OF SHARES BENEFICIALLY OWNED(2) ----------------------- NUMBER OF SHARES PRIOR TO AFTER NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING - -------------------------------------------------- ------------------ -------- -------- Denver Investment Advisors LLC(1) 5,356,275 5.24 4.38 1225 17th Street, 26th Floor Denver, Colorado 80202
- --------------- 66 68 (1) As reported in a Schedule 13G filed with the Securities and Exchange Commission (the "Commission") in February 1997. (2) At September 23, 1997. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Shares as of September 23, 1997 by (i) each director of the Company, (ii) the Named Executive Officers, and (iii) all current directors and executive officers of the Company as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED ---------------------- NUMBER OF SHARES PRIOR TO AFTER DIRECTORS AND EXECUTIVE OFFICERS(1) BENEFICIALLY OWNED OFFERING OFFERING - --------------------------------------------------- ------------------ -------- -------- Allen Fracassi(2)(3)............................... 2,348,597 2.30 1.92 Philip Fracassi(2)(4).............................. 2,026,572 1.98 1.66 John Woodcroft(2)(5)............................... 100,827 * * Marvin Boughton(2)(6).............................. 120,827 * * Colin Soule(2)(7).................................. 95,827 * * Howard Beck(2)(8).................................. 423,336 * * Roy Cairns(2)(9)................................... 923,336 * * Derrick Rolfe(2)(10)............................... 23,336 * * Norman Foster(2)(11)............................... 272,088 * * Felix Pardo(2)(12)................................. 7,336 * * Herman Turkstra(2)(13)............................. 27,446 * * William E. Haynes(2)(14)........................... 3,824 * * Robert L. Knauss(2)(15)............................ 3,824 * * Robert Waxman(2)(16)............................... 87,990 * * Peter Chodos (2)(17)............................... 52,768 * * Robert M. Chiste(2)(18)............................ 567,114 * * Antonio Pingue(2)(19).............................. 130,827 * * All Directors and Executive Officers as a Group (17 7,215,875 7.06 5.90 persons).........................................
- --------------- * Indicates less than 1.0%. (1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from September 23, 1997, whether pursuant to the exercise of options, conversion of securities or otherwise. Each beneficial owner's percentage of ownership is determined by assuming that options to purchase Common Shares that are held by such person and which are exercisable within 60 days of September 23, 1997 have been exercised. Unless otherwise noted in the footnotes below, the Company believes all persons named in the table have sole voting power and investment power with respect to all Common Shares beneficially owned by them. Options to acquire Common Shares which vest after 60 days after September 23, 1997 are indicated separately in the notes that follow. (2) The address of each of the directors and Named Executive Officers is 100 King Street West, P.O. Box 2440 LCD1, Hamilton, Ontario, Canada L8N 4J6. (3) Includes 496,942 Common Shares issuable upon the exercise of employee stock options. Does not include 377,089 Common Shares subject to options which are not exercisable within 60 days. (4) Includes 478,608 Common Shares issuable upon the exercise of employee stock options. Does not include 293,757 Common Shares subject to options which are not exercisable within 60 days. (5) Includes 100,827 Common Shares issuable upon the exercise of employee stock options. Does not include 249,173 Common Shares subject to options which are not exercisable within 60 days. (6) Includes 119,827 Common Shares issuable upon the exercise of employee stock options. Does not include 249,173 Common Shares subject to options which are not exercisable within 60 days. (7) Includes 95,827 Common Shares issuable upon the exercise of employee stock options. Does not include 249,173 Common Shares subject to options which are not exercisable within 60 days. (8) Includes 423,336 Common Shares issuable upon the exercise of employee stock options. Does not include 16,664 Common Shares subject to options which are not exercisable within 60 days. (9) Includes 23,336 Common Shares issuable upon the exercise of employee stock options. Does not include 16,664 Common Shares subject to options which are not exercisable within 60 days. 67 69 (10) Includes 23,336 Common Shares issuable upon the exercise of employee stock options. Does not include 16,664 Common Shares subject to options which are not exercisable within 60 days. (11) Includes 100,000 Common Shares issuable upon the exercise of employee stock options. Does not include 100,000 Common Shares subject to options which are not exercisable within 60 days. (12) Includes 3,336 Common Shares issuable upon the exercise of employee stock options. Does not include 31,664 Common Shares subject to options which are not exercisable within 60 days. (13) Includes 11,120 Common Shares issuable upon the exercise of employee stock options. Does not include 28,880 Common Shares subject to options which are not exercisable within 60 days. (14) Includes 1,668 Common Shares issuable upon the exercise of employee stock options. Does not include 18,332 Common Shares subject to options which are not exercisable within 60 days. (15) Includes 1,668 Common Shares issuable upon the exercise of employee stock options. Does not include 65,681 Common Shares subject to options which are not exercisable within 60 days. (16) Includes 84,990 Common Shares issuable upon the exercise of employee stock options. Does not include 245,010 Common Shares subject to options which are not exercisable within 60 days. (17) Includes 52,768 Common Shares issuable upon the exercise of employee stock options. Does not include 222,232 Common Shares subject to options which are not exercisable within 60 days. (18) Includes 411,554 Common Shares issuable upon the exercise of employee stock options. Does not include 137,185 Common Shares subject to options which are not exercisable within 60 days. (19) Includes 130,827 Common Shares issuable upon the exercise of employee stock options. Does not include 249,173 Common Shares subject to options which are not exercisable within 60 days. SHARE CAPITAL OF THE COMPANY The Company's authorized capital consists of an unlimited number of Common Shares, 102,214,491 of which were issued and outstanding as of September 23, 1997. In addition, options to acquire a further 9,198,690 Common Shares were outstanding on September 23, 1997. The holders of Common Shares are entitled to receive dividends when, if and as declared by the directors and, on liquidation, dissolution or winding up, to receive pro rata the remaining property of the Company available for distribution after the payment of the Company's creditors. The holders of Common Shares are entitled to receive notice of and to attend meetings of shareholders, and to vote on the basis of one vote per Common Share held. Holders of the Common Shares of the Company have no pre-emptive, subscription, redemption or conversion rights. All outstanding shares are fully paid and non-assessable. The Board of Directors of the Company adopted a Shareholder Rights Plan (the "Plan") on April 11, 1995. The Plan was amended by the Board of Directors on May 19, 1995 and approved by the shareholders of the Company on May 24, 1995. Under the Plan, the Board of Directors declared a dividend distribution of one right (a "Right") for each Common Share to holders of record. The Plan does not affect the acquisition of up to 20% of the issued and outstanding Common Shares and other voting shares ("Voting Shares") of the Company. If a person acquires 20% or more of the Voting Shares of the Company other than by means of a Permitted Bid or Competing Bid without the approval of the Board of Directors, holders of Rights other than the acquiror may acquire Common Shares at a significant discount to prevailing market prices. Accordingly, in such a case, the Rights will cause significant dilution to an acquiror other than through a Permitted Bid, a Competing Bid or on terms approved by the Board of Directors. Under the Plan, as amended, a "Permitted Bid" is a take-over bid which provides for a minimum deposit period of at least 60 days that is made to the holders of all Voting Shares of the Company. A Permitted Bid must satisfy certain conditions provided for in the Plan including that the bid be accepted by holders independent of the bidder depositing at least 50% of their shares in acceptance of the bid, in which case the bid must then be extended for a further period of 10 business days. The Plan, as amended, is operative for a three year period expiring June 30, 1998. DESCRIPTION OF CERTAIN INDEBTEDNESS CREDIT FACILITY The Company and Philip Environmental (Delaware) Inc. ("PEI"), a wholly-owned subsidiary of the Company, entered into a Credit Agreement, dated August 11, 1997, with a syndicate of lenders 68 70 composed of Canadian and United States financial institutions. The Company's Credit Facility provides for an aggregate maximum borrowing amount of up to $1.5 billion available in seven tranches, each tranche differentiated by the aggregate maximum amount of available credit, the applicable group of lenders and the eligible borrowers. Borrowings under the Credit Facility bear interest at varying rates, depending on the nature of the loan and the Company's compliance with certain financial ratios. From August 11, 1997 through September 23, 1997, interest rates under the Credit Facility ranged from prime plus 0.25% to prime plus 1.25%. The Company's and PEI's obligations under the Credit Facility are secured by a pledge of all of the issued and outstanding securities held by the Company or PEI in all of their material subsidiaries. The Credit Facility terminates and all unpaid principal, interest, fees and other amounts are due on August 12, 2002. The terms of the Credit Agreement restrict the payment of cash dividends to stockholders and require the Company to comply with a number of financial covenants, including the maintenance of specified financial ratios. As of August 31, 1997, the Company was in compliance with these covenants. As of August 31, 1997, the Company had borrowed an aggregate of $817 million under the Credit Facility. ALLWASTE 7 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2014 In connection with the acquisition of Allwaste, Philip assumed and became co-obligor of, by supplemental indenture (the "Supplemental Indenture"), the due and punctual performance and observance of all the covenants and conditions to be performed by Allwaste under the indenture (the "Indenture") with respect to Allwaste's 7 1/4% Convertible Subordinated Debentures Due 2014 (the "Allwaste Debentures"). The Supplemental Indenture provides that at any time up to and including June 1, 2014, the holder of any Allwaste Debenture will have the right to convert the principal amount of such Allwaste Debenture (or any portion thereof equal to $1,000 or an integral multiple thereof) into Common Shares equal to the principal amount of the Allwaste Debentures surrendered for conversion divided by $19.5376; provided, however, that if such Allwaste Debenture or any portion thereof is called for redemption prior to June 1, 2014, then the right of such holder to convert such Allwaste Debenture into Common Shares will terminate after the close of business on the fifth day prior to the redemption date. As of September 23, 1997, there were outstanding $28.9 million aggregate principal amount of Allwaste Debentures. If all Allwaste Debentures outstanding on that date were converted, the Company would be required to issue approximately 1.48 million Common Shares. The Company's acquisition of Allwaste constituted a "Redemption Event" pursuant to the Indenture. Accordingly, each holder of Allwaste Debentures has the right to require Allwaste to redeem all or any portion (equal to $1,000 or any integral multiple thereof) of such holder's Allwaste Debentures for cash at the principal amount thereof, together with accrued interest thereon to the 90th day following the acquisition; provided, however, that Allwaste is not obligated to redeem any Allwaste Debenture at any time when the subordination provisions of the Allwaste Debentures would not permit Allwaste to make a payment of principal, premium or interest on the Allwaste Debentures. MATERIAL INCOME TAX CONSIDERATIONS The following discussion is not intended to be, nor should it be construed to be, legal or tax advice to any particular prospective purchaser. This discussion does not purport to deal with all aspects of Canadian and United States federal income taxation that may be relevant to prospective purchasers of Common Shares and does not take into account Canadian provincial or territorial tax laws, United States state or local tax laws, or tax laws of jurisdictions outside of Canada and the United States. The following discussion is based upon the tax laws of Canada and the United States as in effect on the date of this Prospectus, which are subject to change. Prospective purchasers should consult their own tax advisors with respect to their particular circumstances. MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS The following sets forth the opinion of Stikeman, Elliott, Canadian counsel to the Company, as to the material Canadian federal income tax considerations generally applicable to a person who acquires 69 71 Common Shares pursuant to this Prospectus and who for the purposes of the Income Tax Act (Canada) (the "Act") and the Canada-United States Income Tax Convention, 1980 (the "Convention") (i) throughout the period during which the purchaser owns the Common Shares, is not resident in Canada and is a resident of the United States, (ii) holds Common Shares as capital property, (iii) deals at arm's length with the Company, (iv) does not use or hold, and is not deemed to use or hold, such Common Shares in, or in the course of, carrying on a business or providing independent personal services in Canada, and (v) does not own (or is not treated as owning) 10% or more of the outstanding voting shares of the Company (a "U.S. Holder"). Special rules, which are not addressed in this discussion, may apply to a U.S. Holder that is (i) an insurer that carries on an insurance business in Canada and elsewhere or (ii) a "financial institution" subject to special provisions of the Act applicable to income gain or loss arising from "mark to market" property. This discussion is based on the current provisions of the Convention, the Act and the regulations thereunder (the "Regulations"), all specific proposals to amend the Act and Regulations announced by the Minister of Finance (Canada) prior to the date of this Prospectus and counsel's understanding of the current published administrative practices of Revenue Canada. This discussion is not exhaustive of all potential Canadian tax consequences to a U.S. Holder and does not take into account or anticipate any other changes in law, whether by judicial, governmental or legislative decision or action, nor does it take into account the tax legislation or considerations of any province, territory or foreign jurisdiction. Dividends paid or credited or deemed to be paid or credited on Common Shares owned by a U.S. Holder will be subject to Canadian withholding tax under the Act at a rate of 25% on the gross amount of the dividends. The rate of withholding tax generally is reduced under the Convention to 15% where the U.S. Holder is the beneficial owner of the dividends. Under the Convention, dividends paid to certain religious, scientific, charitable and similar tax exempt organizations and certain pension organizations that are resident, and exempt from tax, in the United States and who have complied with certain administrative procedures are exempt from this Canadian withholding tax. A gain realized by a U.S. Holder on a disposition or deemed disposition of Common Shares generally will not be subject to tax under the Act unless such Common Shares constitute taxable Canadian property within the meaning of the Act at the time of disposition or deemed disposition. Common Shares generally will not be taxable Canadian property provided the Common Shares are listed on a prescribed stock exchange and at no time within the five-year period immediately preceding the disposition did the U.S. Holder, persons with whom the U.S. Holder did not deal at arm's length, or the U.S. Holder together with such persons, own 25% or more of the issued shares (and in the view of Revenue Canada, taking into account any interest therein or options in respect thereof that belonged to the U.S. Holder, persons with whom the U.S. Holder did not deal at arm's length, or the U.S. Holder and such persons) of any class or series of the Company's shares. A deemed disposition of Common Shares will arise on the death of a U.S. Holder. If the Common Shares are taxable Canadian property to a U.S. Holder, any capital gain realized on a disposition or deemed disposition of such shares will generally be exempt from tax under the Act by virtue of the Convention if the value of the Common Shares at the time of the disposition or deemed disposition is not derived principally from real property situated in Canada (as defined by the Convention). The Company has advised that the Common Shares do not now derive their value principally from real property situated in Canada; however, the determination as to whether Canadian tax would be applicable on a disposition or deemed disposition of Common Shares must be made at the time of that disposition or deemed disposition. MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following sets forth the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, U.S. counsel to the Company, as to the material United States federal income tax consequences of an investment in the Common Shares generally applicable to the following persons who invest in and hold such Common Shares as capital assets ("United States Shareholders"): (i) citizens or residents (as defined for United States federal income tax purposes) of the United States, (ii) corporations or partnerships created or 70 72 organized in the United States or under the laws of the United States or of any state or the District of Columbia, (iii) estates, the income of which is subject to United States federal income taxation regardless of its source, (iv) any trust if (x) a United States court is unable to exercise primary supervision over the administration of the trust and (y) one or more United States fiduciaries have the authority to control all substantial decisions of the trust, and (v) certain trusts in existence on August 20, 1996 which were treated as United States persons under the law in effect immediately prior to such date and which make a valid election to be treated as a "United States Person" under the Internal Revenue Code of 1986, as amended (the "Code"). This discussion does not purport to be a comprehensive description of all the tax considerations that may be relevant to a United States Shareholder's decision to acquire Common Shares. In particular, this discussion does not address (a) the tax treatment of special classes of United States Shareholders, such as banks, insurance companies, tax-exempt organizations or dealers in securities, (b) the tax treatment of United States Shareholders that own (directly or indirectly by attribution) 10 percent or more of the voting shares of the Company, or (c) any aspect of state, local or non-United States tax laws. This discussion is based on the Code, judicial decisions, administrative pronouncements, and existing and proposed Treasury regulations, changes to any of which after the date of this Prospectus could have retroactive effect. Additionally, the implementation of certain aspects of the PFIC rules (discussed below) and other matters discussed herein requires the issuance of Treasury regulations which have not yet been promulgated and which may have retroactive effect. Prospective investors should consult their tax advisors as to the tax consequences of an investment in the Common Shares in light of their particular circumstances, including the effect of any foreign, United States state or local tax laws. TAXATION OF CAPITAL GAINS Gain or loss, if any, recognized by a United States Shareholder on the sale or other disposition of Common Shares will be subject to United States federal income taxation as capital gain or loss in an amount equal to the difference between the United States Shareholder's adjusted tax basis in the Common Shares and the amount realized on the disposition. Any such gain or loss will generally be treated as long-term or short-term capital gain or loss, depending on whether the United States Shareholder's holding period with respect to the Common Shares is longer than one year. In general, long-term capital gains with respect to Common Shares held for more than 18 months are subject to a maximum tax rate of 20% and long-term capital gains with respect to Common Shares held for more than 12 months but not more than 18 months are subject to a maximum tax rate of 28%. A holder of Common Shares who is not a United States Shareholder (a "Non United States Shareholder") generally will not be subject to United States federal income tax or withholding tax in respect of gain recognized on a disposition of Common Shares unless such gain is effectively connected with a trade or business of the Non United States Shareholder in the United States, or in the case of an individual Non United States Shareholder, such Non United States Shareholder is present in the United States for 183 or more days in the calendar year in which such disposition of Common Shares takes place and such Non United States Shareholder either (i) has a tax home (as defined in the Code) in the United States, or (ii) such gain is attributable to an office or other fixed place of business in the United States. DIVIDENDS ON COMMON SHARES The gross amount of any distribution by the Company (including any Canadian taxes withheld therefrom) with respect to Common Shares generally will be includible in the gross income of a United States Shareholder as foreign source dividend income to the extent paid out of current or accumulated earnings and profits of the Corporation, as determined under United States federal income tax principles. To the extent that the amount of any distribution exceeds the Company's current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital to the extent of the United States Shareholder's adjusted tax basis in the Common Shares and to the extent that such distribution exceeds the United States Shareholder's adjusted tax basis in the Common Shares, will be taxed as a capital gain. Such dividends will not be eligible for the dividends received 71 73 deduction generally allowed to corporations under the Code. If a United States Shareholder receives a dividend in Canadian dollars, the amount of the dividend for United States federal income tax purposes will be the U.S. dollar value of the dividend (determined at the spot rate on the date of such payment) regardless of whether the payment is later converted into U.S. dollars. In such case, the United States Shareholder may recognize ordinary income or loss as a result of currency fluctuations between the date on which the dividend is paid and the date the dividend amount is converted into U.S. dollars. A Non United States Shareholder generally will not be subject to United States federal income or withholding tax on dividends received on Common Shares, unless such income is effectively connected with the conduct of a trade or business of such Non United States Shareholder in the United States. Credit for Foreign Taxes Withheld. Subject to the limitations set forth in Sections 901 and 904 of the Code (including certain holding period requirements), the foreign tax withheld or paid with respect to dividends on the Common Shares generally will be eligible for credit against a United States Shareholder's federal income tax liability. Alternatively, a United States Shareholder may claim a deduction for such amount of withheld foreign taxes, but generally only for a year for which such United States Shareholder elects to do so with respect to all foreign income taxes. The overall limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. PASSIVE FOREIGN INVESTMENT COMPANY DISCUSSION The foregoing discussion assumes that the Company is not currently, and will not be in the future, classified as a "passive foreign investment company" ("PFIC") within the meaning of the Code. Based on its current and projected income, assets and activities, the Company does not believe it will be classified as a PFIC for its current or any succeeding taxable year. However, if during any taxable year of the Company, 75% or more of the Company's gross income consists of certain types of "passive" income, or if the average value during a taxable year of the Company's "passive assets" (generally assets that generate passive income) is 50% or more of the average value of all assets held by the Company, the Company will be classified as a PFIC for such year and in succeeding years. If the Company is classified as a PFIC, a United States Shareholder holding Common Shares will be subject to increased tax liability in respect of gain realized on the sale of the Common Shares or upon the receipt of certain dividends, unless such person makes an election to be taxed currently on its pro rata portion of the Company's income, whether or not such income is distributed in the form of dividends or otherwise. UNDERWRITING Subject to the terms and conditions set forth in the U.S. Underwriting Agreement (the "U.S. Underwriting Agreement"), the Company has agreed to sell to each of the underwriters named below (the "U.S. Underwriters"), and each of the U.S. Underwriters, for whom Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as representatives (the "U.S. Representatives"), has severally agreed to purchase from the Company the number of Common Shares set forth opposite its name below:
U.S. UNDERWRITERS NUMBER OF SHARES -------------------------------------------------------------------- ---------------- Salomon Brothers Inc ............................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated............................................ -------- Total........................................................ ========
In the U.S. Underwriting Agreement, the several U.S. Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all the Common Shares offered in the U.S. Offering if any such Common Shares are purchased. In the event of a default by any U.S. Underwriter, the 72 74 U.S. Underwriting Agreement provides that, in certain circumstances, purchase commitments of the non-defaulting U.S. Underwriters may be increased or the U.S. Underwriting Agreement may be terminated. The U.S. Underwriters have agreed to purchase such Common Shares from the Company at the public offering price set forth on the cover page of this Prospectus and the Company has agreed to pay the U.S. Underwriters the underwriting commission set forth on the cover page of this Prospectus for each Common Share so purchased. The Company has been advised by the U.S. Representatives that the several U.S. Underwriters propose initially to offer such Common Shares to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price, less a concession not in excess of $ per Common Share. The U.S. Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per Common Share to other dealers. After the Offerings, the public offering price and such concessions may be changed. The Company has also entered into an International Underwriting Agreement with the underwriters named therein (the "International Underwriters"), for whom Salomon Brothers International Limited and Merrill Lynch International Limited are acting as representatives (the "International Representatives"), providing for the concurrent offer and sale of Common Shares outside of the United States. The public offering price and underwriting commission per Common Share for each of the Offerings will be identical. The closing of each of the Offerings is conditioned upon the closing of the other. The Company has granted to the U.S. Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an aggregate of additional Common Shares at the same public offering price per Common Share as set forth on the cover page of this Prospectus to cover over-allotments, if any. The Company has agreed to pay the U.S. Underwriters the underwriting commission set forth on the cover page of this Prospectus for each additional Common Share so purchased. To the extent that the U.S. Underwriters exercise such option, each U.S. Underwriter will have a firm commitment, subject to certain conditions, to purchase the same proportion of such Common Shares as the number of Common Shares to be purchased and offered by such U.S. Underwriter in the above table bears to the total number of Common Shares initially offered by the U.S. Underwriters. The Company has also granted to the International Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an aggregate of additional Common Shares at the same public offering price per Common Share to cover over-allotments, if any. The U.S. Underwriters and the International Underwriters have entered into an Agreement Between U.S. Underwriters and International Underwriters (the "Agreement Between U.S. Underwriters and International Underwriters"), pursuant to which each U.S. Underwriter has severally agreed that, as part of the distribution of the Common Shares offered by the U.S. Underwriters, (i) it is not purchasing any Common Shares for the account or benefit of anyone other than a U.S. Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Common Shares or distribute this Prospectus to any person outside the United States or to anyone other than a U.S. Person. Each U.S. Underwriter has also agreed that it has not offered or sold and will not offer or sell, by means of any document other than this Prospectus in final form as filed with the Commission, any Common Shares. Each International Underwriter has severally agreed that, as part of the distribution of the Common Shares by the International Underwriters, (i) it is not purchasing any Common Shares for the account or benefit of any U.S. Person, and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Common Shares or distribute any Prospectus relating to the International Offering to any person within the United States or to anyone who is a U.S. Person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement Between U.S. Underwriters and International Underwriters. As used herein, "United States" means the United States of America (including the District of Columbia) and its territories, its possessions and other areas subject to its jurisdiction, and "U.S. Person" means a resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, and certain other persons and entities, and includes any United States branch of a person other than a U.S. Person. 73 75 Pursuant to the Agreement Between U.S. Underwriters and International Underwriters, sales may be made between the Underwriters of such number of Common Shares as may be mutually agreed. The price of any Common Shares so sold shall be the public offering price as set forth on the cover page to this Prospectus, less an amount not greater than the concession to securities dealers. To the extent that there are sales between U.S. Underwriters and International Underwriters pursuant to the Agreement Between U.S. Underwriters and International Underwriters, the number of Common Shares initially available for sale by U.S. Underwriters or International Underwriters may be more or less than the amount appearing on the cover page of this Prospectus No action has been or will be taken in any jurisdiction by the Company or by any Underwriter that would permit a public offering of the Common Shares or possession or distribution of a prospectus in any jurisdiction where action for that purpose is required, other than in the United States and Canada. Persons into whose possession this Prospectus comes are advised by the Company and the Underwriters to inform themselves about, and to observe any restrictions as to, the offering of the Common Shares and the distribution of this Prospectus. This Prospectus may be used by underwriters and dealers in connection with offers and sales of the Common Shares, including Common Shares initially sold in the concurrent international offering by the International Underwriters, to U.S. persons and persons located in the United States. In connection with the Offerings, rules of the Commission permit the Underwriters to engage in certain transactions that stabilize the price of the Common Shares. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Shares. If the Underwriters over-allot or create short positions in the Common Shares in connection with the Offerings by selling more Common Shares than are set forth on the cover page of this Prospectus, the Underwriters may reduce that short position by purchasing Common Shares in the open market. The Underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option described above. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of Common Shares. In addition, neither the Company nor any of the Underwriters makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The U.S. Underwriting Agreement and the International Underwriting Agreement each provide that the Company will indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments the Underwriters may be required to make in respect thereof. The Company and its executive officers and directors will agree that none of them will, directly or indirectly, offer, sell, announce an intention to sell, contract to sell, pledge, hypothecate, grant any option to purchase or otherwise dispose of, any Common Shares or securities convertible or exchangeable into or exercisable for any Common Shares without the prior written consent of Salomon Brothers Inc for a period of 90 days after the date of this Prospectus, except in the case of the executive officers and directors for an aggregate of 500,000 Common Shares, and subject to certain additional exceptions. The Underwriters and their affiliates have provided and will in the future continue to provide investment banking and other financial services for the Company in the ordinary course of business for which they have received and will receive customary compensation. LEGAL MATTERS Certain Canadian legal matters relating to the Common Shares offered hereby will be passed upon, on behalf of the Company, by its General Counsel and by Stikeman, Elliott (Toronto) and, on behalf of 74 76 the Underwriters, by Osler, Hoskin & Harcourt (Toronto). Certain U.S. legal matters relating to the Common Shares offered hereby will be passed upon, on behalf of the Company, by Skadden, Arps, Slate, Meagher & Flom LLP (Toronto and New York) and, on behalf of the Underwriters, by Testa, Hurwitz & Thibeault, LLP (Boston). EXPERTS The consolidated balance sheets of the Company and its subsidiaries as of December 31, 1996 and 1995 and the consolidated statements of earnings, retained earnings and changes in financial position for each of the three years in the period ended December 31, 1996, included in this Prospectus have been included herein in reliance on the report of Deloitte & Touche, independent auditors, as stated in their reports, given on the authority of that firm as experts in accounting and auditing. The consolidated balance sheets of Allwaste and its subsidiaries at August 31, 1996 and 1995, and the consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended August 31, 1996 included in this Prospectus have been included herein in reliance on the report of Arthur Anderson LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. The combined statements of income and of cash flows of Pechiney (ISW), Inc., PPC (ISW), Inc. and Intsel Southwest Limited Partnership for the nine months ended September 26, 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated statements of income and cash flows of Luntz Corporation for the fiscal year ended December 31, 1995 included in this Prospectus have been included herein in reliance on the report of Ernst & Young LLP, independent auditors, given on the authority of that firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (including all amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the Common Shares offered hereby. The Prospectus omits certain information contained in the Registration Statement. For further information with respect to the Company and the Common Shares offered hereby, reference is hereby made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any agreement or other document filed as an exhibit to the Registration Statement are not necessarily complete, and in each instance reference is made to the copy of such agreement filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, DC 20549, and copies of all or any part thereof may be obtained from such office upon payment of the prescribed fees. The Company is subject to the information requirements of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder. In accordance therewith, the Company files periodic reports and other information with the Commission. The reports and other information filed by the Company, including the Registration Statement and the exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at its principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices located at Seven World Trade Center, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any part thereof may be obtained from the Public Reference Section of the Commission in Washington, D.C., upon payment of certain fees prescribed by the Commission and are also publicly available through the Commission's web site (http://www.sec.gov). The Common Shares are listed on the NYSE. Reports and other information described above may be inspected and copied at facilities maintained by the New York Stock Exchange, 20 Broad Street, New York, New York 10005. 75 77 INDEX TO FINANCIAL STATEMENTS
PAGE ------ AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF PHILIP SERVICES CORP. Auditors' Report to Shareholders....................................................... F-2 Unaudited Consolidated Balance Sheets at June 30, 1997 and Audited Consolidated Balance Sheets at December 31, 1996 and 1995................................................. F-3 Unaudited Consolidated Statements of Earnings for the six months ended June 30, 1997 and 1996 and Audited Consolidated Statements of Earnings for the fiscal years ended December 31, 1996, 1995 and 1994..................................................... F-4 Unaudited Consolidated Statements of Retained Earnings for the six months ended June 30, 1996 and 1997 and Audited Consolidated Statements of Retained Earnings for the fiscal years ended December 31, 1996, 1995 and 1994.................................. F-5 Unaudited Consolidated Statements of Changes in Financial Position for the six months ended June 30, 1997 and 1996 and Audited Consolidated Statements of Changes in Financial Position for the fiscal years ended December 31, 1996, 1995 and 1994....... F-6 Notes to Consolidated Financial Statements............................................. F-7 UNAUDITED SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA PRESENTED IN U.S. GAAP (IN U.S. DOLLARS).................................................................... F-27 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF ALLWASTE, INC. Condensed Consolidated Balance Sheets at May 31, 1997 (unaudited) and August 31, 1996................................................................................. F-28 Condensed Consolidated Statements of Operations for the nine and three month periods ended May 31, 1997 and May 31, 1996 (unaudited)...................................... F-29 Condensed Consolidated Statements of Cash Flows for the nine month periods ended May 31, 1997 and May 31, 1996 (unaudited)................................................ F-30 Notes to Condensed Consolidated Financial Statements (unaudited)....................... F-31 AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ALLWASTE, INC. Report of Independent Public Accountants............................................... F-35 Audited Consolidated Balance Sheets at August 31, 1996 and 1995........................ F-36 Audited Consolidated Statements of Operations for the fiscal years ended August 31, 1996, 1995 and 1994.................................................................. F-37 Audited Consolidated Statements of Shareholders' Equity at August 31, 1996, 1995, 1994 and 1993............................................................................. F-38 Audited Consolidated Statements of Cash Flows for the fiscal years ended August 31, 1996, 1995 and 1994....................................................... F-39 Notes to Consolidated Financial Statements............................................. F-40 AUDITED FINANCIAL STATEMENTS OF PECHINEY (ISW), INC., PPC (ISW), INC. AND INTSEL SOUTHWEST LIMITED PARTNERSHIP Report of Independent Accountants...................................................... F-58 Audited Combined Statement of Income for the nine month period ended September 26, 1996................................................................................. F-59 Audited Combined Statement of Cash Flows for the nine month period ended September 26, 1996................................................................................. F-60 Audited Notes to Combined Financial Statements......................................... F-61 AUDITED FINANCIAL STATEMENTS OF LUNTZ CORPORATION Report of Independent Auditors......................................................... F-64 Unaudited Consolidated Statement of Income for the eleven month period ended November 30, 1996 and Audited Consolidated Statement of Income for the fiscal year ended December 31, 1995.................................................................... F-65 Unaudited Consolidated Statement of Cash Flows for the eleven month period ended November 30, 1996 and Audited Consolidated Statement of Cash Flows for the fiscal year ended December 31, 1995......................................................... F-66 Notes to Consolidated Statements of Income and Cash Flows.............................. F-67
F-1 78 AUDITORS' REPORT TO SHAREHOLDERS TO THE SHAREHOLDERS OF PHILIP SERVICES CORP. (FORMERLY PHILIP ENVIRONMENTAL INC.) We have audited the consolidated balance sheets of Philip Services Corp. as at December 31, 1996 and 1995, and the consolidated statements of earnings, retained earnings and changes in financial position for each of the years in the three year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1996 and 1995 and the results of its operations and the changes in its financial position for each of the years in the three year period ended December 31, 1996 in accordance with accounting principles generally accepted in Canada. Deloitte & Touche Chartered Accountants Mississauga, Ontario February 26, 1997 (April 22, 1997 with respect to Note 18(d)) F-2 79 PHILIP SERVICES CORP. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- 1996 1995 JUNE 30, ----------- ----------- 1997 (Restated) ----------- (unaudited) (in thousands of Canadian dollars) ASSETS Current assets Cash and equivalents............................ $ 10,485 $ 8,279 $ -- Accounts receivable (net of allowance for doubtful accounts of $8,092; 1995 -- $5,528)...................................... 354,604 273,865 138,180 Inventory for resale............................ 330,085 248,055 99,442 Other current assets (Note 5)................... 50,845 61,219 71,322 ----------- ----------- ----------- 746,019 591,418 308,944 Fixed assets (Note 6)............................. 471,026 348,065 351,849 Goodwill.......................................... 368,289 329,809 292,610 Other assets (Note 7)............................. 108,366 75,690 48,722 Due from an officer and director.................. 737 737 787 ----------- ----------- ----------- $ 1,694,437 $ 1,345,719 $ 1,002,912 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities........ $ 208,064 $ 216,580 $ 126,531 Interim financing loans payable (Note 3)........ -- -- 53,000 Current maturities of long-term debt and loans from related parties (Notes 8 and 17(b))..... 10,973 27,337 22,809 ----------- ----------- ----------- 219,037 243,917 202,340 Long-term debt (Note 8)........................... 681,307 387,431 249,534 Loans from related parties (Note 17(b))........... -- -- 1,128 Deferred income taxes............................. 46,503 42,777 31,430 Other liabilities (Note 10)....................... 55,207 48,243 58,494 Convertible subordinated debentures (Note 11)..... -- -- 147,884 Contingencies (Note 19) Shareholders' equity (Note 12).................... 692,383 623,351 312,102 ----------- ----------- ----------- $ 1,694,437 $ 1,345,719 $ 1,002,912 ========== ========== ========== Signed on behalf of the Board of Directors. HERMAN TURKSTRA ALLEN FRACASSI Director Director
The accompanying notes are an integral part of these financial statements. F-3 80 PHILIP SERVICES CORP. CONSOLIDATED STATEMENTS OF EARNINGS
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ---------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- --------- ---------- ---------- (unaudited) (unaudited) (Restated) (Restated) (in thousands of Canadian dollars except share and per share amounts) Revenue................................... $ 856,629 323,397 802,490 648,311 489,740 Operating expenses........................ 701,300 251,586 615,462 489,569 366,649 Selling, general and administrative....... 63,461 33,445 78,053 66,563 51,216 Depreciation and amortization............. 24,148 15,438 33,966 25,510 21,354 ----------- ----------- --------- ---------- ---------- Income from continuing operations......... 67,720 22,928 75,009 66,669 50,521 Interest -- short-term.................. 304 570 1,180 2,089 2,355 -- long-term..................... 18,908 14,453 23,418 26,098 19,395 Other income and expense -- net......... (5,522) (2,459) (4,782) (3,689) (2,122) ----------- ----------- --------- ---------- ---------- Earnings from continuing operations before tax..................................... 54,030 10,364 55,193 42,171 30,893 Income taxes (Note 15).................... 16,392 2,707 15,180 12,354 8,769 ----------- ----------- --------- ---------- ---------- Earnings from continuing operations....... 37,638 7,657 40,013 29,817 22,124 Discontinued operations (net of tax) (Note 4)...................................... -- 7,234 (1,005) 2,894 2,502 ----------- ----------- --------- ---------- ---------- Net earnings.............................. $ 37,638 $ 14,891 $ 39,008 $ 32,711 $ 24,626 ----------- ----------- --------- ---------- ---------- Basic earnings per share Continuing operations................... $ 0.53 $ 0.19 $ 0.79 $ 0.80 $ 0.61 Discontinued operations................. -- $ 0.18 $ (0.02) $ 0.08 $ 0.07 ----------- ----------- --------- ---------- ---------- $ 0.53 $ 0.37 $ 0.77 $ 0.88 $ 0.68 =========== =========== ========= ========== ========== Fully diluted earnings per share Continuing operations................... $ 0.52 $ 0.19 $ 0.72 $ 0.68 $ 0.55 Discontinued operations................. -- $ 0.18 $ (0.01) $ 0.05 $ 0.05 ----------- ----------- --------- ---------- ---------- $ 0.52 $ 0.33 $ 0.71 $ 0.73 $ 0.60 =========== =========== ========= ========== ========== Weighted average number of common shares outstanding (000s)...................... 70,970 40,586 50,632 37,342 36,209 =========== =========== ========= ========== ==========
The accompanying notes are an integral part of these financial statements. F-4 81 PHILIP SERVICES CORP. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ---------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- --------- ---------- ---------- (unaudited) (unaudited) (Restated) (Restated) (in thousands of Canadian dollars) Balance, beginning of year as previously reported................................ $ 145,679 $ 106,671 $ 106,671 $ 73,960 $ 49,803 Cumulative effect of change in accounting policy (Note 11)........................ -- -- -- -- (469) ----------- ----------- --------- ---------- ---------- Balance, beginning of year as restated.... 145,679 106,671 106,671 73,960 49,334 Net earnings.............................. 37,638 14,891 39,008 32,711 24,626 ----------- ----------- --------- ---------- ---------- Balance, end of year...................... $ 183,317 $ 121,562 $ 145,679 $ 106,671 $ 73,960 =========== =========== ========= ========== ==========
The accompanying notes are an integral part of these financial statements. F-5 82 PHILIP SERVICES CORP. CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ---------------------------- ----------------------------------------- 1997 1996 1996 1995 1994 ----------- ----------- --------- ---------- ---------- (unaudited) (unaudited) (Restated) (Restated) (in thousands of Canadian dollars) OPERATING ACTIVITIES Net earnings from continuing operations... $ 37,638 $ 7,657 $ 40,013 $ 29,817 $ 22,124 Items included in earnings not affecting cash Depreciation and amortization........... 19,006 11,690 26,236 18,458 15,383 Amortization of goodwill................ 5,142 3,748 7,730 7,052 5,971 Deferred income taxes................... 2,589 (3,941) 19,542 15,542 11,503 Net gain on sale of assets.............. -- -- (2,241) (1,215) -- ----------- ----------- --------- ---------- ---------- Cash flow from continuing operations...... 64,375 19,154 91,280 69,654 54,981 Change in non-cash working capital (Note 14)..................................... (131,283) (42,759) (180,518) (49,818) (63,308) ----------- ----------- --------- ---------- ---------- Cash provided by (used in) continuing operating activities.................... (66,908) (23,605) (89,238) 19,836 (8,327) Cash provided by discontinued operating activities.............................. -- 29,494 28,830 15,114 21,649 ----------- ----------- --------- ---------- ---------- Cash provided by (used in) operating activities.............................. (66,908) 5,889 (60,408) 34,950 13,322 ----------- ----------- --------- ---------- ---------- INVESTING ACTIVITIES Proceeds from sale of solid waste operations (Notes 3 & 4)................ -- 53,250 210,800 -- -- Acquisitions -- including acquired cash (bank indebtedness) (Note 3)............ (175,612) (16,335) (222,440) (11,727) (33,997) Purchase of fixed assets.................. (44,539) (22,810) (59,847) (37,016) (29,910) Other -- net.............................. (8,991) (28,573) (35,903) (26,584) (989) ----------- ----------- --------- ---------- ---------- Cash used in continuing investing activities.............................. (229,142) (14,468) (107,390) (75,327) (64,896) Cash used in investing activities of discontinued operations................. -- (14,059) (17,307) (55,824) (18,421) ----------- ----------- --------- ---------- ---------- Cash used in investing activities......... (229,142) (28,527) (124,697) (131,151) (83,317) ----------- ----------- --------- ---------- ---------- FINANCING ACTIVITIES Proceeds from long-term debt.............. 390,317 48,164 338,704 52,643 193,177 Principal payments of long-term debt...... (120,483) (102,613) (255,914) (11,927) (108,671) Conversion of convertible subordinated debentures.............................. -- -- (147,884) -- (170) Common shares issued...................... 28,422 93,896 291,869 1,466 9,824 Other (Note 12)........................... -- -- (20,708) -- (22) ----------- ----------- --------- ---------- ---------- Cash provided by continuing financing activities.............................. 298,256 39,447 206,067 42,182 94,138 Cash provided by (used in) financing activities of discontinued operations... -- (15,980) (12,683) 38,215 (1,903) ----------- ----------- --------- ---------- ---------- Net cash provided by financing activities.............................. 298,256 23,467 193,384 80,397 92,235 ----------- ----------- --------- ---------- ---------- Net change in cash for the year........... 2,206 829 8,279 (15,804) 22,240 Cash position, beginning of year.......... 8,279 -- -- 15,804 (6,436) ----------- ----------- --------- ---------- ---------- Cash position, end of year................ $ 10,485 $ 829 $ 8,279 $ -- $ 15,804 =========== =========== ========= ========== ==========
The accompanying notes are an integral part of these financial statements. F-6 83 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 1. BASIS OF PRESENTATION Philip Environmental Inc. (the "Company") is an integrated resource recovery and industrial services company, which provides metal recovery and processing services, by-products recovery, and industrial services to major industry sectors throughout North America. These consolidated financial statements include the accounts of the Company and all of its subsidiary companies. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in Canadian dollars using accounting principles generally accepted in Canada ("Canadian GAAP") which, except for the matters as described in note 18, conform in all material respects with accounting principles generally accepted in the United States ("US GAAP"). The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from the Company's estimates. For all periods presented, the Consolidated Financial Statements and Notes to the Consolidated Financial Statements disclose the Company's municipal and commercial solid waste business as discontinued operations, as discussed in note 4. Revenue recognition Revenue from by-products recovery operations is recognized upon receipt and acceptance of materials for processing. Treatment, transportation and disposal costs are accrued when the related revenue is recognized. Revenue from environmental service contracts is recorded using the percentage of completion basis for fixed rate contracts and as the related service is provided for time and material contracts. Revenue from the sale of recovered commodities and steel products is recognized at the time of shipment. For contracts where the Company brokers materials between two parties, only the commission on the transaction is recorded. Cash and equivalents Cash and equivalents consist of cash on deposit and term deposits in money market instruments with maturity dates of less than three months from the date they are acquired. Inventory Inventory is recorded at the lower of average purchased cost and net realizable value. Fixed assets Fixed assets are stated at cost and are depreciated over their estimated useful lives generally on the following basis: buildings 20 to 40 years straight-line; equipment 5% to 30% straight-line. Landfill sites and improvements thereto are recorded at cost and amortized over the life of the landfill site based on the estimated landfill capacity as determined by engineering studies and the landfill capacity utilized during the year is based on actual tonnage received by the site. Operating costs associated with landfill sites are charged to operations as incurred. Assets under development include the direct cost of land, buildings F-7 84 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and equipment acquired for future use together with engineering, legal and other costs incurred before the assets are brought into operation. The Company periodically reviews the carrying value of its fixed assets to determine whether such values are recoverable. Any resulting write-downs are charged to earnings. Goodwill Goodwill represents the excess of the purchase price of businesses acquired over the fair value of the identifiable assets acquired and is amortized over periods not exceeding 40 years. At each balance sheet date management assesses the appropriateness of the goodwill balance based on the undiscounted future cash flow from operating results. Other Assets Deferred financing costs are amortized over the life of the related debt instrument. Other intangibles such as non-compete agreements are amortized over periods relating to the terms of the agreements. Environmental liability The Company accrues the estimated costs relating to the closure and post-closure monitoring of its landfill sites. The Company charges earnings with these estimated future costs based on engineering estimates over the fill rate of landfill sites. The accrued liability for environmental and closure costs is disclosed in the consolidated balance sheet under other liabilities. Amounts required to dispose of waste materials located at the Company's transfer and processing facilities are included in accounts payable and accrued liabilities. Interest capitalization The Company includes, as part of the cost of its fixed assets, all financing costs incurred prior to the asset becoming available for operation, providing the resulting capital cost of the fixed asset does not exceed the net recoverable amount of the asset. Foreign currency translation Assets and liabilities denominated in foreign currencies are translated at the exchange rates in effect at the balance sheet date. Gains and losses on translation are reflected in net earnings of the period, except: (i) unrealized foreign currency gains and losses on long-term monetary assets and liabilities which are deferred and amortized over the remaining lives of the related items on a straight-line basis; (ii) unless the item has been designated as a hedge of the net investment in self-sustaining foreign operations, in which case the translation gains and losses are included in the cumulative foreign currency translation adjustment. The assets and liabilities denominated in a foreign currency for foreign operations, all of which are self-sustaining, are translated at exchange rates in effect at the balance sheet date. The resulting gains and losses are accumulated in a separate component of shareholders' equity. Revenue and expense items are translated at average exchange rates prevailing during the period. F-8 85 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Financial instruments The Company's accounts receivable and long-term debt constitute financial instruments. The Company's accounts receivable approximated their fair value as at December 31, 1996 and 1995. Concentration of credit risk in accounts receivable is limited, due to the large number of customers the Company services. The Company performs ongoing credit evaluations of its customers, but does not require collateral to support customer accounts receivable. The Company establishes an allowance for doubtful accounts based on the credit risk applicable to particular customers, historical and other information. 3. ACQUISITIONS AND DIVESTITURES (in thousands) During 1996, the Company acquired eleven businesses, including Intsel Southwest Limited Partnership ("Intsel") and Luntz Corporation ("Luntz"). Intsel is a distributor of a broad range of heavy carbon steel products based in Houston, Texas. Luntz, based in Canton, Ohio, provides ferrous scrap and mill services in the USA. During 1995, six businesses were acquired and during 1994, two businesses were acquired. All business combinations have been accounted for using the purchase method of accounting and are summarized below:
JUNE 30, --------------------- DECEMBER 31, -------------------------------------------------------------------------- 1997 1996 1995 1994 --------- -------- --------- --------- 1996 ------------------------------------------------ INTSEL LUNTZ OTHER TOTAL --------- --------- --------- --------- Purchase consideration Cash..................... $ 131,576 $ 7,377 $ 84,020 $ 2,473 $ 62,595 $ 149,088 $ 2,565 $ 6,650 Company's common shares................. 23,644 13,000 -- 27,200 13,000 40,200 1,700 8,500 Deferred payments and long-term debt......... 8,681 (4,084) -- 24,480 5,940 30,420 6,140 17,000 Acquisition costs and accruals............... 1,868 43 270 791 4,202 5,263 944 116 --------- -------- --------- --------- --------- --------- --------- --------- $ 165,769 $ 16,336 $ 84,290 $ 54,944 $ 85,737 $ 224,971 $ 11,349 $ 32,266 ========= ======== ========= ========= ========= ========= ========= ========= Fair value of net assets acquired Cash (bank indebtedness).......... $ (9,843) $ 1 $ 2,709 $ -- $ (178) $ 2,531 $ (378) $ (1,731) Long-term debt........... (4,946) (308) -- (12,593) (7,134) (19,727) (338) (3,799) Assets, excluding cash & intangibles............ 181,607 6,607 68,036 93,070 70,577 231,683 19,358 26,499 Liabilities.............. (62,544) (1,449) (24,889) (40,678) (20,366) (85,933) (18,441) (13,516) Goodwill................. 43,243 8,116 37,066 12,425 39,469 88,960 10,308 23,313 Other intangibles........ 18,252 3,369 1,368 2,720 3,369 7,457 840 1,500 --------- -------- --------- --------- --------- --------- --------- --------- $ 165,769 $ 16,336 $ 84,290 $ 54,944 $ 85,737 $ 224,971 $ 11,349 $ 32,266 ========= ======== ========= ========= ========= ========= ========= =========
F-9 86 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 3. ACQUISITIONS AND DIVESTITURES (CONTINUED) The following table summarizes the unaudited consolidated pro-forma results of operations, assuming the 1996 acquisitions of Luntz and Intsel had occurred at the beginning of 1995. This information does not purport to be indicative of the results of the operations that actually would have resulted if the acquisitions had occurred on January 1, 1995.
YEARS ENDED DECEMBER 31 1996 1995 - ------------------------------------------------------------ ----------- ----------- (unaudited) Revenue..................................................... $ 1,064,210 $ 1,028,758 Earnings from continuing operations......................... $ 47,637 $ 38,191 Fully diluted earnings per share from continuing operations................................................ $ 0.83 $ 0.74
In July 1995, the Company acquired the 30% minority interest in Intersan Inc. ("Intersan") not previously owned by the Company for $40,000. The Company arranged interim financing (the "Interim Financing") to acquire the 30% minority interest and to repay a $13,000 advance from the former minority shareholder. The Interim Financing bore interest at a rate of 10% per annum and was secured by the assets of Intersan. In November 1995, the Company reached an agreement to sell the Greater Montreal Area solid waste collection and transfer business of Intersan (the "Intersan Business") for $43,250. As part of the sale of the Intersan Business, the Company entered into a disposal services agreement with the purchaser. The initial consideration for the disposal service agreement amounted to $10,000 and was recorded as deferred revenue (note 10). The proceeds from the sale of the Intersan Business, and the disposal services agreement, which amounted to $53,250, were received in January 1996, and used to repay in full the Interim Financing. Subsequent to the year end, the Company acquired three additional businesses. RMF Global, Inc. of Toledo, Ohio provides industrial maintenance and mechanical services, remediation, cleaning and abatement services. Warrenton Resources, Inc. of Warrenton, Missouri, and Conversion Resources, Inc., of Cleveland, Ohio, two sister companies are processors of non-ferrous metals. Allied Metals Limited ("Allied") is a steel scrap processing and mill services company in the United Kingdom. The total consideration paid for these acquired businesses amounted to approximately $113,500 and was made up of $94,700 in cash, $18,400 in shares of the Company and $400 in deferred payments to the vendors. All three business combinations will be accounted for using the purchase method of accounting in 1997. 4. DISCONTINUED OPERATIONS (in thousands) In August 1996, the Company sold its municipal and commercial solid waste business (the "Solid Waste Business") for a total consideration of US $115,000 to USA Waste Services, Inc. ("USA Waste"). The consideration included US $60,000 in cash, US $38,000 in unrestricted common shares of USA Waste, and US $17,000 in restricted common shares of USA Waste (in total, representing less than 2% of USA Waste's voting stock). The unrestricted common shares of USA Waste were sold in September 1996 for US $39,508, resulting in a gain before tax of US $1,508 which is included in Other income and expense -- net in the Consolidated Statements of Earnings. The restriction on the US $17,000 common shares of USA Waste ($23,290 at December 31, 1996) was removed in January 1997 and in February 1997, the Company sold these shares for US $19,800, resulting in a further gain before tax of US $2,800. F-10 87 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 4. DISCONTINUED OPERATIONS (CONTINUED) As part of the sale of the Solid Waste Business, the Company entered into a five year disposal services agreement with the purchaser at preferential tipping rates to utilize disposal capacity at two of the landfills which were sold. No value was assigned to this agreement in the calculation of the loss which resulted on the sale of the Solid Waste Business. The value of this agreement, estimated to be US $3,000 on a discounted basis, will be recognized as a reduction in future disposal costs as capacity at the landfills is utilized. The sale of the Solid Waste Business in 1996 included the remaining portion of Intersan, and the disposal services agreement, as described in note 3. Revenue of the Solid Waste Business, net of intercompany revenue, was $51,962, $83,850 and $80,573 for the fiscal years ended December 31, 1996, 1995 and 1994, respectively. Income from discontinued operations in the Consolidated Statements of Earnings is presented net of allocated interest expense of $5,133, $7,000 and $4,500 and net of applicable income taxes of $4,394, $2,363 and $2,218 for the fiscal years ended December 31, 1996, 1995 and 1994, respectively. Interest was allocated based upon the ratio of the net assets of the Solid Waste Business to the Company's consolidated net assets. No general corporate overhead was allocated to the discontinued operations.
YEARS ENDED DECEMBER 31 1996 1995 1994 - ----------------------------------------------------------- -------- ------- ------- Loss on sale of Solid Waste Business, net of income taxes recoverable of $3,607.................................... $ (7,848) $ -- $ -- Income from discontinued operations (net of tax)........... 6,843 2,894 2,502 -------- ------- ------- Discontinued operations.................................... $ (1,005) $ 2,894 $ 2,502 ======== ====== ======
5. OTHER CURRENT ASSETS (in thousands)
DECEMBER 31, JUNE 30, ---------------------- 1997 1996 1995 -------- -------- -------- Shares of USA Waste (note 4)............................ $ -- $ 23,290 $ -- Parts and supply inventory.............................. 12,485 10,048 7,361 Deposits on contracts................................... 17,963 14,049 4,848 Income taxes (payable) recoverable...................... (6,058) 1,790 (1,244) Prepaid expenses........................................ 3,127 1,660 2,847 Other................................................... 23,328 10,382 4,260 Proceeds receivable from sale of the Intersan Business and the disposal services agreement (note 3).......... -- -- 53,250 -------- -------- -------- $ 50,845 $ 61,219 $ 71,322 ======== ======== ========
F-11 88 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 6. FIXED ASSETS (in thousands)
JUNE 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------------------------- ----------------------------------- ----------------------------------- ACCUMULATED NET BOOK ACCUMULATED NET BOOK ACCUMULATED NET BOOK COST DEPRECIATION VALUE COST DEPRECIATION VALUE COST DEPRECIATION VALUE --------- ----------- --------- --------- ----------- --------- --------- ----------- --------- Land.......... $ 69,823 $ -- $ 69,823 $ 54,835 $ -- $ 54,835 $ 51,798 $ -- $ 51,798 Landfill sites....... 24,947 2,219 22,728 21,279 891 20,388 95,048 12,650 82,398 Buildings..... 98,421 16,564 81,857 81,336 10,694 70,642 59,836 5,072 54,764 Equipment..... 370,174 93,254 276,920 254,841 74,102 180,739 177,928 38,728 139,200 Assets under development... 19,698 -- 19,698 21,461 -- 21,461 23,689 -- 23,689 --------- ----------- --------- --------- ----------- --------- --------- ----------- --------- $ 583,063 $ 112,037 $ 471,026 $ 433,752 $ 85,687 $ 348,065 $ 408,299 $ 56,450 $ 351,849 ========= =========== ========= ========= =========== ========= ========= =========== =========
7. OTHER ASSETS (in thousands)
DECEMBER 31, JUNE 30, ---------------------- 1997 1996 1995 --------- -------- -------- Restricted investments (a)............................. $ 35,972 $ 32,420 $ 21,205 Deferred financing costs............................... 14,770 15,188 8,735 Other.................................................. 57,624 28,082 18,782 --------- -------- -------- $ 108,366 $ 75,690 $ 48,722 ========= ======== ========
(a) These restricted investments support the Company's self-insurance program and are invested and managed by the Company's wholly-owned insurance subsidiary. F-12 89 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 8. LONG TERM DEBT (in thousands)
DECEMBER 31, JUNE 30, ------------------------ 1997 1996 1995 --------- --------- --------- Bank term loan (including US $150,794 in 1996; US $9,950 in 1995)(a)................................. $ 630,811 $ 339,889 $ 219,846 Bank term loan (b)................................... -- -- 13,900 Loans (including US $767 in 1996; US $1,122 in 1995) collateralized by certain assets of subsidiaries of the Company having a net book value of $11,947 bearing interest at a weighted average fixed rate of 5.7% (1995 -- 9.21%) maturing at various dates up to 2002......................................... 6,704 7,089 1,920 Loans (including US $3,608 in 1996; US $615 in 1995) collateralized by certain assets of subsidiaries of the Company having a net book value of $16,565 bearing interest at prime plus a weighted average floating rate of 1.87% (1995 -- 1.14%) maturing at various dates up to 2002........................... 4,948 7,508 4,287 Loans (including US $25,625), unsecured, bearing interest at prime plus a weighted average floating rate of 3.37% maturing at various dates up to 2001............................................... 25,248 35,698 -- Obligations under capital leases on equipment bearing interest at rates varying from 6% to 12% maturing at various dates to 2002........................... 22,754 19,841 16,336 Other................................................ 1,815 3,611 12,111 --------- --------- --------- 692,280 413,636 268,400 Less current maturities of long-term debt (c)........ 10,973 26,205 18,866 --------- --------- --------- $ 681,307 $ 387,431 $ 249,534 ========= ========= =========
(a) In September 1996, the Company signed a new US $550 million term loan agreement with a syndicate of Canadian and US lenders which replaced the 1994 revolving term loan agreement and refinanced certain other long-term debt. The new term loan agreement expires in September of 2000, and contains certain restrictive covenants and financial covenants including the following: - the Company must meet interest ratio coverage tests as well as total debt and secured debt ratio coverage tests - the Company must maintain a prescribed level of shareholders' equity - certain acquisitions by the Company must be reviewed by the lenders prior to completion At December 31, 1996 the Company is in compliance with all of the covenants of the credit agreement. Borrowings under the credit facility are guaranteed, jointly and severally by the Company's wholly owned subsidiaries and are collateralized by a fixed and floating charge on substantially all of the assets of the Company and its wholly owned subsidiaries. The facility bears interest based on a moving grid. At December 31, 1996, the Company was paying prime rate, which was 4.75%, on these borrowings. F-13 90 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 8. LONG TERM DEBT (CONTINUED) At December 31, 1996, the Company had undrawn credit capacity under this facility of approximately $395,200, net of outstanding letters of credit which amounted to $18,400. (b) Intersan (note 3) had a separate term loan which bore interest at rates varying from prime to prime plus 0.25% and was collateralized by substantially all of the assets of Intersan. This loan was repaid in January of 1996. (c) The aggregate amount of payments required to meet long-term debt installments in each of the next five years is as follows: 1997................................................... $ 26,205 1998................................................... 6,047 1999................................................... 5,192 2000................................................... 373,482 2001................................................... 2,710
9. FINANCIAL INSTRUMENTS (in thousands) Derivative financial instruments are used to fix the interest rate on a portion of the Company's floating rate debt, thereby maintaining interest rate risk at an acceptable level. This is accomplished by swapping the Company's floating rate interest obligations, on a notional amount of debt, with commercial banks having a fixed rate interest obligation. As a result the Company is reliant upon the counterparty to fulfill its obligations and provide protection from interest rate fluctuations. This credit risk exposure is controlled by dealing only with counterparties with strong public credit ratings. A summary of these interest rate swap agreements is as follows:
1996 1995 --------- --------- Notional amount................................................... $ 260,000 $ 180,000 Weighted average term to maturity (years)......................... 1.1 1.5 Average interest rate to maturity................................. 6.60% 6.72%
10. OTHER LIABILITIES (in thousands)
DECEMBER 31 JUNE 30 ---------------------- 1997 1996 1995 -------- -------- -------- Deferred payments (a)................................... 22,497 $ 16,129 $ 20,143 Accrued environmental and closure costs................. 21,604 25,819 24,107 Deferred revenue........................................ -- -- 10,000 Other................................................... 11,106 6,295 4,244 -------- -------- -------- $ 55,207 $ 48,243 $ 58,494 ======== ======== ========
(a) Deferred payments relate to acquisitions (see Acquisitions and Divestitures note 3), whereby the former owners of the businesses have agreed to accept part of their payment over future periods of time. All such amounts are non-interest bearing and are unsecured. F-14 91 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 11. CONVERTIBLE SUBORDINATED DEBENTURES (in thousands except per share amounts)
1995 1996 ---------- --------- (restated) 6% Convertible subordinated debentures........................... $ -- $ 147,884
In 1993, the Company issued US $120,000, 6% convertible subordinated debentures due October 15, 2000 unless previously redeemed, with interest payable each April 15 and October 15. The debentures were convertible at the option of the holder into common shares of the Company at any time up to October 15, 2000 at a conversion price of US$6.25 per common share. In 1994, debentures of US$125 were converted. During 1996, all of the remaining 6% convertible subordinated debentures outstanding were converted into common shares of the Company. Notwithstanding the conversion of these debentures, the January 1996 pronouncement from the Canadian Institute of Chartered Accountants ("CICA") referred to as Section 3860 and entitled "Financial Instruments -- Disclosure and Presentation" is applicable for the Company's year ended December 31, 1996 and, as required, Section 3860 has been applied retroactively. Where a financial instrument consists of both a liability and an equity component, Section 3860 requires that each part be reported separately in accordance with guidance provided in the pronouncement. The Company has therefore restated the liability represented by the 6% convertible subordinated debentures. In addition, shareholders' equity has been restated to include the component of the 6% convertible subordinated debentures deemed to be "other paid in capital" under Section 3860 and amounting to $20,708 at December 31, 1995. Interest expense has been increased for the years ended December 31, 1996, 1995 and 1994 by $2,060, $2,630 and $2,411, respectively to disclose the restated interest expense, and net earnings have been correspondingly reduced. Basic earnings per share have been restated to reflect the reduced net earnings which result from the application of this pronouncement. Fully diluted earnings per share previously reported by the Company remain unchanged for each of the years ended December 31, 1996, 1995 and 1994 since the number of common shares represented by the 6% convertible subordinated debentures remains unchanged and the interest expense of the related liability regardless of how determined, is eliminated in the computation of fully diluted earnings per share. F-15 92 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 12. SHAREHOLDERS' EQUITY (in thousands except number of shares)
DECEMBER 31, ------------------------------ JUNE 30, 1995 1997 1996 ------------ ------------ ------------ (restated) Share capital................................ $ 505,193 $ 476,771 $ 184,901 Other paid in capital (note 11).............. -- -- 20,708 Retained earnings............................ 183,317 145,679 106,671 Cumulative foreign currency translation adjustment................................. 3,873 901 (178) ------------ ------------ ------------ $ 692,383 $ 623,351 $ 312,102 ============ ============ ============ SHARE CAPITAL CONSISTS OF: Authorized Unlimited number of common shares ISSUED Common shares and equivalents Number....................................... 71,469,365 69,876,868 37,453,833 Dollars...................................... $ 505,193 $ 476,771 $ 184,901
The issued share capital of the Company is comprised of the following:
COMMON SHARES -------------------------- NUMBER AMOUNT ----------- --------- BALANCE -- DECEMBER 31, 1994.................................... 37,271,522 $ 183,436 Shares issued in respect of acquisitions during 1995............ 194,116 1,700 Shares cancelled................................................ (68,404) (670) Other........................................................... 32,985 246 Share options exercised for cash................................ 23,614 189 ----------- --------- BALANCE -- DECEMBER 31, 1995.................................... 37,453,833 184,901 Shares issued in respect of acquisitions during 1996............ 3,600,102 40,200 Shares issued on conversion of convertible subordinated debentures.................................................... 19,180,000 146,059 Other paid in capital (note 11)................................. -- 20,708 Shares issued for cash.......................................... 8,625,000 76,065 Share options exercised for cash................................ 953,724 8,365 Other........................................................... 64,209 473 ----------- --------- BALANCE -- DECEMBER 31, 1996.................................... 69,876,868 476,771 Shares issued in respect of acquisitions during 1997............ 1,035,347 23,644 Share options exercised for cash................................ 514,738 3,978 Other........................................................... 42,412 800 ----------- --------- BALANCE -- JUNE 30, 1997........................................ 71,469,365 $ 505,193 ========== =========
F-16 93 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 12. SHAREHOLDERS' EQUITY (CONTINUED) STOCK OPTIONS Common share options issued and outstanding are as follows:
NUMBER $/SHARE --------- ------------------ Employee stock option plans (a) Year of grant 1992......................................................... 50,000 8.00 to 10.375 1993......................................................... 134,000 8.18 to 9.00 1994......................................................... 842,080 6.75 to 8.00 1995......................................................... 843,812 7.875 to 9.875 1996......................................................... 1,210,800 8.50 to 11.90 Issued in conjunction with the acquisition of Philip Environmental Corporation (c).............................. 776,386 7.05 to 8.00 Issued to a director of the Company (b)(c)................... 200,000 7.35 --------- Total outstanding December 31, 1996.......................... 4,057,078 =========
(a) The Company has allotted and reserved 4,257,149 common shares under its 1991 and 1994 Employee Stock Option Plans. Under the plans, options may be granted to purchase common shares of the Company at the then current market price. All options currently expire five to ten years from the date of grant. All the options outstanding were issued at the then current market price. (b) These options were issued in 1991 at a discount to the then current market. (c) These options expire on November 26, 2000. 13. INVESTMENT IN PHILIP UTILITIES MANAGEMENT CORPORATION (in thousands) In October 1996, the Company entered into an agreement with the Ontario Teachers' Pension Plan Board ("Teachers"'), whereby Teachers' acquired an equity position in Philip Utilities Management Corporation ("PUMC"), a subsidiary of the Company. Under the terms of the agreement, Teachers' invested $10 million in equity and will purchase $10 million in subordinated convertible debentures in return for a 30% voting and a 6.4% non-voting interest, respectively, in PUMC. As of December 31, 1996 Teachers' had not purchased any subordinated convertible debentures. Prior to divesting of its 30% ownership interest in PUMC, the Company consolidated the results of the subsidiary. The Company recorded in income only the net fees earned by PUMC for management services rendered, which were insignificant. The shareholders agreement between Teachers' and the Company provides for joint control of all economic activities of PUMC and therefore, from November 1, 1996, the Company's investment in PUMC has been recognized using the proportionate consolidation method. The disposition of the Company's 30% interest in PUMC resulted in a gain of $2,241 which is included in Other income and expense -- net in the Consolidated Statements of Earnings. F-17 94 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 13. INVESTMENT IN PHILIP UTILITIES MANAGEMENT CORPORATION (CONTINUED) At December 31, 1996, the Company's interest in the financial position of PUMC was as follows: Current assets................................................................. $ 12,524 Long-term assets............................................................... $ 14,853 Current liabilities............................................................ $ 7,831 Long-term liabilities.......................................................... $ 4,388 Financial results of PUMC for the two month period ended December 31, 1996 were as follows: Revenue........................................................................ $ 1,812 Expenses....................................................................... $ 1,816 Net loss....................................................................... $ (4) Cash used in operating activities.............................................. $ (83) Cash provided by financing activities.......................................... $ 74 Cash used in investing activities.............................................. $ (1,493)
14. CHANGE IN NON-CASH WORKING CAPITAL (in thousands)
YEARS ENDED DECEMBER 31 ---------------------------------------- 1996 1995 1994 ---------- --------- --------- Accounts receivable................................. $ (51,135) $ (27,078) $ (18,472) Inventory for resale................................ (77,316) (33,121) (49,424) Other............................................... (47,544) (18,215) (3,105) Accounts payable and accrued liabilities............ 1,155 20,943 12,559 Income taxes........................................ (5,678) 7,653 (4,866) ---------- --------- --------- $ (180,518) $ (49,818) $ (63,308) ========== ========= =========
15. INCOME TAXES (in thousands) The Company's income tax provision is comprised of the following:
YEARS ENDED DECEMBER 31 -------------------------------------- 1996 1995 1994 -------- -------- -------- Income tax based on the Federal and Provincial effective income tax rates........................ $ 24,627 $ 18,820 $ 13,697 Increase (decrease) in income taxes resulting from: Lower income tax rates in the USA and other jurisdictions.................................. (6,236) (5,249) (5,484) Manufacturing and processing allowances........... (5,526) (3,394) (1,037) Non-deductible expenses for income tax purposes, principally goodwill amortization.............. 3,298 3,854 2,825 Utilization of unrecognized loss carryforwards.... -- (1,160) -- Other............................................... (983) (517) (1,232) -------- -------- -------- Income taxes........................................ $ 15,180 $ 12,354 $ 8,769 ======== ======== ========
F-18 95 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 15. INCOME TAXES (CONTINUED) The allocation between current and deferred income taxes results primarily from the accelerated write-off of expenditures for income tax purposes and certain accounting accruals not currently deductible for income tax purposes, offset by the accounting recognition of loss carryforwards. 16. INTEREST CAPITALIZATION (in thousands) During the years ended December 31, 1996, 1995 and 1994 the Company included $3,040, $2,427, and $747 respectively of financing costs as part of the cost of assets under development. 17. RELATED PARTIES (in thousands) (a) The following transactions were recorded with the directors and officers of the Company:
1996 1995 1994 -------- --------- -------- Advances from (repayments to) directors............ $ (3,943) $ (18,311) $ (3,889) Interest paid to directors......................... 267 1,891 2,040 Unsecured advances to an officer and director-net..................................... (50) (50) (37)
(b) Loans from related parties consist of:
1996 1995 ------- ------- Note payable (US$826 in 1996; US$2,810 in 1995) to the former owner of an acquired company who is a director of the Company (i)............................................................. $ 1,132 $ 3,835 Mortgage payable to a company owned in part by a director of the Company (ii).................................................... -- 1,236 ------- ------- 1,132 5,071 Less current maturities of loans.................................. 1,132 3,943 ------- ------- $ -- $ 1,128 ====== ======
(i) The $1,132 (1995 -- $3,835) advance is unsecured and bears interest at US prime plus 2% per annum and is payable in monthly installments of $226 plus interest. (ii) The mortgage was secured by the property acquired and bore interest at a rate of 12.84% per annum. This mortgage was paid in full in January 1996 and therefore was included as part of current maturities at December 31, 1995. 18. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (in thousands) These consolidated financial statements have been prepared in accordance with Canadian GAAP which conforms in all material respects with US GAAP except as noted below: (a) Balance Sheets The Financial Accounting Standards Board SFAS No. 109 "Accounting for Income Taxes" requires pre-acquisition losses to be recognized as a reduction in goodwill rather than as a reduction in the income tax provision. Therefore, under US GAAP, the goodwill and the retained earnings disclosed in the Consolidated Balance Sheets at December 31, 1996 and 1995 would be reduced by $4,652 and $4,777 respectively. F-19 96 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 18. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) The separate reporting of the liability and equity components of a financial instrument required by the January 1996 pronouncement by the CICA referred to in note 11 to the Consolidated Financial Statements as Section 3860, is not permitted under US GAAP. Therefore, the restatement of the Company's Consolidated Financial Statements discussed in note 11 must be eliminated to reflect US GAAP. Specifically, under US GAAP, the liability represented by the 6% convertible subordinated debentures would be $163,629 at December 31, 1995, the other paid in capital at December 31, 1995 would be zero, and the share capital of the Company would be $469,853 at December 31, 1996. The retained earnings of the Company would be $150,875, $112,182, and $76,841 as at December 31, 1996, 1995 and 1994, respectively, after adjusting for the impact of Section 3860 as discussed above and adjusting for Luntz as described in paragraph (b) of this note. (b) Statements of Earnings The statements of earnings for the years ended December 31, 1996, 1995, and 1994 have to be adjusted to eliminate the effect of the increased interest expense required under CICA Section 3860, which is not permitted under US GAAP (note 11 to the Consolidated Financial Statements). In addition, under US GAAP, the revenue and expenses of Luntz would not have been included in the Consolidated Statements of Earnings until such time as the Shareholders of Luntz had definitively approved the purchase and sale agreement which occurred on or about December 23, 1996. In 1994, the Company had negotiated a separate line of credit which provided the Company with flexibility if the former minority shareholder of Intersan exercised his right to require the Company to purchase his minority interest in Intersan for $30 million in common shares of the Company. The Company therefore deleted these shares from the calculation of the fully diluted earnings per share for the year ended December 31, 1994. As a result, the basic earnings per share for the year ended December 31, 1994 would not be materially different under US GAAP, but the fully diluted earnings per share for the year ended December 31, 1994 would be reduced. F-20 97 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 18. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) The consolidated statements of earnings which follow have been adjusted to disclose the above noted differences between Canadian GAAP and US GAAP.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ---------------------- ----------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (in thousands of Canadian dollars except share and per share amounts) Revenue............................... $ 856,629 $ 323,397 $ 742,975 $ 648,311 $ 489,740 Operating expenses.................... 701,300 251,586 563,393 489,569 366,649 Selling, general and administrative... 63,461 33,445 75,674 66,563 51,216 Depreciation and amortization......... 24,148 15,438 33,006 25,510 21,354 --------- --------- --------- --------- --------- Income from continuing operations..... 67,720 22,928 70,902 66,669 50,521 Interest -- short-term................ 304 570 1,180 2,089 2,355 -- long-term................. 18,908 14,453 20,977 23,468 16,984 Other income and expense -- net..... (5,522) (2,459) (4,708) (3,689) (2,122) --------- --------- --------- --------- --------- Earnings from continuing operations before tax.......................... 54,030 10,364 53,453 44,801 33,304 Income taxes.......................... 16,392 2,707 13,755 12,354 8,769 --------- --------- --------- --------- --------- Earnings from continuing operations... 37,638 7,657 39,698 32,447 24,535 Discontinued operations (net of tax)................................ -- 7,234 (1,005) 2,894 2,502 --------- --------- --------- --------- --------- $ 37,638 $ 14,891 $ 38,693 $ 35,341 $ 27,037 ========= ========= ========= ========= =========
F-21 98 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 18. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (c) Statements of Changes in Financial Position Amounts included in the Consolidated Statements of Changes in Financial Position include items which were of a non-cash transaction basis and would not be included for US GAAP reporting. The following is a summary of the changes in operating, investing and financing activities under US GAAP.
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------ ------------------------------------ 1997 1996 1996 1995 1994 ---------- ---------- ---------- --------- --------- (in thousands of Canadian dollars) OPERATING ACTIVITIES Net earnings from continuing operations....................... $ 37,638 $ 9,040 $ 39,698 $ 32,447 $ 24,535 Items included in earnings not affecting cash................... 26,737 11,497 50,307 39,837 32,857 ---------- ---------- ---------- --------- --------- Cash flow from continuing operations....................... 64,375 20,537 90,005 72,284 57,392 Change in non-cash working capital.......................... (154,731) (43,034) (154,172) (51,286) (71,312) ---------- ---------- ---------- --------- --------- Cash provided by (used in) continuing operating activities....................... (90,356) (22,497) (64,167) 20,998 (13,920) Cash provided by discontinued operating activities............. -- 29,495 28,830 15,114 21,649 ---------- ---------- ---------- --------- --------- Cash provided by (used in) operating activities............. (90,356) 6,998 (35,337) 36,112 7,729 ---------- ---------- ---------- --------- --------- INVESTING ACTIVITIES Proceeds from sale of solid waste operations....................... 23,448 53,250 187,510 -- -- Acquisitions -- including acquired cash (bank indebtedness)......... (143,149) (7,346) (151,821) (3,887) (7,997) Purchase of fixed assets........... (35,503) (15,269) (40,877) (32,044) (23,510) Other -- net....................... (19,643) (24,289) (44,291) (30,800) (11,489) ---------- ---------- ---------- --------- --------- Cash used in continuing investing activities....................... (174,847) 6,346 (49,479) (66,731) (42,996) Cash used in investing activities of discontinued operations....... -- (14,059) (17,307) (15,237) (18,421) ---------- ---------- ---------- --------- --------- Cash used in investing activities....................... (174,847) (7,713) (66,786) (81,968) (61,417) ---------- ---------- ---------- --------- --------- FINANCING ACTIVITIES Proceeds from borrowings of long-term debt................... 388,439 40,623 294,820 44,585 185,348 Principal payments of long-term debt............................. (124,882) (103,994) (255,914) (11,927) (108,675) Common shares issued............... 3,852 80,896 84,179 189 893 ---------- ---------- ---------- --------- --------- Cash provided by continuing financing activities............. 267,409 17,525 123,085 32,847 77,566 Cash used in financing activities of discontinued operations....... -- (15,980) (12,683) (2,795) (1,638) ---------- ---------- ---------- --------- --------- Cash provided by financing activities....................... $ 267,409 $ 1,545 $ 110,402 $ 30,052 $ 75,928 ---------- ---------- ---------- --------- ---------
F-22 99 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 18. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) There is no impact on the Company's cash position as a result of the variances between Canadian GAAP and US GAAP. (d) Additional Disclosure The following additional disclosures would be provided under US GAAP.
1996 1995 1994 -------- -------- -------- (I) Cash paid for interest.............................. $ 26,551 $ 37,701 $ 26,459 Cash paid for income taxes......................... $ 1,526 $ 3,168 $ 3,919
(II) SEGMENTED INFORMATION
1994 ------------------------ CANADA US Revenue....................................................... $ 390,768 $ 179,545 Gross Profit.................................................. $ 90,675 $ 41,229 Total Assets.................................................. $ 613,962 $ 246,621
(III) SHAREHOLDERS' EQUITY
COMMON SHARES -------------------------- NUMBER AMOUNT Balance -- December 31, 1993................................ 35,906,500 $ 173,612 Shares issued in respect of acquisitions during 1994........ 1,117,914 8,500 Shares issued on conversion of subordinated debentures...... 20,000 170 Other....................................................... 47,108 470 Share options exercised for cash............................ 180,000 684 ----------- --------- Balance -- December 31, 1994................................ 37,271,522 $ 183,436 ========== =========
(IV) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS Stock Options SFAS No. 123 "Accounting for Stock Based Compensation", issued in October 1995, defines a fair value based method of accounting for employee stock options. Under this fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the exercise period. However, SFAS No. 123 allows an entity to continue to measure compensation cost in accordance with Accounting Principle Board Statement No. 25 ("APB 25"). The Company has elected to measure compensation costs related to stock options in accordance with ABP 25 and recognizes no compensation expense for stock options granted. Accordingly, the Company has adopted the disclosure-only provisions of SFAS No. 123. F-23 100 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 18. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) If compensation costs were measured using the fair value of the stock options on the date of grant, during 1995 and 1996, in accordance with SFAS No. 123, the Company's net earnings would be as follows:
1996 1995 ----------------------------- ----------------------------- AS REPORTED AS REPORTED ----------- AS ADJUSTED ----------- AS ADJUSTED ------------ ------------ For SFAS 123 For SFAS 123 Net earnings under US GAAP.... $ 38,693 $ 35,634 $ 35,341 $ 34,077 Basic earnings per share...... $ 0.77 $ 0.71 $ 0.95 $ 0.91 Fully Diluted earnings per share....................... $ 0.68 $ 0.63 $ 0.73 $ 0.71
The weighted average fair value of options granted in 1996 and 1995 were $1.98 and $1.63 respectively. The fair value of each option was determined using the Black-Scholes option valuation model with the following assumptions for 1996 and 1995: (i) risk free interest rate of 6.96 and 7.58 percent, respectively, (ii) expected volatility of 32.74 and 23.95 percent, respectively, (iii) expected option life of ranging from 5 to 10 years and (iv) no annualized dividend yield. Earnings per Share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings per Share" which is effective for years ending after December 15, 1997 (fiscal 1997 for the Company). This statement replaces the presentation of primary earnings per share with a presentation of basic earnings per share ("EPS"). Basic EPS excludes the dilution effect of common stock equivalents previously included in primary EPS and is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. The calculation of diluted EPS will not change under SFAS No. 128. The adoption of SFAS No. 128 by the Company, will not materially change the amounts disclosed as basic EPS. (V) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of long-term debt is estimated to approximate fair value based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The Company's fair value obligation for all interest rate derivative contracts disclosed in Note 9 to the Consolidated Financial Statements as of December 31, 1996 and December 31, 1995 approximate the face value due to the short-term nature of these instruments. The fair value of the Company's convertible subordinated debentures as at December 31, 1995 was estimated to be $147.8 million based on the discounted value of the required future cash payments using an estimated current borrowing rate of a similar liability at December 31, 1995 of 8.5%. F-24 101 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 18. CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES (CONTINUED) (VI) INCOME TAXES The following disclosure is required under the Financial Accounting Standards Board SFAS No. 109 "Accounting for income taxes": The net deferred tax liability consists of the following temporary differences:
1996 1995 --------- --------- Difference in fixed assets and goodwill basis................. $ 60,998 $ 41,959 Net operating loss carryforwards.............................. (21,482) (16,252) Other......................................................... 3,261 5,723 --------- --------- Net deferred tax liability.................................... $ 42,777 $ 31,430 ========= =========
The net operating loss carryforwards expire between the years 2002 and 2011. In assessing the value of the deferred tax assets, management considers whether it is more likely than not that all of the deferred tax assets be realized. Projected future income, tax planning strategies and the expected reversal of deferred tax liabilities are considered in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods which the net operating losses are deductible, it is more likely than not the Company will realize the benefits of these deferred tax assets and therefore, has recorded no valuation allowance. The amount of the deferred tax asset considered realizable, however, could be reduced in the future if estimates of future taxable income during the carryforward period are reduced. (VII)ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
DECEMBER 31, JUNE 30, ------------------------ 1997 1996 1995 --------- --------- --------- Accounts payable................................. $ 155,939 $ 152,325 $ 76,204 Accrued liabilities.............................. 52,125 64,255 50,327 --------- --------- --------- $ 208,064 $ 216,580 $ 126,531 ========= ========= =========
19. CONTINGENCIES (in thousands) (a) Certain operating subsidiaries acquired by the Company have been named as a potentially responsible or liable party in respect of several US federal or state superfund sites. These proceedings are principally based on allegations that the subsidiaries (or their predecessors) disposed of hazardous substances at the sites in question. Based on its review of these claims, the Company has estimated its share of the cost to remediate these sites and has accrued $574 as at December 31, 1996 (1995 -- $1,332) to cover these costs, as disclosed in the table below. (b) Certain of the Company's US subsidiaries' transfer, storage and disposal facilities are contaminated as a result of operating practices at the sites prior to their acquisition by the Company. Investigations of these sites have substantially characterized the nature and extent of the contamination. The subsidiaries, in conjunction with US federal and state environmental regulatory agencies, have developed corrective action plans for the sites and in some instances have commenced to remediate the sites in accordance with approved corrective action plans. The Company estimates the remaining liability to remediate these sites to be $26,650 and has accrued this amount in its December 31, 1996 financial statements (1995 -- $24,322). F-25 102 PHILIP SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS AT JUNE 30, 1997 AND 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 IS UNAUDITED) 19. CONTINGENCIES (CONTINUED) The contingent liabilities discussed under parts (a) and (b) of this note are disclosed in the Consolidated Balance Sheets as follows:
1996 1995 -------- -------- Accounts payable and accrued liabilities........................ $ 1,405 $ 1,547 Accrued environmental and closure costs (note 10)............... 25,819 24,107 -------- -------- $ 27,224 $ 25,654 ======== ========
(c) The Company is named as a defendant in several lawsuits which have arisen in the ordinary course of its business. Management believes that none of these suits is likely to have a material adverse effect on the Company's business or financial condition and therefore has made no provision in these financial statements for the potential liability if any. 20. COMMITMENTS (in thousands) Future rental payments required under operating leases for premises and equipment are as follows: 1997..................................................... $9,850 1998..................................................... 8,389 1999..................................................... 5,898 2000..................................................... 4,080 2001 and thereafter...................................... 6,248
Letters of credit issued in relation to various supply contracts and third party insurance policies amounted to $18,400 as at December 31, 1996 (1995 -- $6,294). 21. SEGMENTED INFORMATION (in thousands) The Company operates in one business segment but has a significant component of US based revenues and earnings. The geographic segmentation of the Company's business is as follows:
1996 1995 ------------------------ ------------------------ UNITED UNITED CANADA STATES CANADA STATES --------- --------- --------- --------- Revenue................................. $ 429,037 $ 373,453 $ 434,857 $ 213,454 Gross Profit............................ $ 113,044 $ 51,738 $ 100,135 $ 42,895 Total assets............................ $ 782,230 $ 563,489 $ 705,709 $ 297,203
F-26 103 PHILIP SERVICES CORP. UNAUDITED SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA PRESENTED IN U.S. GAAP (IN U.S. DOLLARS)
SIX MONTHS ENDED JUNE 30, FISCAL YEARS ENDED DECEMBER 31, -------------------------- --------------------------------------- 1997 1996 1996 1995 1994 ----------- --------- --------- --------- --------- (in thousands of U.S. dollars -- except share and per share amounts) U.S. GAAP STATEMENTS OF EARNINGS DATA: Revenue........................................... $ 623,358 $ 236,506 $ 545,344 $ 472,358 $ 358,784 Operating expenses................................ 510,282 183,991 413,013 356,699 268,606 Selling, general and administrative............... 46,254 24,460 56,063 48,496 37,522 Depreciation and amortization..................... 17,590 11,291 24,225 18,587 15,644 ----------- --------- --------- --------- --------- Income from continuing operations................. 49,232 16,764 52,043 48,576 37,012 Interest -- short-term............................ 221 417 866 1,522 1,725 -- long-term............................... 13,758 9,556 15,397 17,099 12,442 Other income and expense -- net................... (4,051) (1,799) (3,456) (2,688) (1,553) ----------- --------- --------- --------- --------- Earnings from continuing operations before tax.... 39,304 8,590 39,236 32,643 24,398 Income taxes...................................... 11,923 1,979 10,098 9,001 6,424 ----------- --------- --------- --------- --------- Earnings from continuing operations............... 27,381 6,611 29,138 23,642 17,974 Discontinued operations (net of tax).............. -- 5,298 (716) 2,109 1,833 ----------- --------- --------- --------- --------- $ 27,381 $ 11,909 $ 28,422 $ 25,751 $ 19,807 ========== ========= ========= ========= ========= Primary earnings per share: Continuing operations........................... $ 0.39 $ 0.17 $ 0.58 $ 0.63 $ 0.50 Discontinued operations......................... $ -- $ 0.12 $ (0.01) $ 0.06 $ 0.05 ----------- --------- --------- --------- --------- $ 0.39 $ 0.29 $ 0.57 $ 0.69 $ 0.55 ========== ========= ========= ========= ========= Fully diluted earnings per share: Continuing operations........................... $ 0.38 $ 0.14 $ 0.51 $ 0.49 $ 0.40 Discontinued operations......................... $ -- $ 0.10 $ (0.01) $ 0.04 $ 0.02 ----------- --------- --------- --------- --------- $ 0.38 $ 0.24 $ 0.50 $ 0.53 $ 0.42 ========== ========= ========= ========= ========= Weighted average number of common shares outstanding (000s).............................. 70,970 40,586 50,073 37,342 36,209 ========== ========= ========= ========= ========= BALANCE SHEET DATA (END OF PERIOD): Working capital................................... $ 382,062 $ 114,698 $ 253,675 $ 78,098 $ 63,050 Fixed assets, net................................. 341,494 267,296 254,087 257,765 240,374 Total assets...................................... 1,223,387 751,802 977,236 731,234 611,213 Long-term debt (excluding current portion)........ 493,948 179,012 282,825 183,635 167,619 Convertible subordinated debentures............... -- 119,875 -- 119,875 119,875 Shareholders' equity.............................. 496,898 294,287 449,907 213,611 181,541
F-27 104 ALLWASTE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
AUGUST 31, 1996 MAY 31, ---------- 1997 (Audited) ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents....................................... $ 2,017 $ 2,436 Receivables, net................................................ 86,326 75,114 Prepaid expenses................................................ 9,105 3,796 Deferred income taxes and other assets.......................... 8,208 11,170 ------------ ---------- Total current assets......................................... 105,656 92,516 ------------ ---------- Investments....................................................... 16,986 11,030 Property and equipment, at cost................................... 256,344 248,280 Less -- Accumulated depreciation................................ (130,288) (119,307) ------------ ---------- 126,056 128,973 ------------ ---------- Goodwill, net of accumulated amortization......................... 85,529 88,032 Notes receivable.................................................. 11,840 13,517 Other assets...................................................... 3,203 3,119 ------------ ---------- Total assets................................................. $ 349,270 $ 337,187 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................ $ 22,394 $ 19,250 Accrued liabilities: Income taxes payable......................................... 689 5,383 Other........................................................ 35,987 42,892 Current maturities of long-term and convertible subordinated debt........................................................ 2,447 6,249 ------------ ---------- Total current liabilities.................................... 61,517 73,774 ------------ ---------- Long-term debt, net of current maturities......................... 103,045 87,971 Convertible subordinated debt, net of current maturities.......... 32,259 33,924 Deferred income taxes and other liabilities....................... 12,796 10,572 Commitments and contingencies Shareholders' equity: Common Stock.................................................... 404 398 Additional paid-in capital...................................... 62,196 55,699 Retained earnings............................................... 91,389 84,163 ------------ ---------- 153,989 140,260 Less: Treasury Stock............................................... (13,756) (8,561) Unearned compensation related to outstanding restricted Common Stock................................................ (580) (753) ------------ ---------- Total shareholders' equity.............................. 139,653 130,946 ------------ ---------- Total liabilities and shareholders' equity.............. $ 349,270 $ 337,187 ========== ==========
See Notes to Condensed Consolidated Financial Statements. F-28 105 ALLWASTE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED ------------------------------ ------------------------------ MAY 31, 1997 MAY 31, 1996 MAY 31, 1997 MAY 31, 1996 ------------ ------------ ------------ ------------ Revenues........................... $295,392 $286,807 $105,374 $ 98,731 Cost of operations................. 218,690 213,901 76,236 72,237 ------------ ------------ ------------ ------------ Gross profit..................... 76,702 72,906 29,138 26,494 Selling, general and administrative expenses......................... 57,082 60,156 20,076 19,815 Interest expense................... (7,282) (7,327) (2,522) (2,506) Interest income.................... 1,082 773 602 280 Other income (expense), net........ 1,001 1,263 158 535 ------------ ------------ ------------ ------------ Income (loss) from continuing operations before income tax benefit (provision) and minority interest............. 14,421 7,459 7,300 4,988 Income tax benefit (provision)..... (6,562) (3,580) (3,322) (2,443) Minority interest, net of taxes.... (117) 62 (16) 38 ------------ ------------ ------------ ------------ Income (loss) from continuing operations.................... 7,742 3,941 3,962 2,583 Discontinued operations Gain on sale of glass recycling operations, net of applicable income taxes..... -- 3,764 -- -- ------------ ------------ ------------ ------------ Net income (loss)........ $ 7,742 $ 7,705 $ 3,962 $ 2,583 ========== ========== ========== ========== Net income (loss) per common share: Continuing operations............ $ .21 $ .10 $ .10 $ .07 Discontinued operations.......... -- .10 -- -- ------------ ------------ ------------ ------------ Net income (loss) per common share........... $ .21 $ .20 $ .10 $ .07 ========== ========== ========== ========== Weighted average number of common shares outstanding............... 37,592 39,262 38,678 39,063 ========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements. F-29 106 ALLWASTE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
FOR THE NINE MONTHS ENDED ------------------------------ MAY 31, MAY 31, 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income.................................................... $ 7,742 $ 7,705 Reconciliation of net income to cash provided by operating activities: Depreciation............................................... 20,848 21,537 Amortization............................................... 2,313 2,097 Gain on sale of glass recycling operations................. -- (3,764) (Gain) loss on sale of property and equipment.............. 365 (821) Common Stock received in lawsuit settlement................ (854) -- Amortization of unearned compensation -- restricted stock.................................................... 173 95 Change in assets and liabilities, net of effect of acquisitions accounted for as purchases: Receivables, net......................................... (11,240) (1,176) Prepaid expenses and other current assets................ (2,347) (2,108) Notes receivable and other assets........................ (759) 25 Accounts payable and accrued liabilities................. (8,081) (9,361) Deferred income taxes and other non-cash items........... 2,232 2,223 ------------ ------------ Cash provided by operating activities.................... 10,392 16,452 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of glass recycling operations......... -- 41,500 Additions to property and equipment...................... (21,880) (23,265) Purchase of long-term investment, net of debt issued..... (5,965) (2,619) Proceeds from sale of property and equipment............. 4,903 2,893 Payments for acquisitions accounted for as purchases, net of cash acquired...................................... -- (1,113) ------------ ------------ Cash provided by (used in) investing activities.......... (22,942) 17,396 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuances of Common Stock.................. 3,163 553 Net increase (decrease) in revolving credit facility..... 15,180 (28,370) Net increase (decrease) in other long term borrowings.... 2,052 (850) Purchases of convertible subordinated debentures......... (19) (3,264) Increases in Treasury Stock.............................. (7,729) (5,482) ------------ ------------ Cash provided by (used in) financing activities............ 12,647 (37,413) ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES................................. (516) (144) ------------ ------------ DECREASE IN CASH AND CASH EQUIVALENTS........................... (419) (3,709) CASH AND CASH EQUIVALENTS, beginning of period.................. 2,436 4,029 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period........................ $ 2,017 $ 320 ========== ==========
See Notes to Condensed Consolidated Financial Statements. F-30 107 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) SIGNIFICANT ACCOUNTING POLICIES -- The condensed consolidated financial statements include the accounts of Allwaste, Inc. and its subsidiaries (the "Company"). There have been no significant changes in the accounting policies of the Company during the periods presented. For a description of these policies, see Note 1 of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996 and the Company's Proxy Statement dated June 30, 1997, included in the Registration Statement on Form F-4 of Philip Services Corp. ("Philip"), formerly Philip Environmental Inc., filed with the SEC on April 22, 1997, in connection with the acquisition of the Company by Philip. Certain prior period amounts have been reclassified to conform with the current period presentation. On March 6, 1997, the Company announced that a definitive agreement had been reached to merge with Philip. The agreement is subject to stockholder approval, regulatory approvals and certain other conditions. All necessary regulatory approvals required by the agreement have been met. Upon receiving stockholder approval and the satisfaction of certain other conditions, the Company will become an indirect wholly-owned subsidiary of Philip. Under the terms of the agreement, each share of Allwaste Common Stock will be exchanged for 0.611 shares of Philip Common Stock. (2) ACQUISITIONS AND INVESTMENTS -- On January 31, 1997, the Company exercised warrants to purchase additional shares of the Safe Seal Company, Inc. ("Safe Seal"). Consideration for this increase in the investment from 10% to 36.5% included three subordinated notes totaling $3.3 million and cash of $0.6 million. The Company now owns 2,502,518 shares of common stock and 20,000 shares of redeemable Class A preferred stock of Safe Seal for a total investment of $6.6 million (including goodwill of $2.9 million). The Company appropriately changed its method of accounting for the investment from the cost method to the equity method. The effect of this change on the Company's financial statements for prior periods presented is immaterial and accordingly have not been restated. The Company's equity in losses (net of goodwill amortization over 40 years) for the nine and three months ended May 31, 1997 was $9 thousand. The Company also guarantees $17.8 million of indebtedness for Safe Seal and its affiliates. (3) INCOME TAXES -- With respect to continuing operations, income tax provisions for interim periods are estimated based on projections of the annual effective tax rates. Certain assumptions have been made in this regard in estimating the effective tax rate for fiscal 1997, the outcome of which may not be resolved until the end of the fiscal year. The effective tax rate of 46% for the nine months ended May 31, 1997 reflects the estimated U.S. federal and state income taxes and foreign taxes on the earnings of the Company's foreign subsidiaries. F-31 108 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (3) INCOME TAXES -- (CONTINUED) Deferred tax assets and liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities. On the accompanying Condensed Consolidated Balance Sheets, deferred tax assets and liabilities are netted within each tax jurisdiction. The following table sets forth the gross deferred tax assets (liabilities) recorded (in thousands):
MAY 31, AUGUST 31, 1997 1996 --------- ---------- Current deferred tax assets....................................... $ 7,262 $ 8,681 Non-current deferred tax assets................................... 183 3,383 Valuation allowance............................................... (1,230) (1,230) --------- --------- Total deferred tax assets.................................... 6,215 10,834 Non-current deferred tax liabilities.............................. $ (12,273) $ (13,238) --------- --------- Net deferred tax liabilities...................................... $ (6,058) $ (2,404) ========= =========
The components of the net deferred tax assets (liabilities) are as follows (in thousands):
MAY 31, AUGUST 31, 1997 1996 --------- ---------- Depreciation and amortization........................................ $ (17,766) $ (15,753) Financial reserves and accruals not yet deductible................... 11,708 13,349 --------- ---------- Total........................................................... $ (6,058) $ (2,404) ========= =========
(4) LONG-TERM DEBT -- The Company's long-term debt consists of a revolving credit agreement with a group of banks. The agreement, as last amended in January 1997, provides for an unsecured $160 million revolving line of credit to the Company through January 31, 1999, at which time any outstanding borrowings convert to a term loan due in equal quarterly installments through January 31, 2003. At July 10, 1997, after utilizing $33.1 million of the credit facility for letters of credit to secure certain insurance obligations and performance bonds, available borrowing capacity under this agreement was $24.1 million. Management believes that the Company was in compliance with all applicable covenants under the revolving credit agreement as of May 31, 1997. Borrowing availability is subject to the Company maintaining certain minimum financial ratios as set forth in the agreement. (5) SIGNIFICANT NON-CASH FINANCING ACTIVITIES -- During March 1997, the Company issued 79,904 shares of its Common Stock and 959,277 shares of treasury stock in exchange for $7.6 million of convertible subordinated note which were issued as partial consideration to former owners of certain acquired businesses. At May 31, 1997 and August 31, 1996, the Company had outstanding $1.9 million and $11.0 million, respectively, of convertible subordinated notes issued as partial consideration to acquire certain businesses. (6) NET INCOME PER COMMON SHARE -- Net income per common share has been computed based on the weighted average number of shares of Common Stock and Common Stock equivalents outstanding. The calculation of fully-diluted net income per common share is not materially different from the primary calculation. The following table F-32 109 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (6) NET INCOME PER COMMON SHARE -- (CONTINUED) presents the primary weighted average number of shares outstanding for the nine and three months ended May 31, 1997 and May 31, 1996 (in thousands).
FOR THE FOR THE NINE MONTHS ENDED THREE MONTHS ENDED ------------------ ------------------ MAY 31, MAY 31, MAY 31, MAY 31, 1997 1996 1997 1996 ------- ------- ------- ------- Common shares outstanding, beginning of fiscal period..... 39,799 39,609 39,799 39,609 Weighted average number of common shares outstanding: Stock options, treasury stock method................. 586 73 1,321 30 Purchased companies.................................. -- 24 -- 25 Exercise of stock options............................ 140 98 396 136 Treasury stock and other, net........................ (2,933) (542) (2,838) (737) ------- ------- ------- ------- Total weighted average common shares outstanding........ 37,592 39,262 38,678 39,063 ====== ====== ====== ======
(7) INCENTIVE PLANS -- On October 26, 1995, the Company's Board of Directors adopted a limited single-purpose incentive plan for certain key employees. Pursuant to this plan, each participating key employee that purchased shares of the Company's Common Stock, based on a designated percentage of his annual salary, was granted a number of shares of restricted Common Stock equal to two times the number of the shares purchased and an option to purchase a number of shares of Common Stock equal to four times the number of shares purchased. Shares of Common Stock issued under this incentive plan were treasury shares. At May 31, 1997, 206,826 shares of restricted Common Stock and options to purchase 423,464 shares of Common Stock had been granted in connection with this incentive plan. The Company does not contemplate that any additional restricted shares will be issued under the incentive plan or that any options to purchase shares of Common Stock will be granted in connection with the plan. The value of restricted shares awarded under this incentive plan through May 31, 1997 was $0.9 million. These amounts were recorded as unearned compensation related to outstanding restricted stock and are shown as a separate component of Shareholders' Equity. Unearned compensation is being amortized to expense over a four-year vesting period and amounted to $0.2 million and $0.1 million for the nine and three months ended May 31, 1997, respectively. Effective September 1, 1996, in connection with the implementation of the Economic Value Added ("EVA(R)") integrated management system, the Compensation Committee of the Board of Directors approved the adoption of the Allwaste EVA Incentive Compensation Plan (the "EVA Plan"). The EVA Plan governs incentive compensation available to the Company's executive officers and other key employees. Under the EVA Plan, eligible participants are entitled to receive incentive payments based on their meeting or exceeding certain thresholds as established by the Compensation Committee in the case of executive management and by executive management in the case of other participants. A portion of each fiscal years awards (generally, one-third) carry forward to the following year and are added to incentive awards earned for that succeeding fiscal year. (8) DISCONTINUED OPERATIONS -- In September 1995, the Company sold its glass recycling operations to Strategic Holdings, Inc. ("SHI"), a company formed by Equus II, Incorporated ("Equus"). In October 1996, the Company and Equus finalized an agreement with respect to certain post-closing issues which were unresolved on the F-33 110 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (8) DISCONTINUED OPERATIONS -- (CONTINUED) date of the sales transaction. The total consideration, as adjusted, was $56.1 million, including $41.5 million in cash, $8.0 million of redeemable Series A preferred stock redeemable beginning in 2002, and a $6.6 million subordinated note receivable due in 2002. The redeemable Series A preferred stock dividend is $.065 per share for the period prior to September 1, 1996 and $.06 per share thereafter. The subordinated note receivable interest rate is 11% for the period prior to September 1, 1996 and 10.5% thereafter. The agreement also provided that all dividends and interest due prior to August 31, 1997 will not be paid when due, but "paid in kind" in the form of two 8.036% subordinated notes issued September 30, 1996 and June 30, 1997 in the amounts of $1.3 million and $0.9 million, respectively. Principal on these two notes will be due on November 30, 2002. At May 31, 1997, the Company had accrued $0.9 million for dividends and $1.4 million for interest. For the nine months ended May 31, 1997, the Company recognized $0.6 million as interest income and $0.4 million as dividend income which is reflected in other income (expense) in the accompanying Condensed Consolidated Statements of Income. The Company also received warrants to purchase shares of SHI common stock, providing the Company the right to own up to approximately 33% of the outstanding stock of SHI. The Company may receive additional consideration in the form of an adjustment to the purchase price in the event that Equus' internal rate of return, as defined, exceeds certain predetermined targets. The amount of such additional consideration, if any, is not presently determinable. The Company recorded a gain on the sale of its glass recycling operations of $3.8 million, net of applicable income taxes of $1.6 million, in the first quarter of fiscal 1996. F-34 111 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO ALLWASTE, INC.: We have audited the accompanying Consolidated Balance Sheets of Allwaste, Inc. (a Delaware corporation) and subsidiaries as of August 31, 1996 and 1995, and the related Consolidated Statements of Operations, Shareholders' Equity and Cash Flows for each of the three years in the period ended August 31, 1996. These Consolidated Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of Allwaste, Inc. and subsidiaries as of August 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. Houston, Texas ARTHUR ANDERSEN LLP November 15, 1996 F-35 112 ALLWASTE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except shares)
AUGUST 31, ------------------------ 1996 1995 --------- --------- ASSETS Current assets: Cash and cash equivalents......................................... $ 2,436 $ 4,029 Receivables, net of allowance for doubtful accounts............... 75,114 80,065 Prepaid expenses.................................................. 3,796 3,609 Deferred taxes and other current assets........................... 11,170 10,216 --------- --------- Total current assets........................................... 92,516 97,919 --------- --------- Investments......................................................... 11,030 -- Property and equipment, at cost..................................... 248,280 230,291 Less -- Accumulated depreciation.................................. (119,307) (99,193) --------- --------- 128,973 131,098 --------- --------- Goodwill, net of accumulated amortization........................... 88,032 88,122 Notes receivable.................................................... 13,517 4,893 Other assets........................................................ 3,119 4,050 Net assets of discontinued operations............................... -- 46,151 --------- --------- Total assets................................................... $ 337,187 $ 372,233 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.................................................... $ 19,250 $ 28,737 Accrued liabilities: Payroll and related benefits...................................... 9,911 8,282 Workers' compensation insurance................................... 14,751 11,686 Other insurance................................................... 6,381 5,550 Income taxes and other current liabilities........................ 17,232 13,368 Current maturities of long-term and convertible subordinated debt... 6,249 3,371 --------- --------- Total current liabilities...................................... 73,774 70,994 --------- --------- Long-term debt, net of current maturities........................... 87,971 120,535 Convertible subordinated debt, net of current maturities............ 33,924 41,972 Deferred income taxes and other liabilities......................... 10,572 10,441 Commitments and contingencies Shareholders' equity: Preferred Stock, 500,000 shares authorized, none issued or outstanding.................................................... -- -- Common Stock, $.01 par value, 100,000,000 shares authorized, 39,799,029 and 39,609,429 shares issued in 1996 and 1995, respectively................................................... 398 396 Additional paid-in capital........................................ 55,699 54,958 Retained earnings................................................. 84,163 73,999 --------- --------- 140,260 129,353 Less: Treasury Stock, at cost, 1,945,805 and 250,000 shares in 1996 and 1995, respectively........................................ (8,561) (1,062) Unearned compensation related to outstanding restricted Common Stock......................................................... (753) -- --------- --------- Total shareholders' equity................................... 130,946 128,291 --------- --------- Total liabilities and shareholders' equity................... $ 337,187 $ 372,233 ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. F-36 113 ALLWASTE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
FOR THE YEARS ENDED AUGUST 31, --------------------------------------- 1996 1995 1994 --------- --------- --------- Revenues............................................. $ 382,165 $ 344,245 $ 286,861 Cost of operations................................... 286,412 254,596 204,492 --------- --------- --------- Gross profit....................................... 95,753 89,649 82,369 Write-downs of operating equipment................... -- 6,908 -- Selling, general and administrative expenses......... 77,011 72,976 59,020 Interest expense..................................... (9,581) (8,785) (5,617) Interest income...................................... 1,041 402 484 Other income (expense), net.......................... 2,360 (3,499) (1,302) --------- --------- --------- Income (loss) from continuing operations before income tax provision and minority interest...... 12,562 (2,117) 16,914 Income tax provision................................. (6,030) (2,170) (6,725) Minority interest, net of taxes...................... 82 408 407 --------- --------- --------- Income (loss) from continuing operations........... 6,614 (3,879) 10,596 Discontinued operations Income from discontinued operations, net of applicable income taxes................ -- 2,773 2,501 Gain on sale of glass recycling operations, net of applicable income taxes.................... 3,764 -- -- --------- --------- --------- Net income (loss).................................. $ 10,378 $ (1,106) $ 13,097 ========= ========= ========= Net income (loss) per common share: Continuing operations.............................. $ .17 $ (.10) $ .29 Discontinued operations............................ .10 .07 .07 --------- --------- --------- Net income (loss) per common share............ $ .27 $ (.03) $ .36 ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. F-37 114 ALLWASTE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
COMMON STOCK ------------------- ADDITIONAL NUMBER PAID-IN RETAINED TREASURY UNEARNED SHAREHOLDERS' OF SHARES AMOUNT CAPITAL EARNINGS STOCK COMPENSATION EQUITY --------- ------ ---------- -------- -------- ------------ ------------- BALANCE, AUGUST 31, 1993............ 36,740 $367 $ 43,097 $61,732 $ -- $-- $ 105,196 Net income.......................... -- -- -- 13,097 -- -- 13,097 Issuance of Common Stock for purchased businesses.............. 934 9 4,093 -- -- -- 4,102 Issuance of Common Stock pursuant to stock option plans and related tax benefits.......................... 67 -- 292 -- -- -- 292 Treasury Stock acquired in lawsuit settlement........................ -- -- -- -- (1,062) -- (1,062) Change in cumulative translation adjustment........................ -- -- -- (407) -- -- (407) --------- ------ ---------- -------- -------- ------------ ------------- BALANCE, AUGUST 31, 1994............ 37,741 376 47,482 74,422 (1,062) -- 121,218 Net loss............................ -- -- -- (1,106) -- -- (1,106) Issuance of Common Stock for acquired businesses............... 1,432 15 5,079 810 -- -- 5,904 Issuance of Common Stock pursuant to stock option plans and related tax benefits.......................... 436 5 2,397 -- -- -- 2,402 Change in cumulative translation adjustment........................ -- -- -- (127) -- -- (127) --------- ------ ---------- -------- -------- ------------ ------------- BALANCE, AUGUST 31, 1995............ 39,609 396 54,958 73,999 (1,062) -- 128,291 Net income.......................... -- -- -- 10,378 -- -- 10,378 Issuance of Common Stock for previously acquired business...... 25 -- 128 -- -- -- 128 Issuance of Common Stock pursuant to stock option plans and related tax benefits.......................... 165 2 638 -- -- -- 640 Issuance of treasury shares......... -- -- (25) -- 1,714 (925) 764 Compensation expense................ -- -- -- -- -- 172 172 Purchase of Treasury Stock.......... -- -- -- -- (9,213) -- (9,213) Change in cumulative translation adjustment........................ -- -- -- (214) -- -- (214) --------- ------ ---------- -------- -------- ------------ ------------- BALANCE, AUGUST 31, 1996............ 39,799 $398 $ 55,699 $84,163 $(8,561) $ (753) $ 130,946 ======== ======= ========= ======== ======== ============ ============
The accompanying notes are an integral part of these Consolidated Financial Statements. F-38 115 ALLWASTE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE YEARS ENDED AUGUST 31, ----------------------------------- 1996 1995 1994 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $ 10,378 $ (1,106) $ 13,097 Reconciliation of net income (loss) to cash provided by operating activities: Depreciation............................................ 28,639 25,715 20,635 Amortization............................................ 2,909 2,611 2,824 Write-downs of operating equipment...................... -- 6,908 -- Gain on sale of glass recycling operations, net of taxes................................................. (3,764) -- -- Allowances on notes receivable.......................... -- 1,000 790 Write-downs of investments.............................. -- 1,950 950 Amortization of unearned compensation -- restricted stock................................................. 172 -- -- Gain on purchases of convertible subordinated debentures............................................ (153) -- -- Gain on sales of property and equipment................. (1,081) (777) (146) Equity in losses of unconsolidated partnership.......... -- -- 2,805 Gain on sale of Common Stock investment................. -- -- (2,688) Common Stock received in lawsuit settlement............. -- -- (1,062) Change in assets and liabilities, net of effect of acquisitions accounted for as purchases: Receivables........................................... 4,545 (10,787) (9,412) Prepaid expenses, deferred taxes and other current assets............................................. (112) (2,309) (2,556) Notes receivable and other assets..................... (1,602) 722 (3,310) Accounts payable...................................... (9,556) 8,278 (13) Accrued liabilities................................... 2,187 7,170 (2,067) Deferred income taxes and other liabilities........... 366 (1,259) 1,521 --------- --------- --------- Cash provided by operating activities................. 32,928 38,116 21,368 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of glass recycling operations........... 41,500 -- -- Additions to property and equipment........................ (27,541) (47,193) (34,145) Proceeds from sales of property and equipment.............. 3,249 2,394 2,112 Purchase of investments.................................... (3,030) -- -- Payments for acquisitions accounted for as purchases, net of cash acquired of $123, $1,337 and $241............... (2,145) (19,320) (7,468) Proceeds from sale of investment in marketable security.... -- -- 2,982 Cash used in discontinued operations....................... -- (4,233) (7,013) --------- --------- --------- Cash provided by (used in) investing activities....... 12,033 (68,352) (43,532) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuances of Common Stock.................... 665 2,279 292 Net increase (decrease) in revolving credit facility....... (32,309) 35,670 32,910 Net decrease in other long term borrowings................. (4,575) (6,577) (10,469) Purchases of convertible subordinated debentures........... (908) -- -- Purchases of Treasury Stock................................ (9,213) -- -- --------- --------- --------- Cash provided by (used in) financing activities....... (46,340) 31,372 22,733 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES.............................. (214) (127) (407) --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. (1,593) 1,009 162 CASH AND CASH EQUIVALENTS, beginning of year................. 4,029 3,020 2,858 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of year....................... $ 2,436 $ 4,029 $ 3,020 ========= ========= =========
The accompanying notes are an integral part of these Consolidated Financial Statements. F-39 116 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Description of business Allwaste, Inc. ("Allwaste" or the "Company") provides integrated industrial and environmental services and acts as an outsourcing provider of on-site facility processes and services, primarily in the United States, Canada and Mexico. The Company, through its operating subsidiaries and affiliates, provides to its industrial and commercial customers a range of industrial and environmental services, including: on-site industrial and waste management services (including hydroblasting and gritblasting and air-moving and liquid vacuuming); waste transportation and processing; wastewater services; site remediation; maintenance services; turnaround and outage services; container cleaning and repair services; emergency spill response services; and other general plant support services. Principles of consolidation and basis of presentation The Consolidated Financial Statements include the accounts of Allwaste, Inc. and all of its wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. For all periods presented, the Consolidated Financial Statements and Notes to Consolidated Financial Statements reflect the Company's glass recycling operations as a discontinued operation, as discussed in Note 3. Additionally, certain prior year amounts have been reclassified to conform with the fiscal 1996 presentation. Revenue recognition Revenues are recorded as services are performed. Revenues derived from services provided under fixed-price contracts are recognized on a percentage-of-completion basis, using the cost-to-cost method. If it is determined that a contract may result in a loss, a provision for the loss is accrued at that time. Property and equipment Property and equipment are carried at cost and depreciated over the estimated useful life of the asset using the straight-line method. The costs of major improvements are capitalized. Expenditures for maintenance, repairs and minor improvements are expensed as incurred. When property and equipment are sold or retired, the cost and related accumulated depreciation are removed and the resulting gain or loss is included in results of operations. Interest paid in connection with the construction of major facilities and equipment is capitalized. The capitalized interest is recorded as a part of the related asset and is depreciated over the asset's estimated useful life. Capitalized interest related primarily to expansions and improvements at container service facilities was $0.1 million, $0.3 million and $0.1 million for the years ended August 31, 1996, 1995 and 1994, respectively. Goodwill Goodwill represents the excess of the aggregate purchase price over the net tangible and identifiable intangible assets of acquired businesses accounted for under the purchase method of accounting and is amortized on a straight-line basis over a period of 40 years. Subsequent to purchase, the Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the acquired business' undiscounted future cash flows compared to the carrying value of goodwill to determine whether goodwill is deemed to be impaired. Management believes there have been no events or circumstances which warrant revision to the remaining useful life or F-40 117 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) which affect the recoverability of the Company's recorded goodwill. Accumulated amortization of goodwill as of August 31, 1996 and 1995 was $9.1 million and $6.6 million, respectively. Income taxes The Company accounts for income taxes under Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". Under SFAS No. 109, the Company provides deferred income taxes for the tax effects of temporary differences between the financial reporting and income tax bases of the Company's assets and liabilities. Environmental expenditures Environmental expenditures are expensed or capitalized based upon their future economic benefit. Costs which improve a property, as compared with the condition of the property when originally constructed or acquired, and costs which prevent future environmental contamination are capitalized. Costs related to environmental damage resulting from operating activities subsequent to acquisition are expensed. Liabilities for these expenditures are recorded when it is probable that obligations have been incurred and the amounts can be reasonably estimated. Minority interest The Company owns an aggregate 60% joint venture interest in each of two companies in Mexico, and a Mexican company owns the remaining 40% interest in each entity. One of the companies performs various industrial services, including site remediation and aboveground storage tank cleaning services. The primary operations of the other company are underground storage tank testing services. For financial reporting purposes, the joint ventures' assets and liabilities are consolidated with those of the Company. The Mexican company's minority interests, $0.5 million and $0.4 million at August 31, 1996 and 1995, respectively, are included in the Company's Consolidated Balance Sheets in deferred income taxes and other liabilities. The joint venture experienced pretax losses of $0.3 million, $1.2 million and $0.9 million in fiscal 1996, 1995 and 1994, respectively. Per share amounts Per share amounts are calculated based on the weighted average number of common and common equivalent shares outstanding for each year (see Note 13). Foreign currency translation The Company's Canadian and Mexican subsidiaries maintain their books and records in Canadian dollars and Mexican pesos, respectively. Assets and liabilities of these operations are translated into United States ("U.S.") dollars at the exchange rate in effect at the end of each accounting period; and, income and expense accounts are translated at the average exchange rate prevailing during the respective period. Gains and losses resulting from such translation are included in retained earnings. Gains and losses from transactions in foreign currencies are credited or charged to operations currently and are not material. Investment activity In September 1995, the Company sold its glass recycling operations to Strategic Holdings, Inc. ("SHI"), a company formed by Equus II Incorporated ("Equus"). As partial consideration for the sale, the Company received $8.0 million of redeemable Series A preferred stock. The stock is redeemable by SHI beginning in 2002. This investment is recorded using the cost method and is included in investments in the accompanying Consolidated Balance Sheets (See Note 3). F-41 118 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) In October 1995, the Company acquired a 10% interest in The Safe Seal Company, Inc. ("Safe Seal") which specializes in valve repair and leak sealing. This $2.6 million investment consists of 20,000 shares of redeemable Class A preferred stock, 422,000 shares of common stock and warrants to purchase common shares and is recorded using the cost method. For most of fiscal 1994, the Company owned a 40% interest in a wastewater pretreatment facility and recorded such investment using the equity method of accounting. Prior to increasing its ownership interest in late fiscal 1994 to 100%, the Company's equity in losses of this partnership was $1.8 million for the year ended August 31, 1994 and were included in other income (expense), net in the accompanying Consolidated Statements of Operations. Additionally, in fiscal 1994, the Company recorded $1.0 million in losses relating to its investment in this facility which is recorded in other income (expense), net in the accompanying Consolidated Statements of Operations. The Company acquired 181,000 shares of Sanifill, Inc. ("Sanifill"), a publicly traded corporation involved in the collection and disposal of solid waste, pursuant to a private offering in 1989 at an average cost of $1.62 per share. In November 1993, the Company sold all of its shares of Sanifill. The sale resulted in a pretax gain for fiscal year 1994 of $2.7 million which is reflected in other income (expense), net in the accompanying Consolidated Statements of Operations. Fiscal 1995 special charges During fiscal 1995, the Company recorded special charges of $11.9 million. Such charges include $6.9 million of charges classified as write-downs of operating equipment in the accompanying Consolidated Statements of Operations. These write-downs related to the permanent impairment of certain operating equipment in Mexico and California, a wastewater pretreatment facility, equipment relating to two small businesses exited and various owned facilities held for sale. Included in SG&A expenses in the accompanying Consolidated Statements of Operations are $1.1 million of charges primarily representing the write-off of organizational expenses relating to the Mexico joint ventures. The Consolidated Statements of Operations also reflect $0.6 million in interest expense relating to the write-off of previously unamortized loan costs in connection with the bank amendment to the revolving credit facility completed in August 1995. Other income (expenses), net in the accompanying Consolidated Statements of Operations reflects $3.6 million in charges relating to an allowance provided for a note receivable and the write-off of the Company's remaining investment in IAM/Environmental, Inc. ("IAM") and another previously-owned business, as well as the settlement of a lawsuit related to the previously discontinued asbestos abatement business. The write-off related to IAM of $2.0 million reduced the Company's carrying value in this investment to zero. Certain of the charges relating to the Mexico joint venture are partially offset by the minority interest effect of such charges. Cash flow reporting Highly liquid debt instruments with an original maturity of three months or less are considered to be cash equivalents. Cash payments for interest during the years ended August 31, 1996, 1995 and 1994 were $9.6 million, $10.0 million and $6.3 million, respectively, and cash payments for income taxes during the years ended August 31, 1996, 1995 and 1994 were $4.9 million, $4.5 million and $8.4 million, respectively. New financial accounting standards In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which is effective for years beginning after December 15, 1995 (fiscal 1997 for the Company). This statement established F-42 119 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) criteria for recognizing, measuring and disclosing impairments of long-lived assets, identifiable intangibles and goodwill. The Company will adopt SFAS No. 121 in the first quarter of fiscal year 1997; however, management does not expect that the adoption will have a material effect on the Company's financial position or results of operations. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" which is effective for years beginning after December 15, 1995 (fiscal 1997 for the Company). This statement allows entities to choose between a new fair value based method of accounting for employee stock options or similar equity instruments and the current intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25. Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied. The Company expects to continue accounting for employee stock options and similar equity instruments in accordance with APB Opinion No. 25. The pro forma effect for fiscal 1996 has not yet been determined. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the Company's estimates. 2. ACQUISITIONS -- Under the purchase method of accounting, the results of acquired businesses are included with the Company's results from their respective acquisition dates. The following table summarizes the Company's business acquisitions accounted for under the purchase method (dollars in thousands):
BUSINESSES CASH AND CONVERTIBLE SHARES OF TOTAL PURCHASED PROMISSORY NOTES SUBORDINATED NOTES COMMON STOCK CONSIDERATION ---------- ---------------- ------------------ ------------ ------------- Fiscal 1996.... 4 $ 2,445 -$- -- $ 2,445 Fiscal 1995.... 13 23,231 4,985 1,426,096 36,766 Fiscal 1994.... 9 7,875 534 934,290 12,511
The allocations of the purchase price to the fair market value of the net assets acquired in the fiscal 1996 acquisitions are based on preliminary estimates of fair market value and may be revised when additional information concerning asset and liability valuations is obtained. As an integral part of each of the above acquisitions, all former shareholders signed non-compete agreements and key management entered into agreements with the Company to continue managing these businesses. In connection with two acquisitions made prior to fiscal 1996, the Company agreed to make contingent payments to the former owners over periods up to five years based on formulas in the respective acquisition agreements. At the Company's option, these payments may be made in either cash or common stock of the Company. At August 31, 1996, the maximum aggregate amount of contingent payments was $3.2 million. In management's opinion, based on the current performance levels of the individual acquisitions involved, the ultimate settlement of these contingent payment obligations is likely to be substantially less than the $3.2 million maximum aggregate. Approximately $0.3 million in contingent payments were made during 1996. Amounts earned under the terms of these agreements are recorded as additional goodwill and amortized over the remaining amortization period. F-43 120 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. DISCONTINUED OPERATIONS -- In September 1995, the Company sold its glass recycling operations to SHI, a company formed by Equus. In October 1996, the Company and Equus finalized an agreement with respect to certain post-closing issues which were unresolved on the date of the sales transaction. The total consideration, as adjusted, was $56.1 million, including $41.5 million in cash, $8.0 million of redeemable Series A preferred stock redeemable beginning in 2002, and a $6.6 million subordinated note receivable due in 2002. The redeemable Series A preferred stock dividend is $.065 per share for the period prior to September 1, 1996 and $.06 per share thereafter. The subordinated note receivable interest rate is 11% for the period prior to September 1, 1996 and 10.5% thereafter. The agreement also provided that all dividends and interest due prior to August 31, 1997 will not be paid when due, but "paid in kind" in the form of two 8.036% subordinated notes issued September 30, 1996 and June 30, 1997 in the amounts of $1.3 million and $0.9 million, respectively. Principal on these two notes will be due on November 30, 2002. At August 31, 1996, the Company had accrued $0.5 million for dividends and $0.8 million for interest which is reflected in other income (expense) in the accompanying Consolidated Statements of Operations. The Company also received warrants to purchase shares of SHI common stock, providing the Company the right to own up to approximately 33% of the outstanding stock of SHI. The Company may receive additional consideration in the form of an adjustment to the purchase price in the event that Equus' internal rate of return, as defined, exceeds certain predetermined targets. The amount of such additional consideration, if any, is not presently determinable. The Company recorded a gain on the sale of its glass recycling operations of $3.8 million, net of estimated applicable income taxes of $1.6 million, in the first quarter of fiscal 1996. Revenues of the glass recycling operations, net of intercompany sales, were $70.0 million and $63.2 million for the fiscal years ended August 31, 1995 and 1994, respectively. The net assets of the glass recycling operations consisted of the following as of August 31, 1995 (in thousands): Net working capital..................................... $ 7,726 Property and equipment, net............................. 21,335 Goodwill and other assets............................... 19,264 Long-term debt.......................................... 440 Deferred income taxes and other......................... 1,734
Income from discontinued operations in the Consolidated Statements of Operations is presented net of allocated interest expense of $1.6 million and $1.0 million and net of applicable income taxes of $1.8 million and $1.6 million for fiscal years 1995 and 1994, respectively. The interest was allocated based upon the net assets of the glass recycling operations in relation to the Company's consolidated net assets plus general corporate debt. 4. RECEIVABLES -- Receivables included in current assets consisted of the following (in thousands):
AUGUST 31, --------------------- 1996 1995 -------- -------- Trade accounts........................................................ $ 76,378 $ 80,619 Employees............................................................. 567 996 Other................................................................. 489 2,133 -------- -------- 77,434 83,748 Less -- Allowance for doubtful accounts............................... (2,320) (3,683) -------- -------- $ 75,114 $ 80,065 ======== ========
F-44 121 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. RECEIVABLES -- (CONTINUED) Notes receivable recorded as non-current assets consisted of the following (in thousands):
AUGUST 31, --------------------- 1996 1995 -------- -------- Notes receivable from employees....................................... $ 2,702 $ 2,483 Notes receivable from sale of discontinued asbestos abatement operation........................................................... 2,888 2,888 Notes receivable from sale of discontinued glass recycling operations: Subordinated note receivable..................................... 6,610 -- Accrued interest and dividends................................... 1,285 -- Notes receivable from sale of other businesses........................ 350 790 Other................................................................. 682 522 -------- -------- 14,517 6,683 Less -- Loss reserves................................................. (1,000) (1,790) -------- -------- $ 13,517 $ 4,893 ======== ========
5. PROPERTY AND EQUIPMENT -- The principal categories and estimated useful lives of property and equipment were as follows (dollars in thousands):
AUGUST 31, ESTIMATED ------------------------ USEFUL LIVES 1996 1995 ------------- ---------- --------- Land................................................. $ 6,412 $ 6,226 Building and improvements............................ 10 - 30 years 34,421 28,127 Service equipment and related vehicles............... 2 - 20 years 188,309 178,162 Other................................................ 3 - 10 years 19,138 17,776 ---------- --------- 248,280 230,291 Less: accumulated depreciation....................... (119,307) (99,193) ---------- --------- Property and equipment, net.......................... $ 128,973 $ 131,098 ========== =========
6. DEBT -- LONG-TERM DEBT Long-term debt consisted of the following (in thousands):
AUGUST 31, ----------------------- 1996 1995 -------- --------- Revolving credit agreement......................................... $ 87,770 $ 120,079 Notes payable to individuals in connection with acquisitions of businesses (see Note 2), banks and financial institutions, weighted average interest rate of 8.4% at August 31, 1996, payable in various installments through 1999..................... 385 1,142 -------- --------- 88,155 121,221 Less -- Current maturities......................................... (184) (686) -------- --------- $ 87,971 $ 120,535 ======== =========
F-45 122 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. DEBT -- (CONTINUED) Revolving credit agreement In December 1993, the Company entered into a revolving credit agreement with a group of banks. This agreement, as amended most recently in August 1996, provides an unsecured $160 million revolving credit line to the Company through January 31, 1999, at which time any outstanding borrowings convert to a term loan due in equal quarterly installments through January 31, 2003. Interest on outstanding borrowings is charged, at the Company's option, at the banks' prime rate (8 1/4% at August 31, 1996), adjusted Eurodollar Rate or the banks' reserve adjusted certificate of deposit rate (CD rate) plus 0% to 1.625% as determined by the calculation of the debt to cash flow ratio (as defined). A commitment fee of .25% is payable on the unused portion of the line. Three of the banks participating in the revolving credit agreement have also extended to the Company uncommitted, short-term lines of credit with interest rates which may be more favorable to the Company than those available under the revolving credit agreement. As of August 31, 1996, the Company had $87.8 million outstanding under the revolving credit agreement and the uncommitted lines of credit and had utilized $30.1 million of the facility for letters of credit to secure certain insurance obligations and performance bonds. Under the terms of the agreement, the Company must maintain a minimum fixed charge coverage ratio (as defined) and certain other minimum financial ratios. Borrowing availability is subject to the Company meeting minimum leverage and other ratios. Management believes it is in compliance with all applicable covenants under the revolving credit agreement as of August 31, 1996. As of November 15, 1996, available borrowing capacity, as defined under the agreement, was $39.0 million. The credit agreement prohibits the payment of cash dividends. Maturities of long-term debt outstanding at August 31, 1996 are as follows (in thousands): For the year ending August 31 -- 1997............................................................................ $ 184 1998............................................................................ 191 1999............................................................................ 10,982 2000............................................................................ 21,943 2001............................................................................ 21,943 Thereafter...................................................................... 32,912 -------- $ 88,155 ========
In August 1996, the Company purchased a three year interest rate cap agreement of 7.0% on $30,000,000 from two of the banks which participate in the Company's revolving credit agreement. Quarterly payments under the agreement are based on the difference between a floating rate based on a three-month LIBOR and the cap rate. The cost was $0.3 million and is being amortized over the term of the agreement. CONVERTIBLE SUBORDINATED DEBT Convertible Subordinated Debentures In June 1989, the Company completed a public offering of $30.0 million of 7.25% Convertible Subordinated Debentures due June 1, 2014 (the "Debentures"); net proceeds to the Company were $28.7 million. Direct offering costs related to the Debentures are included in other assets in the accompanying Consolidated Balance Sheets and are being amortized over the term of the Debentures. The Debentures are convertible by the holder, at any time, into shares of the Company's Common Stock at a price of $11.94 per share and are redeemable for cash at the option of the Company. The Debentures provide for annual mandatory sinking fund payments equal to 5% of the aggregate principal F-46 123 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. DEBT -- (CONTINUED) amount of the Debentures issued, commencing June 1, 1999. Interest is payable semi-annually, on June 1 and December 1. In fiscal 1996, the Company repurchased $1.1 million of these Debentures at 85% of face value. The related gain of $0.2 million was included in interest expense in the accompanying Consolidated Statements of Operations. In October 1994, the Company entered into an interest rate swap agreement through June 1997 to potentially lower the overall cost of borrowings. The agreement modified the $30.0 million of 7.25% fixed rate debt to LIBOR plus .24% debt, which was reset quarterly. On May 31, 1995, the Company terminated the agreement and is amortizing the $0.5 million received as a reduction of interest expense on a straight-line basis over the remaining term of the original swap. Convertible Subordinated Notes At August 31, 1996, the Company had outstanding $11.1 million of convertible subordinated notes to former owners of certain acquired businesses (the "Notes") which were issued as partial consideration of the acquisition purchase price. The Notes bear interest, payable quarterly, at a weighted average rate of 6.2% and are convertible by the holder into shares of the Company's Common Stock at a weighted average price of $7.24 per share. The Notes are redeemable for cash or the Company's Common Stock at the option of the Company at any time after one year of issuance. Maturities of the Notes outstanding at August 31, 1996 are as follows (in thousands): For the year ending August 31 -- 1997............................................................................ $ 6,065 1998............................................................................ 4,985 ------- $11,050 ========
7. INCOME TAXES -- The Company and its U.S. subsidiaries file a consolidated federal income tax return. Acquired entities file appropriate tax returns through their respective acquisition dates (absent certain administrative elections) and, thereafter, are included in the Company's consolidated return. Foreign income taxes consist primarily of Canadian federal and provincial taxes attributable to the Company's Canadian subsidiaries. Foreign pretax book income (loss) net of certain intercompany interest expense and other items was $0.5 million (consisting of a Mexican loss of $0.2 million and Canadian income of $0.7 million,) ($0.4 million) and $1.2 million for the years ended August 31, 1996, 1995 and 1994, respectively. F-47 124 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES -- (CONTINUED) Federal, state and foreign income tax provisions (benefits) are as follows (in thousands):
FOR THE YEARS ENDED AUGUST 31, ------------------------------------ 1996 1995 1994 ------- -------- ------- Federal -- Current............................................... $ 4,941 $ 6,536 $ 1,327 Deferred.............................................. 706 (6,260) 3,819 ------- -------- ------- 5,647 276 5,146 ------- -------- ------- State -- Current............................................... 1,034 1,494 584 Deferred.............................................. (448) (430) 179 ------- -------- ------- 586 1,064 763 ------- -------- ------- Foreign -- Current............................................... 290 667 840 Deferred.............................................. (493) 163 (24) ------- -------- ------- (203) 830 816 ------- -------- ------- $ 6,030 $ 2,170 $ 6,725 ====== ======== ======
The differences in the income taxes provided and the amount determined by applying the U.S. federal statutory rate to income before income taxes are summarized as follows:
FOR THE YEARS ENDED AUGUST 31, ------------------------- 1996 1995 1994 ---- ----- ---- Federal income tax at statutory rate............................. 35% 35% 35% Effect of valuation allowance.................................... 1 (55) -- State income taxes, net of benefit for federal deduction......... 3 (33) 3 Effect of meals and entertainment limitation..................... 4 (21) -- Effect of other nondeductible amortization of goodwill........... 4 (16) 2 Effect of other nondeductible expenses........................... 1 (7) -- Foreign income taxes at higher rates............................. -- (3) 1 Other............................................................ -- (3) (1) ---- ----- ---- 48% (103)% 40% ===== ===== =====
F-48 125 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES -- (CONTINUED) Deferred income tax expense results principally from the use of different capital recovery and revenue and expense recognition methods for tax and financial accounting purposes. The sources of these temporary differences and related tax effect were as follows (in thousands):
FOR THE YEARS ENDED AUGUST 31, ---------------------------------- 1996 1995 1994 ------- -------- ------- Depreciation and amortization.............................. $ 2,417 $ 901 $ 1,361 Accruals and reserves not deductible until paid............ 1,031 (5,186) 1,926 Write-downs of assets...................................... -- (1,580) -- Sale of certain leasing operations......................... (141) (305) (222) Sale of glass recycling operations......................... (2,932) -- -- Other, net................................................. (610) (357) 909 ------- -------- ------- Total deferred income tax provision (benefit).............. $ (235) $ (6,527) $ 3,974 ====== ======== ======
Deferred tax assets and liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities. On the accompanying Consolidated Balance Sheets, current and non-current deferred tax assets and liabilities are netted within each tax jurisdiction. The following table sets forth the gross deferred tax assets (liabilities) recorded as of August 31 (in thousands):
1996 1995 --------- --------- Current deferred tax assets....................................... $ 8,681 $ 8,512 Non-current deferred tax assets................................... 3,383 5,003 Valuation allowance............................................... (1,230) (1,156) --------- --------- Total deferred tax assets......................................... 10,834 12,359 Non-current deferred tax liabilities.............................. (13,238) (14,998) --------- --------- Net deferred tax liabilities...................................... $ (2,404) $ (2,639) ========= =========
The Company is required to record valuation allowances for deferred tax assets which management believes it is more likely than not that the tax asset will not be realized. Accordingly, the Company established valuation allowances against certain deferred tax assets: primarily those attributable to the Company's net operating losses of its joint ventures in Mexico. Prepaid income taxes of $0.7 and $1.2 million are included in prepaid expenses at August 31, 1996 and 1995, respectively. 8. SHAREHOLDERS' EQUITY -- Preferred Stock The Company can issue up to 500,000 shares of Preferred Stock, none of which are issued or outstanding. The Board of Directors is authorized to provide for the issuance of the Preferred Stock in series, to establish the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. This includes, among other things, any voting rights, conversion privileges, dividend rates, redemption rights, sinking fund provisions and liquidation rights which shall be superior to the Common Stock. No holder of Preferred Stock will have preemptive rights. F-49 126 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. SHAREHOLDERS' EQUITY -- (CONTINUED) Stock option plans In January 1995, the Company's stockholders approved the Amended and Restated 1989 Replacement Non-Qualified Stock Option Plan (the "Plan"), which increased the number of shares issuable under the Plan from 3,000,000 shares to 4,500,000 shares. Under the Plan and notwithstanding certain restrictions placed upon grants of options to persons subject to Section 16(a) of the Securities Exchange Act of 1934, through August 31, 1999, all forfeited, expired and exercised options automatically become available for grants of new options under the Plan; therefore, the number of granted option shares plus those remaining available for grant shall remain constant at 4,500,000 through such date. Stock options are granted under the Plan at an exercise price which equals the fair market value of the Common Stock on the date of grant or on the date which marks the occurrence of the event pursuant to which the options are granted. In July 1996, the compensation committee of the Board of Directors approved a stock option exchange offer program (the "Exchange Program"), pursuant to which all holders of stock options under the Plan were offered the opportunity to exchange existing outstanding option grants for new option grants with a new exercise price of $4.81 per share, a new eight-year term and a new four-year vesting schedule. Options to purchase an aggregate of 2,251,961 shares of Common Stock (of which, options to purchase an aggregate of 287,526 shares were initially granted during fiscal 1996) were exchanged under the Exchange Program. At August 31, 1996, options to purchase 3,419,878 shares were outstanding under the Plan at prices ranging from $3.88 to $6.75 per share, of which options to purchase 404,568 shares were exercisable. Subsequent to August 31, 1996, options to purchase an additional 949,950 shares were granted under the Plan at the per share exercise price of $4.25. In October 1992, the Company's Board of Directors adopted a supplemental option plan ("Supplemental Plan") to enable the Company to fulfill obligations to former employees. A total of 1,500,000 shares are issuable under the amended Supplemental Plan. At August 31, 1996, options to purchase 1,018,812 shares were outstanding under the Supplemental Plan at prices ranging from $4.00 to $10.88 per share, of which options to purchase 689,818 shares were exercisable. Subsequent to August 31, 1996, there were no options granted under the Supplemental Plan. The following table summarizes aggregate stock option activity of both the Company's stock option plans for each of the three years ended August 31:
1996 1995 1994 ------------- ------------- ------------- Options outstanding, beginning of year... 4,220,271 3,422,925 3,153,791 Granted................................ 2,440,601 1,895,400 871,740 Exercised.............................. (164,600) (430,526) (66,377) Forfeited and canceled................. (2,057,587) (667,528) (536,229) ------------- ------------- ------------- Options outstanding, end of year......... 4,438,685 4,220,271 3,422,925 ============= ============= ============= Option prices per share: Granted................................ $4.00 - 6.50 $4.00 - 6.25 $4.00 - 6.75 Exercised.............................. $0.50 - 4.25 $4.00 - 5.88 $4.00 - 5.63 Forfeited and canceled................. $4.00 - 10.88 $4.00 - 12.19 $4.00 - 12.19
F-50 127 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. SHAREHOLDERS' EQUITY -- (CONTINUED) Treasury Stock In July 1995, the Board of Directors of the Company approved a Stock Repurchase Plan which authorizes management of the Company to repurchase up to 5,000,000 shares of Common Stock, either on the open market or in privately negotiated transactions, at prevailing market prices over a two year period. As of August 31, 1996, 2,075,900 shares of Common Stock had been repurchased under the plan at an average price of $4.44 per share. During fiscal 1996, the Company used 380,095 of these treasury shares for incentive plans, employment agreements and various other uses. Subsequent to August 31, 1996, the Company has repurchased 1,029,400 additional shares of its Common Stock at an average cost of $4.67 per share. Future repurchases of the Company's Common Stock will be dependent on prevailing market conditions and other investment opportunities. In October 1993, the Company reached a settlement of a lawsuit with a former owner of an acquired business and other parties. In exchange for a full and complete release of all claims against the parties, the Company received $1.0 million in cash and 250,000 shares of the Company's Common Stock. This transaction resulted in a gain of $1.4 million, net of related fiscal 1994 legal expenses, which is reflected in other income (expense), net in the Consolidated Statements of Operations. Stockholder Rights Plan The Company's Stockholder Rights Plan (the "Rights Plan"), adopted in August 1996, is designed to deter coercive or unfair takeover tactics and to prevent a person or group from gaining control of the Company without offering a fair price to all stockholders. All stockholders of record on August 15, 1996 were issued, for each share of Common Stock held, one "right" entitling them to purchase from the Company one-thousandth of a share of Series One Junior Participating Preferred Stock of the Company at an exercise price of $20 (the "Rights"). The Rights are distributable on the earlier of: 10 days (the "Shares Acquisition Date") after a public announcement that a person or group has acquired beneficial ownership of 15% or more of the Company's Common Stock (an "Acquiring Person") or 10 business days after a person or group commences a tender or exchange offer upon consummation of which such person or group would, if successful, beneficially own 20% or more of the Company's outstanding Common Stock. The Company will generally be entitled to redeem the Rights in full, at $.01 per Right, at any time until close of business up to 10 days following the Shares Acquisition Date. The Rights will expire on August 5, 2006, unless redeemed earlier by the Company's Board of Directors. If a person (and its affiliates) becomes the beneficial owner of 20% or more of the outstanding shares of the Common Stock (a "Flip-In Triggering Event"), each Right (other than those Rights held by an Acquiring Person or its transferees, which Rights are void) becomes exercisable for shares of the Company's Common Stock having a value of twice the exercise price of such Rights. Alternatively, in the event the Company is involved in a merger or other business combination in which the Company would not be the surviving corporation or its Common Stock is changed or converted, or it sells 50% or more of its assets or earning power to another person or group, each Right would entitle the holder to purchase, at the Right's then current exercise price, common shares of such other person or group having a value of twice the exercise price of the Right. F-51 128 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES -- Lease commitments The Company has entered into various operating lease agreements, primarily for office space, service facilities and service equipment utilized for operations. Minimum annual rental payments under noncancellable operating leases as of August 31, 1996 were as follows (in thousands): For the year ending August 31 -- 1997............................................................................ $ 5,324 1998............................................................................ 4,528 1999............................................................................ 3,385 2000............................................................................ 2,268 2001............................................................................ 1,400 Thereafter...................................................................... 4,444 ------- $21,349 ========
Rental expense under operating leases was $16.0 million, $15.1 million and $11.8 million for the years ended August 31, 1996, 1995 and 1994, respectively. These amounts include a service facility leased from the Company's Chairman of the Board of Directors, for which rental expense was $0.1 million for each of the years ended August 31, 1996, 1995 and 1994. Legal matters In the normal course of its operations, the Company can become involved in a variety of legal disputes. Currently, the Company is a defendant in several legal proceedings, including workers' compensation matters and minor business disputes, the majority of which are being handled or are expected to be handled by the Company's insurance carriers. As a company that handles and transports hazardous waste, the Company is involved in various administrative and court proceedings under environmental laws and regulations relating to permit applications, operating authorities and alleged liabilities related to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. Management of the Company believes that a decision adverse to the Company in any one or in all of these proceedings would not have a material effect on the financial position or the results of operations of the Company. Insurance The Company maintains workers' compensation insurance for its employees and other coverages for normal business risks. A substantial portion of the Company's current and prior year insurance coverages are "high deductible" or retrospective policies in which the Company, in many cases, is responsible for the payment of incurred claims up to specified individual and aggregate limits, over which a third party insurer is contractually liable for any additional payment of such claims. Accordingly, the Company bears significant economic risks related to these coverages. On a continual basis, and as of each balance sheet date, the Company records an accrual equal to the estimated costs expected to result from incurred claims plus an estimate of claims incurred but not reported as of such date based on the best available information at such date. However, the nature of these claims is such that actual development of the claims may vary significantly from the estimated accruals. All changes in the accrual estimates are accounted for on a prospective basis and can have a significant impact on the Company's financial position or results of operations. Insurance for environmental accidents and pollution has historically been expensive and difficult to obtain. The Company currently maintains insurance for environmental accidents and pollution relating to the performance of services at certain customer locations. To date, the Company has not incurred F-52 129 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) material fines, penalties or liabilities for pollution, environmental damage or toxic torts. However, in the event a claim is successful against the Company for pollution or toxic tort liability for which the Company is only partially insured or completely uninsured, there could be a material adverse effect on the Company's financial position or results of operations. Environmental Proceedings In November 1996, the West Virginia Department of Environmental Protection (the "West Virginia DEP") issued a draft consent order against one of the Company's subsidiaries, which order seeks to impose an aggregate of approximately $229,000 in fines against the Company relating to a transportation-related spill in West Virginia in November 1995. The Company voluntarily remediated this spill in December 1995. The draft consent order alleges that in remediating the spill, the Company did not comply with certain technical West Virginia DEP remediation regulations relating to recordkeeping and generator requirements. The Company believes that the West Virginia DEP remediation regulations cited by the West Virginia DEP as the basis of this draft consent order are not relevant in the context of an emergency spill response. Therefore, the Company believes that it may be able to successfully negotiate the imposition by the West Virginia DEP of significantly lower penalties in the final consent order. The Company is actively negotiating the draft consent order with the West Virginia DEP and does not believe that the final consent order will have a material adverse effect on the Company's results of operations or financial position. Other matters In August 1995, the Company entered into an agreement with Resource Recovery Techniques of Arizona, Inc. ("RRT"), a start-up operation that was in the process of constructing a wastewater treatment facility located in Phoenix, Arizona (the "Facility"). As part of the agreement, the Company caused the issuance of a Letter of Credit in the amount of $4.2 million for the benefit of holders of tax exempt bonds (the "Bonds") issued to finance the construction of the Facility. The Letter of Credit is subject to draw under the terms of a certain Trust Indenture and Reimbursement Agreement executed in connection with the issuance of the Bonds. As consideration, the Company was issued warrants, with 10 year terms, to purchase 10% of the common stock of RRT and upon the occurrence of certain conditions, an additional 15% of the common stock of RRT. 10. RETIREMENT PLANS -- Effective October 1, 1990, the Company established a defined contribution employee benefit plan, the Allwaste Retirement Savings Plan, which covered substantially all full-time non-union U.S. employees having at least one year of service. On July 1, 1995, the Company adopted the Allwaste Employee Retirement Plan (the "Retirement Plan"), which amended and restated the Allwaste Retirement Savings Plan. Eligible employees may contribute up to 15% of their compensation, subject to certain Internal Revenue Code limitations. The Company matches 50% of each participant's contributions up to 3% of eligible compensation. Retirement Plan participants may select among six investment options, one of which is the Company's Common Stock. At August 31, 1996, the Retirement Plan held 626,723 shares of the Company's Common Stock (market value of $2.6 million) which represented 24.3% of the Retirement Plan's assets. In addition to the Plan, the Company maintains three other defined contribution employee benefit plans which cover a small group of union employees. Defined contribution expense related to all plans for the Company was $0.8 million, $0.6 million and $0.5 million for fiscal years 1996, 1995 and 1994, respectively. F-53 130 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. INCENTIVE PLANS -- On October 26, 1995, the Company's Board of Directors adopted a limited single-purpose incentive plan (the "Incentive Plan") for certain key employees ("Participants") of the Company. Under this plan, each Participant that purchased shares of the Company's Common Stock, based on a designated percentage of the Participant's annual salary (the "Qualifying Shares"), was granted a number of shares of restricted Common Stock equal to two times the number of Qualifying Shares purchased by the Participant. On completion of the purchases by a Participant, the Compensation Committee, in exercise of its discretion and under the Company's Amended and Restated 1989 Replacement Non-qualified Stock Option Plan, granted to such Participant an option to purchase a number of shares of Common Stock equal to four times the number of Qualifying Shares purchased by the Participant. Shares of Common Stock issued under this Incentive Plan are treasury shares. At August 31, 1996, 203,366 shares of restricted Common Stock and options to purchase 423,464 shares of Common Stock have been granted to Participants. Additionally, 3,460 shares of restricted Common Stock were earned and not yet issued. The Company does not contemplate that any additional restricted shares will be issued under the Incentive Plan or that any options to purchase shares of Common Stock will be granted under the Plan in relation to purchases of Qualifying Shares pursuant to the Incentive Plan. The value of restricted shares awarded under this Incentive Plan during fiscal 1996 was $0.9 million. These amounts were recorded as unearned compensation related to outstanding restricted stock and are shown as a separate component of Shareholders' Equity. Unearned compensation is being amortized to expense over a predominately four year vesting period and amounted to $0.2 million for the year ended August 31, 1996. During fiscal 1996, the Company adopted an Interim Management Bonus Plan ("Interim Plan") for eligible personnel, as defined. Under this Interim Plan, eligible personnel may receive bonus payments contingent upon the Company meeting or exceeding certain predetermined earnings levels, as determined by the Compensation Committee of the Board of Directors, and individual performance. At August 31, 1996, compensation earned and recorded in operating expense was $1.0 million. 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to do so. The Company's notes receivable are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Long-term investments are based on the carrying value of the asset. The Company's long-term debt and convertible subordinated debt are estimated based on quotations obtained from broker-dealers who make markets in these and similar securities. The bank credit facilities are based on floating interest rates and, as such, the carrying amount is a reasonable estimate of fair value. Letters of credit are based on the face amount of the related obligations and performance bonds. Interest rate cap agreements are based on quotes from the market makers of these instruments and represent the amounts that the Company would expect to receive to terminate the agreements. F-54 131 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) The estimated fair values of the Company's financial instruments are as follows (in thousands):
AUGUST 31, ------------------------------------------------- 1996 1995 --------------------- ----------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- --------- --------- Notes receivable............................... $ 13,517 $ 13,120 $ 4,893 $ 4,428 Long-term investments.......................... 11,030 11,030 -- -- Long-term debt and convertible subordinated debentures................................... 128,144 123,064 165,878 162,126 Letters of credit.............................. -- 30,090 -- 25,072 Interest Rate Cap Agreement.................... 270 377 -- --
13. NET INCOME (LOSS) PER COMMON SHARE -- Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of Common Stock and equivalents outstanding during the year as shown below (in thousands, except per share data):
FOR THE YEARS ENDED AUGUST 31, ------------------------------------ 1996 1995 1994 -------- -------- -------- Income (loss) from continuing operations, net of income taxes................................................. $ 6,614 $ (3,879) $ 10,596 Discontinued Operations Income from discontinued operations, net of applicable income taxes....................................... -- 2,773 2,501 Gain on sale of glass recycling operations, net of applicable income taxes............................ 3,764 -- -- -------- -------- -------- Net income (loss)....................................... $ 10,378 $ (1,106) $ 13,097 ======== ======== ======== Shares outstanding, beginning of year................... 39,609 37,741 36,740 Weighted average number of common shares outstanding: Stock options, treasury stock method............... 63 290 188 Purchased companies, including earnouts............ 25 816 132 Exercise of stock options.......................... 113 208 4 Treasury stock and other, net...................... (755) (250) (212) -------- -------- -------- Total weighted average common shares outstanding........ 39,055 38,805 36,852 ======== ======== ======== Net income (loss) per common share: Continuing operations................................. $ .17 $ (.10) $ .29 Discontinued operations............................... .10 .07 .07 -------- -------- -------- Net income (loss) per common share...................... $ .27 $ (.03) $ .36 ======== ======== ========
Fully diluted net income per common share is not presented for any period as it is not materially different from the above primary calculations. Common stock equivalents include stock options to purchase Common Stock. The convertible subordinated debt is not a common stock equivalent and does not have a material dilutive effect on net income (loss) per common share for any of the three years presented. F-55 132 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. BUSINESS OPERATIONS AND GEOGRAPHIC INFORMATION -- The primary business of the Company involves the provision of on-site industrial cleaning and waste management services (including hydroblasting and gritblasting and air moving and liquid vacuuming), waste transportation and processing, wastewater services, site remediation, maintenance services, turnaround and outage services, container cleaning and repair services, emergency spill response services and other general plant support services to the industrial customer. The Company's operations are located in the United States, Canada and Mexico, as summarized below (in thousands):
UNITED STATES CANADA MEXICO TOTAL --------- --------- --------- --------- 1996 -- Revenues................................... $ 347,484 $ 32,952 $ 1,729 $ 382,165 Operating income (loss).................... 16,978 2,120 (356) 18,742 Total assets............................... 320,222 16,522 443 337,187 1995 -- Revenues................................... $ 322,644 $ 20,484 $ 1,117 $ 344,245 Operating income (loss).................... 11,253 1,375 (2,863) 9,765 Total assets............................... 359,507 12,257 469 372,233 1994 -- Revenues................................... $ 263,210 $ 22,611 $ 1,040 $ 286,861 Operating income (loss).................... 22,165 2,690 (1,506) 23,349 Total assets............................... 297,063 9,578 2,622 309,263
F-56 133 ALLWASTE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. QUARTERLY FINANCIAL DATA (UNAUDITED) -- The table below sets forth consolidated operating results by fiscal quarter for the years ended August 31, 1996 and 1995, excluding the Company's discontinued glass recycling operations (in thousands, except per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- --------- 1996 -- Revenues.................................. $ 99,798 $ 88,278 $ 98,731 $ 95,358 Gross profit.............................. 26,744 18,659 25,621 24,729 Net income (loss) Continuing operations.................. 2,715 (1,357) 2,583 2,673 Discontinued operations................ 3,764 -- -- -- -------- -------- -------- --------- $ 6,479 $ (1,357) $ 2,583 $ 2,673 ======== ======== ======== ========= Net income (loss) per common share Continuing operations.................. $ .07 $ (.03) $ .07 $ .07 Discontinued operations................ .09 -- -- -- -------- -------- -------- --------- $ .16 $ (.03) $ .07 $ .07 ======== ======== ======== ========= 1995 -- Revenues.................................. $ 82,591 $ 78,433 $ 86,638 $ 96,583 Gross profit.............................. 22,846 20,903 23,384 22,516 Net income (loss) Continuing operations.................. 2,926 1,507 2,170 (10,482) Discontinued operations................ 794 825 872 282 -------- -------- -------- --------- $3,720... $ 2,332 $ 3,042 $ (10,200) ======== ======== ======== ========= Net income (loss) per common share Continuing operations.................. $ .08 $ .04 $ .06 $ (.27) Discontinued operations................ .02 .02 .02 .01 -------- -------- -------- --------- $.10..... $ .06 $ .08 $ (.26) ======== ======== ======== =========
Due to changes in weighted average common shares outstanding, the sum of the quarterly per share amounts for fiscal 1996 and 1995 do not equal earnings (loss) per share for the respective years. F-57 134 REPORT OF INDEPENDENT ACCOUNTANTS To the Boards of Directors of PECHINEY (ISW), INC., PPC (ISW), INC., and INTSEL SOUTHWEST LIMITED PARTNERSHIP We have audited the accompanying combined statements of income and of cash flows for the nine months ended September 26, 1996 of Pechiney (ISW), Inc., PPC (ISW), Inc. and Intsel Southwest Limited Partnership (collectively, the Company). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements audited by us present fairly, in all material respects, the combined results of operations and cash flows of Pechiney (ISW), Inc., PPC (ISW), Inc., and Intsel Southwest Limited Partnership for the nine months ended September 26, 1996, in conformity with accounting principles generally accepted in the United States of America. PRICE WATERHOUSE LLP Houston, Texas April 7, 1997 F-58 135 PECHINEY (ISW), INC., PPC (ISW), INC. AND INTSEL SOUTHWEST LIMITED PARTNERSHIP COMBINED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1996 (in thousands of U.S. dollars) Revenue......................................................................... $ 99,014 Cost of sales................................................................... 84,369 -------- Gross profit.................................................................... 14,645 -------- Operating expenses: Selling, general and administrative........................................... 5,485 Depreciation expense.......................................................... 699 -------- Total operating expenses.............................................. 6,184 -------- Operating income................................................................ 8,461 -------- Other expenses: Management fees............................................................... 182 Net interest expense.......................................................... 150 -------- Total other expenses.................................................. 332 -------- Income before income taxes...................................................... 8,129 Provision for income taxes...................................................... 2,800 -------- Net income...................................................................... $ 5,329 ========
The accompanying notes are an integral part of this statement. F-59 136 PECHINEY (ISW), INC., PPC (ISW), INC. AND INTSEL SOUTHWEST LIMITED PARTNERSHIP COMBINED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1996 (in thousands of U.S. dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................................................................... $ 5,329 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization................................................. 699 Gains on sale of assets....................................................... (81) Deferred income taxes......................................................... 565 Changes in assets and liabilities: Decrease in accounts receivable............................................ 1,267 Increase in inventories.................................................... (4,783) Increase in prepaid expenses............................................... (94) Increase in receivable from a related party................................ (5,761) Decrease in deposits....................................................... 8 Decrease in accounts payable and accrued expenses.......................... (743) Decrease in accounts payable to a related party............................ (72) Increase in income taxes payable........................................... 2,235 Increase in accrued pension liability...................................... 3 Increase in accrued post-retirement benefits............................... 134 ------- Net cash used by operating activities.................................... (1,294) ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets........................................................ (315) ------- Proceeds from sale of assets.................................................... 96 ------- Net cash used by investing activities......................................... (219) ------- Net decrease in cash and cash equivalents....................................... (1,513) Cash and cash equivalents at December 27, 1995.................................. 1,513 ------- Cash and cash equivalents at September 26, 1996................................. $ -- =======
The accompanying notes are an integral part of this statement. F-60 137 PECHINEY (ISW), INC., PPC (ISW), INC. AND INTSEL SOUTHWEST LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION: Effective September 27, 1996, Philip Metals, Inc. and PEN Metals, Inc. (subsidiaries of Philip Environmental Inc.) purchased their respective 100% ownership interests in Pechiney (ISW), Inc. and PPC (ISW), Inc. from Pechiney North America, Inc. (Pechiney) for $614,000 and $60,782,000, respectively. Pechiney (ISW), Inc. owns a one-percent interest in, and is the general partner of, Intsel Southwest Limited Partnership (Intsel). PPC (ISW), Inc. owns a 99-percent interest in, and is the sole limited partner of, Intsel. Intsel is a distributor of heavy carbon steel products throughout the Southwestern and Southeastern regions of the United States. The combined financial statements include the accounts of Pechiney (ISW), Inc., PPC (ISW), Inc. and Intsel (collectively referred to as the Company or the Partnership). All significant intercompany transactions have been eliminated in combination. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES: The combined financial statements have been prepared on the accrual basis using accounting principles generally accepted in the United States of America. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of revenue and expenses at the date of the financial statements. Actual results could differ from those estimates. Revenue recognition Revenue from the distribution of heavy carbon steel products is recognized at the time of shipment. Cash and cash equivalents Cash and cash equivalents consist of demand deposits and term deposits in money market instruments with original maturity dates of three months or less. Fair market value approximates cost for cash and cash equivalents. Inventory Inventory is recorded at the lower of average cost or net realizable value. Fixed assets Fixed assets are depreciated over their estimated useful lives using the straight-line method. Assets are depreciated beginning the month they are placed in service. Repair and maintenance costs associated with assets are charged to operations as incurred. The estimated useful lives of each asset class are as follows:
YEARS ----- Buildings................................................. 5-20 Production machinery...................................... 2-10 Vehicles.................................................. 2-10 Furniture, fixtures and equipment......................... 2-7 Leasehold improvements.................................... 3
F-61 138 PECHINEY (ISW), INC., PPC (ISW), INC. AND INTSEL SOUTHWEST LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): The Company has adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), which requires accounting for impairment of long-lived assets and certain identifiable intangibles held for sale based on an analysis of future net cash flows for those assets. The adoption of SFAS 121 did not have a material effect on the Company's financial position or results of operations. Income taxes The Company accounts for deferred income taxes using the liability method which provides for the recognition of deferred tax assets and liabilities based upon temporary differences between the tax basis of assets and liabilities and their carrying value for financial reporting purposes. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities during the period. In estimating future tax consequences, all expected future events are considered other than enactments of changes in the tax law or rates. NOTE 3 -- POST-RETIREMENT BENEFITS: The Company participates in the post-retirement benefit plan of Pechiney World Trade (USA). The defined benefit post-retirement plan provides certain health care and life insurance benefits for retired employees. Substantially all employees become eligible for these benefits if they have met certain age and service requirements at retirement. The Partnership had fully accrued the accumulated benefit obligation in accordance with the provisions of SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions", which requires accrual of these benefits during the years an employee provides service. Net periodic post-retirement benefit cost for the nine months ended September 26, 1996 was comprised of the following elements (in thousands of U.S. dollars): Current year service cost................................... $ 64 Interest accrued on post-retirement benefit obligations..... 34 ---- Net periodic post-retirement benefit cost................... $ 98 ====
The assumed healthcare cost trend rate used in measuring the benefit obligation is 11% pre-age 65 in 1996 and 9% post-age 65 in 1996, declining at a rate of 1% per year to an ultimate rate of 6% in the year 2001 pre-age 65 and 5% post-age 65. A one percent increase in this rate in each year would increase the aggregate service and interest cost for 1996 by $51,000. The weighted average discount rates used in determining the benefit obligation at December 31, 1996 is 8%. F-62 139 PECHINEY (ISW), INC., PPC (ISW), INC. AND INTSEL SOUTHWEST LIMITED PARTNERSHIP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- INCOME TAXES: The provision for income taxes (which is primarily federal) for the nine months ended September 26, 1996 consists of the following (in thousands of U.S. dollars): Current.................................................. $ 2,235 Deferred................................................. 565 ------- $ 2,800 ======
The difference between income taxes at the statutory federal and effective income tax rates for the nine months ended September 26, 1996 is as follows (in thousands of U.S. dollars): Taxes computed by applying federal statutory rate........ $ 2,845 Other.................................................... (45) ------- $ 2,800 ======
NOTE 5 -- RELATED PARTIES: During the nine months ended September 26, 1996, Pechiney funded the Company's cash requirements in excess of operating cash flows or borrowed the excess operating cash flow from the Company on a daily basis. The resulting liability/receivable accrued interest at 5.656% to 6.088% during the nine months ended September 26, 1996. During the nine months ended September 26, 1996, the Company paid $166,000 of interest expense to Pechiney and received $16,000 of interest income. These amounts have been netted for financial statement purposes. The Partnership obtains certain insurance coverages through its parent companies. Total allocation of insurance expense for the nine months ended September 26, 1996 was approximately $282,000. During the nine months ended September 26, 1996, the Company incurred $182,000 of management fees to Pechiney. During the nine months ended September 26, 1996, eligible employees of the Company participated in the pension plans provided by Pechiney. The Company recorded pension expense of $200,000 and contributed $191,000 to the Pechiney pension plans during the nine months ended September 26, 1996. NOTE 6 -- COMMITMENTS: Future lease payments required under operating leases for premises, equipment and vehicles are as follows (in thousands of U.S. dollars): 1997....................................................... $ 246 1998....................................................... 162 1999....................................................... 38
The Company incurred $255,000 in lease expense during the nine months ended September 26, 1996. NOTE 7 -- CONTINGENCIES: The Company is named as a defendant in a lawsuit which has arisen in the ordinary course of its business. Management believes that this suit is not likely to have a material adverse effect on the Company's business or financial condition. F-63 140 REPORT OF INDEPENDENT AUDITORS Board of Directors LUNTZ CORPORATION We have audited the accompanying consolidated statements of income and cash flows of Luntz Corporation and subsidiary for the year ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated statements of income and cash flows referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Luntz Corporation and subsidiary for the year ended December 31, 1995, in conformity with generally accepted accounting principles. Canton, Ohio Ernst & Young LLP February 19, 1996 F-64 141 LUNTZ CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (in thousands of US dollars)
ELEVEN MONTHS YEAR ENDED ENDED DECEMBER 31 NOVEMBER 30 1995 1996 ----------- ------------- (Unaudited) Revenue: Net sales.................................................. $ 149,988 $ 123,541 Expenses: Cost of sales.............................................. 135,588 110,301 Office and administrative expenses......................... 7,281 8,649 Interest expense........................................... 617 711 Other (income) -- net...................................... (439) (435) ----------- ------------- 143,047 119,226 ----------- ------------- Income before income taxes................................... 6,941 4,315 Provision for income taxes................................... 2,617 1,796 ----------- ------------- Net income................................................... $ 4,324 $ 2,519 ========== ============
See accompanying notes. F-65 142 LUNTZ CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of US dollars)
ELEVEN MONTHS YEAR ENDED ENDED DECEMBER 31 NOVEMBER 30 1995 1996 ----------- ------------- (Unaudited) OPERATING ACTIVITIES Net income................................................... $ 4,324 $ 2,519 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization.............................. 2,665 2,860 Deferred income taxes...................................... (1,382) 234 Gain on sale of equipment.................................. (12) (21) Changes in operating assets and liabilities: Accounts receivable..................................... (3,076) (3,393) Inventories............................................. 2,909 (2,389) Prepaid expenses and other assets....................... (264) (132) Accounts payable........................................ (2,904) (35) Accrued expenses and other liabilities.................. 6,536 56 ----------- ------------- Net cash provided (used) by operating activities............. 8,796 (301) INVESTING ACTIVITIES Purchases of property, plant and equipment................... (8,834) (4,153) Proceeds from sale of equipment.............................. 199 97 Change in short-term investments............................. (19) (64) ----------- ------------- Net cash used in investing activities........................ (8,654) (4,120) FINANCING ACTIVITIES Change in notes payable to banks -- net...................... -- 6,200 Proceeds from long-term borrowings........................... 4,299 35 Principal payments on long-term debt......................... (661) (889) Principal payments on long-term obligations.................. (384) (284) Dividends paid............................................... (97) (180) Purchase of treasury stock................................... -- (171) ----------- ------------- Net cash provided by financing activities.................... 3,157 4,711 ----------- ------------- Increase in cash and cash equivalents........................ 3,299 290 Cash and cash equivalents at beginning of period............. 1,575 4,874 ----------- ------------- Cash and cash equivalents at end of period................... $ 4,874 $ 5,164 ========== ============
See accompanying notes. F-66 143 LUNTZ CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS DECEMBER 31, 1995 1. ACCOUNTING POLICIES Description of Business The Corporation sells scrap metal, ferrous and non-ferrous, to industrial steel producers located principally in Ohio, Pennsylvania and the surrounding states. The financial statements of the Corporation are presented in U.S. dollars and are prepared in accordance with U.S. generally accepted accounting principles. Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary. Significant intercompany accounts and transactions have been eliminated upon consolidation. Cash Equivalents The Corporation considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Concentration of Credit Risk Credit is extended based on an evaluation of the customer's financial condition and generally collateral is not required. Credit terms are consistent with the industry and losses from credit sales are provided for in the financial statements. Inventories Inventories are valued at the lower of cost or market principally by the last-in, first-out (LIFO) method. In 1995, inventory quantities were reduced, resulting in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the current costs. The effect of this liquidation was to increase 1995 net income by approximately $400,000. Property, Plant and Equipment Expenditures for repairs and maintenance are charged to operations as incurred, while expenditures for additions and improvements are capitalized. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets. Useful lives range from 5 to 40 years for buildings and improvements, 5 to 20 years for machinery and equipment and 5 to 10 years for furniture and fixtures. Intangible Assets Amortization is computed using the straight-line method over the estimated useful life of the intangible assets -- 4 to 15 years. Revenue Recognition Revenue from the sale/brokerage of ferrous and non-ferrous scrap metal is recognized at the time of shipment. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-67 144 LUNTZ CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS -- (CONTINUED) 1. ACCOUNTING POLICIES (CONTINUED) Interim Financial Information The accompanying unaudited consolidated statements of income and cash flows for the eleven months ended November 30, 1996, have been prepared by the Corporation in accordance with generally accepted accounting principles for interim financial information and with Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of the interim period have been included. 2. INCOME TAXES The provision for income taxes consists of the following for the year ended December 31, 1995: Current: Federal............................................ $3,238,000 State and local.................................... 761,000 ---------- 3,999,000 Deferred (credit).................................... (1,382,000) ---------- $2,617,000 ==========
The effective income tax rate varied from the statutory federal income tax rate as follows:
1995 ------ Statutory federal income tax rate......................... 34.0% Adjustments: State and local taxes, net of federal tax benefit....... 7.2 Other items............................................. (3.5) ------ Effective income tax rate................................. 37.7% ======
3. RETIREMENT PLANS The Corporation sponsors noncontributory trusteed retirement plans which cover certain hourly employees. These plans provide defined benefits based on years of credited service. The Corporation's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus additional amounts as the Corporation may determine to be appropriate. Assumptions used in accounting for defined benefit retirement plans for the year ended December 31, 1995 are as follows: Expected long-term rate of return on assets................ 8.0% Discount rate.............................................. 7.5%
F-68 145 LUNTZ CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS -- (CONTINUED) 3. RETIREMENT PLANS (CONTINUED) The periodic pension expense for these plans for the year ended December 31, 1995 include the following: Service cost -- benefits earned during the period..... $ 81,000 Interest cost on projected benefit obligation......... 173,000 Actual return on plan assets.......................... (677,000) Net amortization and deferral......................... 424,000 --------- Total pension expense................................. $ 1,000 ==========
At December 31, 1995, approximately 95 percent of the plans' assets were invested in listed stocks and bonds. The Corporation also sponsors a defined contribution 401(k) plan and a profit-sharing plan for its salaried employees. The 401(k) plan allows participants to make contributions, by salary reduction, pursuant to Section 401(k) of the Internal Revenue Code. The Corporation currently contributes 3% of an employee's compensation and also matches employees' contributions, limited to the lesser of 6% of total compensation or the statutory limit, at a rate of 50%. Employees vest immediately in their contributions and over a seven year period for the Corporation's contribution. The Corporation's contribution to the plan was $227,000 in 1995. The profit-sharing plan provides for an annual contribution of profits, at the discretion of the Board Directors, subject to the limitations of the plan. The Corporation expensed $250,000 in 1995 related to the profit-sharing plan. 4. DEFERRED COMPENSATION AGREEMENTS The Corporation has provided deferred compensation agreements to certain retired executives. A liability equal to the present value of expected future payments has been accrued relating to these agreements. Office and administrative expenses included approximately $259,000 for 1995 relating to the deferred compensation agreements. 5. RELATED PARTY TRANSACTIONS Rental expense amounted to approximately $359,000 in 1995, which included $261,000, paid to affiliates under short-term leases for facilities. 6. COMMITMENTS AND CONTINGENCIES The Corporation is subject to legal proceedings and claims which arise in the ordinary course of their business. The Corporation is also involved in environmental claims relating to cleanup costs with environmental protection agencies with respect to certain sites. The Corporation, together with other parties, has been designated a potentially responsible party (PRP) under federal and state environmental protection laws for the remediation of alleged hazardous materials at third-party sites and one corporate owned site. Also, third parties have sought to have the Corporation designated as a PRP for certain other sites. In general, environmental protection laws provide that PRPs may be held jointly and severally liable for investigation and remediation costs regardless of fault. The Corporation has been aggressive in its continued pursuit of claims for reimbursement against the parties responsible for such environmental liabilities pursuant to the federal and state environmental laws that also allow such third-party claims and has aggressively defended itself against the above referenced environmental claims. Further, the Corporation has pursued claims against third-parties that are responsible for either causing such damages or paying for such claims, or both. Accordingly, the Corporation believes that any liabilities which may result from the resolution of these matters, will not have a material adverse effect on the financial condition, liquidity or cash flow of the Corporation. F-69 146 INSIDE BACK COVER Photograph: Heat exchanger bundle being removed by an extractor unit at a refinery. Caption: Philip is a North American leader in providing "turnaround", or scheduled maintenance services, to the petrochemical industry. Photograph: Man dressed in complete protection suit gritblasting the inside of a tank. Caption: Philip provides gritblasting services to clean surfaces on electrostatic precipitators and boilers. Photograph: Man painting blue truck in assembly plant. Caption: Philip's EPOC paint overspray recovery process eliminates the landfilling of paint sludge, a significant waste stream generated in automobile production. Photograph: Mill scale being transported by grab hook at steel mill. Caption: Mill scale, a high iron-bearing by-product of steel manufacturing, is processed by Philip for reuse as a raw material in steel production. Photograph: Liquid aluminum pouring from furnace and cast into ingots. Caption: Philip is a large processor of aluminum dross, a by-product of aluminum smelting, and recovers aluminum for reuse by refiners.
[DESCRIPTION OF BACKGROUND: CLOSE UP PHOTO OF ALUMINUM DEOXIDIZING PRODUCTS, WHICH ARE CONE SHAPED AND GOLD TONED IN COLOR.] [PHILIP LOGO] F-70 147 NO DEALER, SALES PERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN 20,000,000 SHARES THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNPHILIP SERVICES CORP. DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS COMMON SHARES NOT AUTHORIZED OR IN WHICH THE PERSON MAKING (NO PAR VALUE) SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION. - -------------------------------------------------------------- TABLE OF CONTENTS
PAGE ------ Enforceability of Certain Civil Liabilities.......................... 5 Forward-Looking Statements............. 5 Presentation of Financial Information.......................... 5 Exchange Rate Information.............. 6 Prospectus Summary..................... 7
[LOGO] Risk Factors........................... 14 Use of Proceeds........................ 18 Dividend Policy and Record............. 18 Price Range and Trading Volume of the Common Shares........................ 19 Consolidated Capitalization............ 20 Unaudited Pro Forma Consolidated Financial Information................ 21 Selected Consolidated Historical Financial Data....................... 31 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 33
SALOMON BROTHERS INC Business............................... 40 Recent Acquisitions.................... 60
MERRILL LYNCH & CO. Management............................. 62 Certain Transactions................... 66 Security Ownership of Certain Beneficial Owners and Management..... 66 Share Capital of the Company........... 68 Description of Certain Indebtedness.... 68 Material Income Tax Considerations..... 69 Underwriting........................... 72 Legal Matters.......................... 74
PROSPECTUS Experts................................ 75 Available Information.................. 75
DATED , 1997 Index to Financial Statements.......... F-1
I,2 148 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Securities and Exchange Commission registration fee.................. $ 134,446 NASD fee............................................................. 30,500 *NYSE, TSE and ME listing fees....................................... 140,000 *Printing and engraving expenses..................................... 350,000 *Legal fees and expenses............................................. 1,200,000 *Accounting fees and expenses........................................ 450,000 *Transfer agent fees and expenses.................................... 20,000 *Miscellaneous....................................................... 175,054 -------- Total................................................................ $ 2,500,000 ========
- --------------- * Estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under the Business Corporations Act (Ontario), the Registrant may indemnify a present or former director or officer or a person who acts or acted at the Registrant's request as a director or officer of another company of which the Registrant is or was a stockholder or creditor, and his heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of such position, and provided that the director or officer acted honestly and in good faith with a view to the best interests of the Registrant and, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, had reasonable grounds for believing that his conduct was lawful. Such indemnification may, with the approval of the court, be made in connection with the procuring of a judgment in favor of the Registrant or such other company if the conditions set forth above have been fulfilled. A director or officer is entitled to indemnification from the Registrant as a matter of right if he was substantially successful on the merits and fulfilled the conditions set forth above. In accordance with the Business Corporations Act (Ontario), the By-laws of the Registrant provide that the Registrant shall indemnify a director or officer, a former director or officer, or a person who acts or acted at the Registrant's request as a director or officer of a company in which the Registrant is or was a shareholder or creditor, and his heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he was made a part by reason of his being or having been a director or officer of the Registrant or such other company, if he acted honestly and in good faith with a view to the best interests of the Registrant and, in the case of a criminal or administrative action or proceeding that is enforced by monetary penalty, he had reasonable grounds for believing that his conduct was lawful. The By-laws also provide that the Registrant shall indemnify the above described persons in such other circumstances as the Business Corporations Act (Ontario) permits or requires. The By-laws do not limit the right of a person entitled to indemnity to claim indemnity apart from the provisions of the By-laws. The Registrant has the benefit of an insurance policy for itself and its directors and officers against liability incurred by them in the performance of their duties as directors or officers of the Registrant. The aggregate amount of coverage under the policy is Cdn$25 million per policy year. The form of Underwriting Agreements governing the offering registered under this Registration Statement contains provisions by which the underwriters agree to indemnify the Registrant, each person who controls the Registrant within the meaning of the Securities Act of 1933, as amended II-1 149 (the "Securities Act"), and each officer and director of the Registrant, with respect to information furnished by the underwriters for use in this Registration Statement. Reference is made to Item 17 for the undertakings of the Registrant with respect to indemnification for liabilities arising under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) Securities Issued Pursuant to Acquisitions: (i) On September 11, 1997, the Registrant issued 354,430 Common Shares in connection with the acquisition of certain assets of A-C-I Holdings Inc., a Canadian corporation. The transactions were exempt under Regulation S under the Securities Act. (ii) On August 11, 1997, the Registrant issued 2,684,371 Common Shares to shareholders of Intermetco Limited outside the United States in connection with the acquisition of Intermetco. The transactions were exempt under Regulation S under the Securities Act. (iii) On July 31, 1997, the Registrant issued 286,418 Common Shares in connection with the acquisition of the stock of D&L, Inc. The transaction was exempt under Section 4(2) of the Securities Act. (iv) On July 3, 1997, the Registrant issued 422,331 Common Shares in connection with the acquisition of the stock of Roth Bros. Smelting Corp. The transaction was exempt under Section 4(2) of the Securities Act. (v) On June 2, 1997, the Registrant issued 42,412 Common Shares in connection with the acquisition of Uniflo Utilities Management Corp., a Canadian company. The transaction was exempt under Regulation S under the Securities Act. (vi) On May 2, 1997, the Registrant issued 256,792 Common Shares in connection with the acquisition of Lynx Environmental Services Limited, a Canadian corporation. The transaction was exempt under Regulation S under the Securities Act. (vii) On February 12, 1997, the Registrant issued 556,390 Common Shares in connection with the acquisitions of Conversion Resources, Inc. and Warrenton Resources, Inc. The transactions were exempt under Section 4(2) of the Securities Act. (viii) On February 7, 1997, the Registrant issued 222,165 Common Shares in connection with the acquisition of RMF Global, Inc. The transaction was exempt under Section 4(2) of the Securities Act. (ix) On January 7, 1997, the Registrant issued 2,222,222 Common Shares in connection with the acquisition of Luntz Corporation. The transaction was exempt under Section 4(2) of the Securities Act. (x) On June 3, 1996, the Registrant issued 720,850 Common Shares in connection with the acquisition of Delsan Environmental Group Inc., a Canadian corporation. The transaction was exempt under Regulation S under the Securities Act. (xi) On February 15, 1996, the Registrant issued 64,209 Common Shares in connection with the acquisition of Citadel Environmental Services, a Canadian corporation. The transaction was exempt under Regulation S under the Securities Act. (xii) On September 28, 1995, the Registrant issued 79,293 Common Shares in connection with the acquisition of Thorburn-Penny Limited, a Canadian corporation. The transaction was exempt under Regulation S under the Securities Act. (xiii) On May 26, 1995, the Registrant issued 114,823 Common Shares in connection with the acquisition of Thomas Environmental Management Inc., a Canadian corporation. The transaction was exempt under Regulation S under the Securities Act. II-2 150 (xiv) On March 31, 1995, the Registrant issued 1,174,566 Common Shares in connection with the acquisition of Nortru, Inc. The transaction was exempt under Section 4(2) of the Securities Act. (xv) On January 5, 1995, the Registrant issued 32,985 Common Shares in connection with the acquisition of 836750 Ontario Inc., a Canadian corporation. The transaction was exempt under Regulation S under the Securities Act. (xvi) On November 10, 1994, the Registrant issued 919,842 Common Shares in connection with the acquisition of Entreprises Delcapitale Limitee Ontario Inc., a Canadian corporation. The transaction was exempt under Regulation S under the Securities Act. (b) Securities issued pursuant to the exercise of stock options: (i) For the fiscal year ended December 31, 1995, the Registrant issued 23,614 Common Shares in connection with exercise of employee stock options by officers and employees in Canada. The transactions were exempt under Regulation S under the Securities Act. (ii) Between September 1, 1994 and December 31, 1994, the Registrant issued 180,000 Common Shares in connection with exercise of employee stock options by officers and employees in Canada. The transactions were exempt under Regulation S under the Securities Act. (c) Other securities issued: (i) On November 10, 1994, the Registrant issued 13,326 Common Shares as settlement for an account payable to a Canadian person. The transaction was exempt under Regulation S under the Securities Act. II-3 151 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES A. EXHIBITS The following exhibits are attached hereto:
EXHIBIT NUMBER TITLE ------ ----------------------------------------------------------------------------- *1.1 Form of U.S. Underwriting Agreement 3.1 Articles of Amalgamation of Lincoln Waste Management Inc. (previous name of the Registrant), dated April 15, 1991 (filed as Exhibit 1.2 to the Registration Statement on Form 20-F of the Registrant dated January 14, 1993 (File No. 0-20854) and incorporated herein by reference) 3.2 By-Laws of Lincoln Waste Management Inc. (previous name of the Registrant), dated August 16, 1990 (filed as Exhibit 1.3 to the Registration Statement on Form 20-F of the Registrant dated January 14, 1993 (File No. 0-20854) and incorporated herein by reference) *5.1 Opinion of Stikeman, Elliott as to certain Canadian tax matters and the legality of the securities offered hereby 8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain U.S. Federal tax matters 10.1 Stock Purchase Agreement dated December 20, 1996 among Pechiney North America, Inc., Philip Metals (Delaware), Inc. and PEN Metals (Delaware), Inc. relating to the acquisition of Instel Southwest Limited Partnership (filed as Exhibit 10.1 to the Registration Statement on Form F-4 of the Registrant (File No. 333-6834) and incorporated herein by reference) 10.2 Agreement and Plan of Reorganization dated December 30, 1996 among Philip Environmental Inc., Philip Environmental Delaware Acquisition Corp. and Luntz Corporation (filed as Exhibit 10.2 to the Registration Statement on Form F-4 of the Registrant (File No. 333-6834) and incorporated herein by reference) 10.3 Agreement and Plan of Merger, dated as of March 5, 1997, by and among Philip Environmental Inc., Taro Aggregates Ltd., an Ontario corporation and a wholly owned subsidiary of the Registrant ("Taro"), Philip/Atlas Merger Corp., a Delaware corporation and a wholly owned subsidiary of Taro, and Allwaste, Inc., a Delaware corporation (attached as Annex A to the Proxy Statement/Prospectus included in the Registration Statement on Form F-4 of the Registrant (File No. 332-6272) and incorporated herein by reference) 10.4 Agreement and Plan of Merger dated March 5, 1997, among Philip Environmental Inc., Taro Aggregates Ltd., ST Acquisition Corporation and Serv-Tech, Inc. (included as Appendix A to the Proxy Statement/Prospectus in Part I of the Registration Statement on Form F-4 of the Registrant (File No. 333-6834) and incorporated herein by reference) 10.5 Credit Agreement, dated as of August 11, 1997, among Philip Services Corp., Philip Environmental (Delaware), Inc., Canadian Imperial Bank of Commerce, Bankers Trust Company, Dresdner Bank of Canada, Dresdner Bank AG/New York Branch), Royal Bank of Canada and the various persons from time to time subject to the Credit Agreement as Lenders 21.1 Subsidiaries of the Registrant *23.1 Consent of Stikeman, Elliott (included in Exhibit 5.1) 23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1) 23.3 Consent of Deloitte & Touche with respect to the financial statements of the Registrant 23.4 Consent of Arthur Andersen LLP with respect to the financial statements of Allwaste 23.5 Consent of Price Waterhouse LLP with respect to the combined statements of income and of cash flows of Pechiney (ISW), Inc., PPC (ISW), Inc. and Intsel Southwest Limited Partnership for the nine months ended September 26, 1996
II-4 152
EXHIBIT NUMBER TITLE ------ ----------------------------------------------------------------------------- 23.6 Consent of Ernst & Young LLP with respect to the financial statements of Luntz 24.1 Powers of Attorney (contained on the signature pages of this Registration Statement)
- --------------- * To be supplied by amendment. B. FINANCIAL STATEMENT SCHEDULES The following financial statement schedules of the Registrant are filed herewith: SCHEDULES II. Valuation and Qualifying Accounts III. Valuation and Qualifying Accounts IV. Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS The Registrant hereby undertakes that: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 153 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hamilton, Province of Ontario, Canada, on September 26, 1997 PHILIP SERVICES CORP. By: /s/ ALLEN FRACASSI ---------------------------------- ALLEN FRACASSI President and Chief Executive Officer II-6 154 POWERS OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each officer or director of Philip Services Corp. whose signature appears below constitutes and appoints Allen Fracassi and Marvin Boughton, and each of them, with full power to act without the other, his true and lawful attorneys-in-fact and agents, with full and several power of substitution, for him and in his name, place and stead, in any and all capacities, to execute any or all amendments, including post-effective amendments, and supplements to this Registration Statement and any subsequent Registration Statement for the same offering which may be filed under Rule 462(b), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they or he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by or on behalf of the following persons in the capacities and on September 26, 1997
SIGNATURE TITLE - ----------------------------------------------- ------------------------------------------ /s/ ALLEN FRACASSI - ----------------------------------------------- ALLEN FRACASSI President, Chief Executive Officer and Director (Principal Executive Officer) /s/ MARVIN BOUGHTON - ----------------------------------------------- MARVIN BOUGHTON Executive Vice-President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ HOWARD L. BECK - ----------------------------------------------- HOWARD L. BECK Director /s/ ROY CAIRNS - ----------------------------------------------- ROY CAIRNS Director /s/ PHILIP FRACASSI - ----------------------------------------------- PHILIP FRACASSI Director - ----------------------------------------------- NORMAN FOSTER Director /s/ WILLIAM E. HAYNES - ----------------------------------------------- WILLIAM E. HAYNES Director /s/ ROBERT L. KNAUSS - ----------------------------------------------- ROBERT L. KNAUSS Director - ----------------------------------------------- FELIX PARDO Director /s/ DERRICK ROLFE - ----------------------------------------------- DERRICK ROLFE Director
II-7 155
SIGNATURE TITLE - ----------------------------------------------- ------------------------------------------ /s/ HERMAN TURKSTRA - ----------------------------------------------- HERMAN TURKSTRA Director /s/ ROBERT WAXMAN - ----------------------------------------------- ROBERT WAXMAN Director
II-8 156 AUTHORIZED REPRESENTATIVE Pursuant to the requirements of the Securities Act of 1933, the undersigned certifies that it is the duly authorized United States representative of Philip Services Corp. and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hamilton, Province of Ontario, Canada on September 26, 1997 Philip Environmental (New York) Inc. (Authorized United States Representative) By: /s/ COLIN H. SOULE ---------------------------------- Name: COLIN H. SOULE Title: Secretary II-9 157 AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of PHILIP SERVICES CORP.: We have audited the consolidated balance sheets of Philip Services Corp. as at December 31, 1996 and 1995, and the consolidated statements of earnings, retained earnings, and changes in financial position for each of the years in the three year period ended December 31, 1996, and have issued our report thereon; such consolidated financial statements and our report thereon are included elsewhere herein. Our examination also comprehended the Schedule of Additional Disclosures Required Under Regulation 210.12-09 of Regulation S-X of the Securities Exchange Act of 1934 as at December 31, 1996 and 1995, and for each of the years in the three year period ended December 31, 1996. In our opinion, this schedule, when considered in relation to the basic consolidated financial statements as at and for each of the years in the three year period ended December 31, 1996 referred to above, presents fairly, in all material respects, the information shown therein. Deloitte & Touche Chartered Accountants Mississauga, Ontario September 24, 1997 II-10 158 PHILIP SERVICES CORP. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN B COLUMN C -- ADDITIONS COLUMN E COLUMN A ----------------- --------------------------------------- COLUMN D ------------- - ------------- BALANCE AT CHARGED TO CHARGED TO ------------- BALANCE AT DESCRIPTION DECEMBER 31, 1996 COSTS AND EXPENSES OTHER ACCOUNTS(1) DEDUCTIONS(2) JUNE 30, 1997 - ------------- ----------------- ------------------ ----------------- ------------- ------------- Allowance for Doubtful Accounts... (8,091,568) (2,100,566) (1,128,768) 290,587 (11,130,315)
- --------------- (1) Opening balances in companies acquired during the six months ended June 30, 1997. (2) Write-off of uncollectible accounts. II-11 159 PHILIP SERVICES CORP. SCHEDULE III -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN B COLUMN C -- ADDITIONS COLUMN E COLUMN A ----------------- --------------------------------------- COLUMN D ----------------- - ------------------- BALANCE AT CHARGED TO CHARGED TO ------------- BALANCE AT DESCRIPTION DECEMBER 31, 1995 COSTS AND EXPENSES OTHER ACCOUNTS(1) DEDUCTIONS(2) DECEMBER 31, 1996 - ------------------- ----------------- ------------------ ----------------- ------------- ----------------- Allowance for Doubtful Accounts......... (5,528,041) (2,667,425) (998,369) 1,102,267 (8,091,568)
- --------------- (1) Opening balances in companies acquired during the year. (2) Write-off of uncollectible accounts. II-12 160 PHILIP SERVICES CORP. SCHEDULE IV -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN B COLUMN C -- ADDITIONS COLUMN E COLUMN A ----------------- ------------------------------------ COLUMN D ----------------- - --------------------- BALANCE AT CHARGED TO CHARGED TO ------------- BALANCE AT DESCRIPTION DECEMBER 31, 1994 COSTS AND EXPENSES OTHER ACCOUNTS DEDUCTIONS(1) DECEMBER 31, 1995 - --------------------- ----------------- ------------------ -------------- ------------- ----------------- Allowance for Doubtful Accounts........... (4,969,903) (1,866,299) -- 1,308,161 (5,528,041)
- --------------- (1) Write-off of uncollectible accounts. II-13 161
EXHIBIT NUMBER DESCRIPTION PAGE NO. ------ -------------------------------------------------------------------- -------- *1.1 Form of U.S. Underwriting Agreement................................. 3.1 Articles of Amalgamation of Lincoln Waste Management Inc. (previous name of the Registrant), dated April 15, 1991 (filed as Exhibit 1.2 to the Registration Statement on Form 20-F of the Registrant dated January 14, 1993 (File No. 0-20854) and incorporated herein by reference).......................................................... 3.2 By-Laws of Lincoln Waste Management Inc. (previous name of the Registrant), dated August 16, 1990 (filed as Exhibit 1.3 to the Registration Statement on Form 20-F of the Registrant dated January 14, 1993 (File No. 0-20854) and incorporated herein by reference)... *5.1 Opinion of Stikeman, Elliott as to certain Canadian tax matters and the legality of the securities offered hereby....................... 8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain U.S. Federal tax matters............................................ 10.1 Stock Purchase Agreement dated December 20, 1996 among Pechiney North America, Inc., Philip Metals (Delaware), Inc. and PEN Metals (Delaware), Inc. relating to the acquisition of Instel Southwest Limited Partnership (filed as Exhibit 10.1 to the Registration Statement on Form F-4 of the Registrant (File No. 333-6834) and incorporated herein by reference)................................... 10.2 Agreement and Plan of Reorganization dated December 30, 1996 among Philip Environmental Inc., Philip Environmental Delaware Acquisition Corp. and Luntz Corporation (filed as Exhibit 10.2 to the Registration Statement on Form F-4 of the Registrant (File No. 333-6834) and incorporated herein by reference)..................... 10.3 Agreement and Plan of Merger, dated as of March 5, 1997, by and among Philip Environmental Inc., Taro Aggregates Ltd., an Ontario corporation and a wholly owned subsidiary of the Registrant ("Taro"), Philip/Atlas Merger Corp., a Delaware corporation and a wholly owned subsidiary of Taro, and Allwaste, Inc., a Delaware corporation (attached as Annex A to the Proxy Statement/Prospectus included in the Registration Statement on Form F-4 of the Registrant (File No. 332-6272) and incorporated herein by reference)........... 10.4 Agreement and Plan of Merger dated March 5, 1997,among Philip Environmental Inc., Taro Aggregates Ltd., ST Acquisition Corporation and Serv-Tech, Inc. (included as Appendix A to the Proxy Statement/Prospectus in Part I of the Registration Statement on Form F-4 of the Registrant (File No. 333-6834) and incorporated herein by reference).......................................................... 10.5 Credit Agreement, dated as of August 11, 1997, among Philip Services Corp., Philip Environmental (Delaware), Inc., Canadian Imperial Bank of Commerce, Bankers Trust Company, Dresdner Bank of Canada, Dresdner Bank AG/New York Branch), Royal Bank of Canada and the various persons from time to time subject to the Credit Agreement as Lenders............................................................. 21.1 Subsidiaries of the Registrant...................................... *23.1 Consent of Stikeman, Elliott (included in Exhibit 5.1).............. 23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1)........................................................ 23.3 Consent of Deloitte & Touche with respect to the financial statements of the Registrant........................................ 23.4 Consent of Arthur Andersen LLP with respect to the financial statements of Allwaste.............................................. 23.5 Consent of Price Waterhouse LLP with respect to the combined statements of income and of cash flows of Pechiney (ISW), Inc., PPC (ISW), Inc. and Intsel Southwest Limited Partnership for the nine months ended September 26, 1996.....................................
II-14 162
EXHIBIT NUMBER DESCRIPTION PAGE NO. ------ -------------------------------------------------------------------- -------- 23.6 Consent of Ernst & Young LLP with respect to the financial statements of Luntz................................................. 24.1 Powers of Attorney (contained on the signature pages of this Registration Statement).............................................
- --------------- * To be supplied by amendment. II-15 EX-8.1 2 OPINION OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM 1 EXHIBIT 8.1 [LETTERHEAD OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM] September 26, 1997 Philip Services Corp. 100 King Street P.O. Box 2440 LCD1 Hamilton, Ontario Canada L8N 4J6 Ladies and Gentlemen: We are acting as your United States counsel in connection with the Registration Statement on Form S-1 (the "Registration Statement") filed with the United States Securities and Exchange Commission by Philip Services Corp. (the "Company") relating to the public offering of the Company's common shares. We hereby confirm, in all material respects, our opinion with respect to United States federal income tax laws contained in Part I of the Registration Statement under the caption "Material Income Tax Considerations - Material United States Federal Income Tax Considerations" subject to the assumptions and limitations set forth therein. We hereby consent to the use of our name under the caption "Legal Matters" in the Registration Statement and to the filing, as an exhibit to the Registration Statement, of this letter. In giving such consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933. Very truly yours, /s/ Skadden, Arps, Slate, Meagher and Flom LLP EX-10.5 3 CREDIT AGREEMENT 1 EXHIBIT 10.5 PHILIP SERVICES CORP. and PHILIP ENVIRONMENTAL (DELAWARE), INC. as Borrowers CANADIAN IMPERIAL BANK OF COMMERCE as Administrative Agent BANKERS TRUST COMPANY as Syndication Agent CANADIAN IMPERIAL BANK OF COMMERCE and BANKERS TRUST COMPANY as Co-Arrangers DRESDNER BANK CANADA, DRESDNER BANK AG NEW YORK BRANCH and ROYAL BANK OF CANADA as Documentation Agents THE VARIOUS PERSONS FROM TIME TO TIME PARTIES TO THIS AGREEMENT as Lenders ---------------------------------------------------------------- CREDIT AGREEMENT DATED AS OF AUGUST 11, 1997 ---------------------------------------------------------------- BLAKE, CASSELS & GRAYDON 2 TABLE OF CONTENTS ARTICLE ONE DEFINITIONS AND INTERPRETATION 1.01 Definitions ................................................... 1 1.02 Headings, Etc. ................................................ 40 1.03 Financial Terms ............................................... 40 1.04 Number, Gender and Expressions ................................ 43 1.05 Time .......................................................... 43 1.06 Non-Business Days ............................................. 43 1.07 Conflicts ..................................................... 43 1.08 Statutory References .......................................... 44 1.09 Actions by Restricted Parties ................................. 44 1.10 Severability .................................................. 44 1.11 Entire Agreement .............................................. 44 1.12 Permitted Liens ............................................... 45 1.13 Interest Payments and Calculations ............................ 45 1.14 Governing Law ................................................. 45 1.15 Waiver of Jury Trial .......................................... 46 1.16 Currency ...................................................... 47 1.17 Senior Indebtedness ........................................... 47 1.18 Schedules ..................................................... 47
ARTICLE TWO THE CREDIT 2.01 Establishment of the Credit ................................... 48 Tranche 1 ..................................................... 48 Tranche 2 ..................................................... 49 Tranche 3 ..................................................... 50 Cdn. Operating Line ........................................... 50 U.S. Operating Line ........................................... 50 U.S. Operating Line ........................................... 51 LC Line ....................................................... 51 2.02 Purpose of the Credit ......................................... 52 2.03 Borrowings Under Tranches ..................................... 52
3 -2- 2.04 Notice of Borrowing .............................................. 56 2.05 Bankers' Acceptances ............................................. 58 2.06 Letters of Credit ................................................ 61 2.07 Overdrafts under the Operating Lines ............................. 65 2.08 Lenders' Accounts ................................................ 66 2.09 LIBOR Loans ...................................................... 67 2.10 Optional Reduction of Limit of Tranches .......................... 68 2.11 Certain Pre-existing Accommodation ............................... 68
ARTICLE THREE INTEREST AND FEES 3.01 Loans ............................................................ 71 3.02 Overdue Principal and Interest ................................... 72 3.03 Interest on Other Amounts ........................................ 73 3.04 Interest Payment Dates ........................................... 73 3.05 LIBOR Period Determination ....................................... 73 3.06 Failure of the LIBOR ............................................. 75 3.07 Determination of Rates and Basis of Calculation of Interest ...... 76 3.08 Maximum Return ................................................... 76 3.09 Fees for Bankers' Acceptances and BA Equivalent Notes ............ 77 3.10 Fees for Letters of Credit ....................................... 78 3.11 Standby Fee ...................................................... 79 3.12 Agency Fees ...................................................... 80
ARTICLE FOUR REPAYMENT OF ACCOMMODATION 4.01 Optional Repayment ............................................... 80 4.02 Mandatory Repayment .............................................. 81 4.03 Surplus Additional Debt .......................................... 82 4.04 Excess Property Sales Proceeds ................................... 82 4.05 Currency Fluctuations ............................................ 83 4.06 Illegality ....................................................... 83
4 -3- ARTICLE FIVE PAYMENTS AND INDEMNITIES 5.01 Method and Place of Payments .................................... 84 5.02 Currency of Payment ............................................. 88 5.03 Taxes ........................................................... 88 5.04 Increased Costs ................................................. 91 5.05 Indemnities ..................................................... 92
ARTICLE SIX SECURITY 6.01 Form of Security ................................................ 95 6.02 Satisfactory to Administrative Agent ............................ 97 6.03 General Provisions Relating to the Security ..................... 97 6.04 Registration .................................................... 97 6.05 Release of Security ............................................. 98
ARTICLE SEVEN REPRESENTATIONS AND WARRANTIES 7.01 Delivery of Representations and Warranties ...................... 98 7.02 Repetition of Representations and Warranties .................... 107
ARTICLE EIGHT COVENANTS 8.01 Affirmative Covenants ........................................... 107 (a)Financial Statements ......................................... 108 (b)Certificates; Other Information .............................. 111 (c)Payment of Obligations ....................................... 113 (d)Conduct of Business and Maintenance of Existence ............. 113 (e)Maintenance of Property and Insurance ........................ 114
5 - 4 - (f)Inspection of Property: Books and Records; Discussions....... 114 (g)Notices....................................................... 114 (h)Permits and Requirements of Law............................... 116 (i)Use of Accommodation.......................................... 117 (j)Environmental Clean-Up........................................ 117 (k)No Environmental Damage....................................... 117 (l)Security...................................................... 117 (m)Permitted Liens............................................... 118 (n)Appointment of Consultants.................................... 118 (o)Reserves for Environmental Liabilities........................ 118 (p)Payment of Taxes.............................................. 118 (q)Independent Subsidiaries - Delivery of Agreements............. 118 (r)Independent Subsidiaries - Conduct of Business................ 119 (s)Expenses...................................................... 119 (t)Further Assurances............................................ 120 (u)Margin Stock.................................................. 120 (v)Acquisition................................................... 121 (w)Non Material Restricted Subsidiaries.......................... 121 8.02 Negative Covenants............................................... 122 (a)Debt.......................................................... 122 (b)Liens......................................................... 123 (c)Amalgamation, etc............................................. 123 (d)Dispositions of Property...................................... 123 (e)Investments................................................... 126 (f)Restricted Payments........................................... 126 (g)Transfers of Shares........................................... 127 (h)No Share Issuance............................................. 127 (i)Transactions with Affiliates.................................. 127 (j)Sale and Leaseback............................................ 128 (k)Acquisitions.................................................. 128 (l)Limitation of Financial Assistance............................ 129 (m)No Change of Fiscal Year...................................... 129 (n)No Hostile Take-Over Bids..................................... 130 (o)No Change of Name............................................. 130 (p)No Breaches................................................... 130 (q)Arrangements with Independent Subsidiaries.................... 130 (r)Hedging Arrangements.......................................... 130 8.03 Financial Covenants.............................................. 130 8.04 Interpretation of Certain Covenants.............................. 131
6 -5- ARTICLE NINE EVENTS OF DEFAULT 9.01 Events of Default ............................................... 131 (a)Default in Principal ......................................... 131 (b)Default in Interest, etc. .................................... 131 (c)Certain Defaults under Credit Agreement ...................... 131 (d)Other Defaults under Credit Documents ........................ 131 (e)Representations and Warranties ............................... 132 (f)Default under Other Agreements with Lenders .................. 132 (g)Default in other Indebtedness ................................ 132 (h)Credit Documents ............................................. 132 (i)Winding-up etc. .............................................. 133 (j)Voluntary Insolvency Actions ................................. 133 (k)Insolvency Proceedings ....................................... 133 (l)Appointment of Receiver ...................................... 133 (m)Bankruptcy Statutes .......................................... 133 (n)Judgments .................................................... 134 (o)Encumbrances ................................................. 134 (p)Cease to carry on Business ................................... 134 (q)Qualified Auditor's Report ................................... 134 (r)Reorganization ............................................... 134 (s)Material Adverse Effect ...................................... 134 (t)Change of Control of a Restricted Party ...................... 134 (u)Pension Plans ................................................ 135 9.02 Remedies ........................................................ 136 9.03 Benefit of Security; Set-Off; Sharing of Payments ............... 136 9.04 Remedies Cumulative ............................................ 139 9.05 Appropriation of Moneys Received ................................ 139 9.06 Non-Merger ...................................................... 139
ARTICLE TEN CONDITIONS PRECEDENT TO BORROWINGS 10.01 Conditions Precedent to the Initial Borrowing ................... 139 10.02 Conditions Precedent to Subsequent Borrowings ................... 143
7 -6- ARTICLE ELEVEN THE ADMINISTRATIVE AGENT AND OTHER AGENTS 11.01 Appointment ..................................................... 144 11.02 Indemnity from Lenders .......................................... 145 11.03 Exculpation ..................................................... 145 11.04 Reliance on Information ......................................... 146 11.05 Knowledge and Required Action ................................... 146 11.06 Request for Instructions ........................................ 147 11.07 Exchange of Information ......................................... 147 11.08 The Administrative Agent and the Other Agents, Individually ..... 147 11.09 Resignation and Termination ..................................... 148 11.10 Actions by Lenders .............................................. 148 11.11 Provisions for Benefit of Lenders Only .......................... 150
ARTICLE TWELVE MISCELLANEOUS 12.01 Participations, Assignments and Transfers ....................... 151 12.02 Waiver .......................................................... 157 12.03 Further Assurances .............................................. 157 12.04 Notices ......................................................... 158 12.05 Domicile of Accommodation ....................................... 158 12.06 Confidentiality ................................................. 158 12.07 Confirmation to Creditors of Independent Subsidiaries ........... 159 12.08 Survival ........................................................ 159 12.09 Quantities of Documents ......................................... 159 12.10 Reproduction of Documents ....................................... 160 12.11 Language ........................................................ 160 12.12 Counterparts and Effectiveness .................................. 160 12.13 Facsimile Copies ................................................ 160 12.14 Benefit of Agreement ............................................ 161
8 -7- SCHEDULES Schedule 1 - Commitments of the Lenders under Tranches 1, 2 and 3 Schedule 2 - Form of Corporate Separateness Covenant and Assurance Agreement Schedule 3 - Form of Acknowledgement and Agreement from Eligible Affiliates of the Administrative Agent, an Other Agent or a Lender Schedule 4 - List of Independent Subsidiaries Schedule 5 - Form of Non Recourse Acknowledgement and Undertaking Schedule 6 - List of Permitted Liens Schedule 7 - Description of Permitted Indebtedness Schedule 8 - Description of Pre-existing Accommodation Schedule 9 - Form of Tax Sharing Agreement Schedule 10 - Form of Notice of Borrowing Schedule 11 - Form of Note of Conversion/Renewal Schedule 12 - Minimum Amounts of Borrowings under Tranches Schedule 13 - Notice Periods for Borrowing of Types of Accommodation under Tranches Schedule 14 - Form of BA Equivalent Note Schedule 15 - Form of Non Bank Certificate for U.S. Withholding Tax Purposes Schedule 16 - Listing of Particulars of Shares and Other Securities to be Pledged under the Security Schedule 17 - Litigation Schedule 18 - Corporate Chart Schedule 19 - Disclosure Schedule Schedule 20 - List of Material Contracts Schedule 21 - Form of Quarterly Reporting Compliance Certificate Schedule 22 - Form of Quarterly Environmental Compliance Certificate Schedule 23 - Insurance Requirements Schedule 24 - Form of Undertaking relative to Assignments by Lenders Schedule 25 - Form of Assignment and Assumption Agreement relative to Assignments by Lenders Schedule 26 - List of Non Material Restricted Subsidiaries Schedule 27 - Commitments of the Lenders under the LC Line
9 THIS IS A CREDIT AGREEMENT dated as of August 11, 1997 among PHILIP SERVICES CORP., a corporation existing under the laws of Ontario, as a borrower in Canada, PHILIP ENVIRONMENTAL (DELAWARE), INC., a corporation existing under the laws of Delaware, as a borrower in the United States of America, CANADIAN IMPERIAL BANK OF COMMERCE, as administrative agent for the Lenders in the manner and to the extent described in Article Eleven, BANKERS TRUST COMPANY as syndication agent, CANADIAN IMPERIAL BANK OF COMMERCE and BANKERS TRUST COMPANY as co-arrangers of the Credit, DRESDNER BANK CANADA, DRESDNER BANK AG NEW YORK BRANCH and ROYAL BANK OF CANADA as documentation agents, and the various Persons from time to time parties to this Agreement as lenders. THIS CREDIT AGREEMENT WITNESSES that, for valuable consideration (the receipt and sufficiency of which are acknowledged by each of the parties to this Agreement) the parties to this Agreement agree as follows: ARTICLE ONE DEFINITIONS AND INTERPRETATION 1.011 DEFINITIONS In this Agreement, unless the context otherwise requires: "ACCOMMODATION" shall mean Loans, Bankers' Acceptances, BA Equivalent Notes and Letters of Credit made, accepted, purchased or issued, as the case may be, by the Lenders or, where so indicated, by an individual Lender, and shall refer to any one or more Loans, Bankers' Acceptances, BA Equivalent Notes or Letters of Credit where the context requires, and "TYPE" of Accommodation shall refer to whether any particular Accommodation is a Prime Rate Loan, a U.S. Base Rate Loan, a U.S. Reference Rate Loan, a LIBOR Loan, a Bankers' Acceptance (including a BA Equivalent Note) or a Letter of Credit. "ACQUISITION" shall mean, with respect to any Person, any purchase or other acquisition, regardless of how accomplished or effected (including any such purchase or other acquisition effected by way of amalgamation, merger or other form or corporate reorganization), of (a) any other Person (including any purchase or acquisition of such number of the issued and outstanding securities of, or such portion of an equity interest in, such other Person that such other Person becomes a Subsidiary of the purchaser or of any of its Affiliates) or of all or substantially all of the property of any other Person, or (b) any division, business, operation or undertaking of any 10 SECTION 1.01 - 2 - other Person or of all or substantially all of the property of any division, business, operation or undertaking of any other Person. "ADDITIONAL DEBT" shall mean (a) Debt (other than Debt under this Agreement) incurred by a Borrower after the date of this Agreement from any other Person provided that (i) such Debt is unsecured and is not guaranteed by the Cdn. Borrower or any Subsidiary of the Cdn. Borrower which is not a Guarantor Subsidiary (with any such guarantee to contain provision for the automatic release of such guarantee if the Guarantor Subsidiary is sold or if the guarantee from such Subsidiary under the Credit Documents is released), (ii) the Debt of the Borrowers and their Subsidiaries to the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates under the Credit Documents and the Lender/Borrower Hedging Arrangements will always rank at least pari passu as to the right of payment with such Debt, and will not rank subordinate as to the right of payment to any such Debt,(iii) the representations, warranties, covenants, agreements, obligations, liabilities, defaults, acceleration rights and other terms and provisions of such Debt will in the opinion of the Required Lenders be no more favourable to the holder of such Debt, and no more restrictive on the Borrowers or any of their Subsidiaries, than the representations, warranties, covenants, agreements, obligations, liabilities, defaults, acceleration rights and other terms and provisions of the Credit Documents, (iv) the maturity of such Debt shall be at least one year beyond the Maturity Date, there shall be no mandatory repayment, redemption or repurchase obligations under such Debt prior to one year beyond the Maturity Date and payment of such Debt shall not be capable of being accelerated prior to an acceleration of Debt under this Agreement, and (v) interest, fees and the other terms and provisions relative to such Debt shall in the opinion of the Required Lenders be consistent with then current market rates and terms and conditions; and (b) Debt of a Person assumed or acquired by a Restricted Subsidiary as part of an Acquisition provided that (i) such assumed or acquired Debt was not incurred in connection with, for the purpose of, or in anticipation or contemplation of, such Acquisition, (ii) such assumed or acquired Debt is unsecured and is not guaranteed by any Person which is not both a Guarantor Subsidiary and a Subsidiary of the Person acquired (with any such guarantee to contain provision for the automatic release of such guarantee if the Guarantor Subsidiary is sold or if the guarantee from such Subsidiary under the Credit Documents is released), (iii) the Debt of the Borrowers and their Subsidiaries to the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates under the 11 SECTION 1.01 - 3 - Credit Documents and the Lender/Borrower Hedging Arrangements will always rank at least pari passu as to the right of payment with such assumed or acquired Debt, and will not rank subordinate as to the right of payment to any such assumed or acquired Debt, (iv) the representations, warranties, covenants, agreements, obligations, liabilities, defaults, acceleration rights and other terms and provisions of such assumed or acquired Debt will in the opinion of the Required Lenders be no more favourable to the holder of such assumed or acquired Debt, and no more restrictive on the Borrowers or any of their Subsidiaries, than the representations, warranties, covenants, agreements, obligations, liabilities, defaults, acceleration rights and other terms and provisions of the Credit Documents, (v) the maturity of such assumed or acquired Debt shall be at least one year beyond the Maturity Date, there shall be no mandatory repayment, redemption or repurchase obligations under such assumed or acquired Debt prior to one year beyond the Maturity Date and payment of such Debt shall not be capable of being accelerated prior to an acceleration of Debt under this Agreement, and (vi) interest, fees and the other terms and provisions relative to such assumed or acquired Debt shall in the opinion of the Required Lenders be consistent with then current market rates and terms and conditions. "ADMINISTRATIVE AGENT" shall mean Canadian Imperial Bank of Commerce in its capacity as administrative agent under the Credit Documents or such other financial institution as may be appointed as the successor Administrative Agent in the manner and to the extent described in Section 11.09. "ADMINISTRATIVE AGENT'S CDN. PAYMENT BRANCH" shall mean the main branch of the Administrative Agent at Commerce Court, Toronto, Ontario or such other branch of the Administrative Agent in Canada as the Administrative Agent may from time to time designate in writing to the Borrowers. "ADMINISTRATIVE AGENT'S U.S. PAYMENT BRANCH" shall mean the office of CIBC Inc., 7th Floor, 425 Lexington Avenue, New York, New York, 10017 or such other office or branch of the Administrative Agent or one of its Affiliates in the United States of America as the Administrative Agent may from time to time designate in writing to the Borrower. "AFFILIATE" shall mean an "affiliate" as defined by the Business Corporations Act (Ontario). "AFFILIATED" shall mean: (a) in describing a Cdn. Cross Border Lender and its Affiliated U.S. Cross Border Lender or a U.S. Cross Border Lender and its Affiliated Cdn. Cross Border 12 SECTION 1.01 - 4 - Lender, as the case may be, a Cdn. Cross Border Lender and a U.S. Cross Border Lender which are each Affiliates of the other; and (b) in describing a Cdn. LC Lender and its Affiliated U.S. LC Lender or a U.S. LC Lender and its Affiliated Cdn. LC Lender, as the case may be, a Cdn. LC Lender and a U.S. LC Lender which are each Affiliates of the other. "ALLWASTE" shall mean Allwaste, Inc. , a corporation existing under the laws of Delaware. "ALLWASTE AGREEMENT AND PLAN OF MERGER" shall mean the Agreement and Plan of Merger dated as of March 5, 1997 among the Cdn. Borrower, Taro Aggregates Ltd., Philip/Atlas Merger Corp. and Allwaste. "ALLWASTE ACQUISITION" shall mean the Acquisition of Allwaste by the Cdn. Borrower by way of the merger of a wholly-owned Subsidiary of the Cdn. Borrower with and into Allwaste, with Allwaste being the surviving corporation from such merger, pursuant to the Allwaste Agreement and Plan of Merger. "ANNIVERSARY" relative to a Disposition shall have the meaning specified in subsection 8.02(d). "APPLICABLE INTEREST PRICING ADJUSTMENT" shall have the meaning specified in Section 3.01. "APPLICABLE LAW" shall mean, at any time, in respect of any Person, property, transaction, event or other matter, as applicable, all laws (including all Environmental Laws), rules, statutes, regulations, treaties, orders, judgments and decrees and all official directives, rules, guidelines, orders, policies and other requirements of any Governmental Authority (whether or not having the force of law) (collectively the "LAW") relating or applicable at such time to such Person, property, transaction, event or other matter, and shall also include any interpretation of the Law or any part of the Law by any Person having jurisdiction over it or charged with its administration or interpretation. "APPLICABLE LC FEE PRICING RATE" shall have the meaning specified in Section 3.10. "APPLICABLE REFERENCE RATE" for a type of Loan shall mean (a) with respect to Prime Rate Loans, the Prime Rate in effect from time to time, (b) with respect to U.S. Base Rate Loans, the U.S. Base Rate in effect from time to time, (c) with respect to U.S. Reference Rate Loans, the U.S. Reference Rate in effect from time to time, and (d) with respect to LIBOR Loans and any applicable LIBOR Period, the LIBOR determined for such LIBOR Period in accordance with the provisions of this Agreement. With respect to Prime Rate Loans (and other amounts in respect of which interest is to be calculated under this Agreement on the basis of the Prime Rate), U.S. Base Rate Loans (and other amounts in respect 13 SECTION 1.01 - 5 - of which interest is to be calculated under this Agreement on the basis of the U.S. Base Rate) and U.S. Reference Rate Loans (and other amounts in respect of which interest is to be calculated under this Agreement on the basis of the U.S. Reference Rate), the Applicable Reference Rate will change automatically without notice to the Borrowers as and when the Prime Rate, the U.S. Base Rate and the U.S. Reference Rate, as the case may be, shall change so that at all times interest payable under this Agreement on Prime Rate Loans (and other amounts in respect of which interest is to be calculated under this Agreement on the basis of the Prime Rate) shall be based on the Prime Rate then in effect, interest payable on U.S. Base Rate Loans (and other amounts in respect of which interest is to be calculated under this Agreement on the basis of the U.S. Base Rate) shall be based on the U.S. Base Rate then in effect and interest payable on U.S. Reference Rate Loans (and other amounts in respect of which interest is to be calculated under this Agreement on the basis of the U.S. Reference Rate) shall be based on the U.S. Reference Rate then in effect. "APPLICABLE STAMPING FEE" shall have the meaning specified in Section 3.09. "APPLICABLE STANDBY FEE PRICING RATE" shall have the meaning specified in Section 3.11. "ASSOCIATE" shall mean an "associate" as defined by the Business Corporations Act (Ontario). "BA DISCOUNT PROCEEDS" shall mean, with respect to any Bankers' Acceptance or BA Equivalent Note, an amount calculated on the applicable Borrowing Date which is (rounded to the nearest full cent) equal to the face amount of such Bankers' Acceptance or BA Equivalent Note divided by the sum of one plus the product of (a) the BA Discount Rate applicable to such Bankers' Acceptance or BA Equivalent Note multiplied by (b) a fraction, the numerator of which is the term of such Bankers' Acceptance or BA Equivalent Note and the denominator of which is 365. "BA DISCOUNT RATE" shall mean, (i) with respect to any Bankers' Acceptances to be purchased by a BA Lender on any Borrowing Date, the annual discount rate (rounded upward to the nearest whole multiple of 1/100 of 1%) notified to the Administrative Agent by such BA Lender as of 10:00 a.m. on such Borrowing Date as the discount rate of interest at which such BA Lender is then offering to purchase bankers' acceptances accepted by it having a comparable aggregate face amount and identical maturity date to the aggregate face amount and maturity date of the Bankers' Acceptances to be purchased by such BA Lender on such Borrowing Date, and (ii) with respect to any BA Equivalent Notes to be accepted by a Non BA Lender on any Borrowing Date, the annual interest rate (rounded upward to the nearest whole multiple of 1/100 of 1%) notified to the Administrative Agent by such Non BA Lender as being the best estimate 14 SECTION 1.01 - 6 - of such Non BA Lender of the cost to it of obtaining Cdn. Dollars to fund such purchase, but in no event shall the interest rate determined pursuant to this clause (ii) for any Non BA Lender be greater than the discount rate for the Administrative Agent in its capacity as a BA Lender determined pursuant to clause (i) of this definition. If any rate to be determined by the Administrative Agent pursuant to clause (i) or (ii) of this definition is not available on any day, there shall be substituted for such rate the CDOR in effect on such day for bankers' acceptances having a maturity most nearly comparable to the applicable Bankers' Acceptance or BA Equivalent Note. "BA EQUIVALENT NOTE" shall have the meaning specified in subsection 2.05(1) and, for greater certainty, shall include all Pre-existing BA Equivalent Notes as provided for in Section 2.11. "BA LENDER" shall mean any Cdn. Only Lender, Cdn. Cross Border Lender or Cdn. Operating Lender which is a bank chartered under the Bank Act (Canada). "BANKERS' ACCEPTANCE" shall mean a Draft denominated in Cdn. Dollars drawn by the Cdn. Borrower and accepted by a BA Lender as provided in Section 2.05 and, for greater certainty, shall include all Pre-existing BAs as provided for in Section 2.11. "BASE LIBOR" shall mean, with respect to each LIBOR Period for each LIBOR Loan, an annual interest rate per annum, expressed on the basis of a 360 day year, equal to: (a) (i) in the case of Accommodation (other than Accommodation under an Operating Line) the interest rate at which the Administrative Agent is offered deposits of U.S. Dollars by leading banks in the London interbank market as of 11:00 a.m. (London time) on the second Business Day prior to the commencement of such LIBOR Period, for delivery on the first day of such LIBOR Period for the number of months comprised in such LIBOR Period and in an amount equal to the amount of such LIBOR Loan; (ii) in the case of Accommodation under the Cdn. Operating Line, the interest rate at which the Cdn. Operating Lender is offered deposits of U.S. Dollars by leading banks in the London interbank market as of 11:00 a.m. (London time) on the second Business Day prior to the commencement of such LIBOR Period, for delivery on the first day of such LIBOR Period for the number of months comprised in such LIBOR Period and in an amount equal to the amount of such LIBOR Loan; and 15 SECTION 1.01 - 7 - (iii) in the case of Accommodation under a U.S. Operating Line, the interest rate at which the applicable U.S. Operating Lender is offered deposits of U.S. Dollars by leading banks in the London interbank market as of 11:00 a.m. (London time) on the second Business Day prior to the commencement of such LIBOR Period, for delivery on the first day of such LIBOR Period for the number of months comprised in such LIBOR Period and in an amount equal to the amount of such LIBOR Loan; and (b) if any such rate is not available on any day, there shall be substituted for such rate the annual interest rate for deposits of U.S. Dollars for a maturity most nearly comparable to such LIBOR Period which appears on page Q LIBOR 01 of the Reuters Screen as of 11:00 a.m. (London time) on the second Business Day prior to the commencement of such LIBOR Period or, if such Reuters Screen rate is not available on such day, there shall be substituted for such rate the annual interest rate for deposits of U.S. Dollars for a maturity most nearly comparable to such LIBOR Period which appears on the LIBO page of the Reuters Screen as of 11:00 a.m. (London time) on the second Business Day prior to the commencement of such LIBOR Period. "bps" shall mean basis points, each basis point being 1/100 of 1%. "BORROWERS" shall mean the Cdn. Borrower and the U.S. Borrower, and "BORROWER" shall mean either one of the Borrowers. "BORROWING" shall mean the aggregate Accommodation of the same type obtained or to be obtained by a Borrower under the Credit, or any Tranche of the Credit, on any Borrowing Date (for greater certainty including any Bankers' Acceptances or BA Equivalent Notes obtained or to be obtained on the maturity of any outstanding Bankers' Acceptances or BA Equivalent Notes and any Accommodation obtained or to be obtained on the conversion of any outstanding Accommodation into another type of Accommodation and any conversion of the interest rate on Loans in U.S. Dollars or the renewal of the LIBOR Period applicable to any LIBOR Loan pursuant to a Notice of Conversion/Renewal). "BORROWING DATE" shall have the meaning specified in subsection 2.04(1) and shall include, in connection with the calculation of interest on Pre-existing Accommodation, the Closing Date. "BUSINESS DAY" shall mean any day, other than a Saturday or Sunday, on which Canadian chartered banks are open for domestic and foreign exchange business in Toronto, Canada; provided that with respect to any LIBOR Loan "BUSINESS DAY" shall mean any day, other than a Saturday or Sunday, on which dealings in U.S. Dollars may be carried on by and between prime 16 SECTION 1.01 - 8 - banks in the London interbank market, except any such day on which banks are lawfully closed for business in New York, New York, United States of America, London, England or Toronto, Canada and that with respect to any U.S. Base Rate Loan and any U.S. Reference Rate Loan "BUSINESS DAY" shall mean any day, other than a Saturday or Sunday, on which banks are open for domestic and foreign exchange business in New York, New York, United States of America and Toronto, Canada. "CAPITAL EXPENDITURES" of any Person shall mean any expenditures by such Person made in connection with the purchase, lease, acquisition, erection or construction of property (including any such property acquired pursuant to a Capitalized Lease Obligation) or any other expenditures, in any such case which are required to be capitalized in accordance with GAAP, and for greater certainty does not include an Acquisition. "CAPITALIZED LEASE OBLIGATION" shall mean, for any Person, any payment obligation of such Person under an agreement for the lease or rental of, or providing such Person with the right to use, property that, in accordance with GAAP, is required to be capitalized. "CDN. BORROWER" shall mean Philip Services Corp. a corporation existing under the laws of the Province of Ontario, and its successors by amalgamation, merger or otherwise. "CDN. CROSS BORDER LENDERS" shall mean those Lenders listed in Column 3 of Schedule 1 to this Agreement, together with each other Person which from time to time becomes a party to this Agreement and a Lender in Canada to the Cdn. Borrower under Tranche 2 in accordance with Section 12.01, in their capacity as Lenders in Canada to the Cdn. Borrower under Tranche 2, in each case together with their respective successors and assigns, and "CDN. CROSS BORDER LENDER" shall mean any one of the Cdn. Cross Border Lenders. "CDN. DOLLARS" and "CDN. $" shall mean lawful currency of Canada. "CDN. LC COMMITMENT" shall have the meaning specified in subsection 2.01(g). "CDN. LC ISSUER" shall mean Canadian Imperial Bank of Commerce in its capacity as issuer of Letters of Credit to the Cdn. Borrower under the LC Line together with its successors and assigns in such capacity. "CDN. LC LENDERS" shall mean the Cdn. LC Issuer and those other Lenders listed in Column 1 of Schedule 27 to this Agreement, together with each other Person which from time to time becomes a party to this Agreement and a Lender in Canada to the Cdn. Borrower under the LC Line in accordance with Section 12.01, in their capacity as Lenders in Canada to the Cdn. Borrower under the LC Line, in each case together with their respective successors and assigns, and "CDN. LC LENDER" shall mean any one of the Cdn. LC Lenders. 17 SECTION 1.01 - 9 - "CDN. OPERATING LENDER" shall mean Royal Bank of Canada in its capacity as the operating credit lender to the Cdn. Borrower in Canada under the Cdn. Operating Line together with its successors and assigns in such capacity. "CDN. OPERATING LINE" shall have the meaning specified in subsection 2.01(d). "CDN. ONLY LENDERS" shall mean those Lenders listed in Column 1 of Schedule 1 to this Agreement, together with each other Person which from time to time becomes a party to this Agreement and a Lender in Canada to the Cdn. Borrower under Tranche 1 in accordance with Section 12.01, in their capacity as Lenders in Canada to the Cdn. Borrower under Tranche 1, in each case together with their respective successors and assigns, and "CDN. ONLY LENDER" shall mean any one of the Cdn. Only Lenders. "CDOR" shall mean, for any day and relative to Cdn. Dollar bankers' acceptances having any specified term, the average of the annual rates for Cdn. Dollar bankers' acceptances having such specified term (or a term as closely as possible comparable to such specified term) of the Schedule I chartered banks of Canada that appears on the Reuters Screen CDOR page as of at 10:00 a.m. on such day (or, if such day is not a Business Day, as of 10:00 a.m. on the next preceding Business Day), provided that if such rate does not appear on the Reuters Screen CDOR page at such time on such date, the rate for such date will be the average of the BA Discount Rates quoted by the BA Lenders for Canadian dollar bankers' acceptances having such specified term at such time and on such date. "CLOSING DATE" shall mean the earlier of (i) the initial Borrowing Date, and (ii) the date on which the Administrative Agent delivers written notice to the Cdn. Borrower that all of the conditions set forth in Section 10.01 have been satisfied. "CO-ARRANGERS" shall mean Canadian Imperial Bank of Commerce and Bankers Trust Company in their capacity as co-arrangers of the Credit. "CODE" shall mean the United States Internal Revenue Code of 1986, and the regulations promulgated and rulings issued thereunder. "COMBINED LC COMMITMENT" shall mean, with respect to each Cdn. LC Lender and its Affiliated U.S. LC Lender at any time, the U.S. Dollar Amount set forth for such Lenders at such time in the Registry of Commitments as such Lenders' combined commitment under the LC Line (which amount on the date of this Agreement is set forth opposite such Lenders' names in Column 5 of Schedule 27) (as such amount may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement and as the Registry of Commitments may from time to time be amended as provided for in Section 12.01 or in any other applicable provision of this Agreement). 18 SECTION 1.01 - 10 - "COMMITMENT" shall mean: (a) with reference to any Cdn. Only Lender and Tranche 1, such Lender's Tranche 1 Commitment; (b) with reference to any Cdn. Cross Border Lender and Tranche 2, such Lender's Tranche 2 Cdn. Borrowing Commitment, with reference to any U.S. Cross Border Lender and Tranche 2, such Lender's Tranche 2 U.S. Borrowing Commitment, and with reference to any Cdn. Cross Border Lender and its Affiliated U.S. Cross Border Lender and Tranche 2, such Lenders' Tranche 2 Combined Commitment; (c) with reference to any U.S. Only Lender and Tranche 3, such Lender's Tranche 3 Commitment; (d) with respect to the Cdn. Operating Lender, the limit of the Cdn. Operating Line; (e) with respect to each of the U.S. Operating Lenders, the limit of the U.S. Operating Line from such Lender; and (f) with reference to any Cdn. LC Lender and the LC Line, such Lender's Cdn. LC Commitment, with reference to any U.S. LC Lender and the LC Line, such Lender's U.S. LC Commitment, and with reference to any Cdn. LC Lender and its Affiliated U.S. LC Lender and the LC Line, such Lenders' Combined LC Commitment; provided that as of the acceleration of amounts outstanding under the Credit the calculation of the "COMMITMENT" will be based on the amount of Accommodation then outstanding from the Lenders under the Credit or the Tranches of the Credit, as the case may be, as of the date of acceleration (as adjusted to reflect cheques issued under the Operating Lines prior to such date). "COMMITMENT PERCENTAGE" shall mean, at any time with reference to any Lender and the Credit or any Tranche, that number, expressed as a percentage, obtained by dividing such Lender's Commitment for the Credit or such Tranche, as the case may be, at such time by the aggregate Commitments of all Lenders for the Credit or such Tranche, as the case may be, at such time. "CONTAMINANT" shall mean (a) any pollutant, toxic substance, chemical, hazardous waste, hazardous material, hazardous substance, petroleum product, oil, or radioactive material; (b) any substance, gas, material or chemical which is or may be defined as or included in the definition of "hazardous substances", "toxic substances", "hazardous materials", "hazardous wastes" or words of similar import under any Environmental Law; (c) any other chemical, material, gas or 19 SECTION 1.01 - 11 - substance, the exposure or release of which is or may be prohibited, limited or regulated by any Environmental Law; or (d) any chemical, material, gas or substance that does or may pose a hazard to health and/or safety of Persons or the Natural Environment. "CONTESTED" shall mean contested in good faith by appropriate proceedings promptly initiated and diligently conducted. "CONTINGENT OBLIGATION" shall mean, as to any Person, any obligation, whether secured or unsecured, of such Person guaranteeing or in effect guaranteeing any indebtedness, leases, dividends, letters of credit or other monetary obligations (the "PRIMARY OBLIGATIONS") of any other Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person as an account party in respect of a letter of credit issued to assure payment by the primary obligor of any such primary obligation and any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds for the purchase or payment of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the obligee under any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the obligee under such primary obligation against loss in respect of such primary obligation; provided, however, that the term Contingent Obligation: (a) shall not include endorsements of instruments for deposit or collection in the ordinary course of business; (b) shall not include assurances or obligations given by such Person to a third party who has in turn provided assurances (the "THIRD PARTY ASSURANCES") in support or in respect of primary obligations of such Person but only to the extent of such third party assurances and only to the extent that such assurances or obligations from such Person have not been demanded or called upon by, or otherwise become due and payable to, the applicable third party; and (c) when used with respect to a Restricted Party, shall not include assurances or obligations given by such Restricted Party to another Person (the "ASSURANCE BENEFICIARY") in support of any obligations of an Independent Subsidiary to provide or perform services (the "BONDED SERVICES") under a contract, in all such cases to the extent, and only to the extent, that: 20 SECTION 1.01 - 12 - (i) (x) such assurances or obligations from such Restricted Party have not been demanded or called upon by, or otherwise become due and payable to, the applicable Assurance Beneficiary, or (y) having been demanded or called upon, or otherwise having become due or payable, such assurances or obligations at the relevant time, in the good faith reasonable opinion of the Cdn. Borrower, would not be accrued as a liability of such Restricted Party in accordance with GAAP provided that (A) the Cdn. Borrower has notified the Administrative Agent in writing of all relevant details respecting such demand, call or other event pursuant to which such assurances or obligations have become due or payable and the basis on which the Cdn. Borrower has made its determination that such assurances or obligations would not be accrued as a liability of such Restricted Party in accordance with GAAP and has updated such notice from time to time as required under subsection 8.01(b), and (B) the Administrative Agent, acting reasonably, has given its written approval to such assurances or obligations continuing to be subject to this clause and has not subsequently, acting reasonably, withdrawn such approval by written notice to the Canadian Borrower; (ii) the Independent Subsidiary for whose benefit such assurances or obligations are provided has fully indemnified the Restricted Party providing such assurances or obligations for all payments, losses, damages and expenses which such Restricted Party may pay or incur in respect of such assurances or obligations; and (iii) the aggregate amount of: (x) all such assurances and obligations at any time from such Restricted Party and all other Restricted Parties relative to all Independent Subsidiaries and all Bonded Services; less (y) the aggregate amount of all guarantees and performance or other similar bonds (to a maximum amount relative to any Bonded Services of the assurances and obligations of the Restricted Parties relative to such Bonded Services) then issued and outstanding from financially sound and reputable bonding or surety companies 21 SECTION 1.01 - 13 - licensed to provide such guarantees or bonds in the jurisdiction where the applicable Bonded Services are to be provided and provided in favour of the Independent Subsidiary for whose benefit such assurances or obligations are provided (and also, for any such assurances or obligations provided after the date of this Agreement, in favour of the Restricted Party providing such assurances or obligations); do not exceed U.S. $150,000,000 (or the Equivalent Amount in any other currency or currencies). "CONTRACTUAL OBLIGATION" shall mean, with respect to any Person, any provision of any Lien issued by, or otherwise applicable to any of the property of, such Person or of any contract, agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "CORPORATE SEPARATENESS COVENANT AND ASSURANCE AGREEMENT" shall mean an agreement in substantially the form of Schedule 2, or in such other form as the Administrative Agent, acting reasonably, may request in the future having regard to any judicial or statutory developments respecting the principle of substantive consolidation, from an Independent Subsidiary in favour of the Borrowers and the Secured Parties providing agreements, undertakings and covenants from the Independent Subsidiary respecting such Independent Subsidiary's separate and independent operations and creditors for the purpose of assuring that such Independent Subsidiary conducts its business and operation in all respects so as, to the extent possible, to assure that a court would not apply the principle of substantive consolidation so as to permit the creditors of such Independent Subsidiary or its Subsidiaries to have Recourse Against any of the Restricted Parties. "CREDIT" shall have the meaning specified in Section 2.01. "CREDIT DOCUMENTS" shall mean this Agreement, all present and future Security, all present and future Corporate Separateness Covenant and Assurance Agreements and Tax Sharing Agreements, and all other present and future documents, certificates and instruments delivered by a Restricted Party to the Administrative Agent or the Lenders pursuant to, or in respect of, any such documents, in each case as the same may from time to time be supplemented, amended or restated, and "CREDIT DOCUMENT" shall mean any one of the Credit Documents. "CROSS BORDER LENDERS" shall mean the Cdn. Cross Border Lenders and the U.S. Cross Border Lenders, and "CROSS BORDER LENDER" shall mean any one of the Cross Border Lenders. 22 SECTION 1.01 - 14 - "CURRENT ASSETS" shall mean, at any time, all current assets of the Restricted Parties determined as of such time on a Modified Consolidated basis and otherwise in accordance with GAAP. "CURRENT LIABILITIES" shall mean, at any time, all current liabilities of the Restricted Parties determined as of such time on a Modified Consolidated basis and otherwise in accordance with GAAP. "DEBT" shall mean, at any time, all items which would, on a Modified Consolidated basis and otherwise in accordance with GAAP, then be classified as a liability on a balance sheet of the Restricted Parties or in the notes thereto (provided that, for greater certainty, the only items included in the notes thereto which are intended to be treated as debt would include letters of credit, guarantees, performance bonds or assurances and other similar forms of contingent liabilities) and to the extent not otherwise included pursuant to the preceding provisions of this definition shall include, without limitation and without duplication, any item which is (i) an obligation of any Restricted Party in respect of borrowed money or for the deferred purchase price of property or services or an obligation of any Restricted Party which is evidenced by a note, bond, debenture or other similar instrument, (ii) a transfer with recourse or with an obligation to repurchase, to the extent of the liability of any Restricted Party with respect thereto, (iii) an obligation secured by any Lien on any property of any Restricted Party to the extent attributable to its respective interest in such property, even though it has not assumed or become liable for the payment thereof, (iv) all Capitalized Lease Obligations of the Restricted Parties, (v) an obligation arising in connection with an acceptance facility or letter of credit or letter of guarantee issued for the account of any Restricted Party, (vi) a Contingent Obligation of any Restricted Party, (vii) the aggregate amount at which any shares in the capital of any Restricted Party which are redeemable or retractable at the option of the holder of such shares may be redeemed or retracted, or (viii) Debt or Contingent Obligations of another Person assumed or acquired by any Restricted Party, or in respect of which a Restricted Party otherwise becomes liable, in connection with, or as a result of, any Acquisition; provided, however, that there shall not be included for the purpose of this definition any item which is on account of reserves for general contingencies or on account of reserves for environmental compliance or liabilities or which constitutes a trade payable or other payables incurred in the ordinary course of business. "DEBT TO EBITDA COVENANT RATIO" shall mean, on any day, the ratio of (a) Debt on such day to (b) EBITDA for the Reference Financial Period for such day. "DEBT TO EBITDA PRICING ADJUSTMENT RATIO" shall mean: (a) on any Pricing Adjustment Date, the ratio of (i) Debt on the last day of the Reference Financial Period for such Pricing Adjustment Date to (ii) EBITDA for the Reference Financial Period for such Pricing Adjustment Date (by way of 23 SECTION 1.01 - 15 - example the Reference Financial Period for the Pricing Adjustment Date which occurs on January 1, 1998 is the four Financial Quarters ending September 30, 1997 and, accordingly, the Debt to EBITDA Pricing Adjustment Ratio on such Pricing Adjustment Date is the ratio of Debt on September 30, 1997 to EBITDA for the four Financial Quarters ending September 30, 1997); and (b) on September 1, 1997, the ratio of (i) June 30 Pro Forma Debt to (ii) June 30 Pro Forma EBITDA. "DEEMED PROCEEDS OF DISPOSITION AMOUNT" relative to any Disposition shall have the meaning specified in subsection 8.02(d). "DEEMED EXCESS PROCEEDS OF DISPOSITION AMOUNT" relative to any Disposition shall have the meaning specified in subsection 8.02(d). "DEFAULT" shall mean any event, act, omission or condition which with the giving of notice or the passage of time, or both, would result in an Event of Default. "DEPRECIATION EXPENSE" shall mean, with respect to any period, depreciation, amortization, depletion and other like reductions to income of the Restricted Parties for such period not involving any outlay of cash, determined on a Modified Consolidated basis and otherwise in accordance with GAAP. "DISCHARGE" when used as a verb, includes add, deposit, leak or emit and, when used as a noun includes addition, deposit, emission or leak. "DISPOSITION" shall mean any sale, assignment, transfer, conveyance or other disposition of any nature or kind whatsoever of any property or of any right, title or interest in or to any property, and the verb "DISPOSE" shall have a correlative meaning. "DOCUMENTATION AGENTS" shall mean Dresdner Bank Canada, Dresdner Bank AG New York Branch and Royal Bank of Canada in their capacity as documentation agents under this Agreement. "DRAFT" shall have the meaning specified in subsection 2.05(1). "EBITDA" shall mean, for any period, Net Income for such period: (a) increased by the sum of (i) Interest Expense for such period, (ii) Income Tax Expense for such period, (iii) Depreciation Expense for such period, and (iv) unusual or non-recurring non-cash charges incurred during such period in 24 SECTION 1.01 - 16 - connection with corporate restructurings which require an accrual for any future period in accordance with GAAP, in each such case to the extent that such amounts were included in the calculation of Net Income for such period; and (b) decreased by all cash payments during such period relating to non-cash charges that were added back under clause (a)(iv) above in determining EBITDA in any prior period; provided that EBITDA shall be adjusted from time to time as provided for in Section 1.03. "ELIGIBLE AFFILIATE" of the Administrative Agent, any Other Agent or a Lender shall mean an Affiliate of any such Person which has executed and delivered to the Administrative Agent an acknowledgement and agreement in the form of Schedule 3 agreeing to be bound by the provision of Sections 6.05 and 9.03 and Article Eleven of this Agreement in connection with any Lender/Borrower Hedging Arrangement to which such Person is from time to time a party. "ENVIRONMENTAL ACTIVITY" shall mean any past, present or future activity, event or circumstance in respect of a Contaminant, including, without limitation, its storage, use, holding, collection, purchase, accumulation, assessment, generation, manufacture, construction, processing, treatment, stabilization, disposition, handling or transportation, or its Release, escape, leaching, dispersal or migration into or movement through the Natural Environment. "ENVIRONMENTAL LAW" shall mean at any time any and all of the then applicable international, federal, provincial, state, municipal or local Laws, statutes, regulations, codes, rules, treaties, orders, judgments, decrees, resolutions, guidelines, policies, ordinances, official directives and all authorizations relating to the Natural Environment or any Environmental Activity. "EQUIVALENT AMOUNT" shall mean, with respect to any two currencies, the amount obtained in one such currency when an amount in the other currency is translated into the first currency using the spot wholesale transactions buying rate of the Bank of Canada for the purchase of the applicable amount of the first currency with the other currency in effect as of 12:00 noon on the Business Day with respect to which such computation is required for the purpose of this Agreement or, in the absence of such a buying rate on such date, using such other rate as the Administrative Agent may reasonably select. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. 25 SECTION 1.01 - 17 - "ERISA AFFILIATE" shall mean any corporation, trade or business that is, along with a Restricted Party, a member of a controlled group of corporations or a controlled group of trades or businesses, as described in section 414 of the Code, or section 4001 of ERISA. "EVENT OF DEFAULT" shall mean an event specified in Section 9.01. "EXCLUDED TAXES" shall mean, in relation to any Person, those Taxes which are imposed or levied by any jurisdiction or any political subdivision of such jurisdiction solely as a result of such Person (a) being organized under the laws of such jurisdiction or any political subdivision of such jurisdiction, (b) having its principal office or lending office in such jurisdiction, or (c) not dealing at arm's length (as defined for the purposes of any taxing statute in the applicable jurisdiction) with a Borrower, or which would not have been imposed had such Person satisfied a relevant authority that such Person was not a Person mentioned in clause (a), (b) or (c) above; but for greater certainty shall not include any sales, goods or services, or harmonized sales and goods and services taxes payable under the laws of such jurisdiction or any political subdivision of such jurisdiction with respect to any goods or services made available by the Administrative Agent or any Lender to any Restricted Party under any Credit Document. "EXISTING ALLWASTE AND SERV TECH BANK CREDIT AGREEMENTS" shall mean (a) the November 30, 1993 credit agreement between Allwaste, as borrower, Texas Commerce Bank National Association as agent and the various financial institutions parties to such agreement as lenders as such agreement may have been amended, and (b) the May 18, 1995 credit agreement between Serv Tech, as borrower, Texas Commerce Bank National Association as agent and the parties to such agreement as lenders as such agreement may have been amended. "EXISTING BANK DEBT" shall mean: (a) all debts and liabilities of the Borrowers under or in connection with the Existing Philip Bank Credit Agreement and the security and other documents delivered under or in connection with the Existing Philip Bank Credit Agreement other than the Pre-existing Accommodation which is deemed to be outstanding Accommodation under this Agreement pursuant to Section 2.11; and (b) all debts and liabilities of Allwaste and its Subsidiaries and Serv Tech and its Subsidiaries under or in connection with the Existing Allwaste and Serv Tech Bank Credit Agreements and the security and other documents delivered under or in connection with the Existing Allwaste and Serv Tech Bank Credit Agreements. "EXISTING PHILIP BANK CREDIT AGREEMENT" shall mean the September 30, 1996 credit agreement, as amended, among the Cdn. Borrower and the U.S. Borrower, as borrowers, Canadian Imperial Bank of Commerce, as administrative agent, Bankers Trust, BT Bank of 26 SECTION 1.01 - 18 - Canada, Dresdner Bank AG New York and Grand Cayman Branches, Dresdner Bank Canada and Royal Bank of Canada, as managing agents, and the various financial institutions party to such credit agreement as lenders. "FEDERAL FUNDS RATE" shall mean, for any day, an annual interest rate, expressed on the basis of a year of 360 days, equal to the weighted average of the rates on overnight United States federal funds transactions with members of the Federal Reserve System arranged by United States federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or for any Business Day on which such rate is not so published, the arithmetic average of the quotations for such day on such transactions received by the Administrative Agent from three United States federal funds brokers of recognized standing selected by it. "FINANCIAL ASSISTANCE" given by any Person (the "FINANCIAL ASSISTANCE PROVIDER") to or for the account or benefit of any other Person (the "FINANCIAL ASSISTANCE RECIPIENT") shall mean any direct or indirect financial assistance of any nature, kind or description whatsoever of or from such Financial Assistance Provider, or of or from any other Person with Recourse Against such Financial Assistance Provider or any of its property, to or for the account or benefit of the Financial Assistance Recipient (including Investments in a Financial Assistance Recipient, Contingent Obligations for the benefit of a Financial Assistance Recipient, Acquisitions from a Financial Assistance Recipient, and gifts or gratuities to or for the account or benefit of a Financial Assistance Recipient). "FINANCIAL QUARTER" shall mean one of the financial quarters of the Restricted Parties being the period of (a) January, February and March, (b) April, May and June, (c) July, August and September, and (d) October, November and December. "FINANCIAL YEAR" shall mean a financial year of the Restricted Parties being the period from and including January 1 in a calendar year to and including December 31 in the same calendar year. "FIXED CHARGE RATIO" on any day shall mean the ratio of (a) EBITDA for the Reference Financial Period for such day decreased by the amount of all Capital Expenditures made by the Restricted Parties during such Reference Financial Period to (b) Interest Expense for such Reference Financial Period plus Restricted Payments on preferred shares of the Cdn. Borrower made during such Reference Financial Period. "GAAP" shall mean (a) with respect to all financial terms defined in this Agreement, the calculation of the interest rates, Bankers' Acceptance fees, Letter of Credit fees and standby fees set forth in Article Three and the various financial covenants under Section 8.03, those accounting principles which are recognized as being generally accepted in Canada as set out in 27 SECTION 1.01 - 19 - the handbook published by the Canadian Institute of Chartered Accountants as in effect on December 31, 1996, and (b) for all other purposes under this Agreement, those accounting principles which are recognized as being generally accepted in Canada as set out in the handbook published by the Canadian Institute of Chartered Accountants as in effect from time to time. "GOVERNMENTAL AUTHORITY" shall mean any government, parliament, legislature, regulatory authority, agency, commission, tribunal, department, commission, board, instrumentality, court, arbitration board or arbitrator or other law, regulation or rule making entity (including a Minister of the Crown) having or purporting to have jurisdiction on behalf of, or pursuant to the laws of, any country in which any Restricted Party is incorporated, continued, amalgamated, merged or otherwise created or established or in which any Restricted Party carries on business or holds property, or any province, territory, state, municipality, district or political subdivision of any such country or of any such state, province or territory of such country. "GUARANTOR SUBSIDIARY" shall mean, at any time, a Restricted Subsidiary which is at such time party to a valid and enforceable guarantee under which such Subsidiary has guaranteed the due payment and performance of all of the present and future debts and liabilities of either or both of the Borrowers to the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates under or in respect of the Credit Documents and the Lender/Borrower Hedging Arrangements, and "GUARANTOR SUBSIDIARIES" shall mean all of the Guarantor Subsidiaries. "HEDGING ARRANGEMENT" shall mean any arrangement or transaction between a Restricted Party and any other Person which is a rate swap transaction, basis swap, forward rate transaction, commodity swap, interest rate option, forward foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of such transactions or arrangements). "HOSTILE TAKE-OVER BID" shall mean a Take-Over Bid by a Restricted Party or in which a Restricted Party is involved, in respect of which the board of directors of the corporation whose securities are subject to such Take-Over Bid has recommended rejection of such Take-Over Bid. "IN WRITING" or "WRITTEN" shall mean any form of written communication or a communication by means of facsimile or telex device. "INCLUDING" shall mean "including without limitation", and "INCLUDES" shall mean "includes without limitation". "INCOME TAX EXPENSE" shall mean, with respect to any period, the aggregate of all taxes on the income of the Restricted Parties for such period, whether current or deferred (net of any 28 SECTION 1.01 - 20 - incentive tax credits or other similar credits) determined on a Modified Consolidated basis and otherwise in accordance with GAAP. "INDEPENDENT SUBSIDIARY" shall mean: (a) those existing Subsidiaries of the Cdn. Borrower designated by the Cdn. Borrower and the Co-Arrangers as Independent Subsidiaries and referred to in Schedule 4; (b) each Person which becomes a Subsidiary of the Cdn. Borrower after the date of this Agreement as a result of an Acquisition and (i) in respect of which such Acquisition has been financed entirely from, or from any combination of, the proceeds of an issuance of common share equity of the Cdn. Borrower, property of Independent Subsidiaries and any Investments permitted under subsection 8.02(e), provided that such Acquisition has been completed, and the ongoing business and operations of such Subsidiary have been structured so as to continue, without any Financial Assistance from any Restricted Party and without Recourse Against any Restricted Party by any creditors of such Subsidiary or any of its Subsidiaries (other than in either case pursuant to any such Financial Assistance permitted under subsection 8.02(l)), and (ii) which is designated as an Independent Subsidiary by written notice from the Cdn. Borrower to the Administrative Agent at the time of such Acquisition, and (c) each future Subsidiary of the Cdn. Borrower which is designated as an Independent Subsidiary by the Cdn. Borrower and consented to in writing as such by the Administrative Agent and the Required Lenders in each case subject to the terms and conditions, if any, on which such consent is provided by the Administrative Agent and the Required Lenders. In all events any Subsidiary of an Independent Subsidiary shall be deemed to also be an Independent Subsidiary and any Subsidiary of the Cdn. Borrower (other than Phencorp International Finance Inc.) which in the opinion of the Required Lenders is unable to deliver a valid and enforceable unlimited guarantee of all of the present and future debts and liabilities of one or both of the Borrowers under the Credit Documents shall, on delivery of written notice to such effect to the Cdn. Borrower from the Required Lenders (or from the Administrative Agent with the consent of the Required Lenders), also be deemed to be an Independent Subsidiary. 29 SECTION 1.01 - 21 - "INTEREST COVERAGE RATIO" shall mean on any day the ratio of (a) EBITDA for the Reference Financial Period for such day to (b) Interest Expense for the Reference Financial Period for such day. "INTEREST EXPENSE" shall mean, for any period, the aggregate amount of interest and other financing charges, whether capitalized or expensed by the Restricted Parties, on account of such period with respect to Debt including interest, discount and financing fees, commissions, discounts, the interest or time value of money component of costs related to factoring or securitizing receivables or monetizing inventory and other fees and charges payable with respect to letters of credit and bankers' acceptance financing, standby fees, the interest component of Capitalized Lease Obligations and net payments (if any) pursuant to Hedging Arrangements involving interest, but excluding any amount, such as amortization of debt discount and expenses, which would qualify as Depreciation Expense and the amount reflected in income for such period in respect of gains (or losses) attributable to translation of Debt from one currency to another currency, all as determined on a Modified Consolidated basis and otherwise in accordance with GAAP, provided that Interest Expense shall be adjusted from time to time as provided for in Section 1.03. "INVESTMENT" shall mean, with respect to any Person, any direct or indirect investment in or purchase or other acquisition of the securities of or an equity interest in any other Person, any loan or advance to, or arrangement for the purpose of providing funds or credit to (excluding extensions of trade credit in the ordinary course of business in accordance with customary commercial terms), or capital contribution to (whether by means of a transfer of cash or other property or any payment for property or services for the account or use of) any other Person. For greater certainty an Acquisition shall not be treated as an Investment. "INVESTMENT GRADE RATING" shall mean a rating of the long term debt of the Cdn. Borrower of both BBB- or higher by S&P (or the equivalent rating if S&P should change its rating categories) and Baa3 or higher by Moody's (or the equivalent rating if Moody's should change its rating categories). "JUNE 30 PRO FORMA DEBT" shall mean the pro forma Debt of the Restricted Parties shown on the balance sheet of the Restricted Parties (including Allwaste and its Subsidiaries, Serv Tech and its Subsidiaries, and all Acquisitions made by the Restricted Parties up to and including July 31, 1997) forming part of the June 30 Pro Forma Financial Statements. "JUNE 30 PRO FORMA EBITDA" shall mean EBITDA for the four Financial Quarters ending June 30, 1997 determined on a pro forma basis to include and take into account the financial performance of Allwaste and its Subsidiaries, Serv Tech and its Subsidiaries, and all other Acquisitions made by the Restricted Parties up to and including July 31, 1997, in each case 30 SECTION 1.01 - 22 - during the four financial quarters for each such corporation ending as of the date of the most recent publicly available financial statements for such corporation. "JUNE 30 PRO FORMA FINANCIAL STATEMENTS" shall mean Modified Consolidated quarterly financial statements for the Restricted Parties for the Financial Quarter ending June 30, 1997 prepared on a pro forma basis to include and take into account (a) the financial position on such date, and the financial performance during the period ended on such date, of Allwaste and its Subsidiaries, Serv Tech and its Subsidiaries, and all other Acquisitions made by the Restricted Parties up to and including July 31, 1997; and (b) all Debt incurred or assumed by the Restricted Parties after June 30, 1997 in connection with the Acquisitions referred to in clause (a) of this definition (including Debt of the Targets of such Acquisitions and their Subsidiaries which has not been repaid as at the date of delivery of such financial statements). "LAWS" shall have the meaning specified in the definition of the term "Applicable Law". "LC ISSUERS" shall mean the Cdn. LC Issuer and the U.S. LC Issuer, and "LC ISSUER" shall mean either one of the LC Issuers. "LC LENDERS" shall mean (a) the Cdn. LC Lenders, (b) the U.S. LC Lenders and (c) only in connection with the Pre-existing Lcs, the Cdn. Operating Lender and the U.S. Operating Lenders in their respective capacities as issuers of the Pre-existing Lcs, and "LC LENDER" shall mean any one of the LC Lenders. "LC LINE" shall have the meaning specified in subsection 2.01(g). "LENDER/BORROWER HEDGING ARRANGEMENT" shall mean a Hedging Arrangement which is (a) otherwise permitted pursuant to subsection 8.02(r), (b) entered into by a Borrower and any of the Administrative Agent, any Other Agent, a Lender or an Eligible Affiliate of any such Person, and (c) in respect of which the Administrative Agent has received written notice from the applicable Other Agent, Lender or Eligible Affiliate providing the Administrative Agent with particulars of such Hedging Agreement and "LENDER/BORROWER HEDGING ARRANGEMENTS" shall mean all of the Lender/Borrower Hedging Arrangements from time to time. "LENDERS" shall mean the Cdn. Only Lenders, the Cross Border Lenders, the U.S. Only Lenders, the Cdn. Operating Lender, the U.S. Operating Lenders and the LC Lenders and "LENDER" shall mean any one of the Lenders. 31 SECTION 1.01 - 23 - "LETTER OF CREDIT" shall mean a letter of credit issued under the LC Line as provided in Section 2.06 by the Cdn. LC Issuer on behalf of the Cdn. LC Lenders for the account of the Cdn. Borrower or a standby letter of credit issued under the LC Line as provided for in Section 2.06 by the U.S. LC Issuer on behalf of the U.S. LC Lenders for the account of the U.S. Borrower and, for greater certainty, shall include all Pre-existing Lcs as provided for in Section 2.11. "LIBOR" shall mean, with respect to any LIBOR Period: (a) for each LIBOR Loan from a Cdn. Only Lender, a Cdn. Cross Border Lender or the Cdn. Operating Lender, the Base LIBOR for such LIBOR Loan for such LIBOR Period, and (b) for each LIBOR Loan from a U.S. Only Lender, a U.S. Cross Border Lender or a U.S. Operating Lender, the rate obtained by dividing (i) the Base LIBOR for such LIBOR Loan for such LIBOR Period by (ii) a percentage equal to 1 minus the stated maximum rate (stated as a decimal and rounded upwards to the nearest 1/16 of 1%) of all reserves required to be maintained against Eurocurrency liabilities as specified in Regulation D (or against any other category of liabilities which includes deposits by reference to which the interest rate on LIBOR Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Lender to United States residents). "LIBOR LOAN" shall mean any Loan in U.S. Dollars with respect to which interest is calculated under this Agreement for the time being on the basis of the LIBOR and, for greater certainty, shall include all Pre-existing LIBOR Loans as provided for in Section 2.11. "LIBOR PERIOD" shall mean, from time to time with respect to a LIBOR Loan, the applicable interest period of one, three or six months, as selected in accordance with Section 3.05 and any other applicable provision of this Agreement. "LIEN" shall mean any mortgage, charge, pledge, hypothecation, lien (statutory or otherwise), security interest or other encumbrance of any nature however arising, or any other agreement or arrangement creating in favour of any creditor a right in respect of any particular property that is prior to the right of any other creditor in respect of such property, and includes the right of a lessor under a Capitalized Lease Obligation. "LOAN" shall mean the principal amount of Cdn. Dollars or U.S. Dollars advanced by a Lender to a Borrower on any Borrowing Date pursuant to a Notice of Borrowing or made or deemed to have been made by an Operating Lender by way of overdraft pursuant to Section 2.07 (which, for greater certainty, shall include all Pre-existing Prime Rate Overdraft Loans, all Pre-existing U.S. Base Rate Overdraft Loans and all Pre-existing U.S. Reference Rate Overdraft 32 SECTION 1.01 - 24 - Loans as provided for in Section 2.11) or made or deemed to have been made by a Lender pursuant to subsection 2.05(7) or subsection 2.06(3), and "TYPE" of Loan shall refer to whether a particular Loan is a Prime Rate Loan, a U.S. Base Rate Loan, a U.S. Reference Rate Loan or a LIBOR Loan. "MARGIN STOCK" shall have the meaning given to such term under Regulation U (12 CFR Part 221). "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on (a) the business, operations, properties, assets, condition (financial or otherwise) or prospects of the Restricted Parties considered as a whole, or (b) the ability of any of the Restricted Parties to pay or perform any of their respective liabilities or obligations under any of the Credit Documents, or (c) the right, entitlement or ability of the Administrative Agent or the Lenders to enforce any of the debts, liabilities or obligations of any of the Restricted Parties under, or to exercise or enforce any of their respective rights, entitlements or benefits under, any of the Credit Documents. "MATERIAL RESTRICTED PARTIES" shall mean, at any time, the Borrowers and all Restricted Subsidiaries which are not at such time Non Material Restricted Subsidiaries, and "MATERIAL RESTRICTED PARTY" shall mean any one of the Material Restricted Parties. "MATURITY DATE" shall mean August 12, 2002. "MODIFIED CONSOLIDATED" shall mean, when used with respect to any financial term, financial covenant or financial statements, the consolidation of the applicable financial position, financial performance or financial statements of the Restricted Parties without regard to any other Person which is not a Restricted Party, irrespective of whether or not such other Person is a Subsidiary of a Restricted Party or is a Person in which a Restricted Party has an equity or ownership interest. "MOODY'S" shall mean Moody's Investors Service, Inc. and its successors. "NATURAL ENVIRONMENT" shall mean the air, land, subsoil, surface water, ground water, and property or any combination or part thereof in any jurisdiction in which a Borrower or any of its Subsidiaries carries on business. "NET INCOME" shall mean, for any period, the net income (loss) of the Restricted Parties for such period, determined on a Modified Consolidated basis after allowance for minority interests and otherwise in accordance with GAAP provided that, when used in the definition of EBITDA, "Net Income" shall mean Net Income as so determined but excluding, in each case net of applicable taxes, (a) any gain or loss arising from the Disposition of capital assets (other than any Disposition of capital assets made in the ordinary course of business) or the closure of plants 33 SECTION 1.01 - 25 - or undertakings, (b) any gain or loss arising from any write-up or write-down of assets or goodwill, (c) any earnings or losses of any other Person substantially all of the assets of which have been acquired by a Restricted Party in any manner to the extent that such earnings or losses were realized by such other Person prior to the effective date of such acquisition, (d) net earnings of any Person (other than a Restricted Party) in which a Restricted Party has an ownership or equity interest unless such earnings have actually been received by such Restricted Party in the form of cash distributions, (e) the earnings or losses of any Person to which assets of a Restricted Party have been Disposed of or into or with which a Restricted Party has merged or amalgamated, to the extent that such earnings or losses arose prior to the date of such transaction, and (f) any gains or losses arising from the Disposition of any securities owned by a Restricted Party (other than securities held by Philip Barbados and Phencorp International Finance Inc.). "NON ARM'S LENGTH PERSON" shall mean any director, officer, employee, Affiliate or Associate of the Cdn. Borrower or any of its Subsidiaries or Affiliates or any other Person who does not deal at arm's length with the Cdn. Borrower or any of its Subsidiaries or Affiliates within the meaning of such concept as used in the Income Tax Act (Canada). "NON BA LENDER" shall mean any Lender which is a Cdn. Only Lender, a Cdn. Cross Border Lender or the Cdn. Operating Lender, and which is not a BA Lender. "NON MATERIAL RESTRICTED SUBSIDIARIES" shall mean, at any time, those Restricted Subsidiaries (together with their Restricted Subsidiaries) listed in Schedule 26, as such Schedule may be amended from time to time as provided in subsection 8.01(w) provided that: (a) no such Restricted Subsidiary shall be a Non Material Restricted Subsidiary at any time if: (i) the revenue of such Restricted Subsidiary and its Subsidiaries (other than Independent Subsidiaries) for the most recently completed four Financial Quarters exceeded 1% of the aggregate revenue of all of the Restricted Parties for such four Financial Quarters; or (ii) the book value of the property of such Restricted Subsidiary and its Subsidiaries (other than Independent Subsidiaries) at such time exceeds 1% of the book value at such time of all property of all of the Restricted Parties; or (iii) such Restricted Subsidiary or any of its Subsidiaries owns, leases, licenses or otherwise holds at such time any property which is material to the undertaking, business, operation or property of any Material Restricted Party; and 34 SECTION 1.01 - 26 - (b) none of such Restricted Subsidiaries shall be Non Material Restricted Subsidiaries at such time if: (i) the aggregate revenue of all such Restricted Subsidiaries and their Subsidiaries (other than Independent Subsidiaries) for the most recently completed four Financial Quarters exceeded 15% of the aggregate revenue of all of the Restricted Parties for such four Financial Quarters; or (ii) the book value of the property of all such Restricted Subsidiaries and their Subsidiaries (other than Independent Subsidiaries) at such time exceeds 15% of the book value at such time of all property of all of the Restricted Parties. "NON RECOURSE ACKNOWLEDGEMENT AND UNDERTAKING" shall mean an agreement in the form of Schedule 5 from a creditor of an Independent Subsidiary in favour of the Secured Parties acknowledging and agreeing that (a) such Independent Subsidiary is separate and independent from the Restricted Parties, (b) such creditor has granted credit to such Independent Subsidiary without regard to or reliance on any of the Restricted Parties or any of their property or financial positions, and (c) such creditor will not have or claim Recourse Against any Restricted Party with respect to any of the present or future debts or liabilities of such Independent Subsidiary to such creditor. "NON-U.S. PENSION PLAN" shall mean any plan, fund (including, without limitation, any superannuation or pension fund) or other similar program established or maintained outside the United States of America by any Restricted Party or to which any Restricted Party or any Affiliate of a Restricted Party may have any liability primarily for the benefit of employees or former employees of such Restricted Party residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "NON-U.S. WELFARE PLAN" shall mean any plan, fund or other similar program other than a Non-U.S. Pension Plan established or maintained outside the United States of America by any Restricted Party or to which any Restricted Party or any Affiliate of a Restricted Party may have any liability primarily for the benefit of employees or former employees of such Restricted Party residing outside the United States of America, or results in health, medical, disability, life insurance and other employee benefits, and which plan, fund or other similar program is not subject to ERISA or the Code. "NOTICE OF BORROWING" shall have the meaning specified in subsection 2.04(1). 35 SECTION 1.01 - 27 - "NOTICE OF CONVERSION/RENEWAL" shall have the meaning specified in subsection 2.04(1). "OFFICER'S CERTIFICATE" shall mean a certificate in form satisfactory to the Administrative Agent (a) in the case of any such certificate of a Borrower delivered under subsections 8.01(a), 8.01(b), 8.01(g), 8.02(k) and 10.01(j), signed by the President or the Chief Financial Officer of such Borrower (or in the case of the environmental compliance certificate to be delivered under subsection 8.01(b), the Executive Vice President, Corporate and Regulatory Affairs of the Cdn. Borrower), and (b) in all other cases, of the applicable corporation required to provide such certificate signed by the president or vice president of such corporation or by such other of its senior officers as may be acceptable to the Administrative Agent. "OPERATING LENDERS" shall mean the Cdn. Operating Lender and the U.S. Operating Lenders, and "OPERATING LENDER" shall mean any one of the Operating Lenders. "OPERATING LINES" shall mean the Cdn. Operating Line and the U.S. Operating Lines, and "OPERATING LINE" shall mean any one of the Operating Lines. "OTHER AGENTS" shall mean the Syndication Agent, the Co-Arrangers and the Documentation Agents, and "OTHER AGENT" shall mean any one of the Other Agents. "PBGC" shall mean the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "PENSION PLAN" shall mean a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to title I of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which any Restricted Party or any ERISA Affiliate may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "PERMANENT DISPOSITION REDUCTION AMOUNT" relative to any Disposition shall have the meaning specified in subsection 8.02(d). "PERMITS" shall mean all permits, licenses, approvals, franchises, rights-of-way, easements and entitlements which any Restricted Party requires, or is required to have, to own, lease or license its property or operate or carry on the business conducted by it. "PERMITTED LIENS" shall mean Liens referred to in Schedule 6. "PERMITTED INDEBTEDNESS" shall mean the indebtedness referred to in Schedule 7. 36 SECTION 1.01 - 28 - "PERSON" is to be broadly interpreted and shall include an individual, a corporation, a partnership, a trust, an unincorporated organization, a joint venture, the government of a country or any political subdivision of a country, or an agency or department of any such government, any other Governmental Authority and the executors, administrators or other legal representatives of an individual in such capacity. "PHILIP DISCLOSURE DOCUMENTS" shall mean the Proxy Statement of Allwaste and Prospectus of the Cdn. Borrower dated June 30, 1997 and filed by the Cdn. Borrower with the United States Securities and Exchange Commission and the Proxy Statement of Serv Tech and Prospectus of the Cdn. Borrower dated June 24, 1997 and filed by the Cdn. Borrower with the United States Securities and Exchange Commission. "PRE-EXISTING ACCOMMODATION" shall mean all Pre-existing BA Equivalent Notes, Pre-existing Bas, Pre-existing Lcs, Pre-existing LIBOR Loans, Pre-existing Prime Rate Overdraft Loans, Pre-existing U.S. Base Rate Overdraft Loans and Pre-existing U.S. Reference Rate Overdraft Loans. "PRE-EXISTING ACCOMMODATION LENDERS" shall mean, (a) in the case of the Pre-existing Lcs, the LC Lenders, the Cdn. Operating Lender and the U.S. Operating Lenders, (b) in the case of Pre-existing Prime Rate Overdraft Loans and Pre-existing U.S. Base Rate Overdraft Loans, the Cdn. Operating Lender, (c) in the case of Pre-existing U.S. Reference Rate Overdraft Loans, the U.S. Operating Lenders, and (d) in the case of any other Pre-existing Accommodation the applicable Lenders listed in Schedule 8 as the lender relative to such Pre-existing Accommodation. "PRE-EXISTING BA EQUIVALENT NOTES" shall mean the BA Equivalent Notes (as defined in the Existing Philip Bank Credit Agreement) purchased by a Pre-existing Accommodation Lender under the Existing Philip Bank Credit Agreement and described in Part I of Schedule 8, all of which BA Equivalent Notes are deemed, pursuant to the provisions of Section 2.11, to be BA Equivalent Notes purchased by such Lender, and outstanding, under this Agreement under the applicable Tranche specified in Schedule 8. "PRE-EXISTING BAS" shall mean the bankers' acceptances accepted by a Pre-existing Accommodation Lender under the Existing Philip Bank Credit Agreement and described in Part II of Schedule 8, all of which bankers' acceptances are deemed, pursuant to the provisions of Section 2.11, to be Bankers' Acceptances accepted by such Lender, and outstanding, under this Agreement under the applicable Tranche specified in Schedule 8. "PRE-EXISTING LCS" shall mean the letters of credit issued by a Pre-existing Accommodation Lender under the Existing Philip Bank Credit Agreement and described in Part 37 SECTION 1.01 - 29 - IV of Schedule 8, all of which letters of credit are deemed, pursuant to the provisions of Section 2.11, to be (a) in the case of any such letters of credit issued by Canadian Imperial Bank of Commerce, Letters of Credit issued by the Cdn. LC Issuer on behalf of the Cdn. LC Lenders, and outstanding, under this Agreement under the LC Line, (b) in the case of any such letters of credit issued by Canadian Imperial Bank of Commerce, New York Agency, Letters of Credit issued by the U.S. LC Issuer on behalf of the U.S. LC Lenders, and outstanding, under this Agreement under the LC Line, (c) in the case of any such letters of credit issued by the Cdn. Operating Lender, Letters of Credit from the Cdn. Operating Lender issued, and outstanding, under this Agreement under the Cdn. Operating Line, and (d) in the case of any such Letters of Credit issued by a U.S. Operating Lender, Letters of Credit from such U.S. Operating Lender issued, and outstanding, under this Agreement under the U.S. Operating Line from such U.S. Operating Lender. "PRE-EXISTING LIBOR LOANS" shall mean the libor loans made by a Pre-existing Accommodation Lender under the Existing Philip Bank Credit Agreement and described in Part III of Schedule 8, all of which libor loans are deemed, pursuant to the provisions of Section 2.11, to be LIBOR Loans made by such Lender, and outstanding, under this Agreement under the applicable Tranche specified in Schedule 8. "PRE-EXISTING PRIME RATE OVERDRAFT LOANS" shall mean the aggregate amount of Cdn. Dollar prime rate loans outstanding by way of overdraft under Tranche A-4 of the Existing Philip Bank Credit Agreement on the Closing Date, all of which amounts are deemed, pursuant to the provisions of Section 2.11, to be Prime Rate Loans made by way of overdraft by the Cdn. Operating Lender, and outstanding, under this Agreement under the Cdn. Operating Line. "PRE-EXISTING U.S. BASE RATE OVERDRAFT LOANS" shall mean the aggregate amount of U.S. Dollar base rate loans outstanding by way of overdraft under Tranche A-4 of the Existing Philip Bank Credit Agreement on the Closing Date, all of which amounts are deemed, pursuant to the provisions of Section 2.11, to be U.S. Base Rate Loans made by way of overdraft by the Cdn. Operating Lender, and outstanding, under this Agreement under the Cdn. Operating Line. "PRE-EXISTING U.S. REFERENCE RATE OVERDRAFT LOANS" shall mean the aggregate amount of U.S. Dollar reference rate loans outstanding by way of overdraft under Tranche A-5 of the Existing Philip Bank Credit Agreement on the Closing Date, all of which amounts are deemed, pursuant to the provisions of Section 2.11, to be U.S. Reference Rate Loans made by way of overdraft by the applicable U.S. Operating Lender, and outstanding, under this Agreement under the U.S. Operating Line from such U.S. Operating Lender. "PRICING ADJUSTMENT DATE" shall mean the first day of each Financial Quarter. 38 SECTION 1.01 - 30 - "PRIME RATE" shall mean a fluctuating rate of interest per annum, expressed on the basis of a year of 365 or 366 days, as applicable, which is equal at all times to the greater of: (i) (x) in the case of Accommodation under the Credit (other than under the Cdn. Operating Line) or other amounts in respect of which interest is to be calculated under this Agreement on the basis of the Prime Rate, the reference rate of interest (however designated) of the Administrative Agent for determining interest chargeable by it on Cdn. Dollar commercial loans made in Canada, and (y) in the case of Accommodation under the Cdn. Operating Line, the reference rate of interest (however designated) of the Cdn. Operating Lender for determining interest chargeable by it on Cdn. Dollar commercial loans made in Canada; and (ii) 0.75% above CDOR from time to time for 30 day bankers' acceptances. "PRIME RATE LOAN" shall mean any Loan in Cdn. Dollars with respect to which interest is calculated under this Agreement for the time being on the basis of the Prime Rate. "PRO FORMA FINANCIAL STATEMENTS" shall mean the Modified Consolidated quarterly financial statements of the Restricted Parties for the period ending on March 31, 1997 prepared on a pro forma basis to add and take into account the initial Borrowing and the financial position on such date, and the financial performance during the period ending on such date, of all Acquisitions made by the Restricted Parties up to and including July 31, 1997. "PROPERTY" shall include any asset or property of any nature, kind or description whatsoever (whether real, personal or intellectual and whether tangible or intangible) and any cash, receivables, revenue or undertaking, whether or not shown on a balance sheet in accordance with GAAP. "PURCHASE MONEY OBLIGATION" shall mean an obligation of a Restricted Party incurred or assumed to finance the purchase price of any tangible personal property acquired by such Restricted Party in the ordinary course of business, provided that such obligation is incurred or assumed within 30 days after the acquisition of such property and does not exceed the purchase price payable by such Restricted Party for such property, and includes any extension, renewal or refunding of any such obligation so long as the principal amount thereof outstanding on the date of such extension, renewal or refunding is not increased. "RATEABLY" shall mean, at any time: (a) for purposes other than Sections 9.03 and 11.02, as nearly as practical in the opinion of the Administrative Agent, in accordance with the proportion that the aggregate amounts owing under all Credit Documents to the Administrative 39 SECTION 1.01 - 31 - Agent, to any Other Agent or to any particular Lender at such time is of the aggregate amounts owing under all Credit Documents to the Administrative Agent, the Other Agents and all Lenders at such time, or in accordance with the proportion that the outstanding Accommodation from any particular Lender at such time from a particular Borrower or from both Borrowers, as the case may be, under a particular Tranche or Tranches is of the outstanding Accommodation from all Lenders at such time from such Borrower or from both Borrowers, as the case may be, under such Tranche or Tranches; and (b) in the case of Sections 9.03 (subject to the provisions of subsection 9.03(5)) and 11.02, in accordance with the proportion that the aggregate amounts owing under all Secured Party Documents to any Secured Party at such time is of the aggregate amounts owing under all Secured Party Documents to all Secured Parties at such time; and "RATEABLE" shall have an analogous meaning. "RECOURSE AGAINST " any Person shall mean any direct or indirect right, entitlement or recourse of any kind, nature or description whatsoever (whether by agreement, pursuant to statute, at law, in equity or otherwise) to or against such Person or any of such Person's property or credit. "REFERENCE FINANCIAL PERIOD" shall mean: (a) when used to determine any pricing adjustments for interest, Bankers' Acceptance fees, Letter of Credit fees or standby fees under Article Three, in each case, for any Pricing Adjustment Date, the four consecutive Financial Quarters ending on the last day of the second immediately preceding completed Financial Quarter (by way of example, for the Pricing Adjustment Date which occurs on January 1, 1998, the Reference Financial Period is the four Financial Quarters ending September 30, 1997 and for the Pricing Adjustment Date which occurs on April 1, 1998, the Reference Financial Period is the four Financial Quarters ending on December 31, 1997); and (b) when used for any other purpose for any day (i) if such day is the last day of a Financial Quarter, the four consecutive Financial Quarters ending on such day; and (ii) if such day is not the last day of a Financial Quarter, the then most recently completed four Financial Quarters. 40 SECTION 1.01 - 32 - "REGISTRY OF COMMITMENTS" shall have the meaning specified in subsection 2.08(2). "REGULATION D", "REGULATION G", "REGULATION T", "REGULATION U" and "REGULATION X" shall mean Regulation D, Regulation G, Regulation T, Regulation U and Regulation X of the Board of Governors of the United States Federal Reserve System. "REINVESTED" in the Restricted Parties, when used in connection with all or any portion of any Deemed Excess Proceeds of Disposition Amount, shall mean the use of funds by the Restricted Parties in an amount equal to, or to such portion of, such Deemed Excess Proceeds of Disposition Amount to acquire property, or to acquire a business or Person (in which case such Person may not be an Independent Subsidiary) which results in the indirect acquisition by the Restricted Parties of property, which has a fair market value at least equal to such Deemed Excess Proceeds of Disposition Amount or such portion of such Deemed Excess Proceeds of Disposition Amount, as the case may be, and which are to be used in, and are required for use in, the operation of the business of the Restricted Parties. "RELATED BUSINESS" shall mean any business similar to the resource recovery and industrial services business carried on at the date of this Agreement by the Restricted Parties or any other resource recovery and industrial services business. "RELEASE" is to be broadly interpreted and shall include deposit, leak, emit, add, spray, inject, inoculate, abandon, spill, seep, pour, empty, throw, dump, place and exhaust, and when used as a noun has a similar meaning. "REPORTABLE EVENT" shall mean an event described in Section 4043(c) of ERISA with respect to a Pension Plan that is subject to Title IV of ERISA other than those events as to which the 30-day notice period is waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043. "REQUIRED LENDERS" shall mean, at any time, (a) for the purpose of Section 9.02, the Lenders which are entitled to vote in respect of at least 66 and 2/3% of the aggregate U.S. Dollar Amount of all Accommodation then outstanding, and (b) for all other purposes of this Agreement, the Lenders whose Commitments (or after the termination of the Commitments, U.S. Dollar Amount of outstanding Accommodation) are at such time, in the aggregate, at least 66 and 2/3% of the aggregate amount of all Commitments (or after the termination of the Commitments, the U.S. Dollar Amount of all outstanding Accommodation) at such time. "REQUIREMENTS OF LAW" shall mean, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any Applicable Law, or determination of a Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. 41 SECTION 1.01 - 33 - "RESTRICTED PARTIES" shall mean at any time the Borrowers and all Restricted Subsidiaries at such time, and "RESTRICTED PARTY" shall mean any one of the Restricted Parties. "RESTRICTED PAYMENT" shall mean, with respect to any Person, any payment by such Person (a) of any dividends on any shares of its capital, (b) on account of, or for the purpose of setting apart any property for a sinking or other analogous fund for, the purchase, redemption, retirement or other acquisition of any shares of its capital or any warrants, options or rights to acquire any such shares, or the making by such Person of any other distribution in respect of any shares of its capital, (c) of any principal of or interest or premium on or of any amount in respect of a sinking or analogous fund or defeasance fund for any indebtedness or liability of such Person ranking in right of payment subordinate to any liability of such Person under the Credit Documents, or (d) of any management, consulting or similar fee or any bonus payment or comparable payment, or by way of gift or other gratuity, to any Non Arm's Length Person. "RESTRICTED SUBSIDIARIES" shall mean all present and future Subsidiaries of the Cdn. Borrower other than any such Subsidiary which is at the relevant time an Independent Subsidiary, and "RESTRICTED SUBSIDIARY" shall mean any one of the Restricted Subsidiaries. "ROLLING STOCK" shall mean relative to the Restricted Parties all automobiles, trucks and other motorized vehicles of, or used by or for the benefit of, or used in the operation of the business of, any Restricted Party, provided that the term "ROLLING STOCK" shall not include any machinery, equipment or other property (a) which is installed on or affixed to any such automobile, truck or other motorized vehicle, and (b) which (i) uses technology or intellectual property rights which are owned or licensed (other than only as part of a license arrangement with the owner of such vehicle) by any of the Restricted Parties, or (ii) consists of all or part of one or more units which enables such automobile, truck or other motorized vehicle to deliver or perform the services of any Restricted Party in respect of which such vehicle is being used. "SECURED PARTIES" shall have the meaning specified in Section 9.03, and "SECURED PARTY" shall mean any one of the Secured Parties. "SECURED PARTY DOCUMENTS" shall have the meaning specified in Section 9.03, and "SECURED PARTY DOCUMENT" shall mean any one of the Secured Party Documents. "SECURITY" shall have the meaning specified in Section 6.01. "SERV TECH" shall mean Serv-Tech, Inc. a corporation existing under the laws of Texas. "SERV TECH AGREEMENT AND PLAN OF MERGER" shall mean the Agreement and Plan of Merger dated as of March 5, 1997 among the Cdn. Borrower, Taro Aggregates Ltd., ST Acquisition Corporation and Serv Tech. 42 SECTION 1.01 - 34 - "SERV TECH ACQUISITION" shall mean the Acquisition of Serv Tech by the Cdn. Borrower by way of the merger of a wholly-owned Subsidiary of the Cdn. Borrower with and into Serv Tech, with Serv Tech being the surviving corporation from such merger, pursuant to the Serv Tech Agreement and Plan of Merger. "S&P" shall mean Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. and its successors. "SUBSIDIARY" shall mean, as to any Person, (i) any corporation, if securities of such corporation having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation are at the time owned by such Person and/or one or more Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person owns more than 50% of the equity at the time. "SURPLUS ADDITIONAL DEBT AND COMMITMENTS" shall mean at any time the amount, if any, by which (x) the sum of, without duplication, all Additional Debt outstanding at such time and all Additional Debt which any Restricted Party is entitled to obtain at such time (or would be entitled to obtain at such time subject to delivery of notices or requests and compliance with other normal course conditions to borrowing) pursuant to any agreements or commitments with any other Person, in the aggregate exceeds (y) U.S. $250,000,000 (or the equivalent amount in any other currency or currencies). "TAKE-OVER BID" shall mean either (a) an offer to acquire outstanding voting or equity securities of a class of a corporation where the securities that are the subject of such offer, together with the offeror's securities, constitute at least 20% of the outstanding securities of that class of securities on the date the offer is made, or (b) any other event which is a take-over bid within the meaning attributed to such term by any law, treaty, rule, regulation, or requirement of any stock exchange or securities commission, or determination of any arbitrator, court, stock exchange, securities commission or other Governmental Authority, in each case, applicable to or binding on any Restricted Party. "TAX SHARING AGREEMENT" shall mean an agreement in the form of Schedule 9 from an Independent Subsidiary respecting such Independent Subsidiary's agreement to indemnify any Restricted Party from and reimburse any Restricted Party for any United States income, corporate or other taxes payable by such Independent Subsidiary which have been paid by, or in respect of which a claim or demand by a Governmental Authority has been made against, such Restricted Party or one of its Subsidiaries. "TAXES" has the meaning specified in Section 5.03. 43 SECTION 1.01 - 35 - "TARGET" shall mean any company, division, business, undertaking or operation acquired by way of an Acquisition. "TRANCHE 1" shall have the meaning specified in subsection 2.01(a). "TRANCHE 1 COMMITMENT" shall have the meaning specified in subsection 2.01(a). "TRANCHE 2" shall have the meaning specified in subsection 2.01(b). "TRANCHE 2 CDN. BORROWING COMMITMENT" shall have the meaning specified in subsection 2.01(b). "TRANCHE 2 COMBINED COMMITMENT" shall have the meaning specified in subsection 2.01(b). "TRANCHE 2 U.S. BORROWING COMMITMENT" shall have the meaning specified in subsection 2.01(b). "TRANCHE 3" shall have the meaning specified in subsection 2.01(c). "TRANCHE 3 COMMITMENT" shall have the meaning specified in subsection 2.01(c). "TRANCHES" shall mean, collectively, Tranche 1, Tranche 2, Tranche 3, the Cdn. Operating Line, the U.S. Operating Lines and the LC Line, and "TRANCHE" shall mean any one of the Tranches. "TWO-STEP PERMITTED ACQUISITION" shall mean an Acquisition by a Borrower or any Wholly-Owned Restricted Party otherwise permitted under this Agreement and constituting the Acquisition of 100% of the capital stock of any Target not already a Subsidiary of the Cdn. Borrower by way of (x) a tender offer for the shares of such Target, and (y) a subsequent amalgamation or merger of the Target with a Borrower or any Wholly-Owned Restricted Party (provided that in the case of an amalgamation or merger with a Borrower, such Borrower is the surviving corporation from such amalgamation or merger) or a subsequent compulsory acquisition of all remaining outstanding shares of the Target, provided that: (a) the subsequent merger or compulsory share acquisition to be effected as part of such Two-Step Permitted Acquisition shall be consummated as soon as possible after the consummation of the tender offer portion thereof but in any event within 135 days thereafter; 44 SECTION 1.01 - 36 - (b) upon the consummation of the tender offer portion of any Two-Step Permitted Acquisition, the applicable Borrower or Wholly-Owned Restricted Party shall have acquired sufficient shares of the outstanding capital of the applicable Target to effect (without any vote by any other shareholders of the Target) the subsequent amalgamation or merger (as a result of which the Target shall be amalgamated with or merged into the applicable Borrower or become a Wholly-Owned Restricted Party) or compulsory share acquisition within 135 days after the consummation of such tender offer; and (c) prior to the consummation of the tender offer portion of any Two-Step Permitted Acquisition, the applicable Borrower shall have available to it sufficient committed financing to effect such Two-Step Permitted Acquisition (and to make all payments owing in connection with both steps thereof). "UNDISBURSED COMMITMENT" shall mean, at any time with respect to any Lender and any Tranche, the excess, if any, of the Commitment of such Lender at such time under such Tranche over the U.S. Dollar Amount of Accommodation then outstanding from such Lender under such Tranche. "UNDISBURSED CREDIT" shall mean, at any time, the excess, if any, of the limit of the Credit over the U.S. Dollar Amount of Accommodation then outstanding under the Credit. "UNDISBURSED TRANCHE" shall mean, at any time with respect to any Tranche, the excess, if any, of the limit of such Tranche over the U.S. Dollar Amount of Accommodation then outstanding under such Tranche, and "UNDISBURSED TRANCHE 1", "UNDISBURSED TRANCHE 2", "UNDISBURSED TRANCHE 3", "UNDISBURSED CDN. OPERATING LINE", "UNDISBURSED U.S. OPERATING LINE" and "UNDISBURSED LC LINE" shall have analogous meanings. "UNFUNDED CURRENT LIABILITY" of any Pension Plan shall mean the amount, if any, by which the actuarial present value of the accumulated plan benefits under the Pension Plan as of the close of its most recent plan year, determined in accordance with actuarial assumptions at such time consistent with Statement of Financial Accounting Standards No. 87, exceeds the market value of the assets allocable thereto. "U.S. BASE RATE" shall mean a fluctuating rate of interest per annum, expressed on the basis of a year of 365 or 366 days, as applicable, which is equal at all times to the greater of: (i) (x) in the case of Accommodation under the Credit (other than under the Cdn. Operating Line) or other amounts in respect of which interest is to be calculated under this Agreement on the basis of the U.S. Base Rate, the reference rate of interest (however designated) of the Administrative Agent for determining interest 45 SECTION 1.03 - 37 - chargeable by it on U.S. Dollar commercial loans made in Canada, and (y) in the case of Accommodation under the Cdn. Operating Line, the reference rate of interest (however designated) of the Cdn. Operating Lender for determining interest chargeable by it on U.S. Dollar commercial loans made in Canada; and (ii) 0.75% above the USD-LIBOR-Reuters from time to time. "U.S. BASE RATE LOAN" shall mean any Loan in U.S. Dollars with respect to which interest is calculated under this Agreement for the time being on the basis of the U.S. Base Rate. "U.S. BORROWER" shall mean Philip Environmental (Delaware), Inc., a corporation existing under the laws of Delaware, and its successors by amalgamation, merger or otherwise. "U.S. CROSS BORDER LENDERS" shall mean those Lenders listed in Column 5 of Schedule 1 to this Agreement, together with each other Person which from time to time becomes a party to this Agreement and a Lender in the United States of America to the U.S. Borrower under Tranche 2 in accordance with Section 12.01, in their capacity as Lenders in the United States of America to the U.S. Borrower under Tranche 2, in each case together with their respective successors and assigns, and "U.S. CROSS BORDER LENDER" shall mean any one of the U.S. Cross Border Lenders. "U.S. DOLLAR AMOUNT" shall mean, at any time, relative to the Credit, any Tranche, any Commitment or any Person, the sum of (a) the aggregate amount of all Accommodation outstanding at such time under the Credit, under such Tranche, under such Commitment or from such Person, as the case may be, that is denominated in U.S. Dollars, and (b) the aggregate of the Equivalent Amounts at such time, expressed in U.S. Dollars, of all Accommodation outstanding at such time under the Credit, under such Tranche, under such Commitment or from such Person, as the case may be, that is not denominated in U.S. Dollars. "U.S. DOLLARS", "U.S. $" and "$" shall mean lawful currency of the United States of America. "U.S. LC COMMITMENT" shall have the meaning specified in subsection 2.01(g). "U.S. LC ISSUER" shall mean Canadian Imperial Bank of Commerce, New York Agency in its capacity as issuer of Letters of Credit to the U.S. Borrower under the LC Line together with its successors and assigns in such capacity. "U.S. LC LENDERS" shall mean the U.S. LC Issuer and those other Lenders listed in Column 3 of Schedule 27 to this Agreement, together with each other Person which from time to time becomes a party to this Agreement and a Lender in the United States of America to the U.S. 46 SECTION 1.01 - 38 - Borrower under the LC Line in accordance with Section 12.01, in their capacity as Lenders in the United States of America to the U.S. Borrower under the LC Line, in each case together with their respective successors and assigns, and "U.S. LC LENDER" shall mean any one of the U.S. LC Lenders. "U.S. LENDERS" shall have the meaning specified in subsection 5.03(3), and "U.S. LENDER" shall mean any one of the U.S. Lenders. "U.S. ONLY LENDERS" shall mean those Lenders listed in Column 8 of Schedule 1 to this Agreement, together with each other Person which from time to time becomes a party to this Agreement and a Lender in the United States of America to the U.S. Borrower under Tranche 3 in accordance with Section 12.01, in their capacity as Lenders in the United States of America to the U.S. Borrower under Tranche 3, in each case together with their respective successors and assigns, and "U.S. ONLY LENDER" shall mean any one of the U.S. Only Lenders. "U.S. OPERATING LENDERS" shall mean the U.S. Operating Line A Lender and the U.S. Operating Line B Lender, and "U.S. OPERATING LENDER" shall mean either one of the U.S. Operating Lenders. "U.S. OPERATING LINE A" shall have the meaning specified in subsection 2.01(e). "U.S. OPERATING LINE A LENDER" shall mean Comerica Bank in its capacity as the operating credit lender to the U.S. Borrower in the United States of America under U.S. Operating Line A together with its successors and assigns in such capacity. "U.S. OPERATING LINE B" shall have the meaning specified in subsection 2.01(f). "U.S. OPERATING LINE B LENDER" shall mean Texas Commerce Bank National Association in its capacity as the operating credit lender to the U.S. Borrower in the United States of America under U.S. Operating Line B together with its successors and assigns in such capacity. "U.S. OPERATING LINES" shall mean U.S. Operating Line A and U.S. Operating Line B, and "U.S. OPERATING LINE" shall mean either one of the U.S. Operating Lines. "U.S. REFERENCE RATE" shall mean a fluctuating rate of interest per annum, expressed on the basis of a year of 360 days, which is equal at all times to the higher of: (i) (x) in the case of Accommodation under the Credit (other than under the U.S. Operating Lines) or other amounts in respect of which interest is to be calculated under this Agreement on the basis of the U.S. Reference Rate, the reference rate 47 SECTION 1.01 - 39 - of interest (however designated) quoted by the Administrative Agent for determining interest chargeable by it or its Affiliates on U.S. Dollar commercial loans made in the United States of America, and (y) in the case of Accommodation under a U.S. Operating Line, the reference rate of interest (however designated) of the applicable U.S. Operating Lender for determining interest chargeable by it on U.S. Dollar commercial loans made in the United States of America; and (ii) 0.5% above the Federal Funds Rate from time to time. "U.S. REFERENCE RATE LOAN" shall mean any Loan in U.S. Dollars with respect to which interest is calculated under this Agreement for the time being on the basis of the U.S. Reference Rate. "USD-LIBOR-REUTERS" on any day, shall mean the rate for deposits in U.S. Dollars for a period of one month which appears on page Q LIBOR 01 as of 11:00 a.m. (London, England time) on such day (or if such rate does not appear on such page of the Reuters Screen at such time on such day, then such rate which appears on such page of the Reuters Screen as of 11:00 a.m. (London, England time) on the immediately preceding Business Day) or, if such Reuters Screen rate is not available on either such day, the rate for deposits of U.S. Dollars for a period of one month which appears on the LIBO page of the Reuters Screen as of 11:00 a.m. (London, England time) on such day (or if such rate does not appear on the LIBO page at such time on such day, then such rate which appears on the LIBO page of the Reuters Screen as of 11:00 a.m. (London, England time) on the immediately preceding Business Day). "WHOLLY-OWNED RESTRICTED PARTY" shall mean any Restricted Party of which all of the issued and outstanding shares are owned beneficially and of record by any one or more of the Cdn. Borrower and the Wholly-Owned Restricted Parties. "WORKING CAPITAL RATIO" shall mean, at any time, the ratio of (a) Current Assets at such time to (b) Current Liabilities at such time. 1.012 HEADINGS, ETC. The division of this Agreement into Articles, Sections, subsections, paragraphs and clauses and the insertion of headings are for convenience of reference only and will not affect the construction or interpretation of this Agreement. The terms "this Agreement", "hereof", "hereunder" and similar expressions refer to this Agreement and not to any particular Article, Section, subsection, paragraph, clause or other portion of this Agreement. Unless something in the subject matter or context is inconsistent with any such reference, references in 48 SECTION 1.02 - 40 - this Agreement to Articles, Sections, subsections, paragraphs, clauses and Schedules are to Articles, Sections, subsections, paragraphs, clauses and Schedules of this Agreement. 1.013 FINANCIAL TERMS (1) All accounting terms not otherwise defined in this Agreement will have the meanings assigned to such terms by GAAP. The Borrowers acknowledge and agree that the various financial terms defined and used in this Agreement, and the availability of Accommodation, and the interest rates, Bankers' Acceptance fees, Letter of Credit fees and stand-by fees set forth in Article Three and the various financial covenants under Section 8.03, have all been established and agreed upon on the basis of the accounting policies, practices, principles and calculation methods or components thereof adopted and applied by the Cdn. Borrower in the preparation of the Cdn. Borrower's December 31, 1996 annual consolidated audited financial statements (the "FINANCIAL STATEMENTS"). Accordingly, although the Cdn. Borrower shall be entitled to implement any change or modification in accordance with GAAP to any such accounting policies, practices, principles or calculation methods or components thereof, for the purpose of this Agreement, all accounting terms defined or used in this Agreement (including, without limitation, those specifically referred to above) shall at all times be interpreted in accordance with, and all financial statements delivered or supplied under this Agreement shall be accompanied by a reconciliation so as to show the financial position, performance and results of the Restricted Parties in accordance with, GAAP (on a Modified Consolidated basis where required by this Agreement) using, and shall at all times be applied in accordance with GAAP (on a Modified Consolidated basis where required by this Agreement) in a manner consistent with, the policies, practices, principles and calculation methods or components thereof adopted by the Cdn. Borrower with respect to the Financial Statements, irrespective of any change or modification thereto implemented by the Cdn. Borrower (provided however that if the Cdn. Borrower changes such policies, practices, principles or calculation methods, the Cdn. Borrower may for the purpose of the accounting terms defined in this Agreement (a) implement any such change which is neither material in nature nor could have a material impact on the interpretation or calculation of the financial terms or covenants set forth in this Agreement, provided that the Cdn. Borrower has given the Administrative Agent prior written notice of the applicable change, and (b) implement any such change which is material in nature or which could have a material impact on the interpretation or calculation of the financial terms or covenants set forth in this Agreement provided that the Cdn. Borrower has given the Administrative Agent 30 days' prior written notice of such change and the Required Lenders have given their prior written approval to the Cdn. Borrower implementing such change). (2) If there is a Disposition of, or a closure of, any business, undertaking or operation of a Restricted Party (collectively a "SALE"), Interest Expense prior to the date of such Sale ("SALE RELATED HISTORICAL INTEREST EXPENSE") will be adjusted downwards, effective as of the date of such Sale, so that any Sale Related Historical Interest Expense for any period used in any 49 SECTION 1.03 - 41 - calculations of financial terms or covenants under this Agreement after the date of such Sale is reduced on a proportionate basis to reflect a reasonable estimate of what such Sale Related Historical Interest Expense for such period would have been if such Sale had been completed at the beginning of such period. Any such adjustment to Sale Related Historical Interest Expense over any period shall be calculated based on the formula set forth below. The number of completed calendar months immediately preceding such Sale occurring during the respective four Financial Quarter period will be determined and is referred to as "N". Sale Related Historical Interest Expense will be adjusted downward for such period by an amount equal to: N/12 x (NSP x ACOB) where: NSP = the net cash sales proceeds received from such Sale or, in the case of a Sale which is a closure, the book value at the date of such Sale of the business or undertaking closed ACOB = the average rate for the applicable period for Debt of the Cdn. Borrower under this Agreement. (3) If there is an Acquisition by a Restricted Party, Interest Expense prior to the date of such Acquisition ("ACQUISITION RELATED HISTORICAL INTEREST EXPENSE") will be adjusted upwards, effective as of the date of such Acquisition, so that any Acquisition Related Historical Interest Expense for any period used in any calculation of financial terms or covenants under this Agreement after the date of such Acquisition is increased to reflect the incremental Debt issued, incurred or assumed by the Restricted Parties to effect such Acquisition calculated at a rate per annum equal to the rate of interest applicable to such Debt at the date of such Acquisition (in the case of Debt which was issued or incurred in connection with such Acquisition and at the average rate of interest on such Debt for such period in the case of Debt assumed in connection with such Acquisition) as if such incremental Debt had been issued, incurred or assumed at the beginning of such period. (4) If there is a Sale, EBITDA prior to the date of such Sale ("SALE RELATED HISTORICAL EBITDA") will be adjusted downwards, effective as of the date of such Sale, so that any Sale Related Historical EBITDA for any period used in any calculations of financial terms or covenants under this Agreement after the date of such Sale is reduced on a proportionate basis to reflect a reasonable estimate of what Sale Related Historical EBITDA for such period would have been if such Sale had been completed at the beginning of such period. For greater certainty, any adjustment to EBITDA under this subsection in connection with any Sale will be made without duplication of any adjustment made to Interest Expense under subsection 1.03(2) in connection with such Sale. 50 SECTION 1.03 - 42 - (5) If there is an Acquisition by a Restricted Party of a new division, business, undertaking or operation, EBITDA prior to the date of such Acquisition ("ACQUISITION RELATED HISTORICAL EBITDA") will be adjusted upward, effective as of the date of such Acquisition, so that any Acquisition Related Historical EBITDA for any period used in any calculations of financial terms or covenants under this Agreement after the date of such Acquisition is increased to reflect a reasonable estimate of what Acquisition Related Historical EBITDA for such period would have been had such Acquisition been completed at the beginning of such period (and for greater certainty such upward adjustment will not include any expected synergies). For greater certainty, any adjustment to EBITDA under this subsection in connection with any Acquisition will be made without duplication of any adjustment made to Interest Expense under subsection 1.03(3) in connection with such Acquisition. 1.014 NUMBER, GENDER AND EXPRESSIONS Words importing the singular number only will include the plural and vice versa, words importing gender will include all genders and words importing any type or category of Persons will include all types and categories of Persons. Where any term or expression is defined in this Agreement, derivations of such term or expression will have a corresponding meaning. 1.015 TIME Unless otherwise expressly stated, any reference in this Agreement to a time will mean Toronto, Ontario local time. Time shall be of the essence of this Agreement and each of its provisions. 1.016 NON-BUSINESS DAYS Unless otherwise expressly provided in this Agreement, whenever any payment is stated to be due on a day other than a Business Day, the payment will be made on the immediately following Business Day. Notwithstanding the foregoing, if with respect to any payment of principal or interest on a LIBOR Loan the succeeding Business Day falls in the next calendar month, the due date for payment of such principal or interest shall be the next preceding Business Day. In the case of interest or fees payable pursuant to the terms of this Agreement, the extension or contraction of time will be considered in determining the amount of interest and fees. Unless otherwise expressly provided in this Agreement, whenever any action to be taken is stated or scheduled to be required to be taken on, or (except with respect to the calculation of interest or fees) any period of time is stated or scheduled to commence or terminate on, a day other than a Business Day, the action will be taken or the period of time will commence or terminate, as the case may be, on the immediately following Business Day. 1.017 CONFLICTS 51 SECTION 1.07 - 43 - In the event of a conflict, discrepancy, difference or ambiguity in or between the provisions of this Agreement and the provisions of any of the other Credit Documents, then, unless such Credit Document or an acknowledgment from the Cdn. Borrower relative to such Credit Document expressly states that this Section is not applicable thereto, notwithstanding anything else contained in such other Credit Document, the provisions of this Agreement will prevail and the provisions of such other Credit Document will be deemed to be amended to the extent necessary to eliminate such conflict, discrepancy, difference or ambiguity. 1.018 STATUTORY REFERENCES Any reference in this Agreement to any act or statute, or to any section of or any definition in any act or statute, will be deemed to be a reference to such act or statute or section or definition as amended, supplemented, substituted or re-enacted from time to time. 1.019 ACTIONS BY RESTRICTED PARTIES If any provision in the Credit Documents refers to any action taken or to be taken by any Restricted Party or any Independent Subsidiary, or which a Restricted Party or an Independent Subsidiary is prohibited from taking, such provision will be interpreted to include any and all means, direct or indirect, of taking, or not taking, such action, provided however, for greater certainty, the provisions of this Section are not intended to impose any obligation on a Restricted Party or an Independent Subsidiary to effect any action by any means prohibited by then existing Applicable Laws. 1.101 SEVERABILITY If any term, covenant, obligation or agreement contained in this Agreement, or the application of any such term, covenant, obligation or agreement to any Person or circumstance, shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or the application of such term, covenant, obligation or agreement to Persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected by such invalidity or unenforceability and each term, covenant, obligation or agreement contained in this Agreement shall be separately valid and enforceable to the fullest extent permitted by law. 1.11 ENTIRE AGREEMENT This Agreement and all other Credit Documents constitute the entire agreement between the parties to this Agreement with respect to the Credit and the other matters contemplated in this Agreement as of the date of this Agreement, and (except for any fee letter or fee letters between the Co-Arrangers and the Cdn. Borrower or the Administrative Agent and the Cdn. Borrower) 52 SECTION 1.11 - 44 - supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, with respect to the Credit including, without limitation, those contained in the May 28, 1997 arrangement letter from the Co-Arrangers to the Cdn. Borrower. 1.12 PERMITTED LIENS The inclusion of reference to Permitted Liens in any Credit Document is not intended to and shall not subordinate and shall not be interpreted as subordinating any Lien created by any of the Security to any Permitted Lien. 1.13 INTEREST PAYMENTS AND CALCULATIONS (1) All interest payments to be made under this Agreement will be paid without allowance or deduction for deemed re-investment or otherwise, both before and after maturity and before and after default and/or judgment, if any, until payment of the amount on which such interest is accruing, and interest will accrue on overdue interest, if any. (2) Unless otherwise stated, wherever in this Agreement reference is made to a rate of interest or rate of fees "per annum" or a similar expression is used, such interest or fees will be calculated on the basis of a calendar year of 365 days or 366 days, as the case may be, and using the nominal rate method of calculation, and will not be calculated using the effective rate method of calculation or on any other basis that gives effect to the principle of deemed re-investment of interest. (3) For the purposes of the Interest Act (Canada) and disclosure under such act, whenever interest to be paid under this Agreement is to be calculated on the basis of a year of 365 days or 360 days or any other period of time that is less than a calendar year, the yearly rate of interest to which the rate determined pursuant to such calculation is equivalent is the rate so determined multiplied by the actual number of days in the calendar year in which the same is to be ascertained and divided by either 365, 360 or such other period of time, as the case may be. 1.14 GOVERNING LAW THIS AGREEMENT AND, UNLESS OTHERWISE SPECIFIED IN SUCH CERTIFICATE OR OTHER DOCUMENT, ALL CERTIFICATES AND OTHER DOCUMENTS DELIVERED TO THE ADMINISTRATIVE AGENT AND THE LENDERS UNDER THIS AGREEMENT SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE PROVINCE OF ONTARIO AND THE LAWS OF CANADA APPLICABLE IN THE PROVINCE OF ONTARIO. EACH OF THE BORROWERS VOLUNTARILY AND IRREVOCABLY SUBMITS ITSELF TO THE 53 SECTION 1.14 - 45 - JURISDICTION OF ANY COMPETENT FEDERAL OR PROVINCIAL COURT OR TRIBUNAL IN THE PROVINCE OF ONTARIO TO ENABLE THE ADMINISTRATIVE AGENT OR THE LENDERS OR ANY OF THEM TO COMMENCE AND CARRY TO A CONCLUSION ANY SUIT, ACTION OR PROCEEDING FOR THE COLLECTION OF ANY AND ALL AMOUNTS PAYABLE BY SUCH BORROWER UNDER THE CREDIT DOCUMENTS AND/OR THE ENFORCEMENT OF ANY OTHER RIGHT OR SECURITY GIVEN TO THE ADMINISTRATIVE AGENT OR THE LENDERS OR ANY OF THEM BY SUCH BORROWER IN CONNECTION WITH ANY AMOUNT PAYABLE UNDER ANY CREDIT DOCUMENT. Each of the Borrowers further agrees that any final judgment or decree against such Borrower and/or its property in any such suit, action or proceeding shall be conclusive on such Borrower and such property and all parties in interest, and may be enforced in any court or tribunal in any other country, province or state by suit on the judgment or decree, a certified copy of which shall be conclusive evidence of judgement or decree, as the case may be. Nothing in this Section shall be deemed or operate to preclude the Administrative Agent or any Lender from bringing suit or taking other legal action in any other jurisdiction to collect the obligations of any Restricted Party or to realize on the Security, or to enforce a judgment or other court order in favour of the Administrative Agent or any Lender. Each of the Borrowers expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and hereby waives any objection which such Person may have based upon lack of personal jurisdiction, improper venue or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Each of the Borrowers hereby waives personal service of the summons, complaint and other process issued in any such action or suit and agrees that service of such summons, complaints and other process may be made by registered or certified mail addressed to such Person at the address of the Cdn. Borrower set forth on the signature page of this Agreement. 1.15 WAIVER OF JURY TRIAL BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE PROVINCIAL AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN THE PARTIES ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THE CREDIT DOCUMENTS OR THE TRANSACTIONS UNDER THE CREDIT DOCUMENTS. 54 SECTION 1.16 - 46 - 1.16 CURRENCY Unless otherwise specified in this Agreement, all statements of or references to dollar amounts (without further description) mean U.S. Dollars. 1.17 SENIOR INDEBTEDNESS All of the debts, obligations and liabilities of the Cdn. Borrower under or in respect of this Agreement and all of the other Credit Documents and all Lender/Borrower Hedging Arrangements constitutes "Senior Indebtedness" (as defined in the January 1, 1989 indenture (the "ALLWASTE TRUST INDENTURE"), as supplemented, delivered by Allwaste to Texas Commerce Trust Company of New York as trustee) and shall rank in right of payment in priority to all debts, obligations and liabilities of the Cdn. Borrower under or in respect of the Allwaste Trust Indenture or any debentures issued thereunder. 1.18 SCHEDULES The Schedules attached to, and forming part of, this Agreement are as follows: Schedule 1 - Commitments of the Lenders under Tranches 1, 2 and 3 Schedule 2 - Form of Corporate Separateness Covenant and Assurance Agreement Schedule 3 - Form of Acknowledgement and Agreement from Eligible Affiliates of the Administrative Agent, an Other Agent or a Lender Schedule 4 - List of Independent Subsidiaries Schedule 5 - Form of Non Recourse Acknowledgement and Undertaking Schedule 6 - List of Permitted Liens Schedule 7 - Description of Permitted Indebtedness Schedule 8 - Description of Pre-existing Accommodation Schedule 9 - Form of Tax Sharing Agreement Schedule 10 - Form of Notice of Borrowing Schedule 11 - Form of Note of Conversion/Renewal Schedule 12 - Minimum Amounts of Borrowings under Tranches Schedule 13 - Notice Periods for Borrowing of Types of Accommodation under Tranches Schedule 14 - Form of BA Equivalent Note Schedule 15 - Form of Non Bank Certificate for U.S. Withholding Tax Purposes Schedule 16 - Listing of Particulars of Shares and Other Securities to be Pledged under the Security Schedule 17 - Litigation Schedule 18 - Corporate Chart
55 SECTION 1.17 - 47 - Schedule 19 - Disclosure Schedule Schedule 20 - List of Material Contracts Schedule 21 - Form of Quarterly Reporting Compliance Certificate Schedule 22 - Form of Quarterly Environmental Compliance Certificate Schedule 23 - Insurance Requirements Schedule 24 - Form of Undertaking relative to Assignments by Lenders Schedule 25 - Form of Assignment and Assumption Agreement relative to Assignments by Lenders Schedule 26 - List of Non Material Restricted Subsidiaries Schedule 27 - Commitments of the Lenders under the LC Line
ARTICLE TWO THE CREDIT 1.021 ESTABLISHMENT OF THE CREDIT Subject to and upon the terms and conditions set forth in this Agreement, the Lenders (severally and not jointly or jointly and severally) establish in favour of the Borrowers a revolving credit facility (the "CREDIT"), subdivided into seven Tranches, pursuant to which one or more of the Borrowers shall be entitled from time to time prior to the Maturity Date to obtain from one or more of the Lenders Accommodation of various types in an aggregate U.S. Dollar Amount which does not at any time exceed U.S. $1,500,000,000 (as such limit may from time to time be reduced pursuant to the provisions of this Agreement) all as more particularly described below: TRANCHE 1 (a) a tranche ("TRANCHE 1") under which each Cdn. Only Lender severally (and not jointly or jointly and severally) agrees to make available to the Cdn. Borrower in Canada Accommodation by way of Prime Rate Loans, U.S. Base Rate Loans, LIBOR Loans and Bankers' Acceptances (or BA Equivalent Notes), in an aggregate U.S. Dollar Amount not exceeding at any time the U.S. Dollar Amount set forth for such Lender in the Registry of Commitments (which amount on the date of this Agreement is set forth opposite such Lender's name in Column 2 of Schedule 1) (as such amount may from time to time be adjusted as provided for pursuant to the provisions of this Agreement and as the Registry of Commitments may from time to time be amended as provided for in Section 12.01 or in any other applicable provision of this Agreement) (for each such Lender, its "TRANCHE 1 COMMITMENT" and for all such Lenders the "TRANCHE 1 COMMITMENTS"); and 56 SECTION 2.01 - 48 - TRANCHE 2 (b) a tranche ("TRANCHE 2") under which each Cdn. Cross Border Lender and its Affiliated U.S. Cross Border Lender severally (and not jointly or jointly and severally): (i) in the case of the Cdn. Cross Border Lenders, agrees to make available to the Cdn. Borrower in Canada Accommodation by way of Prime Rate Loans, U.S. Base Rate Loans, LIBOR Loans and Bankers' Acceptances (or BA Equivalent Notes) in an aggregate U.S. Dollar Amount not exceeding at any time the U.S. Dollar Amount set forth for such Lender in the Registry of Commitments (which amount on the date of this Agreement is set forth opposite such Lender's name in Column 4 of Schedule 1) (as such amount may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement and as the Registry of Commitments may from time to time be amended as provided for in Section 12.01 or in any other applicable provision of this Agreement) (for each such Cdn. Cross Border Lender its "TRANCHE 2 CDN. BORROWING COMMITMENT" and for all such Cdn. Cross Border Lenders the "TRANCHE 2 CDN. BORROWING COMMITMENTS"); and (ii) in the case of the U.S. Cross Border Lenders, agrees to make available to the U.S. Borrower in the United States of America Accommodation by way of U.S. Reference Rate Loans and LIBOR Loans, in an aggregate U.S. Dollar Amount not exceeding at any time the U.S. Dollar Amount set forth for such Lender in the Registry of Commitments (which amount on the date of this Agreement is set forth opposite such Lender's name in Column 6 of Schedule 1) (as such amount may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement and as the Registry of Commitments may from time to time be amended as provided for in Section 12.01 or in any other applicable provision of this Agreement) (for each such U.S. Cross Border Lender its "TRANCHE 2 U.S. BORROWING COMMITMENT" and for all such U.S. Cross Border Lenders the "TRANCHE 2 U.S. BORROWING COMMITMENTS"); and provided further that the aggregate U.S. Dollar Amount of all such Accommodation made available by each Cdn. Cross Border Lender and its Affiliated U.S. Cross Border Lender at any time will not exceed the U.S. Dollar Amount set forth for such Lenders in the Registry of Commitments (which 57 SECTION 2.01 - 49 - amount on the date of this Agreement is set forth opposite such Lenders' names in Column 7 of Schedule 1) (as such amount may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement and as the Registry of Commitments may from time to time be amended as provided for in Section 12.01 or in any other applicable provision of this Agreement) (for each such Cdn. Cross Border Lender and its Affiliated U.S. Cross Border Lender, their "TRANCHE 2 COMBINED COMMITMENT" and for all such Lenders the "TRANCHE 2 COMBINED COMMITMENTS"); TRANCHE 3 (c) a tranche ("TRANCHE 3") under which each U.S. Only Lender severally (and not jointly or jointly and severally) agrees to make available to the U.S. Borrower in the United States of America Accommodation by way of U.S. Reference Rate Loans and LIBOR Loans in an aggregate U.S. Dollar Amount not exceeding at any time the U.S. Dollar Amount set forth for such Lender in the Registry of Commitments (which amount on the date of this Agreement is set forth opposite such Lender's name in Column 9 of Schedule 1) (as such amount may from time to time be adjusted as provided for pursuant to the provisions of this Agreement and as the Registry of Commitments may from time to time be amended as provided for in Section 12.01 or in any other applicable provision of this Agreement) (for each such Lender, its "TRANCHE 3 COMMITMENT" and for all such Lenders the "TRANCHE 3 COMMITMENTS"); CDN. OPERATING LINE (d) a tranche (the "CDN. OPERATING LINE") under which the Cdn. Operating Lender agrees to make available to the Cdn. Borrower in Canada Accommodation by way of Prime Rate Loans, U.S. Base Rate Loans, LIBOR Loans and Bankers' Acceptances (or BA Equivalent Notes), and only in connection with Pre-existing LCs as provided for in Section 2.11 Letters of Credit, in an aggregate U.S. Dollar Amount not exceeding at any time U.S. $30,000,000 (as such limit may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement); U.S. OPERATING LINE A (e) a tranche ("U.S. OPERATING LINE A") under which the U.S. Operating Line A Lender agrees to make available to the U.S. Borrower in the United States of America Accommodation by way of U.S. Reference Rate Loans and LIBOR Loans in an aggregate U.S. Dollar Amount not exceeding at any time 58 SECTION 2.01 - 50 - U.S. $25,000,000 (as such limit may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement); U.S. OPERATING LINE B (f) a tranche ("U.S. OPERATING LINE B") under which the U.S. Operating Line B Lender agrees to make available to the U.S. Borrower in the United States of America Accommodation by way of U.S. Reference Rate Loans and LIBOR Loans in an aggregate U.S. Dollar Amount not exceeding at any time U.S. $20,000,000 (as such limit may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement); and LC LINE (g) a tranche (the "LC LINE") under which each Cdn. LC Lender and its Affiliated U.S. LC Lender severally (and not jointly or jointly and severally): (i) in the case of the Cdn. LC Lenders, agrees that the Cdn. LC Issuer will make available on behalf of the Cdn. LC Lenders to the Cdn. Borrower Accommodation by way of Letters of Credit in an aggregate U.S. Dollar Amount not exceeding at any time the aggregate of the U.S. Dollar Amounts set forth for each Cdn. LC Lender in the Registry of Commitments (which amount for each such Lender on the date of this Agreement is set forth opposite such Lender's name in Column 2 of Schedule 27) (as such amount may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement and as the Registry of Commitments may from time to time be amended as provided for in Section 12.01 or in any other applicable provision of this Agreement) (for each such Cdn. LC Lender its "CDN. LC COMMITMENT" and for all such Cdn. LC Lenders the "CDN. LC COMMITMENTS"); and (ii) in the case of the U.S. LC Lenders, agrees that the U.S. LC Issuer will make available on behalf of the U.S. LC Lenders to the U.S. Borrower Accommodation by way of standby Letters of Credit in an aggregate U.S. Dollar Amount not exceeding at any time the aggregate of the U.S. Dollar Amounts set forth for each U.S. LC Lender in the Registry of Commitments (which amount for each such Lender on the date of this Agreement is set forth opposite such Lender's name in Column 4 of 59 SECTION 2.01 - 51 - Schedule 27) (as such amount may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement and as the Registry of Commitments may from time to time be amended as provided for in Section 12.01 or in any other applicable provision of this Agreement) (for each such U.S. LC Lender its "U.S. LC COMMITMENT" and for all such U.S. LC Lenders the "U.S. LC COMMITMENTS"); and provided further that the aggregate U.S. Dollar Amount of all such Accommodation made available by both LC Issuers on behalf of the LC Lenders at any time will not exceed U.S. $75,000,000 (as such limit may from time to time be adjusted pursuant to Section 2.03 or as otherwise provided for pursuant to the provisions of this Agreement). 1.022 PURPOSE OF THE CREDIT The Borrowers shall use Accommodation obtained by them under the Credit to refinance all Existing Bank Debt, to finance working capital requirements, the cost of Acquisitions and Capital Expenditures permitted by this Agreement and for general corporate purposes. The Credit may not be used to finance a Hostile Take-Over Bid without the consent of all of the Lenders. 1.023 BORROWINGS UNDER TRANCHES (1) The Cdn. Borrower, not more than 30 days and not less than 5 Business Days prior to the last day of each Financial Quarter, shall give written notice to the Administrative Agent either (x) requesting an adjustment, effective as of the first day of the immediately following Financial Quarter (the "QUARTERLY COMMITMENT ADJUSTMENT DATE") to either or both of (A) Tranche 2 by way of an increase or decrease in the Tranche 2 Cdn. Borrowing Commitments (with any such increase or decrease resulting in a pro rata increase or decrease to the Tranche 2 Cdn. Borrowing Commitment of each Cdn. Cross Border Lender) with a corresponding decrease or increase, as the case may be, in the Tranche 2 U.S. Borrowing Commitments (with any such decrease or increase resulting in a pro rata decrease or increase to the Tranche 2 U.S. Borrowing Commitment of each U.S. Cross Border Lender) (collectively a "TRANCHE 2 COMMITMENT ADJUSTMENT"), and (B) the LC Line by way of an increase or decrease in the Cdn. LC Commitments (with any such increase or decrease resulting in a pro rata increase or decrease to the Cdn. LC Commitment of each Cdn. LC Lender) with a corresponding decrease or increase, as the case may be, in the U.S. LC Commitments (with any such decrease or increase resulting in a pro rata decrease or increase to the U.S. LC Commitment of each U.S. LC Lender) (collectively a "LC COMMITMENT ADJUSTMENT"), or (y) confirming that there will be no Tranche 2 Commitment Adjustment or LC Commitment Adjustment as at the applicable 60 SECTION 2.03 - 52 - Quarterly Commitment Adjustment Date, provided that failure by the Cdn. Borrower to deliver any such written notice to the Administrative Agent within the period required above will be deemed to be delivery by the Cdn. Borrower to the Administrative Agent of a written notice that there will be no Tranche 2 Commitment Adjustment or LC Commitment Adjustment as at the applicable Quarterly Commitment Adjustment Date. Any such Tranche 2 Commitment Adjustment and LC Commitment Adjustment will become effective on the applicable Quarterly Commitment Adjustment Date provided that: (a) the sum of the Tranche 2 Cdn. Borrowing Commitments and the Tranche 2 U.S. Borrowing Commitments after any such Tranche 2 Commitment Adjustment must always equal the Tranche 2 Combined Commitments immediately prior to such Tranche 2 Commitment Adjustment, (b) the sum of the Cdn. LC Commitments and the U.S. LC Commitments after any such LC Commitment Adjustment must always equal the Combined LC Commitments immediately prior to such LC Commitment Adjustment, (c) any such increase or decrease under Tranche 2 must be in a minimum amount of U.S. $10,000,000 or any larger amount which is a whole multiple of U.S. $5,000,000, (d) any such increase or decrease under the LC Line must be in a minimum amount of U.S. $2,000,000 or any larger amount which is a whole multiple of U.S. $100,000, (e) the Borrowers must prior to the applicable Quarterly Commitment Adjustment Date repay sufficient outstanding Accommodation under Tranche 2 in accordance with the terms of this Agreement so that, immediately after such Tranche 2 Commitment Adjustment on such Quarterly Commitment Adjustment Date, the aggregate U.S. Dollar Amount of all Accommodation outstanding under Tranche 2 from the Cdn. Cross Border Lenders does not exceed the adjusted Tranche 2 Cdn. Borrowing Commitments (and the aggregate U.S. Dollar Amount of all Accommodation outstanding under Tranche 2 from each Cdn. Cross Border Lender does not exceed its adjusted Tranche 2 Cdn. Borrowing Commitment) and the aggregate U.S. Dollar Amount of all Accommodation outstanding under Tranche 2 from the U.S. Cross Border Lenders does not exceed the adjusted Tranche 2 U.S. Borrowing Commitments (and the aggregate U.S. Dollar Amount of all Accommodation outstanding under Tranche 2 from each U.S. Cross Border Lender does not exceed its adjusted Tranche 2 U.S. Borrowing Commitment). 61 SECTION 2.03 - 53 - (f) the Borrowers must prior to the applicable Quarterly Commitment Adjustment Date repay sufficient outstanding Accommodation under the LC Line in accordance with the terms of this Agreement so that, immediately after such LC Commitment Adjustment on such Quarterly Commitment Adjustment Date, the aggregate U.S. Dollar Amount of all Accommodation outstanding under the LC Line from the Cdn. LC Lenders does not exceed the adjusted Cdn. LC Commitments and the aggregate U.S. Dollar Amount of all Accommodation outstanding under the LC Line from the U.S. LC Lenders does not exceed the adjusted U.S. LC Commitments. For greater certainty, no Tranche 2 Commitment Adjustment will result in an increase or decrease to the overall Tranche 2 Combined Commitments of all of the Cross Border Lenders or to the Tranche 2 Combined Commitment of any particular Cdn. Cross Border Lender and its Affiliated U.S. Cross Border Lender. Rather, any such Tranche 2 Commitment Adjustment will only result in an increase or decrease, as the case may be, in the Tranche 2 Cdn. Borrowing Commitment of each Cdn. Cross Border Lender with a corresponding decrease or increase, as the case may be, in the Tranche 2 U.S. Borrowing Commitment of its respective Affiliated U.S. Cross Border Lender. In addition, no LC Commitment Adjustment will result in an increase or decrease to the overall LC Combined Commitments of all of the LC Lenders or to the LC Combined Commitment of any particular Cdn. LC Lender and its Affiliated U.S. LC Lender. Rather any such LC Commitment Adjustment will only result in an increase or decrease, as the case may be, in the Cdn. LC Commitment of each Cdn. LC Lender with a corresponding decrease or increase, as the case may be, in the U.S. LC Commitment of its respective Affiliated U.S. LC Lender. (2) The Cdn. Operating Lender, the U.S. Operating Lenders or the LC Lenders may from time to time, with notice to and the consent of the Administrative Agent and the Cdn. Borrower, and will from time to time at the request of the Cdn. Borrower and the Administrative Agent, adjust their Commitments under the Credit (such adjustment to be effective on the date agreed to by the Administrative Agent and the Cdn. Borrower) by: (a) increasing or reducing their respective Commitments under the Cdn. Operating Line (in the case of the Cdn. Operating Lender), the applicable U.S. Operating Line (in the case of a U.S. Operating Lender) and the LC Line (in the case of the LC Lenders) and (b) making a corresponding decrease or increase, as the case may be, in (x) such Lender's Tranche 1 Commitment (if such Lender is also a Cdn. Only Lender), (y) the Tranche 2 Combined Commitment of such Lender and its Affiliated Cross Border Lender (if such Lender is also a Cross Border Lender), or (z) such Lender's Tranche 3 Commitment (if such Lender is also a U.S. Only Lender) provided that: 62 SECTION 2.03 - 54 - (i) the sum of the aggregate Commitments of such Lenders (and where applicable their Affiliated Cross Border Lenders) under the Credit shall not increase or decrease as a result of any such adjustment, and (ii) any such increase or decrease must be in a minimum amount of U.S. $500,000 or any larger amount which is a whole multiple of U.S. $100,000, and (iii) the Borrowers must prior to the applicable adjustment date repay sufficient outstanding Accommodation under the affected Tranches in accordance with the terms of this Agreement so that, immediately after giving effect to such adjustment on such date, the aggregate U.S. Dollar Amount of all Accommodation outstanding under each of the affected Tranches does not exceed the adjusted Commitments of the applicable Lender (or the Applicable Lender and its Affiliated Cross Border Lender, as the case may be, or the Applicable Lender and its Affiliated LC Lender, as the case may be) under the affected Tranches. (3) Except as otherwise specifically stated in this Agreement: (a) each Borrowing by the Cdn. Borrower under Tranche 1 and Tranche 2 (x) will be made available to the Cdn. Borrower by the Cdn. Only Lenders and the Cdn. Cross Border Lenders simultaneously and pro rata based on their respective Undisbursed Commitments under Tranche 1 and Tranche 2 respectively, and (y) will be comprised of the same type of Accommodation, with identical maturity dates and LIBOR Periods, if applicable, from each such Lender; and (b) each Borrowing by the U.S. Borrower under Tranche 2 and Tranche 3 (x) will be made available to the U.S. Borrower by the U.S. Only Lenders and the U.S. Cross Border Lenders simultaneously and pro rata based on their respective Undisbursed Commitments under Tranche 2 and Tranche 3 respectively, and (y) will be comprised of the same type of Accommodation, with identical maturity dates and LIBOR Periods, if applicable, from each such Lender. (4) No Lender will be responsible for any default by any other Lender in its obligation to make Accommodation available to a Borrower nor will the Commitment of any Lender be increased as a result of any such default, except as provided in this subsection. If any Lender fails to make available any Accommodation under Tranche 1, Tranche 2 or Tranche 3 when required under its Commitment relative to such Tranche, the Administrative Agent will promptly notify the other Lenders of such failure, and any Lender which has a Commitment to such Borrower under any of such Tranches, upon notice to the applicable Borrower, the 63 SECTION 2.03 - 55 - Administrative Agent and the other Lenders, may make available to such Borrower within two Business Days after the applicable Borrowing Date the amount (or if more than one Lender so elects, its pro rata share of the amount as nearly as practicable in the opinion of the Administrative Agent) of the failed Accommodation. The maturity date of the LIBOR Period applicable to all LIBOR Loans and the maturity date of all Bankers' Acceptances and BA Equivalent Notes included in the additional Accommodation so made available shall be identical to the respective maturity dates of the LIBOR Period for any LIBOR Loans, and of any Bankers' Acceptances and BA Equivalent Notes, that would have been included in the failed Accommodation and that were included in the Accommodation made available by the non-defaulting Lenders on the applicable Borrowing Date. The Lenders, the Borrowers and the Administrative Agent shall thereupon enter into documentation, in form and substance satisfactory to the Administrative Agent, as may be appropriate to evidence the adjustment of the Commitments relative to the Tranches necessitated by the additional Accommodation made by any Lender and thereafter the Administrative Agent in its discretion may adjust the manner in which any Lender or group or groups of Lenders share in any new Borrowings to ensure that the applicable Lenders or group of Lenders hold outstanding Accommodation as soon as possible thereafter on a pro rata basis as contemplated under the other provisions of this Agreement. Nothing in this subsection shall be deemed to relieve any Lender of its obligation to make available any Accommodation when required to do so under this Agreement, or to prejudice any rights which any Borrower, the Administrative Agent or any other Lender may have against a defaulting Lender. 1.024 NOTICE OF BORROWING (1) Whenever a Borrower desires to obtain a Borrowing (other than a Borrowing under one of the Operating Lines which will be made available by the applicable Operating Lender pursuant to arrangements from time to time entered into between the Cdn. Borrower and the Cdn. Operating Lender and between the U.S. Borrower and each of the U.S. Operating Lenders), it shall give irrevocable prior written notice to the Administrative Agent in substantially the form of Schedule 10 (a "NOTICE OF BORROWING") specifying the identity of the Borrower; the Tranche or Tranches under which the Borrowing is to be obtained; the types and amounts of Accommodation desired; the term of any Bankers' Acceptances or BA Equivalent Notes to be included in such Accommodation; the LIBOR Period to be applicable to any LIBOR Loans to be included in such Accommodation; and the date (which shall be a Business Day) on which such Borrowing is to be obtained (a "BORROWING DATE" which date shall include the date on which any Accommodation is obtained under subsection 2.05(7), subsection 2.06(3) or Section 2.07 and the date on which the basis on which interest is calculated on a Loan in U.S. Dollars is converted or renewed pursuant to a Notice of Conversion/Renewal). Whenever a Borrower desires to convert the basis on which interest is calculated on a Loan in U.S. Dollars from LIBOR (provided that the LIBOR Period for such LIBOR Loan is then expiring) to the U.S. Base Rate or the U.S. Reference Rate, as the case may be, (provided that no conversion of a 64 SECTION 2.04 - 56 - part only of any LIBOR Loans will be permitted if such conversion would reduce the outstanding amount of such LIBOR Loans to less than the applicable minimum borrowing amount for LIBOR Loans provided for in this Agreement) or from the U.S. Base Rate or the U.S. Reference Rate, as the case may be, to LIBOR, or to renew the LIBOR Period for a LIBOR Loan for which the then existing LIBOR Period is then expiring, it shall give irrevocable prior written notice to the Administrative Agent in substantially the form of Schedule 11 (a "NOTICE OF CONVERSION/RENEWAL") specifying the identity of the Borrower; the Tranche or Tranches under which the conversion or renewal is to be made; the types and amounts of Accommodation in respect of which the conversion or renewal is to be made; the LIBOR Period to be applicable to any LIBOR Loans to be included in such conversion or renewal and the date (which shall be a Business Day and shall be at the expiry of any LIBOR Period relative to any LIBOR Loan which is the subject matter of any such conversion or renewal) on which such conversion or renewal is to take place. No Accommodation will be included in any Borrowing if the term of such Accommodation, or any LIBOR Period applicable to such Accommodation, would mature beyond the Maturity Date. Without limitation of any of the conditions precedent set forth in Section 10.02, no Borrower shall be entitled to obtain (or in the case of an outstanding LIBOR Loan renew the LIBOR Period therefor), and the Lenders will not be obliged to make available, Accommodation by way of LIBOR Loans (or renew the outstanding LIBOR Periods for outstanding LIBOR Loans), Bankers' Acceptances or BA Equivalent Notes or Letters of Credit at any time that a Default or an Event of Default has occurred and is continuing. Except for Accommodation under the Operating Lines (which will be made available by the applicable Operating Lender pursuant to arrangements from time to time entered into between the Cdn. Borrower and the Cdn. Operating Lender and between the U.S. Borrower and each of the U.S. Operating Lenders), the Lenders will not be obliged to make available on any Borrowing Date Loans under any Tranche or Tranches in an aggregate amount less than the applicable minimum amounts set forth in Schedule 12 with respect to such Tranche or Tranches. The Administrative Agent will promptly notify the applicable Lenders of the proposed Borrowing and the particulars of the Accommodation to be made available by each Lender. (2) A Notice of Borrowing requesting any Accommodation under the Credit and a Notice or Conversion/Renewal shall be given not later than 10:00 a.m. on the date which is that number of Business Days preceding the applicable Borrowing Date set forth in Schedule 13 with respect to such type of Accommodation. 1.025 BANKERS' ACCEPTANCES (1) To facilitate the procedures contemplated in this Agreement, the Cdn. Borrower will from time to time as required by the applicable Lender provide to the BA Lenders and the Non BA Lenders an appropriate number of executed drafts drawn by the Cdn. Borrower upon each BA Lender, in the form prescribed by such BA Lender for bankers' acceptances (each such executed draft being referred to as a "DRAFT"), and an appropriate number of executed non 65 SECTION 2.05 - 57 - interest-bearing promissory notes of the Cdn. Borrower in favour of each Non BA Lender, in the form of Schedule 14 (each such promissory note being referred to as a "BA EQUIVALENT NOTE"). The dates, the maturity dates and the principal amounts of all Drafts and BA Equivalent Notes delivered by the Cdn. Borrower shall be left blank, to be completed by the Lenders as required by this Agreement. The Drafts or BA Equivalent Notes shall be held by each Lender subject to the same degree of care as if they were such Lender's own property kept at the place at which the Drafts or BA Equivalent Notes are ordinarily kept by such Lender. No Lender shall be liable for its failure to accept a Draft or purchase a BA Equivalent Note as required by this Agreement if the cause of such failure is, in whole or in part, due to the failure of the Cdn. Borrower to provide Drafts or BA Equivalent Notes to the applicable Lender on a timely basis. (2) The Administrative Agent, promptly following receipt of a Notice of Borrowing requesting Bankers' Acceptances, shall (i) advise each BA Lender of the face amount and term of each Draft to be accepted by it, (ii) advise each Non BA Lender of the face amount and term of the BA Equivalent Note to be purchased by it, and (iii) advise each BA Lender whether the BA Lenders are required by such Notice of Borrowing to purchase the Bankers' Acceptances accepted by them. The term of all Bankers' Acceptances and BA Equivalent Notes issued pursuant to any Notice of Borrowing shall be identical. The face amount of each Bankers' Acceptance and BA Equivalent Note shall be Cdn. $100,000 or any whole multiple of Cdn. $100,000, and the aggregate face amount of Bankers' Acceptances and BA Equivalent Notes issued pursuant to any Notice of Borrowing under any Tranche or Tranches shall not be less than the applicable amounts set forth in Schedule 12 with respect to such Tranche or Tranches, as the case may be. Each Bankers' Acceptance and BA Equivalent Note shall be dated the Borrowing Date on which it is issued, and shall be for a term of one, two, three or six months provided that in no event shall the term of a Bankers' Acceptance or a BA Equivalent Note extend beyond the Maturity Date. The aggregate face amount of the Drafts to be accepted at any time by a BA Lender, and the face amount of the BA Equivalent Note to be purchased at any time by a Non BA Lender, shall be determined by the Administrative Agent based upon the amounts of the respective Commitments under the Tranche or Tranches under which such Drafts and BA Equivalent Notes are being issued, except that, if the face amount of any Draft to be accepted by a BA Lender or of the BA Equivalent Note to be purchased by a Non BA Lender, determined as provided for above, would not be Cdn. $100,000 or a whole multiple of Cdn. $100,000, the Administrative Agent in its sole discretion may increase such face amount to the nearest whole multiple of Cdn. $100,000 or may reduce such face amount to the nearest whole multiple of Cdn. $100,000. (3) Each BA Lender shall complete and accept on the applicable Borrowing Date Drafts having the face amounts and term advised by the Administrative Agent pursuant to subsection 2.05(2). If the BA Lenders are required to purchase the Bankers' Acceptances accepted by them, each BA Lender shall purchase on the applicable Borrowing Date the Bankers' Acceptances accepted by it, for an aggregate price equal to the BA Discount Proceeds of such 66 SECTION 2.05 - 58 - Bankers' Acceptances. In all other cases, it shall be the responsibility of the Cdn. Borrower to arrange in accordance with normal market practice for the sale on each Borrowing Date of the Bankers' Acceptances issued by it on such Borrowing Date, and for such purpose the Cdn. Borrower shall advise the Administrative Agent (which shall promptly give the relevant particulars to each BA Lender) as soon as possible and in any event not later than 11:00 a.m. on such Borrowing Date of the price for each Bankers' Acceptance payable by the purchaser of such Bankers' Acceptance and the identity of the Person who will pay such price to, and take delivery of such Bankers' Acceptance from, the applicable BA Lender, and such BA Lender is authorized to release such Bankers' Acceptance to such Person on receipt of a certified cheque or bank draft in an amount equal to such price. (4) Each Non BA Lender, in lieu of accepting Drafts or purchasing Bankers' Acceptances on any Borrowing Date, will complete and purchase from the Cdn. Borrower on such Borrowing Date a BA Equivalent Note in a face amount and for a term identical to the aggregate face amount and term of the Drafts which such Non BA Lender would have been required to accept on such Borrowing Date if it were a BA Lender, for a price equal to the BA Discount Proceeds of such BA Equivalent Note. Each Non BA Lender shall be entitled without charge to exchange any BA Equivalent Note held by it for two or more BA Equivalent Notes of identical date and aggregate face amount (subject to the minimum face amount specified in Subsection 2.05(2)), and the Cdn. Borrower will execute and deliver to the Administrative Agent such BA Equivalent Notes upon not less than five Business Days prior written request for the same to the Cdn. Borrower and the Administrative Agent shall arrange for delivery of such replacement BA Equivalent Notes to such Non BA Lender and the return by such Non BA Lender to the Administrative Agent for delivery to the Cdn. Borrower of the original BA Equivalent Note for cancellation. (5) Upon acceptance of each Draft or purchase of each BA Equivalent Note, the Cdn. Borrower shall pay to the applicable Lender the related fee specified in Section 3.09, and to facilitate payment such Lender shall be entitled to deduct and retain for its own account the amount of such fee from the amount to be transferred by such Lender to the Administrative Agent for the account of such Borrower pursuant to subsection 5.01(1) in respect of the sale of the related Bankers' Acceptance or of such BA Equivalent Note. (6) If the Administrative Agent determines in good faith, which determination shall be final, conclusive and binding upon the Cdn. Borrower, and so notifies the Cdn. Borrower, that there does not exist at the applicable time a normal market in Canada for the purchase and sale of bankers' acceptances, any right of the Cdn. Borrower to require the Lenders to purchase Bankers' Acceptances and BA Equivalent Notes under this Agreement shall be suspended until the Administrative Agent determines that such market does exist and gives notice thereof to the Cdn. Borrower, and any Notice of Borrowing requesting Bankers' Acceptances shall be deemed to be a Notice of Borrowing requesting Prime Rate Loans in a similar aggregate principal amount. 67 SECTION 2.05 - 59 - (7) On the date of maturity of each Bankers' Acceptance or BA Equivalent Note, the Cdn. Borrower shall pay to the Administrative Agent, for the account of the holder of such Bankers' Acceptance or BA Equivalent Note, Cdn. Dollars in an amount equal to the face amount of such Bankers' Acceptance or BA Equivalent Note, as the case may be. The obligation of the Cdn. Borrower to make such payment shall not be prejudiced by the fact that the holder of any such Bankers' Acceptance is the Lender that accepted such Bankers' Acceptance. No days of grace shall be claimed by the Cdn. Borrower for the payment at maturity of any Bankers' Acceptance or BA Equivalent Note. If the Cdn. Borrower does not make such payment, from the proceeds of Accommodation obtained under this Agreement or otherwise, the Lender that accepted such Bankers' Acceptance or initially purchased such BA Equivalent Note may (but shall not be obliged to), without receipt of a Notice of Borrowing, irrespective of whether any applicable conditions precedent under this Agreement have been met and without waiver of the Default or the Event of Default constituted by the Cdn. Borrower's failure to make such payment, make a Prime Rate Loan to the Cdn. Borrower under the Tranche under which such Bankers' Acceptance was issued or such BA Equivalent Note was purchased in the face amount of such Bankers' Acceptance or BA Equivalent Note, as the case may be, and shall promptly give notice of such Loan to the Cdn. Borrower and the Administrative Agent (which shall promptly give similar notice to the other Lenders). The Cdn. Borrower agrees to accept each such Prime Rate Loan and irrevocably authorizes and directs the applicable Lender to apply the proceeds of each such Loan in payment of the liability of the Cdn. Borrower with respect to the related Bankers' Acceptance or BA Equivalent Note. Notwithstanding any other provision of this Agreement, all Prime Rate Loans made as contemplated by this subsection shall be payable on demand by the Administrative Agent or the applicable Lender. (8) If any Bankers' Acceptance or BA Equivalent Note is outstanding on the Maturity Date or at any time that an Event of Default occurs, the Cdn. Borrower will immediately, in the case of any Bankers' Acceptance or BA Equivalent Note outstanding on the Maturity Date, and otherwise immediately upon demand by the Administrative Agent, pay to the Administrative Agent, for the account of the holder of such Bankers' Acceptance or BA Equivalent Note, Cdn. Dollars in an amount equal to the face amount of such Bankers' Acceptance or BA Equivalent Note, as the case may be. Such funds (together with interest on such funds) shall be held by the Agent, subject to Section 9.03, for payment of the liability of the Cdn. Borrower in respect of such Bankers' Acceptance or BA Equivalent Note, and shall bear interest for such terms as are selected from time to time by the Administrative Agent at the wholesale money market rate of the Administrative Agent for deposits of similar amounts and maturities. Any balance of such funds and interest shall be held by the Administrative Agent as security for the remaining liabilities of the Cdn. Borrower under the Credit Documents. (9) The signature of any duly authorized officer of the Cdn. Borrower on a Draft or a BA Equivalent Note may be mechanically reproduced in facsimile, and all Drafts and BA Equivalent Notes bearing such facsimile signature shall be binding upon the Cdn. Borrower as if they had been manually signed by such officer, notwithstanding that such Person whose manual 68 SECTION 2.05 - 60 - or facsimile signature appears on such Draft or BA Equivalent Note may no longer hold office at the date of such Draft or BA Equivalent Note or at the date of acceptance of such Draft by a BA Lender or at any time thereafter. (10) Notwithstanding any other provision of this Agreement, the number of different maturity dates for all Bankers' Acceptances and BA Equivalent Notes outstanding at any time under Tranches 1, 2 and 3 shall not exceed 100 less the number of LIBOR Periods for all LIBOR Loans outstanding at such time under such Tranches, and there shall not at any time be more than that number of different maturity dates for all Bankers' Acceptances and BA Equivalent Notes outstanding at that time under the Cdn. Operating Line as may have been agreed to prior to such time by the Cdn. Borrower and the Cdn. Operating Lender. (11) For the purpose of calculating the undisbursed Credit or any applicable Undisbursed Commitment or Undisbursed Tranche and for any other relevant provision of this Agreement, the amount of Accommodation constituted by any Bankers' Acceptance or BA Equivalent Note shall be the face amount of such Bankers' Acceptance or BA Equivalent Note, as the case may be. 1.026 LETTERS OF CREDIT (1) Each Letter of Credit requested by the Cdn. Borrower shall be made available under the LC Line by the Cdn. LC Issuer on behalf of the Cdn. LC Lenders and each Letter of Credit requested by the U.S. Borrower shall be made available under the LC Line by the U.S. LC Issuer on behalf of the U.S. LC Lenders. Each Letter of Credit (including all documents and instruments required to be presented under such Letter of Credit) shall be satisfactory in form and substance to the applicable LC Issuer. No Letter of Credit shall be issued (or shall be renewable) for a term in excess of one year or for a term which would extend beyond the Maturity Date, or shall require payment in any currency other than Cdn. Dollars or U.S. Dollars in the case of a Letter of Credit issued by the Cdn. LC Issuer or U.S. Dollars in the case of a Letter of Credit issued by the U.S. LC Issuer. (2) As a condition of the issuance or renewal of any Letter of Credit, the Cdn. Borrower or the U.S. Borrower, as the case may be, shall pay to the applicable LC Issuer and shall pay to the Administrative Agent for the account of the applicable the applicable LC Lenders on the date of such issuance or renewal the related fees specified in Section 3.10 and shall, if requested by such LC Issuer, execute and deliver to such LC Issuer such LC Issuer's then current standard form letter of credit application, reimbursement and indemnification agreements (all of which shall constitute Credit Documents). The Cdn. Borrower or the U.S. Borrower, as the case may be, shall also pay to such LC Issuer its customary cable charges and other administrative charges in respect of the issue of such Letter of Credit, the amendment or transfer of such Letter of Credit, each renewal of such Letter of Credit and each drawing made under such Letter of Credit. 69 SECTION 2.06 - 61 - (3) The Cdn. Borrower or the U.S. Borrower, as the case may be, will pay to the applicable LC Issuer sufficient funds in the currency of each Letter of Credit, either immediately on demand by such LC Issuer, to reimburse such LC Issuer for any payment made by it pursuant to such Letter of Credit, or at the option of such LC Issuer by prior written notice to the applicable Borrower, on or prior to the date on which any payment is to be made by such LC Issuer pursuant to such Letter of Credit, to fund such payment by such LC Issuer. If a Borrower does not make any payment required by the preceding sentence, from the proceeds of Accommodation obtained under this Agreement or otherwise, the applicable LC Issuer may (but shall not be obliged to), without receipt of a Notice of Borrowing, irrespective of whether any applicable conditions precedent under this Agreement have been met and without waiver of the Default or the Event of Default constituted by such Borrower's failure to make such required payment, make a Prime Rate Loan or U.S. Base Rate Loan to the Cdn. Borrower (in the case of the Cdn. LC Issuer) or a U.S. Reference Rate Loan to the U.S. Borrower (in the case of the U.S. LC Issuer), as the case may be, in the amount and currency of such required payment, and shall promptly give notice of such Loan to the applicable Borrower and the Administrative Agent (which shall promptly give similar notice to the other LC Lenders). Each Borrower agrees to accept each such Loan and irrevocably authorizes and directs the applicable LC Issuer to apply the proceeds of each such Loan in payment of the liability of such Borrower with respect to such required payment. Notwithstanding any other provision of this Agreement, all Loans made as contemplated by this subsection shall be payable on demand by the Administrative Agent or the applicable LC Issuer. (4) Each of the Cdn. LC Lenders, other than the Cdn. LC Issuer, agrees that it will purchase from the Cdn. LC Issuer, and the Cdn. LC Issuer shall sell to such Lenders, for cash, at par, without representation or warranty from or Recourse Against the Cdn. LC Issuer and irrespective of whether a Default or Event of Default has occurred and is continuing at the relevant time and irrespective of whether the Credit has been terminated or any acceleration of outstanding Accommodation has occurred pursuant to Section 9.02, pro rata based on their respective Cdn. LC Commitments, an undivided interest in any Prime Rate Loan or U.S. Base Rate Loan made by the Cdn. LC Issuer pursuant to subsection 2.06(3), immediately upon such Prime Rate Loan or U.S. Base Rate Loan being made, or if no such Loan has then been made an undivided interest in any reimbursement right of the Cdn. LC Issuer from the Cdn. Borrower pursuant to subsection 2.06(3) for any payment made by the Cdn. LC Issuer pursuant to a Letter of Credit immediately on request by the Cdn. LC Issuer. Each of the U.S. LC Lenders, other than the U.S. LC Issuer, agrees that it will purchase from the U.S. LC Issuer, and the U.S. LC Issuer shall sell to such Lenders, for cash, at par, without representation or warranty from or Recourse Against the U.S. LC Issuer and irrespective of whether a Default or Event of Default has occurred and is continuing at the relevant time and irrespective of whether the Credit has been terminated or any acceleration of outstanding Accommodation has occurred pursuant to Section 9.02, pro rata based on their respective U.S. LC Commitments, an undivided interest in any U.S. Reference Rate Loan made by the U.S. LC Issuer pursuant to 70 SECTION 2.06 - 62 - subsection 2.06(3), immediately upon such U.S. Reference Rate Loan being made, or if no such Loan has then been made an undivided interest in any reimbursement right of the U.S. LC Issuer from the U.S. Borrower pursuant to subsection 2.06(3) for any payment made by the U.S. LC Issuer pursuant to a Letter of Credit immediately on request by the U.S. LC Issuer. The Administrative Agent, upon consultation with the applicable Lenders, shall have the power to settle any documentation required to evidence any such purchase and, if deemed advisable by the Administrative Agent, to execute any document as attorney for any Lender in order to complete any such purchase. The Borrowers and the Lenders acknowledge that the foregoing arrangements are to be settled by the applicable LC Issuer and the applicable LC Lenders among themselves, and the Borrowers expressly consent to the foregoing arrangements among the LC Issuers and the LC Lenders. (5) If any Letter of Credit is outstanding on the Maturity Date or at any time that an Event of Default occurs or that a domestic or foreign court issues any judgement or order restricting or prohibiting payment by the applicable LC Issuer under such Letter of Credit or extending the liability of such LC Issuer to make payment under such Letter of Credit beyond the expiry date specified in such Letter of Credit, the applicable Borrower shall immediately, in the case of any Letter of Credit outstanding on the Maturity Date, and otherwise immediately upon demand by the Administrative Agent, pay to the Administrative Agent, for the account of such LC Issuer, funds in the currency of such Letter of Credit and in the amount of the Accommodation constituted by such Letter of Credit. Such funds (together with interest on such funds) shall be held by the Administrative Agent, subject to Section 9.03, for payment of the liability of such Borrower pursuant to subsection 2.06(3) or otherwise in respect of such Letter of Credit so long as such LC Issuer has or may in any circumstance have any liability under such Letter of Credit, and shall bear interest for such terms as are selected from time to time by the Administrative Agent at the wholesale money market rate of the Administrative Agent for deposits of similar currency, amounts and maturities. Any balance of such funds and interest remaining at such time as the applicable LC Issuer does not have and may never have any liability under such Letter of Credit shall nevertheless continue to be held by the Administrative Agent, if and so long as any Event of Default is continuing, as security for the remaining liabilities of such Borrower under the Credit Documents. (6) Each Borrower agrees that neither LC Issuer nor any LC Lender nor any of their respective officers, directors or correspondents shall assume liability for, or be responsible for, the use which may be made of any Letter of Credit; any acts or omissions of the beneficiary of any Letter of Credit including the application of any payment made to such beneficiary; the form, validity, sufficiency, correctness, genuineness or legal effect of any document or instrument relating to any Letter of Credit, even if such document or instrument should in fact prove to be in any respect invalid, insufficient, inaccurate, fraudulent or forged; payment by an LC Issuer of any draft which does not comply with the terms of any Letter of Credit, unless such payment results from the gross negligence or wilful misconduct of such LC Issuer; the failure of any 71 SECTION 2.06 - 63 - document or instrument to bear any reference or adequate reference to any Letter of Credit; any failure to note the amount of any draft on any Letter of Credit or on any related document or instrument; any failure of the beneficiary of any Letter of Credit to meet the obligations of such beneficiary to any Borrower or any other Person; any errors, inaccuracies, omissions, interruptions or delays in transmission or delivery of any messages, directions or correspondence by mail, facsimile or otherwise, whether or not they are in cipher; any inaccuracies in the translation of any messages, directions or correspondence or for errors in the interpretation of any technical terms; or any failure by an LC Issuer to make payment under any Letter of Credit as a result of any law, control or restriction rightfully or wrongfully exercised or imposed by any Governmental Authority or as a result of any other cause beyond the control of such LC Issuer or its officers, directors or correspondents. (7) The obligations of the Borrowers under this Section with respect to any Letter of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under all circumstances including, without limitation, any matter referred to in subsection 2.06(5); any invalidity of any obligation secured by any Letter of Credit; any incapacity, disability or lack or limitation of status or of power of a Borrower or the beneficiary of any Letter of Credit; any lack of validity or enforceability of any Letter of Credit; the existence of any claim, set-off, defense or other right which a Borrower or any other Restricted Party or any of their Affiliates may have at any time against an LC Issuer, the Administrative Agent, the Other Agents, any Lender, the beneficiary of any Letter of Credit or any other Person; or any breach of contract or other dispute between a Borrower or any other Restricted Party or any of their Affiliates and an LC Issuer, the Administrative Agent, the Other Agents, any Lender, the beneficiary of any Letter of Credit or any other Person. (8) An LC Issuer may accept as complying with the terms of any Letter of Credit any document or instrument required by such Letter of Credit to be completed, signed, presented or delivered by or on behalf of any beneficiary under such Letter of Credit which 72 SECTION 2.06 - 64 - has been completed, signed, presented or delivered by a receiver, trustee in bankruptcy, assignee for the benefit of creditors, secured party or other like person believed in good faith by such LC Issuer to be lawfully entitled to the property of such beneficiary, and such LC Issuer may make payments under such Letter of Credit to such Person. The provisions of this subsection are for the sole benefit of the LC Issuers, the Administrative Agent and the Lenders, and may not be relied on by any other Person. (9) Each Letter of Credit, except as specifically provided in such Letter of Credit, and subject to any provision of this Agreement to the contrary, shall be subject to the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce current at the time of issuance of such Letter of Credit. (10) For the purpose of calculating the Undisbursed Credit, any applicable Undisbursed Commitment or the Undisbursed LC Line and for any other relevant provision of this Agreement, the amount of Accommodation constituted by any Letter of Credit shall be the maximum amount in U.S. Dollars (for which purpose any amount payable in a currency other than U.S. Dollars shall be deemed to be the Equivalent Amount of U.S. Dollars) which the applicable LC Issuer may in all circumstances be required to pay pursuant to the terms of such Letter of Credit. In addition, for the purpose of calculating the principal amount of outstanding Accommodation that has been made available at any time by any LC Lender (including any LC Issuer in its capacity as an LC Lender), each Letter of Credit issued by the Cdn. LC Issuer shall be deemed to have been made available by the Cdn. LC Lenders pro rata based on their respective Cdn. LC Commitments and each Letter of Credit issued by the U.S. LC Issuer shall be deemed to have been made available by the U.S. LC Lenders pro rata based on their respective U.S. LC Commitments. 1.027 OVERDRAFTS UNDER THE OPERATING LINES (1) The Cdn. Borrower shall open a Cdn. Dollar operating account and a U.S. Dollar operating account with the Cdn. Operating Lender. Subject to the limitations set forth in this Agreement, the Cdn. Borrower shall be entitled to obtain Prime Rate Loans under the Cdn. Operating Line by way of overdraft in such Cdn. Dollar operating account and to obtain U.S. Base Rate Loans by way of overdraft under the Cdn. Operating Line in such U.S. Dollar operating account. The aggregate amount of all cheques drawn on such Cdn. Dollar operating account and honoured by the Cdn. Operating Lender on each day together with the aggregate amount of all other withdrawals debited to such account during such day, net of the credit balance of such account at the beginning of such day (if any) and all deposits or credits to such account during such day, shall be deemed to be a Prime Rate Loan by way of overdraft made by the Cdn. Operating Lender to the Cdn. Borrower under the Cdn. Operating Line on such day. The aggregate amount of all cheques drawn on such U.S. Dollar operating account and honoured by the Cdn. Operating Lender on each day together with the aggregate amount of all other 73 SECTION 2.07 - 65 - withdrawals debited to such account during such day, net of the credit balance of such account at the beginning of such day (if any) and all deposits or credits to such account during such day, shall be deemed to be a U.S. Base Rate Loan by way of overdraft made by the Cdn. Operating Lender to the Cdn. Borrower under the Cdn. Operating Line on such day. (2) The U.S. Borrower shall open a U.S. Dollar operating account with each of the U.S. Operating Lenders. Subject to the limitations set forth in this Agreement, the U.S. Borrower shall be entitled to obtain U.S. Reference Rate Loans by way of overdraft under each of the U.S. Operating Lines in such U.S. Dollar operating account maintained with the applicable U.S. Operating Lender. The aggregate amount of all cheques drawn on any such U.S. Dollar operating account and honoured by the applicable U.S. Operating Lender on each day together with the aggregate amount of all other withdrawals debited to such account during such day, net of the credit balance of such account at the beginning of such day (if any) and all deposits or credits to such account during such day, shall be deemed to be a U.S. Reference Rate Loan by way of overdraft made by such U.S. Operating Lender to the U.S. Borrower under the U.S. Operating Line from such U.S. Lender on such day. 1.028 LENDERS' ACCOUNTS (1) Each Lender will open and maintain an account or accounts evidencing (i) the indebtedness and obligations of the applicable Borrower to such Lender under this Agreement in respect of outstanding Accommodation and accrued interest, fees and other amounts payable under this Agreement, (ii) the types of Accommodation outstanding from such Lender to the applicable Borrower from time to time and the date or dates on which such Accommodation was made available to such Borrower, and (iii) the amounts from time to time paid by such Borrower to such Lender under this Agreement on account of Accommodation, interest, fees and other amounts. Each Borrower acknowledges, confirms and agrees that all such accounts kept by the Lenders will constitute prima facie evidence of the matters referred to above; provided, however, that the failure of any Lender to make any entry or recording in any such account shall not limit or otherwise affect the obligations of any Borrower under this Agreement or with respect to any Accommodation, interest, fees or other amounts owed to such Lender. (2) The Administrative Agent will maintain a register (the "REGISTRY OF COMMITMENTS") on which the Administrative Agent will record the nature and amount of all Commitments from time to time of each of the Lenders, the Accommodation made from time to time by each of the Lenders (other than the Operating Lenders) and each repayment in respect of the principal amount of such Accommodation of each such Lender (other than the Operating Lenders). The Administrative Agent will open the Registry of Commitments on the date of this Agreement and will enter into and record on the Registry of Commitments on such date the Commitments of all of the Lenders as set forth in Schedules 1 and 27 and the Commitments of each of the Operating Lenders on the date of this Agreement. Thereafter the Administrative 74 SECTION 2.08 - 66 - Agent will enter into and record on the Registry of Commitments any and all changes to the Commitments of any one or more Lenders made pursuant to the provisions of this Agreement, the addition of new Lenders and the removal of Lenders as a result of assignments and transfers made pursuant to Section 12.01 and all assignments and transfers of Commitments made pursuant to Section 12.01. Failure to make any such recordation, or any error in such recordation shall not affect either of the Borrower's obligations in respect of any Accommodation or otherwise under or in respect of any Credit Document. The transfer of any Commitment of any Lender and the rights to the principal of, interest on and fees with respect to any Accommodation outstanding pursuant to such Commitment shall not be effective as between any Borrower, the Administrative Agent and the transferee until such transfer is recorded on the Registry of Commitments. The registration of any assignment or transfer of any Commitment and Accommodation outstanding thereunder shall be recorded by the Administrative Agent on the Registry of Commitments only upon the acceptance by the Administrative Agent of a properly executed and delivered Undertaking and a properly executed and delivered assignment and assumption agreement pursuant to paragraph 12.01(b)(iii). The Borrowers agree to indemnify and save harmless the Administrative Agent from and against any losses, claims, damages and liabilities of whatsoever nature which may be imposed on, served against or incurred by the Administrative Agent in performing its duties under this subsection. In the event of any conflict between the Registry of Commitments and any account maintained by any Lender pursuant to subsection 2.08(1), the Registry of Commitments shall prevail. Each of the Borrower's designates the Administrative Agent to also serve as such Borrower's agent solely for the purposes of this subsection for the purpose of maintaining the Registry of Commitments. 1.029 LIBOR LOANS (1) Each LIBOR Loan shall be U.S. $100,000 or any whole multiple of U.S. $100,000, and the aggregate amount of all LIBOR Loans advanced pursuant to any Notice of Borrowing under any Tranche or Tranches shall not be less than the applicable amounts set forth in Schedule 12 with respect to such Tranche or Tranches. (2) The aggregate face amount of LIBOR Loans from a Lender on any Borrowing Date shall be determined by the Administrative Agent based upon the amounts of the respective Commitments under the Tranche or Tranches under which such LIBOR Loans are being made, except that, if the amount of any LIBOR Loan to be made by a Lender, determined as provided for above, would not be U.S. $100,000 or a whole multiple of U.S. $100,000, the Administrative Agent in its sole discretion may increase such face amount to the nearest whole multiple of U.S. $100,000 or may reduce such face amount to the nearest whole multiple of U.S. $100,000. 75 SECTION 2.10 - 67 - 1.201 OPTIONAL REDUCTION OF LIMIT OF TRANCHES The Cdn. Borrower shall have the right at any time and from time to time, on behalf of the Borrowers, upon not less than 30 days prior written notice to the Administrative Agent, to permanently reduce the limit of any Tranche (provided that in the case of any of Tranches 1, 2 and 3 such reduction must be made pro rata among all such Tranches then in effect) (and accordingly the limit of each Commitment under such Tranche) by all or any part of the Undisbursed Tranche of such Tranche; provided, however, that no such reduction of the limit of a Tranche shall be in (x) an aggregate amount less than U.S. $1,000,000 (or the entire amount of such Tranche if lesser), or (y) an aggregate amount in excess of U.S. $1,000,000 which is not a whole multiple of U.S. $100,000 (or the entire amount of such Tranche if lesser). 1.21 CERTAIN PRE-EXISTING ACCOMMODATION (1) From and after the Closing Date: (a) Pre-existing BA Equivalent Notes: Each Pre-existing BA Equivalent Note shall be, and shall be deemed for all purposes to be, a BA Equivalent Note purchased from the Cdn. Borrower by the applicable Pre-existing Accommodation Lender indicated in Schedule 8, and outstanding, under this Agreement under the applicable Tranche specified in Schedule 8 as being applicable to such Pre-existing BA Equivalent Note; (b) Pre-existing BAs: Each Pre-existing BA shall be, and shall be deemed for all purposes to be, a Bankers' Acceptance accepted by the applicable Pre-existing Accommodation Lender indicated in Schedule 8 for the account of the Cdn. Borrower, and outstanding, under this Agreement under the applicable Tranche specified in Schedule 8 as being applicable to such Pre-existing BA; (c) Pre-existing LCs: Each Pre-existing LC shall be, and shall be deemed for all purposes (including for the purposes of Sections 2.06 and 3.10) to be, (a) in the case of any such Pre-existing LC issued by the Cdn. LC Issuer, a Letter of Credit issued by the Cdn. LC Issuer on behalf of the Cdn. LC Lenders for the account of the Cdn. Borrower, and outstanding, under this Agreement under the LC Line, (b) in the case of any such Pre-existing LC issued by the U.S. LC Issuer, a Letter of Credit issued by the U.S. LC Issuer on behalf of the U.S. LC Lenders for the account of the U.S. Borrower, and outstanding, under this Agreement under the LC Line, (c) in the case of any such Pre-existing LC issued by the Cdn. Operating Lender, a Letter of Credit from the Cdn. Operating Lender issued for the account of the Cdn. Borrower, and outstanding, under this Agreement under the Cdn. Operating Line, and (d) in the case of any such Pre-existing LC issued by a U.S. 76 SECTION 2.11 - 68 - Operating Lender, a Letter of Credit from such U.S. Operating Lender issued for the account of the U.S. Borrower, and outstanding, under this Agreement under the U.S. Operating Line from such U.S. Operating Lender; (d) Pre-existing LIBOR Loans: Each Pre-existing LIBOR Loan shall be, and shall be deemed for all purposes to be, a LIBOR Loan made by the applicable Pre-existing Accommodation Lender indicated in Schedule 8 to the applicable Borrower indicated in Schedule 8, and outstanding, under this Agreement under the applicable Tranche specified in Schedule 8 as being applicable to such Pre-existing LIBOR Loan; (e) Pre-existing Prime Rate Overdraft Loans: Each Pre-existing Prime Rate Overdraft Loan shall be, and shall be deemed for all purposes to be, a Prime Rate Loan made by the Cdn. Operating Lender by way of overdraft to the Cdn. Borrower, and outstanding, under this Agreement under the Cdn. Operating Line; (f) Pre-existing U.S. Base Rate Overdraft Loans: Each Pre-existing U.S. Base Rate Overdraft Loan shall be, and shall be deemed for all purposes to be, a U.S. Base Rate Loan made by the Cdn. Operating Lender by way of overdraft to the Cdn. Borrower, and outstanding, under this Agreement under the Cdn. Operating Line; (g) Pre-existing U.S. Reference Rate Overdraft Loans: Each Pre-existing U.S. Reference Rate Overdraft Loan from a U.S. Operating Lender shall be, and shall be deemed for all purposes to be, a U.S. Reference Rate Loan made by such U.S. Operating Lender by way of overdraft to the U. S. Borrower, and outstanding, under this Agreement under the U.S. Operating Line from such U.S. Operating Lender; and (h) Pre-existing Accommodation: All of the Pre-existing Accommodation (a) will constitute outstanding indebtedness and liabilities of the applicable Borrower to the applicable Pre-existing Accommodation Lender in its capacity as a Lender under this Agreement, (b) will be subject to all of the terms and provisions of this Agreement and any other applicable Credit Documents including, without limitation, in the case of Pre-existing LIBOR Loans, Pre-existing Prime Rate Overdraft Loans, Pre-existing U.S. Base Rate Overdraft Loans and Pre-existing U.S. Reference Rate Overdraft Loans the payment of interest from and after the Closing Date at the rates, in the manner and at the times provided for in this Agreement, and (c) will be secured by the Security. (2) Each of the Borrowers acknowledges to and agrees with each of the applicable Pre-existing Accommodation Lenders that each such Borrower is indebted to each such Pre- 77 SECTION 2.11 - 69 - existing Accommodation Lender for, and agrees to pay to each such Pre-existing Accommodation Lender on the first interest payment date under Article Three following the Closing Date, all interest which is, at the Closing Date, accrued and unpaid under the Existing Philip Bank Credit Agreement in respect of the Pre-existing LIBOR Loans, Pre-existing Prime Rate Overdraft Loans, Pre-existing U.S. Base Rate Overdraft Loans and Pre-existing U.S. Reference Rate Overdraft Loans outstanding from such Lender to such Borrower. (3) All of the provisions of Section 2.06 and subsection 5.05(2) shall apply to each of the Pre-existing LCs as if reference in such Section to the LC Issuer were deemed to be reference to the applicable Pre-existing Accommodation Lender and, with respect to the Cdn. Operating Lender and each U.S. Operating Lender in their capacities as Pre-existing Accommodation Lenders, reference in such Section to the LC Line was deemed to be reference to the Cdn. Operating Line or the applicable U.S. Operating Line, as the case may be. For greater certainty, Pre-existing LCs from the Cdn. Operating Lender and the U.S. Operating Lenders may not be renewed but will, on expiry, be replaced by a new Letter of Credit issued by the applicable LC Issuer under the LC Line. The Cdn. Borrower, the Cdn. Operating Lender, the U.S. Operating Lenders and the LC Lenders will co-operate with a view to replacing all Pre-existing LCs from the Cdn. Operating Lender and the U.S. Operating Lenders as soon as possible following the Closing Date (in a manner which will not cause duplication of Letters of Credit or inconvenience to the Borrowers) with new Letters of Credit issued by the LC Issuers under the LC Line. (4) Notwithstanding any other provision of this Agreement which would require that Borrowings be made on a pro rata basis by any Lenders or group or groups of Lenders, (a) each of the Pre-existing Accommodation Lenders, subject to subsection 2.11(3), will continue to hold after the Closing Date, until their respective maturity or expiry dates, all Pre-existing Accommodation held by such Lenders on the Closing Date, (b) subject to clause (c) of this subsection and to the limit of each Lender's applicable Commitment, all new Borrowings under this Agreement will be made pro rata by the applicable Lenders or group or groups of Lenders as otherwise required under this Agreement without regard to the Pre-existing Accommodation held by any such Lenders, and (c) the Administrative Agent may from time to time in its discretion adjust the manner in which any Lenders or group or groups of Lenders share in any new Borrowings under this Agreement having regard to the outstanding Pre-existing Accommodation at such time and with a view to ensuring that all applicable Lenders or groups of Lenders hold outstanding Accommodation as soon as possible after the Closing Date on a pro rata basis as contemplated under the other provisions of this Agreement. ARTICLE THREE INTEREST AND FEES 78 SECTION 3.01 - 70 - 1.031 LOANS Each Prime Rate Loan, U.S. Base Rate Loan, U.S. Reference Rate Loan and LIBOR Loan, as the case may be, under the Credit shall bear interest, in the case of Prime Rate Loans, U.S. Base Rate Loans and U.S. Reference Rate Loans, from the Borrowing Date for such Loan to the date of repayment of such Loan and, in the case of LIBOR Loans, during each LIBOR Period applicable to such Loan, on the unpaid amount of such Loan calculated (but not compounded) daily at a nominal rate per annum for each such Loan equal to the Applicable Reference Rate for such type of Loan in effect from time to time plus an additional pricing adjustment (the "APPLICABLE INTEREST PRICING ADJUSTMENT") determined in accordance with the provisions of this Section. On the date of this Agreement the Applicable Interest Pricing Adjustment under this Section for Prime Rate Loans, U.S. Base Rate Loans and U.S. Reference Rate Loans is 25 bps and the Applicable Interest Pricing Adjustment under this Section for LIBOR Loans is 125 bps. The Applicable Interest Pricing Adjustment for each type of Loan will change based on changes to the Debt to EBITDA Pricing Adjustment Ratio. The Applicable Interest Pricing Adjustment for each type of Loan will be reset (a) on September 1, 1997 to that amount indicated below as applying to such type of Loan where the Debt to EBITDA Pricing Adjustment Ratio on such day is as set forth below, and (b) on each Pricing Adjustment Date which occurs on or after January 1, 1998 to that amount indicated below as applying to such type of Loan where the Debt to EBITDA Pricing Adjustment Ratio on such Pricing Adjustment Date is as set forth below: DEBT TO PRIME RATE U.S. BASE U.S. REFERENCE LIBOR LOANS EBITDA PRICING LOANS RATE LOANS RATE LOANS ADJUSTMENT RATIO Prime U.S. Base U.S. Reference LIBOR + Rate + Rate + Rate + < 2.0:1 0 bps 0 bps 0 bps 45 bps < 2.5:1 0 bps 0 bps 0 bps 60 bps < 3.0:1 0 bps 0 bps 0 bps 75 bps < 3.5:1 0 bps 0 bps 0 bps 95 bps < 4.0:1 25 bps 25 bps 25 bps 125 bps = or > 4.0:1 37.5 bps 37.5 bps 37.5 bps 137.5 bps
1.032 OVERDUE PRINCIPAL AND INTEREST (1) If all or part of any Prime Rate Loan, U.S. Base Rate Loan or U.S. Reference Rate Loan shall not be paid when due (whether at its stated maturity, by acceleration or otherwise), such overdue amount shall bear interest (as well after as before judgment), payable on demand, at a rate per annum equal to the rate of interest applicable under this Agreement from time to time to such Loan from the date of such non-payment until paid in full. If any LIBOR Loan shall not 79 SECTION 3.02 - 71 - be paid when due (whether at its stated maturity, by acceleration or otherwise), such amount shall bear interest (as well after as before judgment), payable on demand, at a rate per annum equal to the rate of interest applicable under this Agreement from time to time to: (a) U.S. Base Rate Loans in the case of any LIBOR Loan under Tranche 1 or the Cdn. Operating Line or any LIBOR Loan from a Cdn. Cross Border Lender under Tranche 2; and (b) U.S. Reference Rate Loans in the case of any LIBOR Loan under Tranche 3 or either U.S. Operating Line or any LIBOR Loan from a U.S. Cross Border Lender under Tranche 2; in each case from the date of such non-payment until paid in full. (2) If all or part of any interest in respect of any Prime Rate Loan, U.S. Base Rate Loan or U.S. Reference Rate Loan shall not be paid when due (whether at its stated maturity, by acceleration or otherwise), such overdue interest shall, to the extent permitted by law, bear interest (as well after as before judgment), payable on demand, at a rate per annum equal to the rate of interest applicable under this Agreement from time to time to the type of Loan in respect of which such interest was not paid from the date of such non-payment until paid in full. If all or part of any interest in respect of any LIBOR Loan shall not be paid when due (whether at its stated maturity, by acceleration or otherwise), such overdue interest shall bear interest (as well after as before judgment), payable on demand, at a rate per annum equal to the rate of interest applicable under this Agreement from time to time to: (a) U.S. Base Rate Loans in the case of overdue interest on any LIBOR Loan under Tranche 1 or the Cdn. Operating Line or any LIBOR Loan from a Cdn. Cross Border Lender under Tranche 2; and (b) U.S. Reference Rate Loans in the case of overdue interest on any LIBOR Loan under Tranche 3 or either U.S. Operating Line or any LIBOR Loan from a U.S. Cross Border Lender under Tranche 2; in each case from the date of such non-payment until paid in full. 1.033 INTEREST ON OTHER AMOUNTS If any amount owed by a Restricted Party to the Administrative Agent or to any Lender under any of the Credit Documents is not paid when due and payable, and there is no other provision in any Credit Document specifying the interest payable on such overdue amount, such overdue amount shall bear interest (as well after as before judgement), payable (a) on demand in 80 SECTION 3.03 - 72 - Cdn. Dollars at a rate per annum equal at all times to the Prime Rate plus 2% (in the case of any such amount payable in Cdn. Dollars), or (b) on demand in U.S. Dollars at a rate per annum equal at all times to the U.S. Base Rate plus 2% (in the case of any such amount payable in U.S. Dollars to the Administration Agent, a Cdn. Only Lender, a Cdn. Cross Border Lender, the Cdn. Operating Lender or a Cdn. LC Lender) or the U.S. Reference Rate plus 2% (in the case of any such amount payable in U.S. Dollars to a U.S. Only Lender, a U.S. Cross Border Lender, either U.S. Operating Lender or a U.S. LC Lender), in each such case from the date of non-payment until paid in full (which rate per annum, in each case, shall change automatically without notice to the Restricted Parties as and when the Prime Rate or the U.S. Base Rate or the U.S. Reference Rate, as the case may be, shall change so that at all times the interest payable under this Section shall be based on the Prime Rate or the U.S. Base Rate or the U.S. Reference Rate, as the case may be, then in effect). 1.034 INTEREST PAYMENT DATES (1) Except as specified in subsections 3.02(1) and (2), interest in respect of Prime Rate Loans, U.S. Base Rate Loans and U.S. Reference Rate Loans shall be payable in arrears on the first Business Day in each month with respect to interest which has accrued to and including the last day of the immediately preceding month. (2) Except as specified in subsection 3.02(2), interest in respect of each LIBOR Loan shall be payable on the last day of each LIBOR Period applicable to such LIBOR Loan and also, with respect to each LIBOR Period of a term longer than three months, at the end of each three-month period included in such LIBOR Period. 1.035 LIBOR PERIOD DETERMINATION Each Borrower shall select the term of each LIBOR Period with respect to each LIBOR Loan made or to be made available to it by telephone notice (to be confirmed the same day by way of a Notice of Conversion/Renewal) or facsimile received by the Administrative Agent not later than 10:00 a.m. on the third Business Day prior to the commencement of such LIBOR Period. The first LIBOR Period for any LIBOR Loan shall commence on (and include) the Borrowing Date for such LIBOR Loan, and each LIBOR Period occurring after such first LIBOR Period for such LIBOR Loan shall commence on (and include) the last day of the immediately preceding LIBOR Period for such LIBOR Loan. In each case, a LIBOR Period shall end on the day in the last calendar month included in such Libor Period that numerically corresponds to the first day of such LIBOR Period. Notwithstanding the foregoing: (a) If the Administrative Agent shall not have received due notice of renewal of the LIBOR Period with respect to any outstanding LIBOR Loan in accordance with the first sentence of this Section, or if a Default or Event of Default is continuing 81 SECTION 3.05 - 73 - the expiry of any LIBOR Period with respect to any outstanding LIBOR Loan, such LIBOR Loan shall be automatically converted on the expiry of such existing LIBOR Period to: (i) a U.S. Base Rate Loan under the same Tranche as the Tranche under which such LIBOR Loan was outstanding in the case of any LIBOR Loan under Tranche 1 or the Cdn. Operating Line or any LIBOR Loan from a Cdn. Cross Border Lender under Tranche 2; or (ii) a U.S. Reference Rate Loan under the same Tranche as the Tranche under which such LIBOR Loan was outstanding in the case of any LIBOR Loan under Tranche 3 or either U.S. Operating Line or any LIBOR Loan from a U.S. Cross Border Lender under Tranche 2. (b) Any LIBOR Period that begins on the last Business Day in a calendar month, or on a day for which there is no numerically corresponding day in the calendar month in which such LIBOR Period would otherwise end, shall end on the last Business Day in the calendar month in which such LIBOR Period would otherwise end. (c) If any LIBOR Period would otherwise end on a day which is not a Business Day, such LIBOR Period shall end on the next succeeding Business Day, provided, however, that if such next succeeding Business Day falls in the next calendar month, such LIBOR Period shall end on the next preceding Business Day. (d) No LIBOR Period may extend beyond the Maturity Date. (e) The number of different LIBOR Periods for all LIBOR Loans outstanding at any time under Tranches 1, 2 and 3 shall not exceed 100 less the number of maturity dates for all Bankers' Acceptances and BA Equivalent Notes outstanding at that time under such Tranches, and there shall not at any time be more than that number of different LIBOR Periods for all LIBOR Loans outstanding at that time under an Operating Line as may have been agreed to prior to such time by the applicable Borrower and Operating Lender under such Operating Line. 1.036 FAILURE OF THE LIBOR If at any time a Lender (or in the case of clause (i) below and any Lender under Tranche 1, 2 or 3, the Administrative Agent) shall determine (which determination shall be conclusive and binding) that by reason of circumstances affecting the London interbank market or any other relevant financial market or the position of such Lender (or in the case of clause (i) below and 82 SECTION 3.06 - 74 - any Lender under Tranche 1, 2 or 3, the Administrative Agent) in any such market (i) adequate and reasonable means do not exist for ascertaining the LIBOR to be applicable during any LIBOR Period, or (ii) the LIBOR does not adequately reflect the effective cost to such Lender of the funds to be used by it to make or continue the applicable LIBOR Loan for any LIBOR Period, or (iii) U.S. Dollars in the amount of the applicable LIBOR Loan are not readily available to such Lender for any LIBOR Period in the London interbank market, then such Lender shall give notice of such event (by telephone to be confirmed the same day in writing) or by facsimile to the applicable Borrower and the Administrative Agent (which shall promptly give a copy of such notice to the other Lenders). On the last day of the LIBOR Period then applicable to each such LIBOR Loan, the interest on each LIBOR Loan then outstanding from such Lender as a LIBOR Loan shall cease to be calculated under this Agreement on the basis of the LIBOR and shall commence to be calculated under this Agreement on the basis of: (a) the U.S. Base Rate in the case of any such LIBOR Loan under Tranche 1 or the Cdn. Operating Line or any such LIBOR Loan from a Cdn. Cross Border Lender under Tranche 2; or (b) the U.S. Reference Rate in the case of any such LIBOR Loan under Tranche 3 or either U.S. Operating Line or any such LIBOR Loan from a U.S. Cross Border Lender under Tranche 2. Any Notice of Borrowing which has been delivered to such Lender requesting a LIBOR Loan on a Borrowing Date on or subsequent to such notification date shall be deemed to request: (a) a U.S. Base Rate Loan in the same amount in the case of any such LIBOR Loan under Tranche 1 or the Cdn. Operating Line or any such LIBOR Loan from a Cdn. Cross Border Lender under Tranche 2; or (b) a U.S. Reference Rate Loan in the same amount in the case of any such LIBOR Loan under Tranche 3 or either U.S. Operating Line or any such LIBOR Loan from a U.S. Cross Border Lender under Tranche 2. The Borrowers shall not be entitled to obtain any LIBOR Loan from such Lender so long as any such condition shall continue to exist, and any Loan that would otherwise have been made by such Lender as a LIBOR Loan shall instead be made by such Lender as: (a) a U.S. Base Rate Loan in the same amount in the case of any such LIBOR Loan under Tranche 1 or the Cdn. Operating Line or any such LIBOR Loan from a Cdn. Cross Border Lender under Tranche 2; or 83 SECTION 3.06 - 75 - (b) a U.S. Reference Rate Loan in the same amount in the case of any such LIBOR Loan under Tranche 3 or either U.S. Operating Line or any such LIBOR Loan from a U.S. Cross Border Lender under Tranche 2. 1.037 DETERMINATION OF RATES AND BASIS OF CALCULATION OF INTEREST (1) The BA Discount Rate, Federal Funds Rate, LIBOR, Prime Rate, U.S. Base Rate and U.S. Reference Rate shall be determined by the Administrative Agent whenever such determination is required for any purpose of this Agreement, and such determination by the Administrative Agent, and each determination by a Lender of a rate to be notified to the Administrative Agent pursuant to the definition of "BA Discount Rate" in Section 1.01, or in connection with any rates or fees applicable to any Operating Line, shall be prima facie evidence of such rate. The Administrative Agent shall, at the request of either Borrower, promptly notify such Borrower of any of the rates notified to the Administrative Agent by the Lenders with respect to the "BA Discount Rate" or any Operating Line. (2) All interest in respect of Prime Rate Loans shall be payable in Cdn. Dollars and all interest in respect of U.S. Base Rate Loans, U.S. Reference Rate Loans and LIBOR Loans shall be payable in U.S. Dollars. (3) In calculating interest or fees payable under this Agreement for any period, unless otherwise specifically stated, the first day of such period shall be included and the last day of such period shall be excluded. 1.038 MAXIMUM RETURN Notwithstanding any provision of this Agreement, in no event shall the aggregate "interest" (as defined in section 347 of the Criminal Code (Canada)) payable under this Agreement exceed the effective annual rate of interest on the "credit advanced" (as defined in that section) under this Agreement lawfully permitted by that section, nor shall the interest payable under this Agreement exceed the rate of interest which may be lawfully charged under this Agreement by any other Applicable Law having application to interest payable under this Agreement, and, if any payment, collection or demand pursuant to this Agreement in respect of "interest" (as defined in that section) or under any such other Applicable Law is determined to be contrary to the provisions of that section or such other Applicable Law, such payment, collection or demand shall be deemed to have been made by mutual mistake of the applicable Borrower and the applicable Lender and the amount of such payment or collection shall be refunded to such Borrower. For the purposes of this Agreement, the effective annual rate of interest shall be determined in accordance with generally accepted actuarial practices and principles over the term of the Credit and, in the event of dispute, a certificate of a Fellow of the 84 SECTION 3.08 - 76 - Canadian Institute of Actuaries appointed by the Administrative Agent will be prima facie evidence of such rate. 1.039 FEES FOR BANKERS' ACCEPTANCES AND BA EQUIVALENT NOTES The Cdn. Borrower shall pay to each BA Lender in respect of each Draft tendered by such Borrower to and accepted by such BA Lender, and to each Non BA Lender in respect of each BA Equivalent Note tendered to and purchased by such Non BA Lender, as a condition of such acceptance or purchase, a fee in Cdn. Dollars calculated on the basis of the face amount and the term of such Bankers' Acceptance or BA Equivalent Note and at a rate per annum equal to the stamping fee (the "APPLICABLE STAMPING FEE") in effect on the date of such acceptance or purchase as determined in accordance with the provisions of this Section. On the date of this Agreement the Applicable Stamping Fee is 125 bps. The Applicable Stamping Fee will change based on changes to the Debt to EBITDA Pricing Adjustment Ratio. The Applicable Stamping Fee will be reset (a) on September 1, 1997 to that amount indicated below as applying where the Debt to EBITDA Pricing Adjustment Ratio on such day is as set forth below, and (b) on each Pricing Adjustment Date which occurs on or after January 1, 1998 to that amount indicated below as applying where the Debt to EBITDA Pricing Adjustment Ratio on such Pricing Adjustment Date is as set forth below: DEBT TO EBITDA PRICING ADJUSTMENT APPLICABLE STAMPING RATIO FEE < 2.0:1 45 bps < 2.5:1 60 bps < 3.0:1 75 bps < 3.5:1 95 bps < 4.0:1 125 bps = or > 4.0:1 137.5 bps
1.301 FEES FOR LETTERS OF CREDIT The applicable Borrower, in respect of each Letter of Credit to be issued or renewed by an LC Issuer under the LC Line, as a condition of such issuance or renewal: (a) shall pay to the applicable LC Issuer for its own account a fee (the "FRONTING FEE") in the currency of the Letter of Credit calculated at the rate of 0.125% per annum on the basis of the maximum amount and term of such Letter of Credit, and 85 SECTION 3.10 - 77 - (b) shall pay the Administrative Agent for the Ratable account of the applicable LC Lenders (including the applicable LC Issuer in its capacity as an LC Lender) a fee (the "ISSUANCE FEE") in the currency of the Letter of Credit calculated at a rate per annum equal to the rate (the "APPLICABLE LC FEE PRICING RATE") in effect on the date of such issuance or renewal, as the case may be, as determined in accordance with the provisions of this Section, on the basis of the maximum amount and term of such Letter of Credit. On the date of this Agreement the Applicable LC Fee Pricing Rate is 125 bps. The Applicable LC Fee Pricing Rate will change based on changes to the Debt to EBITDA Pricing Adjustment Ratio. The Applicable LC Fee Pricing Rate will be reset (a) on September 1, 1997 to that amount indicated below as applying where the Debt to EBITDA Pricing Adjustment Ratio on such day is as set forth below, and (b) on each Pricing Adjustment Date which occurs on or after January 1, 1998 to that amount indicated below as applying where the Debt to EBITDA Pricing Adjustment Ratio on such Pricing Adjustment Date is as set forth below: DEBT TO EBITDA APPLICABLE LC FEE PRICING ADJUSTMENT PRICING RATE RATIO < 2.0:1 45 bps < 2.5:1 60 bps < 3.0:1 75 bps < 3.5:1 95 bps < 4.0:1 125 bps = or > 4.0:1 137.5 bps
The Administrative Agent will promptly distribute the Issuance Fee among the applicable LC Lenders (including the applicable LC Issuer in its capacity as an LC Lender). For greater certainty, on the Closing Date, (a) the Cdn. Borrower shall pay to the Cdn. LC Issuer a Fronting Fee for each Pre-existing LC issued by the Cdn. LC Issuer calculated in the manner referred to above on the basis of the maximum amount and the balance of the term of such Pre-existing LC on such date, (b) the U.S. Borrower shall pay to the U.S. LC Issuer a Fronting Fee for each Pre-existing LC issued by the U.S. LC Issuer calculated in the manner referred to above on the basis of the maximum amount and the balance of the term of such Pre-existing LC on such date, and (c) each LC Issuer shall pay to the Administrative Agent for distribution to the applicable LC Lenders such LC Lenders' share of the Issuance Fee for each of the Pre-existing LCs calculated in the manner referred to above on the basis of the maximum amount and the balance of the term of such Pre-existing LC on such date. 86 SECTION 3.11 - 78 - 1.31 STANDBY FEE The Borrowers shall pay to the Administrative Agent for distribution to each Lender a standby fee in U.S. Dollars, for the period commencing on the Closing Date and ending on the Maturity Date (or on such earlier date as the Commitments are terminated), calculated on the daily amount of each Undisbursed Tranche at a rate per annum equal to the rate (the "APPLICABLE STANDBY FEE PRICING RATE") as determined in accordance with the provisions of this Section. On the date of this Agreement the Applicable Standby Fee Pricing Rate is 35 bps. The Applicable Standby Fee Pricing Rate will be reset (a) on September 1, 1997 to that amount indicated below as applying where the Debt to EBITDA Pricing Adjustment Ratio on such day is as set forth below, and (b) on each Pricing Adjustment Date which occurs on or after January 1, 1998 to that amount indicated below as applying where the Debt to EBITDA Pricing Adjustment Ratio on such Pricing Adjustment Date is as set forth below: DEBT TO EBITDA APPLICABLE STANDBY PRICING ADJUSTMENT FEE PRICING RATE RATIO < 2.0:1 15 bps < 2.5:1 20 bps < 3.0:1 25 bps < 3.5:1 30 bps < 4.0:1 35 bps = or > 4.0:1 40 bps
Accrued Standby fees shall be due and payable on the first Business Day of each Financial Quarter in respect of the immediately preceding Financial Quarter and on the Maturity Date (or with respect to any applicable Lender, on such earlier date as its Commitments are terminated). 1.32 AGENCY FEES In consideration of the Administrative Agent acting as agent under the Credit Documents, the Cdn. Borrower shall pay to the Administrative Agent an agency fee in an amount, and on the terms and conditions, set out in any agency fee letter from time to time entered into by the Administrative Agent and the Cdn. Borrower, or as otherwise agreed to in writing from time to time by the Administrative Agent and the Cdn. Borrower. All such written arrangements between the Administrative Agent and the Cdn. Borrower shall constitute Credit Documents. 87 SECTION 4.01 - 79 - ARTICLE FOUR REPAYMENT OF ACCOMMODATION 1.041 OPTIONAL REPAYMENT (1) Each Borrower shall have the right to repay from time to time on any Business Day (an "OPTIONAL REPAYMENT DATE") any Accommodation outstanding to it, without premium but subject to Section 5.05, on the terms and conditions that, except in the case of any repayments under an Operating Line which shall be subject to arrangements from time to time entered into between the Cdn. Borrower and the Cdn. Operating Lender and between the U.S. Borrower and each of the U.S. Operating Lenders: (a) such Borrower shall give to the Administrative Agent not less than 3 Business Days' irrevocable prior written notice (other than with respect to repayments by way of renewal or conversions of Accommodation which shall require the applicable notice for Borrowings referred to in Section 2.04) specifying the amount and the type of Accommodation to be repaid (which shall be the same type from each applicable Lender), the Tranche under which such Accommodation is outstanding, and the applicable Optional Repayment Date; (b) each repayment of Accommodation pursuant to this subsection shall be allocated (as to both amount, type, and applicable maturity, of Accommodation) to the Lenders under the applicable Tranche (or in the case of Tranches 1, 2 and 3 under all of such Tranches) having Commitments under such Tranche or Tranches, as the case may be, to the Borrower making the repayment on a Rateable basis; (c) the aggregate U.S. Dollar Amount of Accommodation repaid pursuant to this subsection at any time shall be not less than U.S. $10,000,000 or an amount in excess of U.S. $10,000,000 which is a whole multiple of U.S. $100,000 (or all Accommodation then outstanding under the applicable Tranche, if lesser); (d) no repayment of any LIBOR Loan shall be made otherwise than upon the expiration of a LIBOR Period applicable to such LIBOR Loan and no repayment of any Bankers' Acceptance or BA Equivalent Note shall be made otherwise than on the maturity date of such Bankers' Acceptance or BA Equivalent Note, as the case may be; and (e) on the applicable Optional Repayment Date such Borrower shall repay outstanding Accommodation in accordance with the notice given pursuant to clause (a) above and for such purpose shall pay to the Administrative Agent the 88 SECTION 4.01 - 80 - amount of any Loans, Bankers' Acceptances and BA Equivalent Notes included in such repayment together with all interest and other fees and other amounts accrued and unpaid under this Agreement, and any amounts payable under Section 5.05, with respect to any such Accommodation that is repaid. For greater certainty, however, a repayment of outstanding Accommodation under a Tranche pursuant to this subsection shall not reduce the limit of such Tranche then in effect and additional Accommodation may from time to time be obtained by the Borrowers under such Tranche in accordance with and subject to the applicable provisions of this Agreement. (2) The Administrative Agent shall promptly notify the applicable Lenders of any proposed repayment of Accommodation pursuant to subsection 4.01(1) and the amount and type of such Accommodation to be repaid to each such Lender. The amount received by the Administrative Agent in respect of any Loans, Bankers' Acceptances and BA Equivalent Notes included in the repayment shall be distributed by the Administrative Agent to the applicable Lenders on a Rateable basis and any accrued and unpaid interest, fees and other amounts (other than amounts payable under Section 5.05 which shall be for the account of the Lender entitled to the same) received by the Administrative Agent with respect thereto shall be distributed by the Administrative Agent to the applicable Lenders on the basis of their respective entitlements thereto. 1.042 MANDATORY REPAYMENT Each Borrower shall repay all Accommodation outstanding to it, together with all accrued interest, fees and other amounts then unpaid by it with respect to such Accommodation and the Credit, on the Maturity Date, and the Credit and all of the Commitments shall be automatically terminated on the Maturity Date. 1.043 SURPLUS ADDITIONAL DEBT AND COMMITMENTS If: (a) the Cdn. Borrower does not have an Investment Grade Rating on the date that any Surplus Additional Debt and Commitments is assumed, created or otherwise arises; or (b) the Cdn. Borrower has an Investment Grade Rating on the date that any Surplus Additional Debt and Commitments is assumed, created or otherwise arises but loses such Investment Grade Rating within the period of 90 days following such date; 89 SECTION 4.03 - 81 - (the date on which such Surplus Additional Debt and Commitments is assumed, created or otherwise arises as described in subsection (a) of this Section or the date on which the Cdn. Borrower loses its Investment Grade Rating as described in subsection (b) of this Section, whichever is applicable, being referred to as the "ADDITIONAL DEBT CREDIT REDUCTION DATE"), the limit of the Credit (on a pro rata basis among Tranches 1, 2 and 3 on the basis of the aggregate Commitments under such Tranches until the limit of such Tranches is reduced to 0 and thereafter on a pro rata basis among the remaining Tranches on the basis of the aggregate Commitments under such Tranches), effective on such Additional Debt Credit Reduction Date, will be permanently reduced by an amount equal to 75% of the amount of such Surplus Additional Debt and Commitments so assumed, created or otherwise arising and each of the Borrowers, within 5 Business Days of any such date referred to in subsection (a) of this Section and within 15 Business Days of any such date referred to in subsection (b) of this Section, will repay sufficient Accommodation under the affected Tranches so that, after giving effect to such repayment and any concurrent repayments made by the other Borrower, the U.S. Dollar Amount of the Accommodation then outstanding under each such Tranche does not exceed the reduced limit of such Tranche. 1.044 EXCESS PROPERTY SALES PROCEEDS (1) On the Business Day following the date of the closing of any Disposition, the Borrowers shall pay to the Administrative Agent (to be applied on a Rateable basis to the Lenders under Tranches 1, 2 and 3 until all Accommodation under such Tranches has been repaid and then on Rateable basis to the Lenders under the remaining Tranches) an amount equal to that portion, if any, of the Deemed Proceeds of Disposition Amount relative to such Disposition which was not Reinvested in the Restricted Parties on the date of the closing of such Disposition (provided that no such repayment shall reduce the limit of the Credit). (2) On the Anniversary of each Disposition the limit of the Credit (on a pro rata basis among Tranches 1, 2 and 3 until the limit of such Tranches is reduced to 0 and thereafter on a pro rata basis among the remaining Tranches) will be permanently reduced by an amount equal to the Permanent Disposition Reduction Amount, if any, relative to such Disposition and each of the Borrowers will repay sufficient Accommodation under the affected Tranches so that, after giving effect to such repayment and any concurrent repayments made by the other Borrower, the U.S. Dollar Amount of the Accommodation then outstanding under each such Tranche does not exceed the reduced limit of such Tranche. 1.045 CURRENCY FLUCTUATIONS If at any time the U.S. Dollar Amount of the Accommodation then outstanding under any Tranche exceeds the limit of such Tranche then in effect, each Borrower shall repay in accordance with subsection 4.01(1) within 10 days of receipt of a demand for such repayment from the Administrative Agent such Accommodation outstanding to it so that, after giving effect 90 SECTION 4.05 - 82 - to such repayment and any concurrent repayments made by the other Borrower, the U.S. Dollar Amount of the Accommodation then outstanding under such Tranche does not exceed the limit of such Tranche then in effect. 1.046 ILLEGALITY Notwithstanding any other provision of this Agreement, if the making or continuation of any type of Accommodation by any Lender, or the receipt by any Lender of any amount payable under this Agreement by a Borrower in respect of any such Accommodation, shall have been made unlawful or impracticable due to compliance by such Lender in good faith (as determined by such Lender, which determination shall be conclusive and binding) with any Applicable Law or with any request or directive (whether or not having the force of law) by any Governmental Authority (including any central bank, Superintendent of Financial Institutions or other comparable authority or agency) having jurisdiction, such Lender shall give notice of such event to such Borrower and the Administrative Agent (which shall promptly give similar notice to the other Lenders) and: (a) in the case of a LIBOR Loan, on the last day of the LIBOR Period then applicable to such LIBOR Loan, or on such earlier date as may be required by such event, the interest on such Loan shall cease to be calculated under this Agreement on the basis of the LIBOR and shall commence to be calculated under this Agreement on the basis of: (i) the U.S. Base Rate in the case of any such LIBOR Loan under Tranche 1, the Cdn. Operating Line or any such LIBOR Loan from a Cdn. Cross Border Lender under Tranche 2 and provided that such Lender is then obliged to make U.S. Base Rate Loans under this Agreement; or (ii) the U.S. Reference Rate in the case of any such LIBOR Loan under Tranche 3, or any such LIBOR Loan under either U.S. Operating Line or any such LIBOR Loan from a U.S. Cross Border Lender under Tranche 2; (b) in the case of a U.S. Base Rate Loan or a U.S. Reference Rate Loan, on such date thereafter as may be required by such Lender, the interest on such Loan shall cease to be calculated under this Agreement on the basis of the U.S. Base Rate or the U.S. Reference Rate, as the case may be, and shall commence to be calculated under this Agreement on the basis of the LIBOR (and such Borrower shall select the term of each applicable LIBOR Period in accordance with Section 3.05) (provided that such Lender is then obliged to make LIBOR Loans under this Agreement); and 91 SECTION 4.06 - 83 - (c) in any other case, such Borrower shall repay to such Lender all Accommodation of such type on such date thereafter as may be required by such Lender, and for such purpose shall be entitled to obtain from such Lender any type of Accommodation that such Lender is then obliged to make available under this Agreement in a U.S. Dollar Amount equal to the U.S. Dollar Amount of the Accommodation required to be repaid by it. During the continuation of any such event such Lender shall have no obligation under this Agreement to make available any Accommodation of such type, but shall make available its pro rata share of each Borrowing by way of such other type of Accommodation as it is then obliged to make available under this Agreement that is requested by the applicable Borrower. ARTICLE FIVE PAYMENTS AND INDEMNITIES 1.051 METHOD AND PLACE OF PAYMENTS (1) Each Lender (other than the Operating Lenders which shall make arrangements directly with the applicable Borrowers respecting the advance of proceeds of Accommodation under the Operating Lines) shall transfer for value by 11:00 a.m. on each applicable Borrowing Date: (a) immediately available Cdn. Dollars in an aggregate amount equal to: (i) the amount of any Prime Rate Loan to be made by it on such Borrowing Date; and (ii) the amount of all BA Discount Proceeds in respect of any Bankers' Acceptance or BA Equivalent Note purchased by it on such Borrowing Date and the amount of all proceeds received by it as contemplated by subsection 2.05(3) in respect of any Bankers' Acceptance accepted by it and purchased by a third party on such Borrowing Date, in each case net of the related fee payable to such Lender pursuant to Section 3.09; to the Administrative Agent's Cdn. Dollar Asset Distribution Suspense Account in Canada, Account No. 09-21416, Transit No. 00002, Main Branch, Commerce Court, Toronto, Canada; and (b) immediately available U.S. Dollars in an aggregate amount equal to the amount of any U.S. Base Rate Loan and any LIBOR Loan from a Cdn. Cross Border Lender 92 SECTION 5.01 - 84 - or a Cdn. Only Lender to be made by it on such Borrowing Date to the Agent's U.S. Dollar Asset Distribution Suspense in Canada, Account No. 02-13616, Transit No. 00002, Main Commerce Court, Toronto, Canada; and (c) immediately available U.S. Dollars in an aggregate amount equal to the amount of any U.S. Reference Rate Loan and any LIBOR Loan from a U.S. Cross Border Lender or a U.S. Only Lender to be made by it on such Borrowing Date to the Administrative Agent's account in the United States of America, at Morgan Guaranty Trust Company of New York in New York, New York, ABA 021-000-238 for further credit to the account of CIBC New York Agency, Account No. 630-004-80 for further credit to agented loans, Account No. 07-09611 - Attention Agency Services - Reference Philip. Provided that no costs in excess of costs associated with a transfer to the accounts specified in the preceding sentence would be incurred by the Borrowers or any of the Lenders, the Administrative Agent may designate such other accounts and offices as it may see fit for the purposes referred to in the preceding sentence. Subject to any direction given to the Administrative Agent by the applicable Borrower, the Administrative Agent shall make all such amounts received by it from the Lenders as aforesaid available to the applicable Borrower by depositing the same for value on the applicable Borrowing Date (a) in the case of the Cdn. Borrower to such account in Canada in the name of such Borrower as such Borrower shall have previously designated by timely notice in writing to the Administrative Agent, and (b) in the case of the U.S. Borrower, to such account in the United States of America as such Borrower shall have previously designated by timely notice in writing to the Administrative Agent. (2) Notwithstanding subsection 5.01(1), the Administrative Agent shall be entitled to assume that each Lender has made or will make available to the Administrative Agent all funds required to be made available by such Lender as specified in subsection 5.01(1), and the Administrative Agent may (but shall not be obliged to), in reliance upon such assumption, make available to the applicable Borrower a corresponding amount. If such funds are in fact not received by the Administrative Agent from such Lender on any Borrowing Date and the Administrative Agent has made available the corresponding amount to the applicable Borrower on such Borrowing Date, such corresponding amount shall not be a Loan or the proceeds of any Bankers' Acceptances or BA Equivalent Note made available or purchased by such Lender to or from such Borrower and the Administrative Agent shall be entitled (in its capacity as Administrative Agent) to recover from such Borrower, on demand, the corresponding amount made available by the Administrative Agent to such Borrower as aforesaid together with interest on such amount at the rate applicable under this Agreement to Prime Rate Loans, if such amount is in Cdn. Dollars, or U.S. Base Rate Loans, if such amount is in U.S. Dollars and was made available to the Cdn. Borrower, or U.S. Reference Rate Loans, if such amount was made available to the U.S. Borrower. If, after the applicable Borrowing Date but prior to such time as 93 SECTION 5.01 - 85 - the Administrative Agent has demanded repayment from a Borrower as permitted by the preceding sentence, the funds required to be made available by the applicable Lender are in fact received by the Administrative Agent, the Administrative Agent shall be entitled to retain such funds for its own account and the corresponding amount made available by the Administrative Agent to such Borrower on such Borrowing Date shall, notwithstanding the preceding sentence, be deemed to have been a Loan or the proceeds of Bankers' Acceptances or a BA Equivalent Note, as the case may be, made available by such Lender to such Borrower on such Borrowing Date and such Lender shall pay to the Administrative Agent on demand, as reimbursement for expenses incurred by the Administrative Agent, an amount equal to the product of (i) the standard interbank reference rate then in effect in Canada (with respect to such amounts made available by any Cdn. Only Lender or any Cdn. Cross Border Lender) or in the United States of America (with respect to such amounts made available by any U.S. Only Lender or any U.S. Cross Border Lender) multiplied by (ii) the corresponding amount made available by the Administrative Agent, multiplied by (iii) a fraction, the numerator of which is the number of days that have elapsed from and including such Borrowing Date to the date on which such funds are received by the Administrative Agent from such Lender and the denominator of which is the number of days in the calendar year in which the same is to be determined. A certificate of the Administrative Agent with respect to any amount owing by a Lender under this subsection shall be binding and conclusive in the absence of manifest error. (3) The Cdn. Borrower undertakes at all times that any Accommodation is outstanding to it or any other amount is owed by it under any Credit Document to maintain at the Administrative Agent's Cdn. Payment Branch an account in Cdn. Dollars and an account in U.S. Dollars which the Administrative Agent shall be entitled to debit with such amounts as are from time to time required to be paid by such Borrower under the Credit Documents, as and when such amounts are due, and that each such account will contain sufficient funds for such purpose. All payments by the Cdn. Borrower under the Credit Documents (except for payments prior to the Maturity Date to the Cdn. Operating Lender under the Cdn. Operating Line which shall be made directly to the Cdn. Operating Lender in accordance with arrangements entered into between the Cdn. Borrower and the Cdn. Operating Lender from time to time), unless otherwise expressly provided in such Credit Document, shall be made to the Administrative Agent at the Administrative Agent's Cdn. Payment Branch for the Rateable account of the Lenders entitled to such payment not later than 12:00 noon for value on the date when due, and shall be made in immediately available funds without set-off or counterclaim. All payments by the U.S. Borrower under the Credit Documents (except for payments prior to the Maturity Date to a U.S. Operating Lender under a U.S. Operating Line which shall be made directly to such U.S. Operating Lender in accordance with arrangements entered into between the U.S. Borrower and such U.S. Operating Lender from time to time), unless otherwise expressly provided in such Credit Document, shall be made to the Administrative Agent at the Administrative Agent's U.S. Payment Branch for the Rateable account of the Lenders entitled to such payment not later than 12:00 noon for value on the date when due, and shall be made in immediately available funds without set-off or counterclaim. Unless the Administrative Agent shall have been notified by a 94 SECTION 5.01 - 86 - Borrower not later than the Business Day prior to the date on which any payment to be made by such Borrower under a Credit Document is due that such Borrower does not intend to remit such payment, the Administrative Agent shall be entitled to assume that such Borrower has remitted or will remit such payment when so due and the Administrative Agent may (but shall not be obliged to), in reliance upon such assumption, make available to each applicable Lender on such payment date an amount equal to such Lender's Rateable share of such assumed payment. If such Borrower does not in fact remit such payment to the Administrative Agent as required by the Credit Documents, each applicable Lender shall immediately repay to the Administrative Agent on demand the amount so made available to such Lender, together with interest on such amount at the interbank reference rate then in effect in Canada (with respect to amounts paid to the Cdn. Only Lenders, the Cdn. Operating Lender, the Cdn. LC Lenders or the Cdn. Cross Border Lenders) or in the United States of America (with respect to amounts paid to the U.S. Only Lenders, the U.S. Operating Lenders, the U.S. Cross Border Lenders or the U.S. LC Lenders) in respect of each day from and including the date such amount was made available by the Administrative Agent to such Lender to the date such amount is repaid in immediately available funds to the Administrative Agent, and such Borrower shall immediately pay to the Administrative Agent on demand such amounts as are sufficient to compensate the Administrative Agent and the Lenders for all costs and expenses (including, without limitation, any interest paid to lenders of funds) which the Administrative Agent may sustain in making any such amounts available to the Lenders or which any Lender may sustain in receiving any such amount from and in repaying any such amount to the Administrative Agent or in compensating the Administrative Agent as aforesaid. A certificate of the Administrative Agent as to any amounts payable by a Borrower pursuant to the preceding sentence and containing reasonable details of the calculation of such amounts shall be, absent manifest error, prima facie evidence of the amounts so payable. If any amount which has been received by the Administrative Agent not later than 12:00 noon on any Business Day as provided above is not paid by the Administrative Agent to a Lender on such Business Day as required under this Agreement, the Administrative Agent shall immediately pay to such Lender on demand interest on such amount at the interbank reference rate then in effect in Canada (with respect to amounts payable to the Cdn. Only Lenders, the Cdn. Operating Lender, the Cdn. LC Lenders or the Cdn. Cross Border Lenders) or in the United States of America (with respect to amounts payable to the U.S. Only Lenders, the U.S. Operating Lenders, the U.S. Cross Border Lenders or the U.S. LC Lenders) in respect of each day from and including the day such amount was required to be paid by the Administrative Agent to such Lender to the day such amount is so paid. 1.052 CURRENCY OF PAYMENT Accommodation shall be repaid by each Borrower as required under this Agreement in the currency in which such Accommodation was obtained by such Borrower. Any payment on account of an amount payable under any Credit Document in a particular currency (the "PROPER CURRENCY") made to or for the account of the Administrative Agent, an Other Agent or a Lender in a currency (the "OTHER CURRENCY") other than the proper currency, whether pursuant to a 95 SECTION 5.02 - 87 - judgement or order of any court or tribunal or otherwise and whether arising from the conversion of any amount denominated in one currency into any other currency for the purpose of making or filing a claim, obtaining an order or judgement, enforcing an order or judgement or otherwise, shall constitute a discharge of the applicable Borrower's obligation under such Credit Document only to the extent of the amount of the proper currency which the Administrative Agent, such Other Agent or such Lender is able, in the normal course of its business within one Business Day after receipt by it of such payment, to purchase with the amount of the other currency so received. If the amount of the proper currency which the Administrative Agent, such Other Agent or such Lender is so able to purchase is less than the amount of the proper currency originally due to it under such Credit Document, such Borrower shall indemnify and save the Administrative Agent, such Other Agent or such Lender, as the case may be, harmless from and against any loss or damage arising as a result of such deficiency. This indemnity shall constitute an obligation separate and independent from any other obligation contained in any Credit Document, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by the Administrative Agent, any Other Agent or any Lender from time to time, shall continue in full force and effect notwithstanding any judgement or order for a liquidated sum in respect of an amount due under any Credit Document or under any judgement or order and shall not merge in any order of foreclosure made in respect of any Security or other security given to or for the benefit of the Administrative Agent, the Other Agents and the Lenders. 1.053 TAXES (1) All payments by a Borrower under the Credit Documents shall be made free and clear of, and without reduction for or on account of, any present or future income, capital, large corporations, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings of any kind or nature whatsoever or any installments, interest or penalties payable with respect thereto now or in the future imposed, levied, collected, withheld or assessed by any country or any political subdivision of any country (collectively "TAXES"); provided, however, that subject to subsection 5.03(2), if any Taxes which are not Excluded Taxes are required by Applicable Law to be withheld from any interest or other amount payable to the Administrative Agent, any Other Agent or any Lender under any Credit Document, the amount so payable to the Administrative Agent, such Other Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent, such Other Agent or such Lender, on a net basis after payment of all Taxes other than Excluded Taxes (including all Taxes other than Excluded Taxes imposed on any additional amounts payable under this subsection) and after payment of all Excluded Taxes imposed by any relevant jurisdiction on any additional amounts payable under this subsection, interest or any such other amount payable under such Credit Document at the rate or in the amount specified in such Credit Document. Each Borrower shall be fully liable and responsible for and shall, promptly following receipt of a request from the Administrative Agent, pay to the Administrative Agent any and all sales, goods and services and harmonized sales and goods and services taxes payable under the laws of Canada, any Province of Canada, the United 96 SECTION 5.03 - 88 - States of America, any State of the United States of America or any other country or jurisdiction with respect to any and all goods and services made available under the Credit Documents to such Borrower by the Administrative Agent, the Other Agents and the Lenders, and such taxes shall be included in the definition of "Taxes" for all purposes of this Agreement. Whenever any Taxes are payable by a Borrower, as promptly as possible thereafter it shall send to the Administrative Agent, for the account of the Administrative Agent and each affected Other Agent and Lender, a certified copy of an original official receipt showing payment of such Taxes. If a Borrower fails to pay any Taxes when due or if a Borrower fails to remit to the Administrative Agent the required documentary evidence of such payment, such Borrower shall indemnify and save harmless the Administrative Agent, the Other Agents and the Lenders from any incremental taxes, interest, penalties or other liabilities that may become payable by the Administrative Agent, by any Other Agent or by any Lender or to which the Administrative Agent, any Other Agent or any Lender may be subjected as a result of any such failure. A certificate of the Administrative Agent, any Other Agent or any Lender as to the amount of any such taxes, interest or penalties and containing reasonable details of the calculation of such taxes, interest or penalties shall be, absent manifest error, prima facie evidence of the amount of such taxes, interest or penalties, as the case may be. (2) If a Borrower makes any payment to any Lender pursuant to subsection 5.03(1) and such Lender shall receive any tax benefit which it would not have received if there had been no such payment, such Lender agrees to pay to such Borrower the amount of such tax benefit (to a maximum of the payment made by such Borrower) after the same has been obtained; provided, however, that (i) this subsection shall place such Lender in no worse position than it would have been if such Borrower had not been required to make such payment; (ii) no Event of Default shall have occurred and be continuing; and (iii) any subsequent disallowance, elimination, reduction, deferral, disqualification or recapture of all or any part of a tax benefit of a Lender for which a payment by such Lender to a Borrower has been made (or is due) pursuant to this subsection shall be treated as a Tax subject to indemnification hereunder. Each Lender shall have sole discretion as to whether or not it will seek any tax benefit and as to the allocation of its income, and no Lender shall be obliged to disclose any information to any Borrower regarding its income or taxes. (3) Each U.S. Only Lender, U.S. Cross Border Lender, U.S. Operating Lender and U.S. LC Lender (collectively the "U.S. LENDERS") that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes agrees to deliver to the U.S. Borrower and the Administrative Agent on or prior to the Closing Date, or in the case of a Lender that is an assignee or transferee of an interest of a U.S. Lender under this Agreement pursuant to Section 12.01 (unless the respective Lender was already a U.S. Lender immediately prior to such assignment or transfer) or otherwise becomes a U.S. Lender after the Closing Date, on the date of such assignment or transfer to such Lender or the date on which such Lender becomes a U.S. Lender, as the case may be: 97 SECTION 5.03 - 89 - (a) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement; or (b) if the Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 4224 or 1001 pursuant to paragraph (a) above: (i) a certificate substantially in the form of Schedule 15 (any such certificate being a "NON-BANK CERTIFICATE"); and (ii) two accurate and complete original signed copies of Internal Revenue service Form W-8 (or successor form) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement. In addition, each U.S. Lender agrees that from time to time after the Closing Date or after such Lender becomes a U.S. Lender (whether because of an assignment or transfer or otherwise), when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the U.S. Borrower and the Administrative Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Non-Bank Certificate, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement, or it shall immediately notify the U.S. Borrower and the Administrative Agent of its inability to deliver any such Form or Certificate, in which case such U.S. Lender shall not be required to deliver any such Form or Certificate pursuant to this subsection. Notwithstanding anything to the contrary contained in subsection 5.03(1), but subject to the last sentence of this subsection: (c) the U.S. Borrower shall be entitled, to the extent it is required to do so by Applicable Law, to deduct or withhold income or similar Taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable under this Agreement for the account of any U.S. Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes to the extent that such Lender has not provided to the U.S Borrower U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding; and 98 SECTION 5.03 - 90 - (d) the U.S. Borrower shall not be obligated pursuant to subsection 5.03(1) to gross-up payments to be made to a U.S. Lender in respect of income or similar Taxes imposed by the United States if (i) such Lender has not provided to the U.S. Borrower the Internal Revenue Service Forms required to be provided to the U.S. Borrower pursuant to this subsection or (ii) in the case of a payment, other than interest, to a U.S. Lender described in paragraph (b) above, to the extent that such Forms do not establish a complete exemption from withholding of such Taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section, the U.S. Borrower agrees to pay any additional amounts and to indemnity each U.S. Lender in the manner set forth in subsection 5.03(1) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any Taxes deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Closing Date in any Applicable Law, or in the interpretation thereof, relating to the deducting or withholding of such Taxes. 1.054 INCREASED COSTS If subsequent to the date of this Agreement any change in or introduction of any Applicable Law or of any administrative policy or practice of any Governmental Authority, or compliance by any Lender with any request or directive (whether or not having the force of law) by any Governmental Authority (including any central bank, Superintendent of Financial Institutions or other comparable authority or agency) having jurisdiction shall: (a) subject the Administrative Agent, such Other Agent or such Lender to any Tax of any kind whatsoever including Excluded Taxes with respect to this Agreement or any other Credit Document, any Commitment or any Accommodation made by such Lender, or change the basis of taxation of payments to the Administrative Agent, such Other Agent or such Lender of principal, interest, fees or any other amount payable under any Credit Document (except for changes in the rate of Tax on the overall net income of the Administrative Agent, such Other Agent or such Lender imposed by its jurisdiction of incorporation, the jurisdiction of its principal office or applicable lending office, or any political subdivision of any such jurisdiction); (b) impose, modify or make applicable any capital maintenance or capital adequacy requirement, reserve requirement, special deposit requirement or other similar requirement against assets held by, or deposits or other liabilities in or for the account of, or any Accommodation or Commitment made available or established by, or any other acquisition of funds by, such Lender; or 99 SECTION 5.04 - 91 - (c) impose on the Administrative Agent, such Other Agent or such Lender or the London interbank market any other condition, restriction or limitation; and the result of any of the foregoing is to increase the cost to the Administrative Agent, such Other Agent or such Lender of making or maintaining any Accommodation or Commitment or to reduce any amount otherwise receivable by it under this Agreement or any other Credit Document with respect to any Accommodation or Commitment or otherwise, then provided that such additional cost or reduced amount receivable is not fully offset at all relevant times by an increase in the applicable interest rate or rates or fees under this Agreement or other applicable Credit Document, the Borrowers (or each applicable Borrower in the case of any Commitment to, or any Accommodation outstanding to, such Borrower) shall promptly pay to the Administrative Agent, such Other Agent or such Lender, upon demand, such additional amounts necessary to compensate the Administrative Agent, such Other Agent or such Lender, after taking into account all applicable Taxes and Excluded Taxes, for such additional cost or reduced amount receivable which the Administrative Agent, such Other Agent or such Lender deems to be material as are determined in good faith by the Administrative Agent, such Other Agent or such Lender. If the Administrative Agent, an Other Agent or a Lender becomes entitled to claim any additional amount pursuant to this Section, it shall notify the Borrowers, through the Administrative Agent, of the event by reason of which it has become so entitled promptly upon the Administrative Agent, such Other Agent or such Lender becoming aware of such event. A certificate of the Administrative Agent, an Other Agent or a Lender as to any such additional amount payable to it and containing reasonable details of the calculation of such amount shall be, absent manifest error, prima facie evidence of such amount. 1.055 INDEMNITIES (1) Each Borrower shall indemnify and save harmless the Administrative Agent, each Other Agent and each Lender from all claims, demands, liabilities, damages, losses, costs, charges and expenses (including the reasonable fees and expenses of counsel for the Administrative Agent, the Other Agents and the Lenders), including any loss or expense arising from interest or fees payable by the Administrative Agent, such Other Agent or such Lender to lenders of funds obtained by it in order to make or maintain any Accommodation and any loss or expense incurred in liquidating or re-employing deposits from which such funds were obtained, which may be incurred by the Administrative Agent, such Other Agent or such Lender as a consequence of (i) default by such Borrower in the payment when due of any amount payable under any Credit Document, (ii) default by such Borrower in obtaining a Borrowing on the date specified in any applicable notice relative to such Borrowing after such Borrower has given such notice under this Agreement that it desires to obtain such Borrowing, (iii) default by such Borrower in making any optional repayment of outstanding Accommodation after such Borrower has given notice under this Agreement that it desires to make such repayment, (iv) the repayment by such Borrower of any LIBOR Loan otherwise than on the expiration of any applicable LIBOR Period or the repayment of any other Accommodation otherwise than on the maturity date of 100 SECTION 5.05 - 92 - such Accommodation (including without limitation any such payment pursuant to any of the provisions of Article Four or upon acceleration pursuant to Section 9.02), (v) the entering into by the Administrative Agent, such Other Agent or such Lender of this Agreement and the other Credit Documents to which the Administrative Agent, such Other Agent or such Lender is a party and any amendment, waiver or consent relating hereto or thereto, and, otherwise than are determined by a court of competent jurisdiction to be attributable primarily to the gross negligence or wilful misconduct of the Administrative Agent, such Other Agent or such Lender, the performance by the Administrative Agent, such Other Agent or such Lender of its obligations under this Agreement and the other Credit Documents, and (vi) the application by any Borrower of any Accommodation or any proceeds of any Accommodation. A certificate of the Administrative Agent, an Other Agent or any Lender as to any such loss or expense and containing reasonable details of the calculation of such loss or expense shall be, absent manifest error, prima facie evidence of the amount of such loss or expense, as the case may be. (2) The Borrowers shall indemnify and save harmless each LC Lender from all claims, demands, liabilities, damages, losses, costs, charges and expenses which may be asserted against or incurred by such LC Lender, otherwise than as are determined by a court of competent jurisdiction to be attributable primarily to the gross negligence or wilful misconduct of such LC Lender, as a direct or indirect consequence of the issuance or renewal of any Letter of Credit at the request of such Borrower or of any failure by any LC Issuer to make any payment under any Letter of Credit issued at the request of such Borrower as a result of any law, control or restriction rightfully or wrongfully exercised or imposed by any Governmental Authority. (3) Each Borrower shall indemnify and save harmless the Administrative Agent, each Other Agent and each Lender and their respective Affiliates, agents, officers, directors and employees (each an "INDEMNIFIED PARTY") from all claims, demands, liabilities, damages, losses, costs, charges and expenses (including without limitation any investigatory, remedial, clean-up, compliance or preventative costs, charges and expenses) which may be asserted against or incurred by such Indemnified Party, otherwise than as are determined by a court of competent jurisdiction to be attributable primarily to the gross negligence or wilful misconduct of such Indemnified Party, whether upon realization of the Security, or as a lender to the Cdn. Borrower or the U.S. Borrower, or as successor to or assignee of any right or interest of the applicable Borrower, or any of the Cdn. Borrower's Subsidiaries or as a result of any order, investigation or action by any Governmental Authority relating to any one of its or their business or property, or as mortgagee in possession or successor or successor-in-interest to any one of the Borrowers, their respective Subsidiaries, or as a result of any taking of possession of all or any real property by foreclosure, deed or deed in lieu of foreclosure or by any other means relating to the Borrowers, or any of their Subsidiaries under or on account of any applicable Environmental Law, (including the assertion of any Lien thereunder) with respect to: (a) the Release of a Contaminant, the threat of the Release of any Contaminant, or the presence of any Contaminant affecting the real or personal property of a Borrower 101 SECTION 5.05 - 93 - or any of its Subsidiaries, whether or not the Contaminant or emanates from a Borrower's property or any other property or personal property located thereon (unless such property or property is under the control of a Lender due to relationship with a third party), including any loss of value the property of a Borrower or any of its Subsidiaries as a result of any of the foregoing; (b) the Release of a Contaminant owned by, or under the charge, management or control of, a Borrower or any of its Subsidiaries or any predecessors or assignors thereof; (c) any costs of removal or remedial action incurred by any Governmental Authority or any costs incurred by any other Person or damages from injury to, destruction of, or loss of natural resources in relation to, the real property or personal property of a Borrower or any of its Subsidiaries or any contiguous real property or elsewhere or personal property located thereon, including reasonable costs of assessing such injury, destruction or loss incurred pursuant to Environmental Law; (d) liability for personal injury or property damage arising by reason of any civil law offenses or quasi-criminal offenses or under any statutory or common tort law theory and any and all other third party claims of any and every nature whatsoever, including, without limitation, damages assessed for the maintenance of a public or private nuisance or for the carrying on of a dangerous activity at, near, or with respect to the real or personal property of a Borrower, or any of its Subsidiaries or elsewhere; and/or (e) any other matter relating to the Natural Environment and Environmental Law affecting the property or the operations and activities of a Borrower or any of its Subsidiaries within the jurisdiction of any Governmental Authority. The Borrowers' obligations shall arise both on the discovery of the presence of any Contaminant that has not been dealt with in accordance with Environmental Law and shall also arise where any Governmental Authority has taken or threatened any action in connection with the presence of, or any Environmental Activity respecting, any Contaminant. Each Borrower acknowledges that the Lenders have agreed to make the Credit available in reliance on the Borrowers' representations, warranties and covenants, including the delivery of this indemnity. This indemnity supersedes any other provisions of this Agreement or any other Credit Document which in any way limits the liability of a Borrower. The obligations of the Borrowers arising under this indemnity will be absolute and unconditional and shall not be affected by any act, omission, or circumstances whatsoever, whether or not occasioned by the fault of the Administrative Agent, the Other Agents or the Lenders except as determined by a court of competent jurisdiction to 102 SECTION 5.05 - 94 - be primarily due to gross negligence or wilful misconduct of the Administrative Agent, the Other Agents or the Lenders. The foregoing indemnities will survive the Disposition of any or all right, title and interest in and to the real property and personal property of the Restricted Parties and their Subsidiaries to any Person, including, without limitation, whether or not affiliated with the Restricted Parties and their Subsidiaries. ARTICLE SIX SECURITY 1.061 FORM OF SECURITY As general and continuing security for the due payment and performance of all present and future indebtedness and liability of the Borrowers to (x) the Administrative Agent, the Other Agents and the Lenders under the Credit Documents, and (y) the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates under all Lender/Borrower Hedging Arrangements, the following security (collectively the "SECURITY") will be provided to the Administrative Agent on behalf of the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates: (a) a first specific hypothecation and pledge of all of the issued and outstanding securities now or hereafter held by either of the Borrowers in any and all of their Subsidiaries which are Material Restricted Parties, whether wholly or partially owned, acknowledged by such Subsidiaries, together with such resolutions and consents as the Administrative Agent may determine are legally required or advisable and the security certificates duly issued by each of such Subsidiaries evidencing such pledge of securities duly endorsed in blank for transfer; (b) an unlimited guarantee and postponement of claim by each Borrower whereby it guarantees to (x) the Administrative Agent, the Other Agents and the Lenders the due payment and performance of all present and future indebtedness and liability owing under the Credit Documents by the other Borrower and (y) the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates the due payment and performance of all present and future indebtedness and liability owing under the Lender/Borrower Hedging Arrangements by the other Borrower; (c) an unlimited guarantee and postponement of claim by each Restricted Subsidiary (other than Phencorp International Finance Inc.) whereby it guarantees (x) to the Administrative Agent and the Lenders the due payment and performance of all present and future indebtedness and liability now or in the future owing under the 103 SECTION 6.01 - 95 - Credit Documents by the Borrowers (or if agreed to by the Administrative Agent by either one of the Borrowers) (including any indebtedness or liability of the Borrowers pursuant to the guarantees referred to in subsection 6.01(b)) and (y) the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates the due payment and performance of all present and future indebtedness and liability owing under the Lender/Borrower Hedging Arrangements by the Borrowers (or if agreed to by the Administrative Agent by either one of the Borrowers); (d) a first specific hypothecation and pledge of all of the issued and outstanding securities now or hereafter held by any of the Restricted Subsidiaries in any and all of their respective Subsidiaries which are Material Restricted Parties, whether wholly or partially owned, acknowledged by such Subsidiaries, together with such resolutions and consents as the Administrative Agent may determine are legally required or advisable and the security certificates duly issued by each of such Subsidiaries evidencing such pledge of securities duly endorsed in blank for transfer; and (e) a postponement and subordination from Phencorp International Finance Inc. subordinating all debts and liabilities owing to it by the Restricted Parties to all debts and liabilities owing to the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates by the Restricted Parties under or in respect of the Credit Documents and the Lender/Borrower Hedging Arrangements. For convenience, Schedule 16 lists all Restricted Parties which are required to deliver securities pledge agreements and a description of all securities, and all issuers of such securities, to be pledged to the Administrative Agent by each such Restricted Party. 1.062 SATISFACTORY TO ADMINISTRATIVE AGENT The Security will be in such form or forms, and will be registered in such jurisdictions, as the Administrative Agent and its legal counsel may from time to time reasonably require. 1.063 GENERAL PROVISIONS RELATING TO THE SECURITY Nothing in this Agreement or in any Security now held or acquired in the future by or on behalf of the Administrative Agent, the Other Agents or the Lenders, nor any act or omission of the Administrative Agent, any Other Agent or any of the Lenders with respect to any such Security, will in any way prejudice or affect the rights, remedies or powers of the Administrative Agent, any Other Agent or any of the Lenders with respect to any other Security at any time held by or on behalf of the Administrative Agent, the Other Agents or the Lenders. 104 SECTION 6.04 - 96 - 1.064 REGISTRATION The Administrative Agent may, at the reasonable expense of the Borrowers, register, file or record the Security or notices in respect of the Security in all offices where such registration, filing or recording is, in the opinion of the Administrative Agent or its counsel, necessary or of advantage to the creation, perfection and preservation of the Liens arising pursuant to the Security. The Administrative Agent may, at the Borrowers' reasonable expense, renew such registrations, filings and recordings from time to time as and when required to keep them in full force and effect. The Borrowers acknowledge that the forms of Security have been prepared based upon Applicable Law in effect at the date of execution of the Security and that such laws may change, and that the laws of other jurisdictions may require the execution and delivery of different forms of security instruments in order to grant to the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates the rights intended to be granted by the Security. The Borrowers will, and will cause the other Restricted Parties to, on request from the Administrative Agent from time to time, execute and deliver to the Administrative Agent such additional security instruments and will amend or supplement, and will cause the other Restricted Parties to amend or supplement, any Security theretofore provided to the Administrative Agent: (a) to reflect any changes in such laws, whether arising as a result of statutory amendments, court decisions or otherwise; (b) to facilitate the registration of appropriate forms of Security in all appropriate jurisdictions; or (c) if any Person having delivered Security amalgamates or merges with any other Person or enters into any corporate reorganization; in each case in order to confer upon the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates such Liens with such priority as are intended to be created by the Security. The Borrowers will pay or indemnify the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates against any and all stamp duties, registration fees and similar taxes or charges which may be payable or determined to be payable in connection with the execution, delivery, performance, registration or enforcement of any Credit Document or any of the transactions contemplated by any Credit Document. 1.065 RELEASE OF SECURITY Following termination of all of the Commitments and the due payment in full of all debts, obligations and liabilities of the Restricted Parties to the Administrative Agent, the Lenders and the Other Agents under or in respect of the Credit Documents, the Administrative Agent will, at 105 SECTION 6.05 - 97 - the cost and expense of the Cdn. Borrower, release and discharge the Restricted Parties and their property from the Security. ARTICLE SEVEN REPRESENTATIONS AND WARRANTIES 1.071 DELIVERY OF REPRESENTATIONS AND WARRANTIES Each Borrower (with respect to itself only) and the Cdn. Borrower (with respect to itself and the other Restricted Parties and other Subsidiaries) represents and warrants to the Administrative Agent, the Other Agents and each of the Lenders as follows: (a) each of the Restricted Parties has been duly incorporated, amalgamated, merged or continued, as the case may be, and is validly subsisting as a corporation under the laws of its jurisdiction of incorporation, amalgamation, merger or continuance, as the case may be, (or in the case of Restricted Parties which are not corporations has been duly created or established as a partnership or other applicable entity and validly exists under and is governed by the law of the jurisdiction in which it has been created or established) and is duly qualified to carry on its business in each jurisdiction in which the nature of its business requires qualification except to the extent that any such failures to be so qualified individually or in the aggregate do not have, and do not have any reasonable likelihood of having, a Material Adverse Effect; (b) each of the Restricted Parties has the power and authority to enter into and perform its obligations under the Credit Documents to which it is a party and all other instruments and agreements delivered pursuant to any of the Credit Documents and to own its property and carry on its business as currently conducted; (c) the execution, delivery and performance of the Credit Documents and every other instrument or agreement delivered pursuant to the Credit Documents has been duly authorized by all requisite action and each of such documents has been duly executed and delivered and constitutes a valid and binding obligation of each of the Restricted Parties, as the case may be, enforceable in accordance with its terms subject to (x) applicable bankruptcy, insolvency, moratorium and similar laws at the time in effect affecting the rights of creditors generally, and (y) equitable remedies such as injunctions and specific performance which may only be granted in the discretion of the court before which they are sought; 106 SECTION 7.01 - 98 - (d) none of the Restricted Parties is a party to any agreement or instrument which has, or has any reasonable likelihood of having, a Material Adverse Effect; (e) none of the Restricted Parties is subject to any judgment, order, writ, injunction, decree or award, or to any restriction, rule or regulation (other than customary or ordinary course restrictions, rules and regulations consistent or similar with those imposed on other Persons engaged in similar businesses) which has a Material Adverse Effect, or in the future may have a Material Adverse Effect; (f) none of the Restricted Parties is in default under any guarantee, bond, debenture, note or other instrument evidencing any indebtedness or under the terms of any instrument pursuant to which any of the foregoing has been issued or made and delivered in the aggregate for all Restricted Parties in excess of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies), and there exists no state of facts which after notice or lapse of time or both or otherwise would constitute such a default; (g) except as disclosed on Schedule 17 or 19 or with respect to matters not individually in excess of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies) or in an aggregate amount which if all such actions were successful would have any reasonable likelihood of having a Material Adverse Effect, there are no actions, suits or proceedings pending or threatened against or affecting any of the Restricted Parties at law or in equity or before or by any Governmental Authority of any kind nor are any of the Restricted Parties aware of any existing ground on which any such action, suit or proceeding might be commenced with any reasonable likelihood of success; and there have been no material adverse developments since the date of this Agreement respecting any of the matters disclosed on Schedules 17 or 19; and no Restricted Party is in default with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any court, arbitrator or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, either separately or in the aggregate, would represent an amount in excess of U.S. $5,000,000 (or the Equivalent Amount in any other currency or currencies); (h) the Cdn. Borrower has furnished the Administrative Agent with its most recent annual and quarterly consolidated financial statements; all such financial statements have been prepared in accordance with GAAP, except as stated in such financial statements or in the notes to such financial statements; each balance sheet contained in such financial statements, when read with the deconsolidation and reconciliation accompanying such financial statements, presents fairly the Modified Consolidated financial position of the Cdn. Borrower as at the date of such balance sheet; and each statement of profit and loss contained in such 107 SECTION 7.01 - 99 - financial statements when read with the deconsolidation and reconciliation accompanying such financial statements, presents fairly the Modified Consolidated results of the Cdn. Borrower's operations for the periods indicated; the Cdn. Borrower has also furnished the Administrative Agent with the Pro Forma Financial Statements and such Pro Forma Financial Statements have been, and on delivery of the same the June 30 Pro Forma Financial Statements will have been, prepared in accordance with GAAP, expressly state all of the underlying assumptions on which they have been prepared all of which assumptions are reasonable in the circumstances, and constitute a reasonably true and accurate description of the combined financial position and financial performance of the Restricted Parties (including all Acquisitions made on or prior July 31, 1997) as of the date of, and for the financial period ending on the date of, such Pro Forma Financial Statements; (i) since December 31, 1996, (x) there has been no change in the Modified Consolidated financial condition of the Restricted Parties as shown on the balance sheet of the Restricted Parties as at that date read with the deconsolidation and reconciliation accompanying such balance sheet which change has had, or has any reasonable likelihood of having, a Material Adverse Effect, and (y) the business, operations, properties, assets, condition (financial or otherwise) or prospects of the Restricted Parties have not been materially adversely affected as a result of any act or event including, without limitation, fire, explosion, casualty, flood, drought, riot, storm, condemnation, act of God, accident, labour trouble, expropriation or act of any government; (j) neither the financial statements referred to above, any statement or report furnished under the Credit Documents after the date of this Agreement nor, to the best of the Cdn. Borrower's knowledge, the Philip Disclosure Documents nor the June, 1997 confidential offering memorandum respecting the Credit circulated by the Co-Arrangers in connection with the initial syndication of the Credit contain, as at the time such statements, other statement or report, disclosure documents or confidential offering memorandum were furnished, any untrue statement of a material fact or any omission of a material fact necessary to make the statements contained in such financial statements, in such other statement or report, in any Philip Disclosure Document or in the confidential offering memorandum not misleading in any material respect, and all such statements and reports, taken as a whole together with the Credit Documents and the Philip Disclosure Documents and the confidential offering memorandum do not contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained in the Credit Documents, the Philip Disclosure Documents, the confidential offering memorandum or in such financial statements, other statement or report not misleading in any material respect; 108 SECTION 7.01 - 100 - (k) there is no fact known to a Borrower which such Borrower has not disclosed to the Administrative Agent or the Lenders in writing which affects, or so far as it can now reasonably foresee, will affect the property, liabilities, affairs, business, prospects, operations or condition, financial or otherwise, of any Restricted Party or the ability of any Restricted Party to perform its obligations under any of the Credit Documents or any agreements or instruments delivered pursuant to the Credit Documents or the ability of the Cdn. Borrower to complete the Allwaste Acquisition and which could reasonably be expected to be material to a prospective lender providing credit of the size and nature contemplated by this Agreement; (l) neither the execution nor delivery of the Credit Documents, or any agreements or instruments delivered pursuant to the Credit Documents, the consummation of the transactions contemplated in the Credit Documents, nor compliance with the terms, conditions and provisions of the Credit Documents conflicts with or will conflict with, or results or will result in any breach of, or constitutes a default under or contravention of, any Requirement of Law applicable to, or any Contractual Obligation of, any Restricted Party, or results or will result in the creation or imposition of any Lien upon any Restricted Party's properties; (m) each of the Restricted Parties has obtained, made or taken all consents, approvals, authorizations, declarations, registrations, filings, notices and other actions whatsoever required as at the date of this Agreement in connection with the execution and delivery by any Restricted Party of any of the Credit Documents and all other agreements or instruments delivered pursuant to the Credit Documents, and the consummation of the transactions contemplated by the Credit Documents; (n) no consent, approval or authorization of any Governmental Authority is required in connection with the enforcement of any of the Credit Documents or any agreements or instruments delivered pursuant to the Credit Documents; (o) each of the Restricted Parties has paid or made adequate provision for the payment of all Taxes levied on it or on its property or income which are due and payable, including interest and penalties, or has accrued such amounts in its financial statements for the payment of such Taxes except for charges, fees or dues which are not material in amount, which are not delinquent or if delinquent are being contested, and in respect of which non-payment would not have, or have any reasonable likelihood of having, a Material Adverse Effect, and there is no material action, suit, proceeding, investigation, audit or claim now pending, or to the knowledge of any Restricted Party, threatened by any Governmental Authority 109 SECTION 7.01 - 101 - regarding any Taxes nor has any Restricted Party agreed to waive or extend any statute of limitations with respect to the payment or collection of Taxes; (p) no Restricted Party will incur any material Tax liability with respect to the Allwaste Acquisition, the Serv Tech Acquisition or any other transaction contemplated under any of the Credit Documents; (q) no event or omission has occurred which constitutes a Default or an Event of Default; (r) no Restricted Party is in material default and, to the best of the knowledge of each Borrower after due enquiry, no event or omission has occurred which, with the passage of time or the giving of notice or both, would constitute a material default pursuant to any material order, writ, decree or demand of any Governmental Authority or a material default on any material Permits; (s) each Restricted Party is the sole beneficial owner of its property with good and marketable title to such property, subject only to Permitted Liens, with the leases for any leased property to which it is a lessee being in good standing and in full force and effect; (t) the corporate structure of the Cdn. Borrower and its Subsidiaries is as set out in Schedule 18, which Schedule also contains: (x) a list of the Cdn. Borrower and each of the other Restricted Parties and the Independent Subsidiaries; (y) a complete and accurate list of (A) each such Person's full and correct name (including any French and English forms of name), and (B) the full address (including postal code or zip code) of each such Person's chief executive office; and (z) details of the authorized and issued share capital of each of the Restricted Parties and their Subsidiaries (other than the Cdn. Borrower) and the name of the registered and beneficial owner of all of the issued and outstanding securities of each such Restricted Party; (u) security certificates with powers of attorney representing all of the issued and outstanding shares of each of the Material Restricted Parties (other than the Cdn. 110 SECTION 7.01 - 102 - Borrower) have been delivered and pledged to the Administrative Agent pursuant to the Security and the Liens created thereunder continue to constitute a first priority perfected Lien in all such security certificates and the shares represented by such security certificates; (v) except as disclosed on Schedule 19, none of the Restricted Parties or any of their respective Subsidiaries is subject to any material civil, criminal, regulatory proceeding or governmental or regulatory investigation arising under, related to or with respect to Environmental Law or is subject to any such material proceeding which is with respect to laws relating to occupational health and safety nor is a Borrower aware of any threatened material proceedings or investigations. Each of the Restricted Parties and their respective Subsidiaries is actively and diligently proceeding to use its respective best efforts to comply in all material respects with all Environmental Law and laws relating to occupational health and safety, and all such steps are being completed in a manner consistent with a prudent and responsible professional resource recovery and industrial service company; (w) all real property owned or leased by a Restricted Party may be used in all material respects by the Restricted Parties pursuant to Applicable Law for the present use and operation of the material elements of the business conducted on such real property; (x) each of the Restricted Parties has obtained all necessary material Permits (including Permits under Environmental Law), which are all in good standing in all material respects and unrevoked, necessary for the operations being conducted or intended to be conducted on the applicable Restricted Party's property, and there are no existing circumstances which might give rise to the revocation of any such material Permits; (y) except as disclosed in Schedule 17, none of the Restricted Parties has received any notice of any material liens within the meaning of the Construction Lien Act of Ontario or similar legislation prevailing in any other jurisdiction; (z) Schedule 20 lists all material contracts to which a Restricted Party is a party and in respect of which the performance or non-performance of such contract could have a Material Adverse Effect; (aa) no steps have been taken to terminate any Pension Plan or Non-U.S. Pension Plan which, in either case, could result in any material liability being incurred by any Restricted Party and no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a lien for any material amount under section 302(f) of ERISA and no contribution failure has occurred with respect to any 111 SECTION 7.01 - 103 - Non-U.S. Pension Plan sufficient to give rise to a lien or deemed trust for any material amount under Applicable Law and no Pension Plan has an Unfunded Current Liability which when added to the amount of Unfunded Current Liabilities with respect to all other Pension Plans exceeds the aggregate amount of Unfunded Current Liabilities that existed on the initial Borrowing Date by U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies), and using actuarial assumptions and computation methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of the Restricted Parties and their ERISA Affiliates to all Pension Plans which are multiemployer plans (as defined in Section 4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Pension Plan ended prior to the date of the most recent Borrowing Date would not exceed U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies), and the Restricted Parties do not maintain or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) which provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Pension Plan the obligations with respect to which could reasonably be expected to have a Material Adverse Effect, and no condition exists or event or transaction has occurred with respect to any Pension Plan or Non-U.S. Pension Plan which could result in the incurrence by any Restricted Party of any material liability, fine or penalty, and each Non-U.S. Pension Plan and Non-U.S. Welfare Plan has been maintained in substantial compliance with its terms and in compliance in all material respects with the requirements of any and all Applicable Laws and has been maintained, where required, in all material respects in good standing with applicable Governmental Authorities. All contributions required to be made with respect to each Non-U.S. Pension Plan and Non-U.S. Welfare Plan have been timely made in accordance in all material respects with the terms thereof and all Applicable Laws. The Restricted Parties have not incurred any material obligation in connection with the termination of or withdrawal from any Non-U.S. Pension Plan or Non-U.S. Welfare Plan. Each Non-U.S. Pension Plan and Non-U.S. Welfare Plan for which funding is required under its terms pursuant to Applicable Laws is fully funded or fully insured in all material respects on both a solvency and going concern basis as at the end of the applicable Restricted Party's most recently ended Financial Year on substantially the basis of the actuarial assumptions and methodology contained in the most recent actuarial valuation report filed in respect of such plan with the applicable Governmental Authority or where no such filing is required in accordance with the most recent actuarial valuation report prepared in respect of such plan. (bb) the value of the Margin Stock at any time owned by the Restricted Parties (other than Margin Stock acquired pursuant to a Two-Step Permitted Acquisition, which, at the time this representation is made, continues to constitute Margin Stock that 112 SECTION 7.01 - 104 - is pledged at such time as Security) does not exceed 25% of the value of the property of the Restricted Parties taken as a whole. Neither the making available of any Accommodation by a Lender, nor the use of the proceeds of any such Accommodation, will violate or be inconsistent with the provisions of Regulation G, T, U or X. (cc) none of the Restricted Parties is an "investment company" within the meaning of the United States Investment Company Act of 1940, as amended, or a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company," or of a "subsidiary company" of a "holding company," within the meaning of the United States Public Utility Holding Company Act of 1935, as amended; (dd) no portion of any of the property of any of the Restricted Parties has been listed, designated or identified in the National Priorities List ("NPL") or the CERCLA Information System ("CERCLIS"), both as published by the United States Environmental Protection Agency, or any similar list of sites published by any federal, state or local authority proposed for requiring clean up or remedial or corrective action under any Environmental Law; (ee) the Cdn. Borrower reviews and evaluates on an ongoing basis, in consultation with its environmental consultants, the potential liability of the Restricted Parties under Environmental Law or otherwise relative to Environmental Activities and sets and at all times maintains reserves on its financial statements for these liabilities based on, and in an amount at least equal to, the Cdn. Borrower's reasonable estimate of the potential liability of the Restricted Parties relative to all such matters; (ff) the Cdn. Borrower and its officers, advisors and consultants have completed customary and reasonable financial, environmental, business and legal due diligence reviews of Allwaste and Serv Tech and their Subsidiaries and their respective businesses, operations, properties, financial condition and performance and are not aware of any fact or matter respecting any of the foregoing which (i) as a result of or in connection with the Allwaste Acquisition or the Serv Tech Acquisition, has any reasonable likelihood of having a Material Adverse Effect, or (ii) is otherwise of a nature which a reasonable Person would consider that a prudent and conscientious Person entering into an agreement such as this Agreement as an agent, a co-arranger or a lender would want to be made aware of; and (gg) (i) the revenue of each of the Restricted Subsidiaries listed in Schedule 26 (as such Schedule may have been amended as provided for in subsection 8.01(w) prior to the time this representation is given) and its 113 SECTION 7.01 - 105 - Subsidiaries (other than Independent Subsidiaries) for the most recently completed four Financial Quarters was less than 1% of the aggregate revenue of all of the Restricted Parties for such four Financial Quarters; (ii) the book value of the property of each of the Restricted Subsidiaries listed in Schedule 26 (as such Schedule may have been amended as provided for in subsection 8.01(w) prior to the time this representation is given) and its Subsidiaries (other than Independent Subsidiaries) is less than 1% of the book value of all property of all of the Restricted Parties; (iii) no Restricted Subsidiary listed in Schedule 26 (as such Schedule may have been amended as provided for in subsection 8.01(w) prior to the time this representation is given) or any of its Subsidiaries owns, leases, licenses or otherwise holds any property which is material to the undertaking, business, operation or property of any Material Restricted Party; (iv) the aggregate revenue of all of the Restricted Subsidiaries listed in Schedule 26 (as such Schedule may have been amended as provided for in subsection 8.01(w) prior to the time this representation is given) and their Subsidiaries (other than Independent Subsidiaries) for the most recently completed four Financial Quarters was less than 15% of the aggregate revenue of all of the Restricted Parties for such four Financial Quarters; and (v) the book value of the property of all of the Restricted Subsidiaries listed in Schedule 26 (as such Schedule may have been amended as provided for in subsection 8.01(w) prior to the time this representation is given) and their Subsidiaries (other than Independent Subsidiaries) is less than 15% of the book value of all property of all of the Restricted Parties. 1.072 REPETITION OF REPRESENTATIONS AND WARRANTIES The representations and warranties set out in Section 7.01 will be deemed to be repeated by each of the Borrowers as of the date of each request for new Accommodation by any Borrower (other than rollovers, renewals or conversions of Accommodation) except to the extent that on or prior to such date (a) the Cdn. Borrower has advised the Administrative Agent in writing of a variation in any such representation or warranty, and (b) if such variation in the opinion of the Required Lenders, acting reasonably, is material to the property, business, prospects or financial position of the Restricted Parties considered as a whole or could otherwise have a Material Adverse Effect, the Required Lenders have approved such variation. 114 SECTION 8.01 - 106 - ARTICLE EIGHT COVENANTS 1.081 AFFIRMATIVE COVENANTS So long as this Agreement is in force and except as otherwise permitted by the prior written consent of the Required Lenders (or such greater threshold as may be provided for elsewhere in this Agreement), each of the Borrowers covenants and agrees that it will, and with respect to clauses (b), (c), (d), (e), (f), (h), (j), (k), (l), (m), (n), (p), (t), (u) and (v) it will cause each of the other Restricted Parties to, and with respect to clauses (q) and (r) it will cause each of the Independent Subsidiaries to: (a) Financial Statements. Furnish to the Administrative Agent: (i) (x) as soon as available, but in any event within 120 days after the end of each Financial Year a copy of the audited consolidated balance sheet of the Cdn. Borrower and its Subsidiaries as at the end of such Financial Year, together with the related audited consolidated statements of earnings, changes in financial position and shareholders' equity of the Cdn. Borrower and its Subsidiaries for such Financial Year, setting forth in each case in comparative form the figures for the previous Financial Year and reported on by Deloitte & Touche or any other independent internationally recognized firm of chartered accountants or certified public accountants; (y) as soon as available, but in any event within 90 days after the end of each Financial Year (A) a copy of the unaudited consolidated balance sheet of the Cdn. Borrower and its Subsidiaries as at the end of such Financial Year, together with the related unaudited consolidated statements of earnings, changes in financial position and shareholders' equity of the Cdn. Borrower and its Subsidiaries for such Financial Year, setting forth in each case in comparative form the figures for the previous Financial Year and budgeted figures for such Financial Year and accompanied by an Officer's Certificate substantially in the form of Schedule 21 stating that in such officer's opinion such financial statements present fairly the consolidated financial position of the Cdn. Borrower and its Subsidiaries as at the date of such statements and for the reporting period included in such statements, and (B) a deconsolidation and 115 SECTION 8.01 - 107 - reconciliation of the financial statements referred to in clause (A) above deconsolidating and eliminating the balance sheet, income and cash flow effects from Persons which are not Restricted Parties and rendering the equivalent of the financial statements referred to in clause (A) above on a Modified Consolidated basis and in compliance with Section 1.03; and (z) as soon as available, but in any event within 120 days after the end of each Financial Year a copy of the unaudited consolidated balance sheet of the U.S. Borrower and its Subsidiaries as at the end of such Financial Year, together with the related unaudited consolidated statements of earnings, changes in financial position and shareholders' equity of the U.S. Borrower and its Subsidiaries for such Financial Year, setting forth in each case in comparative form the figures for the previous Financial Year accompanied by an Officer's Certificate substantially in the form of Schedule 21 stating that in such officer's opinion such financial statements present fairly the consolidated financial position of the U.S. Borrower and its Subsidiaries as at the date of such statements and for the reporting period included in such statements; (ii) as soon as available, but in any event not later than 60 days after the end of each of the first three Financial Quarters: (x) (A) a copy of the unaudited consolidated balance sheet of the Cdn. Borrower and its Subsidiaries as at the end of such Financial Quarter, together with the related unaudited consolidated statements of earnings, changes in financial position and shareholders' equity of the Cdn. Borrower and its Subsidiaries for such Financial Quarter and the portion of the Financial Year through the end of such Financial Quarter, setting forth in each case in comparative form the figures for the previous Financial Year and the budgeted figures for such Financial Quarter and the portion of the Financial Year to the end of such Financial Quarter, and accompanied by an Officer's Certificate substantially in the form of Schedule 21 stating that in such officer's opinion such financial statements present fairly the consolidated financial position of the Cdn. Borrower and its Subsidiaries as at the date of such statements and for the reporting period included in such statements (subject to normal year-end audit adjustments), (B) a deconsolidation and reconciliation of the financial statements referred to in clause (A) above deconsolidating and eliminating the 116 SECTION 8.01 - 108 - balance sheet, income and cash flow effects from Persons which are not Restricted Parties and rendering the equivalent of the financial statements referred to in clause (A) above on a Modified Consolidated basis and in compliance with Section 1.03, and (C) if such Financial Quarter is the Financial Quarter ending June 30, 1997, the June 30 Pro Forma Financial Statements; and (y) a copy of the unaudited consolidated balance sheet of the U.S. Borrower and its Subsidiaries as at the end of such Financial Quarter, together with the related unaudited consolidated statements of earnings, changes in financial position and shareholders' equity of the U.S. Borrower and its Subsidiaries for such Financial Quarter and the portion of the Financial Year through the end of such Financial Quarter, setting forth in each case in comparative form the figures for the previous Financial Year, and accompanied by an Officer's Certificate substantially in the form of Schedule 21 stating that in such officer's opinion such financial statements present fairly the consolidated financial position of the U.S. Borrower and its Subsidiaries as at the date of such statements and for the reporting period included in such statements (subject to normal year-end audit adjustments); (iii) as soon as available, but in any event not later than the earlier of 10 days after the date of approval thereof by the board of directors of the Cdn. Borrower and 60 days after the commencement of each Financial Year, a copy of the Modified Consolidated corporate budget (the "ANNUAL BUDGET") (both capital and operating) for the Restricted Parties for such Financial Year (including without limitation a summary of all proposed Capital Expenditures and Dispositions by division) as approved by the board of directors of the Cdn. Borrower setting forth the principal assumptions upon which such budget is based and which budget shall contain forecasted consolidated balance sheets, statements of earnings and statements of expenses for the Restricted Parties for the Financial Year covered by such budget and forecasted statements of changes in financial position for the Restricted Parties for the Financial Year covered by such budget, such budget to be in substantially the form of, and to contain summaries and information, and corporate and division financial information (including information respecting fixed assets and expenditures, Capital Expenditures, investments, intangible assets and bank position, debt and interest expense) as contained in the February, 1997 annual budget of the Cdn. Borrower; and 117 SECTION 8.01 - 109 - (iv) as soon as available, but in any event not later than the date of the delivery of the Annual Budget for any Financial Year, an update of the five-year forecast for the Restricted Parties covering the Financial Year covered by such Annual Budget and the following four Financial Years, which five-year forecast shall be in substantially the form of, and to contain summaries and information, and corporate and division financial information (including information respecting fixed assets and expenditures, Capital Expenditures, investments, intangible assets and bank position, debt and interest expense) as contained in, the five-year forecast delivered by the Cdn. Borrower to the Co-Arrangers in connection with the initial syndication of the Credit. All financial statements will be prepared on a consolidated basis (or a Modified Consolidated basis, as the case may be) and in accordance with GAAP (containing any required reconciliations to show all amounts which for the purpose of this Agreement are to be determined in accordance with GAAP in effect on December 31, 1996 as so determined in accordance with GAAP in effect on such date). Audited financial statements required to be delivered pursuant to this Agreement will be complete and accompanied by a report of an independent auditor confirming that the audit was conducted in accordance with generally accepted auditing standards and confirming that in the auditor's opinion, such financial statements present fairly in all material respects the consolidated financial position of the Cdn. Borrower at the relevant date and the consolidated results of its operations and the consolidated changes in its financial position for the relevant period, in accordance with GAAP. (b) Certificates; Other Information. Furnish to the Administrative Agent: (i) concurrently with the delivery of the financial statements referred to in clauses 8.01(a)(i) and (ii), an Officer's Certificate of the Cdn. Borrower substantially in the form of Schedule 21 stating that, to the best of such officer's knowledge, each of the Restricted Parties and the Independent Subsidiaries during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in each of the Credit Documents to be observed, performed or satisfied by it, and that such officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate, such certificate to include calculations to evidence compliance with the financial covenants set forth in Section 8.03 and the Debt to EBITDA Pricing Adjustment Ratio applicable to the calculation of interest and fees pursuant to Article Three; 118 SECTION 8.01 - 110 - (ii) concurrently with the delivery of the financial statements referred to in clauses 8.01(a)(i) and (ii), an Officer's Certificate of the Cdn. Borrower substantially in the form of Schedule 22 respecting compliance by the Restricted Parties with Environmental Laws; (iii) concurrently with the delivery of the financial statements referred to in clause 8.01(a)(i), a copy of the annual environmental report respecting the Restricted Parties from an independent environmental consultant satisfactory to the Administrative Agent, acting reasonably, retained by the Restricted Parties; (iv) concurrently with the delivery of the financial statements referred to in clause 8.01(a)(i), certificates of all insurance referred to in subsection 8.01(e) (excluding any policies relating solely to automobile insurance) of each of the Restricted Parties in effect on the last day of the immediately preceding Financial Year; (v) within 10 Business Days of the granting of any material Permitted Lien, notice of such Permitted Lien and, promptly following any request from the Administrative Agent, such information relating to any Permitted Lien or Permitted Liens as the Administrative Agent may reasonably request; (vi) promptly, and in any event, within 5 Business Days after any Restricted Party (w) is notified by the Internal Revenue Service of its liabilities for the tax imposed by Section 4971 of the Code, for failure to make required contributions to a Pension Plan or Section 4975 of the Code, or penalties under Section 502(i) of ERISA for engaging in a prohibited transaction, (x) notifies PBGC of the termination of a defined benefit pension plan, if there are not, or may not be, sufficient assets to convert the plan's benefit labilities as required by Section 4041 of ERISA, (y) is notified by the PBGC of the institution of pension plan termination proceedings under Section 4042 of ERISA or that it has a material liability under Section 4063 of ERISA, or (z) is notified that it has withdrawal liability under Section 4202 of ERISA which is material, copies of the notice or other communication given or sent; (vii) within five Business Days after the same are sent, copies of all reports which any Restricted Party sends to its shareholders or partners which are material to the business, operations, property. condition or prospects, financial or otherwise, of either Borrower or any Restricted Subsidiary, and within five days after the same are filed, copies of all financial statements and copies of all reports, notices, news releases and other 119 SECTION 8.01 - 111 - documents, if any, which any Restricted Party may make to, or file with, any Governmental Authority (including any stock exchange or any federal, provincial or state securities commission or analogous Governmental Authority) and which reports, notices, news releases or other documents contain information, or relate to matters, which are material to the business, operations, property, condition or prospects (financial or otherwise) of either Borrower or any Restricted Subsidiary; (viii) promptly on entering into any definitive or final form of agreement respecting any Acquisition, any Disposition or any Additional Debt involving an amount (or in the case of a Disposition, an amount or property of a value) in excess of U.S. $50,000,000 (or the Equivalent Amount in any other currency or currencies), notice of such proposed Acquisition, Disposition or Additional Debt, as the case may be, and all pertinent information relative thereto and from time to time thereafter promptly all relevant information respecting any material developments relative to, and respecting the completion or closing of, such Acquisition, Disposition or Additional Debt, as the case may be; (ix) all other information with respect to the Restricted Parties and their respective property and the Independent Subsidiaries which may be requested from time to time by the Administrative Agent, acting reasonably, and which is available to the Restricted Parties; and (x) with each quarterly compliance certificate referred to in clause 8.01(b)(i), an updated report with supporting financial information confirming the status of all assurances and obligations referred to in clause (c)(i)(y) of the definition of Contingent Obligation, any proceedings or events respecting the demand, call or other event relative to such assurances and obligations and the basis on which such assurances and obligations would or would not be treated as a liability in accordance with GAAP and, promptly following any material change or development in the nature or status of any assurances or obligations referred to in clause (c)(i)(y) of the definition of Contingent Obligation which are in an amount in excess of U.S. $5,000,000 (or the Equivalent Amount in any other currency or currencies), an updated report confirming the status of such assurances or obligations, any proceedings or events respecting the demand, call or other event relative to such assurances or obligations and the basis on which such assurances or obligations would or would not be treated as a liability in accordance with GAAP. 120 SECTION 8.01 - 112 - (c) Payment of Obligations. Pay, discharge or otherwise satisfy (i) in accordance with normal business practices in the case of trade payables, and (ii) at or before maturity or before they become delinquent, as the case may be, in the case of all of its other Debt and other material obligations of whatever nature, except when (x) the amount or validity thereof is currently being contested, (y) reserves in conformity with GAAP with respect thereto have been provided for in the Modified Consolidated financial statements of the Restricted Parties, and (z) the failure to pay the same would not have, or have any reasonable likelihood of having, a Material Adverse Effect. (d) Conduct of Business and Maintenance of Existence. Engage in business of the same general type as now conducted by it; carry on and conduct its business and operations in a proper, efficient and businesslike manner, in accordance with good business practice; preserve, renew and keep in full force and effect its existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business; and comply with all Contractual Obligations and Requirements of Law except to the extent that the failure to comply therewith would not, in the aggregate, have, or have any reasonable likelihood of having, a Material Adverse Effect. (e) Maintenance of Property and Insurance. Keep all property useful and necessary in its business in good working order and condition, normal wear and tear excepted; maintain with financially sound and reputable insurance companies insurance with respect to the conduct of its business and on all its property which meets the requirements of Schedule 23; and furnish to the Administrative Agent, upon written request, full information as to, and certified copies of all policies respecting, the insurance carried. (f) Inspection of Property: Books and Records; Discussions. Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives and agents of the Administrative Agent and the Other Agents to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time, on reasonable notice and as often as may reasonably be desired, and to discuss the business, operations, property, condition and prospects (financial or otherwise) of the Restricted Parties with senior officers of the Restricted Parties and with their independent chartered accountants. (g) Notices. Promptly give notice to the Administrative Agent: (i) of the occurrence of any Default or Event of Default; 121 SECTION 8.01 - 113 - (ii) of any: (x) default or event of default under any Contractual Obligation of any Restricted Party; or (y) litigation, investigation or proceeding which may exist or be threatened at any time between any Restricted Party and any Governmental Authority; or (z) any other event or circumstance; which in any such case the Borrower considers has, or has any reasonable likelihood of having, a Material Adverse Effect; (iii) of any suit, litigation or other proceeding which is commenced or threatened against any Restricted Party which involves a claim in excess of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies), or in which any injunctive or similar relief is sought, and all material developments in respect thereof; (iv) the occurrence of the acceleration, default or demand pursuant to the terms of any Debt of any Restricted Party which is in the aggregate in excess of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies); (v) any material default or event of default under any material Permitted Lien or any Debt secured by any material Permitted Lien; (vi) of the date on which any material contribution is required to be made to any Pension Plan under Section 302(f) of ERISA; (vii) of the institution of any steps by any Person to terminate any Pension Plan or Non-U.S. Pension Plan if such termination could give rise to any material liability on the part of any Restricted Party, or the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a lien for a material amount under section 302(f) of ERISA or the failure to make a required contribution to any Non-U.S. Pension Plan if such failure is sufficient to give rise to a lien or deemed trust for a material amount under Applicable Law, or the taking of any action with respect to a Pension Plan which could result in the requirement that any Restricted Party furnish a bond or other security to the PBGC or such 122 SECTION 8.01 - 114 - Pension Plan, or that could have the result that any Restricted Party may incur any material liability pursuant to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Pension Plan or any Non-U.S. Pension Plan or Non-U.S. Welfare Plan in addition to the liability that existed on the initial Borrowing Date pursuant to any such plan or plans, or the occurrence of any event with respect to any Pension Plan or Non-U.S. Pension Plan or Non-U.S. Welfare Plan which could result in the incurrence by any Restricted Party of any material liability, fine or penalty; (viii) of the occurrence of any event or circumstance which the Borrower considers has, or which has any reasonable likelihood of having, a Material Adverse Effect; (ix) any civil, criminal or regulatory proceedings or investigations which could give rise to a claim or claims individually in excess of U.S. $2,000,000 (or the Equivalent Amount in any other currency or currencies) or in the aggregate in excess of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies) arising under, relating to or with respect to any Environmental Law or laws relating to occupational health and safety, including without limitation, any action request, control order, stop order or violation notice or breach of any certificate, approval, permit, consent, order or direction concerning the installation or operation of any machinery, equipment or facility constituting the property of the Cdn. Borrower or any of its Subsidiaries, or concerning any structure, activity or facility on or in any such property; (x) any material Release from the real property of the Cdn. Borrower or any of its Subsidiaries into the Natural Environment other than a Release which is not in violation in any material respect of Environmental Law; and (xi) if any Restricted Party learns that any Governmental Authority or any employee or agent thereof has determined, threatens to determine or requires an investigation to determine that there exists any material Release from the property of the Cdn. Borrower or any of its Subsidiaries into the Natural Environment other than a Release which is not in violation in any material respect of Environmental Law. Each notice pursuant to this subsection shall be accompanied by an Officer's Certificate of the Cdn. Borrower setting forth details of the occurrence referred to 123 SECTION 8.01 - 115 - therein and stating the potential effect of such occurrence on the business, operations, property and financial condition of the Borrowers and the Restricted Subsidiaries and what action the Restricted Parties have taken and propose to take with respect thereto. (h) Permits and Requirements of Law. Obtain and maintain in effect all Permits which are material to the ownership and operation of its business and property from time to time, and comply in all material respects with the conditions of such Permits. (i) Use of Accommodation. Ensure that all proceeds of Accommodation are used only for the purposes expressly permitted by Section 2.02. (j) Environmental Clean-Up. Investigate and clean-up, as required by Applicable Laws (subject to the right of the Restricted Parties to dispute or contest interpretations of the Law provided that such dispute or contestation would not give rise to, and would not have any reasonable likelihood of giving rise to, a Material Adverse Effect), any Release of Contaminant from any of its properties or caused by it with the utmost care and due diligence and comply in all material respects with all material orders issued by any Governmental Authority with respect to the Natural Environment. (k) No Environmental Damage. Conduct its business and affairs in a manner consistent with that of a prudent and responsible resource recovery and industrial services company and at all times actively and diligently proceed to use its best efforts to comply with (and will comply in all material respects with) all Environmental Law and laws relating to occupational health and safety. (l) Security. (i) Provide, and cause each other Restricted Party (other than Phencorp International Finance Inc.) to provide, to the Administrative Agent (on or prior to the Closing Date with respect to the Restricted Parties on such date and otherwise within 30 days of any Person becoming a Restricted Party (or such longer period as may be agreed to by the Administrative Agent where an auditor's report or confirmation may be required as a condition to the validity or enforceability of any such Security) or within 30 days following the date by which the quarterly compliance certificate for the Financial Quarter (or the Financial Year in the case of a 4th Financial Quarter) in which a Non Material Restricted Subsidiary becomes a Material Restricted Party is required to be delivered to the Administrative Agent, as the case may be), the Security (together with all 124 SECTION 8.01 - 116 - applicable security certificates and powers of attorney for all securities of all Material Restricted Parties to be pledged under such Security) required from time to time pursuant to Article Six in accordance with the provisions of such Article, accompanied by supporting resolutions, certificates and opinions in form and substance satisfactory to the Administrative Agent, acting reasonably; (ii) provide the Administrative Agent on a monthly basis, with all pertinent information, if any, required to update the information set forth in Schedule 16 and Schedule 18 and to ensure that all issued and outstanding shares of all Material Restricted Parties (other than the Cdn. Borrower) continue to be validly pledged to the Administrative Agent under the Security; and (iii) do, execute and deliver, and cause each of its Subsidiaries to do, execute and deliver, all such things, documents, security, agreements and assurances as may from time to time be requested by the Administrative Agent, acting reasonably, to ensure that the Administrative Agent holds at all times valid, enforceable, perfected first priority Security from the Restricted Parties meeting the requirements of Article Six. (m) Permitted Liens. Comply in all material respects with each agreement which constitutes a Permitted Lien and requires compliance therewith by a Restricted Party. (n) Appointment of Consultants. Allow the Administrative Agent on behalf of the Other Agents and the Lenders, with, prior to an Event of Default, the Cdn. Borrower's consent (such consent not to be unreasonably withheld or delayed), to appoint consultants or agents at any time to complete audits or to report on any other matter as may be deemed necessary by the Administrative Agent on behalf of the Other Agents and the Lenders (or any one of them), all at the Cdn. Borrower's expense. (o) Reserves for Environmental Liabilities. Review and evaluate on an ongoing basis, in consultation with its environmental consultants, the potential liability of the Restricted Parties under Environmental Law or otherwise relative to Environmental Activities and set and at all times maintain reserves on its financial statements for these liabilities based on, and in an amount at least equal to, the Cdn. Borrower's reasonable best estimate of the potential liability of the Restricted Parties relative to all such matters. 125 SECTION 8.01 - 117 - (p) Payment of Taxes. Pay or cause to be paid all Taxes, government fees and dues levied, assessed or imposed on it or on all or any part of its property as and when the same become due and payable; provided that it may contest the payment of any such Taxes, fees or dues if it has maintained adequate reserves with respect thereto in accordance with GAAP. (q) Independent Subsidiaries - Delivery of Agreements. Cause each Independent Subsidiary (in the case of Independent Subsidiaries existing on the date of this Agreement, on or prior to the Closing Date, and in the case of Persons which become Independent Subsidiaries after the date of this Agreement, within 30 days of the date on which they become Independent Subsidiaries): (i) to execute and deliver to the Borrowers and the Administrative Agent a Corporate Separateness Covenant and Assurance Agreement and, if such Independent Subsidiary consents or is required to join in the filing of consolidated federal income tax returns in the United States of America with any one or more of the Restricted Parties, a Tax Sharing Agreement together in each case with such supporting certificates, resolutions, corporate documentation and legal opinions as the Administrative Agent, acting reasonably, may request with respect to such agreements; and (ii) to deliver, or cause to be delivered, to the Borrowers and to the Administrative Agent Non Recourse Acknowledgements and Undertakings from all material creditors of such Independent Subsidiary; and cause each Independent Subsidiary to observe, perform and comply with, in all material respects, its covenants, obligations and undertakings from time to time under its Corporate Separateness Covenant and Assurance Agreement and Tax Sharing Agreement. (r) Independent Subsidiaries - Conduct of Business. Cause each Independent Subsidiary to conduct its business and affairs without any Financial Assistance from any Restricted Party (except for Investments permitted under subsection 8.02(e) and Financial Assistance permitted under subsection 8.02(l)) and in a manner which, to the extent then possible under Applicable Law, would not result in the creditors of such Independent Subsidiary having any Recourse Against any Restricted Party for the debts, liabilities or obligations of such Independent Subsidiary to such creditors. (s) Expenses. Pay promptly all reasonable fees and disbursements (including sales tax, goods and services tax and harmonized sales and goods and services tax) incurred or paid by the Administrative Agent, the Other Agents or the Lenders in 126 SECTION 8.01 - 118 - connection with the preparation, negotiation, execution, delivery, maintenance, administration, amendment and enforcement (including any workouts in connection with or in lieu of any enforcement), of the Credit Documents and any and all other documents contemplated by a Credit Document and in connection with the consummation of the transactions contemplated by the Credit Documents and each grant of Accommodation and in connection with the initial syndication of the Commitments and including without limitation, all court costs and all fees and disbursements of lawyers, auditors, consultants, accountants and environmental auditors and investigators. Such fees and disbursements (or if the exact amount thereof is undetermined at the time, a reasonable estimate thereof) may, without further direction of either Borrower be paid out of any grant of Accommodation under the Credit. Failure to deduct actual or estimated fees and disbursements in whole or in part as aforesaid will not reduce the Borrowers' liability therefor. The Administrative Agent will be entitled (but not obligated) at any time and from time to time to pay or satisfy any liability or obligation of a Borrower pursuant to any Credit Document or any document contemplated by a Credit Document and the Cdn. Borrower will, on request by the Administrative Agent, promptly reimburse the Administrative Agent for all amounts expended, advanced or incurred by the Administrative Agent to satisfy such liability or obligation or to enforce the rights of the Administrative Agent, any Other Agent or any Lender pursuant to any Credit Document which amounts will include all court costs, lawyers' fees, fees of auditors, consultants and accountants, environmental auditors and investigators and investigation expenses reasonably incurred by the Administrative Agent, any Other Agent or any Lender in connection with any such matters. (t) Further Assurances. At its expense, promptly following the request of the Administrative Agent, cure or cause to be cured all defects in the content, execution and delivery of any Credit Document and any other document arising from the Credit Documents. At its expense, promptly execute and deliver to the Administrative Agent, or cause to be executed and delivered to the Administrative Agent, on request by the Administrative Agent, all such other and further documents, agreements and instruments necessary to satisfy the obligations of the Restricted Parties under the Credit Documents or under any of the documents arising from the Credit Documents, to effect any registrations or filings required by the Administrative Agent or to obtain any consents required by the Administrative Agent. (u) Margin Stock. Take any and all actions as may be required to ensure that no securities pledged, or required to be pledged, pursuant to the Security shall constitute Margin Stock; provided that, in the case of a Two-Step Permitted Acquisition where the consummation of the tender offer portion thereof results in 127 SECTION 8.01 - 119 - the acquisition of Margin Stock, the Margin Stock so acquired shall be pledged pursuant to the Security and (x) at the time of the consummation of any such tender offer and upon the occurrence of each Borrowing during any period that Accommodation is secured by Margin Stock, (i) it will take any and all actions as may be required, or as may be reasonably requested by the Administrative Agent, to establish compliance with Regulations G and U, (ii) the Borrowers shall deliver to each Lender a duly completed Form U-1 or G-3, as appropriate, referred to in Regulations U and G, and (iii) each Lender shall be able in good faith to complete such Form U-1 or G-3, as the case may be, showing that the Accommodation made available by the Lenders pursuant to this Agreement comply with Regulations U and G, including with respect to the collateral valuation requirements of such Regulations and (y) as promptly as practicable after the consummation of the back-end merger in respect of such Two-Step Permitted Acquisition and in any event within 30 days thereafter (or, if earlier, 30 days after the respective Target becomes a Wholly-Owned Restricted Party of a Borrower), the Borrowers will, and will cause the other Restricted Parties to, take any and all actions as may be required to ensure that no security acquired pursuant to such Two-Step Permitted Acquisition shall continue to, or at any time thereafter, constitute Margin Stock. (v) Acquisitions. Structure each Acquisition so that the purchasing or acquiring Restricted Party receives at the time of closing of such Acquisition a payout and discharge letter from all general bank, financial institution or credit providers (subject to Permitted Indebtedness allowed relative to such Acquisition pursuant to clause 1 of Schedule 7 and Permitted Liens allowed relative to such Acquisition pursuant to clause (s) of Schedule 6), execute and deliver, and cause to be executed and delivered, all Security required as a result of such Acquisition (including a pledge of the securities of any acquired Target and its Subsidiaries and guarantees and securities pledges from such Target and its Subsidiaries) within the time frames required under subsection 8.01(l), and cause the Permitted Indebtedness, if any, allowed under clause 1 of Schedule 7 relative to such Acquisition, and any Permitted Liens, if any, allowed under clause (s) of Schedule 6 relative to such Acquisition, to be repaid, released and discharged within the time frames required in such clauses. (w) Non Material Restricted Subsidiaries. Within 30 days following any Acquisition and within 30 days following the date by which the compliance certificate for the Financial Quarter (or Financial Year in the case of the 4th Financial Quarter) in which any one or more Restricted Subsidiaries listed in Schedule 26 (as such Schedule may have been amended prior to such time) cease to qualify as a Non Material Restricted Subsidiary is required to be delivered to the Administrative Agent, deliver to the Administrative Agent a draft revised Schedule 26 listing 128 SECTION 8.01 - 120 - only Restricted Subsidiaries which would qualify as Non Material Restricted Subsidiaries under this Agreement, together with such supporting financial and other information and certificates as the Administrative Agent, acting reasonably, may require to confirm the same, which amended schedule, on delivery of written notice from the Administrative Agent to the Cdn. Borrower acknowledging acceptance of the same, shall become Schedule 26 for all purposes of this Agreement. 1.082 NEGATIVE COVENANTS ------------------ So long as this Agreement is in force and except as otherwise permitted by the prior written consent of the Required Lenders (or such greater threshold as may be provided elsewhere in this Agreement), each of the Borrowers covenants and agrees that it will not, and that it will cause each of the other Restricted Parties not to, directly or indirectly: (a) Debt. Create, incur, assume or suffer or permit to exist any Debt except: (i) Debt owing to the Administrative Agent, the Other Agents or the Lenders under any Credit Document; (ii) Debt owing under Purchase Money Obligations in an amount not in excess of the amount of Purchase Money Obligations which may constitute Permitted Liens at any time as set forth in Schedule 6; (iii) Debt owing under Capitalized Lease Obligations relating only to Rolling Stock and Debt owing under other Capitalized Lease Obligations (including any such Capitalized Lease Obligations under a sale and lease back transaction permitted under subsection 8.02(j)) in an amount not in excess of the amount of Capitalized Lease Obligations which may constitute Permitted Liens at any time as set forth in Schedule 6; (iv) Debt owing under operating leases arising as a result of a sale and lease back transaction relating only to Rolling Stock and Debt owing under operating leases arising under any other sale and lease back transactions permitted under subsection 8.02(j) in an amount not in excess of U.S. $70,000,000 (or the Equivalent Amount in any other currency or currencies) less the aggregate amount of Debt owing at such time under all Purchase Money Obligations and under all Capitalized Lease Obligations (other than Capitalized Lease Obligations relating only to Rolling Stock); 129 SECTION 8.02 - 121 - (v) Debt owing under operating leases (other than those referred to in paragraph (iv) of this subsection) entered into in the ordinary course of business for the purpose of carrying on the same; (vi) Debt under Hedging Arrangements permitted under subsection 8.02(r); (vii) Permitted Indebtedness; and (viii) subject to compliance with the provisions of Section 4.03, Additional Debt. (b) Liens. Create, incur, assume or suffer or permit to exist any Lien upon any of its property, whether now owned or hereafter acquired, except for Permitted Liens. (c) Amalgamation, etc. Enter into any transaction of amalgamation or consolidation or merger or liquidate, wind-up or dissolve itself (or suffer any liquidation, winding-up or dissolution or any proceedings therefor) or continue itself under the laws of any other statute or jurisdiction, except that, subject to the Restricted Parties taking such action, and executing and delivering to the Administrative Agent such undertakings, certificates, agreements, opinions and other documents as the Administrative Agent, acting reasonably, may require to affirm and assure the continued validity, enforceability, effectiveness and priority of the Security and the continued validity, enforceability and effectiveness of the covenants, agreements and obligations of the Restricted Parties under the Credit Documents, and provided that no Default or Event of Default is then continuing or would be created thereby, any Wholly-Owned Restricted Party may be amalgamated or consolidated or merged or liquidated, wound-up or dissolved with or into a Borrower, provided that such Borrower shall be the continuing corporation, or with or into any one or more other Wholly-Owned Restricted Parties provided that if any such Restricted Party is a Material Restricted Party, a Material Restricted Party shall be the continuing corporation. (d) Dispositions of Property. Except as permitted by subsection 8.02(c), Dispose of, in one transaction or a series of transactions, all or any part of its property, whether now owned or hereafter acquired, except that: (i) each of the Restricted Parties may Dispose of, in the normal course of its business for the purpose of carrying on the same, for fair market value, in accordance with customary trade terms, any tangible property that would reasonably be considered to be the subject matter of sales by it in the normal course of its business for the purpose of carrying on the same, or 130 SECTION 8.02 - 122 - that is worn out, obsolete or no longer useful for the purpose of carrying on its business; (ii) any Restricted Subsidiary may Dispose of all or any of its property (upon voluntary liquidation or otherwise) to a Borrower or to any Wholly-Owned Restricted Party which has provided all Security required to be provided under this Agreement; (iii) the Restricted Parties may, so long as no Default or Event of Default is continuing or would be created thereby, provided that such Disposition would not have, or have any reasonable likelihood of having, a Material Adverse Effect, in addition to the other transactions permitted by this subsection (d), Dispose of property in any Financial Year (the "REFERENCE FINANCIAL YEAR") provided however that: (x) on the Business Day following the date of the closing of any such Disposition an amount equal to that portion, if any, of the purchase price payable to the Restricted Parties under any such Disposition (the "DEEMED PROCEEDS OF DISPOSITION AMOUNT" relative to such Disposition) which is not Reinvested in the Restricted Parties on the date of the closing of such Disposition will be paid by the Borrowers to the Administrative Agent to repay Accommodation under the Credit as provided for in subsection 4.04(1); and (y) on that date which is one year from and including the date of the closing of any such Disposition (the "ANNIVERSARY" of such Disposition) in respect of which the fair market value at the time of such Disposition of the property so Disposed of exceeds (the amount of such excess being the "DEEMED EXCESS PROCEEDS OF DISPOSITION AMOUNT" relative to such Disposition) the greater of (1) $0, and (2) U.S. $50,000,000 (or the Equivalent Amount in any other currency or currencies) less the fair market value of all other property of the Restricted Parties Disposed of prior to such time under this paragraph of this subsection during the Reference Financial Year: (A) the limit of the Credit will be permanently reduced by an amount (the "PERMANENT DISPOSITION REDUCTION AMOUNT" relative to such Disposition) equal to the amount, if any, by which (X) the Deemed Excess Proceeds of Disposition Amount relative to such Disposition exceeds (Y) the amount, if any, which has been Reinvested in the 131 SECTION 8.02 - 123 - Restricted Parties from the date of the closing of such Disposition to the Anniversary of such Disposition and which has not previously been used in the calculation of the Permanent Disposition Reduction Amount relative to any other Disposition; and (B) the Borrowers shall make such permanent repayments of Accommodation, if any, required under the provisions of subsection 4.04(2); and (iv) a Restricted Party may enter into an arrangement to factor or securitize accounts receivable or monetize inventory of such Restricted Party provided however that no Default or Event of Default has occurred and is continuing at the time of giving effect to, or would result from or be created by giving effect to, such arrangement and provided further that in connection with any such arrangement other than such an arrangement involving only Guarantor Subsidiaries: (w) such arrangement is entered into with third parties on an arm's length basis on reasonable commercial terms consistent with those entered into by other Persons in similar transactions in the market place; (x) the proceeds from such arrangement are used solely for the working capital purposes of the Restricted Parties; (y) such arrangement is without any Recourse Against any Restricted Party; and (z) the aggregate of (A) the face amount of all accounts receivable generated by the Restricted Parties and owned at any time by another Person or by other Persons under all such factoring or securitization arrangements, and (B) the value (determined in accordance with GAAP in the same manner as used by the Restricted Parties to value their other inventory) of all inventory created or acquired by the Restricted Parties and owned or held at such time by another Person or by other Persons under all such monetization transactions, may not exceed U.S. $115,000,000 (or the Equivalent Amount in any other currency or currencies). For greater certainty there will not be included in calculating the amounts referred to in clauses (A) and (B) of this paragraph the face amount of accounts receivable generated by a Target or its 132 SECTION 8.02 - 124 - Subsidiaries prior to the date of the Acquisition of such Target by a Restricted Party and sold to another Person or Persons by such Target or its Subsidiaries prior to the date of such Acquisition under factoring or securitization arrangements entered into by such Target or its Subsidiaries prior to such date, or the value of inventory created or acquired by a Target or its Subsidiaries prior to the date of the Acquisition of such Target by a Restricted Party and sold to another Person or Persons by such Target or its Subsidiaries prior to the date of such Acquisition under monetization arrangements entered into by such Target or its Subsidiaries prior to such date, in each case provided that neither such arrangement nor such sale was entered into or effected in connection with, or in anticipation or contemplation of, such Acquisition. (e) Investments. Make any Investments in any one or more Persons who are not Wholly-Owned Restricted Parties which exceed, in the aggregate for all such Investments made after the date of this Agreement and all Financial Assistance given after the date of this Agreement as permitted under subsection 8.02(l) by all Restricted Parties, U.S. $50,000,000 (or the Equivalent Amount in any other currency or currencies). (f) Restricted Payments. Make any Restricted Payment, except that, so long as no Default or Event of Default is continuing (other than with respect to Restricted Payments which are in the form of management or consulting fees or bonuses payable to officers or directors of a Restricted Party in accordance with bona fide arrangements entered into in good faith in the ordinary course of business consistent with past practices, which may be paid in the circumstances provided for in paragraphs (i) and (ii) of this subsection although a Default or Event of Default may be continuing provided that amounts owing under this Agreement have not been accelerated at or prior to such time pursuant to Section 9.02) or would be created thereby: (i) any Wholly-Owned Restricted Party may pay Restricted Payments to a Borrower or to any other Wholly-Owned Restricted Party; and (ii) the Cdn. Borrower may make Restricted Payments at any time provided that: (x) the sum of (A) all such Restricted Payments to be made at such time and (B) all Restricted Payments made on or after the date of this Agreement and prior to such time; 133 SECTION 8.02 - 125 - does not exceed (y) 25% of cumulative Net Income for the period from January 1, 1997 to the date of the proposed payment of such Restricted Payment. (g) Transfers of Shares. Except for Dispositions which constitute a Disposition of all of the issued and outstanding shares of such Restricted Party held by the Restricted Parties and which is otherwise permitted under paragraph 8.02(d)(iii), Dispose of, or enter into any agreement to Dispose of, or grant any option respecting, any shares or other equity interest in any Restricted Party now or hereafter directly or indirectly held by any Restricted Party or in any other way permit any reduction in the direct or indirect voting interest, or the direct or indirect equity interest, of any Restricted Party in any other Restricted Party. For greater certainty, nothing in this subsection prohibits shareholders of the Cdn. Borrower from Disposing of any shares in the Cdn. Borrower held by them. (h) No Share Issuance. Except for the issue of common shares by the Cdn. Borrower, issue any securities unless the Person to whom such securities are issued is a Restricted Party and then only if (i) the issue of such securities would not result in any reduction in the direct or indirect voting interest, or the direct or indirect equity interest, of any Restricted Party in the Restricted Party issuing such securities, and (ii) if any of the securities of the issuing Restricted Party are pledged to the Administrative Agent under the Security, the additional securities so issued are validly pledged for the benefit of the Administrative Agent and the Lenders under the Security. Notwithstanding anything contained in this subsection, the Cdn. Borrower may issue common shares in its capital without the consent of the Lenders. (i) Transactions with Affiliates. Except as specifically permitted under this Agreement, enter into any transaction, including the purchase, Disposition of any property or the rendering of any services, with any Affiliate that is not a Wholly-Owned Restricted Party, or with any of its or their directors or officers, or enter into, assume or suffer to exist any employment, consulting or analogous agreement or arrangement with any such Affiliate or with any of its or their directors or officers, except a transaction or agreement or arrangement (i) which is in the ordinary course of business of such Restricted Party and which is upon fair and reasonable terms not less favorable to such Restricted Party than it would obtain in a comparable arm's-length transaction, and (ii) if the aggregate value of such transaction or agreement, or the property or services covered by such transaction or agreement, could reasonably be expected to exceed U.S. $50,000,000 (or the Equivalent Amount in any other currency or currencies), in respect of which such Restricted Party has first delivered a letter from an 134 SECTION 8.02 - 126 - independent financial advisor acceptable to the Administrative Agent confirming to the satisfaction of the Administrative Agent, acting reasonably, the compliance of such transaction or agreement with the requirements of this subsection. (j) Sale and Leaseback. Enter into any arrangement with any Person providing for the leasing by any of the Restricted Parties, as lessee, of property which has been or is to be Disposed of by any Restricted Party to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or the lease obligation of any of the Restricted Parties provided that the Restricted Parties may enter into such a sale and lease back transaction provided that (i) no Default or Event of Default has occurred and is continuing at the time of, or would result from or be created by giving effect to, such transaction; (ii) the liabilities of the Restricted Parties under such transaction shall constitute Debt for the purposes of this Agreement; and (iii) in connection with any such transaction other than a sale and lease back of property consisting only of Rolling Stock and other than a sale of property from one Guarantor Subsidiary to another Guarantor Subsidiary and the lease of such property by the selling Guarantor Subsidiary from the buying Guarantor Subsidiary: (x) the Disposition of the property subject to such transaction shall constitute a Disposition of property under paragraph 8.02(d)(iii) and the proceeds from such Disposition shall be applied as provided for in such paragraph and elsewhere in this Agreement; and (y) the aggregate amount of the liabilities of the Restricted Parties under such transaction together with the aggregate amount of the liabilities of the Restricted Parties under all other such transactions may not at any time exceed U.S. $70,000,000 (or the Equivalent Amount in any other currency or currencies) less the aggregate amount at such time of all Debt under Purchase Money Obligations and all Debt under Capitalized Lease Obligations (other than Capitalized Lease Obligations relating only to Rolling Stock). (k) Acquisitions. Make any Acquisition unless: (i) the Acquisition is in a Related Business; 135 SECTION 8.02 - 127 - (ii) no Default or Event of Default has occurred and is continuing on the date of, or would occur as a result of giving effect to, such Acquisition; and (iii) if the cost (including assumption of Debt) for such Acquisition would exceed U.S. $150,000,000 (or the Equivalent Amount in any other currency or currencies) and the Cdn. Borrower does not have an Investment Grade Rating at the time of such proposed Acquisition, the Cdn. Borrower has delivered to the Co-Arrangers at least 5 Business Days prior to the closing of such Acquisition an Officer's Certificate in substantially the same form as Schedule 21 with pro forma financial information (which certificate will be distributed to the Lenders at least 5 Business Days (or such shorter period as may be practical having regard to the date on which the Co-Arrangers receive such certificate) prior to the closing of such Acquisition) confirming on a pro forma basis the continued compliance of the Restricted Parties (including the subject matter of such Acquisition) after giving effect to such Acquisition with the provisions of the Credit Documents. For greater certainty, the provisions of this subsection will not prohibit an Acquisition (including an Acquisition by an Independent Subsidiary) where such Acquisition is financed entirely (x) from, or from a combination of, the proceeds of a common share equity issue of the Cdn Borrower, sources other than Accommodation or the Restricted Parties or any of their property and any Investments permitted under subsection 8.02(e), (y) without any Financial Assistance from any of the Restricted Parties (other than Financial Assistance permitted under subsection 8.02(l)), and (z) without Recourse Against any of the Restricted Parties (other than pursuant to Financial Assistance permitted under subsection 8.02(l)). (l) Limitation of Financial Assistance. Provide any Financial Assistance to any one or more Persons which are not Wholly-Owned Restricted Parties which exceed, in the aggregate for all such Financial Assistance made after the date of this Agreement and all Investments given after the date of this Agreement as permitted under subsection 8.02(e) by all Restricted Parties, U.S. $50,000,000 (or the Equivalent Amount in any other currency or currencies); provided, however, that this limitation shall not apply to assurances or obligations of Restricted Parties which are excluded from the definition of Contingent Obligation pursuant to paragraph (c) of such definition. (m) No Change of Fiscal Year. Change its financial year end of December 31. 136 SECTION 8.02 - 128 - (n) No Hostile Take-Over Bids. Make any Hostile Take-Over Bid without the prior consent of all of the Lenders, after they have received and considered such information as they may request from the Cdn. Borrower. (o) No Change of Name. Change its name without 30 days prior written notice to the Administrative Agent. (p) No Breaches. Make any request for Accommodation which, if made, would result in the occurrence of a Default or an Event of Default, including a default in the Debt to EBITDA Covenant Ratio required to be maintained under Section 8.03. (q) Arrangements with Independent Subsidiaries. Except to the extent that the same constitutes an Investment permitted under subsection 8.02(e) or Financial Assistance permitted under subsection 8.02(l), provide any Financial Assistance to any Independent Subsidiary or take or fail to take any other action, or permit any Independent Subsidiary to take or fail to take any action, which could result in any creditor of an Independent Subsidiary having any Recourse Against any Restricted Party. (r) Hedging Arrangements. Enter into any Hedging Arrangement unless such Hedging Arrangement: (i) is designed to protect the Restricted Parties against fluctuations in currency exchange rates, interest rates or commodity prices; and (ii) has been entered into by such Restricted Party bona fide and in good faith in the ordinary course of its business for the purpose of carrying on the same and not for speculative purposes. 1.083 FINANCIAL COVENANTS ------------------- So long as this Agreement is in force the Cdn. Borrower: (a) will ensure that the Interest Coverage Ratio is at all times greater than 3.5 to 1.0; (b) will ensure that the Debt to EBITDA Covenant Ratio is at all times: (i) on or before December 31, 1998, equal to or less than 4.25 to 1.0; (ii) on or after January 1, 1999 and on or before December 31, 1999, equal to or less than 4.0 to 1.0; and 137 SECTION 8.03 - 129 - (iii) on or after January 1, 2000, equal to or less than 3.75 to 1.0; (c) will ensure that the Fixed Charge Ratio is at all times equal to or greater than 1.25 to 1.0; and (d) will ensure that the Working Capital Ratio is at all times equal to or greater than 1.25 to 1.0. 1.084 INTERPRETATION OF CERTAIN COVENANTS ----------------------------------- The specification in Article Three of interest rates and fees for a range which is different than the covenants set forth in Section 8.03, does not limit the extent of, or relieve the Borrowers from complying with, the covenants in this Agreement. ARTICLE NINE ------------ EVENTS OF DEFAULT ----------------- 1.091 EVENTS OF DEFAULT ----------------- Any one or more of the following events will constitute an Event of Default: (a) Default in Principal. If a Borrower fails to repay any indebtedness on account of principal under the Credit when due under this Agreement. (b) Default in Interest, etc. If a Borrower fails to pay any interest, fees or other amount payable under any Credit Document (other than principal referred to in subsection 9.01(a)) within two Business Days of the due date thereof. (c) Certain Defaults under Credit Agreement. If a Borrower defaults in the performance or observance of any term, condition or covenant contained in Section 8.02 or Section 8.03. (d) Other Defaults under Credit Documents. Subject to subsections 9.01(a), (b) and (c), if a Restricted Party or any Independent Subsidiary defaults in the performance or observance of any term, condition or covenant contained in any Credit Document and, with respect to any covenant which is capable of being cured, such default continues for a period of 15 days or more after written notice of such default has been delivered by the Administrative Agent or the Required Lenders to the applicable Person (provided that the grace period can be abridged by the Administrative Agent or the Required Lenders with respect to any covenant 138 SECTION 9.01 - 130 - for which the above referenced 15 day grace period is available if the Administrative Agent or the Required Lenders consider that the delay would impair the Security or if the nature or rank of the Security is being challenged). (e) Representations and Warranties. If any representation, warranty or statement made in any Credit Document or any certificate or other document delivered to the Administrative Agent, any Other Agent or any of the Lenders pursuant to this Agreement is untrue or incorrect in any material respect when made or when deemed to have been made. (f) Default under Other Agreements with Lenders. If a Restricted Party defaults in the performance or observance of any term, condition, representation or covenant contained in any Lender/Borrower Hedging Arrangement or in any other agreement between such Restricted Party and the Administrative Agent, any of the Other Agents or any of the Lenders or any of their respective Eligible Affiliates (other than the Credit Documents) after the expiry of any applicable grace periods. (g) Default in other Indebtedness. If there shall be outstanding any amount or amounts exceeding an aggregate of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies) in respect of which any one or more of the Restricted Parties shall have failed to make a payment when due and payable, or if any amount or amounts exceeding an aggregate of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies) shall have become due and payable by, or could then be declared by the Person to whom such amount is to be paid to be due and payable by, any one or more of the Restricted Parties prior to the stated maturity date thereof or prior to the regularly scheduled date for payment thereof as a result of any default or event of default (however described) or other failure by any one or more of the Restricted Parties to perform or observe any obligation or covenant. (h) Credit Documents. If any Credit Document or any part thereof shall, at any time after its respective execution and delivery and for any reason, cease in any way to be in full force and effect or if the Security or any part thereof shall, at any time after its execution and delivery and for any reason, cease to constitute a Lien of the nature and priority specified in or contemplated by this Agreement, and in either such case such event continues for a period of 15 days after notice thereof from the Administrative Agent or the Required Lenders to the Cdn. Borrower, or if the validity or enforceability of any Credit Document is disputed in any manner by any of the parties thereto other than the Administrative Agent and the Lenders; 139 SECTION 9.01 - 131 - (i) Winding-up etc. If an order is made or an effective resolution passed for the winding-up, liquidation or dissolution of a Restricted Party, except to the extent permitted under subsection 8.02(c). (j) Voluntary Insolvency Actions. If any Restricted Party institutes proceedings for its winding up, liquidation or dissolution, or takes action to become a voluntary bankrupt, or consents to the filing of a bankruptcy proceeding against it, or files a proposal, a notice of intention to make a proposal, a petition or answer or consent seeking reorganization, readjustment, arrangement, composition or similar relief under any bankruptcy law or any other similar applicable law or consents to the filing of any such petition, or consents to the appointment of a receiver, liquidator, trustee or assignee in bankruptcy or insolvency of all or a substantial part of the property of any Restricted Party, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due or commits any other act of bankruptcy, or suspends or threatens to suspend transaction of its usual business, or any action is taken by any Restricted Party in furtherance of any of the aforesaid. (k) Insolvency Proceedings. If a court having jurisdiction enters a decree or order adjudging any Restricted Party a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, readjustment, arrangement, composition or similar relief under any bankruptcy law or any other similar applicable law, or a decree or order of a court having jurisdiction for the appointment of a receiver, liquidator, trustee or assignee in bankruptcy or insolvency of all or a substantial part of the undertaking or property of any Restricted Party, or for the winding up, dissolution or liquidation of its affairs, is entered and such decree, order or petition is not contested and the effect thereof stayed, or any material part of the undertaking or property of any Restricted Party is sequestered or attached and is not returned to the possession of such Restricted Party or released from such attachment within 45 days thereafter. (l) Appointment of Receiver. If a receiver, manager, receiver and manager, trustee, custodian or other similar official is appointed in respect of any Restricted Party or any material part of its property. (m) Bankruptcy Statutes. If any proceeding, voluntary or involuntary, is commenced, or an order or petition is issued, respecting any Restricted Party pursuant to any statute relating to bankruptcy, insolvency, reorganization of debts, liquidation, winding-up or dissolution, including, without limitation, any proceedings, proposal, notice of intention to make a proposal, order or petition under the Bankruptcy and Insolvency Act (Canada), the United States Bankruptcy Code, the 140 SECTION 9.01 - 132 - Company Creditors Arrangement Act (Canada), the Winding-up Act (Canada) or any similar legislation in any other jurisdiction. (n) Judgments. If a final judgment for an amount in excess of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies) is rendered against a Restricted Party and, within 15 Business Days after entry thereof, such judgment has not been discharged or execution thereof stayed pending appeal or if, within 15 days after the expiration of any such stay, such judgment has not been discharged. (o) Encumbrances. If an encumbrancer takes possession of any property of one or more Restricted Parties the value of which in the opinion of the Required Lenders exceeds U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies), or if a distress or execution or any similar process is levied or enforced against any property of one or more Restricted Parties, the value of which in the opinion of the Required Lenders exceeds U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies), and such distress, execution or similar process remains unsatisfied for such period as would permit such property or any part thereof to be sold thereunder, provided that such possession or process has not been stayed and is not being contested in good faith by the applicable Restricted Party (or if contested in good faith is not dismissed within 45 days). (p) Cease to carry on Business. If a Restricted Party ceases or threatens to cease to carry on in the ordinary course its business or a substantial part thereof, except to the extent permitted under subsection 8.02(c). (q) Qualified Auditor's Report. If any report of the Cdn. Borrower's auditors contains any qualification which in the opinion of the Required Lenders relates to a matter which has a Material Adverse Effect. (r) Reorganization. If there is any reorganization of a Restricted Party and in consequence of such reorganization the applicable Restricted Party is not the surviving entity of such reorganization, or if there is any consolidation, merger or amalgamation of a Restricted Party with any other Person except to the extent permitted under subsection 8.02(c). (s) Material Adverse Effect. If, in the opinion of the Required Lenders (which opinion will be conclusive), any event occurs which has a Material Adverse Effect. 141 SECTION 9.01 - 133 - (t) Change of Control of a Restricted Party. Except for Dispositions of shares of a Restricted Party permitted under subsection 8.02(g), if there occurs without the prior written consent of the Required Lenders, a change of control of a Restricted Party. For the purposes of this Agreement, there will be a "change of control" if: (i) with respect to any Restricted Party, there is a change of "control" as defined in the Business Corporations Act (Ontario); or (ii) with respect to the Cdn. Borrower, the nominees of any single Person (other than Allen Fracassi) or any single Person (other than Allen Fracassi) together with such Person's Associates and/or Affiliates comprise a majority of the board of directors of the Cdn. Borrower. (u) Pension Plans. If (i) any steps are instituted to terminate a Pension Plan or a Non-U.S. Pension Plan in whole or in part if as a result of such termination any Borrower could be required to make a contribution to such Pension Plan or Non-U.S. Pension Plan, or could incur a liability or obligation to such Pension Plan or Non-U.S. Pension Plan, in excess of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies), or (ii) if a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a lien for an amount in excess of U.S. $2,000,000 (or the Equivalent Amount in any other currency or currencies) under section 302(f) of ERISA or if a contribution failure occurs with respect to any Non-U.S. Pension Plan sufficient to give rise to a lien or a deemed trust for an amount in excess of U.S. $10,000,000 (or the Equivalent Amount in any other currency or currencies) under Applicable Law or, (iii) if, (x) a Pension Plan has an Unfunded Current Liability, there is any withdrawal liability of a Restricted Party or any ERISA Affiliate to any Pension Plan which is a multiemployer plan (as defined in Section 4001(a)(3) of ERISA), any Restricted Party has incurred or is likely to incur liabilities pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) or Non-U.S. Welfare Plan that provide benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or Pension Plans or Non-U.S. Pension Plans, and a condition exists or an event or transaction may occur with respect to any Pension Plan or Non-U.S. Pension Plan or Non-U.S. Welfare Plan; and (y) there shall result from any such condition, event or events the imposition or the granting of a Lien, or a liability or a material risk of incurring a liability; and 142 SECTION 9.01 - 134 - (z) such Lien, or liability, individually, and/or in the aggregate, in the opinion of the Required Lenders, has had, or could reasonably be expected to have, a Material Adverse Effect. 1.092 REMEDIES -------- (1) Upon the occurrence of any Event of Default, and at any time thereafter if the Event of Default shall then be continuing, the Administrative Agent with the consent of the Required Lenders may, and upon written request by the Required Lenders shall, take any or all of the following actions: (i) by written notice to the Cdn. Borrower declare all principal amounts with respect to Accommodation, all amounts payable with respect to outstanding Bankers' Acceptances and BA Equivalent Notes as provided for in subsection 2.05(8), all amounts payable with respect to outstanding Letters of Credit as provided for in subsection 2.06(5), and all accrued interest, fees and other amounts hereunder to be, whereupon the same shall become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers; (ii) by written notice to the Cdn. Borrower declare the Credit and the Commitments to be terminated, whereupon the same shall terminate immediately and all standby fees, availment fees and other amounts accrued under the Credit Documents shall immediately become due and payable without any further notice of any kind; provided however that if an Event of Default described in subsections 9.01(i), (j), (k), (l) or (m) and relative to either Borrower shall occur, the result which would otherwise occur only on the giving of notice by the Administrative Agent to the Cdn. Borrower as specified in clauses (i) and (ii) above shall occur automatically without the giving of any such notice; (iii) realize upon the Security and any other security applicable to the liability of any of the Restricted Parties under the Credit Documents; and (iv) without limitation, exercise any other action, suit, remedy or proceeding authorized or permitted by any Credit Documents or any other agreement, at law, in equity, under statute or otherwise. (2) If any Restricted Party shall fail to comply with any covenant contained in any Credit Document that is applicable to it, the Administrative Agent may satisfy the obligations of such Restricted Party with respect to such covenant, and all costs and expenses thereby incurred by or on behalf of the Administrative Agent shall be reimbursed by the Borrowers to the Administrative Agent immediately. 1.093 BENEFIT OF SECURITY; SET-OFF; SHARING OF PAYMENTS. -------------------------------------------------- (1) Subject to subsection 9.03(5), all Security shall be held for the Rateable benefit of the Administrative Agent, the Other Agents, the Lenders and their respective Eligible Affiliates (collectively the "SECURED PARTIES"), and all proceeds from the Security which are distributable to the Secured Parties shall be applied for the Rateable benefit of the Secured Parties irrespective of any priority to which any Secured Party may otherwise be entitled. Notwithstanding the foregoing or any other provision of any of the Credit Documents or the Lender/Borrower 143 SECTION 9.03 - 135 - Hedging Arrangements (collectively the "SECURED PARTY DOCUMENTS"), if there shall exist at any time any amount payable by any Secured Party to any other Secured Party pursuant to any provision of any Secured Party Document, then such amount shall be taken into account when calculating, and an appropriate portion of such amount shall be paid from, any proceeds of Security otherwise payable to such first Secured Party. (2) Each Borrower agrees that, upon the occurrence of an Event of Default, in addition to (and without limitation of) any right of set-off, bankers' lien, counterclaim or other right or remedy that any Secured Party may otherwise have, each Secured Party shall be entitled, at its option, but subject to subsection 9.03(3), to offset any and all balances held by it for the account of such Borrower at any of its offices or branches, in any currency, against any and all amounts owed by such Borrower to such Secured Party under any Secured Party Document (regardless of whether any such balances are then due or payable to such Borrower), in which case such Secured Party shall promptly notify such Borrower and the Administrative Agent thereof; provided that such Secured Party's failure to give any such notice shall not affect the validity thereof. Any Person purchasing an interest in the obligations of any Borrower as contemplated by subsection 9.03(3) may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such interest as fully as if such obligations had been originally incurred to such Person and such Person were the holder thereof. (3) Each Secured Party (a "SURPLUS SECURED PARTY") that receives any payment or recovery (except (i) interest and fees paid as required pursuant to the Credit Documents prior to the acceleration of any payment or the termination of the Credit and the Commitments pursuant to Section 9.02, (ii) payments made in accordance with subsections 8.01(s) or 9.02(2) or Articles Four or Five prior to the acceleration of any payment or the termination of the Credit and the Commitments pursuant to Section 9.02 (including any prepayment of any or all amounts owing under the Credit Documents prior to the Maturity Date), (iii) payments made by a Borrower to a Secured Party under a Lender/Borrower Hedging Arrangement between such Borrower and such Secured Party, in accordance with the provisions of such Hedging Arrangement, prior to the acceleration of any payment or the termination of the Credit and the Commitments pursuant to Section 9.02, and (iv) any payment pursuant to this subsection 9.03(3)) from, or from the property of, any Restricted Party in respect of any obligation of a Restricted Party to such Secured Party under any Secured Party Document (whether by voluntary payment, by realization of any security held by such Secured Party, by exercise of a right of set-off or banker's lien, by counterclaim or cross action, by the enforcement of any of the Secured Party Documents, by reason of any priority afforded in any insolvency proceeding, or otherwise) in an amount which, relative to the corresponding amounts received by the other Secured Parties (the "DEFICIENT SECURED PARTIES"), is a greater proportion than the proportion which the obligations of such Borrower to the Surplus Secured Party under the Secured Party Documents bears to the obligations of such Borrower to the Deficient Secured Parties under the Secured Party Documents immediately prior to such receipt (in each case without regard to any Excess Amounts as defined in subsection 9.03(5)), the Surplus Secured Party shall purchase for cash 144 SECTION 9.03 - 136 - from the Deficient Secured Parties, without recourse, an interest in the obligations of the Restricted Parties to the Deficient Secured Parties under the Secured Party Documents in such amount as shall result in a Rateable participation (subject to subsection 9.03(5)) by all of the Secured Parties in the obligations of the Restricted Parties to all of the Secured Parties under the Secured Party Documents (provided that, to the extent that the Secured Parties determine that the same is practicable, any such purchase will be structured to minimize any increase of the amount for which any Borrower is liable in respect of Taxes pursuant to Section 5.03 and, if requested by the Administrative Agent, any such purchase shall be accompanied by an indemnity in favour of the Administrative Agent for any liability which the Administrative Agent may incur to any Governmental Authority in connection with any such increased Taxes for which any Restricted Party becomes liable pursuant to Section 5.03); provided, however, that if the Surplus Secured Party is thereafter required to relinquish all or any portion of such excess payment or recovery to any Person (other than to the Deficient Secured Parties as provided herein), such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. The Administrative Agent, upon consultation with the applicable Secured Parties, shall have the power to settle any documentation required to evidence any such purchase or restoration and, if deemed advisable by the Administrative Agent, to execute any document as attorney for any Secured Party in order to complete any such purchase or restoration. The Borrowers acknowledge that the foregoing arrangements are to be settled by the Secured Parties among themselves, and the Borrowers expressly consent to the foregoing arrangements among the Secured Parties. (4) Nothing contained in the Secured Party Documents shall require any Secured Party to exercise any right, or shall affect the right of any Secured Party to exercise and retain the benefits of exercising any right, with respect to any indebtedness or obligation of any of the Borrowers existing otherwise than pursuant to the Secured Party Documents. (5) Notwithstanding any other provisions of any of the Secured Party Documents, the aggregate amount (the "EXCESS AMOUNT") of any obligations owing by the Borrowers to a Secured Party under a Tranche on the date of any acceleration under Section 9.02 which are in excess of such Secured Party's Commitment under such Tranche at such time shall not, as among the Secured Parties, be treated as outstanding Accommodation from such Secured Party for the purpose of determining the Secured Party's Rateable entitlement to proceeds from the Security or other enforcement proceedings, with the intent that proceeds from Security and from any other enforcement proceedings shall be distributed first to the Secured Parties Rateably only on the basis of outstanding Accommodation and other amounts ("PRIOR AMOUNTS") owing under the Secured Party Documents which are not Excess Amounts and second, only after payment of all such Prior Amounts (and all interest, fees and other amounts payable relative to such Prior Amounts), Rateably to the Secured Parties on the basis of all Excess Amounts. 145 SECTION 9.04 - 137 - 1.094 REMEDIES CUMULATIVE ------------------- The rights and remedies of the Administrative Agent, the Other Agents and the Lenders under the Credit Documents are cumulative and in addition to and not in substitution for any rights or remedies provided by any other agreement, at law, in equity, under statute or otherwise. 1.095 APPROPRIATION OF MONEYS RECEIVED -------------------------------- Each of the Administrative Agent, the Other Agents and the Lenders may from time to time when an Event of Default has occurred and is continuing, but subject to subsection 9.03(3), appropriate any moneys received by it from the Restricted Parties or from any security held by such Person in or toward payment of such of the obligations of the Borrowers or any other Restricted Party under the Credit Documents as such Person in its sole discretion may see fit. 1.096 NON-MERGER ---------- The taking of a judgment or judgments or any other action or dealing whatsoever by the Administrative Agent, any Other Agent or any Lender in respect of the Security will not operate as a merger of any indebtedness or liability of either of the Borrowers to the Administrative Agent, any Other Agent or any of the Lenders or in any way suspend payment or affect or prejudice the rights, remedies and powers, legal or equitable, which the Administrative Agent, any Other Agent or any Lender may have in connection with such liabilities and the surrender, cancellation or any other dealings with any security for such liabilities will not release or affect the liability of either of the Borrowers or any other Restricted Party under any of the Credit Documents or any security held by or on behalf of the Administrative Agent, the Other Agents and the Lenders. ARTICLE TEN ----------- CONDITIONS PRECEDENT TO BORROWINGS ---------------------------------- 1.101 CONDITIONS PRECEDENT TO THE INITIAL BORROWING --------------------------------------------- No Lender shall be obliged to make available any Accommodation under the initial Borrowing under the Credit unless all of the following have occurred and/or are true: (a) The Administrative Agent shall have received the relevant Notice of Borrowing. (b) The Administrative Agent shall have received the Security, which shall have been duly registered and filed, and have the priority, as required by Article Six and all necessary third party consents relative to the issuance of the Security. 146 SECTION 10.01 - 138 - (c) The Administrative Agent shall have received a Corporate Separateness Covenant and Assurance Agreement and, with respect to Independent Subsidiaries which has consented or is required to join in the filing of consolidated federal income tax returns in the United States of America with one or more Restricted Parties, a Tax Sharing Agreement duly authorized, executed and delivered by each of the Independent Subsidiaries and shall have received a duly executed Non Recourse Acknowledgement and Undertaking from each material creditor of an Independent Subsidiary specified by the Co-Arrangers. (d) There shall exist no Default or Event of Default on the initial Borrowing Date and the completion of the Allwaste Acquisition, the Serv Tech Acquisition, and the applicable Borrowing would not result in the occurrence of a Default or an Event of Default, and each Borrower shall have delivered to the Administrative Agent an Officer's Certificate to such effect. (e) All representations and warranties contained in Article Seven (applied as if Allwaste and its Subsidiaries and Serv Tech and its Subsidiaries were Restricted Parties at such time) shall be true on and as of the initial Borrowing Date with the same effect as if such representations and warranties had been made on and as of the initial Borrowing Date, and each Borrower shall have delivered to the Administrative Agent an Officer's Certificate to such effect. (f) The Administrative Agent and the Lenders shall have received such financial and other information relating to the Restricted Parties and the Allwaste Acquisition and the Serv Tech Acquisition, as they shall have reasonably requested. (g) The Administrative Agent shall have received certified copies of, or certificates of insurance for, all insurance maintained by the Restricted Parties, Allwaste and its Subsidiaries and Serv Tech and its Subsidiaries, and such insurance shall comply with the requirements of the Credit Documents. (h) Except for any Permitted Indebtedness, the Existing Bank Debt shall be repaid in full, and the Existing Philip Bank Credit Agreement and the Existing Allwaste and Serv Tech Credit Agreements shall be cancelled, simultaneously with the obtaining of the initial Borrowing. (i) Each Borrower shall have paid to each of the Administrative Agent, the Other Agents and the Lenders all fees and other amounts which shall have become due and payable by it to the Administrative Agent or such Lender on or prior to the initial Borrowing Date and shall have paid all fees payable to the advisors of the Administrative Agent and the Lenders. 147 SECTION 10.01 - 139 - (j) All Liens over any property of any of the Restricted Parties and Allwaste and its Subsidiaries, and if the Serv Tech Acquisition has closed prior to such time or is closing at such time Serv Tech and its Subsidiaries, other than Permitted Liens, shall have been released and discharged or the Co-Arrangers shall have received undertakings and assurances satisfactory to them respecting the release and discharge of all such Liens. (k) The following documents in form, substance and execution acceptable to the Administrative Agent shall have been delivered to the Administrative Agent: (i) a certified copy of the constating documents and by-laws of each Material Restricted Party (including Allwaste and Serv Tech and those of their respective Subsidiaries which would constitute Material Restricted Parties), and of all corporate proceedings taken and required to be taken by each Material Restricted Party (including Allwaste and Serv Tech and those of their respective Subsidiaries which would constitute Material Restricted Parties), to authorize the execution and delivery of the Credit Documents to which it is a party and the performance of the transactions by it contemplated in such Credit Documents; (ii) a certificate of incumbency for each Restricted Party (including Allwaste and Serv Tech and those of their respective Subsidiaries which would constitute Material Restricted Parties) setting forth specimen signatures of the persons authorized to execute the Credit Documents to which it is a party; (iii) a certificate of status or certificate of good standing, as the case may be, for each Material Restricted Party (including Allwaste and Serv Tech and those of their respective Subsidiaries which would constitute Material Restricted Parties); (iv) the opinion of counsel for each of those Material Restricted Parties (including Allwaste and Serv Tech and those of their respective Subsidiaries which would constitute Material Restricted Parties) designated by the Co-Arrangers as material, such opinion to be in form and substance satisfactory to the Lenders; (v) the opinion of Canadian counsel for the Administrative Agent and the Lenders, in form and substance satisfactory to the Lenders; (vi) an environmental compliance certificate from the Cdn. Borrower's Executive Vice-President, Corporate and Regulatory Affairs; 148 SECTION 10.01 - 140 - (vii) the most recent annual audit (and any subsequent addendums) from the Cdn. Borrower's independent environmental auditor; (viii) an Officer's Certificate of the Cdn. Borrower, together with pro forma financial statements and other information in form and detail satisfactory to the Required Lenders, giving effect to the Allwaste Acquisition, the Serv Tech Acquisition and the initial Borrowing hereunder and confirming the interest and fee pricings under Article Three, and compliance with the financial covenants under Section 8.03, after giving effect to the Allwaste Acquisition and the Serv Tech Acquisition, and such initial Borrowing; and (ix) such other documents relative to the Credit Documents, the transactions contemplated in the Credit Documents and the Allwaste Acquisition, and the Serv Tech Acquisition, as the Administrative Agent and the Lenders may reasonably require. (l) The Allwaste Acquisition shall have closed, or shall close concurrently with such Borrowing, on terms and conditions satisfactory to the Administrative Agent and the Lenders. (m) If the Serv Tech Acquisition has been completed prior to, or is completed concurrently with, such Borrowing, such Acquisition shall have been completed on the terms and conditions set forth in the Serv Tech Agreement and Plan of Merger. (n) The Restricted Parties and Allwaste will have obtained all required consents and approvals to the completion of the Allwaste Acquisition including without limitation any required consents and approvals under existing Applicable Law and from all applicable Governmental Authorities all of which shall be in full force and effect and in good standing. (o) The Borrowers shall have executed and delivered an agency fee letter to the Administrative Agent in form and substance satisfactory to the Administrative Agent. (p) There shall not be instituted or pending any action, proceeding or application before or by any Governmental Authority or any other Person (i) challenging the Allwaste Acquisition which is effective to restrain, prohibit or delay the Allwaste Acquisition, or (ii) which in the opinion of the Required Lenders, acting reasonably, has a reasonable likelihood of having a Material Adverse Effect. 149 SECTION 10.01 - 141 - (q) The Co-Arrangers shall have received, reviewed and indicated their satisfaction with the Cdn. Borrower's current 5 year financial forecast. (r) The initial Borrowing shall have taken place on or before August 31, 1997. 1.102 CONDITIONS PRECEDENT TO SUBSEQUENT BORROWINGS --------------------------------------------- No Lender shall be obliged to make available any subsequent Accommodation under the Credit unless all of the following have occurred and/or are true: (a) The Administrative Agent shall have received the relevant Notice of Borrowing (other than with respect to Borrowings under an Operating Line which shall be subject to such notice requirements as may have been agreed to by the Cdn. Borrower and the Cdn. Operating Lender and by the U.S. Borrower and each of the U.S. Operating Lenders). (b) There shall exist no Default or Event of Default on the applicable Borrowing Date and the applicable Borrowing would not result in the occurrence of a Default or an Event of Default, and the applicable Borrower shall have delivered to the Administrative Agent, if so requested by the Administrative Agent, an Officer's Certificate to such effect. (c) After giving effect to the applicable Borrowing the Borrowers will continue to be in compliance with the Debt to EBITDA Covenant Ratio requirements set forth in Section 8.03, and the applicable Borrower shall have delivered to the Administrative Agent, if so requested by the Administrative Agent, an Officer's Certificate to such effect. (d) The representations and warranties contained in Article Seven as the same may have been modified prior to such time as provided for in Section 7.02 shall be true on and as of the applicable Borrowing Date with the same effect as if such representations and warranties had been made on and as of the applicable Borrowing Date, and the applicable Borrower shall have delivered to the Administrative Agent, if so requested by the Administrative Agent, an Officer's Certificate to such effect. (e) All conditions specified in Section 10.01, to the extent not previously satisfied for any reason, shall have been satisfied. (f) All conditions required to be complied with by the applicable Borrowing Date pursuant to any undertakings delivered to the Administrative Agent by a 150 SECTION 10.02 - 142 - Restricted Party on the Closing Date or in connection with the initial Borrowing shall have been satisfied and fulfilled. (g) If at the time of such Borrowing any Margin Stock is pledged or required to be pledged pursuant to the Security, all actions required to be taken pursuant to subsection 8.01(u) shall have been taken to the reasonable satisfaction of the Administrative Agent. ARTICLE ELEVEN -------------- THE ADMINISTRATIVE AGENT AND OTHER AGENTS ----------------------------------------- 1.111 APPOINTMENT ----------- The Lenders, the Other Agents and their Eligible Affiliates hereby appoint Canadian Imperial Bank of Commerce to act as their administrative agent as herein specified and, except as may be specifically provided to the contrary herein, each of the Lenders hereby irrevocably authorizes Canadian Imperial Bank of Commerce, as the agent of such Lender, to take such action on its behalf under or in connection with the Credit Documents and to exercise such powers thereunder as are delegated to the Administrative Agent by the terms thereof and such other powers as are reasonably incidental thereto which it may be necessary for the Administrative Agent to exercise in order that the provisions of the Credit Documents are carried out. The Lenders hereby acknowledge and agree that the Administrative Agent is the holder of an irrevocable power of attorney from the Lenders for the purpose of holding any of the Security or any other security granted by any Person with respect to the liabilities of the Restricted Parties under the Credit Documents, and the Administrative Agent hereby agrees to act in such capacity. The Lenders hereby designate Bankers Trust Company to act as the Syndication Agent, Canadian Imperial Bank of Commerce and Bankers Trust Company to act as Co-Arrangers and Dresdner Kleinwort Benson and Royal Bank of Canada to act as Documentation Agents, in each case to act in such capacities as specified in this Agreement and in the other Credit Documents. The Administrative Agent and each Other Agent may perform any of its duties under the Credit Documents by or through its agents. The Restricted Parties shall not be concerned to enquire whether the powers which the Administrative Agent is purporting to exercise have become exercisable or otherwise as to the propriety or regularity of any other action on the part of the Administrative Agent, and accordingly insofar as the Restricted Parties are concerned the Administrative Agent shall for all purposes hereof be deemed to have authority from the Lenders to exercise the powers and take the actions which are in fact exercised and taken by it. 151 SECTION 11.02 - 143 - 1.112 INDEMNITY FROM LENDERS ---------------------- The Lenders, the Other Agents, the Administrative Agent and their Eligible Affiliates agree to Rateably indemnify the Administrative Agent and the Other Agents (to the extent that such Person is not promptly reimbursed by the Borrowers on demand) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any nature or kind whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in its capacity as administrative agent hereunder or any Other Agent in its capacity as an Other Agent hereunder which in any way relate to or arise out of the Credit Documents or any action taken or omitted by such Person in such capacity under the Credit Documents; provided that no Lender or Eligible Affiliate shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements which result from such Person's gross negligence or wilful misconduct. Without limitation, each Lender, each Other Agent and each of their Eligible Affiliates agrees to reimburse the Administrative Agent promptly upon demand for its Rateable share of out-of-pocket expenses (including the fees and disbursements of counsel) incurred by the Administrative Agent in connection with the preparation of the Credit Documents and the determination or preservation of any rights of the Administrative Agent, the Other Agents, the Lenders or their respective Eligible Affiliates under, or the enforcement of, or legal advice in respect of rights or responsibilities under, the Credit Documents, to the extent that the Administrative Agent is not promptly reimbursed for such expenses by the Borrowers on demand. 1.113 EXCULPATION ----------- None of the Administrative Agent or any Other Agent shall have any duties or responsibilities except those expressly set forth in the Credit Documents. None of the Administrative Agent, any Other Agent nor any of their respective officers, directors, employees or agents shall be liable for any action taken or omitted to be taken under or in connection with the Credit Documents, unless such act or omission constitutes gross negligence or wilful misconduct. The duties of the Administrative Agent and the Other Agents shall be mechanical and administrative in nature; none of the Administrative Agent or any Other Agent shall have by reason of the Credit Documents a fiduciary relationship with any Lender and nothing in the Credit Documents, express or implied, is intended to or shall be construed as to impose upon the Administrative Agent or any Other Agent any obligation except as expressly set forth therein. None of the Lenders shall have any duties or responsibilities to any of the other Lenders except as expressly set forth in the Credit Documents. None of the Administrative Agent or any Other Agent shall be responsible for any recitals, statements, representations or warranties in any of the Credit Documents or which may be contained in any other document subsequently received by the Administrative Agent, any Other Agent or the Lenders from or on behalf of any Restricted Party or any Independent Subsidiary or for the authorization, execution, effectiveness, genuineness, validity or enforceability of any of 152 SECTION 11.03 - 144 - the Credit Documents, and none of the Administrative Agent or any Other Agent shall be required to make any inquiry concerning the performance or observance by any Restricted Party or any Independent Subsidiary of any of the terms, provisions or conditions of any of the Credit Documents. Each of the Lenders severally represents and warrants to the Administrative Agent and the Other Agents that it has made and will continue to make such independent investigation of the financial condition and affairs of the Restricted Parties as such Lender deems appropriate in connection with its entering into of any of the Credit Documents and the making and continuance of any Accommodation hereunder, that such Lender has and will continue to make its own appraisal of the credit worthiness of the Restricted Parties and that such Lender in connection with such investigation and appraisal has not relied upon any information provided to such Lender by the Administrative Agent or by any Other Agent. 1.114 RELIANCE ON INFORMATION ----------------------- The Administrative Agent and each Other Agent shall be entitled to rely upon any writing, notice, statement, certificate, facsimile, telex or other document or communication believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and, with respect to all legal matters pertaining to the Credit Documents and its duties thereunder, upon the advice of counsel selected by it. 1.115 KNOWLEDGE AND REQUIRED ACTION ----------------------------- None of the Administrative Agent nor any Other Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default (other than the non-payment of any principal, interest or other amount to the extent the same is required to be paid to the Administrative Agent for the account of the Lenders) unless the Administrative Agent or such Other Agent has received notice from a Lender or a Borrower specifying such Default or Event of Default and stating that such notice is given pursuant to this Section. In the event that the Administrative Agent receives such a notice, it shall give prompt notice thereof to the Lenders, and shall also give prompt notice to the Lenders of each non-payment of any amount required to be paid to the Administrative Agent for the account of the Lenders. The Administrative Agent shall, subject to Section 11.06, take such action with respect to such Default or Event of Default as shall be directed by the Lenders in accordance with this Article; provided that, unless and until the Administrative Agent shall have received such direction the Administrative Agent may, but shall not be obliged to, take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interest of the Lenders; and provided further that the Administrative Agent in any case shall not be required to take any such action which it determines to be contrary to the Credit Documents or to any Applicable Law. 153 SECTION 11.06 - 145 - 1.116 REQUEST FOR INSTRUCTIONS ------------------------ The Administrative Agent may at any time request instructions from the Lenders with respect to any actions or approvals which, by the terms of any of the Credit Documents, the Administrative Agent is permitted or required to take or to grant, and the Administrative Agent shall be absolutely entitled to refrain from taking any such action or to withhold any such approval and shall not be under any liability whatsoever as a result thereof until it shall have received such instructions from the Lenders. No Lender shall have any right of action whatsoever against the Administrative Agent as a result of the Administrative Agent acting or refraining from acting under the Credit Documents in accordance with instructions from the Lenders or the Required Lenders, as applicable. The Administrative Agent shall in all cases be fully justified in failing or refusing to take or continue any action under the Credit Documents unless it shall have received further assurances to its satisfaction from the Lenders and their Eligible Affiliates of their indemnification obligations under Section 11.02 against any and all liability and expense which may be incurred by it by reason of taking or continuing to take such action, and unless it shall be secured in respect thereof as it may deem appropriate. 1.117 EXCHANGE OF INFORMATION ----------------------- The Borrowers agree that each Lender, the Administrative Agent and the Other Agents may provide to the other Lenders or the Administrative Agent or any Other Agent such information concerning the financial position and property and operations of the Restricted Parties as, in the opinion of such Lender or the Administrative Agent, is relevant to the ability of each of the Restricted Parties to fulfil its respective obligations under or in connection with the Credit Documents. 1.118 THE ADMINISTRATIVE AGENT AND THE OTHER AGENTS, INDIVIDUALLY ----------------------------------------------------------- With respect to its Commitments, the Accommodation made available by it and the Credit Documents to which it is a party, each of the Persons which is the Administrative Agent or an Other Agent and their respective Affiliates shall have the same rights and powers under the Credit Documents as any other Lender and may exercise such rights and powers as though such Person were not the Administrative Agent or an Other Agent or an Affiliate of the Administrative Agent or an Other Agent, and the term "Lenders" and "Required Lenders" shall, unless the context clearly otherwise indicates, include each such Person in its individual capacity. It is understood and agreed by all of the Lenders that each of the Persons which is the Administrative Agent or an Other Agent, either directly or through its Affiliates, from time to time accepts deposits from, lends money to, provides underwriting, consulting and advisory services to, and generally engages in banking, securities, advisory and other related and ancillary businesses with the Restricted Parties and their Affiliates and Associates otherwise than as a Lender under the Credit Documents and may continue to do so as if it were not the 154 SECTION 11.08 - 146 - Administrative Agent or an Other Agent under the Credit Documents and shall have no duty to account to any of the Lenders with respect to any such dealings. 1.119 RESIGNATION AND TERMINATION --------------------------- If at any time (i) the Administrative Agent or any Other Agent shall deem it advisable, in its sole discretion, it may deliver to each of the Lenders and the Borrowers written notification of its resignation insofar as it acts on behalf of the Lenders pursuant to this Article or (ii) the Administrative Agent or any Other Agent is in default of any of its obligations hereunder and the Lenders shall deem it advisable, in their sole discretion, they may deliver to the Administrative Agent or such Other Agent, as the case may be, and the Borrowers written notification of the termination of the Administrative Agent's or such Other Agent's, as the case may be, authority to act on behalf of the Lenders pursuant to this Article. Any such resignation or termination of the Administrative Agent is to be effective upon the date of the appointment by the Lenders of a successor which shall assume all of the rights, powers, privileges and duties of the Administrative Agent under the Credit Documents, which appointment shall be promptly made from among the remaining Lenders and written notice thereof shall be given to the Borrowers concurrently with such appointment. The Borrowers shall have the right to approve any successor Administrative Agent to be appointed by the Lenders as aforesaid at any time that no Default or Event of Default has occurred and is continuing, provided that such approval shall not be unreasonably withheld or delayed. Any such resignation or termination of any Other Agent is to be effective immediately. If in the case of resignation by the Administrative Agent no appointment of a successor Administrative Agent has been made by the Lenders and approved by the Borrowers within 30 days, the resigning Administrative Agent may make such appointment without the approval of the Borrowers from among the remaining Lenders on behalf of the Lenders, and shall forthwith give notice of such appointment to the Lenders and the Borrowers. 1.1101 ACTIONS BY LENDERS ------------------ (1) Any approval (including without limitation any approval of or authorization for any amendment to any of the Credit Documents), instruction or other expression of the Lenders under any of the Credit Documents may be obtained by an instrument in writing signed in one or more counterparts by the Required Lenders, or where required by subsection 11.10(3) all of the Lenders (which instrument in writing, for greater certainty, may be delivered by facsimile). (2) Any approval (including without limitation any approval of or authorization for any amendment to any of the Credit Documents), instruction or other expression of the Lenders hereunder may also be included in a resolution that is submitted to a meeting or adjourned meeting of the Lenders duly called and held for the purpose of considering the same as hereinafter provided and shall be deemed to have been obtained if such resolution is passed by the affirmative vote evidenced in writing of the Required Lenders at a meeting at which a 155 SECTION 11.10 - 147 - quorum is present. A meeting of Lenders may be called by the Administrative Agent and shall be called by the Administrative Agent upon the request of any three Lenders. Every such meeting shall be held in the City of Toronto or at such other reasonable place as the Administrative Agent may approve. At least seven days notice of the time and place of any such meeting shall be given to the Lenders and shall include or be accompanied by a draft of the resolutions to be submitted to such meeting, but the notice may state that such draft is subject to amendment at the meeting or any adjournment thereof. The Required Lenders who are present in person or by proxy at the time and place specified in the notice shall constitute a quorum for the purpose of the transaction of business. A person nominated in writing by the Administrative Agent shall be chairman of the meeting. Upon every poll taken at any such meeting every Lender who is present in person or represented by a proxy duly appointed in writing (who need not be a Lender) shall be entitled to one vote in respect of each U.S. $1 of its Commitment (or if the Commitments have been terminated each U.S. $1 of the U.S. Dollar Amount of its outstanding Accommodation). In respect of all matters concerning the convening, holding and adjourning of Lenders' meetings, the form, execution and deposit of instruments appointing proxies and all other relevant matters, the Administrative Agent may from time to time make such reasonable regulations not inconsistent with this subsection 11.10(2) as it shall deem expedient and any regulations so made by the Administrative Agent shall be binding upon the Borrowers, the Administrative Agent and the Lenders. (3) Notwithstanding subsections 11.10(1) and (2): (a) the consent of all of the Lenders evidenced by an instrument in writing or, if all of the Lenders are present at a meeting of Lenders as aforesaid, by an affirmative vote of all of the Lenders, will be required for (i) any amendment to, postponement of, or discharge of all or substantially all of the Security (other than a release of Security over any property which a Restricted Party is expressly permitted to Dispose of pursuant to the provisions of this Agreement) or any release of the Cdn. Borrower from its guarantee forming part of the Security, (ii) any reduction to the amount of, or any extension to the date of, payment of any principal, interest or fees under this Agreement, (iii) any change to or waiver of clauses 9.01(a), (b), (i), (j), (k), (l) or (m) as they relate to a Borrower, Sections 9.02 and 9.03 or this Subsection, or (iv) any reduction in the percentage specified in the definition of Required Lenders or in any percentage of Lenders specified in any Credit Document as being required for the Lenders to take any action (it being understood that, with the consent of the Required Lenders, additional extensions of credit pursuant to this Agreement may be included in the determination of the Required Lenders on substantially the same basis as the extensions of the Commitments are included on the Closing Date); (b) except for any change in a Commitment otherwise expressly provided for in this Agreement, the consent of the particular Lender will be required for any change in 156 SECTION 11.10 - 148 - the Commitment of such Lender (it being understood that neither a reallocation of Commitments among Tranches as permitted under this Agreement nor waivers or modifications of conditions precedent, covenants, Defaults or Events of Default or of a mandatory reduction of the total Commitment shall constitute an increase of the Commitment of any Lender); (c) the consent of the Administrative Agent will be required for any change with respect to the duties or liabilities of the Administrative Agent under the Credit Documents; and (d) the consent of an Other Agent will be required for any change with respect to the duties or liabilities of such Other Agent under any of the Credit Documents. (4) An instrument in writing from the Required Lenders or, where applicable, all of the Lenders as provided for in subsection 11.10(1) and a resolution passed pursuant to subsection 11.10(2) ( any such instrument in writing or resolution being an "APPROVAL INSTRUMENT") shall be binding upon all of the Lenders, the Other Agents, the Administrative Agent and their respective Eligible Affiliates, and the Administrative Agent (subject to the provisions for its indemnity contained in this Agreement) shall be bound to give effect thereto accordingly. For greater certainty, to the extent so authorized in the Approval Instrument, the Administrative Agent shall be entitled (but not obligated) to execute and deliver on behalf of the Administrative Agent, the Other Lenders, all of the Lenders and all of their respective Eligible Affiliates, without the requirement for the execution by any other Person or Persons, any consents, waivers, documents or instruments (including without limitation any amendment to any of the Credit Documents) necessary or advisable in the opinion of the Administrative Agent to give effect to the matters approved by the Required Lenders or all of the Lenders, as the case may be, in any Approval Instrument. 1.111 PROVISIONS FOR BENEFIT OF LENDERS ONLY -------------------------------------- The provisions of this Article (other than Section 11.07, the last sentence of Section 11.01 and the last sentence of subsection 11.10(4)) relating to the rights and obligations of the Lenders, the Other Agents, the Administrative Agent and their respective Eligible Affiliates inter se shall be operative as between the Lenders, the Other Agent, the Administrative Agent and their respective Eligible Affiliates only, and the Borrowers shall not have any rights under or be entitled to rely for any purposes upon such provisions. 157 SECTION 12.01 - 149 - ARTICLE TWELVE -------------- MISCELLANEOUS ------------- 1.121 PARTICIPATIONS, ASSIGNMENTS AND TRANSFERS ----------------------------------------- (1) In addition to any transfer required by Section 9.03 to be made to any other Lender or required by Applicable Law to be made to any Person, a Lender may assign or transfer (a "SYNDICATION"), or grant participations (a "PARTICIPATION") in, or enter into any other arrangement (a "CREDIT DERIVATIVE") for the purpose of sharing, transferring or otherwise mitigating its risks with respect to, all or any part of its rights and obligations in respect of its Commitments or any Accommodation from time to time outstanding from it to such Persons ("PARTICIPANTS"), at such times and upon such terms as it may determine, without any obligation to obtain any consent from any Restricted Party, in accordance with the following provisions: (a) With respect to the grant of any Participation or any Credit Derivative: (i) the granting Lender shall remain fully liable for all of its obligations under the Credit Documents to the same extent as if such Participation or Credit Derivative had not been granted; (ii) all amounts payable by the Borrowers to the granting Lender under this Agreement shall be determined as if such Lender had not granted such Participation or Credit Derivative and as if such Lender were funding all Accommodation included in such Participation or Credit Derivative in the same way that it is funding all Accommodation made available by it in which no Participation or Credit Derivative has been granted; (iii) the granting Lender shall administer such Participation or Credit Derivative on behalf of the applicable Participant, and neither such Participant nor any Restricted Party shall have any rights against or obligations to, or deal directly with, each other in respect of such Participation or Credit Derivative; and (iv) the granting Lender shall ensure that its arrangements with respect to any such Participation or Credit Derivative do not require the granting Lender to consult with the applicable Participant with respect to any consents, approvals or votes from such granting Lender relative to any matter except for consents, approvals, amendments or waivers which would (x) extend the final scheduled maturity of any Accommodation in which such Participant is participating or reduce the rate or extend the time for payment of interest or fees thereon or reduce the principal amount thereof, or increase the amount of the Participant's participation over the amount thereof then in effect (it being understood that a waiver of any Default or 158 SECTION 12.01 - 150 - Event of Default or of a mandatory reduction in the Commitments shall not constitute a change in the terms of such participation, and that an increase in the available portion of any Commitment of any Lender shall be permitted without the consent of any Participant if the Participant's participation is not increased as a result thereof), (y) consent to the assignment or transfer by a Borrower of any of its rights or obligations under this Agreement, or (z) release all or substantially all of the Security (except as expressly provided for in the Credit Documents). (b) with respect to any such Syndication: (i) no such assignment or transfer shall be made at any time that an Event of Default is not continuing unless the applicable assignee or transferee (the "ASSIGNEE") is an Affiliate of the assigning or transferring Lender (the "ASSIGNOR") or is an Eligible Transferee. The term "ELIGIBLE TRANSFEREE" shall mean and include a commercial bank, trust company, insurance company, financial institution, any fund (a "FUND") that invests in bank loans and any other "accredited investor" (as defined in Regulation D of the United States Securities and Exchange Act). In the case of any Lender that is a Fund, any other Fund which is managed by the same investment advisor of such Lender or by an Affiliate of such investment advisor shall be deemed to be an Affiliate of such Lender for the purposes of this subsection; (ii) at the time of any such assignment or transfer to an Assignee which will, as a result of such assignment or transfer, become a U.S. Lender, which is not already a U.S. Lender and which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for United States Federal income tax purposes, the Assignee shall, to the extent legally entitled to do so, provide to the U.S. Borrower in the case of a Lender described in clause (a) or (b) of subsection 5.03(3), the forms described in such clause (a) or (b), as the case may be; (iii) the Assignor shall obtain from the Assignee an undertaking of the Assignee, addressed to the parties to this Agreement (as such parties may be constituted at such time) and substantially in the form of Schedule 24 (the "UNDERTAKING"), whereby the Assignee agrees to be bound by this Agreement in the place and stead of the Assignor to the extent of the rights and obligations of the Assignor in respect of the amount of its Commitments that has been assigned or transferred to the Assignee and the assignment or transfer shall be made by way of an assignment and 159 SECTION 12.01 - 151 - assumption agreement between the Assignor and the Assignee substantially in the form of Schedule 25; (iv) no such assignment or transfer other than an assignment or transfer to another Lender or to any Affiliate of any Lender shall be made to any Person if the Assignor has not received the prior written consent of the Administrative Agent, such consent not to be unreasonably withheld or delayed; (v) subject to paragraph 12.01(1)(h), no such assignment or transfer shall be made by any Cross Border Lender at any time that an Event of Default is not continuing unless (a) the assignment or transfer is made by both the applicable Cdn. Cross Border Lender and its Affiliated U.S. Cross Border Lender, (b) the assignment or transfer is of a Tranche 2 Combined Commitment of such Lenders, and (c) the assignment or transfer is made on a combined basis to a Person which is a financial institution in Canada which will agree to make available the full amount of the assigned Tranche 2 Combined Commitment as a Cdn. Cross Border Lender under Tranche 2 to the Cdn. Borrower in Canada and an Affiliated Person which is a U.S. financial institution which will agree to make available the full amount of the assigned Tranche 2 Combined Commitment as its Affiliated U.S. Cross Border Lender under Tranche 2 to the U.S. Borrower in the United States of America; (vi) no such assignment or transfer shall be made by the Cdn. Operating Lender under the Cdn. Operating Line unless such assignment or transfer is of all of the Cdn. Operating Lender's Commitment under such Tranche; (vii) no such assignment or transfer shall be made by a U.S. Operating Lender under the U.S. Operating Line from such U.S. Operating Lender unless such assignment or transfer is of all of such U.S. Operating Lender's Commitment under such U.S. Operating Line; (viii) subject to paragraph 12.01(1)(h), no such assignment or transfer shall be made by any LC Lender at any time that an Event of Default is not continuing unless (a) the assignment or transfer is made by both the applicable Cdn. LC Lender and its Affiliated U.S. LC Lender, (b) the assignment or transfer is of a Combined LC Commitment of such Lenders, and (c) the assignment or transfer is made on a combined basis to a Person which is a financial institution in Canada which will agree to make available the full amount of the assigned Combined LC Commitment as a 160 SECTION 12.01 - 152 - Cdn. LC Lender under the LC Line to the Cdn. Borrower and an Affiliated Person which is a U.S. financial institution which will agree to make available the full amount of the assigned Combined LC Commitment as its Affiliated U.S. LC Lender under the LC Line to the U.S. Borrower; (ix) each Borrower agrees that, subject to the subsection 2.08(2) and clause (x) of this paragraph requiring recordation of such assignment or transfer in the Registry of Commitments, such assignment or transfer shall be effective upon the date provided in the assignment or transfer agreement between the Assignor and the Assignee (but in no event earlier than the date that the relevant Undertaking is delivered by the Assignee to the Administrative Agent), and the Assignee shall thereafter be and be treated as a Lender for all purposes of the Credit Documents and shall, to the extent of the rights and obligations assigned or transferred to it by the Assignor, be entitled to the full benefits and subject to the full obligations of the Assignor under the Credit Documents to the same extent as if the Assignee were an original party in respect of the rights and obligations assigned or transferred to it, and the Assignor shall be released and discharged accordingly; (x) the Administrative Agent shall notify the Borrowers of the identity, nationality and applicable lending office of the Assignee and the rights and obligations assigned or transferred to the Assignee immediately after the assignment or transfer, and shall make the necessary entries and recordings in the Registry of Commitments reflecting the adjustments to the Commitments resulting from such assignment or transfer which assignment or transfer and adjustments shall not be effective until so recorded by the Administrative Agent in the Registry of Commitments as provided for in subsection 2.08(2), and the Borrowers shall promptly following any written request from the Administrative Agent execute and deliver such assurances as may be reasonably requested by the Administrative Agent to confirm any of the matters provided for in this Section including, without limitation, the release and discharge provided for in clause (ix) of this paragraph; (xi) unless the Assignee is an Affiliate of the Assignor, the Assignee shall be entitled to receive all principal, interest and other amounts owing under this Agreement in respect of any Accommodation that is included in the assignment or transfer as aforesaid free from all equities or rights of set-off or counterclaim between the Borrowers or any of them and the Assignor 161 SECTION 12.01 - 153 - and any intermediate assignee or transferee or other Person entitled thereto, and all Persons may act accordingly; (xii) the minimum amount of any assignment or transfer which is less than the whole Commitment of the Assignor shall be U.S. $5,000,000 or an amount in excess thereof which is a whole multiple of U.S. $100,000; and (xiii) the Assignor or the Assignee, as the case may be, shall pay to the Administrative Agent at the time of any such assignment or transfer to a Person who is not an Affiliate of the Assignor an administration fee of U.S. $2,500 for each Assignee relative to each such assignment or transfer (provided that assignments or transfers to two Affiliated Persons under Tranche 2 who will act as a Cdn. Cross Border Lender and its Affiliated U.S. Cross Border Lender or to two Affiliated Persons under the LC Line who will act as a Cdn. LC Lender and its Affiliated U.S. LC Lender shall be treated as one assignment or transfer to one Assignee). (c) Each of the Borrowers, the Other Agents and the Lenders consents to each and every assignment or transfer which may be made on or after the date of this Agreement pursuant to this Section, and to the release and discharge of each Assignor in accordance with clause (ix) of paragraph of this Section. (d) Each Assignee shall be deemed to have confirmed to the Administrative Agent, the Other Agents and the Lenders that it has received a copy of this Agreement together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to acquire such of the rights and obligations of the Assignor as have been assigned or transferred to it, and each Assignee agrees that, independently and without reliance upon the Administrative Agent, any Other Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, it will continue to make its own credit decisions in taking or not taking actions under this Agreement, and further agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Documents are required to be performed by it as a Lender. (e) Any grant, assignment or transfer pursuant to this Section will not constitute a repayment by the applicable Borrower to the granting Lender or to the Assignor, as the case may be, of any Accommodation included in such assignment or transfer, nor a new advance of such Accommodation to such Borrower by the grantee or by the Assignee, as the case may be, and the parties acknowledge that the applicable Borrower's obligations under this Agreement with respect to any 162 SECTION 12.01 - 154 - assigned or transferred Accommodation will continue and not constitute new obligations. (f) The Lenders, the Administrative Agent and the Other Agents may disclose on a confidential basis to a potential or actual Participant or Assignee such information concerning the Restricted Parties, the Independent Subsidiaries and the Credit Documents as the Administrative Agent, any Other Agent or any Lender may consider to be appropriate in connection therewith, provided that such potential or actual Participant or Assignee, as the case may be, shall be subject to the provisions of Section 12.06. (g) A Borrower may not, and, unless expressly permitted under this Agreement, shall not permit any other Restricted Party to, assign or transfer all or any of its rights or obligations under any Credit Document without the prior written consent of all of the Lenders. (h) Notwithstanding clauses 12.01(1)(b)(v) and 12.01(1)(b)(viii), the Administrative Agent and the Cdn. Borrower may consent to an assignment or transfer by an Assignor which would have the effect of adjusting the Commitments under the Tranches of a Credit by all or a portion of the amount assigned or transferred by each Assignor having regard to the wish of the Assignor to become a Lender under a different Tranche of such Credit with respect to the amount so assigned or transferred than the Tranche under which such amount was held by the Assignor. (i) To the extent that an assignment or transfer of all or any portion of a Lender's Commitments and related outstanding Accommodation by way of a Participation or a Credit Derivative pursuant to subsection 12.01(a) or pursuant to this subsection would, at the time of such assignment or transfer, result in increased costs under Section 5.03 or Section 5.04 in excess of those being charged by the applicable Assignor prior to such assignment or transfer, then the applicable Borrower, in accordance with and pursuant to the other provisions of this Agreement, shall not be obligated to pay such excess increased costs (although the Borrowers, in accordance with and pursuant to the other provisions of this Agreement, shall be obligated to pay the costs which are not in excess of those being charged by the applicable Assignor prior to such assignment or transfer and any subsequent increased costs of the type described above resulting from changes after the date of the such assignment or transfer). (2) Any Lender may pledge its interests in the Credit Documents in the ordinary course of its business including to the United States Federal Reserve or any other similar Governmental Authority and, with the consent of the Administrative Agent, any Lender that is a 163 SECTION 12.01 - 155 - Fund may pledge all or any portion of its interests in the Credit Documents to its trustee in support of its obligations to its trustee. 1.122 WAIVER ------ No delay on the part of the Administrative Agent, any Other Agent or any Lender in exercising any right or privilege under any Credit Document shall operate as a waiver of such right or privilege, and no waiver of any Default or Event of Default shall operate as a waiver of such Default or Event of Default unless made in writing and signed by an authorized officer of the Administrative Agent. No written waiver shall preclude the exercise by the Administrative Agent, any Other Agent or any Lender of any right, power or privilege under any Credit Document other than in respect of the specific action or inaction covered by such waiver and strictly in accordance with the terms of such waiver, or extend to or apply to any other Default or Event of Default. No Lender shall be deemed to have waived, by reason of making available any Accommodation under this Agreement, any Default or Event of Default which has arisen by reason of any representation or warranty made or deemed to have been made in any Credit Document proving to be false or misleading. 1.123 FURTHER ASSURANCES ------------------ Each Borrower shall from time to time immediately upon request by the Administrative Agent do, make and execute, and cause each of the other Restricted Parties and each of their respective Subsidiaries to do, make and execute, all such documents, acts, matters and things as may be reasonably required by the Administrative Agent to give effect to the Credit Documents, and to any assignment or transfer permitted by Section 12.01. 1.124 NOTICES ------- Any notice or communication to be given under this Agreement (other than telephone notice as specifically provided in this Agreement) may be effectively given by delivering (whether by courier or personal delivery) the same at the addresses set out on the signature pages of this Agreement (or with respect to any Assignee pursuant to Section 12.01, to the address provided by such Assignee to the Cdn. Borrower and the Administrative Agent) or by sending the same by facsimile or prepaid registered mail to the parties at such addresses. Any notice so mailed shall be deemed to have been received on the fifth Business Day next following the mailing of such notice, provided that postal service is in normal operation during such time. Any facsimile notice shall be deemed to have been received on transmission (and receipt of confirmation of transmission) if sent during normal business hours on a Business Day and, if not, on the next Business Day following transmission. Any party may from time to time notify the other parties, in accordance with the provisions of this Section, of any change of its address 164 SECTION 12.04 - 156 - which after such notification, until changed by like notice, shall be the address of such party for all purposes of this Agreement. 1.125 DOMICILE OF ACCOMMODATION ------------------------- The Accommodation made available by each Lender shall be made and carried at the branch or office of such Lender set out opposite the name of such Lender on the signature pages of this Agreement; provided that each Lender may make, carry or transfer the Accommodation made available by it from, at or to any other branch or office of such Lender, provided that if, on the basis of the Applicable Law in effect and the circumstances existing as at the date of any such transfer, such transfer increases the amount for which any Borrower is liable with respect to Taxes pursuant to Section 5.03 or increased costs pursuant to Section 5.04 compared to such amounts existing prior to such transfer, such Lender shall not be entitled to receive from any Borrower, and no Borrower shall be obligated to pay, such excess increased costs (although the Borrowers, in accordance with and pursuant to the other provisions of this Agreement, shall be obligated to pay the costs which are not in excess of those being charged by such Lender prior to such transfer and any subsequent increased costs of the type described above resulting from changes after the date of such transfer). 1.126 CONFIDENTIALITY --------------- Each of the Lenders will maintain on a confidential basis (except as otherwise permitted under the Credit Documents or as required by Applicable Law) all information relating to the Borrowers and their Subsidiaries provided to it under the Credit Documents by such Borrower; provided, however, that a Lender may share such information with those of its Affiliates which are lending institutions (but for greater certainty not with any such Affiliates which are brokers or investment dealers unless any such Affiliate is one institution which has both a lending division and a broker dealer division, in which case such information may not be shared with any members of the broker dealer division) and provided further that this Section shall not apply to any information which (i) was in the public domain at the time of communication to such Lender, (ii) enters the public domain through no fault of such Lender subsequent to the time of communication to such Lender, (iii) was in such Lender's possession free of any obligation of confidence at the time of communication to such Lender, (iv) was communicated to such Lender free of any obligation of confidence subsequent to the time of initial communication to such Lender, (v) was communicated to any Person free from any obligation of confidence subsequent to the time of communication to such Lender (provided that any communication by a Restricted Party shall be deemed to have been made in confidence unless otherwise indicated by such Restricted Party) or (vi) is disclosed in order to permit the Administrative Agent and the Lenders to enforce any of their rights under any of the Credit Documents. 165 SECTION 12.07 - 157 - 1.127 CONFIRMATION TO CREDITORS OF INDEPENDENT SUBSIDIARIES ----------------------------------------------------- The Administrative Agent, on behalf of itself, the Other Agents and the Lenders, will execute and deliver from time to time such reasonable confirmations as any material creditor of an Independent Subsidiary may request confirming that, other than in respect of their interest in the shares of any Independent Subsidiary subject to the Lien of the Security or in respect of any claims made by a Restricted Party against an Independent Subsidiary as a consequence of any dealings or relationships between such Persons, none of the Administrative Agent, the Other Agents or any Lenders claim any Recourse Against such Independent Subsidiary in connection with the debts and liabilities of the Restricted Parties under the Credit Documents. 1.128 SURVIVAL -------- All agreements, representations and warranties made in this Agreement shall survive the execution and delivery of this Agreement and the obtaining of Accommodation and all indemnities set forth in this Agreement, and all obligations and liabilities under Sections 5.02, 5.03, 5.04 and 5.05, shall survive the repayment of all Accommodation and the termination of this Agreement. 1.129 QUANTITIES OF DOCUMENTS ----------------------- Each Borrower agrees to provide to the Administrative Agent sufficient quantities of all documents, reports, financial statements and other information required under the Credit Documents to be provided to the Administrative Agent so that there shall be copies for the Administrative Agent and each of the Other Agents and the Lenders. 1.1201 REPRODUCTION OF DOCUMENTS ------------------------- All Credit Documents and all documents relating to any Credit Documents, including consents, waivers and modifications which may hereafter be executed, documents received by the Administrative Agent, any Other Agent or the Lenders in connection with the negotiation of this Agreement and the making available of Accommodation, and financial statements, certificates and other information previously or hereafter furnished to the Administrative Agent, any Other Agent or the Lenders, may be reproduced by the Administrative Agent, the Other Agents or the Lenders by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and the Administrative Agent, the Other Agents and the Lenders may destroy any original documents so reproduced. Each Borrower agrees that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by the Administrative Agent, the Other Agents or the Lenders in the regular course of 166 SECTION 12.10 - 158 - business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. 1.121 LANGUAGE -------- The parties to this Agreement expressly request and require that this Agreement, all other Credit Documents, and all related documents be drafted in English. Les parties aux presentes conviennent et exigent que cette Convention et tous les documents qui s'y rattachent soient rediges en Anglais. 1.122 COUNTERPARTS AND EFFECTIVENESS ------------------------------ This Agreement may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument and shall become effective on the date when each of the parties to this Agreement shall have signed a copy of this Agreement (whether the same or different copies) and shall have delivered the same to the Administrative Agent. 1.123 FACSIMILE COPIES ---------------- An executed copy of this Agreement may be delivered by any party to this Agreement by facsimile. In such event such party shall immediately deliver to the other parties an original copy of this Agreement executed by such party. 167 SECTION 12.14 - 159 - 1.124 BENEFIT OF AGREEMENT -------------------- This Agreement shall be binding upon and enure to the benefit of the parties to this Agreement and their respective successors and permitted assigns. IN WITNESS OF WHICH the parties to this Agreement have executed this Agreement as of the day and year indicated on the first page of this Agreement. ADDRESS: PHILIP SERVICES CORP, 100 King Street West P.O. Box 2440 LCD 1 by: /s/ Marvin Boughton c/s ______________________________ Hamilton, Ontario name: Marvin Boughton L8N 4J6 title: Chief Financial Officer, Executive Vice President Attention: Senior Vice President and General Counsel by: /s/ Colin Soule c/s ______________________________ Facsimile: (905) 521-9160 name: Colin Soule title: Executive Vice President, General Counsel ADDRESS: PHILIP ENVIRONMENTAL (DELAWARE), INC. 100 King Street West P.O. Box 2440 LCD 1 Hamilton, Ontario by: /s/ Marvin Boughton ______________________________ L8N 4J6 name: Marvin Boughton title: Chief Financial Officer, Attention: Senior Vice President and Executive Vice President General Counsel Facsimile: (905) 521-9160 by: /s/ Colin Soule ______________________________ name: Colin Soule title: Executive Vice President, General Counsel
(signatures continued on the next following page) 168 - 160 - (signatures continued from the preceding page) ADDRESS: CANADIAN IMPERIAL BANK OF COMMERCE Loan Underwriting and (in its capacity as Administrative Agent) Administration - Canada Commerce Court West - 7 Toronto, Ontario by: /s/ Geoff Bond M5L 1A2 ________________________________ name: Geoff Bond title: Director Attention: Manager - Agency Facsimile: (416) 980-5151 ADDRESS: CANADIAN IMPERIAL BANK OF COMMERCE CIBC Wood Gundy (in its capacity as a Lender) 7th Floor Commerce Court West Toronto, Ontario by: /s/ Gerry L. Beauclair M5L 1A2 ______________________________ name: Gerry L. Beauclair title: Managing Director Attention: Managing Director Facsimile: (416) 980-8384 BRANCH OFFICE FOR ACCOMMODATION: Main Branch Commerce Court Toronto, Ontario
(signatures continued on the next following page) 169 - 161 - (signatures continued from the preceding page) ADDRESS: CIBC INC. 425 Lexington Avenue New York, NY 10017 by: /s/ Howard A. Palmer _____________________________ name: Howard A. Palmer Attention: Director title: Authorized Signatory Facsimile: (212) 856-3761 BRANCH OFFICE FOR ACCOMMODATION: Two Paces West 2727 Paces Ferry Road Suite 1200 Atlanta, Georgia 30339 ADDRESS: CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY 425 Lexington Avenue New York, NY 10017 by: /s/ Howard A. Palmer _____________________________ Attention: Director name: Howard A. Palmer title: Authorized Signatory Facsimile: (212) 856-3761 BRANCH OFFICE FOR ACCOMMODATION: Two Paces West 2727 Paces Ferry Road Suite 1200 Atlanta, Georgia 30339
(signatures continued on the next following page) 170 - 162 - (signatures continued from the preceding page) ADDRESS: BANKERS TRUST COMPANY c/o BT Bank of Canada P.O. Box 100 by: /s/ Victoria Page _____________________________ Royal Bank Plaza name: Victoria Page North Tower, Suite 1700 title: Managing Director Toronto, Ontario M5J 2J2 Attention: Vice President Facsimile: (416) 941-9587 BRANCH OFFICE FOR ACCOMMODATION: Bankers Trust Company One Bankers Trust Plaza 130 Liberty Street New York, New York 10006 ADDRESS: BT BANK OF CANADA P.O. Box 100 Royal Bank Plaza by: ______________________________ North Tower, Suite 1700 name: Philip Hampson Toronto, Ontario title: Vice President M5J 2J2 Attention: Vice President Facsimile: (416) 941-9587 BRANCH OFFICE FOR ACCOMMODATION:
(signatures continued on the next following page) 171 - 163 - (signatures continued from the preceding page) ADDRESS: ABN AMRO BANK CANADA 79 Wellington Street West 15th Floor, Aetna Tower by: /s/ Yvon J. Jeghers P.O. Box 114, TD Centre _____________________________ Toronto, Ontario name: Yvon J. Jeghers title: Group Vice President M5K 1G8 Attention: Yvon J. Jeghers by: /s/ David Moore _____________________________ name: David Moore Facsimile: (416) 367-7937 title: Vice President BRANCH OFFICE FOR ACCOMMODATION: 79 Wellington Street West 15th Floor, Aetna Tower P.O. Box 114, TD Centre Toronto, Ontario M5K 1G8
(signatures continued on the next following page) 172 - 164 - (signatures continued from the preceding page) ADDRESS: BANK OF AMERICA CANADA 200 Front Street West Suite 2700 by: /s/ Michel Hurtubise Toronto, Ontario ______________________________ M5V 3L2 name: Michel Hurtubise title: Vice President Attention: Michel Hurtubise, Vice President Facsimile: (416) 349-4283 BRANCH OFFICE FOR ACCOMMODATION: 200 Front Street West Suite 2700 Toronto, Ontario M5V 3L2 ADDRESS: BANK OF AMERICA NT&SA 1850 Gateway Blvd. 5th Floor by: /s/ Denis Caldera Concord, California 94520 ______________________________ name: Denis Caldera title: Vice President Attention: Denis Caldera, Vice President Facsimile: (510) 675-8053/8051 BRANCH OFFICE FOR ACCOMMODATION: 1850 Gateway Blvd. 5th Floor Concord, California 94520
(signatures continued on the next following page) 173 - 165 - (signatures continued from the preceding page) ADDRESS: BANQUE NATIONALE DE PARIS (CANADA) 36 Toronto Street Suite 750 Toronto, Ontario by: /s/ Quoc Le Minh M5C 2C5 ______________________________ name: Quoc Le Minh title: Senior Vice President General Manager, Ontario Attention: Tom Currie Facsimile: (416) 947-3541 BRANCH OFFICE FOR ACCOMMODATION: 36 Toronto Street Suite 750 Toronto, Ontario M5C 2C5
(signatures continued on the next following page) 174 - 166 - (signatures continued from the preceding page) ADDRESS: THE BANK OF NOVA SCOTIA Corporate Banking - Ontario 44 King Street West by: /s/ Stephen P. Hart 16th Floor ______________________________ Toronto, Ontario name: Stephen P. Hart M5H 1H1 title: Vice President & Unit Head Attention: Stephen P. Hart by: /s/ M.S. Jackson ______________________________ Facsimile: (416) 866-2009 name: M.S. Jackson title: Senior Relationship Manager BRANCH OFFICE FOR ACCOMMODATION: Corporate Banking Ontario 44 King Street West 16th Floor Toronto, Ontario M5H 1H1 ADDRESS: THE BANK OF NOVA SCOTIA, NEW YORK AGENCY 1 Liberty Plaza Floors 22-26 New York, NY 10006 by: /s/ John F. Neylan ______________________________ Attention: John F. Neylan name: John F. Neylan title: Relationship Manager Facsimile: (212) 225-5286 BRANCH OFFICE FOR ACCOMMODATION: 1 Liberty Plaza Floors 22-26 New York, NY 10006
(signatures continued on the next following page) 175 - 167 - (signatures continued from the preceding page) ADDRESS: THE BANK OF TOKYO-MITSUBISHI (CANADA) Royal Bank Plaza South Tower, Suite 2100 P.O. Box 42 by: ______________________________ Toronto, Ontario name: Ted Vanderlaan M5J 2J1 title: Vice President Attention: Ted Vanderlaan, Vice President by: ______________________________ Facsimile: (416) 865-9511 name: David C.A. Frost title: Senior Vice President BRANCH OFFICE FOR ACCOMMODATION: Royal Bank Plaza South Tower, Suite 2100 P.O. Box 42 Toronto, Ontario M5J 2J1 ADDRESS: THE BANK OF TOKYO-MITSUBISHI, LTD., NEW YORK BRANCH U.S. Corporate Banking Division 1251 Avenue of the Americas 12th Floor by: /s/ J.B. Meredith New York, NY 10020 ______________________________ name: J.B. Meredith title: Power of Attorney Attention: Bruce Meredith Senior Vice President & Manager Facsimile: (212) 782-6440 BRANCH OFFICE FOR ACCOMMODATION: 1251 Avenue of the Americas 12th Floor New York, NY 10020
(signatures continued on the next following page) 176 - 169 - (signatures continued from the preceding page) ADDRESS: THE CHASE MANHATTAN BANK OF CANADA 100 King Street West Suite 6900 1 First Canadian Place by: /s/ Gene Gomes Box 106 _______________________________ Toronto, Ontario name: Gene Gomes M5X 1A4 title: Vice President Attention: Gene Gomes Facsimile: (416) 216-4161 BRANCH OFFICE FOR ACCOMMODATION: 100 King Street West Suite 6900 1 First Canadian Place Box 106 Toronto, Ontario M5X 1A4 ADDRESS: TEXAS COMMERCE BANK NATIONAL ASSOCIATION 712 Main St. 5 TCBE 78 Houston, Texas 77002 by: /s/ Michael Ondruch ________________________________ Attention: Michael Ondruch name: Michael Ondruch title: Vice President Facsimile: (713) 216-6004 BRANCH OFFICE FOR ACCOMMODATION: 712 Main St. 5 TCBE 78 Houston, Texas 77002
(signatures continued on the next following page) 177 - 170 - (signatures continued from the preceding page) ADDRESS: BANQUE PARIBAS 1200 Smith Suite 3100 by: /s/ Scott Clingan Houston, TX 77002 ______________________________ name: Scott Clingan title: Vice President Attention: Scott Clingan Facsimile: (713) 659-5234 by: /s/ Timothy A. Donnon ______________________________ name: Timothy A. Donnon BRANCH OFFICE FOR ACCOMMODATION: title: Managing Director 1200 Smith Suite 3100 Houston, TX 77002
(signatures continued on the next following page) 178 - 171 - (signatures continued from the preceding page) ADDRESS: COMERICA BANK International Finance Department 500 Woodward Avenue by: /s/ Darlene P. Persons 23rd Floor ______________________________ Detroit, Michigan 48226-3328 name: Darlene P. Persons title: Vice President Attention: Darlene P. Persons Facsimile: (313) 222-3377 BRANCH OFFICE FOR ACCOMMODATION: Internationae Finance Department 500 Woodward Avenue 23rd Floor Detroit, Michigan 48226-3328
(signatures continued on the next following page) 179 - 172 - (signatures continued from the preceding page) ADDRESS: CREDIT LYONNAIS CANADA One Financial Place One Adelaide Street East by: /s/ Helen Thomas Suite 2505 ______________________________ Toronto, Ontario name: Helen Thomas M5C 2V9 title: Vice President, Corporate Banking Attention: Assistant Vice President by: /s/ David Farmer Facsimile:(416) 202-6525 ______________________________ name: David Farmer BRANCH OFFICE FOR ACCOMMODATION: title: First Vice-President and Manager, Central Region One Financial Place One Adelaide Street East Suite 2505 Toronto, Ontario M5C 2V9 ADDRESS: CREDIT LYONNAIS NEW YORK BRANCH 1301 Avenue of the Americas New York, NY 10019 by: /s/Dennis Knecht Attention: Marie Matsoukis-Malliaros ______________________________ name: Dennis Knecht Facsimile: (212) 459-3169 title: Vice President, Correspondent Banking BRANCH OFFICE FOR ACCOMMODATION: 1301 Avenue of the Americas New York, NY 10019
(signatures continued on the next following page) 180 - 173 - (signatures continued from the preceding page) ADDRESS: CREDIT SUISSE FIRST BOSTON CANADA 525 University Avenue Suite 1300 Toronto, Ontario by: /s/ Peter Chauvin M5G 2K8 ______________________________ name: Peter Chauvin title: Vice President Attention: Vice President, Corporate Banking Facsimile: (416) 351-3671 by: /s/ W.M. Mcfarland ______________________________ name: W.M. Mcfarland title: Vice President BRANCH OFFICE FOR ACCOMMODATION: 525 University Avenue Suite 1300 Toronto, Ontario M5G 2K8 ADDRESS: CREDIT SUISSE FIRST BOSTON Eleven Madison Avenue New York, New York 10010-3629 by: /s/ David W. Kratovil ______________________________ name: David W. Kratovil Attention: David W. Kratovil title: Director Facsimile: (212) 325-8309 by: /s/ Chris T. Horgan ______________________________ name: Chris T. Horgan BRANCH OFFICE FOR ACCOMMODATION: title: Vice President Eleven Madison Avenue New York, New York 10010-3629
(signatures continued on the next following page) 181 - 174 - (signatures continued from the preceding page) ATTENTION: THE DAI-ICHI KANGYO BANK, LTD. One World Trade Centre Suite 4911 by: /s/ Robert P. Gallagher New York, New York 10048 ______________________________ name: Robert P. Gallagher title: Assistant Vice President Attention: Robert P. Gallagher Corporate Finance Facsimile: (212) 524 0579 BRANCH OFFICE FOR ACCOMMODATION: One World Trade Centre Suite 4911 New York, New York 10048 ADDRESS: DAI-ICHI KANGYO BANK (CANADA) P.O. Box 295, Suite 5025 Commerce Court West by: /s/ Hideki Suda Toronto, Ontario ______________________________ M5L 1H9 name: Hideki Suda title: Vice President Attention: Alvin Lindhorst Facsimile: (416) 365-7314 BRANCH OFFICE FOR ACCOMMODATION: P.O. Box 295, Suite 5025 Commerce Court West Toronto, Ontario M5L 1H9
(signatures continued on the next following page) 182 - 175 - (signatures continued from the preceding page) ADDRESS: DEUTSCHE BANK CANADA 222 Bay Street Suite 1100, P.O. Box 196 by: /s/ Francois Wentzel Toronto, Ontario ______________________________ M5K 1H6 name: Francois Wentzel title: Vice President and Director Attention: Vice President, Corporate Finance by: /s/ T.G. Leonard ______________________________ Facsimile: (416) 682-8444 name: T.G. Leonard title: Vice President BRANCH OFFICE FOR ACCOMMODATION: 222 Bay Street Suite 1200, P.O. Box 196 Toronto, Ontario M5K 1H6 ADDRESS: DEUTSCHE BANK AG Deutsche Bank Securities Corporation 31 West 52nd Street by: /s/ Jean Hannigan New York, New York 100 ______________________________ name: Jean Hannigan title: Vice President Attention: Vice President Facsimile: (212) 469-8212 by: /s/ John Augsburger ______________________________ name: J. Augsburger BRANCH OFFICE FOR ACCOMMODATION: title: Vice President Deutsche Bank AF Cayman Islands Branch 31 West 52nd Street New York, New York 10019
(signatures continued on the next following page) 183 - 176 - (signatures continued from the preceding page) ADDRESS: DRESDNER BANK CANADA Suite 1700, Exchange Tower 2 First Canadian Place, P.O. Box 430 by: /s/ Bill Eeuwes Toronto, Ontario ______________________________ M5X 1E3 name: Bill Eeuwes title: Vice President Attention: Vice President by: /s/ Linda Krisman Facsimile: (416) 369-8362 ______________________________ name: Linda Krisman title: Assistant Vice President BRANCH OFFICE FOR ACCOMMODATION: Suite 1700, Exchange Tower 2 First Canadian Place, P.O. Box 430 Toronto, Ontario M5X 1E3
(signatures continued on the next following page) 184 - 177 - (signatures continued from the preceding page) ADDRESS: DRESDNER BANK AG NEW YORK BRANCH AND DRESDNER BANK AG 75 Wall Street GRAND CAYMAN BRANCH 25th Floor New York, NY 10005 by: /s/ Ben Marzouk Attention: Vice President ______________________________ name: Ben Marzouk title: Vice President Facsimile: (212) 429-2781 BRANCH OFFICE FOR ACCOMMODATION: by: /s/ Anthony J. Berti ______________________________ name: Anthony J. Berti 75 Wall Street title: Assistant Treasurer 25th Floor New York, NY 10005
(signatures continued on the next following page) 185 - 178 - (signatures continued from the preceding page) ADDRESS: FIRST CHICAGO NBD BANK, CANADA 161 Bay Street Suite 4240 Toronto, Ontario by: /s/ Michael C. Bauer M5J 2S1 ______________________________ name: Michael C. Bauer title: Vice President Attention: Michael C. Bauer by: /s/ Michael N. Tam ______________________________ Facsimile: (416) 363-7574 name: Michael N. Tam title: Assistant Vice President BRANCH OFFICE FOR ACCOMMODATION: 161 Bay Street Suite 4240 Toronto, Ontario M5J 2S1 ADDRESS: NBD BANK 611 Woodward Avenue Detroit, Michigan 48226 by: /s/ Michael C. Bauer _____________________________ name: Michael C. Bauer Attention: Michael C. Bauer title: Vice President Facsimile: (416) 363-7564 by: /s/ Michael N. Tam ______________________________ BRANCH OFFICE FOR ACCOMMODATION: name: Michael N. Tam title: Assistant Vice President 611 Woodward Avenue Detroit, Michigan 48226
(signatures continued on the next following page) 186 - 179 - (signatures continued from the preceding page) ADDRESS: FUJI BANK CANADA BCE Place, Canada Trust Tower Suite 2800 161 Bay Street by: /s/ John E. Baily ______________________________ Toronto, Ontario name: John E. Baily M5J 2S1 title: Senior Vice President Attention: Daniel Lee, Vice President, Credit Facsimile: (416) 865-9618 BRANCH OFFICE FOR ACCOMMODATION: BCE Place, Canada Trust Tower Suite 2800 161 Bay Street Toronto, Ontario M5J 2S1 ADDRESS: THE FUJI BANK, LIMITED Houston Agency 1221 McKinney Street by: /s/ Philip C. Lauinger III Suite 4100 ______________________________ Houston, Texas 77010 name: Philip C. Lauinger III title: Vice President & Manager Attention: Philip C. Lauinger III Facsimile: (713) 759-0048 BRANCH OFFICE FOR ACCOMMODATION Houston Agency Suite 4100 1221 McKinney Street Houston, Texas 77010
(signatures continued on the next following page) 187 - 180 - (signatures continued from the preceding page) ADDRESS: HIBERNIA NATIONAL BANK 313 Carondelet Street New Orleans, LA 70131 by: /s/ Troy J. Villafarra ______________________________ name: Troy J. Villafarra Attention: Troy Villafarra title: Vice President Facsimile: (504) 533-5344 BRANCH OFFICE FOR ACCOMMODATION IN CANADA: 313 Carondelet Street New Orleans, LA 70131
(signatures continued on the next following page) 188 - 181 - (signatures continued from the preceding page) ADDRESS: THE INDUSTRIAL BANK OF JAPAN (CANADA) 100 Yonge Street Suite 1102 P.O. Box 29 by: /s/ Toru Irie Toronto, Ontario __________________________________ M5C 2W1 name: Toru Irie title: Senior Vice President Attention: Campbell McLeish Facsimile: (416) 367-3452 BRANCH OFFICE FOR ACCOMMODATION: 100 Yonge Street Suite 1102 P.O. Box 29 Toronto, Ontario M5C 2W1 ADDRESS: THE INDUSTRIAL BANK OF JAPAN, LTD. 1251 Avenue of the Americas New York, New York 10020-1104 by: /s/ J. Kenneth Biegen _________________________________ name: J. Kenneth Biegen Attention: Wayne Wright title: Senior Vice President Assistant Vice President Facsimile: (212) 282-4488 BRANCH OFFICE FOR ACCOMMODATION: 1251 Avenue of the Americas New York, New York 10020-1104
(signatures continued on the next following page) 189 - 182 - (signatures continued from the preceding page) ADDRESS: KEYBANK NATIONAL ASSOCIATION 127 Public Square MC: OH-01-27-0606 Cleveland, Ohio 44114 by: /s/ Sharon F. Weinstein _____________________________ name: Sharon F. Weinstein Credit Matters: title: Vice President - --------------- Attention: Sharon F. Weinstein Facsimile: (216) 689-4981 Notices of Borrowing: - --------------------- Attention: Sandy Wilder Facsimile: (216) 689-4981 BRANCH OFFICE FOR ACCOMMODATION: 127 Public Square MC: OH-01-27-0606 Cleveland, Ohio 44114
(signatures continued on the next following page) 190 - 183 - (signatures continued from the preceding page) ADDRESS: THE LONG TERM CREDIT BANK OF JAPAN, LTD. 165 Broadway New York, NY 10006 by: /s/ Satoru Otsuba __________________________________ name: Satoru Otsuba Attention: Greg Hong, Vice President title: Joint General Manager Facsimile: (212) 335-4524 BRANCH OFFICE FOR ACCOMMODATION: 165 Broadway New York, NY 10006
(signatures continued on the next following page) 191 - 184 - (signatures continued from the preceding page) ADDRESS: LLOYDS BANK PLC 575 Fifth Avenue 18th Floor by: /s/ William R. Davies New York, New York 10017 ______________________________ name: William R. Davies Attention: Windsor Davies title: Vice President & Manager Facsimile: (212) 930-5098 BRANCH OFFICE FOR ACCOMMODATION: One Biscayne Tower Suite 3200 2 South Biscayne Boulevard Miami, Florida 33131
(signatures continued on the next following page) 192 - 185 - (signatures continued from the preceding page) ADDRESS: THE MUTUAL LIFE ASSURANCE COMPANY OF CANADA 227 King Street South Waterloo, Ontario N2J 4C5 by: /s/ Keith Cressman Attention: Keith Cressman ______________________________ name: Keith Cressman Facsimile: (519) 888-3666 title: Manager, Corporate Loans BRANCH OFFICE FOR ACCOMMODATION: 227 King Street South Waterloo, Ontario N2J 4C5
(signatures continued on the next following page) 193 - 186 - (signatures continued from the preceding page) ADDRESS: NATIONAL BANK OF CANADA 150 York Street Suite 200 by: /s/ Douglas Richmond Toronto, Ontario ______________________________ M5H 3A9 name: Douglas Richmond title: Manager Attention: Manager by: /s/ Anne Brown Facsimile: (416) 864-7682 ______________________________ name: Anne Brown title: Manager BRANCH OFFICE FOR ACCOMMODATION: 150 York Street Suite 200 Toronto, Ontario M5H 3A9 ADDRESS: NATIONAL BANK OF CANADA, NEW YORK BRANCH 1850 - 2121 San Jacinto Dallas Texas 75201 by: /s/ Larry L. Sears Attention: Vice President ______________________________ name: Larry L. Sears Facsimile: (214) 871-2015 title: Group Vice President BRANCH OFFICE FOR ACCOMMODATION: by: /s/ Bill Handley ______________________________ 125 West 55th Street name: Bill Handley New York, New York 10019 title: Vice President
(signatures continued on the next following page) 194 - 187 - (signatures continued from the preceding page) ADDRESS: NATIONSBANK, N.A. Credit Matters: - --------------- by: /s/ Peter D. Griffith 600 Peachtree Street, N.E. ______________________________ 22nd Floor name: Peter D. Griffith Atlanta, Georgia 30308 title: Senior Vice President Attention: Peter Griffith Facsimile: (404) 607-6423 Borrowings and Administrative Matters: 101 N. Tryon Street 15th Floor Charlotte, NC 28255-0001 Attention: Kerri Thompson facsimile: (704) 386-8694 BRANCH OFFICE FOR ACCOMMODATION: 101 N. Tryon Street 15th Floor Charlotte, NC 28255-0001
(signatures continued on the next following page) 195 - 188 - (signatures continued from the preceding page) ADDRESS: MELLON BANK CANADA P.O. Box 320 Suite 3200, Royal Trust Tower by: /s/ Wendy B.H. Bocti Toronto-Dominion Centre ______________________________ Toronto, Ontario name: Wendy B.H. Bocti M5K 1K2 title: Vice President Attention: Wendy B.H. Bocti Facsimile: (416) 860-2409 BRANCH OFFICE FOR ACCOMMODATION: P.O. Box 320 Suite 3200, Royal Trust Tower Toronto-Dominion Centre Toronto, Ontario M5K 1K2 ADDRESS: MELLON BANK, N.A. One Mellon Bank Centre Room 4401 by: /s/ Dwayne R. Finney Pittsburg, Pennsylvania 15258 ______________________________ name: Dwayne R. Finney Attention: Dwayne R. Finney title: Assistant Vice President Facsimile: (412) 234-8888 BRANCH OFFICE FOR ACCOMMODATION: One Mellon Bank Centre Room 4401 Pittsburg, Pennsylvania 15258
(signatures continued on the next following page) 196 - 189 - (signatures continued from the preceding page) ADDRESS: PNC BANK, NATIONAL ASSOCIATION One PNC Plaza - 2nd Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15265 by: /s/ Lawrence W. Jacobs ______________________________ name: Lawrence W. Jacobs Attention: Lawrence W. Jacobs title: Vice President Facsimile: (412) 762-6484 BRANCH OFFICE FOR ACCOMMODATION: One PNC Plaza - 2nd Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15265
(signatures continued on the next following page) 197 - 190 - (signatures continued from the preceding page) ADDRESS: ROYAL BANK OF CANADA 3405 Harvester Road Suite 201 by: ______________________________ Burlington, Ontario name: Peter Gray-Donald L7N 3N1 title: Senior Account Manager Attention: Senior Account Manager Facsimile: (905) 333-7209 BRANCH OFFICE FOR ACCOMMODATION: 3405 Harvester Road Suite 201 Burlington, Ontario L7N 3N1 ADDRESS: ROYAL BANK OF CANADA One North Franklin Suite 700 by: /s/ Molly Drennan Chicago, Ill 60606 ______________________________ name: Molly Drennan title: Senior Account Manager Attention: Manager Facsimile: (312) 551-0805 BRANCH OFFICE FOR ACCOMMODATION: Grand Cayman Branch (N. Amer #1) New York Operations Center Royal Bank of Canada One Financial Square New York, NY 10005
(signatures continued on the next following page) 198 - 191 - (signatures continued from the preceding page) ADDRESS: THE ROYAL BANK OF SCOTLAND PLC Wall Street Plaza 88 Pine Street New York, New York 10005 by: /s/ Russell M. Gibson ______________________________ name: Russell M. Gibson Attention: R.M. Gibson title: Vice President and Deputy Manager Facsimile: (212) 480-0791 BRANCH OFFICE FOR ACCOMMODATION: Wall Street Plaza 88 Pine Street New York, New York 10005
(signatures continued on the next following page) 199 - 192 - (signatures continued from the preceding page) ADDRESS: SAKURA BANK (CANADA) Commerce Court West Suite 3601, P.O. Box 59 by: ______________________________ Toronto, Ontario name: Elwood R. Langley M5L 1B9 title: Vice President Attention: Vice President Corporate Finance Facsimile: (416) 369-0268 BRANCH OFFICE FOR ACCOMMODATION: Commerce Court West Suite 3601, P.O. Box 59 Toronto, Ontario M5L 1B9 ADDRESS: THE SAKURA BANK, LIMITED 277 Park Avenue New York, NY 10172-0098 by: /s/ Hiroshi Ozaki _______________________________ name: Hiroshi Ozaki Attention: Hiroshi Ozaki title: Vice President Facsimile: (212) 888-7651 BRANCH OFFICE FOR ACCOMMODATION: 277 Park Avenue New York, NY 10172-0098
(signatures continued on the next following page) 200 - 193 - (signatures continued from the preceding page) ADDRESS: SANWA BANK CANADA BCE Place, Canada Trust Tower P.O. Box 525, Suite 4400 by: /s/ Shigeki Iwashita 161 Bay Street ______________________________ Toronto, Ontario name: Shigeki Iwashita M5J 2S1 title: Vice President Attention: Vice President, Corporate Banking Facsimile: (416) 366-8599 BRANCH OFFICE FOR ACCOMMODATION: BCE Place, Canada Trust Tower P.O. Box 525, Suite 4400 161 Bay Street Toronto, Ontario M5J 2S1 ADDRESS: THE SANWA BANK, LIMITED, ATLANTA AGENCY Georgia-Pacific Center Suite 4950 133 Peachtree Street, N.E. by: /s/ Shigeki Iwashita Atlanta, Gerogia 30303 ______________________________ name: Shigeki Iwashita title: Attorney-in-Fact Attention: Vice President, US Corporate Finance Facsimile: (404) 589-1629 BRANCH OFFICE FOR ACCOMMODATION: Georgia-Pacific Center Suite 4950 133 Peachtree Street, N.E. Atlanta, Gerogia 30303
(signatures continued on the next following page) 201 - 194 - (signatures continued from the preceding page) ADDRESS: SOCIETE GENERALE (CANADA) Scotia Plaza 100 Yonge Street by: /s/ Michael Klopchic Suite 1002 ______________________________ Toronto, Ontario name: Michael Klopchic M5C 2W1 title: Relationship Manager Attention: Michael Klopchic Relationship Manager by: /s/ Eric Dhoste ______________________________ name: Eric Dhoste Facsimile: (416) 364-1897 title: Vice President BRANCH OFFICE FOR ACCOMMODATION: Scotia Plaza 100 Yonge Street Suite 1002 Toronto, Ontario M5C 2W1 ADDRESS: SOCIETE GENERALE - CHICAGO 181 West Madison Suite 3400 by: /s/ Joseph A. Philbin Chicago, Ill 60602 ______________________________ name: Joseph A. Philbin title: Vice President Attention: Joseph Philbin Facsimile: (312) 578-5099 BRANCH OFFICE FOR ACCOMMODATION: 181 West Madison Suite 3400 Chicago, Ill 60602
(signatures continued on the next following page) 202 - 195 - (signatures continued from the preceding page) ADDRESS: SUMMIT BANK 750 Walnut Avenue Cranford, NJ 07016 by: /s/ Rick Sobrevinas ______________________________ name: Rick Sobrevinas Attention: Rick Sobrevinas title: Managing Director Facsimile: (908) 709-3160 BRANCH OFFICE FOR ACCOMMODATION: 750 Walnut Avenue Cranford, NJ 07016
(signatures continued on the next following page) 203 - 196 - (signatures continued from the preceding page) ADDRESS: THE SUMITOMO BANK OF CANADA Ernst & Young Tower Suite 1400, P.O. Box 172 by: /s/ Alfred Lee 222 Bay Street ______________________________ Toronto, Ontario name: Alfred Lee M5K 1H6 title: Vice President Attention: Alfred Lee Facsimile: (416) 368-4934 BRANCH OFFICE FOR ACCOMMODATION: Ernest & Young Tower Suite 1400, P.O. Box 172 222 Bay Street Toronto, Ontario M5K 1H6 ADDRESS: THE SUMITOMO BANK, LIMITED Chicago Branch Suite 4800 by: /s/ John Kemper Sears Tower ______________________________ 233 South Wacker Drive name: John Kemper Chicago, Illinois 60606 title: Senior Vice President Attention: Diane Zeller Scherer Facsimile: (312) 876-6436 BRANCH OFFICE FOR ACCOMMODATION: Chicago Branch Sears Tower, Suite 4800 233 South Wacker Drive Chicago, Illinois 60606
(signatures continued on the next following page) 204 - 197 - (signatures continued from the preceding page) ADDRESS: THE TOYO TRUST & BANKING CO., LTD. 666 Fifth Avenue 33rd Floor New York, New York 10103-3395 by: /s/ T. Mikumo __________________________ Attention: Paul St. Mauro name: T. Mikumo title: Vice President Facsimile: (212) 307-3498 BRANCH OFFICE FOR ACCOMMODATION: 666 Fifth Avenue 33rd Floor New York, New York 10103-3395
(signatures continued on the next following page) 205 - 198 - (signatures continued from the preceding page) ADDRESS: THE TORONTO-DOMINION BANK 8th Floor, TD Tower P.O. Box 1 by: Bruce A. Schouten Toronto-Dominion Centre ________________________________ Toronto, Ontario name: Bruce A. Schouten M5K 1S2 title: Manager Attention: Manager, Corporate Lending Facsimile: (416) 944-5630 BRANCH OFFICE FOR ACCOMMODATION: Main Branch King & Bay, Toronto c/o Corporate Accounts Administration 8th Floor, TD Tower P.O. Box 1 Toronto-Dominion Centre Toronto, Ontario M5K 1S2 Attention: Lynne Crofts Facsimile: (416) 982-6630 ADDRESS: TORONTO DOMINION (NEW YORK), INC. Credit-related Purposes: - ------------------------ 31 West 52nd Street by: /s/ David G. Parker New York, New York 10019 ________________________________ name: David G. Parker title: Manager - Attention: Duncan Robertson Credit Administration Facsimile: (212) 468-0551 BRANCH OFFICE FOR ACCOMMODATION: 909 Fannin, Suite 1700 Houston, Texas 77010 Attention: David G. Parker Facsimile: (713) 653-8248
(signatures continued on the next following page) 206 - 199 - (signatures continued from the preceding page) ADDRESS: U.S. BANK 1420 Fifth Avenue WWH 276 by: /s/ Arnold J. Conrad Seattle, WA 98101 ______________________________ name: Arnold J. Conrad title: Vice-President Attention: Arnold J. Conrad Facsimile: (206) 587-5259 BRANCH OFFICE FOR ACCOMMODATION: 1420 Fifth Avenue WWH 276 Seattle, WA 98101
(signatures continued on the next following page) 207 - 200 - (signatures continued from the preceding page) ADDRESS: WACHOVIA BANK, N.A. 191 Peachtree Street NE Atlanta, Georgia 30303 by: /s/ Henry H. Hagan ______________________________ name: Henry H. Hagan Attention: Brian Rubins title: Senior Vice President Facsimile: (404) 332-6898 BRANCH OFFICE FOR ACCOMMODATION: 191 Peachtree Street NE Atlanta, Georgia 30303
EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 MATERIAL SUBSIDIARIES The following is a list of the material subsidiaries of Philip Services Corp: Philip Enterprises Inc., an Ontario corporation. Luntz Corporation, a Delaware corporation. Taro Aggregates Ltd., an Ontario corporation. Philip Environmental (Delaware), Inc., a Delaware corporation. Allwaste, Inc., a Delaware corporation. Serv-Tech, Inc., a Texas corporation. Philip Metals Recovery (USA) Inc., an Arizona corporation. EX-23.3 5 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23.3 [DELOITTE & TOUCHE LETTERHEAD] INDEPENDENT AUDITORS' REPORT We consent to the use in this Registration Statement of Philip Services Corp. on Form S-1 of our report dated February 26, 1997 (April 22, 1997 with respect to Note 18(d)), on our audits of the consolidated balance sheets of Philip Services Corp. as at December 31, 1996 and 1995, and the consolidated statements of earnings, retained earnings and changes in financial position for each of the years in the three year period ended December 31, 1996, and of our auditors' report on the schedule of additional disclosures required under Regulation 210.12-09 of Regulation S-X of the Securities Exchange Act of 1934 as at December 31, 1996 and 1995, and for each of the years in the three year period ended December 31, 1996, which are included in the prospectus of this Registration Statement. We also consent to the reference of our firm under the caption "Experts". /s/ Deloitte & Touche --------------------- Chartered Accountants Mississauga, Ontario September 24, 1997 EX-23.4 6 CONSENT OF ARTHUR ANDERSEN, LLP 1 Exhibit 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report covering the consolidated balance sheets of Allwaste, Inc. and its subsidiaries as of August 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1996 (and to all references to our firm) included in or made a part of this registration statement on Form S-1 filed by Philip Services Corp. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Houston, Texas September 26, 1997 EX-23.5 7 CONSENT OF PRICE WATERHOUSE, LLP 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of Philip Services Corp. of our report dated April 7, 1997 relating to the combined statements of income and of cash flows of Pechiney (ISW), Inc., PPC (ISW), Inc. and Intsel Southwest Limited Partnership, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Houston, Texas September 25, 1997 EX-23.6 8 CONSENT OF ERNST & YOUNG, LLP 1 Exhibit 23.6 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 19, 1996, with respect to the consolidated statements of income and cash flows of Luntz Corporation, included in the Registration Statement (Form S-1 No. 333-00000) of Philip Services Corp. for the registration of 23,000,000 shares of its common stock. /s/ Ernst & Young LLP ------------------------------ Ernst & Young LLP Canton, Ohio September 22, 1997 -----END PRIVACY-ENHANCED MESSAGE-----