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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
Commission file number 0-30417

PHILIP SERVICES CORPORATION

(713) 623-8777
(Registrant’s Telephone Number, Including Area Code)

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

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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

     The number of shares of common stock of the Registrant outstanding at May 19, 2003 was 27,909,342.

REPORT INDEX
TO FORM 10-Q

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Certain statements contained in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this document, the words “anticipate,” “believe,” “estimate,” “expect” 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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, the risks discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and risks discussed from time to time in the Company’s other 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.

PHILIP SERVICES CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)

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

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PHILIP SERVICES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

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

2

PHILIP SERVICES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

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

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PHILIP SERVICES CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

(1)

Basis of Presentation

     These Consolidated Condensed Financial Statements contain information relating to Philip Services Corporation (“PSC”), a Delaware corporation, and its subsidiaries (collectively, the “Company”), which has been prepared by management.

     The Consolidated Condensed Financial Statements herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). As applicable under such regulations, certain information and footnote disclosures normally included in complete annual financial statements have been condensed or omitted. The Company believes that the presentation and disclosures herein are adequate to make the information not misleading, in any material respect, and the financial statements reflect all elimination entries and normal adjustments that are necessary for a fair statement of the results for the three-months ended March 31, 2003. There have been no significant changes in the accounting policies of the Company during the periods presented. For a description of these policies, see Note 2 of the Notes to the Company’s Consolidated Condensed Financial Statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2002.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements. These estimates and assumptions will also affect the reported amount of certain revenues and expenses during the reporting period. Actual results could differ materially based on any changes in estimates and assumptions that the Company uses in the preparation of its financial statements.

     The Company is an industrial services and metals services company that provides industrial outsourcing, environmental services and metals services to major industry sectors throughout North America.

Note Regarding Anticipated Filing Pursuant to Chapter 11 of the Bankruptcy Code

     On April 10, 2003, the Company filed a Current Report on Form 8-K announcing its expectation that it would file for bankruptcy protection pursuant to Chapter 11 of the U.S. Bankruptcy Code. In addition, the report of KPMG LLP, the Company’s independent accountants, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 includes an explanatory paragraph that states that the expiration of the Company’s revolving operating facility on June 2, 2003, and the absence of a replacement revolving operating facility, raises substantial doubt about the Company’s ability to continue as a going concern.

     Although the date of filing for a bankruptcy proceeding is currently uncertain, it is probable that the Company will make such filing in the near future. The Company’s announcement and the qualified opinion of the Company’s independent accountants is adversely affecting the Company’s relationships with its creditors, vendors, customers, and others, and is adversely affecting the Company’s businesses.

     While determinations would ultimately be made by the Bankruptcy Court, there can be no assurance that that the Company’s common stockholders and unsecured lenders would receive any value in exchange for their interests in the Company in the event of a bankruptcy.

     Readers should consider the information contained in this quarterly report on Form 10-Q in this context.

Credit Facilities

     The Company operates under two credit facilities, the term loan and the revolving operating facility (see Note 9 of Notes to Consolidated Condensed Financial Statements). The revolving operating facility, which is senior to the term loan and provides day-to-day working capital for the Company, was scheduled to mature on April 8, 2003. Through a negotiated agreement, the revolving operating facility has been extended to June 2, 2003, subject to certain terms and fees described below.

     The Company is using the period of the extension to prepare to restructure its balance sheet and refinance its debt. It is anticipated that the restructuring will be effected through a proceeding under Chapter 11 of the Bankruptcy Code. To this end, the Company has

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retained bankruptcy counsel and restructuring advisors and is consulting with its significant stockholders, its lenders and its other advisors. Among other things, the Company is in discussions with its lenders concerning debtor-in-possession financing, although there can be no assurances that such financing will be available or obtained.

     Under the amendment of the revolving operating facility executed with the lenders as of April 8, 2003, the lending commitment under Tranche A of the facility was reduced from $100 million to $78 million. The capacity under other tranches is unchanged, and as a result, the total capacity of the facility is unchanged. In connection with the amendment, the Company has paid an aggregate fee of $100,000 to the lenders under Tranche B-Prime, which are, respectively, affiliates of the Company’s two largest stockholders, Carl C. Icahn and affiliates and Stephen Feinberg and affiliates.

Reclassification

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

(2)

Discontinued Operations (in thousands)

     For the three-months ended March 31, 2003 and 2002, the Company recognized before-tax income on discontinued operations of $8,775 and $7,525, respectively. The before-tax income on discontinued operations comprises the following:

	•		On March 2, 2003, the bulk of the businesses comprising the Company’s Project Services Division were sold to Fluor Enterprises, Inc. (“Fluor”) for proceeds of $21,200, of which $4,000 was in the form of a deferred payment obligation that requires $2,000 be paid to the Company on March 2, 2004 and the remaining $2,000 be paid to the Company on March 2, 2005. The working capital of these businesses of approximately $43,000, was retained by PSC. As a result of the sale, assets with a net book value of $9,416 were transferred to Fluor generating a $8,166 gain on the divestiture, net of transaction and other costs. The Company has recorded the results of operations for these businesses as discontinued on the Consolidated Condensed Statements of Earnings for the three-months ended March 31, 2003 and 2002. The businesses divested to Fluor generated revenue of approximately $55,217 and $108,572, and before-tax income from discontinued operations, including the aforementioned gain on sale of the Division’s assets, of $8,402 and $8,360 in the three-months ended March 31, 2003 and 2002, respectively.
	•		During the three-months ended March 31, 2003, certain assets of the Company’s Canadian Ferrous Division were sold for proceeds of $6,135, of which $2,000 was in the form of a deferred payment obligation. A gain on the divesture was recorded in the amount of $819. As such, the Company recorded the results of operations of the Canadian Ferrous Division as discontinued on the Consolidated Condensed Statements of Earnings and recorded the remaining assets of the division as “held for sale” on the March 31, 2003 Consolidated Condensed Balance Sheet. The Company’s Canadian Ferrous Division generated revenue of approximately $4,674 and $9,345 and before tax income from discontinued operations, including the aforementioned gain on sale of certain of the Division’s assets, of $373 and $368 in the three months ended March 31, 2003 and 2002, respectively.
	•		The impairment of assets ultimately sold during the 2002 fiscal year related to the Company’s Demolition and Decommissioning business resulted in a loss for the three-months ended March 31, 2002 of $2,804. These assets generated revenues of $1,910 and operating losses of $943 in the three-months ended March 31, 2002.
	•		The sale of certain assets during the three-months ended March 31, 2002, with a net book value of $2,930 generated a gain of $2,341. These assets generated revenues of $464 and operating income of $203 in the three-months ended March 31, 2002.

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(3)

Stockholders’ Deficit, Common Stock and Stock-based Compensation Plans (in thousands except share and per share amounts)

Stockholders’ Deficit and Common Stock

     The Company’s share capital comprised 27,884,283 shares of common stock at March 31, 2003.

Stock-based compensation

     The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) No. 25 “Accounting for Stock Issued to Employees,” and complies with the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock Based Compensation, Transition and Disclosure”. Under APB No. 25, compensation cost, if any, is recognized over the respective vesting period based on the difference on the date of grant, between the fair value of the Company’s common stock and the grant price. The Company accounts for stock-based awards to non-employees in accordance with SFAS No. 148, SFAS No. 123 and EITF 96-18. An expense is recognized for common stock or stock options issued for services rendered by non-employees based on the estimated fair value of the security exchanged.

     SFAS No. 148 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, Statement No. 148, acting as an update to Statement 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. 148.

     The Company has four stock-based compensation plans and one special stock option allotment as described further in Note 17 of the Notes to the Company’s Consolidated Financial Statements included in the Company’s Form 10-K for the fiscal year ended December 31, 2002. If compensation costs were measured using the fair value of the Company’s stock options on the date of grant, in accordance with SFAS No. 148, the Company would have recognized compensation costs for the three-months ended March 31, 2003, and 2002 in the manner exhibited in the below table.

     The compensation costs shown in the above table were calculated using the Black-Scholes option valuation model. The weighted average fair value of options granted during the three-month period ended March 31, 2003, was $0.01. Such valuation uses the following assumptions: (i) risk free interest rate of 2.78%, (ii) expected volatility of 1.00, (iii) expected option life of approximately 5 years and (iv) no annualized dividend yield. There were no options granted during the three-month period ended March 31, 2002, thus

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the additional compensation expense for this period shown in the above table relates only to compensation cost recognized over the option exercise periods related to previously granted awards.

     The Company has reserved 1,000,000 shares of common stock for issuance under its 2001 Officers’ Stock-Based Bonus Plan (“Officers’ Plan”). Under the Officers’ Plan, awards of restricted common stock, options to purchase shares of common stock, stock appreciation rights and/or phantom stock rights may be granted. Participation in the Officers’ Plan is limited to officers of the Company and its subsidiaries. Generally the awards vest evenly over a four-year period from the date of grant. As of March 31, 2003, 269,131 shares of restricted stock had been granted. Of these, 221,741 shares had been forfeited as of March 31, 2003, resulting in a net restricted stock issuance of 47,390 shares as of March 31, 2003.

     Under its 2001 Non-Employee Directors Restricted Stock Plan (“Directors Plan”), the Company has reserved 400,000 shares of common stock for issuance. Under the Directors Plan, shares of restricted common stock with a market value of twenty-five hundred dollars will be granted on the first business day of each fiscal quarter during the term of the Directors Plan to each non-employee director. One-quarter of the shares granted as of each grant date will vest on each of the first four anniversaries of such grant date except with respect to the initial grant of shares. As of March 31, 2003, 132,544 shares of restricted stock had been granted under the Directors Plan. Currently, because of the low stock price, the Board has elected to impose a price of fifty cents per share on the restricted shares granted under the restricted stock plans. Accordingly, each of the restricted stock grants by the Company since October 2002 has a market value of less than two thousand five hundred dollars.

(4)

Accounts Receivable (in thousands)

(5)

Other Current Assets (in thousands)

(6)

Property, Plant and Equipment (in thousands)

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(7)

Other Assets (in thousands)

(a)		The majority of the Company’s restricted investments are controlled by the Company’s wholly owned insurance subsidiary and totaled approximately $39,214 and $39,904 at March 31, 2003, and December 31, 2002, respectively. The insurance subsidiary’s restricted investments 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. At March 31, 2003, restricted investments controlled by the Company’s wholly owned insurance subsidiary comprise $28,728 of cash and cash equivalents and $10,486 in bonds with maturities from April 2003 through December 2007. At December 31, 2002, restricted investments controlled by the Company’s wholly owned insurance subsidiary comprise $29,855 of cash and cash equivalents and $10,049 in bonds with maturities from January 2003 through December 2007.
(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 of up to $2,000 for any one occurrence. To the extent that any insurance carrier is unable to meet its obligations under existing insurance policies, the Company could be liable for the defaulted amount. From time to time, other retention amounts apply because claims arise under policies of subsidiary, acquired or predecessor companies.
		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 Company’s 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 reserve to reflect the potential exposure pending further clarification of the liabilities by the courts. The reserve balance was $3,700 at March 31, 2003, and December 31, 2002.

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(b)

Accrued closure costs related to severance, lease and other restructuring costs are as follows:

		Additions and adjustments in 2002 have been recorded as Asset Impairment and Other Unusual Costs in the Consolidated Condensed Statements of Earnings (see Note 12).
(9)		Long-Term Debt (in thousands, except share and per share amounts)

(a)		Term Debt and Convertible Payment-In-Kind Debt
		As of March 31, 2000, the Company entered into its existing credit facility (the “Credit Facility”). Concurrently, the Company entered into the revolving operating facility, which initially provided for borrowings up to $175,000, subject to a borrowing base formula calculated on accounts receivable (the Credit Facility and revolving operating facility, together the “Existing Senior Debt”). 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 8.33% and 25.00% on the amount of the PIK debt being redeemed, excluding mandatory prepayments. The PIK debt is convertible by the lenders at any time into shares of common stock of PSC at an initial conversion price of $11.72 per share, which was in excess of the fair market value of PSC on a per share basis determined based upon an enterprise valuation. The carrying value of the term debt was $170,905 at March 31, 2003, and December 31, 2002.

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

	(i)		25% of the net asset-sale proceeds from the disposition of assets sold other than in the ordinary course of business after first paying off various tranches of senior debt and collateralizing letters of credit;
	(ii)		the net proceeds from any foreign subsidiary dispositions in excess of $1,000 annually.

		The Company was also required yearly for the first two years and quarterly thereafter to repay the term debt first and then the PIK debt in an amount equal to 75% of the cash flow available for debt service. Through March 31, 2003, no repayments have been required under this provision.
		The Existing Senior Debt contains cross-default provisions as well as certain restrictive covenant provisions, including limitations on the incurrence of indebtedness, the sale of assets, the incurrence of liens, the making of specified investments and the payment of cash dividends. In addition, the Company is required to satisfy, among other things, certain financial covenants, including specified amounts of EBITDA and maximum capital expenditures. At March 31, 2003, the Company was in compliance with the covenants under the Existing Senior Debt. However, the qualified opinion of the Company’s independent accountants for the Consolidated Financial Statements at December 31, 2002, constitutes an event of default (as defined in the credit agreements) under both the revolving operating facility and the Credit Facility. The Company received a waiver of this default from the lenders under each facility in connection with the extension of the revolving operating facility. Additionally, because the revolving operating facility expires on June 2, 2003, and because, at the date of this filing, the Company has not secured a replacement facility, the Company is unable to project compliance with its credit facilities through 2003. In the event the Company is unable to secure the replacement facility by June 2, 2003, and the revolving operating facility is not further extended, the Company will be unable to meet its obligations. This would result in an event of default under both the Credit Facility and the revolving operating facility. Upon the occurrence and continuation of an event of default, the Company’s lenders under the Credit Facility and revolving operating facility may, among other things, declare all obligations under such facility to be immediately due and payable. If an acceleration of the indebtedness under either of the facilities has occurred, an event of default will occur under the Company’s indentures with respect to the unsecured payment-in-kind-notes described below.
(b)		Unsecured Payment-in-Kind Notes
		On April 7, 2000, the Company issued an aggregate amount of $48,000 of unsecured payment-in-kind notes (“unsecured notes”). The unsecured notes mature on April 15, 2010 and bear interest at a fixed rate of 6%. The interest is payable semi-annually on April 15 and October 15, and can be paid up to April 15, 2005, in cash or additional unsecured notes, at the option of the Company. The Company had issued an additional $7,645 of unsecured notes as of March 31, 2003, 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. The unsecured notes were recorded at $43,864 and $42,679 at March 31, 2003, and December 31, 2002, respectively.
		On April 7, 2000, the Company issued an aggregate amount of $18,000 of unsecured convertible payment-in-kind notes (“unsecured convertible notes”). The unsecured convertible notes mature on April 15, 2020, and bear interest at a fixed rate of 3% starting April 15, 2003. The interest is payable semi-annually on April 15 and October 15. The unsecured convertible notes may be converted at any time into shares of common stock of PSC at an initial conversion price of $30 per share. If a change in control occurs, the Company is required to make an offer to purchase an amount of unsecured convertible notes equal to between 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. As of March 31, 2003, unsecured convertible notes with a face value of $721 had been converted into 23,996 shares of common stock pursuant to the terms of the indenture covering the unsecured convertible notes. The unsecured convertible notes were recorded at $6,183 and $6,019 at March 31, 2003, and December 31, 2002, respectively.

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The unsecured notes contain provisions whereby an acceleration under the existing senior debt causes a default under the unsecured notes. In addition, the existing senior debt contains provisions whereby a default under the unsecured notes causes a default under the existing senior debt.

(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. At March 31, 2003, the Company’s borrowing base formula limited the availability of the revolving operating facility to $146,539. The Company had undrawn capacity under the revolving operating facility of $21,751, net of borrowings of $33,053 and outstanding letters of credit of $91,735. The revolving operating facility was scheduled to mature on April 8, 2003 and has been extended to June 2, 2003.
		The Company is using the period of the extension to prepare to restructure its balance sheet and refinance its debt. It is anticipated that the restructuring will be effected through a proceeding under Chapter 11 of the Bankruptcy Code. To this end, the Company has retained bankruptcy counsel and restructuring advisors and is consulting with its significant stockholders, its lenders and its other advisors. Among other things, the Company is in discussions with its lenders concerning debtor-in-possession financing though there can be no assurances that such financing will be available or obtained.
		Under the amendment of the revolving operating facility executed with the lenders as of April 8, 2003, the lending commitment under Tranche A of the facility was reduced from $100,000 to $78,000. The capacity under other tranches is unchanged, and as a result, the total capacity of the facility is unchanged. In connection with the amendment, the Company has paid an aggregate fee of $100 to the lenders under Tranche B-Prime, which are, respectively, affiliates of the Company’s two largest stockholders, Carl C. Icahn and affiliates and Stephen Feinberg and affiliates.
		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 0.25% 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 annual fee of 10.075%.
		Under the revolving operating facility, the Company is required to pay an annual service/agency fee equal to $900 and a monthly loan servicing fee equal to $20 for Tranches A and B-Prime. The Tranche Sub-B Agency fee is $10 paid monthly. In addition, the Company is required to pay monthly an unused line of credit fee equal to 0.375%, 0.75% and 2.0% per annum on the average unused portion of Tranche A, Tranche B-Prime and Tranche Sub-B, respectively.
(d)		The various components of long-term debt described in Note 9 (the “Company’s Public Debt Instruments”) are financial instruments. The Company’s Public Debt Instruments were discounted from face value to their fair market value on March 31, 2000. As of December 31, 2000, the carrying value at that time approximated fair market value. Over the last few years, 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.
(10)		Other Liabilities (in thousands)

(a)

Asset retirement obligation represents discounted closure and post-closure costs associated with the Company’s landfill operations. The Company’s asset retirement obligation was determined based on its estimated fair value, which was measured on a present value basis, using a credit-adjusted, risk-free rate of 7.5% coupled with an inflation rate of 2.0%. Accretion

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		expense was and will continue to be added to the landfill retirement obligation using the effective interest method. All landfill retirement costs arising from closure and post-closure obligations were capitalized as part of the landfill asset and are being amortized using the Company’s existing landfill accounting practices. Accretion expense associated with the asset retirement obligation was $89 and spending against the asset retirement obligation was $14 for the three-month period ended March 31, 2003.
(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 are as follows:

(12)

Asset Impairment and Other Unusual Costs (in thousands)

     Asset impairments and other unusual costs for the three-month period ending March 31, 2002, are composed of the following:

     In the first quarter of 2002, the Company decided to close the corporate headquarters in Rosemont, Illinois and the corporate governance functions were moved to the shared service operations in Houston. Included in the unusual costs for the 2002 three-month period is $3,624 in cash cost for severance and other exit cost to be incurred at these locations. Twelve employees were terminated as a result of these restructurings. The Company also incurred costs in 2002 related to its PSC Way project which was a project designed to standardize business processes to allow it to operate more efficiently and share information and best practices. The total cash costs for the PSC Way initiative in the first quarter of 2002 were $1,845, of which $869 was capitalized to fixed assets and $976 is included in other unusual costs as process re-engineering costs. There were no asset impairments recorded during the three months ended March 31, 2002.

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(13)

Earnings Per Common Share (in thousands)

(14)

Comprehensive Loss (in thousands)

(15)

Related Parties (in thousands)

     The Company’s two largest stockholders, Carl C. Icahn and Stephen Feinberg, participate in the Company’s revolving operating facilities and the term debt and PIK facilities through entities they control. Mr. Icahn controlled approximately $185,090 and $182,515 of the Company’s total debt as of March 31, 2003, and 2002, respectively and was associated with approximately $4,949 and $3,635 in interest expense and fees for the three-month periods ending March 31, 2003, and 2002, respectively. Mr. Feinberg controlled approximately $101,277 and $90,336 of the Company’s total debt as of March 31, 2003, and 2002, respectively and was associated with approximately $2,736 and $1,303 in interest expense and fees for the three-month periods ending March 31, 2003, and 2002, respectively. In addition, entities controlled by these stockholders received shares of common stock in connection with the Company’s April 2002 mezzanine financing. Also, in connection with the April 2003 revolving operating facility amendment, a fee of $100 was paid to the lenders under Tranche B-Prime, which are, respectively, Carl C. Icahn and affiliates and Stephen Feinberg and affiliates.

     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 were approximately $0 and $660 for the three-month periods ending March 31, 2003, and 2002, respectively.

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(16)

Segmented Information (in thousands)

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

	•		The Industrial Services Group includes operations that perform industrial cleaning, maintenance, and environmental services.
	•		The Metals Services Group, whose primary operations include ferrous and non-ferrous scrap collection and processing, brokerage and transportation and on-site mill services.
	•		The Project Services Division includes operations that perform refractory, catalyst and union mechanical and turnaround services.