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