PHILIP SERVICES CORP/DE - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission file number 0-30417

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PHILIP SERVICES CORPORATION
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 98-0131394
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification Number)
or Organization)
9700 HIGGINS ROAD, SUITE 750, ROSEMONT, 60018
ILLINOIS (Zip Code)
(Address of Principal Executive Offices)

(847) 685-9752
(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value Nasdaq National Market

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of shares of common stock on the
Nasdaq Stock Market on April 11, 2002, was approximately $11,336,947 (assumes
officers, directors and all stockholders beneficially owning 5% or more of the
outstanding shares of Common Stock are affiliates).

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

The number of shares of common stock of the Registrant outstanding on April
11, 2002 was 24,256,437.
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INDEX
TO FORM 10-K

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and similar expressions, as they
relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Many factors could cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements that may be expressed or implied by
such forward-looking statements, including, among others, the risks discussed in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, and risks discussed from time to time in the Company's filings
with the Securities and Exchange Commission and other regulatory authorities.
Should one or more of these risks or uncertainties materialize, or should
assumptions underlying the forward-looking statements prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated or expected. These risks and uncertainties should be
considered in evaluating forward-looking statements, and undue reliance should
not be placed on such statements. The Company does not assume any obligation to
update these forward-looking statements.

PART I

ITEM 1. BUSINESS

INTRODUCTION

Philip Services Corporation (together with its subsidiaries, "PSC" or the
"Company") is an industrial and metals services company operating in three
segments: (i) Industrial Outsourcing Group; (ii) Environmental Services Group;
and (iii) Metals Services Group. PSC has approximately 10,000 full-time
employees at over 150 locations across North America. The Company's operations
are based primarily in the United States.

The Industrial Outsourcing Group's operations include industrial cleaning
and maintenance, mechanical services, piping and fabrication services,
turnaround and outage services, electrical contracting and instrumentation,
refractory, catalyst, decommissioning, and remediation services. The Industrial
Outsourcing Group primarily services the refining, petrochemical, utilities, oil
and gas, pulp and paper, and automotive industries.

The Environmental Services Group provides commercial and industrial waste
collection, recycling, processing and disposal, as well as laboratory analytical
services, container and tank cleaning and emergency response services primarily
to the manufacturing, automotive, chemical, paint and coatings, transportation,
and aerospace industries, as well as to municipalities and consulting and
engineering firms.

The Metals Services Group's operations include ferrous and non-ferrous
scrap collection and processing services, brokerage, transportation and on-site
mill services as well as end-processing and distribution of steel products. The
Metals Services Group primarily services the steel, foundry, manufacturing and
automotive industries.

The Company was originally incorporated in Delaware on July 10, 1991 under
the name Philip Environmental (Delaware), Inc. The Company's principal executive
offices are at 9700 Higgins Road, Rosemont, Illinois 60018, and its telephone
number is 847-685-9752.

SPECIAL NOTE REGARDING RECENT EVENTS

Certain material events have occurred since December 31, 2001, of which
investors should be aware in considering the information contained in this Form
10-K.

Management Changes

On March 31, 2002, Anthony G. Fernandes, Chairman, President and Chief
Executive Officer, left the Company. In addition, Mr. Fernandes resigned as a
member of the Board of Directors. The Board of Directors has determined at this
time not to appoint a chief executive officer. Rather, the presidents of the
three operating groups, Industrial Outsourcing, Environmental Services, and
Metals Services, will exercise executive authority over their respective groups
and report directly to the Board. The remaining corporate functions (such as
chief financial officer and general counsel) will also report directly to the
Board.

The Company also announced that it would move its headquarters in suburban
Chicago to Houston by the end of the second quarter of 2002.

Board of Directors Changes

Subsequent to the departure of Mr. Fernandes, the Board, on April 12, 2002,
elected Robert L. Knauss as Chairman. Mr. Knauss previously served as Chairman
from April 7, 2000, when the Company emerged as a publicly held entity from the
bankruptcy of its predecessor (see Item 1, Business, Information Regarding
Oldco) until May 9, 2001, when Mr. Fernandes was elected.

The departure of Mr. Fernandes left two vacancies on the Board. Peter
Offermann previously resigned on February 1, 2002. The Board determined not to
fill the vacancies and on April 12, 2002, reduced the number of directors
constituting the entire Board to seven from nine.

1

Additional Financing

The Company has two credit facilities, a $335.8 million term facility with
an syndicate of lenders ("credit facility") and a revolving credit agreement
("revolving operating facility"). On April 12, 2002, the Company obtained
additional financing under its revolving operating facility (see Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations). The terms of the additional financing are complex, and the
discussion that follows is only a summary. The amendment to the revolving
operating facility is filed as an exhibit to this Form 10-K.

The additional financing increases the maximum amount that may be borrowed
under the revolving operating facility (exclusive of optional overadvances) to
$195 million from $175 million. In addition, the revolving operating facility
was amended to add a new Tranche Sub-B in the amount of $70 million. Because the
defined borrowing base under Tranche Sub-B is more liberal than under Tranches A
or B-Prime, and because a reserve of $25 million is not deducted from the
borrowing base under Tranche Sub-B as it is under Tranches A and B-Prime, the
net effect is to provide availability under Tranche Sub-B at times when there is
no availability under Tranches A and B-Prime. Approximately $31 million was
borrowed under Tranche Sub-B upon implementation to repay previous "overadvance"
borrowings under Tranche A during the first quarter of 2002. Tranche Sub-B is a
revolving facility, except that any payments of principal as a result of asset
sales (other than in the ordinary course of business) automatically reduce the
availability under Tranche Sub-B.

The commitments under Tranche Sub-B have been provided by affiliates of
Carl C. Icahn ($49 million) and affiliates of Stephen Feinberg ($21 million).
Mr. Icahn and Mr. Feinberg and their affiliates are respectively the largest and
second largest stockholders of the Company (see Item 12, Security Ownership of
Certain Beneficial Owners and Management).

Certain fees were incurred in connection with Tranche Sub-B and are
detailed in Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations. Among these fees is the issuance to the Tranche Sub-B
lenders of 3,638,466 shares of the common stock of the Company, amounting to 15%
of the outstanding common stock prior to the issuance, upon payment in cash of
the par value of $0.01 per share. These shares were divided between the Icahn
group and the Feinberg group in proportion to their respective commitments. Item
12, Security Ownership of Certain Beneficial Owners and Management, reflects pro
forma the ownership of each group after the issuance. In connection with the
issuance, the Icahn group and the Feinberg group have been granted two demand
registration rights and an unlimited number of piggyback registration rights
covering both the newly issued shares and all other shares held by these groups,
as well as pre-emptive rights with respect to future issuances by the Company.

The covenants under the revolving operating facility were amended to
eliminate the interest coverage ratio, to waive the default under the EBITDA
covenant for the period ended December 31, 2001, and to lower the EBITDA
covenant requirement for periods ending March 31, June 30, September 30, and
December 31, 2002.

The revolving operating facility was also amended to extend the maturity
date of the facility to April 8, 2003 from September 30, 2002.

In addition to the foregoing changes, the revolving operating facility was
further amended in a number of sections to facilitate certain transactions or to
effect conforming changes. Investors are referred to Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations herein
and to the full text of the documents filed as exhibits to this Form 10-K.

The Company's credit facility (see Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations) and the intercreditor
agreement among the Company's lenders were amended primarily to permit or
facilitate the changes to the revolving operating facility. In addition, the
interest coverage ratio under the credit facility was eliminated, the EBITDA
covenant requirements reduced, and the default under the EBITDA covenant for the
period ended December 31, 2002 waived.

2

INFORMATION REGARDING OLDCO

This Form 10-K contains information relating to Philip Services Corporation
and its subsidiaries, which has been prepared by management, and Philip Services
Corp. ("Oldco"), an Ontario company, and its subsidiaries (Oldco and its
subsidiaries being referred to collectively as the "Predecessor Company"), which
has been compiled by management of PSC. On April 7, 2000, Oldco and certain of
its Canadian subsidiaries transferred substantially all of their assets and
liabilities (except for liabilities subject to compromise) to the Company at
fair value. The liabilities subject to compromise of $726.5 million were
retained by Oldco and certain of its Canadian subsidiaries. As a result, Oldco
remains insolvent. Management of PSC has determined that certain consolidated
financial and other information concerning the Predecessor Company may be of
limited interest to the stockholders of the Company and has therefore included
such information in this document. The consolidated financial information
concerning the Predecessor Company does not reflect the effects of the
application of fresh start reporting. Readers should, therefore, review this
material with caution and not rely on the information concerning the Predecessor
Company as being indicative of future results for the Company or providing an
accurate comparison of financial performance.

On June 25, 1999, Oldco and substantially all of its wholly owned
subsidiaries located in the United States (the "U.S. Debtors"), filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code with
the United States Bankruptcy Court for the District of Delaware (the "U.S.
Court"). Oldco and substantially all of its wholly owned subsidiaries located in
Canada (the "Canadian Debtors") commenced proceedings under the Companies'
Creditors Arrangements Act in Canada in the Ontario Superior Court of Justice
(the "Canadian Court") on the same date.

On November 26, 1999, the Canadian Court sanctioned the Plan of Compromise
and Arrangement (as amended and supplemented, the "Canadian Plan"), and on
November 30, 1999, the U.S. Court confirmed the Joint Plan of Reorganization (as
amended, the "U.S. Plan"). The Canadian Plan and the U.S. Plan were further
amended during March 2000 (collectively, the "Plan") and became effective, as
amended, on April 7, 2000. Under the Plan, the Company emerged from bankruptcy
protection as a new public entity.

Under the Plan, syndicated debt of Oldco of $1 billion was converted into
$250 million of senior secured debt, $100 million of convertible secured
payment-in-kind debt and 91% of the shares of common stock of the Company. The
senior secured debt was reduced to $235.8 million on plan implementation due to
repayment of $14.2 million from proceeds of asset sales. The secured
payment-in-kind debt is convertible into 25% of the shares of common stock of
the Company, calculated on a fully diluted basis, as of the effective date of
the Plan. The Plan also provided for the conversion of certain specified
impaired unsecured claims into $60 million of unsecured payment-in-kind notes
and 5% of the shares of common stock of the Company as of the effective date of
the Plan. The Plan allowed certain holders of unsecured claims to receive $1.50
in face amount of unsecured convertible notes in exchange for every $1.00 in
unsecured payment-in-kind notes that such holder would have received under the
Plan. The aggregate amount of unsecured convertible notes issued was $17.5
million. The Company also issued 1.5% of its shares of common stock to Canadian
and U.S. class action plaintiffs to settle all class action claims. Other
potential equity claimants received 0.5% of the shares of common stock of the
Company and the stockholders of Oldco received 2% of the shares of common stock
of the Company.

The Company has adopted fresh start reporting in accordance with the
AICPA's Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." For financial reporting purposes, the
effective date of the Plan was considered to be March 31, 2000. Due to the
changes in the financial structure of the Company and the application of fresh
start reporting as a result of the consummation of the Plan, the consolidated
financial statements of the Company issued subsequent to Plan implementation are
not comparable with the consolidated financial statements issued by the
Predecessor Company prior to Plan implementation. A black line has been drawn on
the accompanying consolidated financial information to separate and distinguish
between the Company and Predecessor Company.

3

OPERATING GROUPS

PSC has structured its businesses into operating groups based on the
services provided. This segmentation allows for efficient delivery of services
to its customer base.

Industrial Outsourcing Group

The Industrial Outsourcing Group is an integrated provider of a broad range
of industrial outsourcing services, with approximately 76 facilities and
approximately 6,500 employees. The Group has a significant presence in the
heavily industrialized regions of the Gulf Coast, West Coast, Northeast,
Southeast and Northwest United States, and is headquartered in Sugar Land,
Texas. See Note 21 to the Consolidated Financial Statements, included elsewhere
herein, for the revenue, income (loss) from operations and total assets of the
Industrial Outsourcing Group for the fiscal years ended December 31, 2001, 2000
and 1999.

The Industrial Outsourcing Group primarily serves the refining,
petrochemical, utilities, oil and gas, pulp and paper, and automotive
industries, with the heaviest market penetration in the refining, petrochemical
and utilities industries. Industrial Outsourcing services include industrial
cleaning and maintenance, mechanical services, piping and fabrication services,
turnaround and outage services, electrical contracting and instrumentation,
refractory, catalyst, decommissioning and remediation services.

Industrial cleaning and maintenance services include hydroblasting,
gritblasting, air-moving and liquid vacuum 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
unresponsive to other conventional cleaning techniques. Gritblasting utilizes
both abrasive and non-abrasive media to clean surfaces on electrostatic
precipitators and boilers and to increase process efficiency. Air-moving and
liquid vacuuming removes and transport industrial wastes or salvageable
materials contained in clients' tanks, containers or other process
configurations. Other services include tank cleaning, waste reduction,
remediation services, explosive deslagging and chemical cleaning.

The Industrial Outsourcing Group's turnaround and outage services provide
refineries, chemical and petrochemical facilities and power plants a
single-source vendor to meet their requirements for large-scale, critical-path
maintenance projects. The Group has the capability to conduct complex project
planning and scheduling, and to coordinate the extensive workforce, vendors and
technologies required for the maintenance, repair or replacement of process
equipment, operating machinery and piping, valves, vessels and drums. These
sophisticated maintenance programs play an important role in the continuous
improvement of industrial process efficiencies. Other services provided include
project management, planning and scheduling, decontamination, heat-exchanger
maintenance, specialty welding, catalyst, refractory and corrosion prevention
services and electrical contracting and instrumentation services. The Group
employs a highly experienced and skilled labor force and technologies that
reduce the downtime associated with turnaround and outage projects. These
technologies also reduce the safety risks associated with confined space entry,
heat exchanger extraction and cleaning.

Environmental Services Group (previously By-Products Services Group)

The Environmental Services Group operations provide commercial and
industrial by-product collection, processing and disposal, engineered fuel
blending, solvent distillation, analytical services, container- and tank-
cleaning services, on-site services, lab packing, household hazardous waste
services and emergency response services to generators of hazardous wastes in
the automotive, chemical, paint and coatings, transportation, manufacturing and
aerospace industries, as well as to municipalities and consulting and
engineering firms. The Group employs approximately 2,300 people at approximately
40 locations, with heavy concentration in the Northeast, Northwest, Midwest and
Southeast United States and Southern Ontario, and is headquartered in Houston,
Texas. See Note 21 to the Consolidated Financial Statements, included elsewhere
herein, for the revenue, income (loss) from operations and total assets of the
Environmental Services Group for the fiscal years ended December 31, 2001, 2000
and 1999.

4

The Environmental Services Group applies 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 reduces the
quantity of materials destined for final disposal and the cost of that disposal.
The Group also processes and stabilizes wastes for end disposal at third-party
sites. The Group provides these services through on-site waste management
programs at the clients' facility or through transportation and processing at
one of the Company's fixed facilities. The Group also operates an engineered
landfill in Stoney Creek, Ontario, which is licensed to receive non-hazardous
commercial and industrial wastes.

The Environmental Services Group recovers value from organic chemical waste
either by processing by-products into an engineered fuel or by distilling spent
solvents for reuse. Engineered fuels involve the blending of liquid and solid
industrial by-products into a customized fuel for use in industrial furnaces,
principally cement kilns. The Group also distills spent solvents 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 liquid wastes and sludges.

The Environmental Services Group operates a network of environmental
laboratories, primarily based in Canada, from which it provides analytical
testing for its clients across North America. There is significant opportunity
to cross-sell these analytical services to the Company's waste management
clients and also to utilize these services to meet the Group's internal
analytical testing requirements. The Group also provides emergency response
services, including containment, clean-up, and disposal of material resulting
from the inadvertent release of dangerous or hazardous materials, and wastes or
spills of material that are unusual to the environment in quantity or quality.

The Environmental Services Group provides container services, specializing
in tanker truck, railcar, intermediate sea containers, and tote cleaning, repair
and certification. Tank cleaning involves the removal of sludge and residual
products from the interior of storage tanks to allow inspection, repair and/or
product changeover. These services are either delivered on-site at the client's
location or at one of the Group's fixed tank wash or intermodal bulk-container
cleaning facilities. The Group also operates wastewater treatment facilities to
manage wastes generated by these operations and three rail car cleaning
facilities. PSC is one of the largest independent operators of container- and
tank-cleaning facilities in North America.

Metals Services Group

The Metals Services Group provides ferrous and non-ferrous scrap collection
and processing services, brokerage and transportation and on-site mill services.
The Group is one of the largest providers of ferrous scrap processing and
brokerage services in North America. The Metal Services operations are
concentrated in the Southeast United States, the Ohio-Pittsburgh corridor, and
the Southern Great Lakes Basin, and employs approximately 1,100 people at
approximately 37 locations. The Group provides services to North American steel
companies and is headquartered in Cleveland, Ohio. See Note 21 to the
Consolidated Financial Statements, included elsewhere herein, for the revenue,
income (loss) from operations and total assets of the Metals Services Group for
the fiscal years ended December 31, 2001, 2000 and 1999.

The Metals Services Group is a major processor and broker of ferrous scrap
to steel mills and foundries. In 2001, the Group processed over two million tons
of scrap. Ferrous scrap is generated as a by-product of automotive stamping and
fabrication and is also derived from post-consumer sources such as cars and
refrigerators. It is processed by baling, separation or shredding during which
time the material is graded and sorted. The primary consumers of ferrous scrap
are the foundry industry and steel mills, which use ferrous scrap as a primary
feedstock. The Group's operations are regionally concentrated close to
industrial scrap producers and other suppliers and to local steel mills.

The Metals Services Group's prices for ferrous scrap are established and
adjusted based upon prices offered monthly by the major steel producers. The
price of ferrous scrap is a significant factor influencing the profitability of
the Group. The Group manages its commodity price risk by acquiring ferrous metal
scrap as it is needed for its clients and maintaining relatively low inventories
of scrap and processed metals.

5

The Group also operates a large brokerage business, which involves the
purchase of scrap from generators and the sale and transportation of the scrap
to the Company's steel mill and foundry customers to meet their raw material
requirements. In 2001, the Company brokered approximately three million tons of
scrap.

The Metals Services Group provides a broad range of services to steel
mills. These services include on-site services such as scrap inventory
management, pit cleaning and charge preparation, by-product management that
includes slag management and oil recovery, and processing and distribution,
which comprises a specialized galvanized steel coil distribution and slitting
operation.

The Group also collects and processes non-ferrous scrap, including copper
and aluminum, for sale to industrial consumers. The scrap is either purchased
from industrial generators or small retail accounts or recovered from the
Group's ferrous scrap operations.

The Metals Services Group also provides demolition services, which involve
the removal of process equipment, buildings and structures and the recovery of
ferrous and non-ferrous materials for reuse.

Weak market conditions in the steel industry as well as depressed pricing
and demand for ferrous scrap continue to have a negative impact on revenue and
profitability in this business. In the fourth quarter of 2000 and during 2001,
five major customers of the Group filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. Throughout 2001, scrap prices were severely depressed.
Although the Company aggressively seeks to lower its purchase costs, margins
have narrowed and brokerage volumes have declined. The Company is responding by
managing its inventory, as well as reducing costs and consolidating its
operations so that they operate more efficiently.

BACKLOG

Revenue backlog for the Industrial Outsourcing Group was $133.9 million as
at December 31, 2001 with all of the work anticipated to be completed in 2002.
While backlog can be an indication of expected future revenues, backlog is
subject to revisions from time to time due to cancellations, modifications and
changes in the scope of projects or their design and construction schedules.
There can be no assurance whether or when backlog will be realized as revenue.
While the Environmental Services Group and the Metals Services Group have
alliances with customers, they do not have contracts for committed volumes or
fixed price arrangements and, therefore, do not have any revenue backlog.

IMPACT OF INFLATION, ECONOMIC CONDITIONS AND SEASONALITY

All of the Company's operating groups are impacted by seasonal demands for
their services. Large maintenance projects handled by the Industrial Outsourcing
Group, including turnaround and outage services in the refining, petrochemical
and utilities industries, are primarily scheduled in the spring and fall, which
are lower demand periods in these industries. The Environmental Services Group
is impacted by inclement weather during the winter months, primarily in the
Northeast. The Metals Services Group is impacted by traditional steel industry
shutdowns in the summer months and December.

Moreover, a general economic slowdown results in the Company experiencing
lower levels of activity and demand for its services in all business segments.
In particular, the Metals Services Group is currently negatively affected by a
downturn in the automotive industry, the general slowdown of the economy,
reduced steel production and soft pricing for ferrous and non-ferrous scrap.

PROPRIETARY TECHNOLOGY

The Company possesses a body of patented and unpatented technology that it
uses in its business. However, proprietary technology is not a driving force for
the Company, and the Company has no research and development capability.

The Industrial Outsourcing Group is the primary user of proprietary
technologies. These include Fast Draw(R), a remote control heat exchanger bundle
extraction technology; Fast Clean(TM), a semi-robotic heat exchanger bundle
cleaning process; and Life Guard(TM), a technology for decontaminating
hydrocarbons in

6

refinery towers and vessels to reduce potential health and safety impacts during
cleaning and maintenance activities.

The Metals Services Group applies processing technologies to obtain better
yields from ferrous scrap, as well as produce a higher-quality and
higher-density product to meet the melt requirements of its steel mill clients.

Although the Company possesses patents for certain of its technologies, it
relies primarily on trade secret protection and confidentiality to protect its
proprietary technologies. There can be no assurance that the Company will be
able to maintain the confidentiality of its technology; however, the Company
does not believe the loss of any single patent or trade secret would materially
affect its business.

The following table outlines certain of the Company's proprietary
technologies:

SALES AND MARKETING

The Company's sales and marketing objective is to establish long-term
relationships with its clients and develop a thorough understanding of their
businesses to create value for clients by providing differentiated products and
services. Through these relationships, the Company works with its clients to
maximize their process efficiencies, reduce down time and health, safety and
environmental risks, and minimize waste destined for end-disposal. The Company
believes that its ability to offer a broad range of integrated services across
North America provides a competitive advantage with respect to large companies
that are consolidating vendors and seeking to develop broad-based relationships
with preferred suppliers.

Industrial Outsourcing Group

The Industrial Outsourcing Group places less emphasis on traditional sales
approaches to capture new clients and more on cross-selling a broad range of
services to its existing large industrial client base. The Company has
established a substantial base of clients crossing key industrial sectors. The
Company identifies opportunities to package additional services with services it
is already providing these clients. This process is carried out by sales and
operating personnel who have relationships with these clients. To support many
of its industrial services contracts, PSC dedicates on-site personnel at some
clients' facilities to manage the relationship. These on-site personnel have an
opportunity to assess client needs and offer additional services provided by the
Company. PSC seeks to enter into master service agreements with large clients to
establish the Company as an approved national vendor. Master service agreements
are a primary vehicle for large companies to reduce the number of suppliers and
control costs while concurrently establishing high standards of service
delivery.

Environmental Services Group

The Environmental Services Group relies heavily on small to mid-size
accounts and employs a sales force that relies on more traditional marketing
methods to broaden its customer base. The Group participates in competitive
bidding processes to obtain contracts granted by municipalities, local
governments or private enterprise for services such as analytical services and
household hazardous waste management. Contracts are

7

generally awarded on the basis of sealed bids submitted by interested bidders,
and competition for these contracts is generally intense.

Metals Services Group

The Metals Services Group employs account representatives within its
brokerage business, who are responsible for purchasing scrap from commercial and
industrial generators and selling the scrap to end-users, principally steel
mills. The Group has established relationships with scrap generators as well as
end users. The market for the Group's services is narrow and largely
relationship oriented and geographically based. The Group's account
representatives and location managers are principally responsible for managing
and growing client relationships.

COMPETITION

The industrial and metal 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, safety,
prior experience, financial capability and liability management. The Company
believes its primary competitive strengths are: (i) a broad range of integrated
industrial services, (ii) broad geographic capabilities, and (iii) skilled and
experienced employees. The Company competes with a variety of companies that may
be larger in particular business lines in which the Company operates. The
Company seeks to enhance its competitive position by increasing the efficiency
of its operations through economies of scale and increased recovery rates,
thereby lowering its costs, which increases margin and gives it pricing
flexibility. The Company also accompanies its product sales with a broad range
of services or vertically integrates its operations to provide multiple services
to its customers at their plant locations. The Company's competitive position
has been damaged by market concerns about its financial condition over the past
12 months.

Each operating group provides outsourcing services that, while non-core to
its customers' primary business activities, are critical to their operations.
The Company's customers are seeking to improve competitiveness by focusing on
their core businesses, reducing costs and accessing specialized technologies and
expertise through more effective vendor relationships. Three key trends that the
Company believes have developed as a result are: (i) increased outsourcing of
non-core services; (ii) a reduction in the number of vendors from which
outsourced services are purchased; and (iii) a trend towards longer-term and
broader-based vendor alliances. The Company believes that its operations are
positioned to benefit from these trends.

Many non-core activities can be performed on a more cost-effective basis by
specialized industrial service providers that can deliver multiple services from
a single source across several plant locations. By reducing the number of
vendors from which outsourced activities are purchased, and acquiring services
from those suppliers that can provide an integrated service solution on a broad
geographic basis, customers can lower administrative costs, reduce management
overhead and increase supplier accountability.

Industrial outsourcing and metals services companies operate in a largely
unconsolidated market. PSC competes with a number of local service providers who
cannot offer a similar breadth of services or geographic reach. PSC believes
that it provides one of the broadest ranges of integrated industrial and metals
services in the industry. PSC's revenue is primarily generated from the
Company's large corporate accounts, with heavy concentration in the refining,
petrochemical and steel industries.

Industrial Outsourcing Group

The Industrial Outsourcing Group competes with numerous local, regional and
national companies of varying sizes, some of which have greater financial
resources and flexibility than the Company. Competition for industrial
outsourcing services is based primarily on unit prices, productivity, safety,
innovative approaches and quality of service. The Industrial Outsourcing Group
competes by providing cost-effective service differentiated by a highly
experienced work force with specialized skills in the application of
technologies, by

8

integrating and offering multiple services on a broad geographic basis, and by
focusing on continuous improvement in its health and safety record.

Environmental Services Group

The hazardous waste management industry, which provides disposal services,
including incineration and hazardous waste landfills, significantly competes
with the Environmental Services Group for by-product waste streams by providing
price-competitive disposal alternatives to a number of the Group's waste
management and by-products recovery services. The Group competes by developing
and employing innovative technologies that minimize on-site waste generation for
its clients, maximizing the value of, and reuse opportunities for, the
industrial by-products, and servicing small quantity generators, where there is
strong demand for the Group's by-products collection and management services.

Due to the Group's broad base of collection and treatment facilities, it
primarily concentrates on servicing the small to mid-size waste generator
market. The Group's network of waste processing and by-product recovery
facilities enables it to provide its clients with a competitive alternative to
conventional disposal. As the Company does not own any hazardous waste
end-disposal facilities, the Group depends on obtaining competitive rates from
these facilities in order to provide its clients with competitive
waste-management services. This lack of proprietary end-disposal capacity is a
competitive limitation for the Group.

Metals Services Group

The primary competitors of the Metals Services Group on the purchase side
are other scrap processors in regions where the Group operates. Competition is
primarily 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 Group acquires its scrap. The Group believes that its
longstanding relationship with generators of metal-bearing scrap provides it
with a stable source of supply. In its scrap processing and brokerage
operations, the Group competes for access to scrap with large regional operators
as well as numerous smaller operators. On the sale side, scrap prices tend to
respond to worldwide supply and demand from steel mill customers and, therefore,
can be highly volatile. The Metals Services Group competes by offering a secure
supply of high-quality scrap that is processed according to customer
specifications, and by providing a range of additional on-site mill services.

GOVERNMENT REGULATION

The Company is subject to significant government regulation, including
stringent environmental laws and regulations. Among other things, these laws and
regulations impose requirements to control discharges to the air, soil and
surface and subsurface waters. The Company is also subject to regulations
regarding health, safety, zoning, land use and the handling and transportation
of industrial by-products and waste materials. This regulatory framework imposes
considerable compliance burdens and costs on the Company. See "Capital
Expenditures" in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, for a discussion of the Company's estimated
capital expenditures in relation to environmental compliance matters.
Notwithstanding the burdens of this compliance, the Company believes that its
business prospects are enhanced by the enforcement of environmental laws and
regulations by government agencies.

Applicable federal and state or provincial laws and regulations regulate
many aspects of the industrial and metal services industries. Laws and
regulations typically provide operating standards for treatment, storage,
management and disposal of waste and set limits on the release of contaminants
into the environment. Such laws and regulations, among other things, (i)
regulate the nature of the industrial by-products and wastes that the Company
can accept for processing at its treatment, storage and disposal facilities, the
nature of the treatment it can provide at such facilities and the location and
expansion of such facilities, (ii) impose liability for remediation and clean-up
of environmental contamination, including spills or releases of certain
industrial by-products and waste materials resulting from shipping of waste
off-site or past and present operations at the Company's facilities, and (iii)
may require financial assurance that funds will be available for the clean-up
and remediation or the closure and, in some cases, post-closure care of sites.
Such laws and regulations also

9

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.

This regulatory process also requires the Company to obtain and retain
numerous governmental approvals, licenses and permits to conduct its operations.
In addition, because a portion of the Company's business consists of the
transportation of wastes, including hazardous wastes, the Company is subject to
United States Department of Transportation and other regulations requiring
certain licensing, permits and other government approvals. Operating permits
need to be renewed periodically and may be subject to revocation, modification,
denial or non-renewal for various reasons, including the failure of the Company
to satisfy regulatory concerns. Adverse decisions by governmental authorities on
permit applications submitted by the Company may result in abandonment or delay
of projects, premature closure of facilities or restriction of operations, all
of which could have a material adverse effect on the Company's financial
condition.

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 industrial and metal services industry. Included are laws,
regulations and initiatives to ban or restrict the shipment of wastes, impose
higher taxes on out-of-state waste shipments than in-state shipments, and
reclassify certain categories of non-hazardous wastes as hazardous. Certain
state and local governments have promulgated "flow control" regulations that
attempt to require that all waste generated within the state or local
jurisdiction must go to certain disposal sites. 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.

The Company's facilities are subject to periodic unannounced inspection by
federal, provincial, state and local authorities to ensure compliance with
license terms and applicable laws and regulations. The Company works with such
authorities to remedy any deficiencies found during such inspections. If serious
violations are found or deficiencies, if any, are not remedied, the Company
could incur substantial fines and other expenses.

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 expenses.

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 a 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.

The industrial and metal services industries in North America have become
subject to extensive and evolving regulation. The Company makes a continuing
effort to anticipate relevant material regulatory, political and legal
developments, but it cannot predict the extent to which any future legislation
or regulation may affect its operations. The Company believes that with
heightened legal, political and citizen awareness and concerns, companies in the
industrial and metal services industries may from time to time incur fines and
penalties and will be faced, in the normal course of business, with 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 and metal services industries to modify, supplement or
replace equipment and facilities at costs that may be substantial. Because the
businesses in which the Company is engaged are intrinsically connected with the
protection of the environment and the potential discharge of materials into the
environment, a portion of the Company's capital expenditures is expected to
relate, directly or indirectly, to
10

such equipment and facilities. Moreover, it is possible that future
developments, such as increasingly strict 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

United States laws and state common law may impose liability on the present
or former owners or operators of facilities that 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 complies with applicable laws and regulations. Similar liability may
be imposed upon the generators and transporters of wastes that 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.

Statutory liability stems primarily from the Comprehensive Environmental
Response Compensation and Liability Act of 1980 ("CERCLA") and its state
equivalents (collectively, "Superfund") and the Resource Conservation and
Recovery Act of 1976 ("RCRA") and similar state statutes. CERCLA imposes joint
and several liability for the costs of remediation and natural resource damages
on the owner or operator of a facility from which there is a release or a threat
of a release of a hazardous substance into the environment and on the generators
and transporters of those hazardous substances. Under RCRA and equivalent state
laws, regulatory authorities may require, pursuant to administrative order or as
a condition of an operating permit, that the owner or operator of a regulated
facility take corrective action with respect to contamination resulting from
past or present operations. Such laws also require that the owner or operator of
regulated facilities provide assurance that funds will be available for the
closure and, in some cases, post-closure care of its facilities. The Company is
exposed to potential liability 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. There may also be common law liability for personal
injury caused by hazardous substances. The Company may face similar potential
liability in other countries in which it operates.

The Company is aware that hazardous substances are present in some of the
landfills and transfer, storage-processing and disposal facilities used by it.
Certain of these sites have experienced environmental problems, and clean-up and
remediation is required. The Company has grown in the past by acquiring other
businesses. As a result, the Company has acquired, or may in the future acquire,
landfills and other transfer and processing sites that contain hazardous
substances or that have other potential environmental problems and related
liabilities, and may acquire businesses that in the future incur substantial
liabilities arising out of their respective past practices, including past
disposal practices.

Certain of PSC's metals facilities and its transfer, storage, processing
and disposal facilities are environmentally impaired 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. PSC, in conjunction with environmental
regulatory agencies, has in some instances commenced remediation of the sites in
accordance with approved corrective action plans pursuant to permits or other
agreements with regulatory authorities. The Company has established procedures
to periodically evaluate these sites, giving consideration to the nature and
extent of the contamination. 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

11

costs of which could be substantial. Such laws and regulations allow the
financial assurance requirements to be satisfied by various means, including
letters of credit, surety bonds, trust funds, a financial (net worth) test and a
guarantee by a parent company. In the United States, a company must pay the
closure costs for a waste treatment, storage or disposal facility owned by it
upon the closure of the facility and thereafter, in some cases, 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. See Item 3, Legal Proceedings, for discussion of legal
proceedings against some of the Company's subsidiaries in connection with
superfund laws.

Estimates of the Company's liability for remediation of a particular site
and the method and ultimate cost of remediation require a number of assumptions
and are inherently difficult, and the ultimate outcome may differ from current
estimates. As additional information becomes available, estimates are adjusted.
It is possible that technological, regulatory or enforcement developments, the
results of environmental studies or other factors could alter estimates and
necessitate the recording of additional liabilities, which could be material.
Moreover, because PSC has disposed of waste materials at numerous third-party
disposal facilities, it is possible that PSC will be identified as a potentially
responsible party at additional sites. The impact of such future events cannot
be estimated at the current time.

The Company may also be required to indemnify clients who incur liability
in connection with the foregoing pursuant to the terms of contracts between such
clients and the subsidiaries involved.

EMPLOYEES

At December 31, 2001, PSC employed approximately 10,000 full-time
employees, of whom approximately 1,000 are unionized. Of the total employees,
approximately 6,500 work in the Industrial Outsourcing Group, approximately
2,300 work in the Environmental Services Group, approximately 1,100 work in the
Metals Services Group, and approximately 100 work in shared services/corporate.

12

ITEM 2. PROPERTIES

The Company currently operates from over 150 locations primarily in North
America. The Company believes that most of its primary existing facilities are
effectively utilized, well maintained and in good condition. The Company
continues to divest itself of unneeded or underutilized properties. The Company
believes that its facilities are adequate for its current needs and that
suitable additional space will be available as required.

The Company's corporate headquarters are located in Rosemont, Illinois and
comprise leased premises of 10,477 square feet.

The following is a list of the principal sites from which the Company
conducts its operations. Unless otherwise indicated, all of the listed sites are
held in fee by PSC or a wholly owned subsidiary, subject to the security
interests of the Company's lenders under the credit facility and the revolving
operating facility described elsewhere herein.

INDUSTRIAL OUTSOURCING GROUP

ENVIRONMENTAL SERVICES GROUP

13

METALS SERVICES GROUP

(1) A number of the Company's subsidiaries operate sites that provide services
in more than one category.

(2) Leased facility.

14

ITEM 3. LEGAL PROCEEDINGS

In October 1999, Exxon Corporation ("Exxon") commenced an action in the
District Court, Harris County, Texas against International Catalyst, Inc.
("INCAT"), an indirect wholly owned subsidiary of the Company, for damages of
$32.1 million arising from certain work conducted by INCAT at Exxon's Baytown,
Texas chemical plant. Exxon alleges that INCAT was responsible for the purchase
and installation in 1996 of improper gasket materials in the internal bed piping
flange joints of the Baytown plant, which caused damages to the facility and
consequential losses arising from the shutdown of the plant while repairs were
made. Primary and excess insurers of the Company have issued reservations of
rights letters. The second excess layer carrier has filed a motion for summary
judgment on the issue of denial of coverage, and the first excess layer carrier
has joined in that motion. An agreement in principle to settle this litigation
was reached during April, 2002. If the settlement is approved by all interested
parties, the Company's liability will be covered by insurance, except for a
small deductible.

On September 13, 1999, a lawsuit was filed in state court in Ohio
(Ashtabula County), alleging injury to 130 named plaintiffs resulting from
evacuation due to a fire and shelter-in-place orders with respect to a sodium
filter at an RMI Titanium Company ("RMI") plant in Ashtabula, Ohio. The
plaintiffs alleged negligence on the part of RMI and the Company in the removal
of sodium from the filter on RMI's premises. Plaintiffs sought actual and
punitive damages and their attorneys applied for class action status to
represent 500 people affected by the evacuation order and the approximately
4,500 people affected by the shelter-in-place orders. RMI demanded
indemnification from PSC under the terms of the contract pursuant to which the
work was performed. The Company has a significant retained liability before
insurance coverage is triggered. The parties have reached a settlement in
principle, which must be approved by the court after a fairness hearing in order
to become effective. The Company has accrued for the amount of the settlement.

In December 1998, the Company and other potentially liable parties ("PLPs")
completed a remedial investigation of the Pasco Sanitary Landfill Site in the
State of Washington and submitted a feasibility study to the Washington State
Department of Ecology ("Ecology"). The seven-year plan outlined in the study is
expected to be the final remedy to be followed by post-closure monitoring for
approximately 30 years. The cost of cleanup is estimated to be in the range of
$14-17 million. The Company's share of such costs cannot be determined at this
time, but preliminary estimates indicate that the Company may be liable for more
than 50% of such costs. The Company is pursuing insurance coverage to cover the
Company's costs for the cleanup. The Company has reviewed the nature and extent
of this issue as well as other of its liabilities with respect to other
superfund sites and considered the number, connection and financial ability of
other named and unnamed PLPs and the nature and estimated cost of the likely
remedies. Based on its review, at December 31, 2001, the Company has accrued its
estimate of the liability to remediate these sites at $17.8 million. If it is
determined that more expensive remediation approaches may be required in the
future, the Company could incur additional obligations that could be material.

On March 22, 2000, the EPA filed a Complaint and Proposed Compliance Order
against the Paint Services Group of Nortru, Inc. ("Nortru"), an indirect wholly
owned subsidiary of the Company, relating to a multi-media inspection conducted
by the EPA at all Nortru Detroit facilities in March and April 1999. Violations
alleged included a failure to repair a crack in a secondary containment system
and a failure to engage in proper monitoring of air emissions for certain
equipment as required under regulations applicable to large-quantity generators
of hazardous wastes. While Nortru has negotiated a settlement relating to this
complaint that includes payment of a penalty of $53,718 and compliance with
applicable regulations, the Company believes that the EPA is likely to file
other complaints as a result of the 1999 inspections. The Company is unable to
predict the nature or amount of its liability under such complaints if and when
brought.

On August 6, 2001, Burlington Environmental, Inc., was served with a
Complaint and Compliance Order by the U.S. EPA and similar enforcement documents
from the Washington Department of Ecology ("Ecology") assessing penalties in
excess of $1.0 million relating to alleged non-compliance with regulations at
three facilities in Washington State and a company laboratory located in Renton
Washington. The Complaint alleged violations of and non-compliance with
provisions of the facility RCRA permits and state and federal regulations
relating to the operations at these facilities. The Company entered negotiations
with

15

the EPA that resulted in the filing of a Consent Agreement and Final Order
("CAFO") on January 17, 2002. Under the terms of the CAFO, the Company will pay
a fine of approximately $136,000 in six installments over a six-month period and
perform a Supplemental Environmental Project ("SEP") that includes the early
closure of one of its Seattle-based RCRA facilities. The anticipated cost of
closure and consolidation of operations at other regional facilities is
approximately $2.1 million. Implementation of the SEP will take approximately
two years depending upon the Company's ability to obtain the necessary state and
local permits to perform the work. Concurrent with the EPA negotiations, the
Company negotiated a settlement in principle with Ecology. Final terms have not
been established.

In addition to the matters reported above, from time to time PSC becomes
aware of compliance matters relating to, or receives notices from Federal, state
or local governmental entities of alleged violations of environmental, health
and/or safety laws and regulations pertaining to, among other things, the
disposal or discharge of chemical substances (including hazardous wastes). In
some instances, these matters may become the subject of administrative
proceedings or lawsuits and may involve monetary sanctions of $100,000 or more
(exclusive of interest and costs).

Moreover, PSC is a defendant in various other lawsuits, claims and
investigations that have arisen in the ordinary course of the Company's
business.

The Company is unable to predict the outcome of certain of the foregoing
matters, and cannot provide assurance that these or future matters will not have
a material adverse effect on the results of operations or financial condition of
the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The Company's common stock trades under the symbol "PSCD" in the United
States on the Nasdaq National Market tier of the Nasdaq Stock Market ("Nasdaq")
and under the symbol "PSC" in Canada on the Toronto Stock Exchange. The
Company's stock began trading on Nasdaq on May 22, 2000.

The following table sets forth for the fiscal periods indicated (based on
the fiscal year ended December 31) the high and low sale prices per share of the
Company's common stock as reported by Nasdaq.

On April 11, 2002, the last reported per share sale price on Nasdaq was
$1.03. At April 11, 2002, there were 24,256,437 shares of common stock
outstanding and held of record by approximately 1,200 stockholders.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends on its common stock
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 and revolving operating facility
prohibit the payment of dividends by the Company other than to certain
subsidiaries.

RECENT SALES OF UNREGISTERED SECURITIES

On May 5, 2000, the Company issued 41,946 shares of common stock to the
then President and CEO of the Company for $249,998 in cash. Such shares were
placed in reliance on Section 4(2) of the Securities Act of 1933, as amended,
and Regulation D promulgated thereunder.

On April 12, 2002, in connection with the mezzanine financing, the Company
issued 3,638,466 shares of common stock to entities affiliated with Carl C.
Icahn and Stephen Feinberg, upon payment in cash of the par value of $0.01 per
share. Such shares were placed in reliance on Section 4(2) of the Securities Act
of 1933, as amended, and Regulation D promulgated thereunder.

17

ITEM 6. SELECTED FINANCIAL DATA

Due to changes in the financial structure of the Company and the
application of fresh start reporting as a result of the consummation of the Plan
under the reorganization proceedings, the Consolidated Financial Statements of
the Company issued subsequent to Plan implementation are not comparable with the
Consolidated Financial Statements issued by the Predecessor Company. A black
line has been drawn on the accompanying financial statements to separate and
distinguish between the financial information that relates to Company and the
financial information that relates to Predecessor Company. Financial information
regarding the Predecessor Company has been compiled by the Company.

The selected financial data should be read in conjunction with the
accompanying Consolidated Financial Statements of the Company and the related
notes thereto. Cash dividends were not paid during the periods set forth below.
The basic and diluted earnings (loss) per share for the Predecessor Company have
not been presented as they are not comparable to subsequent periods due to the
Plan implementation and fresh start reporting. (In thousands of dollars, except
EBITDA, share and per share amounts).

(1) EBITDA is defined in the Company's credit facilities as consolidated net
earnings (or loss) before interest expense, income taxes and depreciation
expense and in addition excludes after-tax gains or losses from business or
location closures, losses from the write-down of long-term assets and
certain other defined special charges.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED)

INTRODUCTION

PSC is an industrial and metals services company operating in three
segments: (i) the Industrial Outsourcing Group; (ii) the Environmental Services
Group; and (iii) the Metals Services Group. At December 31, 2001, PSC had
approximately 10,000 full-time employees at over 140 locations primarily in
North America. The Company's operations are based primarily in the United
States. For geographical information, see Note 21 to the Consolidated Financial
Statements.

The Industrial Outsourcing Group's operations include industrial cleaning
and maintenance, mechanical services, piping and fabrication services,
turnaround and outage services, electrical contracting and instrumentation,
refractory, catalyst, decommissioning, and remediation services. The Industrial
Outsourcing Group primarily services the refining, petrochemical, utilities, oil
and gas, pulp and paper, and automotive industries.

The Environmental Services Group provides commercial and industrial waste
collection, recycling, processing and disposal, as well as laboratory analytical
services, container and tank cleaning and emergency response services primarily
to the manufacturing, automotive, chemical, paint and coatings, transportation,
and aerospace industries, as well as to municipalities and consulting and
engineering firms.

The Metals Services Group's operations include ferrous and non-ferrous
scrap collection and processing services, brokerage, transportation and on-site
mill services as well as end-processing and distribution of steel products. The
Metals Services Group primarily services the steel, foundry, manufacturing and
automotive industries.

The Company earns revenue by providing industrial outsourcing services,
from the sale of recovered metals, and from fees charged to customers for
by-product transfer and processing, collection and disposal services. The
Company 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.

The Company's operating expenses include direct labor, indirect labor,
payroll-related taxes, benefits, fuel, maintenance and repairs of equipment and
facilities, depreciation, insurance, property taxes, and accrual for future
closure and remediation costs. Selling, general and administrative expenses
include management salaries, clerical and administrative costs, provisions for
bad debts, professional services and facility rentals, as well as costs related
to the Company's marketing and sales force.

The Consolidated Financial Statements herein contain information relating
to Philip Services Corporation and its subsidiaries, which has been prepared by
management, and information relating to the Predecessor Company, which has been
compiled by management of PSC. On April 7, 2000, Oldco and certain of its
Canadian subsidiaries transferred substantially all of their assets and
liabilities (except for liabilities subject to compromise) to the Company at
fair value. The liabilities subject to compromise of $726.5 million were
retained by Oldco and certain of its Canadian subsidiaries. As a result, Oldco
remains insolvent. For financial reporting purposes, the effective date of the
reorganization was March 31, 2000. Management of PSC has determined that certain
consolidated financial and other information of the Predecessor Company may be
of limited interest to the stockholders of PSC and has therefore included such
information in this document. The consolidated financial information of the
Predecessor Company does not reflect the effects of the application of fresh
start reporting. Readers should, therefore, review this material with caution
and not rely on the information concerning the Predecessor Company as being
indicative of future results for the Company or providing an accurate comparison
of financial performance.

The Company conducts substantially the same businesses as the Predecessor
Company with the exception of the UK Metals business, which was sold on April 7,
2000.

19

CREDIT FACILITIES

Under the credit facility and revolving operating facility ("facilities"),
more fully described in Note 9 to the Consolidated Financial Statements, the
Company is required to meet certain financial covenants. During 2001, the
Company was negatively impacted by the general slowdown in the economy, poor
conditions in the steel industry, the bankruptcy of major customers, and the
events of September 11, among other matters. The Company was unable to meet its
EBITDA (defined in the Company's credit facilities as consolidated net earnings
(or loss) before interest expense, income taxes and depreciation expense and in
addition excludes after-tax gains or losses from business or location closures,
losses from the write-down of long-term assets and certain other defined special
charges) and interest coverage (defined as the ratio of EBITDA to cash interest
expense and certain credit facilities' fees minus any cash interest paid under
the Company's debt instruments with respect to events resulting from a change of
control) covenants and as a result sought relief in March 2001 and again in May
2001. In November 2001, additional amendments to the facilities were executed by
the lenders, reducing the EBITDA and interest coverage requirements for the
third quarter. Notwithstanding these amendments, the Company still was unable at
September 30, 2001 to project continued covenant compliance for the following 12
months. Accordingly, issues of whether the Company was a going concern were
raised, and balances under the facilities were classified as current.

During the fourth quarter the Company was unable to obtain surety bonds
from its providers at an acceptable cost, and the Company began to issue letters
of credit in lieu of performance bonds. Letters of credit reduce availability
under the revolving operating facility by the full face amount of the letter.
This increase in letter of credit usage eventually reduced the availability of
advances under the revolving operating facility to an amount inadequate to
sustain day-to-day operations.

During the first quarter of 2002, and pending agreement on permanent
additional financing, the revolving operating facility was amended, utilizing
the optional overadvance provisions, first by $11 million and then by an
additional $20 million. Fees of $1 million and $2 million, respectively, were
paid for these increases. These advances of $31 million were repaid when the
mezzanine financing, described below, was put in place.

On April 12, 2002, the revolving operating facility was amended to provide
additional financing for the duration of the facility (hereinafter "mezzanine
financing"). The amendments increase the maximum amount that may be borrowed
under the revolving operating facility (exclusive of optional overadvances) to
$195 million from $175 million. In addition, the revolving operating facility
was amended to add a new Tranche Sub-B in the amount of $70 million. Because the
defined borrowing base under Tranche Sub-B is more liberal than under Tranches A
or B-Prime, and because a reserve of $25 million is not deducted from the
borrowing base under Tranche Sub-B as it is under Tranches A and B-Prime, the
net effect is to provide availability under Tranche Sub-B at times when there is
no availability under Tranches A and B-Prime. Tranche Sub-B is a revolving
facility, except that any payments of principal as a result of asset sales
(other than in the ordinary course of business) automatically reduce the
availability under Tranche Sub-B.

The covenants under the revolving operating facility were amended to
eliminate the interest coverage ratio, to waive the default under the EBITDA
(defined in the Company's credit facilities as consolidated net earnings (or
loss) before interest expense, income taxes and depreciation expense and in
addition excludes after-tax gains or losses from business or location closures,
losses from the write-down of long-term assets and other defined special
charges) covenant for the period ended December 31, 2001, and to lower the
EBITDA covenant requirement to approximately $4.6 million, $9.7 million, $14.8
million and $20.4 million for the cumulative year-to-date periods ending March
31, June 30, September 30, and December 31, 2002, respectively.

The revolving operating facility was also amended to extend the maturity
date of the facility to April 8, 2003 from September 30, 2002.

In addition to the foregoing changes, the revolving credit facility was
further amended in a number of sections to facilitate certain transactions or to
effect conforming changes. Among these changes was a provision making it easier
to enter into transactions with affiliates provided that the transaction in
question is at least as fair to the Company as could be achieved in an arm's
length negotiation.

20

The commitments under Tranche Sub-B have been provided by affiliates of
Carl C. Icahn ($49 million) and affiliates of Stephen Feinberg ($21 million).
Mr. Icahn and Mr. Feinberg and their affiliates are respectively the largest and
second largest stockholders of the Company (see Item 12, Security Ownership of
Certain Beneficial Owners and Management).

Certain fees were incurred in connection with Tranche Sub-B. Specifically,
Tranche Sub-B lenders received an upfront fee of $6 million. The $2 million fee
that was paid for the $20 million interim overadvance was credited against the
$6 million fee for the mezzanine facility. Tranche Sub-B lenders will receive a
fee of 2% per annum based on the unused portion of the Tranche Sub-B facility.
There will also be a prepayment fee of 3% based upon a termination by the
Company of any or all of Tranche Sub-B.

In addition to those fees, the Company issued to the Tranche Sub-B lenders
3,638,466 shares of the common stock of the Company, amounting to 15% of the
outstanding common stock prior to the issuance, upon payment in cash of the par
value of $0.01 per share. These shares were divided between the Icahn group and
the Feinberg group in proportion to their respective commitments. In connection
with the issuance, the Icahn group and the Feinberg group have been granted two
demand registration rights and an unlimited number of piggyback registration
rights covering both the newly issues shares and all other shares held by these
groups, as well as pre-emptive rights with respect to future issuances by the
Company.

A further fee of $1 million was paid to the lenders under the revolving
operating facility for the amendment and for resetting the covenants. The
administrative agent under the revolving operating facility, Foothill Capital
Corporation, will receive $10,000 per month for administering Tranche Sub-B.

Investors are referred to the full text of the documents filed as exhibits
to this Form 10-K.

The Company's credit facility and the intercreditor agreement among the
Company's lenders were amended primarily to permit or facilitate the changes to
the revolving operating facility. In addition, the interest coverage ratio under
the credit facility was eliminated, the EBITDA covenant requirements reduced,
and the default under the EBITDA covenant for the period ended December 31, 2001
waived.

At December 31, 2001, the Company was in compliance with the amended
covenants under the facilities. The Company projects it will remain in
compliance for subsequent periods ending March 31, June 30, September 30 and
December 31, 2002. As a result, the Company's credit facility debt has been
reclassified as long-term. In the event that the Company is unable to comply
with the covenants in future periods, such non-compliance would constitute an
"Event of Default" under both of the facilities. Upon the occurrence and during
the continuation of an Event of Default, the lenders under each facility, at the
election of the holders of 66 2/3% of the total commitments under such facility
(the "Required Lenders"), may, among other things, declare all obligations under
such facility to be immediately due and payable. In addition, at the election of
the Required Lenders under the revolving operating facility, the participants
may cease advancing money or extending credit to the Company. If an acceleration
of the indebtedness under either of the facilities occurred, the Company would
also be in default under its indentures with respect to the unsecured
payment-in-kind-notes described in Note 9(b) to the Consolidated Financial
Statements.

RESULTS OF OPERATIONS

To facilitate a comparison of the Company's operating performance, the
following discussion of results of operations compares the consolidated
financial results for the year ended December 31, 2001, with the combined
consolidated financial results for the twelve months ended December 31, 2000,
which represents the consolidated financial results for the Predecessor Company
for the three months ended March 31, 2000 and the consolidated results for the
Company for the nine months ended December 31, 2000, and with the Predecessor
Company's results of operations for the year ended December 31, 1999.
Consequently, the prior year's information presented below does not comply with
AICPA's Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code", which calls for separate reporting
for the Company and the Predecessor Company.

21

The following table presents, for the periods indicated, the results of
operations and the percentage relationships that the various items in the
Consolidated Statements of Earnings bear to the consolidated revenue from
continuing operations. ($ in millions)

EARNINGS FROM CONTINUING OPERATIONS

For the year ended December 31, 2001, the Company had a loss from
continuing operations of $78.1 million or $3.25 per share. This compares to a
loss for the combined Company and Predecessor Company of $44.2 million from
continuing operations for the year ended December 31, 2000 and a loss for the
Predecessor Company from continuing operations of $280.5 million for the year
ended December 31, 1999.

The results of operations for the years ended December 31, 2001 and 2000
were impacted by special charges recorded amounting to $11.9 million and $17.1
million, respectively (see "Special charges" below). There were no special
charges recorded in 1999. The results of operations for the years ended December
31, 2000 and 1999 were impacted by reorganization costs amounting to $20.6
million and $164.2 million, respectively (see "Reorganization costs" below).
Excluding these special charges and reorganization costs, the results from
continuing operations were a loss of $66.2 million or $2.75 per share for the
year ended December 31, 2001, a loss of $6.5 million for the year ended December
31, 2000 and a loss of $116.3 million for the year ended December 31, 1999.

22

OPERATING RESULTS

The operating results reflect the following: ($ in millions)

Industrial Outsourcing Group

Revenue from the Industrial Outsourcing Group increased by $16.0 million
for the year ended December 31, 2001 when compared to the prior year. This
increase was due to strong demand for the Company's services during the first
half of the year, partially offset by the general economic slowdown during the
second half, particularly customers deferring projects following the events of
September 11. In addition, during 2001, various European operations were closed
or sold that had $7.5 million and $11.4 million of revenue in 2001 and 2000,
respectively. Revenue increased $36.9 million for the year ended December 31,
2000 when compared to 1999. This increase was due to an increase in
critical-path services, including refinery turnarounds and utility outage
services, as well as a large contract in the electrical instrumentation
operations that had been ongoing since the fall of 1999 and was substantially
completed in the third quarter of 2000. These increases were partly offset by
the sale in June 1999 of Oldco's civil construction and maintenance business
("BEC"), which generated $20.7 million of revenue in 1999, and the closure of
certain unprofitable locations in Europe and the United States, which generated
$29.0 million of revenue in fiscal 1999.

Income (loss) from operations before special charges as a percentage of
revenue was 3.4%, 4.7%, and (2.0%) for the years ended December 31, 2001, 2000,
and 1999, respectively. The decrease in margin from 2001 compared to 2000 is
principally attributable to the large electrical instrumentation project during
the prior year which did not recur in 2001, as well as unusually low volumes
during the fourth quarter and operating losses in the paint services business.
In the latter part of 2001, the slowdown in the economy began to impact revenue
and profitability of the Industrial Outsourcing Group. Scheduling of some large
maintenance projects handled by the Industrial Outsourcing Group, including
turnaround and outage services, which are typically scheduled in the fall and
spring months, were either delayed or postponed by customers.
23

This trend is expected to continue into 2002. Improved performance in 2000
compared to 1999 was due to higher margin critical-path services, improvements
in market conditions in the petroleum refining sector due to increased crude oil
prices, as well as cost reduction measures, the closure of unprofitable
locations and the consolidation of low margin businesses.

Environmental Services Group

Revenue from the Environmental Services Group increased by $7.1 million for
the year ended December 31, 2001 when compared to the same period in 2000. The
Company believes that the revenue improvement was principally due to increased
penetration of existing customers and cross-selling of additional services.
Revenue increased by $7.9 million in 2000 compared to 1999 due to improvements
in market conditions in 2000, increased market share as the result of
competitors' financial difficulties, and the fact that in 1999 many customers
were reluctant to enter into service agreements until the financial uncertainty
surrounding the Predecessor Company was resolved. The general economic slowdown
in 2001 slowed the rate of waste generation by manufacturing customers and
negatively impacted revenues, a trend which may continue into 2002.

Income from operations before special charges as a percentage of revenue
was 6.6%, 4.7% and 1.6% for the years ended December 31, 2001, 2000, and 1999,
respectively. The continued increase in profitability over the past two years
was due to the increase in revenue, improved asset utilization, closure and
consolidation of unprofitable locations and cost reduction initiatives. The
economic slowdown in general manufacturing industries, such as automotive,
negatively impacted revenues and profitability in the second half of 2001, and
this impact is expected to continue into 2002.

Metals Services Group

Revenue from the Metals Services Group decreased by $149.4 million for the
year ended December 31, 2001 compared to the prior year. This decrease was
principally due to lower volumes and a 14% decrease in average scrap prices
during the year. Production cutbacks at domestic steel mills, a weak export
market, an oversupply of industrial scrap and a strong availability of scrap
alternatives all contributed to the lower volumes and scrap prices. Several
steel mills entered or operated under Chapter 11 bankruptcy during the year.
Revenue decreased $29.4 million for 2000, when compared to 1999. This decrease
was the result of lower volumes and scrap prices during 2000, and the sale of
the UK Metals business in April 2000. A Canadian operation was sold in May 2001
which generated approximately $3 million and $8 million in revenue during 2001
and 2000, respectively.

Income (loss) from operations before special charges as a percentage of
revenue was (3.4%), 2.0%, and 0.4% for the years ended December 31, 2001, 2000,
and 1999, respectively. The deterioration in 2001 from the prior year was
principally due to $18.0 million of additional bad debt provisions compared to
$5.9 million in 2000, as well as operating losses incurred due to the low volume
and pricing. The increase in 2000 was due to improved inventory control, as well
as consolidation and cost reduction initiatives. Five major customers of the
Group filed for protection under Chapter 11 in the fourth quarter of 2000 and
during 2001. Weak market conditions in the steel and automotive industries as
well as depressed pricing and demand for ferrous scrap had a negative impact on
revenue and profitability in this business in 2001, and this trend is expected
to continue into 2002.

Shared Services and Eliminations

Shared services and eliminations includes the expenses related to the
shared service operations, the retained liabilities of the Company's captive
insurance company and other non-operating entities. The loss from operations
before special charges for the year ended December 31, 2001 was $49.8 million
and includes a $4.7 million charge for potential insurance exposure to Reliance
Insurance Company (see Note 8 of the Consolidated Financial Statements). The
loss from operations before special charges of $44.5 million for the year ended
December 31, 2000 includes the insurance costs relating to the retained
liabilities of the captive insurance company, which were $8.7 million higher
than the prior year as the operations experienced several

24

more severe self-insured incidents. The loss from operations before special
charges for the year ended December 31, 1999 includes $13 million in
professional fees incurred prior to the filing of the Plan. Subsequent to the
filing, these costs were included in reorganization costs.

DISCONTINUED OPERATIONS

On May 18, 1999, Oldco sold its investment in Philip Utilities Management
Corp. ("PUMC") for cash proceeds of $70.1 million resulting in a gain of $39.1
million. The operations of PUMC (previously reported as the utilities management
segment) have been treated as discontinued operations.

In December 1998, Oldco made the decision to discontinue its non-ferrous
and copper operations segments. A sale of certain of the aluminum operations
(included in non-ferrous operations) closed on January 11, 1999 for total
consideration of approximately $69.5 million. The remaining operations in these
segments were closed or sold during 1999 and 2000 except for three operations
with annual revenue of $7 million, which were transferred to continuing
operations.

Revenue from the discontinued non-ferrous, copper and utilities management
operations, net of intercompany revenue was $5.9 million and $74.7 million for
the years ended December 31, 2000 and 1999, respectively.

DIVESTITURES

During 2001, the Company determined that its Paint Services operations were
not a strategic fit with the rest of the business units and obtained a signed
commitment from a buyer to purchase the business. Consequently $6.8 million was
charged to "Other income and expense -- net" in recognition of the loss on the
sale of the business. The sale was completed during the first quarter of 2002.

During the third and fourth quarters of 2001, various European operations
of the Industrial Outsourcing Group were sold for net proceeds of $2 million.
These businesses generated revenue of $7.5 million, $11.4 million, and $12.3
million, and loss from operations of $(1.4) million, $(1.9) million, and $(1.4)
million, in 2001, 2000 and 1999, respectively. No significant gain or loss was
realized on the sales.

In June 2001, the Company sold its metals recycling and mill services
business in Montreal ("Recyclage") for net proceeds of $10.3 million. The
business, which was part of the Metals Services Group, generated revenue of $3
million, $8.2 million, and $8.8 million, and income from operations of $0.3
million, $1.3 million, and $1.3 million, in 2001, 2000, and 1999, respectively.
The gain on sale of $4.3 million is included in "Other income and expense --
net."

On April 7, 2000, Oldco sold its metals recycling and mill services
business in the United Kingdom for net proceeds of $47.7 million. The business,
which was part of the Metals Services Group, generated annual revenue of $29.9
million and $81.2 million, and income from operations of $2.4 million and $3.5
million, in 2000 and 1999, respectively.

In June 1999, Oldco sold the assets of BEC for $23.1 million resulting in a
gain on sale of $1.0 million. The business, whose results are included in
Industrial Outsourcing Group, generated annual revenue of $20.7 million and loss
from operations of $(0.8) million in 1999.

25

SPECIAL CHARGES

2001

The special charges are composed of the following: ($ in thousands)

Business units, locations or activities to be exited:
Assets written down to estimated net realizable value of
$-0-................................................... $ 204
Severance costs........................................... 316
Other exiting costs....................................... 2,862
Business units, locations or activities to be continued:
Assets written down to estimated net realizable value of
$200................................................... 1,809
Process re-engineering costs.............................. 6,744
-------
Pre-tax..................................................... $11,935
=======
After tax................................................... $11,935
=======

Accruals related to special charges are detailed in Note 8 to the
Consolidated Financial Statements.

Asset impairments and other costs recorded as special charges

During 2001, the Company continued to seek operating efficiencies and
identified locations or business units to be closed. Included in the special
charges are non-cash costs for asset impairments of $0.2 million and $3.2
million in cash costs for severance and other exit costs to be incurred at these
locations. Approximately 48 employees are to be terminated as a result of these
restructurings, of which 24 had not yet been terminated at December 31, 2001.

In addition, a patent infringement lawsuit was settled during the year in
which the Company agreed to discontinue the use of certain equipment parts at an
ongoing operation. An assessment of the recoverability of the net asset value
for this equipment resulted in a non-cash asset impairment charge of $1.8
million.

Process reengineering costs

During 2000, the Company embarked on an initiative, the PSC Way, to
standardize business processes to allow it to operate more efficiently and share
information and best practices. This initiative includes defining common
business processes related to transactional functions as well as client
relationships and includes establishing a common management systems platform.
The total cash costs for the PSC Way initiative in 2001 were $12.2 million, of
which $5.4 million was capitalized to fixed assets and $6.7 million is included
in special charges as process re-engineering costs. The PSC Way initiative will
continue into 2002 with additional cash costs expected of approximately $3
million.

2000

The special charges comprise the following: ($ in thousands)

Business units, locations or activities to be exited:
Assets written down to estimated net realizable value..... $ 5,683
Severance costs........................................... 4,828
Other exiting costs....................................... 1,163
Business units, locations or activities to be continued:
Process re-engineering.................................... 5,443
-------
Pre-tax..................................................... $17,117
=======
After tax................................................... $15,483
=======

26

The total cash costs for the PSC Way initiative in 2000 were $8.6 million,
of which $3.2 million was capitalized to fixed assets and $5.4 million is
included in special charges as process re-engineering costs.

In the fourth quarter of 2000, the Company made the decision to exit its
European industrial outsourcing operations due to its limited geographical
presence following the sale of the UK Metals business in the first quarter.
Included in special charges is $4.1 million in non-cash charges for asset
impairments and $0.8 million in cash costs related to severance and other exit
costs.

The Company has also made the decision to close and/or consolidate several
locations. Included in special charges are cash costs of $5.2 million for
severance and other exit costs and $1.6 million in non-cash costs relating to
asset impairments.

Approximately 132 employees were to be terminated as a result of these
restructurings, of which 17 remained to be terminated as of December 31, 2001.

REORGANIZATION COSTS

AICPA's Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" requires that costs for transactions
and events directly associated with the reorganization of the Predecessor
Company be recorded separately in the Consolidated Statement of Earnings.

Reorganization costs of $20.6 million were recorded in the three months
ended March 31, 2000, including $17.9 million in professional fees and $2.7
million in other costs. Reorganization costs of $164.2 million were recorded
during fiscal year 1999, including $118.1 million relating to the revaluation of
assets and liabilities to fair value, $20.1 million relating to professional
fees, $12.6 million relating to employee severance and retention programs, and
$13.4 million in additional legal claims and other costs.

SELLING, GENERAL AND ADMINISTRATIVE COSTS

Selling, general and administrative costs were $168.2 million or 11.1% of
revenue in fiscal 2001 compared to $153.2 million or 9.4% of revenue in fiscal
2000. Costs increased due to higher bad debt expense and an insurance charge
related to Reliance Insurance, which is discussed in Note 8 to the Consolidated
Financial Statements.

Selling, general and administrative costs were $153.2 million or 9.4% of
revenue in fiscal 2000 compared to $188.2 million or 11.6% of revenue in fiscal
1999. The reduction was due to cost reduction efforts, closures of operations
and the inclusion of $13.0 million in professional fees incurred in 1999 prior
to the filing of the Plan.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization of property, plant and equipment in 2001 was
$44.1 million, representing a decrease of $3.3 million or 7.0% over 2000. This
decrease was principally due to reduced capital expenditures over the past three
years. Capital expenditures during 1999 amounted to $29.3 million, reflecting
cash conservation during the bankruptcy period.

INTEREST EXPENSE

Interest expense in 2001 was $39.5 million, representing an increase of
$9.4 million over 2000. This increase was due to having a full twelve months of
interest expense in 2001 compared to nine months of interest expense in 2000.
The Predecessor Company's reorganization resulted in suspended interest during
the first quarter of 2000 being included in the balance of the debt at Fresh
Start.

Interest expense in 2000 was $30.1 million, representing a decrease of
$22.7 million or 43% over 1999. This decrease was due to the Predecessor
Company's reorganization which resulted in syndicate debt of $1 billion being
reduced to $235.8 million of senior secured term debt and $100 million of
convertible secured payment-in-kind debt. Although the Predecessor Company
suspended payments of interest under the

27

syndicate debt in November 1998, all amounts owing were expensed and included in
the balance of the bank term loan through the date of filing of the Plan.

OTHER INCOME AND EXPENSE -- NET

2001

The Company determined that its Paint Services operations were not a
strategic fit with the rest of the business units and obtained a signed
commitment from a buyer to purchase the business. Therefore $6.8 million was
charged to "Other income and expense -- net" in recognition of the loss on the
sale of the business. The sale was completed during the first quarter of 2002.

The Company's investment in a joint venture for providing ferrous scrap
material and handling services, Sparrows Point Scrap Services LLC. ("SPSP"), was
written off after assessing the profitability of operations and recoverability
of the investment. A charge of $1.8 million was recorded.

The Industrial Outsourcing Group facility in Cedar Crest, TX., was sold,
and a gain of $1.9 million was recognized. The operation will move to a nearby
location with comparable costs.

Other income and expense -- net for the year ended December 31, 2001 also
includes interest earned of $3.1 million and equity income on investments.

2000

Other income and expense -- net for the year ended December 31, 2000
consists of gains on the sale of assets of $7.8 million, interest earned of $6.9
million and equity income on investments.

1999

Other income and expense -- net for 1999 consists of interest and equity
income.

INCOME TAXES

In assessing the value of the deferred tax assets, management considered
whether it would be more likely than not that all of the deferred tax assets
will be realized. Projected future income tax planning strategies and the
expected reversal of deferred tax liabilities are considered in making this
assessment. Based on the level of historical taxable income, projections for
future taxable income and subject to the limitation on the utilization of net
operating loss carryforwards and excess interest deduction carryforwards, the
Company has determined at this time that it is more likely than not that the
Company will not realize the benefits of the deferred tax assets at December 31,
2001. The Company has recorded a valuation allowance of $239.5 million at
December 31, 2001 and $201.8 million at December 31, 2000.

Certain future events may result in the net operating loss and excess
interest deduction carryforwards being utilized in the Company's future income
tax returns which the Company will record as a reduction in the valuation
allowance. To the extent the utilized amount relates to a period prior to the
reorganization, the associated credit will be to additional paid-in capital in
accordance with the principles of fresh start reporting. To the extent the
utilized amount relates to a period subsequent to the reorganization, the
associated credit will be to the tax provision.

The provisions for income tax in 2001 and 2000 result from taxes on profits
in certain foreign jurisdictions and state income taxes on profits in certain
states.

The Predecessor Company recorded income taxes recoverable in the year ended
December 31, 1999. The composition of the income tax recoverable in 1999 is
discussed in Note 18 to the Consolidated Financial Statements. The Predecessor
Company recorded a valuation allowance of $307.3 million at December 31, 1999.

28

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2001, the Company's working capital was $92.9 million,
representing a decrease of $81.8 million since December 31, 2000. Cash used in
continuing operating activities was $13.1 million for the year ended December
31, 2001 compared to cash provided by continuing operating activities of $82.5
million for the year ended December 31, 2000. The use of cash in 2001 was
largely due to operating losses. In the second quarter of 2000, the Company
received $44.6 million of the proceeds from the sale of the UK Metals business
and $20.0 million of restricted cash was released to the Company, which are
included in changes in non-cash working capital in the Consolidated Statement of
Cash Flows. Cash proceeds from sale of operations principally reflects the
disposition of Recyclage.

As of March 31, 2000, the Company entered into the credit facility.
Concurrently, the Company entered into the revolving operating facility ("senior
debt"), which initially provided up to $175 million, subject to a borrowing base
formula calculated on accounts receivable. The credit facility provides term
debt of $235.8 million ("term debt") and $100.0 million in convertible
payment-in-kind debt ("PIK debt"). The term debt of $250 million contemplated
under the Plan was reduced to $235.8 million on plan implementation due to the
repayment of $14.2 million from proceeds of asset sales. Obligations under the
credit facility were $289.9 at December 31, 2001. The credit facility matures on
March 31, 2005 and bears interest at a fixed rate of 9% for the term debt and
10% for the PIK debt. Interest payments on the term debt are due quarterly in
arrears, and, on the PIK debt, interest is payable in full on March 31, 2005.
The term debt or any part thereof and/or all of the PIK debt may be prepaid and
redeemed by the Company at any time during the agreement once the revolving
operating facility has been terminated. The Company must pay a redemption
premium of between 1% and 5% on the amount of the term debt being redeemed
(excluding mandatory prepayments) and between 8 1/3% and 25% on the amount of
the PIK debt being redeemed. The PIK debt is convertible by the lenders at any
time into shares of common stock of PSC at an initial conversion price of $11.72
per share, which was in excess of the fair market value of PSC on a per-share
basis at the time of issue.

The Company generally is required to repay the term debt first and then the
PIK debt in an amount equal to:

(i) 25% of the net asset-sale proceeds from the disposition of assets
sold other than in the ordinary course of business after first paying
off various tranches of senior debt and collateralizing letters of
credit.

(ii) the net proceeds from any foreign subsidiary dispositions in excess
of $1 million annually.

The Company is also required yearly for the first two years and quarterly
after that, to repay the term debt first and then the PIK debt in an amount
equal to 75% of the cash flow available for debt service.

During 2000, the Company made mandatory prepayments of the term debt
relating to net asset sales of $47.2 million, including the sale of the UK
Metals business. During 2001, the Company made mandatory prepayments relating to
net asset sales of $17.7 million, reducing the term debt to $170.9 million as at
December 31, 2001.

The facilities are guaranteed jointly and severally by PSC and
substantially all of its direct and indirect wholly owned subsidiaries and are
collateralized by security interests in the assets of PSC and substantially all
of its direct and indirect wholly owned subsidiaries and a pledge of securities
of substantially all of its direct and indirect wholly owned subsidiaries.

The revolving operating facility as amended in April 2002 provides for a
revolving line of credit, subject to a borrowing base formula calculated on
accounts receivable, of up to $195 million. The revolving operating facility
matures on April 8, 2003.

Borrowings under the revolving operating facility bear interest at a rate
equal to the base rate (which is based on the Wells Fargo Bank "prime rate")
plus 1% on Tranche A advances, 3% on Tranche B-Prime advances, and the greater
of 11.5% or the base rate plus 5% on Tranche Sub-B advances, or at the option of

29

the Company, on Tranche A advances at a rate equal to the LIBOR rate plus 3%. A
letter of credit issuance fee of .25% plus an annual fee of 2.75% is charged on
the amount of all outstanding letters of credit issued under Tranche A. Letters
of credit issued under Tranche Sub-B bear an interest rate of 10.075%.

The Company is required to pay annually an agency fee and an annual fee
equal to $150,000 and $750,000, respectively, and a monthly loan servicing fee
equal to $20,000 for Tranches A and B-Prime. The Tranche Sub-B Agency fee is
$10,000 per month. In addition, the Company is required to pay monthly an unused
line of credit fee equal to 0.375%, 0.75%, and 2.0% per annum on the average
unused portion of Tranches A, B-Prime, and Sub-B, respectively, under the
revolving operating facility. At December 31, 2001, the Company's borrowing base
formula limited the availability of the revolving operating facility to
approximately $119,276. The Company had undrawn capacity under the revolving
operating facility of approximately $22,865, net of borrowings and outstanding
letters of credit of approximately $96,411.

The facilities contain certain restrictive covenants, including limitations
on the incurrence of indebtedness, the sale of assets, the incurrence of liens,
the making of specified investments, and the payment of cash dividends. In
addition, the Company is required to satisfy, among other things, certain
financial covenants, including specified amounts of EBITDA and maximum capital
expenditures.

The facilities contain cross-default provisions.

Under the facilities, the Company is required to meet certain financial
covenants. During 2001, the Company was negatively impacted by the general
slowdown in the economy, poor conditions in the steel industry, the bankruptcy
of major customers, and the events of September 11, among other matters. The
Company was unable to meet its EBITDA and interest coverage covenants and as a
result sought relief in March 2001 and again in May 2001. In November 2001,
additional amendments to the facilities were executed by the lenders, reducing
the EBITDA and interest coverage requirements for the third quarter.
Notwithstanding these amendments, the Company still was unable at September 20,
2001 to project continued covenant compliance for the following 12 months.
Accordingly, issues of whether the Company was a going concern were raised, and
balances under the facilities were classified as current.

During the fourth quarter the Company was unable to obtain surety bonds
from its providers at an acceptable cost, and the Company began to issue letters
of credit in lieu of performance bonds. Letters of credit reduce availability
under the revolving operating facility by the full face amount of the letter.
This increase in letter of credit usage eventually reduced the availability of
advances under the revolving operating facility to an amount inadequate to
sustain day-to-day operations.

During the first quarter of 2002, and pending agreement on permanent
additional financing, the revolving operating facility was amended, utilizing
the optional overadvance provisions, first by $11 million and then by an
additional $20 million. These advances of $31 million were repaid when the
mezzanine financing, described below, was put in place.

On April 12, 2002, the revolving operating facility was amended to provide
for the mezzanine financing. The amendments increase the maximum amount that may
be borrowed under the revolving operating facility (exclusive of optional
overadvances) to $195 million from $175 million. In addition, the revolving
operating facility was amended to add a new Tranche Sub-B in the amount of $70
million. Because the defined borrowing base under Tranche Sub-B is more liberal
than under Tranches A or B-Prime, and because a reserve of $25 million is not
deducted from the borrowing base under Tranche Sub-B as it is under Tranches A
and B-Prime, the net effect is to provide availability under Tranche Sub-B at
times when there is no availability under Tranches A and B-Prime. Tranche Sub-B
is a revolving facility, except that any payments of principal as a result of
asset sales (other than in the ordinary course of business) automatically reduce
the availability under Tranche Sub-B.

The covenants under the revolving operating facility were amended to
eliminate the interest coverage ratio, to waive the default under the EBITDA
covenant for the period ended December 31, 2001, and to lower the EBITDA
covenant requirement to approximately $4.6 million, $9.7 million, $14.8 million
and $20.4 million for the cumulative year-to-date periods ending March 31, June
30, September 30, and December 31, 2002, respectively.
30

The revolving operating facility was also amended to extend the maturity
date of the facility to April 8, 2003 from September 30, 2002.

In addition to the foregoing changes, the revolving credit facility was
further amended in a number of sections to facilitate certain transactions or to
effect conforming changes. Among these changes was a provision making it easier
to enter into transactions with affiliates provided that the transaction in
question is at least as fair to the Company as could be achieved in an arm's
length negotiation.

The commitments under Tranche Sub-B have been provided by affiliates of
Carl C. Icahn ($49 million) and affiliates of Stephen Feinberg ($21 million).
Mr. Icahn and Mr. Feinberg and their affiliates are respectively the largest and
second largest stockholders of the Company (see Item 12, Security Ownership of
Certain Beneficial Owners and Management).

Certain fees were incurred in connection with Tranche Sub-B. Specifically,
Tranche Sub-B lenders received an upfront fee of $6 million. The $2 million fee
that was paid for the $20 million interim overadvance was credited against the
$6 million fee for the mezzanine facility. Tranche Sub-B lenders will receive a
fee of 2% per annum based on the unused portion of the Tranche Sub-B facility.
There will also be a prepayment fee of 3% based upon a termination by the
Company of any or all of Tranche Sub-B.

In addition to those fees, the Company issued to the Tranche Sub-B lenders
3,638,466 shares of the common stock of the Company, amounting to 15% of the
outstanding common stock prior to the issuance, upon payment in cash of the par
value of $0.01 per share. These shares were divided between the Icahn group and
the Feinberg group in proportion to their respective commitments. Item 12,
Security Ownership of Certain Beneficial Owners and Management, reflects pro
forma the ownership of each group after the issuance. In connection with the
issuance, the Icahn group and the Feinberg group have been granted two demand
registration rights and an unlimited number of piggyback registration rights
covering both the newly issued shares and all other shares held by these groups,
as well as pre-emptive rights with respect to future issuances by the Company.

A further fee of $1 million was paid to the lenders under the revolving
operating facility for the amendment and for resetting the covenants. The
administrative agent under the revolving operating facility, Foothill Capital
Corporation, will receive $10,000 per month for administering Tranche Sub-B.

Investors are referred to the full text of the documents filed as exhibits
to this Form 10-K.

The Company's credit facility and the intercreditor agreement among the
Company's lenders were amended primarily to permit or facilitate the changes to
the revolving operating facility. In addition, the interest coverage ratio under
the credit facility was eliminated, the EBITDA covenant requirements reduced,
and the default under the EBITDA covenant for the period ended December 31, 2001
waived.

At December 31, 2001, the Company was in compliance with the amended
covenants under the facilities. The Company projects it will remain in
compliance for subsequent periods ending March 31, June 30, September 30 and
December 31, 2002. As a result, the Company's credit facility debt has been
reclassified as long-term. In the event that the Company is unable to comply
with the covenants in future periods, such non-compliance would constitute an
"Event of Default" under both of the facilities. Upon the occurrence and during
the continuation of an Event of Default, the Required Lenders may, among other
things, declare all obligations under such facility to be immediately due and
payable. In addition, at the election of the Required Lenders under the
revolving operating facility, the participants may cease advancing money or
extending credit to the Company. If an acceleration of the indebtedness under
either of the facilities occurred, the Company would also be in default under
its indentures with respect to the unsecured payment-in-kind-notes described in
Note 9(b) to the Consolidated Financial Statements.

Financial Reporting Release No. 61, recently issued by the SEC, requires
all registrants to discuss liquidity and capital resources, trading activities
involving non-exchange traded contracts and relationships and transactions with
related parties that derive benefit from their non-independent relationships
with the registrant.

31

The following table summarizes the maturity dates of the significant
financial obligations and commitments of the Company:

Letters of credit issued amounted to $84,282 as at December 31, 2001
(December 31, 2000 -- $69,526).

The Company did not utilize derivatives in 2001 or 2000.

RELATED PARTIES

The Company's two largest stockholders, Carl C. Icahn and Stephen Feinberg
(see Item 12, Security Ownership of Certain Beneficial Owners and Management),
have been involved in providing interim financing subsequent to December 31,
2001 pending completion of the mezzanine financing as described in Note 24 to
the Consolidated Financial Statements. These stockholders also participate
through entities they control in the revolving operating facility described in
Note 9(c) to the Consolidated Financial Statements and share interest and fees
paid on that facility. Additionally, they are participants in the Company's PIK
and term debt facilities described in Note 9(a) to the Consolidated Financial
Statements. Mr. Icahn controls approximately $184 million of the Company's debt
which was associated with approximately $13 million in interest expense and $1
million in fees during 2001. Mr. Feinburg controls approximately $60 million of
the Company's debt which was associated with approximately $4 million in
interest expense and $.5 million in fees during 2001. Comparable amounts for
2000 are not available.

The Company has utilized the services of SBI and Company, Inc. ("SBI") for
information technology services associated with the PSC Way business
reengineering project. SBI is partially owned by entities controlled by one of
the Company's largest shareholders, Stephen Feinberg (see Item 12, Security
Ownership of Certain Beneficial Owners and Management). Fees paid to SBI totaled
$8.5 million and $7.3 million in 2001 and the nine months ended December 31,
2000, respectively.

Sparrows Point Scrap Processing, LLC. ("SPSP") is a joint venture operation
the Company has with AMG Resources Corporation to provide ferrous scrap and
scrap handling services to Bethlehem Steel Corporation. Sales to SPSP were $1.2
million and $0.9 million in 2001 and 2000, respectively. Accounts receivable-net
due to the Company were $0.5 million and $0.7 million at December 31, 2001 and
2000 respectively. Although the Company wrote off the remaining investment
(approximately $1.8 million) in SPSP during 2001 after assessing the
recoverability of the investment, a contingency remains for the Company's
guarantee of 50% of the operating losses of the joint venture. The amount or
timing of any future gains or losses cannot be reliably estimated at this time.
Additionally, the Company has exposure for its share of financial guarantees
with respect to future lease commitments of $12.7 million and debt obligations
of approximately $0.8 million.

CAPITAL EXPENDITURES

Capital expenditures for continuing operations were $47.0 million for the
year ended December 31, 2001, compared to $49.6 million for the same period in
2000. Cash conservation measures by the Company minimized the amount of capital
expenditures in 2000 and 2001.

The Company's capital expenditure program for 2002 is expected to be
approximately $46 million. Approximately $5 million of the capital expenditure
program is expected to be spent on environmental compliance matters relating to
facilities operated by the Company.

32

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 released by the SEC recommends that all
registrants include a discussion of "critical" accounting policies or methods
used in the preparation of the financial statements.

The Company's significant accounting policies are contained in the
accompanying Notes to Consolidated Financial Statements. The financial
statements have been prepared in conformity with generally accepted accounting
principles and, accordingly, include amounts based upon informed estimates and
judgments of management with due consideration given to materiality. As a
result, actual results could differ from those estimates. The following
represents those critical accounting policies where materially different amounts
would be reported under different conditions or using different assumptions.

REVENUE RECOGNITION. Revenue from industrial services is recorded as the
services are performed, using the percentage-of-completion basis for fixed rate
contracts and as-the-related-service-is-provided for time and material
contracts. Revenue from by-product recovery operations is recognized along with
the related costs of treatment, disposal and transportation at the time of
performance of services. Revenue from the direct sale of recovered commodities
and steel products or for contracts where the Company brokers materials between
two parties, takes title to the product and assumes the risks and rewards of
ownership, is recognized at the time of customer acceptance. If the Company is
acting as an agent in those transactions, then only the commission on the
transaction is recorded.

The Company uses the percentage-of-completion basis to account for its
fixed price contracts. Under this method, the amount of total costs and profits
expected to be realized is estimated, as is the recoverability of costs related
to change orders. Revenue is recognized as work progresses in the ratio that
costs bear to the estimated total costs for each contract. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance. Selling, general and administrative costs are charged to
expense as incurred. Provisions for estimated losses on incomplete contracts are
recorded in the period in which such losses are determined. Changes in estimates
or differences in the actual cost to complete the contract could result in
recognition of differences in earnings.

ENVIRONMENTAL COSTS. As at December 31, 2001, the Company had accrued
liabilities of $72.4 million for environmental investigation, compliance, and
remediation costs. The liabilities are based upon estimates with respect to the
number of sites for which the Company may be responsible, the scope and cost of
work to be performed at each site, the portion of costs that will be shared with
other parties, and the timing of remediation work. When timing and amounts of
expenditures can be reliably estimated, amounts are discounted. Where timing and
amounts cannot be reliably estimated, a range is estimated and the best estimate
within the high and low end of the ranges is recognized. Estimates can be
affected by factors including future changes in technology, changes in
regulations or requirements of local governmental authorities, the extent of the
remediation necessary based upon environmental testing, and the actual costs of
disposal.

RECEIVABLES, NET OF VALUATION ALLOWANCES. Accounts receivable at December
31, 2001 were $233.5 million net of a $36.8 million allowance for doubtful
accounts. The valuation allowance was determined based upon the Company's
evaluation of known requirements, aging of receivables, historical experience,
and the economic environment. While the Company believes it has appropriately
considered known or expected outcomes, its customers' ability to pay their
obligations could be adversely affected by further contraction in the economy or
unexpected changes in ferrous metals or energy prices. Changes in these
estimates of collectability could have a material impact on earnings.

INVENTORY. Inventories are primarily composed of scrap metal and are
valued at the lower of average purchased cost or market valuation. Prices are
established and adjusted 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, which allows the Company to turn its inventory
approximately every 46 days. Based on the inventory levels at December 31, 2001,
a 10% change in the price of ferrous scrap during a 30-day period is estimated
to change the Company's earnings (loss) from continuing operations before tax by
$1.0 million.

33

RESTRUCTURING CHARGES. The Company continuously evaluates the productivity
and profitability of individual operating locations and the existing asset base
to identify opportunities to improve its cost structure. Future opportunities
may involve, among other things, adding or closing locations, re-deploying or
disposing of assets, or otherwise restructuring operations. Costs associated
with the closures, severances, and asset impairments are estimated and are
recorded in accordance with applicable accounting requirements. Actual costs
incurred and timing could vary based upon many factors outside the Company's
control, including environmental and local governmental requirements.

INSURANCE LIABILITIES. Insurance accruals were $50.5 million at December
31, 2001. The Company retains liability for workers' compensation claims, auto,
and general liability, where permitted, for up to $1 million of any one
occurrence and for property claims up to $2 million. The Company purchased
insurance to limit the Company's aggregate exposure through October 1, 2001 to
losses of $1.5 million for auto and general liability, $5 million for
environmental liability and $14 million for workers' compensation claims.
Insurance claims liabilities have been accrued using actuarial principles and
industry standard rates on an undiscounted basis. Third party administrators
estimate the ultimate potential cost for individual claims. Actual development
of individual claims could vary from the estimated amounts due to severity of
injuries, the potential for damage awards, and future changes in medical costs.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations." This statement addresses financial accounting
and reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations" and FASB Statement No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." The provisions of this
statement apply to all business combinations initiated after June 30, 2001.
Management believes that adoption of Statement 141 will not have a material
effect on the Company's financial statements.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." This Statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, "Intangible Assets." The provisions of
this Statement are required to be applied starting with fiscal years beginning
after December 15, 2001. Management believes that adoption of Statement 142 will
not have a material effect on the Company's financial statements.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations." The statement applies to
legal obligations associated with the retirement of long-lived asset, except for
certain obligations of lessees. The provisions of this statement are required to
be applied for fiscal years beginning after June 15, 2002. Management is in the
process of evaluating the impact of the adoption of Statement 143, which could
have a material effect on the Company's financial statements.

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets." This
statement supersedes FASB Statement 121. This statement addresses financial
accounting and reporting for long-lived assets impaired and disposed of by sale.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001. Management is in the process
of evaluating the impact of adoption of Statement No. 144 on the Company's
financial statements.

CAPITAL STRUCTURE

Under the Plan, the Company allocated 24,000,000 shares of common stock to
claimants as at the Plan effective date. Because of disputed claims 654,291
shares have not yet been issued. When these claims are resolved, the shares will
be issued to the appropriate claimants. The Company currently cannot determine
the persons with the rights to these shares. In all events the shares will be
issued to claimants under the Plan.

During 2001, 230,698 shares of restricted stock were issued to various
officers and the non-employee members of the Board of Directors under applicable
plans discussed in Note 17 to the Financial Statements.

34

In addition, 23,174 shares were issued in conversion of the Company's 3%
Convertible Subordinated Notes during the twelve months ended December 31, 2001.

On April 12, 2002, in connection with the mezzanine financing, the Company
issued 3,638,466 shares of common stock to entities affiliated with Carl C.
Icahn and Stephen Feinberg, upon payment in cash of the par value of $0.01 per
share.

FRESH START REPORTING

The Company has adopted fresh start reporting in accordance with the
AICPA's Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." For financial reporting purposes, the
effective date of the Plan was considered to be March 31, 2000. The following
audited balance sheet of the Company reflects the effects of the fresh start
reporting under the Plan. The effect of the Plan and the implementation of fresh
start reporting on the Company's Consolidated Balance Sheet as at March 31, 2000
were as follows: (in thousands)

Notes:

A. Certain assets and liabilities of the Predecessor Company were not acquired
by the Company, which includes syndicate debt of the Predecessor Company of
$657,286.

B. To record the discharge of debt, which was converted into $250,000 of senior
secured debt, $100,000 of convertible secured payment in-kind debt and 91%
of the common stock of the Company, and the repayment on Plan implementation
of $14,175 of term debt from the proceeds of asset sales, which were
previously held as restricted cash.

35

C. The UK Metals business was sold effective April 7, 2000. The net proceeds of
$47,684 represents the fair value of the net assets of the UK Metals
business and was recorded in other current assets at March 31, 2000. On May
25, 2000 the Canadian Court ordered the distribution of approximately
$44,587 of the net proceeds, which reduced the term debt of the Company.

RISK FACTORS

CONTROL BY PRINCIPAL STOCKHOLDERS

Carl C. Icahn and entities over which he exercises direct or indirect
control owned in the aggregate approximately 40.7% of the Company's outstanding
common stock as of April 11, 2002. In addition, such persons hold PIK debt that
is convertible into 4,527,196 additional shares of common stock and received an
additional 2,546,926 shares in connection with the mezzanine financing described
elsewhere herein. In addition, Stephen Feinberg and entities over which he
exercises direct or indirect control owned approximately 13.4% of the Company's
outstanding common stock as of April 11, 2002 PIK debt convertible into
1,536,597 additional shares of common stock and received an additional 1,091,540
shares in connection with the mezzanine financing described elsewhere herein.
These stockholders are in a position to exercise significant influence over the
affairs of the Company, which influence might or might not be consistent with
the interests of other stockholders, and on the outcome of any matters submitted
to the Company's stockholders for approval.

FUTURE FINANCING ALTERNATIVES

The Company currently utilizes debt financing as discussed in Note 9 to the
Consolidated Financial Statements. The amount and terms of these agreements have
been modified during 2001 and 2002 to reflect changes in the Company's financial
performance. Any future financing that may be needed to alter, amend, or replace
these facilities is not guaranteed, and the unavailability of alternatives could
have a material effect on the Company.

LIMITED MARKET FOR THE COMMON STOCK

Of the shares of common stock issued or to be issued in connection with the
Plan, 91% were issued to the Oldco's syndicate debt holders. As a result, there
is little liquidity in the market for the common stock, and there can be no
assurance that an actively liquid trading market will develop.

LITIGATION RISKS

The Company's business includes health, safety and environmental risks,
and, as a result, the Company becomes subject from time to time to legal or
administrative proceedings whose outcome is uncertain and which may involve
substantial legal costs and penalties. See "Legal Proceedings." The Company is
unable to predict the outcome of all of its pending matters, and there can be no
assurance that the ultimate resolution of such matters will not have a material
adverse effect on the financial condition of the Company.

EFFECT OF COMMON STOCK AVAILABLE FOR FUTURE SALE

Sales of a substantial number of shares of common stock, or the perception
that such sales could occur, could adversely affect prevailing market prices of
the common stock. The Company has reserved 9,132,423 shares of common stock for
issuance under its PIK debt and unsecured convertible notes. Furthermore, the
Company has reserved 1,040,000 shares of common stock for issuance under its
Stock Option Plan, 200,000 shares for issuance under its Restricted Stock Plan
for Non-Employee Directors and 1,000,000 shares for issuance under its Omnibus
Stock Bonus Plan for Officers. Finally, the Company issued 3,638,466 shares of
common stock to the Icahn group and the Feinberg group in connection with the
mezzanine financing described elsewhere herein (see "-- Control by Principal
Stockholders"). These shares are restricted in the hands of these stockholders.
These shares, as well as all others held by these stockholders, are subject to
registration rights and, accordingly, could be issued into the public market at
any time. No prediction can be

36

made regarding the effect that future sales of shares of common stock will have
on the market price of currently outstanding shares.

LIMITATIONS ON CHANGE OF CONTROL

The Board of Directors of the Company is authorized to issue preferred
stock in one or more series, with such terms, conditions and preferences as it
deems appropriate, without stockholder action. Although the Company has no
present plans to issue any shares of preferred stock, such shares could be
issued in a manner that could render more difficult, or discourage, an attempt
to obtain control of the Company by means of a tender offer, merger, proxy
contest or otherwise. The Company currently has no stockholder rights plan.

LIMITATIONS IN CREDIT FACILITIES AND CERTIFICATE OF INCORPORATION

The Company's credit facility and revolving operating facility contain
financial and other covenants that limit the Company's ability to make
acquisitions or investments, incur indebtedness, create liens, sell assets,
engage in mergers or acquisitions and pay cash dividends. In addition, the
Company's Certificate of Incorporation contains certain restrictions on the
Company's ability to issue to or adopt incentive-based compensation programs.
These restrictions could restrict corporate activities and limit the ability of
the Company to react quickly to adverse economic conditions, effect future
financings or take advantage of business opportunities that may arise.

COMPETITION

The Company operates in a highly competitive environment. The publicity
relating to the Company's financial difficulties over the past year has eroded
its financial position. The Company primarily provides services to industrial
companies. Many other companies offer the same or similar services and compete
with the Company on a number of bases including, but not limited to (i) price;
(ii) quality of service; (iii) proximity to the client; (iv) local or regional
presence; (v) technology; (vi) safety performance; and (vii) financial strength.
Many of these companies have greater financial resources than the Company either
nationally or in the particular locale in which they operate. Moreover, the
Company continues to be affected by the damage to its reputation caused by the
bankruptcy of Oldco.

With respect to the metals business in particular, the challenge posed
generally by the high competitive environment is exacerbated by the severe
economic conditions in the steel industry. The United States steel industry has
been deteriorating for several decades in the face of foreign competition and
other factors. During the fourth quarter of 2000 and 2001, five steel companies
that were major customers of the Company filed for protection under Chapter 11
of the United States Bankruptcy Code. While the Company has taken steps to
protect itself from some of the credit exposure, it cannot protect itself fully,
and it cannot make up for the loss of these major customers as the pool of major
steel customers is relatively small. Moreover, prices for scrap steel are highly
cyclic and have recently been at a 30-year low. The combination of these factors
has put considerable pressure on the Company's metals business, and it is not
possible at this time to project any significant improvement in 2002.

DEPENDENCE ON OUTSOURCING

The Company's growth is dependent on the continuation of outsourcing within
industrial enterprises. As enterprises focus on their core business, they are
perceived to be increasingly outsourcing non-core, non-revenue-generating
activities in order to reduce costs. Such activities can often be performed on a
more cost-effective basis by specialized industrial service and metal recovery
companies that have greater expertise, technology advantages or economies of
scale. In addition, many industrial enterprises have sought 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.

37

ENVIRONMENTAL AND REGULATORY RISKS

ENVIRONMENTAL REGULATIONS. The Company's operations are subject to
comprehensive laws and regulations related to the protection of the environment.
Such laws and regulations, among other things (i) regulate the nature of the
industrial by-products and wastes that the Company can accept for processing at
its treatment, storage and disposal facilities, the nature of the treatment it
can provide at such facilities and the location and expansion of such
facilities, (ii) impose liability for remediation and clean-up of environmental
contamination, including spills or releases of certain industrial by-products
and waste materials resulting from shipping of waste off-site or past and
present operations at the Company's facilities, and (iii) may require financial
assurance that funds will be available for the clean-up and remediation or the
closure and, in some cases, 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. Because the Company provides its customers with
services designed to protect the environment by cleaning and removing waste
materials or substances from customers' equipment or sites, the Company is
subject to regulations that impose liability on persons involved in handling,
processing, generating or transporting hazardous materials. Regulatory
requirements may also be imposed as conditions of operating permits or licenses
both initially and upon renewal or modification. The Company must properly
remove, handle, treat, recycle or dispose of waste materials or incur liability.
Transportation, transfer, storage and disposal of waste is difficult and
accidents may occur. These laws and regulations are stringent and are likely to
become more stringent. Existing laws and regulations, and new laws and
regulations, may require the Company to modify, supplement, replace or curtail
its operating methods or to modify or replace 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 may be required at these sites at substantial cost. The Company has
developed or is developing cost estimates that are periodically reviewed and
updated, and 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 entail 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 reserves and have a
material adverse impact on the Company's operations or financial condition.
Moreover, governments have from time to time required companies to remediate
sites where materials were properly disposed because those governments have
instituted higher standards. Thus, even proper disposal of waste does not assure
the Company relief from future liability.

In the normal course of its business and as a result of the extensive
governmental regulation of industrial, environmental and metal recovery
services, 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 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 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 location 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

38

Company has been, and may in the future be, subject to citizen opposition and
adverse 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 LIABILITIES AND INSURANCE COVERAGE. The Company is subject
to potential liability for personal injuries caused by releases of hazardous
substances and for remediation of risks posed by hazardous substances.
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 damage. Accordingly, if the Company
were to incur liability for environmental damage either not provided for under
such coverage or in excess of such coverage, the Company's financial condition
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 and within 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 strictures 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 "Government Regulation" in Item 1,
Business.

BONDING

In order to bid on certain industrial outsourcing or waste management
contracts, the Company, like other bidders, is required to post various types of
surety bonds. 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 bidding requirements and 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 or a
guarantee by a parent company. There is no assurance that the Company will
obtain or continue to have adequate bonding facilities available to satisfy
bonding requirements. Because of the tightening surety market and the Company's
limited financial resources, the Company has recently found it impossible to
obtain a sufficiently large bonding facility. This has had an adverse effect on
the Company's financial position.

RELIANCE ON KEY EMPLOYEES

The Company's success is dependent in part on its ability to retain and
motivate its officers and key employees. The Predecessor Company's financial
difficulties and the Company's recent financial difficulties have had and
continue to have a detrimental effect on its ability to attract and retain key
officers and employees. As a result, the Company has experienced over the last
year, and continues to experience, high employee turnover. There can be no
assurance that the Company will be able to retain or employ qualified management
and technical personnel. While the Company has entered into employment
agreements with certain members of its senior management, should any of these
persons be unable or unwilling to continue their employment with the Company,
the business prospects of the Company could be materially and adversely
affected.

COMMODITY PRICE AND CREDIT RISKS

The Company is exposed to commodity price risk during the period that it
has title to scrap that is held in inventory for processing and/or resale. Scrap
prices are volatile due to numerous factors beyond the control of the Company,
including general economic conditions, labor costs, competition, import duties,
tariffs and currency exchange rates. In an increasing price environment,
competitive conditions will determine how much of the scrap price increases can
be passed on to the Company's customers. There can be no assurance that the
Company will not have a significant net exposure due to significant price swings
or failure of a counterparty to perform pursuant to the contract.

39

INSURANCE CARRIER RISK

The Company retains liability for workers' compensation claims, auto, and
general liability, where permitted, for up to $1 million of any one occurrence
and for property claims up to $2 million. The Company purchased insurance to
limit the Company's aggregate exposure through October 1, 2001 to losses of $1.5
million for auto and general liability, $5 million for environmental liability
and $14 million for workers' compensation claims. To the extent that any
insurance carrier is unable to meet their obligations under existing insurance
policies, the Company would be liable for the defaulted amount. (See Note 8 to
the Consolidated Financial Statements for a discussion of an issue relating to
Reliance Insurance.)

RISKS ASSOCIATED WITH ACQUISITIONS

Between 1996 and 1998 the Predecessor Company completed over 40
acquisitions. In connection with these acquisitions, there may be liabilities
that the Predecessor Company failed to discover, including liabilities arising
from pollution of the environment or non-compliance with environmental laws by
prior owners, 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to financial risk resulting from volatility in
foreign exchange rates, interest rates and commodity prices. The Company seeks
to minimize these risks through its regular operating and financing activities
and, when deemed appropriate, through the use of derivative financial
instruments. In 2001, there were no derivative instruments used. See Note 16 to
the Consolidated Financial Statements.

FOREIGN CURRENCY RATE RISK

The revenue and expenses of the Company's Canadian and European
subsidiaries are generally denominated using the local currency. The functional
currency of these subsidiaries is the local currency and therefore, foreign
currency translation adjustments made on consolidation are reflected as a
component of stockholders' equity (deficit) as stated in the Company's
accounting policies. Changes in the foreign exchange rates compared to the
United States dollar can have an effect on the Company's revenue and
profitability. The sensitivity of the net loss from continuing operations before
tax to the changing foreign currency rates is not significant based on the 2001
operating results from foreign subsidiaries. As of December 31, 2001,
substantially all of the European operations had been divested.

INTEREST RATE RISK

Substantially all of the Company's long-term debt bears interest at a fixed
rate. Borrowings under the revolving operating facility bear interest at a
floating rate based on the Wells Fargo Bank prime rate or LIBOR rate. At
December 31, 2001, the Company had borrowings of $12.1 million under the
revolving operating facility. In addition, letters of credit outstanding have
been charged against the borrowing capacity under the revolving operating
facility. The Company's exposure to interest rate risk at December 31, 2001 was
not significant.

COMMODITY PRICE RISK

Prices in the Metals Services Group are established and adjusted monthly by
the major steel producers. The price of ferrous scrap is a significant factor
influencing the profitability of the Metals Services Group. The Company manages
its commodity price risk by acquiring ferrous metal scrap as it is needed for
its customers which allows the Company to turn its inventory approximately every
46 days. Based on the inventory levels of the Metals Services Group as at
December 31, 2001, a 10% change in the price of ferrous scrap during a 30 day
period is estimated to change the Company's earnings (loss) from continuing
operations before tax by $1.0 million.

40

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Philip Services Corporation:

In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of earnings, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Philip Services
Corporation and its subsidiaries at December 31, 2001 and December 31, 2000 and
the results of their operations and their cash flows for the year ended December
31, 2001 and for the nine months ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in Item
14(a)(2) of Part IV herein presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
March 20, 2002, except for Notes 1, 9, and 24 as to which the date is April 12,
2002.

41

PHILIP SERVICES CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS)

The accompanying notes are an integral part of these financial statements.
42

PHILIP SERVICES CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS OF US DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)

These consolidated financial statements contain information relating to
Philip Services Corporation, a Delaware corporation and its subsidiaries, and
Philip Services Corp., an Ontario company, and its subsidiaries, which has been
compiled by management of PSC. On April 7, 2000, Oldco and certain of its
Canadian subsidiaries transferred substantially all of their assets and
liabilities (except for liabilities subject to compromise) to the Company at
fair value. The liabilities subject to compromise of $726.5 million were
retained by Oldco and certain of its Canadian subsidiaries. As a result, Oldco
remains insolvent. Management of PSC has determined that consolidated financial
information of the Predecessor Company may be of limited interest to the
stockholders of PSC and has therefore included such information in this
document. The consolidated financial information of the Predecessor Company does
not reflect the effects of the application of fresh start reporting. Readers
should, therefore, review this material with caution and not rely on the
information disclosed for the Predecessor Company.

The accompanying notes are an integral part of these financial statements.
45

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

These Consolidated Financial Statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation, and its
subsidiaries, which has been prepared by management, and information relating to
Philip Services Corp., an Ontario corporation, and its subsidiaries, which has
been compiled by management of PSC. On April 7, 2000, Oldco and certain of its
Canadian subsidiaries transferred substantially all of their assets and
liabilities (except for liabilities subject to compromise) to the Company at
fair value. The liabilities subject to compromise of $726.5 million were
retained by Oldco and certain of its Canadian subsidiaries. As a result, Oldco
remains insolvent. Management of PSC has determined that certain consolidated
financial information of the Predecessor Company may be of limited interest to
the stockholders of PSC and has therefore included such information in this
document. The consolidated financial information of the Predecessor Company does
not reflect the effects of the application of fresh start reporting and is
unaudited. Readers should, therefore, review this material with caution and not
rely on the information disclosed for the Predecessor Company.

The Company is an industrial services and metals services company that
provides industrial outsourcing, environmental services and metal services to
major industry sectors throughout North America. The Company conducts
substantially the same lines of business as the Predecessor Company with the
exception of the UK Metals business, which was sold on April 7, 2000.

The Consolidated Financial Statements of the Company have been prepared in
U.S. dollars using accounting principles generally accepted in the United States
of America except that the consolidated financial statements of the Predecessor
Company have been prepared on the basis of accounting principles applicable to a
going concern, which would assume that the Predecessor Company would realize the
carrying value of its assets and satisfy its obligations and commitments except
as otherwise disclosed, in the normal course of business. However, because of
the reorganization and the circumstances relating to this event, the Predecessor
Company is insolvent, and, therefore, will not be able to realize the carrying
value of its assets and satisfy its obligations and commitments. The financial
statements of the Predecessor Company do not give effect to any adjustments to
the carrying value of assets or amounts and priority of liabilities that would
be necessary under the basis of accounting principles that would be applicable
to an insolvent company.

CREDIT FACILITIES

The Company has two credit facilities, a $335.8 million term facility with
an international syndicate of lenders ("credit facility") and a revolving credit
agreement ("revolving operating facility"). Under the credit facility and
revolving operating facility ("facilities"), more fully described in Note 9, the
Company is required to meet certain financial covenants. During 2001, the
Company was negatively impacted by the general slowdown in the economy, poor
conditions in the steel industry, the bankruptcy of major customers, and the
events of September 11, among other matters. The Company was unable to meet its
EBITDA (defined in the Company's credit facilities as consolidated net earnings
(or loss) before interest expense, income taxes and depreciation expense and in
addition excludes after-tax gains or losses from business or location closures,
losses from the write-down of long-term assets and other defined special
charges) and interest coverage (defined as the ratio of EBITDA to cash interest
expense and certain credit facilities' fees minus any cash interest paid under
the Company's debt instruments with respect to events resulting from a change of
control) covenants and as a result sought relief in March 2001 and again in May
2001. In November 2001, additional amendments to the facilities were executed by
the lenders, reducing the EBITDA and interest coverage requirements for the
third quarter. Notwithstanding these amendments, the Company still was unable at
September 30, 2001 to project continued covenant compliance for the following 12
months. Accordingly, issues of whether the Company was a going concern were
raised, and balances under the facilities were classified as current.

During the fourth quarter the Company was unable to obtain surety bonds
from its providers at an acceptable cost, and the Company began to issue letters
of credit in lieu of performance bonds. Letters of

46

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BASIS OF PRESENTATION (continued)

credit reduce availability under the revolving operating facility by the full
face amount of the letter. This increase in letter of credit usage eventually
reduced the availability of advances under the revolving operating facility to
an amount inadequate to sustain day-to-day operations.

During the first quarter of 2002, and pending agreement on permanent
additional financing, the revolving operating facility was amended, utilizing
the optional overadvance provisions, first by $11 million and then by an
additional $20 million. Fees of $1 million and $2 million, respectively, were
paid for these increases. These advances of $31 million were repaid when the
mezzanine financing, described below, was put in place.

On April 12, 2002, the revolving operating facility was amended to provide
for the mezzanine financing. The amendments increase the maximum amount that may
be borrowed under the revolving operating facility (exclusive of optional
overadvances) to $195 million from $175 million. In addition, the revolving
operating facility was amended to add a new Tranche Sub-B in the amount of $70
million. Because the defined borrowing base under Tranche Sub-B is more liberal
than under Tranches A or B-Prime, and because a reserve of $25 million is not
deducted from the borrowing base under Tranche Sub-B as it is under Tranches A
and B-Prime, the net effect is to provide availability under Tranche Sub-B at
times when there is no availability under Tranches A and B-Prime. Tranche Sub-B
is a revolving facility, except that any payments of principal as a result of
asset sales (other than in the ordinary course of business) automatically reduce
the availability under Tranche Sub-B.

The covenants under the revolving operating facility were amended to
eliminate the interest coverage ratio, to waive the default under the EBITDA
covenant for the period ended December 31, 2001, and to lower the EBITDA
covenant requirement to approximately $4.6 million, $9.7 million, $14.8 million
and $20.4 million for the cumulative year-to-date periods ending March 31, June
30, September 30, and December 31, 2002, respectively.

The revolving operating facility was also amended to extend the maturity
date of the facility to April 8, 2003 from September 30, 2002.

In addition to the foregoing changes, the revolving credit facility was
further amended in a number of sections to facilitate certain transactions or to
effect conforming changes. Among these changes was a provision making it easier
to enter into transactions with affiliates provided that the transaction in
question is at least as fair to the Company as could be achieved in an arm's
length negotiation.

The commitments under Tranche Sub-B have been provided by affiliates of
Carl C. Icahn ($49 million) and affiliates of Stephen Feinberg ($21 million).
Mr. Icahn and Mr. Feinberg and their affiliates are respectively the largest and
second largest stockholders of the Company (see Item 12, Security Ownership of
Certain Beneficial Owners and Management).

Certain fees were incurred in connection with Tranche Sub-B. Specifically,
Tranche Sub-B lenders received an upfront fee of $6 million. The $2 million fee
that was paid for the $20 million interim overadvance was credited against the
$6 million fee for the mezzanine facility. Tranche Sub-B lenders will receive a
fee of 2% per annum based on the unused portion of the Tranche Sub-B facility.
There will also be a prepayment fee of 3% based upon a termination by the
Company of any or all of Tranche Sub-B.

In addition to those fees, the Company issued to the Tranche Sub-B lenders
3,638,466 shares of the common stock of the Company, amounting to 15% of the
outstanding common stock prior to the issuance, upon payment in cash of the par
value of $0.01 per share. These shares were divided between the Icahn group and
the Feinberg group in proportion to their respective commitments. In connection
with the issuance, the Icahn group and the Feinberg group have been granted two
demand registration rights and an unlimited number of piggyback registration
rights covering both the newly issues shares and all other shares held by these
groups, as well as pre-emptive rights with respect to future issuances by the
Company.

47

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BASIS OF PRESENTATION (continued)

A further fee of $1 million was paid to the lenders under the revolving
operating facility for the amendment and for resetting the covenants. The
administrative agent under the revolving operating facility, Foothill Capital
Corporation, will receive $10,000 per month for administering Tranche Sub-B.

Investors are referred to the full text of the documents filed as exhibits
to this Form 10-K.

The Company's credit facility and the intercreditor agreement among the
Company's lenders were amended primarily to permit or facilitate the changes to
the revolving operating facility. In addition, the interest coverage ratio under
the credit facility was eliminated, the EBITDA covenant requirements reduced,
and the default under the EBITDA covenant for the period ended December 31, 2001
waived.

At December 31, 2001, the Company was in compliance with the amended
covenants under the facilities. The Company projects it will remain in
compliance for subsequent periods ending March 31, June 30, September 30 and
December 31, 2002. As a result, the Company's credit facility debt has been
reclassified as long-term. In the event that the Company is unable to comply
with the covenants in future periods, such non-compliance would constitute an
"Event of Default" under both of the facilities. Upon the occurrence and during
the continuation of an Event of Default, the lenders under each facility, at the
election of the holders of 66 2/3% of the total commitments under such facility
(the "Required Lenders"), may, among other things, declare all obligations under
such facility to be immediately due and payable. In addition, at the election of
the Required Lenders under the revolving operating facility, the participants
may cease advancing money or extending credit to the Company. If an acceleration
of the indebtedness under either of the facilities occurred, the Company would
also be in default under its indentures with respect to the unsecured
payment-in-kind-notes described in Note 9(b).

BANKRUPTCY FILING AND PLAN OF REORGANIZATION

On June 25, 1999, Oldco and substantially all of its wholly owned
subsidiaries located in the United States (the "U.S. Debtors"), filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code with the United States Bankruptcy Court for the District of Delaware (the
"U.S. Court"). Oldco and substantially all of its wholly owned subsidiaries
located in Canada (the "Canadian Debtors") commenced proceedings under the
Companies' Creditors Arrangements Act in Canada in the Ontario Superior Court of
Justice (the "Canadian Court") on the same date.

On July 12, 1999, the U.S. Debtors filed a Joint Plan of Reorganization
(the "U.S. Plan") with the U.S. Court and on July 15, 1999, the Canadian Debtors
filed a Plan of Compromise and Arrangement (the "Canadian Plan") with the
Canadian Court. In August 1999, a number of motions were brought before the
Canadian Court challenging the fairness of the Canadian Plan. As a result, Oldco
filed an amended plan in the U.S. Court on September 21, 1999 (the "Amended U.S.
Plan") and an amended plan in the Canadian Court on September 24, 1999 (the
"Amended Canadian Plan"). On November 2, 1999, Oldco filed a Supplement to the
Amended Canadian Plan (the "Canadian Plan Supplement"). The Canadian Plan
Supplement amended and restated the Amended Canadian Plan and provided that
substantially all of the assets of the Canadian Debtors be transferred to new
companies that, on the implementation of the Amended U.S. Plan, became wholly
owned subsidiaries of PSC. All the shares held by Oldco in PSC were cancelled
under the Amended U.S. Plan. On November 5, 1999, Oldco's lenders voted to
approve the Canadian Plan Supplement. On November 26, 1999, a hearing was held
in the Canadian Court at which the Canadian Plan Supplement was sanctioned. On
November 30, 1999, the Amended U.S. Plan was confirmed in the U.S. Court. On
March 8, 2000, the Canadian Plan Supplement was amended to permit the sale of
the UK Metals business and to address certain tax restructuring issues. On March
20, 2000, a similar amendment was made by the U.S. Court with respect to the
Amended U.S. Plan. The Amended U.S. Plan and the Canadian Plan Supplement
(collectively the "Plan") became effective on April 7, 2000. Under the Plan, PSC
emerged from bankruptcy protection as a new public entity.

48

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. BASIS OF PRESENTATION (continued)

Under the Plan, members of Oldco's secured credit facility received $250
million of senior secured term debt, $100 million of convertible secured
payment-in-kind debt and 91% of the shares of common stock of PSC. The senior
secured term debt was reduced to $235.8 million on Plan implementation due to
the repayment of $14.2 million from proceeds of asset sales. The secured
payment-in-kind debt is convertible into 25% of the shares of common stock of
PSC on a fully diluted basis as of the Plan effective date. The Plan also
provided for the conversion of certain specified impaired unsecured claims, into
$60 million of unsecured payment-in-kind notes and 5% of the shares of common
stock of PSC as of the Plan effective date. The Plan allowed certain holders of
unsecured claims to receive $1.50 in face amount of unsecured convertible notes
in exchange for every $1.00 in unsecured payment-in-kind notes that such holder
would have received under the Plan. The aggregate amount of unsecured
convertible notes issued was not to exceed $18 million. PSC also issued 1.5% of
its shares of common stock to Canadian and U.S. class action plaintiffs to
settle all class action claims. Other potential equity claimants received 0.5%
of the shares of common stock of PSC and the stockholders of Oldco received 2%
of the shares of common stock of PSC.

FRESH START REPORTING

The Company adopted fresh start reporting in accordance with the AICPA's
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code." For financial reporting purposes, the effective date
of the Plan was considered to be March 31, 2000. Under the principles of fresh
start reporting, the Company is required to determine its reorganization value.
The reorganization value of the Company was determined with the assistance of
independent advisors. The methodology employed involved the estimation of an
enterprise value (i.e. the fair market value of the corporation's debt and
stockholders' equity) which was approximately $500 million. The significant
factors used in the determination of the reorganization value were the
industries in which the Company operates, the general economic conditions that
impact the Company and the application of certain valuation methodologies, which
included a discounted cash flow analysis based on two years' cashflow
projections prepared by management with discount rates of between 11% and 12%
and an analysis of comparable publicly traded company multiples and sales
transactions. The reorganization value was then allocated to the Company's
assets and liabilities based on their fair values. No significant adjustments
were made to the Company's assets and liabilities under fresh start reporting as
their fair values approximated recorded amounts at March 31, 2000.

The Consolidated Statement of Earnings for the three months ended March 31,
2000 reflects fresh start adjustments of $45.3 million. This amount comprises
the gain on the debt discharge of $24.0 million and $21.3 million relating to
the Predecessor Company's disposition of the UK Metals business on April 7,
2000.

Due to the changes in the financial structure of the Company and the
application of fresh start reporting as a result of the consummation of the
Plan, the consolidated financial statements of the Company issued subsequent to
Plan implementation are not comparable with the consolidated financial
statements issued by the Predecessor Company prior to Plan implementation. A
black line has been drawn on the accompanying Consolidated Financial Statements
to separate and distinguish between the Company and Predecessor Company.

RECLASSIFICATION

Certain reclassifications of prior periods' data have been made to conform
with the current period reporting.

49

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company and the Predecessor Company
to make estimates and assumptions that affect reported amounts of assets,
liabilities, income and expenses and disclosures of contingencies. Actual
results could differ from the estimates and judgments made in preparing these
financial statements.

PRINCIPLES OF CONSOLIDATION

These consolidated financial statements include the accounts of the Company
and all of its majority owed subsidiaries. All intercompany transactions have
been eliminated on consolidation. The equity method of accounting is used for
investment ownership ranging from 20% to 50%.

REVENUE RECOGNITION

Revenue from industrial services is recorded as the services are performed,
using the percentage-of-completion basis for fixed rate contracts and
as-the-related-service-is-provided basis for time and material contracts.
Revenue from by-product recovery operations is recognized along with the related
costs of treatment, disposal and transportation at the time of performance of
services. Revenue from the direct sale of recovered commodities and steel
products or for contracts where the Company brokers materials between two
parties, takes title to the product and assumes the risks and rewards of
ownership is recognized at the time of customer acceptance. If the Company is
acting as an agent in those transactions, then only the commission on the
transaction is recorded.

The Company uses the percentage-of-completion basis to account for its
fixed price contracts. Under this method, revenue is recognized as work
progresses in the ratio that costs bear to estimated total costs for each
contract. Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on incomplete contracts are recorded in the period in which
such losses are determined. Changes in estimates or differences in the actual
cost to complete the contract could result in recognition of differences in
earnings.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash on deposit and term deposits in
money market instruments with original maturity dates of less than three months
from the date they are acquired.

INVENTORY

Inventory is recorded at the lower of average purchased cost or market.

PROPERTY, PLANT AND EQUIPMENT

In accordance with fresh start reporting, property, plant and equipment
were reflected at their fair value as of March 31, 2000. Additions to property,
plant and equipment subsequent to this date are recorded at cost. Property,
plant and equipment are depreciated over their estimated useful lives generally
on the following basis: buildings 20 to 40 years straight-line; equipment three
to 20 years straight-line. Landfill sites and improvements thereto are recorded
at cost and amortized over the life of the landfill site based on the estimated
landfill capacity utilized during the year. Operating costs associated with
landfill sites are charged to operations as incurred. Assets under development
include the direct cost of land, buildings and equipment acquired for future use
together with engineering, legal and other costs incurred before the assets are
brought into operation. No significant amounts of interest were capitalized
during the periods presented.

50

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

Under the provisions of SOP 98-1, the Company capitalizes costs associated
with software developed or obtained for internal use when both the preliminary
project stage is completed and management deems it probable the project will be
completed and used to perform the function intended. Capitalized costs include
only external direct costs of materials and services consumed in developing or
obtaining internal-use software, and payroll and payroll-related costs for
employees who are directly associated with and who devote time to the
internal-use software project. Capitalization of such costs cease when the
project is substantially complete and ready for its intended purpose.

The Company includes as part of the cost of its property, plant and
equipment, all financing costs incurred prior to the asset becoming available
for operation. No significant amounts of interest were capitalized during the
periods presented.

IMPAIRMENT OF LONG LIVED ASSETS

The Company reviews long-lived assets, including property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying amount of such an asset may not be recoverable. Management
will determine whether there has been a permanent impairment on such assets held
for use in the business by comparing anticipated undiscounted future cash flows
from operating activities involving the asset to the carrying value of the
asset. The amount of any resulting impairment will be calculated using the
present value of the same cash flows. Long-lived assets to be disposed of are
valued at the lower of carrying amount or net realizable value.

RESTRICTED INVESTMENTS

Restricted investments, which have been classified as held to maturity, are
carried at cost, which approximates fair market value.

ENVIRONMENTAL LIABILITY

The Company accrues environmental remediation costs associated with
identified sites where an assessment has indicated that cleanup costs are
probable and can be reasonably estimated. Such accruals are based on currently
available information, estimated timing of remedial actions, existing technology
and enacted laws and regulations. The liability for environmental and closure
costs is disclosed in the consolidated balance sheet under accrued liabilities
and other liabilities. Costs to dispose of waste materials located at the
Company's industrial services facilities are included in accrued liabilities.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's foreign subsidiaries is its
respective local currency. The assets and liabilities denominated in a foreign
currency for foreign operations are translated at exchange rates in effect at
the balance sheet date. The resulting gains and losses are reflected in the
other accumulated comprehensive loss in stockholders' equity (deficit).

FINANCIAL INSTRUMENTS

The Company's accounts receivable, accounts payable and long-term debt
constitute financial instruments. The Company's accounts receivable and accounts
payable approximated their fair value as at December 31, 2001 and December 31,
2000. The fair value of the Company's long-term debt is discussed in Note 9 to
the Consolidated Financial Statements. Concentration of credit risk in accounts
receivable is limited, due to the large number of customers the Company services
throughout North America. The Company performs ongoing credit evaluations of its
customers, but does not require collateral to support

51

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)

customer accounts receivable. The Company establishes an allowance for doubtful
accounts based on the credit risk applicable to particular customers and
historical and other information.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations." This statement addresses financial accounting
and reporting for business combinations and supersedes APB Opinion No. 16,
"Business Combinations" and FASB Statement No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." The provisions of this
statement apply to all business combinations initiated after June 30, 2001.
Management believes that adoption of Statement 141 will not have a material
effect on the Company's financial statements.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." This Statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, "Intangible Assets." The provisions of
this Statement are required to be applied starting with fiscal years beginning
after December 15, 2001. Management believes that adoption of Statement 142 will
not have a material effect on the Company's financial statements.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations." The statement applies to
legal obligations associated with the retirement of long-lived asset, except for
certain obligations of lessees. The provisions of this statement are required to
be applied for fiscal years beginning after June 15, 2002. Management is in the
process of evaluating the impact of the adoption of Statement 143 which could
have a material effect on the Company's financial statements.

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets." This
statement supersedes FASB Statement 121. This statement addresses financial
accounting and reporting for long-lived assets impaired and disposed of by sale.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001. Management is in the process
of evaluating the impact of adoption of Statement No. 144 on the Company's
financial statements.

3. DIVESTITURES AND DISCONTINUED OPERATIONS (in thousands)

DIVESTITURES

During 2001, the Company determined that its Paint Services operations were
not a strategic fit with the rest of the business units and obtained a signed
commitment from a buyer to purchase the business. Therefore $6.8 million was
charged to "Other income and expense -- net" in recognition of the loss on the
sale of the business. The sale was completed during the first quarter of 2002.

During the third and fourth quarters of 2001, various European operations
of the Industrial Outsourcing Group were sold for net proceeds of $2 million.
These businesses generated revenue of $7.5 million, $11.4 million, and $12.3
million, and loss from operations of $(1.4) million, $(1.9) million, and $(1.4)
million, in 2001, 2000 and 1999, respectively. No significant gain or loss was
realized on the sale.

In June 2001, the Company sold its metals recycling and mill services
business in Montreal ("Recyclage") for net proceeds of $10.3 million. The
business, which was part of the Metals Services Group, generated revenue of $3
million, $8.2 million, and $8.8 million, and income from operations of $0.3
million, $1.3 million, and $1.3 million, in 2001, 2000, and 1999, respectively.
The gain on sale of $4.3 million is included in "Other income and expense --
net."

On April 7, 2000, Oldco sold its metals recycling and mill services
business in the United Kingdom for net proceeds of $47.7 million. The business,
which was part of the Metals Services Group, generated annual
52

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. DIVESTITURES AND DISCONTINUED OPERATIONS (in thousands) (continued)

revenue of $29.9 million and $81.2 million, and income from operations of $2.4
million and $3.5 million, in 2000 and 1999, respectively.

In June 1999, Oldco sold the assets of BEC for $23.1 million resulting in a
gain on sale of $1.0 million. The business, whose results are included in
Industrial Outsourcing Group, generated annual revenue of $20.7 million and loss
from operations of $(0.8) million in 1999.

DISCONTINUED OPERATIONS

On May 18, 1999, Oldco sold its investment in Philip Utilities Management
Corp. ("PUMC") for cash proceeds of $70,104, resulting in a gain on sale of
$39,115. The operations of PUMC, previously reported as the utilities management
division, are reflected as discontinued operations. In December 1998, Oldco made
the decision to discontinue the non-ferrous and copper operations of its Metals
Services business. The sale of certain aluminum operations included in the
non-ferrous operations was completed on January 11, 1999 for a total
consideration of approximately $69,500. During 1999 and 2000 the remainder of
the operations in these segments were closed or sold, except for three
operations with annual revenue of approximately $7,000, which have been
transferred to continuing operations.

Revenue from the non-ferrous, copper and utilities management operations,
net of intercompany revenue, was $3,730 and $2,347 for the three months ended
March 31, 2000 and nine months ended December 31, 2000, respectively, and
$74,682 for the fiscal year ended December 31, 1999. Net earnings from
discontinued operations in the Consolidated Statements of Earnings is presented
net of applicable income tax provision of $0 for the three months ended March
31, 2000 and nine months ended December 31, 2000; and $674 for the fiscal year
ended December 31, 1999.

4. ACCOUNTS RECEIVABLE (in thousands)

5. OTHER CURRENT ASSETS (in thousands)

(a) On April 7, 2000, Oldco sold its metals recycling and mill services business
in the United Kingdom for net proceeds of $47,684. On May 25, 2000, the
Canadian Court ordered the distribution of approximately $44,587 of the net
proceeds, which were used to pay down the term debt of the Company.

53

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. PROPERTY, PLANT AND EQUIPMENT (in thousands)

7. OTHER ASSETS (in thousands)

(a) Restricted investments are controlled by the Company's wholly owned
insurance subsidiary, and, as at December 31, 2001, approximately $38,390
(December 31, 2000 -- $31,183) had been pledged as security for the
Company's insurance liabilities. The restricted investments are held
primarily in US and foreign government and commercial debt instruments rated
AA or better by Moodys and Standard & Poors.

8. ACCRUED LIABILITIES (in thousands)

Accrued liabilities consist of the following:

(a) The Company determines its insurance claims liability using actuarial
principles on an undiscounted basis. The Company retains liability for (i)
workers' compensation claims of up to $1,000 for any one occurrence; (ii)
auto and general liability claims of up to $1,000 for any one occurrence;
and (iii) certain property claims up to $2,000 for any one occurrence. The
Company purchased additional insurance that limits the Company's aggregate
exposure in any one year through October 1, 2001 to losses of $1,500 for
auto and general liability claims (above the $100 retention per claim);
$5,000 certain for insured environmental liabilities (above the $100
retention per claim); and $14,000 for workers' compensation

54

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. ACCRUED LIABILITIES (in thousands) (continued)

claims (without retention). To the extent that any insurance carrier is unable
to meet its obligations under existing insurance policies, the Company could be
liable for the defaulted amount. From time to time, other retention amounts
apply because claims arise under policies of subsidiary, acquired or
predecessor companies.

Various insurance policies prior to June of 1999, including workers'
compensation policies, were placed with Reliance Insurance Company and/or its
former subsidiary companies ("Reliance Insurance"). On October 3, 2001, the
Insurance Commissioner of Pennsylvania placed Reliance Insurance into
liquidation. State guaranty associations have been ordered to assume the insured
obligations of Reliance Insurance, subject to statutory limitations. Until such
plans are finalized by the various state associations, there is a risk that the
Company could be liable for some portion of the $4,700 claims which are
contractually covered by Reliance. Cash and letters of credit on deposit with
Reliance Insurance are specifically dedicated to the Company's retained
liability of up to $500 per occurrence and should not be pooled or otherwise
used to settle Reliance Insurance liabilities. The Company has recorded a charge
of $4,700 to reflect the potential exposure pending further clarification of the
liabilities by the courts.

Accrued closure costs are as follows:

Adjustments reflecting reductions in exit costs were recorded when certain
facilities were closed and disposed of sooner than had been originally planned.
In some cases, severance accruals were reversed when employees were terminated
prior to completion of the originally planned retention period. Additions and
adjustments have been recorded as special charges in the Consolidated Statements
of Earnings (see Note 13).

55

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. LONG-TERM DEBT (in thousands except per share amounts)

(a) Term Debt and Convertible Payment-In-Kind Debt

As of March 31, 2000, the Company entered into a $335,825 term credit
facility. Concurrently, the Company entered into the revolving operating
facility ("senior debt"). See Note 9(c). The term debt of $250,000
contemplated under the Plan was reduced to $235,825 on Plan implementation
due to the repayment of $14,175 from proceeds of asset sales. The credit
facility provides term debt of $235,825 ("term debt") and $100,000 in
convertible payment-in-kind debt ("PIK debt"). The credit facility matures
on March 31, 2005 and bears interest at a fixed rate of 9% for the term
debt and 10% for the PIK debt. Interest payments on the term debt are due
quarterly in arrears, up to a maximum of $20,000 in the first year, and on
the PIK debt, interest is payable in full on March 31, 2005. The term debt
or any part thereof and/or all of the PIK debt may be prepaid and redeemed
by the Company at any time during the agreement once the revolving
operating facility has been terminated. The Company must pay a redemption
premium of between 1% and 5% on the amount of the term debt being redeemed
and between 8 1/3% and 25% on the amount of the PIK debt being redeemed
excluding mandatory prepayments. The PIK debt is convertible by the lenders
at any time into shares of common stock of PSC at an initial conversion
price of $11.72 per share, which was in excess of the fair market value of
PSC on a per share basis, determined based on an enterprise valuation as
discussed in Note 1.

The Company generally is required to repay the term debt first and then the
PIK debt in an amount equal to:

(i) 25% of the net asset-sale proceeds from the disposition of assets
sold other than in the ordinary course of business after first paying
off various tranches of senior debt and collateralizing letters of
credit.

(ii) the net proceeds from any foreign subsidiary dispositions in excess
of $1,000 annually.

The Company is also required yearly for the first two years and quarterly
after that, to repay the term debt first and then the PIK debt in an amount
equal to 75% of the cash flow available for debt service.

56

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. LONG-TERM DEBT (in thousands except per share amounts) (continued)

During 2000, the Company made mandatory prepayments of the term debt
relating to net asset sales of $47,227, including the sale of the UK Metals
business. During 2001, the Company made mandatory prepayments relating to
net asset sales of $17,693, reducing the term debt to $170,905 as at
December 31, 2001.

The credit facility and the revolving operating facility ("facilities") are
guaranteed jointly and severally by PSC and substantially all of its direct
and indirect wholly owned subsidiaries and are collateralized by security
interests in the assets of PSC and substantially all of its direct and
indirect wholly owned subsidiaries and a pledge of securities of
substantially all of its direct and indirect wholly owned subsidiaries.

The facilities contain certain restrictive covenants, including limitations
on the incurrence of indebtedness, the sale of assets, the incurrence of
liens, the making of specified investments, and the payment of cash
dividends. In addition, the Company is required to satisfy, among other
things, certain financial covenants, including specified amounts of EBITDA
and maximum capital expenditures.

The facilities contain cross-default provisions.

Under the facilities, the Company is required to meet certain financial
covenants. See Note 9(c) for a description of recent amendments to these
covenants and execution of a new mezzanine facility.

(b) Unsecured Payment-in-Kind Notes

Under the Plan, the Company issued an aggregate amount of $48,000 of
unsecured payment-in-kind notes ("unsecured notes"). The unsecured notes
mature on April 15, 2010 and bear interest at a fixed rate of 6%. The
interest is payable semi-annually on April 15 and October 15, and can be
paid up to April 15, 2005 in cash or additional unsecured notes, at the
option of the Company. The Company had issued an additional $2,314 of
unsecured notes as of December 31, 2001 in payment of interest. If a change
in control occurs, the Company is required to make an offer to purchase an
amount of unsecured notes equal to the present value of the remaining
scheduled payments of principal and interest, discounted at 16%, plus
accrued interest thereon. The unsecured notes will bear interest at a rate
of 12% from the date of a change in control until such time as the
unsecured notes are redeemed. The unsecured notes provide for annual
mandatory sinking fund payments equal to 20% of the aggregate principal
amount of the outstanding unsecured notes at April 15, 2005, plus all
accrued and unpaid interest thereon, commencing April 15, 2006. At December
31, 2001, the unsecured notes were recorded at $38,129 (December 31, 2000
-- $34,354).

Under the Plan, the Company issued an aggregate amount of $18,000 of
unsecured convertible payment-in-kind notes ("unsecured convertible
notes"). The unsecured convertible notes mature on April 15, 2020 and bear
interest at a fixed rate of 3% starting April 15, 2003. The interest is
payable semi-annually on April 15 and October 15. The unsecured convertible
notes may be converted at any time into shares of common stock of PSC at an
initial conversion price of $30 per share. If a change in control occurs,
the Company is required to make an offer to purchase an amount of unsecured
convertible notes equal to between 64% and 100% of the principal amount of
unsecured convertible notes outstanding, plus accrued interest thereon. The
unsecured convertible notes will bear interest at a rate of 12% from the
date of a change in control until such time as the unsecured convertible
notes are redeemed. In the twelve months ended December 31, 2001, unsecured
convertible notes with a face value of $695 were converted into 23,174
shares of common stock pursuant to the terms of the indenture covering the
unsecured convertible notes. At December 31, 2001, the unsecured
convertible notes were recorded at $5,379 (December 31, 2000 -- $4,874).

57

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. LONG-TERM DEBT (in thousands except per share amounts) (continued)

The unsecured notes contain provisions whereby an acceleration under the
facilities causes a default under the notes. In addition, the facilities
contain provisions whereby a default under the unsecured notes causes a
default under the facilities.

(c) Revolving Operating Facility

The revolving operating facility provides for a revolving line of credit,
subject to a borrowing base formula calculated on accounts receivable, of
up to $195,000. The revolving operating facility matures on April 8, 2003.

Borrowings under the revolving operating facility bear interest at a rate
equal to the base rate (which is based on the Wells Fargo Bank "prime
rate") plus 1% on Tranche A advances, 3% on Tranche B-Prime advances, and
the greater of 11.5% or the base rate plus 5% on Tranche Sub-B advances or
at the option of the Company on Tranche A advances at a rate equal to the
LIBOR rate plus 3%. A letter of credit issuance fee of .25% plus an annual
fee of 2.75% is charged on the amount of all outstanding letters of credit
issued under Tranche A. Letters of credit issued under Trance Sub-B bear an
interest rate of 10.075%.

The Company is required to pay annually an agency fee and an annual fee
equal to $150,000 and $750,000, respectively, and a monthly loan servicing
fee equal to $20,000 for Tranches A and B-Prime. The Tranche Sub-B Agency
fee is $10,000 paid monthly. In addition, the Company is required to pay
monthly an unused line of credit fee equal to 0.375%, 0.75%, and 2.0% per
annum on the average unused portion of Tranche A, Tranche B-Prime, and
Tranche Sub-B, respectively, under the revolving operating facility. At
December 31, 2001, the Company's borrowing base formula limited the
availability of the revolving operating facility to approximately $119,276.
The Company had undrawn capacity under the revolving operating facility of
approximately $22,865, net of borrowings and outstanding letters of credit
of approximately $96,411.

The credit facility and the revolving operating facility contain certain
restrictive covenants, including limitations on the incurrence of
indebtedness, the sale of assets, the incurrence of liens, the making of
specified investments, and the payment of cash dividends. In addition, the
Company is required to satisfy, among other things, certain financial
covenants, including specified amounts of EBITDA and maximum capital
expenditures.

The credit facility and the revolving operating facility contain
cross-default provisions.

Under the facilities, the Company is required to meet certain financial
covenants. During 2001, the Company was negatively impacted by the general
slowdown in the economy, poor conditions in the steel industry, the
bankruptcy of major customers, and the events of September 11, among other
matters. The Company was unable to meet its EBITDA and interest coverage
covenants and as a result sought relief in March 2001 and again in May
2001. In November 2001, additional amendments to the revolving operating
facility and the credit facility were executed by the lenders, reducing the
EBITDA and interest coverage requirements for the third quarter.
Notwithstanding these amendments, the Company still was unable at September
30, 2001 to project continued covenant compliance for the following 12
months. Accordingly, issues of whether the Company was a going concern were
raised, and balances under the credit facility and revolving operating
facility were classified as current.

During the fourth quarter the Company was unable to obtain surety bonds
from its providers at an acceptable cost, and the Company began to issue
letters of credit in lieu of performance bonds. Letters of credit reduce
availability under the revolving operating facility by the full face amount
of the letter. This increase in letter of credit usage eventually reduced
the availability of advances under the revolving operating facility to an
amount inadequate to sustain day-to-day operations.

58

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. LONG-TERM DEBT (in thousands except per share amounts) (continued)

During the first quarter of 2002, and pending agreement on permanent
additional financing, the revolving operating facility was amended,
utilizing the optional overadvance provisions, first by $11,000 and then by
an additional $20,000. These advances of $31,000 were repaid when the
mezzanine financing, described below, was put in place.

On April 12, 2002, the revolving operating facility was amended to provide
for the mezzanine financing. The amendments increase the maximum amount
that may be borrowed under the revolving operating facility (exclusive of
optional overadvances) to $195,000 from $175,000. In addition, the
revolving operating facility was amended to add a new Tranche Sub-B in the
amount of $70,000. Because the defined borrowing base under Tranche Sub-B
is more liberal than under Tranches A or B-Prime, and because a reserve of
$25,000 is not deducted from the borrowing base under Tranche Sub-B as it
is under Tranches A and B-Prime, the net effect is to provide availability
under Tranche Sub-B at times when there is no availability under Tranches A
and B-Prime. Tranche Sub-B is a revolving facility, except that any
payments of principal as a result of asset sales (other than in the
ordinary course of business) automatically reduce the availability under
Tranche Sub-B.

The covenants under the revolving operating facility were amended to
eliminate the interest coverage ratio, to waive the default under the
EBITDA covenant for the period ended December 31, 2001, and to lower the
EBITDA covenant requirement to $4,600, $9,700, $14,800, and $20,400 for the
cumulative year-to-date periods ending March 31, June 30, September 30, and
December 31, 2002, respectively.

The revolving operating facility was also amended to extend the maturity
date of the facility to April 8, 2003 from September 30, 2002.

Investors are referred to the full text of the documents filed as exhibits
to this Form 10-K.

The Company's credit facility and the intercreditor agreement among the
Company's lenders were amended primarily to permit or facilitate the
changes to the revolving operating facility. In addition, the interest
coverage ratio under the credit facility was eliminated, the EBITDA
covenant requirements reduced for periods ending March 31, 2002 and
thereafter, and the default under the EBITDA covenant for the period ended
December 31, 2001 waived.

(d) The various components of long-term debt described in Note 9 (a) and (b)
(the "Company's Public Debt Instruments") are financial instruments. The
Company's Public Debt Instruments were discounted from face value to their
fair market value on March 31, 2000 (Fresh Start). As of December 31, 2000,
the carrying value at that time approximated fair market value. During 2001,
there have been changes in market interest rates, a general decline in the
availability of credit, and disappointing financial performance by the
Company. It is likely that these factors have caused the fair market value
of the Company's Public Debt Instruments to be materially less than the
current carrying value. There is no public market in the Company's Public
Debt Instruments, and, therefore, the Company is unable to determine their
fair market value.

(e) The aggregate amount of payments required to meet long-term debt
installments in each of the next five years is as follows:

2002........................................................ $ 1,612
2003........................................................ 1,715
2004........................................................ 828
2005........................................................ 290,532
2006........................................................ 574
Thereafter.................................................. 44,518

59

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. OTHER LIABILITIES (in thousands)

11. STATEMENT OF CASH FLOWS (in thousands)

CHANGES IN ASSETS AND LIABILITIES

SUPPLEMENTAL CASH FLOW INFORMATION

The supplemental cash flow disclosures and non-cash transactions for the
year ended December 31, 2001, the nine months ended December 31, 2000, and the
three months ended March 31, 2000 are as follows:

12. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

The American Institute of Certified Public Accountants has issued Statement
of Position 98-5 "Reporting on the Costs of Start-Up Activities" which was
effective for fiscal years beginning after December 15, 1998. This statement
requires that all pre-operating costs be expensed as incurred. The statement
also requires that upon initial application any previous pre-operating costs
that had been deferred be expensed and reported as a cumulative effect of a
change in accounting principle.

60

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SPECIAL CHARGES (in thousands)

2001

The special charges are composed of the following:

Business units, locations or activities to be exited:
Assets written down to estimated net realizable value of
$-0-................................................... $ 204
Severance costs........................................... 316
Other exiting costs....................................... 2,862
Business units, locations or activities to be continued:
Assets written down to estimated net realizable value of
$200................................................... 1,809
Process re-engineering costs.............................. 6,744
-------
Pre-tax..................................................... $11,935
=======
After tax................................................... $11,935
=======

Asset impairments and other costs recorded as special charges

During 2001, the Company has continued to seek operating efficiencies and
identified locations or business units to be closed. Included in the special
charges are non-cash costs for asset impairments of $204 and $3,178 in cash
costs for severance and other exit costs to be incurred at these locations.
Approximately 48 employees are to be terminated as a result of these
restructurings, of which 24 had not yet been terminated at December 31, 2001.

In addition, a patent infringement lawsuit was settled during the year in
which the Company agreed to discontinue the use of certain equipment parts at an
ongoing operation. An assessment of the recoverability of the net asset value
for this equipment resulted in a non-cash asset impairment charge of $1,809.

Process re-engineering costs

During 2000, the Company embarked on an initiative, the PSC Way, to
standardize business processes to allow it to operate more efficiently and share
information and best practices. This initiative includes defining common
business processes related to transactional functions as well as client
relationships and includes establishing a common management systems platform.
The total cash costs for the PSC Way initiative in 2001 were $12,166, of which
$5,422 was capitalized to fixed assets and $6,744 is included in special charges
as process re-engineering costs. The PSC Way initiative will continue into 2002
with additional cash costs expected of approximately $3,000.

2000

The special charges comprise the following:

Business units, locations or activities to be exited:
Assets written down to estimated net realizable value..... $ 5,683
Severance costs........................................... 4,828
Other exiting costs....................................... 1,163
Business units, locations or activities to be continued:
Process re-engineering costs.............................. 5,443
-------
Pre-tax..................................................... $17,117
=======
After tax................................................... $15,483
=======

61

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SPECIAL CHARGES (in thousands) (continued)

In the fourth quarter of 2000, the Company made the decision to exit its
European industrial outsourcing operations due to its limited geographical
presence following the sale of the UK Metals business in the second quarter.
Included in special charges are $4,057 in non-cash charges for asset impairments
and $757 in cash costs related to severance and other exit costs.

The Company made the decision in 2000 to close and/or consolidate several
locations. Included in special charges are cash costs of $5,234 for severance
and other exit costs and $1,626 in non-cash costs relating to asset impairments.

Approximately 132 employees were to be terminated as a result of these
restructurings, of which 17 remained to be terminated as of December 31, 2001.

The total cash costs for the PSC Way initiative in 2000 were $8,636, of
which $3,193 was capitalized to fixed assets and $5,443 is included in special
charges as process re-engineering costs.

14. REORGANIZATION COSTS (in thousands)

The expenses resulting from Oldco's reorganization have been segregated
from expenses related to operations in the accompanying Consolidated Statements
of Earnings and include the following:

15. EARNINGS PER SHARE (in thousands)

The weighted average number of shares of common stock outstanding and the
basic and diluted earnings (loss) per share for the Predecessor Company are
required to be disclosed under generally accepted accounting principles.
However, these amounts have not been presented as they are not comparable to
subsequent periods due to the restructuring and the implementation of fresh
start reporting, and management, in compiling this information, believes these
amounts would not be meaningful.

62

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS

At both December 31, 2001 and December 31, 2000, the Company had no
derivative instruments outstanding. The Predecessor Company utilized interest
rate swaps and collars to fix the interest rate on a portion of its floating
rate debt and thereby manage the interest rate risk associated therewith. The
credit risk of counterparty fulfillment on all such contracts is mitigated by
dealing only with credit worthy major public financial institutions.

17. COMMON STOCK (in thousands except number of shares/options and per share
amounts)

The outstanding share capital of the Company comprises the following:

The Company has allotted and reserved 9,132,423 shares of common stock
issuable under the PIK debt and the unsecured convertible notes. As at December
31, 2001, 23,174 of these shares had been issued.

STOCK OPTIONS

On the Plan effective date, the Company issued 1,000,000 common stock
options to Mr. Anthony G. Fernandes, the President and CEO, at exercise prices
ranging from $5.96 to $8.69 per share. These prices were in excess of the
Company's fair market value on a per share basis as at the Plan effective date
determined based on an enterprise valuation as discussed in Note 1. Upon the
departure of Mr. Fernandes from the Company on March 31, 2002, 500,000 of such
options had vested and will be exercisable until their expiration on March 31,
2005. The rest of these options were cancelled.

The Company has allotted and reserved 1,040,000 shares of common stock
under its 2000 Stock Option Plan ("Option Plan") Under the Option Plan, options
vest annually over a four year period and may be granted to purchase shares of
common stock of the Company at the greater of the then-current market price or
$6.83. The options have a term of not more than ten years from the date of
grant. Options granted under the Option Plan may be either incentive stock
options, which are intended to meet the requirement of Section 422 of the
Internal Revenue Code, or non-qualified stock options. The Company had granted
929,053 options under the Option Plan as at December 31, 2001 at an exercise
price of $6.83.

63

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. COMMON STOCK (in thousands except number of shares/options and per share
amounts) (continued)

There were 382,125 options exercisable at December 31, 2001 with a range of
exercise prices from $5.96 to $8.69 and a weighted average exercise price of
$6.95. As of December 31, 2000, there were no options exercisable.

SFAS No. 123 "Accounting for Stock Based Compensation," issued in October
1995, defines a fair value based method of accounting for employee stock
options. Under this fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
exercise period. However, SFAS No. 123 allows an entity to continue to measure
compensation cost in accordance with Accounting Principle Board Statement No. 25
("APB 25"). The Company has elected to measure compensation costs related to
stock options in accordance with APB 25 and recognizes no compensation expense
for stock options granted at or above the grant date stock price. Accordingly,
the Company has adopted the disclosure only provisions of SFAS No. 123.

If compensation costs were measured using the fair value of the stock
options on the date of grant in accordance with SFAS No. 123 the Company's net
loss would be as follows:

The weighted average fair value of options granted during the year ended
December 31, 2001 was $0.76. The fair value of each option was determined using
the Black-Scholes option valuation model with the following assumptions: (i)
risk free interest rate of 4.67%, (ii) expected volatility of 94.73%, (iii)
expected option life ranging from five to ten years, and (iv) no annualized
dividend yield.

The weighted average fair value of options granted during the nine months
ended December 31, 2000 was $4.06. The fair value of each option was determined
using the Black-Scholes option valuation model with the following assumptions:
(i) risk free interest rate of 5.09%, (ii) expected volatility of 76.08, (iii)
expected option life ranging from 5 to 10 years, and (iv) no annualized dividend
yield.

The stock option information for the Predecessor Company is required under
generally accepted accounting principles. However, this information has not been
presented as all outstanding options of the Predecessor Company were eliminated
during the restructuring, and management, in compiling this information,
believes that this information would not be meaningful.

64

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

RESTRICTED STOCK

The Company has allotted and reserved 1,000,000 shares of common stock
under its 2002 Officers' Stock-Based Bonus Plan ("Bonus Plan") and 200,000
shares of common stock under its 2002 Non-Employee Directors Restricted Stock
Plan ("Restricted Stock Plan"). Under the Bonus Plan, the Company may grant
restricted shares, options, SARs and phantom stock to officers of the Company or
its subsidiaries. As at December 31, 2001, 200,870 restricted shares had been
granted under the Bonus Plan. Such restricted shares generally vest 1/4 annually
for the first four years after the date of grant. Under the Restricted Stock
Plan, the Company is required to grant to each director who is not an employee
of the Company, on the first business day of every quarter, restricted shares
with a fair market value of $2,500. As at December 31, 2001, 29,828 restricted
shares had been granted under the Restricted Stock Plan. Such restricted shares
generally vest 1/4 annually for the first four years after the date of grant.

Summary of Restricted Stock Issued: ($ in thousands)

18. INCOME TAXES (in thousands)

The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, the Company provides deferred income taxes
for the tax effects of temporary differences between the financial reporting and
income tax bases of the Company's assets and liabilities.

The Company is organized under the laws of the State of Delaware and is
regarded as a United States corporation for the purposes of this note. The
Predecessor Company was organized under the laws of Ontario and is regarded as a
Canadian corporation for purposes of this note.

The Company has net operating loss carryforwards in the U.S. of
approximately $290,000. The US net operating loss carryforwards expire between
the years 2007 and 2021. The Company has approximately $98,000 in excess
interest deductions carryforwards which carry forward indefinitely.

Distribution of the new common stock of the Company to the Company's
creditors pursuant to the Plan has resulted in an ownership change as defined in
Section 382 of the Internal Revenue Code. As a result, the Company's ability to
utilize $144,000 of its net operating loss carryforwards and its excess interest
deduction carryforwards is limited.

Certain future events may result in the net operating loss and excess
interest deduction carryforwards being utilized in the Company's future income
tax returns, which the Company will record as a reduction in the valuation
allowance. To the extent the utilized amount relates to a period prior to the
reorganization, the associated credit will be to additional paid-in capital in
accordance with the principles of fresh start reporting. To the extent the
utilized amount relates to a period subsequent to the reorganization, the
associated credit will be to the tax provision.

65

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. INCOME TAXES (in thousands) (continued)

Federal, state and foreign income tax provisions (benefits) are as follows:

The Company's income tax expense (benefit) comprises the following:

The provisions for income tax in 2001 and 2000 result from taxes on profits
in certain foreign jurisdictions and state income taxes on profits in certain
states.

66

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. INCOME TAXES (in thousands) (continued)

The net deferred tax liability consists of the following temporary
differences:

The net operating loss carryforwards expire between the years 2007 and
2021. In assessing the value of the deferred tax assets, management considers
whether it is more likely than not that all of the deferred tax assets will be
realized. Projected future income tax planning strategies and the expected
reversal of deferred tax liabilities are considered in making this assessment.
In 2001, based on the level of historical taxable income and projections for
future taxable income over the periods in which the net operating losses are
deductible, it was determined that, at this time, it is more likely than not
that the Company will not realize the benefits of deferred tax assets. The
valuation allowance increased by $37,742 in 2001, of which $27,889 relates to
the change in deferred tax assets for 2001 and $9,853 relates to adjustments
made to the deferred tax assets on finalization of the Company's 2000 federal
tax return. The valuation allowance increased by $80,487 for the nine months
ended December 31, 2000, of which $14,184 relates to the change in deferred tax
assets related to the nine-month period and $66,303 relates to the adjustment of
deferred tax assets and liabilities resulting from an analysis of book and tax
basis differences as of the fresh start reporting date.

Provisions have not been made for U.S. income taxes on approximately
$19,150 of undistributed earnings of foreign subsidiaries as these earnings are
considered indefinitely reinvested. These earnings could become subject to U.S.
income taxes if they were remitted as dividends, were lent to the Company or a
U.S. subsidiary, or if the Company should sell its stock in the subsidiaries. If
such earnings were not considered indefinitely reinvested, deferred U.S. income
taxes would have been provided of approximately $6,778.

19. RELATED PARTIES (in thousands)

(a) The Company's two largest stockholders, Carl C. Icahn and Stephen Feinberg,
have been involved in providing interim financing subsequent to December 31,
2001 pending completion of the mezzanine financing as described in Notes 1,
9, and 24. These stockholders also participate through entities they control
in the revolving operating facility described in Note 9(c) and share
interest and fees paid on that facility. Additionally, they are participants
in the Company's PIK and term debt facilities described in Note 9(a). Mr.
Icahn controls approximately $184 million of the Company's debt which was
associated with approximately $13 million in interest expense and $1 million
in fees during 2001. Mr. Feinburg controls approximately $60 million of the
Company's debt which was associated with approximately $4 million in
interest expense and $.5 million in fees during 2001. Comparable amounts for
2000 are not available.

(b) The Company has utilized the services of SBI and Company, Inc. ("SBI") for
information technology services associated with the PSC Way business
reengineering project. SBI is partially owned by entities controlled by one
of the Company's largest stockholders, Stephen Feinberg. Fees paid to SBI
totaled $8,495 and $7,325 in 2001 and 2000, respectively.

(c) Sparrows Point Scrap Processing, LLC. ("SPSP") is a joint venture operation
the Company has with AMG Resources Corporation to provide ferrous scrap and
scrap handling services to Bethlehem Steel Corporation. Sales to SPSP were
$1,246 and $943 in 2001 and the nine months ended December 31,

67

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

19. RELATED PARTIES (in thousands)

2000, respectively. Accounts receivable-net due to the Company were $500 and
$700 at December 31, 2001 and 2000, respectively.

20. COMMITMENTS (in thousands)

Future rental payments required under operating leases for premises and
equipment are as follows:

2002........................................................ $21,023
2003........................................................ 15,031
2004........................................................ 11,504
2005........................................................ 6,965
2006 and thereafter......................................... 20,360

Rental expense for the year ended December 31, 2001 and the nine months
ended December 31, 2000 amounted to $24,948 and $15,772 respectively.

Letters of credit issued amounted to $84,282 as at December 31, 2001
(December 31, 2000 -- $69,526).

21. SEGMENTED INFORMATION (in thousands)

The Company's business operations are organized into the following three
segments:

- Industrial Outsourcing Group, which includes the operations that perform
industrial cleaning and maintenance, mechanical services, piping and
fabrication, turnaround and outage services, electrical contracting and
instrumentation, decommissioning and remediation services services.

- Environmental Services Group, which includes commercial and industrial
by-product collection, processing and disposal, engineered fuel
blending, solvent distillation, analytical services, container and tank
cleaning services, on-site services, lab packing, household hazardous
waste services and emergency response services.

- Metals Services Group, whose primary operations include ferrous and
non-ferrous scrap collection and processing, brokerage and
transportation and on-site mill services.

68

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. SEGMENTED INFORMATION (in thousands) (continued)

- --------------------------------------------------------------------------------

The geographical segmentation of the Company's and Predecessor Company's
businesses is as follows:

69

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. CONTINGENCIES (in thousands)

(a) The Company (together with the industries in which it operates) is subject
to federal, state, local and foreign (particularly Canadian provincial)
environmental laws and regulations concerning discharges to the air, soil,
surface and subsurface waters and the generation, handling, storage,
transportation, treatment and disposal of waste materials and hazardous
substances. The Company and the industries in which it operates are also
subject to other federal, state, local and foreign (particularly Canadian
provincial) laws and regulations including those that require the Company
to remove or mitigate the effects of the disposal or release of certain
materials at various sites.

It is impossible to predict precisely what effect these laws and
regulations will have on the Company in the future. Compliance with
environmental laws and regulations may result in, among other things,
capital expenditures, costs and liabilities. Management believes, based on
past experience and its best assessment of future events, that these
environmental liabilities and costs will be assessed and paid over an
extended period of time. The Company believes that it will be able to fund
such liabilities and costs in the ordinary course of business.

Certain of the Company's facilities are environmentally impaired as a
result of operating practices at the sites prior to their acquisition by
the Company. The Company has established procedures to periodically
evaluate these sites, giving consideration to the nature and extent of the
contamination. The Company has provided for the remediation of these sites
based upon management's judgment and prior experience. The Company has
estimated the liability to remediate these sites to be $55,899 (December
31, 2000 -- $55,457).

Certain subsidiaries of the Company have been named as potentially
responsible or liable parties under U.S. federal and state superfund laws
in connection with various sites. It is alleged that the Company and its
subsidiaries or their predecessors transported waste to the sites, disposed
of waste at the sites, or operated the sites in question. The Company has
reviewed the nature and extent of the allegations, the number, connection
and financial ability of other named and unnamed potentially responsible
parties and the nature and estimated cost of the likely remedy. Based on
its review, the Company has accrued its estimate of its liability to
remediate these sites at $16,504 (December 31, 2000 -- $21,331). If it is
determined that more expensive remediation approaches may be required in
the future, the Company could incur additional obligations, which could be
material.

The liabilities discussed above are disclosed in the Consolidated Balance
Sheets as follows:

Estimates of the Company's liability for remediation of a particular site
and the method and ultimate cost of remediation require a number of
assumptions and are inherently difficult, and the ultimate outcome may
differ from current estimates. As additional information becomes available,
estimates are adjusted. It is possible that technological, regulatory or
enforcement developments, the results of environmental studies or other
factors could alter estimates and necessitate the recording of additional
liabilities, which could be material. Moreover, because PSC has disposed of
waste materials at numerous third-party disposal facilities, it is possible
that PSC will be identified as a potentially responsible party at
additional sites. The impact of such future events cannot be estimated at
the current time.

(b) In October 1999, Exxon Corporation ("Exxon") commenced an action in the
District Court, Harris County, Texas against International Catalyst, Inc.
("INCAT"), an indirect wholly owned subsidiary of

70

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. CONTINGENCIES (in thousands) (continued)

PSC, for damages of approximately $32,100 arising from certain work
conducted by INCAT at Exxon's Baytown, Texas chemical plant. Exxon alleges
that INCAT was responsible for the purchase and installation in 1996 of
improper gasket materials in the internal bed piping flange joints of the
Baytown plant which caused damages to the facility and consequential losses
arising from the shutdown of the plant while repairs were made. Primary and
excess insurers of the Company have issued reservation of rights letters.
The second excess layer carrier has filed a motion for summary judgment on
the issue of denial of coverage, and the first excess layer carrier has
joined in that motion. An agreement in principle to settle this litigation
has been reached. If the settlement is approved by all interested parties,
the Company's liability will be covered by insurance, except for a small
deductible.

(c) On September 13, 1999, a lawsuit was filed in state court in Ohio
(Ashtabula County), alleging injury to 130 named plaintiffs resulting from
evacuation due to a fire and shelter-in-place orders with respect to a
sodium filter at an RMI Titanium Company ("RMI") plant in Ashtabula, Ohio.
The plaintiffs alleged negligence on the part of RMI and the Company in the
removal of sodium from the filter on RMI's premises. Plaintiffs sought
actual and punitive damages and their attorneys applied for class action
status to represent 500 people affected by the evacuation order and the
approximately 4,500 people affected by the shelter-in-place orders. RMI
demanded indemnification from PSC under the terms of the contract pursuant
to which the work was performed. The Company has a significant retained
liability before insurance coverage is triggered. The parties have reached
a settlement in principle, which must be approved by the court after a
fairness hearing in order to become effective. The Company has accrued for
the settlement.

(d) On March 22, 2000, the EPA filed a Complaint and Proposed Compliance Order
against the Paint Services Group of Nortru, Inc. ("Nortru"), an indirect
wholly owned subsidiary of the Company, relating to a multi-media
inspection conducted by the EPA at all Nortru Detroit facilities in March
and April 1999. Violations alleged included a failure to repair a crack in
a secondary containment system and a failure to engage in proper monitoring
of air emissions for certain equipment as required under regulations
applicable to large-quantity generators of hazardous wastes. While Nortru
has negotiated a settlement relating to this complaint that includes
payment of a penalty of $53 and compliance with applicable regulations, the
Company believes that the EPA is likely to file other complaints as a
result of the 1999 inspections. The Company is unable to predict the nature
or amount of its liability under such complaints if and when brought.

(e) On August 6, 2001, Burlington Environmental, Inc. was served with a
Complaint and Compliance Order by the U.S. EPA and similar enforcement
documents from the Washington Department of Ecology ("Ecology") assessing
penalties in excess of $1,000 relating to alleged non-compliance with
regulations at three facilities in Washington State and a company
laboratory located in Renton Washington. The Complaint alleged violations
of and non-compliance with provisions of the facility RCRA permits and
state and federal regulations relating to the operations at these
facilities. The Company entered negotiations with the EPA that resulted in
the filing of a Consent Agreement and Final Order ("CAFO") on January 17,
2002. Under the terms of the CAFO, the Company will pay a fine of
approximately $136 in six installments over a six-month period and perform
a Supplemental Environmental Project ("SEP") that includes the early
closure of one of its Seattle-based RCRA facilities. The anticipated cost
of closure and consolidation of operations at other regional facilities is
approximately $2,100. Implementation of the SEP will take approximately two
years depending upon the Company's ability to obtain the necessary state
and local permits to perform the work. Concurrent with the EPA
negotiations, the Company negotiated a settlement in principle with
Ecology. Final terms have not been established.

(f) The Company is a defendant in lawsuits for which the Company has insurance
coverage. Each of these suits is, in the event of an adverse verdict,
subject to a deductible. Although the Company does not

71

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. CONTINGENCIES (in thousands) (continued)

believe that the uninsured liability from any of these suits would be
material, it is not possible to predict the effect of the cumulative
deductibles. The Company is named as a defendant in a number of other
lawsuits which have arisen in the ordinary course of its business. The
Company believes that except as otherwise reported herein, neither the
insured litigation nor the other litigation is likely to have a material
adverse effect on its business or financial condition and, therefore, has
made no provision in these financial statements for the potential
liability, if any. The Company is, however, unable to predict the outcome
of certain of the forgoing matters and cannot provide assurance that these
or future matters will not have a material adverse effect on the results of
operations or financial condition of the Company.

(g) Sparrows Point Scrap Processing, LLC. ("SPSP") is a joint venture operation
the Company has with AMG Resources Corporation to provide ferrous scrap and
scrap handling services to Bethlehem Steel Corporation. Although the
Company wrote off the remaining investment (approximately $1,800) in SPSP
during 2001 after assessing the recoverability of the investment, a
contingency remains for the Company's guarantee of 50% of the operating
losses of the joint venture. The amount or timing of any future gains or
losses cannot be reliably estimated at this time. Additionally, the Company
has exposure for its share of financial guarantees with respect to future
lease commitments of $12,699 and debt obligations of approximately $800.
Sales to SPSP were $1,246 and $943 in 2001 and 2000, respectively. Accounts
receivable-net due to the Company were $500 and $700 at December 31, 2001
and 2000 respectively.

72

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

23. UNAUDITED QUARTERLY FINANCIAL DATA (in thousands, except per share
amounts)

The table below sets forth consolidated operating results by fiscal quarter
for the years ended December 31, 2001 and 2000.

The basic and diluted earnings (loss) per share for the three months ended
March 31, 2000 have not been presented as they are not comparable to subsequent
periods due to the restructuring and the implementation of fresh start
reporting.

Certain reclassifications of prior period and reported 2001 period data
have been made to conform with the 2001 full-year reporting.

24. SPECIAL NOTE REGARDING RECENT EVENTS

Certain material events have occurred since December 31, 2001, of which
investors should be aware in considering the information contained in this Form
10-K.

MANAGEMENT CHANGES

On March 31, 2002, Anthony G. Fernandes, Chairman, President and Chief
Executive Officer, left the Company. In addition, Mr. Fernandes resigned as a
member of the Board of Directors. Upon his termination of employment, the
Company is obligated to pay him an amount equal to one year of base salary plus
50% of base salary prorated for time employed during the fiscal year, together
with certain other amounts. The Board of Directors has determined at this time
not to appoint a chief executive officer. Rather, the presidents of the

73

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

24. SPECIAL NOTE REGARDING RECENT EVENTS (continued)

three operating groups, Industrial Outsourcing, Environmental Services, and
Metals Services, will exercise executive authority over their respective groups
and report directly to the Board. The remaining corporate functions (such as
chief financial officer and general counsel) will also report directly to the
Board.

The Company also announced that it would move its headquarters in suburban
Chicago to Houston by the end of the second quarter of 2002.

BOARD OF DIRECTORS CHANGES

Subsequent to the departure of Mr. Fernandes, the Board, on April 12, 2002,
elected Robert L. Knauss as Chairman. Mr. Knauss previously served as Chairman
from April 7, 2000, when the Company emerged as a publicly held entity from the
bankruptcy of its predecessor (see Item 1, Business, Information Regarding
Oldco) until May 9, 2001, when Mr. Fernandes was elected.

The departure of Mr. Fernandes left two vacancies on the Board. Peter
Offermann previously resigned on February 1, 2002. The Board determined not to
fill the vacancies and on April 12, 2002, reduced the number of directors
constituting the entire Board to seven from nine.

ADDITIONAL FINANCING

On April 12, 2002 the Company obtained additional financing under its
revolving operating facility. The terms of the additional financing are
described in Notes 1 and 9 (c).

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

74

PART III

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

EXECUTIVE OFFICERS

Set forth below is certain information concerning the Company's executive
officers who are not also directors.

- ---------------

(1) Served as an executive officer of Oldco within two years before Oldco filed voluntary petitions
under United States and Canadian bankruptcy and insolvency laws.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires that the Company's officers, its
directors and persons who own more than 10% of a registered class of the
Company's equity securities report their beneficial ownership and changes in
their beneficial ownership of the Company's equity securities by filing reports
with the SEC. Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms so filed. Based solely on a
review of the copies of such forms furnished to the Company for 2001, all
Section 16(a) filing requirements applicable to the Company's officers,
directors and greater than 10% percent stockholders were complied with, except
that Mr. O'Neill's Form 3 was filed late.

77

ITEM 11 EXECUTIVE COMPENSATION

The following table sets forth information with respect to all compensation
paid or earned for services rendered to the Company during the year ended
December 31, 2001 and the nine months ended December 31, 2000 by its chief
executive officer and its four other most highly compensated executive officers
employed by the Company as of the end of fiscal year 2001, and by an additional
individual who would have been among the four other most highly compensated
except that he was not serving as an executive officer at the end of the fiscal
year (together, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

(1) The following amounts were paid by Oldco to the Named Executive Officers
for the three months ended March 31, 2000: Mr. Fernandes (salary of
$125,000); Mr. Fanta (salary of $59,312 and a retention bonus of $45,000);
Mr. Smith (salary of $62,301); Mr. Recatto (salary of $36,346 and a
retention bonus of $20,000); and Mr. Forlani (salary of $72,690 and a
retention bonus of $29,480)

(2) Mr. Fernandes's employment with the Company terminated on March 31, 2002.

(3) Represents group life insurance premiums paid by the Company.

(4) Represents moving expenses paid by the Company.

(5) Mr. Millstone began his employment with the Company on August 28, 2000.

(6) Represents $60,748 of moving expenses paid by the Company and a $25,000
signing bonus.

(7) Mr. Smith's employment with the Company terminated on February 1, 2002.

(8) Represents $1,670 of insurance related cost and $3,800 of other fringe
benefits.

(9) Mr. Forlani became SVP, Metals Services Group, as of February 1, 2002.
During 2001, Mr. Forlani was not an executive officer of the Company.

(10) Represents $9,290 of auto-related expense and $3,424 of insurance
premiums.

78

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth the number of stock options granted to the
Named Executive Officers during 2001.

(1) Options for all of these shares were forfeited by Messrs. Fernandes and
Smith in connection with the termination of their employment in 2002.

AGGREGATED FISCAL YEAR-END OPTION VALUES

The following table provides information regarding the exercisable and
unexercisable stock options held by the Named Executive Officers as of December
31, 2001. No Named Executive Officer exercised any options in fiscal year 2001.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

(1) 558,145 unexercisable options were forfeited by Mr. Fernandes in connection
with the termination of his employment in March 2002.

(2) All of these options were forfeited by Mr. Smith in connection with the
termination of his employment in February 2002.

LONG-TERM INCENTIVE PLANS

In 2001, the Company granted deferred compensation awards to certain Named
Executive Officers in the form of individual accounts with maximum account
values ranging from $16,862 to $20,397. Such account balances are payable in
full or in part, at the Board's discretion, four years after the date of such
awards, provided that the Named Executive Officers are then employed by the
Company and the Company's equity market capitalization exceeds $143 million.

79

LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR

DIRECTOR COMPENSATION

Each nonemployee director other than the Chairman receives (i) an award of
options to purchase 8,000 shares of common stock upon becoming a director, (ii)
an annual award of options to purchase 4,000 shares of common stock, (iii) an
annual retainer of $10,000, (iv) an annual award of $10,000 paid in restricted
stock, (v) $1,000 for every Board or Board Committee meeting attended (or $500
if such meeting was telephonic), and (vi) a $1,000 per diem when traveling for
the purpose of handling matters relating to the current management changes,
corporate restructuring, and relocation of the corporate headquarters. Instead
of the foregoing awards and meeting fees, Mr. Knauss, as Chairman of the Board
until May 9, 2001, received for 2001 (i) a grant of options to purchase 20,000
shares, as an annual retainer, (ii) an annual stipend of $35,000, (iii)
payments, as described in (v) above, for Board and Committee meetings occurring
after May 9, 2001 and (iv) an annual award of $10,000 paid in restricted stock.
For his current services as Chairman, Mr. Knauss receives a monthly stipend of
$15,000 and has been granted additional options to purchase 25,000 shares of
common stock, but does not receive an annual retainer nor any meeting fees. All
options granted have an exercise price not less than the fair market value of a
share of common stock on the date of grant. Committee chairmen also receive an
annual stipend of $5,000. Nonemployee directors are also reimbursed for certain
expenses in connection with attendance at Board and Board Committee meetings.

Directors who are employees or officers of the Company do not receive
additional compensation for service as a director, but are reimbursed expenses.

EMPLOYMENT AND SEVERANCE ARRANGEMENTS

Mr. Fernandes. In August 1999, the Company and Oldco entered into an
employment agreement with Mr. Fernandes providing for an annual base salary of
$500,000, which amount may be increased by the Board of Directors from time to
time. Mr. Fernandes's employment with the Company terminated on March 31, 2002.

Pursuant to the terms of his employment agreement, 500,000 of the options
to acquire common stock that Mr. Fernandes received pursuant to the agreement
vested and will be exercisable at a price of $5.96 per share until their
expiration on March 31, 2005. The balance of such options were cancelled.

In addition, pursuant to the employment agreement and as amended and
supplemented by an agreement with Mr. Fernandes dated February 22, 2002, upon
his termination of employment, the Company is obligated to pay him an amount
equal to one year of base salary plus 50% of base salary prorated for time
employed during the fiscal year. Such amount is to be paid over one year in
accordance with the Company's normal payroll practice. In addition, Mr.
Fernandes is entitled to receive certain continued vision plan and life
insurance benefits, as well as payment for certain unused vacation and a tax
gross-up payment in the amount of $26,000.

Mr. Fernandes continues to be bound by certain confidentiality and
non-competition obligations under the employment agreement.
80

Mr. Millstone. In August 2000, the Company entered into an employment
agreement with Mr. Millstone, providing for an annual base salary of $235,000.
Under the agreement, Mr. Millstone is eligible to participate in the Company's
incentive bonus plan, as may be in effect from time to time, with a target bonus
of 40% of his base salary.

If Mr. Millstone's employment is terminated by the Company without cause,
the Company will pay Mr. Millstone an amount equal to the sum of his
then-current annual base salary plus an amount equal to 40% of his annual base
salary, multiplied by 1.5. Such amount is to be paid over 18 months in
accordance with the Company's normal payroll practice. If Mr. Millstone's
employment is terminated in certain circumstances following a change of control,
the Company will pay Mr. Millstone an amount equal to two times his annual base
salary. In addition, in all such circumstances, the Company will pay for
continuing medical and dental coverage, earned but unpaid bonus and outplacement
services.

Mr. Millstone has certain confidentiality obligations under the employment
agreement and is subject to a non-competition provision for a period of two
years following termination.

Mr. Fanta. In October 1998, a subsidiary of the Company entered into an
employment agreement with Mr. Fanta, providing for payment of an annual base
salary, which amount may be increased from time to time. Currently, Mr. Fanta's
base salary is $270,000. Under the agreement, Mr. Fanta is eligible to
participate in the Company's incentive bonus plan and deferred compensation
plan, as each may be in effect from time to time. The agreement provides for an
initial five-year term, which automatically renews for one-year terms.

If Mr. Fanta's employment is terminated by the Company other than for
cause, the Company will pay Mr. Fanta a lump-sum amount equal to his base salary
for 18 months (or, in the case of a termination within two years following a
change of control, 30 months). In addition, any options or restricted stock vest
immediately upon a change of control.

Mr. Fanta has certain confidentiality obligations under the employment
agreement and is subject to a non-competition provision during the employment
term and for a period of two years following termination.

Mr. Recatto. In December 1997, a subsidiary of the Company entered into an
employment agreement with Mr. Recatto, providing for payment of an annual base
salary, which amount may be increased from time to time in accordance with
Company policy. Currently, Mr. Recatto's base salary is $230,000. Under the
agreement, Mr. Recatto is eligible to participate in the Company's incentive
bonus plan, as may be in effect from time to time. The agreement provides for an
initial three-year term, which automatically renews for one-year terms.

If Mr. Recatto's employment is terminated by the Company without cause, the
Company will pay Mr. Recatto a lump-sum payment equal to his base salary for 12
months.

Mr. Recatto has certain confidentiality obligations under the employment
agreement and is subject to a non-competition provision during the employment
term and for a period of two years following termination.

Mr. Forlani. In February 2002, the Company entered into an employment
agreement with Mr. Forlani, providing for payment of an annual base salary of
$275,000 plus the opportunity to earn a target bonus of 35% in accordance with
Company policy and incentive plans as may be in effect from time to time.

If Mr. Forlani's employment is terminated by the Company without cause, the
Company will pay Mr. Forlani an amount equal to 18 months' salary. Such amount
is to be paid over 18 months in accordance with the Company's normal payroll
practice. If Mr. Forlani's employment is terminated in certain circumstances
following a change of control, the Company will pay Mr. Forlani an amount equal
to 24 months of his base salary. In addition, in all such circumstances, the
Company will pay for continuing medical and dental coverage, earned but unpaid
bonus and outplacement services.

Mr. Forlani has certain confidentiality obligations under the employment
agreement and is subject to a non-competition provision for a period of one year
following termination.

Mr. Smith. In January 2000, the Company entered into an employment
agreement with Mr. Smith. Mr. Smith's employment with the Company terminated on
February 1, 2002. In connection with such
81

termination, Mr. Smith did not receive any severance payments. Mr. Smith
continues to be bound by certain confidentiality and non-competition obligations
under the employment agreement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee during 2001 were Messrs. Van
Sant, Knauss, Mitchell and Pardo. Nathaniel D. Woodson, former director of the
Company, also served on the Compensation Committee prior to his resignation as a
director. During 2001, no Company executive officer served on the board of
directors or compensation committee of any other corporation with respect to
which any member of the Compensation Committee was engaged as an executive
officer. No member of the Compensation Committee was a Company employee in 2001,
and none was formerly a Company officer. Mr. Pardo was formerly President and
Chief Executive Officer of Oldco, the Company's former sole stockholder.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors. The Compensation Committee is
composed of non-employee directors responsible for the oversight, approval and
reporting to the Board of Directors on all elements of compensation for elected
corporate officers. The Compensation Committee has furnished the following
report on executive compensation for fiscal year 2001.

COMPENSATION PHILOSOPHY

The executive compensation program provides a total compensation package
composed of base pay, annual performance-based cash incentives, and long-term
performance-based equity incentives, all of which are designed to provide
incentives to and reward executives for superior performance and the creation of
stockholder value. The Compensation Committee believes that a
pay-for-performance culture based on accountability and linkage to business
objectives is critical for future business success.

The practice of the Company is to target total compensation for the
Company's executives at the median level for comparable positions at similarly
sized companies (in terms of revenue) in general industry, with the opportunity
to earn total compensation at up to the 75th percentile, although with respect
to certain positions, the compensation paid by the Company currently may be
lower than these levels.

EXECUTIVE COMPENSATION PROGRAM

The Company's executive compensation program presently consists of three
key components: base salary, annual incentives and long-term incentives. Each
component is discussed below. The Company does not presently have a pension
plan, a deferred compensation plan (except for the deferred compensation awards
described above under "Long-Term Incentive Plans") or a supplemental retirement
plan for executives. Under the Company's certificate of incorporation, the
Company is not permitted to adopt any stock-based compensation plan or
arrangement other than (i) the Company's existing Stock Option Plan, (ii) stock
options, the equity purchase and stock-based bonus rights of Mr. Fernandes under
his employment agreement, (iii) a restricted stock or similar plan for
non-employee directors providing for issuance of shares of common stock in lieu
of fees or retainers with a value not to exceed $10,000 per director per year,
which plan was adopted by the Company on May 9, 2001, and (iv) a stock-based
bonus plan for officers, not exceeding 30% of such officer's base salary per
year, which plan was adopted by the Company on May 9, 2001.

BASE SALARY

Base salaries of executive officers are targeted to be competitive relative
to comparable companies. In determining salaries, the Compensation Committee
also takes into account individual experience and performance.

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ANNUAL INCENTIVES

Amounts of the awards to executive officers under the annual incentive were
based upon a combination of a subjective evaluation of performance and
attainment of objective goals relating to income, safety and cash flow. For
2001, excluding Mr. Fernandes's bonus, annual incentives for the executives were
$127,576.

LONG-TERM INCENTIVES

During 2001, the Company's long-term incentives consisted of awards of
stock options, restricted shares and performance units to executive officers and
other employees under the Company's Stock Option Plan and Officers' Stock-Based
Bonus Plan and the deferred compensation awards described above under "Long-Term
Incentive Plans." The Company awarded options to purchase shares of common stock
to executive officers under the Company's Officers' Stock-Based Bonus Plan in
2001, at an exercise price of $6.83. These option awards do not include the
options granted to the Chief Executive Officer described below.

CHIEF EXECUTIVE OFFICER COMPENSATION

Compensation paid to Mr. Fernandes is determined in accordance with an
employment agreement with the Company and Oldco, which is described above under
"Employment Agreements." The employment agreement provides for an annual salary
of $500,000, and also provides for performance-based compensation. On March 1,
2001, Mr. Fernandes received an increase in base salary to $540,000 annually.
Under the agreement, Mr. Fernandes is eligible to receive a bonus of up to 75%
of his base salary, based upon achievement of performance parameters, including
the profitability of the Company, his individual performance and contribution
and the strategic needs of the Company and its affiliates as established by the
Board of Directors in good faith after consultation with Mr. Fernandes, provided
that in the event of extraordinary performance as determined by the Board of
Directors, in its discretion, the bonus may be up to 100% of base salary. A
bonus of $325,000 was paid on March 1, 2001 with respect to 2000. For 2001, no
bonus will be paid. Pursuant to the employment agreement, the Company granted
Mr. Fernandes the right to purchase contemporaneously with the conclusion of the
Company's bankruptcy proceedings shares of common stock having a value of up to
$250,000 at a purchase price of $5.96 per Share and provided him a right to
receive options to acquire 1,000,000 shares at exercise prices ranging from
$5.96 to $8.69. Additionally, on May 9, 2001, Mr. Fernandes was granted 58,145
options at an exercise price of $5.96, 46,957 restricted shares that vest 25% on
each anniversary date of grant, and 59,749 performance units that vest December
31, 2003 if certain performance criteria are met.

DEDUCTIBILITY OF EXECUTIVE COMPENSATION

Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to public companies for compensation in excess of $1
million paid to the Company's Chief Executive Officer or any of the four other
most highly compensated executive officers. The limitation does not apply to
compensation based on the attainment of objective performance goals. The
Compensation Committee has considered the impact of the deduction limitation and
has determined that it is not in the best interests of the Company or its
stockholders to base compensation solely on objective performance criteria.
Rather, the Compensation Committee believes that it should retain the
flexibility to base compensation on its subjective evaluation of performance as
well as on the attainment of objective goals.

R. William Van Sant Robert J. Mitchell
Robert L. Knauss Felix Pardo

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PERFORMANCE GRAPH

The following graph sets forth a comparison of the cumulative total
stockholder return on the Company's common stock for the period beginning May
22, 2000, the date shares of common stock began trading on the Nasdaq National
Market, and ending December 31, 2001, as compared with the cumulative total
return of the S&P SmallCap 600 Index and the Russell 2000 Index. Due to the
breadth of the Company's business, no published industry or line-of-business
index exists and the Company does not believe it can reasonably identify a peer
group for comparison. The Company has selected the Russell 2000 Index as an
index of issuers with similar market capitalizations. This graph assumes an
investment of $100 on May 22, 2000 in the Company's common stock and on April
30, 2000 in the S&P SmallCap 600 Index and the Russell 2000 Index, and assumes
reinvestment of dividends, if any. The stock price performance shown on the
graph below is not necessarily indicative of future stock price performance.
[PERFORMANCE GRAPH]

84

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of April 11, 2002,
regarding the beneficial ownership of the Company's common stock by (i) each
person known by the Company to own beneficially more than 5% of its outstanding
common stock, (ii) each director, (iii) each Named Executive Officer, and (iv)
all executive officers and directors as a group. Beneficial ownership has been
determined for this purpose in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), under which a person is
deemed to be the beneficial owner of securities if he or she has or shares
voting power or investment power in respect of such securities or has the right
to acquire beneficial ownership of securities within 60 days of April 11, 2002.
Except as otherwise indicated, the Company believes that the persons listed
below, based on information provided by such persons, have sole investment and
voting power with respect to the shares shown opposite their names. Unless
otherwise indicated, the address of each of the persons listed below is the
Company's principal executive office.

* Less than 1%

(1) Percentage of beneficial ownership is based on 24,256,437 shares
outstanding as of April 11, 2002. Includes 654,291 shares to be issued in
connection with bankruptcy proceedings of Oldco, which shares are treated
as outstanding for all purposes in this Form 10-K. Also assumes exercise by
only the person or group named in each row of all options and convertible
debt held by such person or group and exercisable or convertible within 60
days.

(2) Based solely upon information provided in the Schedule 13D amendment filed
November 21, 2001. Barberry Corp., American Real Estate Partners, L.P.,
American Property Investors, Inc., Beckton Corp. and Mr. Icahn have shared
voting and investment power with respect to the shares. Barberry Corp. is
the general partner of High River Limited Partnership and is 100% owned by
Mr. Icahn. American Property Investors, Inc. is the general partner of both
American Real Estate Holdings L.P. and American Real Estate Partners, L.P.
and American Real Estate Partners, L.P. is a limited partner of American
Real Estate Holdings L.P. owning 100% of the limited partnership interests
therein.

85

American Property Investors, Inc. is 100% owned by Beckton Corp., which is 100%
owned by Mr. Icahn. The address of these entities (other than Mr. Icahn) is: 100
South Bedford Road, Mount Kisco, New York 10549. Mr. Icahn's address is: Carl C.
Icahn, c/o Icahn Associates Corp., 767 Fifth Avenue, 47th Floor, New
York, New York 10153.

(3) Assumes issuance of 3,554,262 shares upon conversion of the PIK debt.

(4) Assumes issuance of 972,934 shares upon conversion of the PIK debt.

(5) Assumes issuance of 4,527,196 shares upon conversion of the PIK debt. Upon
the issuance of 2,546,926 additional shares of common stock to entities
controlled by Mr. Icahn in connection with the mezzanine financing, Mr.
Icahn is deemed to own beneficially an aggregate of 16,929,427 shares, or
52.2%, of the Company's common stock.

(6) Based solely upon information provided in the Schedule 13D amendment filed
November 28, 2001. Includes 1,536,597 Shares issuable to Mr. Feinberg upon
conversion of the Company's PIK Debt. Shares and PIK debt are held through
Cerberus Partners, LP, Cerberus International, Ltd. and certain private
investment funds. Mr. Feinberg possesses sole power to vote and direct the
disposition of all securities of the Company owned by such entities. The
address of Mr. Feinberg is: 450 Park Avenue, 28th Floor, New York, New York
10022. Upon the issuance of 1,091,540 additional shares of common stock to
entities controlled by Mr. Feinberg in connection with the mezzanine
financing, Mr. Feinberg is deemed to own beneficially an aggregate of
5,872,915 shares, or 20.0%, of the Company's common stock.

(7) Includes shares that may be acquired pursuant to options that are
exercisable within 60 days of April 11, 2002 as follows: Mr. Knauss (15,000
shares); Mr. Fernandes (500,000 shares); Mr. First (7,000 shares); Mr.
Frost (7,000 shares); Mr. Pardo (7,000 shares); Mr. Van Sant (7,000
shares); Mr. Fanta (38,361 shares); Mr. Millstone (17,345 shares); Mr.
Recatto (30,079 shares); and all directors and officers as a group (646,134
shares).

(8) Includes 22,162 shares issuable upon conversion of the Company's 3%
convertible subordinated notes. Such notes, and 9,244 shares, are held by
Mr. Pardo as trustee for the Felix Pardo Revocable Trust.

(9) Includes 13,000 shares held by Mr. Fernandes's wife. Mr. Fernandes
disclaims beneficial ownership of such shares.

(10) Includes 5,000 shares held by Mr. Millstone in tenancy in common with his
wife.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In settlement of certain unsecured claims in connection with Oldco's
insolvency proceedings, the Company issued to Felix Pardo, a director of the
Company and former Chief Executive Officer of Oldco, 9,244 shares of common
stock, $664,871 in principal amount of 3% convertible subordinated notes, which
are convertible into 22,162 shares of common stock, and $18,957 in principal
amount of 6% subordinated notes.

In settlement of certain unsecured claims in connection with Oldco's
insolvency proceedings, the Company issued to David E. Fanta, an executive
officer of the Company, 1,091 shares of common stock and $56,260 in principal
amount of 6% subordinated notes. In addition, Mr. Fanta was indebted to the
Company during 2000 in the amount of $62,769, which represented certain tax
payments made by Oldco on Mr. Fanta's behalf in connection with the 1997 merger
between Oldco and Allwaste, Inc.

Mr. Mitchell, a director of the Company, is an employee of Icahn Associates
Corp., a corporation controlled by Carl C. Icahn, the Company's largest
stockholder and a significant lender to the Company. As at December 31, 2001,
the Company was indebted to entities controlled by Mr. Icahn in the aggregate
principal amount of $138.5 million.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

The following financial statements and independent auditors' report
required by the Item are filed herewith under Item 8.

(i) Report of Independent Accountants

(ii) Consolidated Balance Sheets

(iii) Consolidated Statements of Earnings

(iv) Consolidated Statements of Stockholders' Equity (Deficit)

(v) Consolidated Statements of Cash Flows

(vi) Notes to the Consolidated Financial Statements

(2) Financial Statement Schedule

Schedule II Valuation and Qualifying Accounts

(3) Exhibits

88

(b) On October 2, 2001, the registrant filed a Form 8-K relating to the
resignation of two of its directors and appointment of two new
directors in their place and stead. No other reports on Form 8-K were
filed by the registrant during the fiscal quarter ended December 31,
2001.

89

SIGNATURE PAGE

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: April 12, 2002

PHILIP SERVICES CORPORATION

By: /s/ ROBERT L. KNAUSS
------------------------------------
Robert L. Knauss
Chairman
(Principal Executive Officer)

By: /s/ THOMAS P. O'NEILL, JR
------------------------------------
Thomas P. O'Neill, Jr.
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

90

PHILIP SERVICES CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II

(1) Opening balances in companies acquired in the year net of closing balances
of companies sold in the year.

(2) Write-off of uncollectible accounts

91

EXHIBIT INDEX