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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   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, 2000
                         Commission file number 0-20854

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

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

<TABLE>
<S>                                            <C>
                   DELAWARE                                      98-131394
(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)
</TABLE>

                                 (847) 685-9752
              (Registrant's Telephone Number, Including Area Code)
          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<S>                                            <C>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
---------------------------------------------- ----------------------------------------------
        Common Stock, $0.01 par value                      Nasdaq National Market
                                                           Toronto Stock Exchange
</TABLE>

     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. [X]

     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 March 26, 2001 was approximately $42,575,092 (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 March
27, 2001 was 24,041,946.

                      DOCUMENTS INCORPORATED BY REFERENCE
  PART III: INCORPORATES CERTAIN INFORMATION BY REFERENCE TO THE REGISTRANT'S
  DEFINITIVE PROXY STATEMENT TO BE FILED WITH RESPECT TO THE ANNUAL MEETING OF
                     STOCKHOLDERS TO BE HELD ON MAY 9, 2001
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                                     INDEX
                                  TO FORM 10-K

<TABLE>
<CAPTION>
10-K PART AND ITEM NO.                                                  PAGE NO.
----------------------                                                  --------
<S>        <C>                                                          <C>
                                     PART I
Item 1.    Business....................................................        1
Item 2.    Properties..................................................       12
Item 3.    Legal Proceedings...........................................       13
Item 4.    Submission of Matters to a Vote of Security Holders.........       15

                                    PART II
Item 5.    Market for Registrant's Common Equity and Related
             Stockholder Matters.......................................       16
Item 6.    Selected Financial Data.....................................       16
Item 7.    Management's Discussion and Analysis of Financial Condition
             and Results of Operations.................................       18
Item 7A.   Quantitative and Qualitative Disclosures About Market
             Risk......................................................       36
Item 8.    Financial Statements and Supplementary Data.................       37
Item 9.    Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure..................................       69

                                    PART III
Item 10.   Directors and Executive Officers of the Registrant..........       69
Item 11.   Executive Compensation......................................       69
Item 12.   Security Ownership of Certain Beneficial Owners and
             Management................................................       69
Item 13.   Certain Relationships and Related Transactions..............       69

                                    PART IV
Item 14.   Exhibits, Financial Statements Schedules and Reports on Form
             8-K.......................................................       69
</TABLE>

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.
<PAGE>   3

                                     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) By-Products Services Group; and
(iii) Metals Services Group. PSC employs approximately 11,400 people at over 200
locations across North America. The Company's operations are based primarily in
the United States.

     The Industrial Outsourcing Group provides industrial cleaning and
maintenance, mechanical services, piping and fabrication services, turnaround
and outage services, electrical contracting and instrumentation, decommissioning
and remediation services and paint booth cleaning and overspray recovery
services primarily to the refining, petrochemical, utilities, oil and gas, pulp
and paper, automotive and transportation industries. The By-Products Services
Group provides industrial by-product collection, recycling, processing and
disposal as well as analytical services, container and tank cleaning and
emergency response services primarily to the automotive, chemical, paint and
coatings, transportation, and aerospace industries, as well as to municipalities
and consulting and engineering firms. The Metals Services Group provides ferrous
and non-ferrous scrap collection and processing services, brokerage and
transportation services and on-site mill services, primarily to 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.

INFORMATION REGARDING OLDCO

     This Form 10-K contains information relating to Philip Services Corporation
and its subsidiaries, which has been prepared by management, and information
relating to 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. 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 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
and is unaudited. 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 United States Bankruptcy
Code with the United States Bankruptcy Court for the District of Delaware (the
"U.S. Court"). Oldco and substantially all of its wholly owned subsidiaries
located in Canada (the "Canadian Debtors") commenced proceedings under the
Companies' Creditors Arrangements Act in Canada in the Ontario Superior Court of
Justice (the "Canadian Court") on the same date.

     On November 26, 1999, the Canadian Court sanctioned the Plan of Compromise
and Arrangement (as amended, restated 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.

                                        1
<PAGE>   4

     Under the Plan, members of Oldco's secured credit facility received $250
million of senior secured term debt, $100 million of convertible secured
payment-in-kind debt and 91% of the shares of common stock of the Company. The
senior secured term 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 not to
exceed $18 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.

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 110 facilities and
approximately 7,600 employees. The Group has a significant presence in the
heavily industrialized regions of the Gulf Coast, Northeast, Southeast and
Southwest United States, and is headquartered in Sugarland, 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, 2000, 1999 and 1998.

     The Industrial Outsourcing Group primarily serves the refining,
petrochemical, utilities, oil and gas, pulp and paper, automotive, and
transportation 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, decommissioning and remediation services and paint booth
cleaning and overspray recovery services.

     Industrial cleaning and maintenance services include hydroblasting,
gritblasting, airmoving 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 prepare metal surfaces for protective coatings
and non-destructive testing. Air-moving and liquid vacuuming remove and handle
industrial wastes or salvageable materials contained in clients' tanks,
containers or other process configurations. Other services include
decommissioning and remediation services.

     PSC's turnaround and outage services provide refineries, petrochemical
facilities and power plants a single source vendor to meet their requirements
for large-scale scheduled maintenance projects. PSC has the
                                        2
<PAGE>   5

capability to conduct complex project planning and scheduling, and coordinate
the extensive workforce, vendors and technologies required for the scheduled
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. While large scale maintenance projects are predominantly scheduled
in the spring and fall, they are impacted by user demand in the petrochemical,
refining and utilities industries, as well as by other economic factors. For
this reason, large-scale maintenance projects have been rescheduled in the past,
and timing can be difficult to predict with certainty. Other services provided
include project management, planning and scheduling, decontamination, heat
exchanger maintenance, specialty welding, explosive deslagging, chemical
cleaning, catalyst maintenance, refractory and corrosion services and electrical
contracting and instrumentation services. The Group employs a core labor force
that is experienced and skilled as well as proprietary technologies that reduce
the downtime associated with turnaround and outage projects. These technologies
also reduce the safety risks associated with confined space entry, heat bundle
extraction and cleaning.

     The Industrial Outsourcing Group also provides integrated paint booth
management and paint overspray recovery services to automotive and parts
manufacturers that use paint spray booth systems. The Company's patented
Emulsion for Paint Overspray Control(TM) ("EPOC") system is installed at over 20
automotive and equipment manufacturing facilities in North America. The EPOC
system improves the efficiency of the painting process and reduces costs by
eliminating build up in the paint booth and decreasing paint usage. An economic
slowdown in general manufacturing industries, such as automotive, will
negatively impact revenue and profitability.

By-Products Services Group

     The By-Products Services Group provides industrial by-product collection,
recycling, processing and disposal as well as analytical services, container and
tank cleaning and emergency response services primarily to the automotive,
chemical, paint and coatings, transportation, and aerospace industries, as well
as to municipalities and consulting and engineering firms. The By-Products
Services Group employs approximately 2,100 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 By-Products
Services Group for the fiscal years ended December 31, 2000, 1999 and 1998.

     The By-Products 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' facilities 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 By-Products Services Group recovers value from organic chemical waste,
including the processing of 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 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 By-Products Services Group operates a network of environmental
laboratories, primarily based in Canada, from which it provides analytical
testing for its clients across North America. The Company plans to cross-sell
these analytical services to the Company's waste management clients and also to
more effectively 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

                                        3
<PAGE>   6

inadvertent release of dangerous or hazardous materials, and wastes or spills of
material that are unusual to the environment in quantity or quality.

     The By-Products Services Group also provides container and tank cleaning
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 clients' locations or at one of PSC's fixed tank wash
or intermodal bulk container cleaning facilities. The Company also operates
wastewater treatment facilities to manage wastes generated by these operations.
PSC is one of the largest independent operators of container and tank cleaning
facilities in North America.

     The current economic slowdown in general manufacturing industries, such as
the automotive industry, as well as high fuel and utility costs, impact revenue
and profitability in the Group.

Metals Services Group

     The Metals Services Group provides ferrous and non-ferrous scrap collection
and processing services, brokerage, transportation and on-site mill services, as
well as end-processing and distribution. 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 1,500 people at over 50 locations. The Group provides services to
the majority of 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,
2000, 1999 and 1998.

     The Metals Services Group is a major processor and broker of ferrous scrap
to steel mills and foundries. In 2000, the Company 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 Company's operations are regionally concentrated close to
industrial scrap producers, other suppliers and 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.

     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 customers to meet their raw material requirements.
In 2000, 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 is comprised of 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 manufacturers. The scrap is either
purchased from industrial generators or small retail accounts or recovered from
the Company's ferrous scrap operations.

     PSC 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 the first
quarter of 2001, four major customers of the Group filed for protection under
Chapter 11 of the
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<PAGE>   7

United States Bankruptcy Code. In the second half of 2000 and the first quarter
of 2001, scrap prices have been 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 $63.8 million as
at December 31, 2000 with all of the work anticipated to be completed in 2001.
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 By-Products 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 By-Products 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
shut downs in the summer months and December.

     Moreover, a general economic slowdown, as well as high fuel and utility
costs, 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 heat exchanger bundle extraction
technology; Fast Clean(TM), a semi-robotic heat exchanger bundle cleaning
process; and Life Guard(TM), a technology for decontaminating refinery towers
and vessels to reduce potential health and safety impacts during cleaning and
maintenance activities. PSC's EPOC(TM) paint overspray recovery system reduces
paint usage and supports alternatives to the landfilling of paint sludge.

     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.

                                        5
<PAGE>   8

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

<TABLE>
<CAPTION>
TECHNOLOGY                          APPLICATION                            INDUSTRY SERVED
----------                          -----------                            ---------------
<S>                                 <C>                                    <C>
Fast Draw(R).....................   Extraction of                          Petrochemical, hydrocarbon
                                    heat exchanger bundles                 processing

Fast Clean(TM)...................   Semi-robotic cleaning of               Petrochemical, hydrocarbon
                                    heat exchanger bundles                 processing

Life Guard(TM)...................   Decontamination of hydrocarbons        Petrochemical, hydrocarbon
                                    in refinery towers and vessels         processing
WeldSmart(TM)....................   Welding, heat treatment                All welding applications

EPOC(TM).........................   Paint overspray capture                Automotive and equipment
                                    and recovery                           manufacturers

Super Blender(TM)................   Processing of solid and liquid         Petrochemical, paint, automotive
                                    by-products into engineered fuels      cement
</TABLE>

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. Through these alliances, 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 are seeking to develop broad-based
relationships with their preferred suppliers. PSC also 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.

Industrial Outsourcing Group

     The Company has established a substantial base of clients that cross
industrial sectors. The Industrial Outsourcing Group places more emphasis on
retaining and broadening the range of services it provides to its existing large
industrial client base. The sales or operating personnel who have relationships
with clients identify opportunities to package and sell additional services. In
addition, to support many of its industrial services contracts, PSC dedicates
on-site personnel at its significant clients' facilities to manage the
relationship. These personnel have the opportunity to assess client needs and
offer additional services provided by the Company. The Group also participates
in competitive bidding processes to obtain contracts for its industrial
cleaning, turnaround and outage services.

By-Products Services Group

     The By-Products Services Group focuses on servicing 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 local governments or private
enterprise for services such as analytical services and industrial and household
hazardous waste management. Contracts are generally awarded on the basis of
sealed bids submitted by interested bidders and competition for these contracts
is generally intense.

Metals Services Group

     Within its brokerage business, the Metals Services Group employs account
representatives who are responsible for purchasing scrap from commercial and
industrial generators and selling the scrap to end-users, principally steel
mills. The Company has established relationships with scrap generators as well
as end-users.

                                        6
<PAGE>   9

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 national, regional and
local 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. In servicing
its customers, the Company believes its primary competitive strengths are: (i) a
broad range of integrated industrial services; (ii) broad geographic
capabilities; (iii) proprietary technologies; (iv) identification, development
and utilization of industry best practices; and (v) 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 sales with a broad range of services, or vertically integrates
its operations to provide multiple services to its customers at their plant
locations.

     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
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 industrial and metals services
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, industries 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. The total North American market for the
major industry sectors that PSC services, including aerospace, automotive,
electronics, petrochemical, oil and gas, petroleum refining, power, pulp and
paper and steel, is estimated at over $30 billion annually.

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 than the Company. Competition for industrial outsourcing services is
based primarily on hourly rates, productivity, safety, innovative approaches and
quality of service. The Industrial Outsourcing Group competes by providing a
highly experienced work force with specialized skills in the application of
technologies, by utilizing best practices, by integrating and offering multiple
services on a broad geographic basis, and by focusing on continuous improvement
in its health and safety record.

                                        7
<PAGE>   10

By-Products Services Group

     The hazardous waste management industry, which provides disposal services,
including incineration and hazardous waste landfills, competes with the
By-Products 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.

     The Company primarily concentrates on servicing the small to mid-size waste
generator market. The Company's network of waste processing and by-product
recovery facilities enables PSC to provide its clients with a competitive
alternative to conventional disposal. As the Company does not own any hazardous
waste end disposal facilities, it depends on obtaining competitive rates from
these facilities in order to provide its clients with competitive waste
management services.

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 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 Item 7, Capital
Expenditures in Management's Discussion and Analysis of Financial Condition and
Results of Operations, which appears elsewhere herein, 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 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 they can provide at such facilities and the location and
expansion of such facilities, (ii) impose liability for remediation and clean-up
of environmental contamination, including spills or releases of certain
industrial by-products and waste materials resulting from shipping of waste
off-site or past and present operations at the Company's facilities, and (iii)
may require financial assurance that funds will be available for the clean-up
and remediation or the closure and, in some cases, post-closure care of sites.
Such laws and regulations also require manifests to be completed and delivered
in connection with any shipment of prescribed materials so that the movement and
disposal of such material can be traced and the persons responsible for any
mishandling of such material identified.

                                        8
<PAGE>   11

     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 metals recovery and industrial services industry. Included
among them 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, 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 penalties.

     In the event that administrative actions fail to cure the perceived problem
or where the relevant regulatory agency so desires, an injunction or temporary
restraining order or damages may be sought in a court proceeding. In addition,
public interest groups, local citizens, local municipalities and other persons
or organizations may have a right to seek relief from court for purported
violations of law. In some jurisdictions recourse to the courts for individuals
under common law principles such as nuisance have been or may be enhanced by
legislation providing members of the public with statutory rights of action to
protect the environment. In such cases, even if an industrial by-products or
waste materials treatment, storage or disposal facility is operated in full
compliance with applicable laws and regulations, local citizens and other
persons and organizations may seek compensation for damages caused by the
operation of the facility.

     While, in general, the Company's businesses have benefited from increased
governmental regulation, the industrial and metals services industries in North
America have become subject to extensive and evolving regulation. The Company
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
metals 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 services and metals recovery 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 such equipment and facilities.
See Item 7, Capital Expenditures in Management's Discussion and Analysis of
Financial Condition and Results of Operations, which appears elsewhere herein,
for a discussion of the Company's estimated capital expenditures in relation to
environmental compliance matters. Moreover, it is

                                        9
<PAGE>   12

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 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.

     Such 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. 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 may in the future incur substantial
liabilities arising out of their respective past practices, including past
disposal practices.

     Certain of PSC's metal facilities and its transfer, storage, processing and
disposal facilities are environmentally impaired as a result of operating
practices at the sites, and site restoration costs 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 to remediate
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 expected site restoration or closure.
Estimated site restoration or closure 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. At
December 31, 2000, the total of these reserves was $55.5 million.

     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

                                        10
<PAGE>   13

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, included elsewhere
herein, for discussion of legal proceedings against the Company 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 PRP 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, 2000, PSC employed approximately 11,400 people. Of the
total employees, approximately 7,600 work in the Industrial Outsourcing Group,
approximately 2,100 work in the By-Product Services Group, approximately 1,500
work in the Metals Services Group, and approximately 200 work in shared
services/corporate.

                                        11
<PAGE>   14

ITEM 2.  PROPERTIES

     The Company currently operates from over 200 locations primarily in North
America. The Company believes that its primary existing facilities are
effectively utilized, well maintained and in good condition. The Company
believes that its facilities are adequate for its current needs and that
suitable additional space will be available as required.

     The Company's corporate office is located in Rosemont, Illinois and is
comprised of 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.

                          INDUSTRIAL OUTSOURCING GROUP

<TABLE>
<CAPTION>
OWNER                                  LOCATION                   NATURE OF SERVICES PROVIDED(1)
-----                                  --------                   ------------------------------
<S>                                    <C>                        <C>
PSC Industrial Outsourcing, Inc......  Detroit, Michigan          service depot
                                       Deerpark, Texas            service depot(2)
                                       Reserve, Louisiana         service depot(2)
                                       Baton Rouge, Louisiana     service depot
                                       Sand Springs, Oklahoma     service depot
</TABLE>

                           BY-PRODUCTS SERVICES GROUP

<TABLE>
<CAPTION>
OWNER                                  LOCATION                   NATURE OF SERVICES PROVIDED(1)
-----                                  --------                   ------------------------------
<S>                                    <C>                        <C>
Burlington Environmental Inc.........  Kansas City, Missouri      by-products collection, processing and transfer
                                       Seattle, Washington        by-products collection, processing and transfer
                                       Kent, Washington           by-products collection, processing and transfer
                                       Tacoma, Washington         by-products collection, processing and transfer
Nortru, Inc..........................  Detroit, Michigan          by-products collection, processing and transfer
RMF Global, Inc......................  Toledo, Ohio               by-products industrial services contracting(2)
Northland Environmental, Inc.........  Providence, Rhode Island   by-products collection, processing and transfer
Republic Environmental Systems
  (Pennsylvania), Inc................  Hatfield, Pennsylvania     by-products collection, processing and transfer
Philip Reclamation Services..........  Houston, Texas             by-products collection, processing and transfer
Philip Services Inc..................  Etobicoke, Ontario         by-products decommissioning service(2)
</TABLE>

                             METALS SERVICES GROUP

<TABLE>
<CAPTION>
OWNER                                 LOCATION                     NATURE OF SERVICES PROVIDED(1)
-----                                 --------                     ------------------------------
<S>                                   <C>                          <C>
PSC Metals Inc......................  Burns Harbor, Indiana        metals collection, processing and transfer(2)
                                      St. Louis, Missouri          metals collection, processing and transfer
                                      Beaver Falls, Pennsylvania   metals collection, processing and transfer
                                      Nashville, Tennessee         metals collection, processing and transfer(2)
                                      Memphis, Tennessee           metals collection, processing and transfer(2)
                                      Chattanooga, Tennessee       metals collection, processing and transfer
                                      Harriman, Tennessee          metals collection, processing and transfer
                                      Knoxville, Tennessee         metals collection, processing and transfer(2)
                                      Cleveland, Ohio              metals collection, processing and transfer(2)
                                      Canton, Ohio                 metals collection, processing and transfer(2)
                                      Mansfield, Ohio              metals collection, processing and transfer
                                      Birmingham, Alabama          metals collection, processing and transfer(2)
Philip Metals Recovery (USA) Inc....  Painesville, Ohio            metals collection, processing and transfer(2)
Philip Services Inc.................  Hamilton, Ontario            metals collection, processing and transfer
</TABLE>

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

(2) Leased facility.

                                        12
<PAGE>   15

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. The Company has conducted a review of the allegations and determined that
it is not feasible to predict the final outcome of the proceedings or what
portion of any Company liability in the proceeding will be covered by applicable
insurance policies or recovery against other parties.

     On April 14, 2000, Maxus Energy Corporation et al. ("Maxus") commenced an
action in the United States District Court for the Northern District of Ohio
against various parties, including Philip Metals Recovery (USA), Inc. ("PMR"),
an indirect wholly owned subsidiary of PSC. The action was brought under CERCLA
for the recovery of past response costs relating to the releases and threatened
releases of hazardous substances at the Diamond Shamrock superfund site located
in Painesville, Ohio. The plaintiffs allege that they have incurred more than
$19.5 million in response costs in connection with the site. The site is
approximately 1,100 acres in size, and, since July 1996, PMR has operated a
secondary aluminum smelter on approximately 24 acres of property within the
site. The Company has conducted a preliminary review of the claims made in the
action and determined that it is not feasible to predict the final outcome of
the proceedings.

     On June 6, 2000, a lawsuit was filed in the United States District Court
for the Eastern District of Texas against SECO, Inc. ("SECO"), an indirect
wholly owned subsidiary of PSC, by a former employee of SECO for unpaid overtime
wages under the Fair Labor Standards Act ("FLSA"). The plaintiff alleges that
SECO knowingly attempted to artificially characterize a portion of the hourly
wage rate as "per diem" reimbursement, thereby reducing the hourly rate for
purposes of calculating overtime pay. The court has ruled that the case will
proceed as an FLSA "collective action." The Company is currently reviewing the
potential exposure in this case based upon the possibility of a national class
of claimants.

     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 allege negligence on the part of RMI and the Company in the removal
of sodium from the filter on RMI's premises. Plaintiffs are seeking actual and
punitive damages and their attorneys are applying 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 has demanded
indemnification from PSC under the terms of the contract pursuant to which the
work was performed. The Company has a retained liability of $2.1 million before
insurance coverage is available. The Company has conducted a preliminary review
of the claims made in the action and determined that it is not feasible to
predict the final outcome of the proceedings.

     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
("Preferred Remedy") is expected to be the final remedy to be followed by
post-closure monitoring for approximately 30 years. Ecology presented the
parties with draft agreed orders in June 2000 covering two separate scopes of
work. One scope of work relates to the closure and post-closure monitoring of
the sanitary landfill portion of the site. The other scope of work covers the
remediation and monitoring of the industrial waste burial zones. Cooperating
PLPs, including the Company, have executed the agreed orders. The Company has
reached agreement with the industrial waste area generator PLPs with respect to
funding allocation for remediation of all but one of the industrial waste zones.
The Company has also entered into negotiations with the sanitary landfill PLPs,
including certain municipalities that may have access to grant funding for the
closure of the landfill. Preferred Remedy activities are expected to commence in
2001. The cost of cleanup is estimated to be in the range of $14-17 million. The
Company's share of such costs cannot

                                        13
<PAGE>   16

be definitively determined at this time, but preliminary estimates indicate that
the Company may be liable for more than 50% of such costs. The Company is
investigating whether insurance coverage may be available 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, 2000, the Company has accrued its estimate of the
liability to remediate these sites at $21.3 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 January 16, 1997, the State of Missouri and the Missouri Department of
Natural Resources ("MDNR") brought an enforcement action against Solvent
Recovery Company ("SRC"), an indirect wholly owned subsidiary of PSC, in Jackson
County Circuit Court alleging numerous violations of hazardous waste regulations
at SRC's Kansas City, Missouri facility. Included in the complaint were
allegations that alterations or additions to the facility's operations had been
implemented without required modification of the facility's hazardous waste
permit, as well as allegations of numerous deficiencies under regulations and
SRC's permit in the accumulation of, record keeping for, and inspection,
labeling, transportation and handling of such waste. The parties reached a
settlement under which the Company paid $225,000, with a payment of an
additional $125,000 if the facility did not remain in compliance with applicable
federal and state environmental standards for three years. The MDNR inspected
the facility in September and December 2000, reported numerous violations and
subsequently imposed an additional fine of $4,600. MDNR has indicated that
additional fines may be expected. On February 1, 2001, an explosion and fire
occurred at the facility. Although considerable property damage occurred, only
minor personal injuries were reported. The Company has undertaken an
investigation, but it is too early to determine a probable cause. It is likely
that governmental authorities will seek to impose some type of sanctions under
environmental or other laws for this event. No claims have been asserted at this
time, and the Company is unable to predict the nature or amount of such claims
if asserted.

     On December 21, 2000, an action was commenced in the United States District
Court for the Southern District of Texas against Chemical Reclamation Services,
Inc. ("CRS") and PSC alleging that faulty equipment on a tank car utilized by
CRS to dispose of waste paint and solvent caused a spill of waste material. The
plaintiff alleges that the spill, which occurred in 1999, resulted in more than
$1.4 million in costs for emergency removal action and subsequent environmental
evaluation of the spill site. This case is in an early stage and at this time,
the Company is unable to predict its potential exposure.

     The New York Attorney General's office has conducted a criminal
investigation into the environmental practices of PMR at a recycling facility in
Orangeburg, New York. The Attorney General alleged that PMR improperly disposed
of lead-contaminated floor sweepings, improperly handled lead sludges and
improperly discharged lead contaminated waste water at the facility. Although
the Company disputes certain of the allegations, the Company reached a
settlement with the Attorney General in which the Company will plead guilty to a
misdemeanor and pay a fine of $250,000. In addition, the Company will contribute
$750,000 for the purchase of parkland in the State of New York as a
supplementary environmental project. These costs were recorded in the results
from discontinued operations in the Statement of Earnings for the nine months
ended December 31, 2000.

     On March 22, 2000, the EPA filed a Compliant and Proposed Compliance Order
again 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.

                                        14
<PAGE>   17

     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.

                                        15
<PAGE>   18

                                    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 the high
and low sale prices per share of the Company's common stock as reported by
Nasdaq.

<TABLE>
<CAPTION>
                                                             PRICE RANGE OF
                                                              COMMON STOCK
                                                                 NASDAQ
                                                             --------------
                                                             HIGH      LOW
                                                             -----    -----
<S>                                                          <C>      <C>
2000
Second quarter (from May 22).............................    7.00     6.00
Third quarter............................................    6.75     4.06
Fourth quarter...........................................    4.19     2.56
</TABLE>

     On March 26, 2001, the last reported per share sale price on Nasdaq was
$3.38. At March 26, 2001, there were 24,041,946 shares of common stock
outstanding and held of record by approximately 1,140 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
President and CEO of the Company in exchange for a payment of $249,998 in cash
made May 4, 2000. Such shares were issued and sold in reliance upon Section 4(2)
of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.

ITEM 6.  SELECTED FINANCIAL DATA

     The Consolidated Financial Statements herein contain information relating
to Philip Services Corporation ("PSC") and its subsidiaries (collectively the
"Company"), which has been prepared by management, and information relating to
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. 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

                                        16
<PAGE>   19

stockholders of PSC and has therefore included such information in this
document. The unaudited consolidated financial information of the Predecessor
Company does not reflect the effects of the application of fresh start reporting
and has been compiled by PSC in accordance with generally accepted accounting
principles in the United States of America and reflects all adjustments
(consisting of normal recurring adjustments except for those required as a
result of bankruptcy proceedings) which were necessary for the fair statement of
operating results, financial condition and cashflows for the periods presented.
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.

     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.

     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.
($ in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                      |                         PREDECESSOR COMPANY
                                                      |  ------------------------------------------------------------------
                                    NINE MONTHS ENDED |   THREE MONTHS                 YEARS ENDED DECEMBER 31,
                                      DECEMBER 31,    |  ENDED MARCH 31,   ------------------------------------------------
                                          2000        |       2000            1999         1998          1997        1996
                                    ----------------- |  ---------------   ----------   -----------   ----------   --------
<S>                                 <C>               |  <C>               <C>          <C>           <C>          <C>
STATEMENT OF EARNINGS DATA:                           |
Revenue...........................     $1,156,107     |    $  480,386      $1,621,101   $ 2,409,677   $1,386,628   $342,696
Operating expenses................      1,017,322     |       419,094       1,462,348     2,146,677    1,145,144    272,102
Special charges...................         17,117     |            --              --     1,109,877      135,466         --
Selling, general and                                  |
  administrative costs............        101,883     |        37,043         177,919       269,594      108,842     51,242
Depreciation and amortization.....         34,914     |        12,436          53,786        97,229       54,386     22,743
                                       ----------     |    ----------      ----------   -----------   ----------   --------
Income (loss) from operations.....        (15,129)    |        11,813         (72,952)   (1,213,700)     (57,210)    (3,391)
Interest expense..................         29,126     |           952          52,774        76,432       35,787     13,119
Other income and expense-net......         (5,195)    |        (9,598)         (3,772)       (1,648)     (14,334)    (1,790)
                                       ----------     |    ----------      ----------   -----------   ----------   --------
Earnings (loss) from continuing                       |
  operations before tax and                           |
  reorganization costs............        (39,060)    |        20,459        (121,954)   (1,288,484)     (78,663)   (14,720)
Reorganization costs..............             --     |        20,607         164,205            --           --         --
Income taxes......................          4,175     |           856          (5,616)       41,443      (17,638)   (10,232)
                                       ----------     |    ----------      ----------   -----------   ----------   --------
Loss from continuing operations...     $  (43,235)    |    $   (1,004)     $ (280,543)  $(1,329,927)  $  (61,025)  $ (4,488)
                                       ==========     |    ==========      ==========   ===========   ==========   ========
Basic and diluted loss per share-                     |
  continuing operations...........     $    (1.80)    |    $    (0.01)     $    (2.14)  $    (10.14)  $    (0.69)  $  (0.09)
Weighted average number of shares                     |
  of common stock outstanding                         |
  (000s)..........................         24,037     |       131,144         131,144       131,130       88,191     50,073
BALANCE SHEET DATA: (END OF                           |
  PERIOD)                                             |
Working capital (deficiency)......     $  174,702     |    $  233,995      $  236,254   $  (772,168)  $  364,739   $139,326
Total assets......................        722,549     |       867,755         861,579     1,098,857    2,650,641    812,299
Total debt including current                          |
  maturities......................        347,270     |     1,152,036       1,153,653     1,097,546      983,398    297,836
Stockholders' equity (deficit)....         70,582     |      (644,725)       (641,133)     (393,125)   1,216,941    379,010
OTHER DATA:                                           |
Amortization......................             --     |            --             557        32,273       16,393      7,650
Depreciation......................         34,914     |        12,436          53,229        64,956       37,993     15,093
Additions to property, plant and                      |
  equipment.......................         41,197     |         8,403          29,313        59,053       62,366     41,016
</TABLE>

                                        17
<PAGE>   20

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

INTRODUCTION

     PSC is an industrial and metals services company operating in three
segments: (i) the Industrial Outsourcing Group; (ii) the By-Products Services
Group; and (iii) the Metals Services Group. PSC employs approximately 11,400
people at over 200 locations across North America. The Company's operations are
based primarily in the United States. For geographical information, see Note 21
to the Consolidated Financial Statements appearing elsewhere herein.

     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,
decommissioning and remediation services and paint booth cleaning and overspray
recovery services. The Industrial Outsourcing Group primarily services the
refining, petrochemical, utilities, oil and gas, pulp and paper, automotive and
transportation industries.

     The By-Products Services Group provides industrial by-product collection,
recycling, processing and disposal and analytical services, container and tank
cleaning and emergency response services primarily to the 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. 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, 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 ("PSC") and its subsidiaries (collectively the
"Company"), which has been prepared by management, and information relating to
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. 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 and is unaudited. 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 lines of business as the
Predecessor Company with the exception of the UK Metals business, which was sold
on April 7, 2000.

                                        18
<PAGE>   21

     To facilitate a comparison of the Company's operating performance in fiscal
2000, the following discussion of results of operations compares the combined
consolidated financial results for the year 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, with the Predecessor
Company's results of operations for the years ended December 31, 1999 and 1998.
Consequently, the fiscal 2000 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.

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

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                        -----------------------------------------------------
                                             2000               1999               1998
                                        ---------------   ----------------   ----------------
<S>                                     <C>        <C>    <C>         <C>    <C>         <C>
Revenue..............................   $1,636.5   100%   $ 1,621.1   100%   $ 2,409.7   100%
Operating expenses...................    1,436.4    88%     1,462.3    90%     2,146.7    89%
Special charges......................       17.1     1%          --     --     1,109.9    46%
Selling, general and administrative
  costs..............................      138.9     8%       177.9    11%       269.6    11%
Depreciation and amortization........       47.4     3%        53.8     3%        97.2     4%
                                        --------   ----   ---------   ----   ---------   ----
Loss from operations.................       (3.3)    --       (72.9)   (4%)   (1,213.7)  (50%)
Interest expense.....................       30.1     2%        52.8     3%        76.4     3%
Other income and expense-net.........      (14.8)   (1%)       (3.8)    --        (1.6)    --
                                        --------   ----   ---------   ----   ---------   ----
Loss from continuing operations
  before tax and reorganization
  costs..............................      (18.6)   (1%)     (121.9)   (7%)   (1,288.5)  (53%)
Reorganization costs.................       20.6     2%       164.2    10%          --     --
Income taxes.........................        5.0     --        (5.6)    --        41.4     2%
                                        --------   ----   ---------   ----   ---------   ----
Loss from continuing operations......      (44.2)   (3%)     (280.5)  (17%)   (1,329.9)  (55%)
                                        ========   ====   =========   ====   =========   ====
</TABLE>

EARNINGS FROM CONTINUING OPERATIONS

     For the year ended December 31, 2000, the combined results of the Company
and the Predecessor Company resulted in a loss from continuing operations of
$44.2 million or $1.84 per share. This compares to a loss for the Predecessor
Company of $280.5 million from continuing operations for the year ended December
31, 1999 and a loss for the Predecessor Company from continuing operations of
$1,329.9 million for the year ended December 31, 1998.

     The results of operations for the years ended December 31, 2000 and 1998
were impacted by special charges recorded amounting to $17.1 million and
$1,209.1 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 charges, the results from continuing operations were a
loss of $6.5 million or $0.27 per share for the year ended December 31, 2000, a
loss of $116.3 million for the year ended December 31, 1999 and a loss of $120.8
million for the year ended December 31, 1998.

                                        19
<PAGE>   22

OPERATING RESULTS

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

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31, 2000
                                       ---------------------------------------------------------------
                                                                                 SHARED
                                       INDUSTRIAL    BY-PRODUCTS    METALS     SERVICES &
                                       OUTSOURCING    SERVICES     SERVICES   ELIMINATIONS     TOTAL
                                       -----------   -----------   --------   ------------   ---------
<S>                                    <C>           <C>           <C>        <C>            <C>
Revenue.............................     $ 682.9       $274.0      $  679.6     $    --      $ 1,636.5
Income from operations..............        25.0         11.8          13.3       (53.4)          (3.3)
Income from operations before
  special charges...................        32.0         13.0          13.3       (44.5)          13.8
</TABLE>

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31, 1999
                                       ---------------------------------------------------------------
                                                                                 SHARED
                                       INDUSTRIAL    BY-PRODUCTS    METALS     SERVICES &
                                       OUTSOURCING    SERVICES     SERVICES   ELIMINATIONS     TOTAL
                                       -----------   -----------   --------   ------------   ---------
<S>                                    <C>           <C>           <C>        <C>            <C>
Revenue.............................     $ 646.0       $266.1      $  709.0     $    --      $ 1,621.1
Income (loss) from operations.......       (13.6)         4.2           2.5       (66.1)         (73.0)
</TABLE>

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31, 1998
                                       ---------------------------------------------------------------
                                                                                 SHARED
                                       INDUSTRIAL    BY-PRODUCTS    METALS     SERVICES &
                                       OUTSOURCING    SERVICES     SERVICES   ELIMINATIONS     TOTAL
                                       -----------   -----------   --------   ------------   ---------
<S>                                    <C>           <C>           <C>        <C>            <C>
Revenue.............................     $ 825.2       $301.1      $1,283.4     $    --      $ 2,409.7
Loss from operations................      (412.1)       (48.1)       (516.0)     (237.5)      (1,213.7)
Income (loss) from operations before
  special charges...................        37.4          8.3          (2.4)      (86.1)         (42.8)
</TABLE>

Industrial Outsourcing Group

     Revenue from the Industrial Outsourcing Group increased by $36.9 million
for the year ended December 31, 2000 when compared with the same period in the
prior year. This increase was due to an increase in critical-path services,
including refinery turnarounds and utility outage services, as well as due to a
large contract in the electrical instrumentation operations that had been
ongoing since the fall of 1999 and which 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. Revenue for the year ended December 31, 1999
decreased by $179.2 million when compared to 1998. This decrease was the result
of the sale of BEC, the closure of operations and the financial instability of
the Predecessor Company due to its reorganization filings as customers were
reluctant to enter into service agreements until the financial uncertainty was
resolved.

     Income (loss) from operations before special charges as a percentage of
revenue was 4.7%, (2%), and 4.5% for the years ended December 31, 2000, 1999 and
1998, respectively. The increase in 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 all contributed to the
improvement in performance in 2000. In the latter part of 2000, the slowdown in
the economy began to impact revenue and profitability of the Industrial
Outsourcing Group. Scheduling of large maintenance projects handled by the
Industrial Outsourcing Group, including turnaround and outage services, which
are typically scheduled in the fall and spring months, are in some cases either
being delayed or rescheduled by customers. This trend may continue into 2001. In
addition, economic slowdowns in the automotive industry are likely to negatively
impact revenue and profitability in 2001. During 1999, the

                                        20
<PAGE>   23

Predecessor Company was operating in an environment of financial instability
that resulted in difficult market conditions and competitive pressures on
pricing. The decrease in income (loss) from operations in 1999 when compared to
1998 was the result of the closure and sale of operations and the reorganization
filings of the Predecessor Company.

By-Products Services Group

     Revenue from the By-Products Services Group increased by $7.9 million for
the year ended December 31, 2000 when compared to the same period in 1999. The
Company believes that the revenue improvement was due to improvements in market
conditions in 2000, the closure of unprofitable locations, 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 revenue decrease of $35.0
million in fiscal 1999 when compared to fiscal 1998 was due to the Predecessor
Company's reorganization filings as noted above as well as the closure of
several unprofitable locations during 1998.

     Income from operations before special charges as a percentage of revenue
was 4.7% for the year ended December 31, 2000 compared with 1.6% for the year
ended December 31, 1999 and 2.8% for the year ended December 31, 1998. This
increase in 2000 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
the automotive and transportation sectors, negatively impacted revenues and
profitability in the fourth quarter of 2000. High utility and fuel costs also
impacted the profitability of the fourth quarter. These impacts are expected to
continue into the first quarter of 2001. The decrease in income from operations
in 1999 when compared with 1998 was due to the reorganization filings of the
Predecessor Company.

Metals Services Group

     Revenue from the Metals Services Group decreased by $29.4 million for the
year ended December 31, 2000 when compared to the year ended December 31, 1999.
This decrease was the result of lower volumes and scrap prices which decreased
by an average of 31% during 2000 and the sale of the UK Metals business in April
2000. 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. The decrease in revenue
of $574.4 million for the year ended December 31, 1999 when compared to the same
period in 1998 was also due to lower volumes and sale prices for scrap, largely
attributable to reduced shipments of domestic scrap material to Asian markets
and higher imports, causing an oversupply in North America. The Metals Services
Group also sold its steel distribution business in July, 1998, which accounts
for $88.0 million of the decrease in revenue. In addition, throughout 1999,
volumes were adversely impacted by the negative financial situation of the
Predecessor Company as scrap generators were reluctant to provide scrap other
than on a C.O.D. basis.

     Income from operations before special charges as a percentage of revenue
was 2.0% for the year ended December 31, 2000 compared to 0.4% for the year
ended December 31, 1999 and 0% for the year ended December 31, 1998. This
increase in 2000 was due to improved inventory control, as well as consolidation
and cost reduction initiatives. The income from operations for 2000 was reduced
by $5.9 million, due to the fact that three major customers of the Group filed
for protection under Chapter 11 of the United States Bankruptcy Code in the
fourth quarter of 2000 and the first quarter of 2001. In addition, another major
customer of the Group filed for protection under Chapter 11 of the United States
Bankruptcy Code in the first quarter of 2001, which had no effect on the year
end results but will impact the 2001 first quarter results. 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 2000 and this trend is continuing into 2001. The increase in
the income from operations in 1999 when compared to 1998 was due to cost
reduction initiatives that included the closure of certain unprofitable
operations.

                                        21
<PAGE>   24

Shared Services and Eliminations

     Shared services and eliminations includes the administrative costs of the
shared service operations, the retained liabilities of the Company's captive
insurance company and other non-operating entities. The loss from operations 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 more severe
self insured incidences. The loss from operations for the year ended December
31, 1999 includes $13 million in professional fees incurred prior to the filing
of the Plan and Year 2000 costs of $7 million. Subsequent to the filing of the
Plan, these costs were included in reorganization costs. After excluding the
excess insurance costs, the professional fees and year 2000 costs, the loss from
operations before special charges for fiscal 2000 decreased by $10.4 million or
23% compared to fiscal 1999 due to cost reduction efforts.

     The loss from operations before special charges for the 1999 fiscal year
decreased by $20.2 million when compared to fiscal 1998. Professional fees of
$13 million and $14 million were included the loss from operations in 1999 and
1998, respectively. The closure of certain redundant corporate office locations
and reductions in corporate staff contributed to the remainder of the decrease
in 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 the
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 $6.1 million, $74.7 million and
$492.4 million for the years ended December 31, 2000, 1999, and 1998,
respectively.

DIVESTITURES

     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, $81.2 million and $88.1 million and income (loss) from operations of
$2.4 million, $3.5 million and $(2.2) million in 2000, 1999 and 1998,
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 $70
million and income (loss) from operations of $(0.8) million and $4.5 million in
1999 and 1998, respectively.

     On July 7, 1998, Oldco's Houston, Texas based steel distribution business
was sold for cash proceeds of $95 million, resulting in a gain on sale of
approximately $17 million. This business, which was part of the Metals Services
Group, generated revenue of $88.0 million and income from operations of $12.7
million in 1998.

                                        22
<PAGE>   25

SPECIAL CHARGES

2000

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

<TABLE>
<S>                                                             <C>
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
                                                                =======
</TABLE>

     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 2000 were $8.6 million, of
which $3.2 million was capitalized to property, plant and equipment and $5.4
million is included in special charges as process re-engineering costs. The PSC
Way initiative will continue into 2001 with additional cash costs expected of
approximately $15 million, including severance costs.

     In the fourth quarter of 2000, the Company also 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 is in the process of selling or winding down these
operations, and it is likely that additional costs will be incurred.

     The Company has also made the decision to close and/or consolidate several
locations including the consolidation of the previous three business segments,
Industrial Outsourcing Services, By-Products Management and Specialty Businesses
into the Industrial Outsourcing Group and the By-Products Services Group.
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 are being terminated as a result of these
restructurings. At December 31, 2000 $5.5 million remained for severance
accruals and other exit costs. As locations are continually being evaluated, it
is possible that further special charges will be recorded in 2001.

1998

     The following table summarizes the special charges for continuing
operations recorded by the Predecessor Company and identifies where they are
disclosed in the Consolidated Statements of Earnings: ($ in thousands)

<TABLE>
<S>                                                             <C>
Asset impairments and other costs recorded as special
  charges...................................................    $1,109,877
Costs recorded as selling, general and administrative
  costs.....................................................        61,014
Writedowns of investments recorded as other income and
  expenses..................................................        38,250
                                                                ----------
Pre-tax.....................................................    $1,209,141
                                                                ==========
After tax...................................................    $1,209,141
                                                                ==========
</TABLE>

                                        23
<PAGE>   26

Asset impairments and other costs recorded as special charges

     For the year ended December 31, 1998, the Predecessor Company recorded a
charge of $1.1 billion reflecting the effects of (i) decisions made with respect
to the potential disposition of certain operations, (ii) impairments of
property, plant and equipment and related goodwill resulting from decisions to
exit various business locations or activities and dispose of the related assets,
and (iii) assessments of the recoverability of property, plant and equipment and
the related goodwill of business units in continuing use as a result of the
significant deterioration in the metals markets and business operations of the
Predecessor Company during 1998.

     The Predecessor Company reviewed its long-lived assets and intangibles such
as goodwill, to assess whether the events and changes in circumstances described
in the Financial Condition section indicated that the carrying amounts of assets
may not be recoverable. In making these estimates, management utilized the
assessments, calculations and determinations made in preparing the plan of
reorganization filed with the appropriate courts in Canada and the United
States, including estimates of overall enterprise value. Where the
reorganization plan or estimates of enterprise value raised doubts as to the
recoverability of the assets, management estimated the future cash flows from
the asset and its eventual disposition. If these estimates of future cash flow
did not provide a reasonable level of assurance as to the recoverability of the
carrying value of the asset, the carrying value was written down to its
estimated recoverable amount.

     All businesses assessed for asset impairment were acquired in purchase
business combinations and, accordingly, the goodwill that arose in the
transactions was included in the tests for recoverability. Assets to be disposed
of were valued at their estimated net realizable value while the value of the
assets of the business units to be continued were assessed at fair value
principally using discounted cash flow methods using a discount rate of
approximately 12%.

     Special and non-recurring charges relate to the impairment of property,
plant and equipment and related goodwill and comprise the following: ($ in
thousands)

<TABLE>
<S>                                                             <C>
Business units, locations or activities to be exited:
  Goodwill written off......................................    $   40,000
  Fixed assets written down to estimated net realizable
     value of $6,500........................................        18,863
  Future lease and other exiting costs......................        24,254
Business units, locations or activities to be continued:
  Goodwill impairment.......................................       951,660
  Property, plant and equipment written down to estimated
     net realizable value of $99,816........................        52,360
  Other intangibles impairment..............................        22,740
                                                                ----------
                                                                $1,109,877
                                                                ==========
</TABLE>

Costs recorded as selling, general and administrative costs

     Included in selling, general and administrative costs in 1998 are costs of
$28.0 million relating to charges for financing fees and debt restructuring
costs. Deferred financing costs that were previously amortized over the life of
the syndicate debt were written off as the existing syndicate debt was replaced.
The Predecessor Company's financial position, its planned divestitures,
litigation with debtors, unexpected financial difficulties of certain customers
and a general deterioration in market conditions necessitated recording an
additional provision for doubtful accounts of $25.0 million. The remainder of
the special charges recorded in selling, general and administrative costs
related to severance payments and other costs resulting from ongoing cost
reduction measures and restructuring.

Writedowns of investments recorded as other income and expenses - net

     The Predecessor Company's 24.2% investment in Innovative Valve Technologies
Inc. ("Invatec"), was accounted for using the equity method of accounting.
Invatec is a publicly traded company that provides

                                        24
<PAGE>   27

comprehensive maintenance, repair, replacement and value-added distribution
services of industrial valves and process system components. The reduction in
carrying value of $25 million recognized a potentially long-term impairment in
value that was reflected by the then-current market performance of Invatec's
shares. In 1999, the Predecessor Company sold the investment.

     The Predecessor Company's investment in Strategic Holdings Inc., which was
accounted for at cost, was divested in 1998 for less than its original book
value. Accordingly, a writedown of the investment of $13.3 million was recorded
in 1998 as part of "Other income and expense - net."

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 $138.9 million or 8.5% of
revenue in fiscal 2000 compared to $177.9 million or 11.0% 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.

     Selling, general and administrative costs decreased by $91.7 million or
34.0% in fiscal 1999 when compared to fiscal 1998. This decrease was
attributable to sales and closures of operations, cost reduction initiatives and
the inclusion of $61.0 million of special charges discussed above.

DEPRECIATION AND AMORTIZATION

     Depreciation and amortization of property, plant and equipment in 2000 was
$47.4 million, representing a decrease of $6.4 million or 11.9% over 1999. This
decrease was due to the write-offs of property, plant and equipment during 1999
as part of the Predecessor Company's reorganization and due to reduced capital
expenditures during 1999 and 2000.

     Depreciation and amortization of property, plant and equipment in 1999 was
$53.8 million, a decrease of $43.4 million over 1998. This decrease was due
primarily to the special charge recorded in 1998, which included the write-off
of property, plant and equipment and goodwill.

INTEREST EXPENSE

     Interest expense in 2000 was $30.1 million, representing a decrease of
$22.7 million or 43% over 1999. This decrease was due to the Predecessor
Company's reorganization which resulted in syndicate debt of $1 billion being
reduced to $235.8 million of senior secured term debt and $100 million of
convertible secured payment-in-kind debt. Although the Predecessor Company
suspended payments of interest under the syndicate debt in November 1998, all
amounts owing were expensed and included in the balance of the bank term loan
through the date of filing of the Plan.

     Aggregate interest expense in 1999 was $52.8 million or $23.6 million less
than 1998. Interest on the syndicate debt ceased to accrue as of the filing
date, June 25, 1999, which resulted in the decrease in interest expense.

                                        25
<PAGE>   28

OTHER INCOME AND EXPENSE - NET

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

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

     Other income and expense - net for the year ended December 31, 1998
consists primarily of a net gain of $17.2 million before tax on the sale of the
steel distribution business, writedowns on investments of $38.3 million
described in Special charges and net proceeds on the termination of the merger
agreement to acquire Safety Kleen Corp. in the first quarter of 1998 of $14.7
million. As well, the Predecessor Company earned $7.4 million of interest and
equity income on investments during 1998.

INCOME TAXES

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

     Certain future events may result in such deferred tax assets being utilized
in the Company's future income tax returns, which the Company will record as a
reduction in the valuation allowance and, in accordance with the principles of
fresh start reporting, a credit to additional paid-in capital.

     The Predecessor Company recorded income taxes recoverable in the year ended
December 31, 1999 and income tax expense in the year ended December 31, 1998.
The composition of the income tax recoverable in 1999 and the income tax expense
in 1998 are discussed in Note 18 to the Consolidated Financial Statements
appearing elsewhere herein. The Predecessor Company recorded a valuation
allowance of $307.3 million and $202.4 million at December 31, 1999 and 1998,
respectively

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2000, the Company's working capital was $174.7 million,
representing a decrease of $87.2 million from the fresh start balance sheet at
March 31, 2000. This decrease is largely attributable to the repayment of term
debt of $44.6 million from the proceeds receivable on the sale of UK Metals and
a reduction in revenue in the Metals Services Group.

     As of March 31, 2000, the Company entered into a $335.8 million credit
agreement ("credit facility") with a syndicate of international lenders.
Concurrently, the Company entered into a revolving credit agreement ("revolving
operating facility") that provides up to $175 million, subject to a borrowing
base formula calculated on accounts receivable. The credit facility provides
term debt of $235.8 million ("term debt") and $100.0 million in convertible
payment-in-kind debt ("PIK debt"). The term debt of $250 million contemplated
under the Plan was reduced to $235.8 million on plan implementation due to the
repayment of $14.2 million from proceeds of asset sales. The credit facility
matures on March 31, 2005 and bears interest at a fixed rate of 9% for the term
debt and 10% for the PIK debt. Interest payments on the term debt are due
quarterly in arrears, up to a maximum of $20.0 million in the first year, and on
the PIK debt, interest is payable in full on March 31, 2005. The term debt or
any part thereof and/or all of the PIK debt may be prepaid and redeemed by the
Company at any time during the agreement once the revolving operating facility
has been terminated. The Company must pay a redemption premium of between 1% and
5% on the amount of the term debt being redeemed (excluding mandatory
prepayments) and between 8 1/3% and 25% on the amount of the PIK debt being
redeemed. The PIK debt is convertible by the lenders at any time into shares of

                                        26
<PAGE>   29

common stock of PSC at an initial conversion price of $11.72 per common share,
which was in excess of the fair market value of PSC on a per share basis at the
time of issue.

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

     (i)   75% of the net asset sale proceeds from the disposition of assets
        sold other than in the ordinary course of business;

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

     (iii) the net proceeds from the sale of the UK Metals business, which
        occurred in April, 2000.

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

     During 2000, the Company made mandatory prepayments of the term debt
relating to net asset sales of $47.2 million, including the sale of the UK
Metals business, reducing the term debt to $188.6 million as of year end.

     The credit facility contains certain restrictive covenants, including
limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of specified investments, and the payment of
cash dividends. In addition, the Company is required to satisfy, among other
things, certain financial covenants calculated quarterly on a 12-month rolling
basis, including specified interest coverage ratio, specified amounts of EBITDA,
and maximum capital expenditures.

     The credit facility, subject first to the revolving operating facility, is
guaranteed jointly and severally by PSC and substantially all of its direct and
indirect wholly owned subsidiaries and is collateralized by security interests
in the assets of PSC and substantially all of its direct and indirect wholly
owned subsidiaries and a pledge of securities of substantially all of its direct
and indirect wholly owned subsidiaries.

     The revolving operating facility provides for a revolving line of credit,
subject to a borrowing base formula calculated on accounts receivable, of up to
$175 million divided into Tranche A for up to $100 million and Tranche B for $75
million. The revolving operating facility matures on September 30, 2002. If the
Company elects to terminate the revolving operating facility at any time before
April 7, 2001 then it must pay a termination fee equal to 0.75% times the sum of
the Tranche A advances and letters of credit outstanding, and, if the Company
elects to terminate such facility between April 7, 2001 and October 7, 2001,
then it must pay a termination fee equal to 0.375% times the sum of the Tranche
A advances and letters of credit outstanding.

     Borrowings under the revolving operating facility bear interest at a rate
equal to the base rate (which is based on the Wells Fargo Bank "prime rate")
plus 1% on Tranche A advances and 3% on Tranche B advances or at the option of
the Company on Tranche A advances at a rate equal to the Libor rate plus 3%. A
letter of credit fee of 2.75% is charged on the amount of all outstanding
letters of credit. The Company is required to pay annually an agency fee and an
annual fee equal to $150,000 and $750,000, respectively, and a monthly loan
servicing fee equal to $20,000. In addition, the Company is required to pay
monthly an unused line of credit fee equal to 0.375% and 0.75% per annum on the
average unused portion of Tranche A and Tranche B, respectively, under the
revolving operating facility. At December 31, 2000, the Company's borrowing base
formula limits the availability of the revolving operating facility to $150
million. The Company had undrawn capacity under the revolving operating facility
of approximately $80.5 million, net of letters of credit of approximately $69.5
million.

     The revolving operating facility contains certain restrictive covenants,
including limitations on the incurrence of indebtedness, the sale of assets, the
incurrence of liens, the making of specified investments, and the payment of
cash dividends. In addition, the Company is required to satisfy, among other
things, certain financial covenants calculated quarterly on a 12-month rolling
basis, including specified interest coverage ratio, specified amounts of EBITDA,
and maximum capital expenditures.

     The credit facility and the revolving operating facility contain cross
default provisions whereby a default in one agreement causes a default in the
other agreement.

                                        27
<PAGE>   30

     At December 31, 2000, the Company was in compliance with the covenants of
its credit facility and its revolving operating facility. During 2000, the
Company had undertaken a significant project to operate more efficiently, share
information and install best practices. This project, the PSC Way, includes
defining common business processes related to transactional functions as well as
client relationships and includes establishing a common management systems
platform. The PSC Way is vital to the Company's future business success, but was
not contemplated at the time the covenants were established. The total cash
costs for the PSC Way in 2000 were $8.6 million, of which $3.2 million was
capitalized to property, plant and equipment and $5.4 million was included in
special charges as process re-engineering costs.

     Accordingly, the Company sought and received from its lenders on March 28,
2001, amendments to both the facilities to reduce the EBITDA and interest
coverage ratio requirements for periods beginning with the 12 months ending
March 31, 2001, to allow leeway to pursue the PSC Way. In addition, the Company
sought certain other technical amendments to the facilities.

     During the first quarter 2001, pressure on the Company's businesses,
particularly the metals business, led management to recognize that the Company
might have difficulty complying with the amended EBITDA covenants under the
facilities. In light of this development, the Company undertook an intensive
review of its business prospects and spending for 2001 to determine if the
covenant relief would be adequate not only through the sharp slowdown being
experienced in the first quarter, but throughout 2001. The Company used what it
believes are reasonable assumptions within the bounds of its knowledge. Metals
prices are subject to commodity price risk, see Item 7A. Quantitative and
Qualitative Disclosures about Market Risk, Commodity Price Risk, included
elsewhere herein. The Company currently expects that it will remain in
compliance with the amended covenants. In the event it is unable to comply with
the amended covenants, the Company will renegotiate with its lenders or seek
alternate financing.

     Investors should take into account that forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Further
adverse developments with respect to the Company's business prospects or the
United States economy generally could cause actual results to differ materially.
See "Special Note Regarding Forward-Looking Statements" and "Risk Factors"
included elsewhere herein.

     For the nine months ended December 31, 2000, the Company reported cash
provided by continuing operating activities of $99.3 million. On April 7, 2000,
Oldco sold its metals recycling and mill services business in the UK for net
proceeds of $47.7 million. As a result of the reorganization, this amount was
reported as a receivable in the fresh start balance sheet in other current
assets. Included in the cash provided from operating activities is $44.6 million
from the sale of the UK metals business and $20.9 million of restricted cash
released to the Company in April 2000. Excluding the effects of these two items,
cash provided by continuing operating activities for the year ended December 31,
2000 was $25.8 million compared to cash used by continuing operating activities
of $7.0 million in the year ended December 31, 1999 and $59.1 million in the
year ended December 31, 1998. This improvement is due to an improvement in cash
collection activities and improved earnings.

     The Company believes that over the next twelve months cash generated from
operations and the proceeds from the sale of operations together with amounts
available under the revolving operating facility will be adequate to meet its
capital expenditures and working capital needs, although no assurance can be
given in this regard.

CAPITAL EXPENDITURES

     Capital expenditures for continuing operations were $49.6 million for the
year ended December 31, 2000, compared to $29.3 million for the same period in
1999. Cash conservation measures by the Company reduced the amount of capital
expenditures in 1999.

     The Company's capital expenditure program for 2001 is expected to be $63
million. Approximately $5 million of the capital expenditure program is expected
to be spent on environmental compliance matters relating to facilities operated
by the Company.

                                        28
<PAGE>   31

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In November 2000, Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs," which states that
all amounts billed to a customer in a sale transaction related to shipping and
handling represent revenues earned for goods provided and, accordingly, should
be classified as revenue. Issue No. 00-10 also addresses disclosure of the
classification of shipping and handling costs. In addition, if shipping and
handling costs are significant and are not included as part of cost of sales,
disclosure should be made for both the amount of such costs and the line items
on the income statement that include them. As the Company records shipping and
handling revenue and costs on a gross basis, no changes were made under No.
00-10.

     In June 2000, the Financial Accounting Standards Board issued SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
an amendment of SFAS No. 133. In June 1999, FASB issued SFAS No. 137 to defer
the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" establishes accounting and reporting
standards for derivative instruments and hedging activities and requires that an
entity recognize these items as assets or liabilities in the statement of
financial position and measure them at fair value. Changes in fair value of the
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction, and, if it is, the type of hedge transaction. Adoption of the
standard in 2000 had no effect on the Company's financial position as the
Company had no derivative instruments or hedging activities at that time.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") on revenue recognition. In order to
comply with SAB 101, the Company has changed its accounting policy for contracts
where it collects and processes waste material. In accordance with SAB 101,
revenue is now recognized only after the waste has been disposed of in
accordance with the customer contracts. The Company adopted SAB 101 in the
fourth quarter of 2000. There was no significant impact on the Company's
financial statements.

     The Predecessor Company also changed its accounting policy for contracts
where it brokers material between two parties. The revenue and operating
expenses are recorded on a gross basis rather than recording only the net
commission as had previously been done. This change in accounting policy does
not affect net earnings and has been applied retroactively. The revenues and
operating expenses for the years ended December 31, 1999 and 1998 have been
increased by $498 million and $213 million, respectively.

CAPITAL STRUCTURE

     Under the Plan, the Company allocated 24,000,000 shares of common stock to
claimants as at the Plan effective date. Because of disputed claims, 764,926
shares have not yet been issued. When these claims are resolved, the shares will
be issued to the appropriate claimants. The Company currently cannot determine
the persons with the rights to these shares. In all events the shares will be
issued to claimants under the Plan. A further 41,946 shares were issued during
the nine months ended December 31, 2000.

                                        29
<PAGE>   32

FRESH START REPORTING

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

<TABLE>
<CAPTION>
                               PREDECESSOR                                                    REORGANIZED
                                 COMPANY           NET ASSETS       DEBT       UK METALS    PHILIP SERVICES
                           PHILIP SERVICES CORP       NOT        DISCHARGE     BUSINESS       CORPORATION
                              MARCH 31, 2000        ACQUIRED     UNDER PLAN      SOLD       MARCH 31, 2000
                           --------------------    ----------    ----------    ---------    ---------------
                                                     NOTE A        NOTE B       NOTE C
<S>                        <C>                     <C>           <C>           <C>          <C>
Current Assets
  Cash.................         $   36,454          $     --      $     --     $ (4,338)       $ 32,116
  Accounts
     receivable........            327,458                --            --      (15,880)        311,578
  Inventory for
     resale............             40,440                --            --       (3,659)         36,781
  Other................            104,956            (4,509)      (14,175)      44,523         130,795
                                ----------          --------      --------     --------        --------
                                   509,308            (4,509)      (14,175)      20,646         511,270
Property, plant and
  equipment............            297,976               (59)           --      (16,505)        281,412
Other assets...........             60,471            (5,821)           --           --          54,650
                                ----------          --------      --------     --------        --------
                                $  867,755          $(10,389)     $(14,175)    $  4,141        $847,332
                                ==========          ========      ========     ========        ========
Current Liabilities
  Accounts payable.....         $  105,967          $     --      $     --     $(11,570)       $ 94,397
  Accrued
     liabilities.......            151,218            (4,286)           --       (3,875)        143,057
  Current portion of
     long-term debt....             11,333            (6,000)           --         (172)          5,161
                                ----------          --------      --------     --------        --------
                                   268,518           (10,286)           --      (15,617)        242,615
Long-term debt.........              4,235             8,619       371,820         (134)        384,540
Deferred income
  taxes................              6,886                --            --         (306)          6,580
Other long-term
  liabilities..........             96,373                --            --       (1,070)         95,303
Liabilities subject to
  compromise...........          1,136,468          (726,451)     (410,017)          --              --
Stockholders' equity...           (644,725)          717,729        24,022       21,268         118,294
                                ----------          --------      --------     --------        --------
                                $  867,755          $(10,389)     $(14,175)    $  4,141        $847,332
                                ==========          ========      ========     ========        ========
</TABLE>

Notes:

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

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

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

                                        30
<PAGE>   33

RISK FACTORS

CONTROL BY PRINCIPAL STOCKHOLDERS

     Carl C. Icahn and entities over which he exercises direct or indirect
control have filed a Schedule 13D dated April 14, 2000 indicating that the group
owns in the aggregate approximately 34.6% of the Company's currently outstanding
common stock. In addition, such entities hold convertible debt that is
convertible into approximately 3,250,635 additional shares of common stock.
Accordingly, Mr. Icahn has substantial influence over the Company, which
influence might or might not be consistent with the interests of other
stockholders, and on the outcome of any matters submitted to the Company's
stockholders for approval. In addition, Stephen Feinberg and entities over which
he exercises direct or indirect control have filed a Schedule 13D dated April
24, 2000 indicating that the group owns approximately 10.4% of the Company's
currently outstanding common stock, and Taunus Corporation has filed a Schedule
13G dated February 14, 2001 indicating that it owns approximately 5.0% of the
Company's currently outstanding common stock. Although the Company does not know
of any current agreement, understanding or arrangement among these stockholders
to act together on any matter, these stockholders would be in a position to
exercise significant influence over the affairs of the Company if they were to
act together in the future.

LIMITED MARKET FOR THE COMMON STOCK

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

LITIGATION RISKS

     The Company's business includes health, safety and environmental risks,
and, as a result, the Company becomes subject from time to time to legal or
administrative proceedings whose outcome is uncertain and which may involve
substantial legal costs and penalties. See Item 3, Legal Proceedings, included
elsewhere herein. The Company is unable to predict the outcome of all of its
pending matters, and there can be no assurance that the ultimate resolution of
such matters will not have a material adverse effect on the financial condition
of the Company.

EFFECT OF COMMON STOCK AVAILABLE FOR FUTURE SALE

     Sales of a substantial number of shares of common stock, or the perception
that such sales could occur, could adversely affect prevailing market prices of
the common stock. The Company has reserved 9,132,423 shares of common stock for
issuance under its PIK debt and unsecured convertible notes. Furthermore, the
Company has reserved 1,040,000 shares of common stock for issuance under its
Stock Option Plan and will seek stockholder approval to adopt a Nonemployee
Directors Restricted Stock Plan and a Stock-Based Bonus Plan for officers that
will provide for the issuance of up to an additional 200,000 and 1,000,000
shares of common stock, respectively. No prediction can be made regarding the
effect that future sales of shares of common stock will have on the market price
of currently outstanding shares.

LIMITATIONS ON CHANGE OF CONTROL

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

     As of March 31, 2000, the Company declared a dividend of one preferred
share purchase right for each share of common stock outstanding at the close of
business on March 31, 2000. Such a right will also be attached to each share of
common stock subsequently issued. Such rights will have certain anti-takeover

                                        31
<PAGE>   34

effects. With certain exceptions, if triggered, the rights would cause
substantial dilution to a person or group of persons that acquires more than 20%
of the common stock on terms not approved by the Board.

LIMITATIONS IN CREDIT FACILITIES AND CERTIFICATE OF INCORPORATION

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

COMPETITION

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

     With respect to the metals business in particular, the challenge posed
generally by the high competitive environment is exacerbated by the severe
economic conditions in the steel industry. The United States steel industry has
been deteriorating for several decades in the face of foreign competition and
other factors. In the fourth quarter of 2000 and the first quarter of 2001, four
steel companies that were major customers of the Company have filed for
protection under Chapter 11 of the United States Bankruptcy Code. While the
Company has taken steps to protect itself from some of the credit exposure, it
cannot protect itself fully, and it cannot make up for the loss of these major
customers as the pool of major steel customers is relatively small. Moreover,
prices for scrap steel are highly cyclic and are currently at a 20-year low. The
combination of these factors has put considerable pressure on the Company's
metals business, and it is not possible at this time to project any significant
improvement in 2001. Similar conditions prevailed in 1998 and were a factor in
the financial difficulties of the Predecessor Company.

     In addition to the foregoing, the Company has experienced some
deterioration in its other businesses in the first quarter of 2001 because of
the slowing in the United States economy and high fuel and utilities costs.

DEPENDENCE ON OUTSOURCING

     The Company's growth is dependent on the continuation of outsourcing within
industrial enterprises. As enterprises focus on their core business, they are
perceived to be increasingly outsourcing non-core, non-revenue generating
activities in order to reduce costs. Such activities can often be performed on a
more cost-effective basis by specialized industrial service and metal recovery
companies that have greater expertise, technology advantages or economies of
scale. In addition, many industrial enterprises have sought to reduce the number
of vendors of industrial and resource recovery services by purchasing services
only from those suppliers that can provide a "total service" solution, thereby
providing further administrative and cost reductions. If the pace of either of
these trends slows or reverses, it could have a material adverse effect on the
Company's financial position and results of operations.

ENVIRONMENTAL AND REGULATORY RISKS

     ENVIRONMENTAL REGULATIONS.  The Company's operations are subject to
comprehensive laws and regulations related to the protection of the environment.
Such laws and regulations, among other things (i) regulate the nature of the
industrial by-products and wastes that the Company can accept for processing at
its treatment, storage and disposal facilities, the nature of the treatment they
can provide at such facilities and the
                                        32
<PAGE>   35

location and expansion of such facilities, (ii) impose liability for remediation
and clean-up of environmental contamination, including spills or releases of
certain industrial by-products and waste materials resulting from shipping of
waste off-site or past and present operations at the Company's facilities, and
(iii) may require financial assurance that funds will be available for the
clean-up and remediation or the closure and, in some cases, post-closure care of
sites. Such laws and regulations also require manifests to be completed and
delivered in connection with any shipment of prescribed materials so that the
movement and disposal of such material can be traced and the persons responsible
for any mishandling of such material identified. Because the Company provides
its customers with services designed to protect the environment by cleaning and
removing waste materials or substances from customers' equipment or sites, the
Company is subject to regulations that impose liability on persons involved in
handling, processing, generating or transporting hazardous materials. Regulatory
requirements may also be imposed as conditions of operating permits or licenses
both initially and upon renewal or modification. The Company must properly
remove, handle, treat, recycle or dispose of waste materials or incur liability.
Transportation, transfer, storage and disposal of waste is difficult and
accidents may occur. These laws and regulations are stringent and are likely to
become more stringent. Existing laws and regulations, and new laws and
regulations, may require the Company to modify, supplement, replace or curtail
its operating methods or to modify or replace facilities or equipment at costs
which may be substantial without any corresponding increase in revenues.

     Hazardous substances are present in some of the processing, transfer,
storage, disposal and landfill facilities owned or used by the Company.
Remediation may be required at these sites at substantial cost. The Company has
developed or is developing cost estimates that are periodically reviewed and
updated, and maintains reserves for these matters based on such cost estimates.
Estimates of the Company's liability for remediation of a particular site and
the method and ultimate cost of remediation entail a number of assumptions and
are inherently difficult. There can be no assurance that the ultimate cost and
expense of corrective action will not substantially exceed reserves and have a
material adverse impact on the Company's operations or financial condition.
Moreover, governments have from time to time required companies to remediate
sites where materials were properly disposed because those governments have
instituted higher standards. Thus, even proper disposal of waste does not assure
the Company relief from future liability.

     In the normal course of its business and as a result of the extensive
governmental regulation of industrial, environmental and metal recovery
services, the Company has been the subject of administrative and judicial
proceedings by regulators and has been subject to requirements to remediate
environmental contamination or to take corrective action. There will be
administrative or court proceedings in the future in connection with the
Company's present and future operations or the operations of acquired
businesses. In such proceedings in the past, the Company has been subject to
monetary fines and certain orders requiring the Company to take remedial action.
In the future, the Company may be subject to monetary fines, penalties,
remediation, clean-up or stop orders, injunctions or orders to cease or suspend
certain of its practices. The outcome of any proceeding and associated costs and
expenses could have a material adverse impact on the operations or financial
condition of the Company.

     The demand for certain of the Company's services may be adversely affected
by the amendment or repeal of federal, state, provincial, or foreign laws and
regulations or by changes in the enforcement policies of the regulatory agencies
concerning such laws and regulations.

     PUBLIC CONCERNS.  There is a high level of public concern over industrial
by-products recovery and waste management operations, including the siting and
operation of transfer, processing, storage and disposal facilities and the
collection, processing or handling of industrial by-products and waste
materials, particularly hazardous materials. Zoning, permit and licensing
applications and proceedings and regulatory enforcement proceedings are all
matters open to public scrutiny and comment. As a result, from time to time, the
Company has been, and may in the future be, subject to citizen opposition and
adverse publicity which may have a negative effect on its operations and delay
or limit the expansion and development of operating properties and could have a
material adverse effect on its operations or financial condition.

                                        33
<PAGE>   36

     ENVIRONMENTAL INSURANCE COVERAGE.  Consistent with industry trends, the
Company is not likely to be able to obtain adequate amounts of environmental
impairment insurance at a reasonable premium to cover liability to third parties
for environmental damage. Accordingly, if the Company were to incur liability
for environmental damage either not provided for under such coverage or in
excess of such coverage, the Company's financial condition and results of
operations could be materially and adversely affected.

     JURISDICTIONAL RESTRICTIONS ON WASTE TRANSFERS.  In the past, various
states, provinces, counties and municipalities have attempted to restrict the
flow of waste across and within their borders, and various federal, provincial,
state, county and municipal governments may seek to do the same in the future.
Any such strictures may result in the Company incurring increased third-party
disposal costs in connection with alternate disposal arrangements.

     SAFETY.  The Company is engaged in businesses which require significant
attention to workplace safety. The cost to the Company both in the well-being of
its workers and in insurance premiums, deductibles, regulatory fines and
penalties has been significant. The Company continues to place considerable
effort on establishing a culture of safety and continuous improvement in its
safety performance.

     For a more detailed description of the impact of environmental and other
governmental regulation upon the Company, see Item 1, Business - Government
Regulation, included elsewhere herein.

BONDING

     In order to bid on certain industrial outsourcing or waste management
contracts, the Company, like other bidders, is required to post a financial
responsibility bond. The Company is also required under certain United States'
and Canadian laws and regulations to demonstrate financial responsibility for
possible bodily injury and property damage to third parties caused by both
sudden and non-sudden occurrences. The Company is also required to provide
financial assurance that funds will be available when needed for closure and
post-closure care at certain of its treatment, storage and disposal facilities,
the costs of which could be substantial. Such bidding requirements and such laws
and regulations allow the financial assurance requirements to be satisfied by
various means, including letters of credit, surety bonds, trust funds, a
financial (net worth) test or a guarantee by a parent company. There is no
assurance that the Company will obtain or continue to have adequate bonding
facilities available to satisfy bonding requirements. Because of the tightening
surety market and the Company's limited financial resources, it has had
difficulty obtaining a sufficiently large bonding facility, which could have a
material adverse effect on the Company's financial position and results of
operations.

RELIANCE ON KEY EMPLOYEES

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

COMMODITY PRICE AND CREDIT RISKS

     The Company is exposed to commodity price risk during the period that it
has title to scrap that is held in inventory for processing and/or resale. Scrap
prices are volatile due to numerous factors beyond the control of the Company,
including general economic conditions, labor costs, competition, import duties,
tariffs and currency exchange rates. In an increasing price environment,
competitive conditions will determine how much of the scrap price increases can
be passed on to the Company's customers. There can be no assurance that the
Company will not have a significant net exposure due to significant price swings
or failure of a customer or supplier to perform pursuant to the contract.
                                        34
<PAGE>   37

INSURANCE CARRIER RISK

     The Company retains liability for (i) workers' compensation claims of up to
$500,000 for any one occurrence, (ii) auto and general liability claims of up to
$250,000 for any one occurrence, and (iii) certain environmental liabilities up
to $2.1 million for any one occurrence. The Company purchases additional
insurance that limits the Company's aggregate exposure in any one year to losses
of $1.5 million for auto and general liability claims (above the $100,000
retention per claim); $5 million for insured environmental liabilities (above
the $100,000 retention per claim); and $14 million for workers' compensation
claims (without retention). To the extent that any insurance carrier is unable
to meet its obligations under existing insurance policies, the Company could be
liable for the defaulted amount.

RISKS ASSOCIATED WITH ACQUISITIONS

     Between 1996 and 1998 the Predecessor Company completed over 40
acquisitions. In connection with these acquisitions, there may be liabilities
that the Predecessor Company failed to discover, including liabilities arising
from pollution of the environment or non-compliance with environmental laws by
prior owners, for which the Company, as a successor owner, may be responsible.
Indemnities and warranties for such liabilities from sellers, if obtained, may
not fully cover the liabilities due to their limited scope, amounts, or
duration, the financial limitations of the indemnitor or warrantor, or other
reasons.

                                        35
<PAGE>   38

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to financial risk resulting from volatility in
foreign exchange rates, interest rates and commodity prices. The Company seeks
to minimize these risks through its regular operating and financing activities
and, when deemed appropriate, through the use of derivative financial
instruments. In 2000, the use of derivative instruments was limited. See Note 16
to the Consolidated Financial Statements.

FOREIGN CURRENCY RATE RISK

     The revenue and expenses of the Company's Canadian and European
subsidiaries are generally denominated using the local currency. The functional
currency of these subsidiaries is the local currency and therefore, foreign
currency translation adjustments made on consolidation are reflected as a
component of stockholders' equity (deficit) as stated in the Company's
accounting policies. Changes in the foreign exchange rates compared to the
United States dollar can have an effect on the Company's revenue and
profitability. The sensitivity of the net loss from continuing operations before
tax to the changing foreign currency rates is not significant based on the 2000
operating results from foreign subsidiaries.

INTEREST RATE RISK

     Substantially all of the Company's long-term debt bears interest at a fixed
rate. Borrowing under the revolving operating facility bears interest at a
floating rate based on the Wells Fargo Bank prime rate or LIBOR rate. At
December 31, 2000, the Company had not borrowed under the revolving operating
facility, but has done so in the first quarter of 2001. In addition, letters of
credit outstanding have been charged against the borrowing capacity under the
revolving operating facility. The Company's exposure to interest rate risk at
December 31, 2000 was not significant.

COMMODITY PRICE RISK

     Prices in Metals Services Group are established and adjusted monthly by the
major steel producers. The price of ferrous scrap is a significant factor
influencing the profitability of the Metals Services Group. In 2000, the
Company's average selling price of ferrous scrap decreased to $85 per ton from
$134 per ton in the first quarter of 2000. The Company manages its commodity
price risk by acquiring ferrous metal scrap as it is needed for its customers
which allows the Company to turn its inventory approximately every 38 days.
Based on the inventory levels of the Metals Services Group as at December 31,
2000, a 10% change in the price of ferrous scrap during a 30 day period is
estimated to change the Company's earnings (loss) from continuing operations
before tax by $1.0 million.

                                        36
<PAGE>   39

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

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

     As discussed in Note 8, the Company's operating results could deteriorate
further as a result of continuing competitive market conditions, particularly in
the metals business, which may result in the Company having a potential event of
default under the terms of certain restrictive covenants included in its debt
agreements. The Company's plans to address these possibilities and for providing
liquidity during 2001 are also described in Note 8.

/s/  PricewaterhouseCoopers LLP
Hamilton, Ontario, Canada
March 9, 2001, except for Note 8, which is dated March 28, 2001

                                        37
<PAGE>   40

                          PHILIP SERVICES CORPORATION

                          CONSOLIDATED BALANCE SHEETS

                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                            FRESH   |   PREDECESSOR
                                                                            START   |     COMPANY
                                                                          --------- |   ------------
                                                          DECEMBER 31,    MARCH 31, |   DECEMBER 31,
                                                              2000          2000    |       1999
                                                          ------------    --------- |   ------------
                                                                                    |   (UNAUDITED)
<S>                                                       <C>             <C>       |   <C>
ASSETS                                                                              |
Current assets                                                                      |
  Cash and cash equivalents...........................      $ 38,747      $ 32,116  |    $   48,316
  Accounts receivable (net of allowance for doubtful                                |
     accounts of $20,980, March 31, 2000 - $14,299;                                 |
     December 31, 1999 - $23,938).....................       236,939       311,578  |       305,441
  Inventory for resale................................        42,318        36,781  |        38,939
  Other current assets (Note 4).......................        74,842       130,795  |       107,688
                                                            --------      --------  |    ----------
                                                             392,846       511,270  |       500,384
Property, plant and equipment (Note 5)................       277,571       281,412  |       303,639
Other assets (Note 6).................................        52,132        54,650  |        57,556
                                                            --------      --------  |    ----------
                                                            $722,549      $847,332  |    $  861,579
                                                            ========      ========  |    ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                      |
Current liabilities                                                                 |
  Accounts payable....................................      $ 80,549      $ 94,397  |    $  110,762
  Accrued liabilities (Note 7)........................       133,237       149,852  |       141,451
  Current maturities of long-term debt (Note 8).......         4,358         5,161  |        11,917
                                                            --------      --------  |    ----------
                                                             218,144       249,410  |       264,130
Long-term debt (Note 8)...............................       342,912       384,540  |         5,268
Deferred income taxes (Note 18).......................         8,982         6,580  |         5,020
Other liabilities (Note 9)............................        81,929        88,508  |        91,826
Liabilities subject to compromise (Note 10)...........            --            --  |     1,136,468
Commitments and contingencies (Notes 20 and 22)                                     |
Stockholders' equity (deficit)(Note 17)...............        70,582       118,294  |      (641,133)
                                                            --------      --------  |    ----------
                                                            $722,549      $847,332  |    $  861,579
                                                            ========      ========  |    ==========
</TABLE>

    These consolidated financial statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company"), which has been prepared by management, and
information relating to Philip Services Corp. ("Oldco"), an Ontario company, and
its subsidiaries (collectively 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
consolidated financial information of the Predecessor Company may be of limited
interest to the stockholders of PSC and has therefore included such information
in this document. The consolidated financial information of the Predecessor
Company does not reflect the effects of the application of fresh start reporting
and is unaudited. Readers should, therefore, review this material with caution
and not rely on the information disclosed for the Predecessor Company.

   The accompanying notes are an integral part of these financial statements.
                                        38
<PAGE>   41

                          PHILIP SERVICES CORPORATION

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

<TABLE>
<CAPTION>
                                                              |                       PREDECESSOR COMPANY
                                                FOR THE       |  --------------------------------------------------------------
                                              NINE MONTHS     |  FOR THE THREE MONTHS   FOR THE YEAR ENDED   FOR THE YEAR ENDED
                                           ENDED DECEMBER 31, |    ENDED MARCH 31,         DECEMBER 31,         DECEMBER 31,
                                                  2000        |          2000                  1999                 1998
                                           ------------------ |  --------------------   ------------------   ------------------
                                                              |      (UNAUDITED)           (UNAUDITED)          (UNAUDITED)
<S>                                        <C>                |  <C>                    <C>                  <C>
Revenue..................................      $1,156,107     |        $480,386             $1,621,101          $ 2,409,677
Operating expenses.......................       1,017,322     |         419,094              1,462,348            2,146,677
Special charges (Note 13)................          17,117     |              --                     --            1,109,877
Selling, general and administrative                           |
  costs..................................         101,883     |          37,043                177,919              269,594
Depreciation and amortization............          34,914     |          12,436                 53,786               97,229
                                               ----------     |        --------             ----------          -----------
Income (loss) from operations............         (15,129)    |          11,813                (72,952)          (1,213,700)
Interest expense.........................          29,126     |             952                 52,774               76,432
Other income and expense - net...........          (5,195)    |          (9,598)                (3,772)              (1,648)
                                               ----------     |        --------             ----------          -----------
Earnings (loss) from continuing                               |
  operations before tax and                                   |
  reorganization costs...................         (39,060)    |          20,459               (121,954)          (1,288,484)
Reorganization costs (Note 14)...........              --     |          20,607                164,205                   --
Income taxes (Note 18)...................           4,175     |             856                 (5,616)              41,443
                                               ----------     |        --------             ----------          -----------
Loss from continuing operations..........         (43,235)    |          (1,004)              (280,543)          (1,329,927)
Cumulative effect of change in accounting                     |
  principle (Note 12)....................              --     |              --                 (1,543)                  --
Discontinued operations net of tax (Note                      |
  3).....................................          (2,274)    |           1,473                 29,443             (256,945)
Fresh start adjustments (Note 1).........              --     |          45,290                     --                   --
                                               ----------     |        --------             ----------          -----------
Net earnings (loss)......................      $  (45,509)    |        $ 45,759             $ (252,643)         $(1,586,872)
                                               ==========     |        ========             ==========          ===========
Basic and diluted earnings (loss) per                         |
  share                                                       |
  Continuing operations..................      $    (1.80)    |        $  (0.01)            $    (2.14)         $    (10.14)
  Discontinued operations................           (0.09)    |            0.01                   0.22                (1.96)
  Other..................................              --     |            0.35                  (0.01)                  --
                                               ----------     |        --------             ----------          -----------
                                               $    (1.89)    |        $   0.35             $    (1.93)         $    (12.10)
                                               ==========     |        ========             ==========          ===========
Weighted average number of shares of                          |
  common stock outstanding (000's).......          24,037     |         131,144                131,144              131,130
                                               ==========     |        ========             ==========          ===========
</TABLE>

    These consolidated financial statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company"), which has been prepared by management, and
information relating to Philip Services Corp. ("Oldco"), an Ontario company, and
its subsidiaries (collectively 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
consolidated financial information of the Predecessor Company may be of limited
interest to the stockholders of PSC and has therefore included such information
in this document. The consolidated financial information of the Predecessor
Company does not reflect the effects of the application of fresh start reporting
and is unaudited. Readers should, therefore, review this material with caution
and not rely on the information disclosed for the Predecessor Company.

   The accompanying notes are an integral part of these financial statements.
                                        39
<PAGE>   42

                          PHILIP SERVICES CORPORATION

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                          OTHER
                                                                        RETAINED       ACCUMULATED          TOTAL
                                                            COMMON      EARNINGS      COMPREHENSIVE     STOCKHOLDERS'
                                                            STOCK       (DEFICIT)    EARNINGS (LOSS)   EQUITY (DEFICIT)
                                                          ----------   -----------   ---------------   ----------------
<S>                                                       <C>          <C>           <C>               <C>
PREDECESSOR COMPANY:
  Balance, December 31, 1997 (unaudited)...............   $1,348,066   $   (86,274)     $(44,851)         $1,216,941
  Common shares issued.................................          566            --            --                 566
  Tax benefit on stock option exercise.................        2,850            --            --               2,850
  Comprehensive loss:
    Net loss...........................................           --    (1,586,872)           --
    Foreign currency translation adjustments...........           --            --       (26,610)
  Total comprehensive loss.............................                                                   (1,613,482)
                                                          ----------   -----------      --------          ----------
  Balance, December 31, 1998 (unaudited)...............   $1,351,482   $(1,673,146)     $(71,461)         $ (393,125)
  Comprehensive loss:
    Net loss...........................................           --      (252,643)           --
    Foreign currency translation adjustments...........           --            --         4,635
  Total comprehensive loss.............................                                                     (248,008)
                                                          ----------   -----------      --------          ----------
  Balance, December 31, 1999 (unaudited)...............   $1,351,482   $(1,925,789)     $(66,826)         $ (641,133)
  Comprehensive earnings:
    Net earnings.......................................           --        45,759            --
    Foreign currency translation adjustments...........           --            --        (4,061)
  Total comprehensive earnings.........................                                                       41,698
                                                          ----------   -----------      --------          ----------
  Balance, March 31, 2000 (unaudited)..................   $1,351,482   $(1,880,030)     $(70,887)         $ (599,435)
                                                          ==========   ===========      ========          ==========
_______________________________________________________________________________________________________________________

  Fresh start adjustments..............................   (1,233,188)    1,880,030        70,887             717,729
                                                          ----------   -----------      --------          ----------
PHILIP SERVICES CORPORATION:
  Balance, Fresh Start March 31, 2000..................   $  118,294   $        --      $     --          $  118,294
  Shares of common stock issued........................          250            --            --                 250
  Comprehensive loss:
    Net loss...........................................           --       (45,509)           --
    Foreign currency translation adjustments...........           --            --        (2,453)
  Total comprehensive loss.............................                                                      (47,962)
                                                          ----------   -----------      --------          ----------
  Balance, December 31, 2000...........................   $  118,544   $   (45,509)     $ (2,453)         $   70,582
                                                          ==========   ===========      ========          ==========
</TABLE>

    These consolidated financial statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company"), which has been prepared by management, and
information relating to Philip Services Corp. ("Oldco"), an Ontario company, and
its subsidiaries (collectively 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
consolidated financial information of the Predecessor Company may be of limited
interest to the stockholders of PSC and has therefore included such information
in this document. The consolidated financial information of the Predecessor
Company does not reflect the effects of the application of fresh start reporting
and is unaudited. Readers should, therefore, review this material with caution
and not rely on the information disclosed for the Predecessor Company.

   The accompanying notes are an integral part of these financial statements.
                                        40
<PAGE>   43

                          PHILIP SERVICES CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                              |                       PREDECESSOR COMPANY
                                                FOR THE       |  --------------------------------------------------------------
                                              NINE MONTHS     |  FOR THE THREE MONTHS   FOR THE YEAR ENDED   FOR THE YEAR ENDED
                                           ENDED DECEMBER 31, |    ENDED MARCH 31,         DECEMBER 31,         DECEMBER 31,
                                                  2000        |          2000                  1999                 1998
                                           ------------------ |  --------------------   ------------------   ------------------
                                                              |      (UNAUDITED)           (UNAUDITED)          (UNAUDITED)
<S>                                        <C>                |  <C>                    <C>                  <C>
OPERATING ACTIVITIES                                          |
Net loss from continuing operations......       $(43,235)     |        $ (1,004)            $(280,543)          $(1,329,927)
Items included in earnings not affecting                      |
  cash                                                        |
  Depreciation and amortization..........         34,914      |          12,436                53,786                73,090
  Amortization of goodwill...............             --      |              --                    --                24,139
  Accrued but unpaid interest............         10,888      |              --                49,540                    --
  Deferred income taxes..................          2,849      |              --                    --                33,092
  Writedown of investments...............             --      |              --                 4,220                    --
  Gain on sale of assets.................             --      |          (7,820)               (3,523)              (16,843)
  Non-cash special and reorganization                         |
    costs................................          5,683      |              --               112,874             1,209,141
                                                --------      |        --------             ---------           -----------
Cash flow from continuing operations.....         11,099      |           3,612               (63,646)               (7,308)
Changes in non-cash working capital......         88,172      |         (11,622)               56,621               (51,745)
                                                --------      |        --------             ---------           -----------
Cash provided by (used in) continuing                         |
  operating activities...................         99,271      |          (8,010)               (7,025)              (59,053)
Cash provided by (used in) discontinued                       |
  operating activities...................            191      |          (1,453)               (2,249)               (2,349)
                                                --------      |        --------             ---------           -----------
Cash provided by (used in) operating                          |
  activities.............................         99,462      |          (9,463)               (9,274)              (61,402)
                                                --------      |        --------             ---------           -----------
INVESTING ACTIVITIES                                          |
Proceeds from sale of operations.........             --      |              --                23,085               104,922
Acquisition - including acquired cash                         |
  (bank indebtedness)....................             --      |              --                    --               (22,181)
Purchase of property, plant and                               |
  equipment..............................        (37,802)     |          (8,403)              (27,438)              (56,289)
Proceeds from sale of assets.............          3,053      |          11,379                16,647                25,785
Other - net..............................         (3,115)     |          (5,623)              (14,156)              (12,155)
                                                --------      |        --------             ---------           -----------
Cash provided by (used in) continuing                         |
  investing activities...................        (37,864)     |          (2,647)               (1,862)               40,082
Cash provided by (used in) investing                          |
  activities of discontinued                                  |
  operations.............................             --      |           1,545                72,123               (21,868)
                                                --------      |        --------             ---------           -----------
Cash provided by (used in) investing                          |
  activities.............................        (37,864)     |          (1,102)               70,261                18,214
                                                --------      |        --------             ---------           -----------
FINANCING ACTIVITIES                                          |
Proceeds from long-term debt.............             --      |              --                   140               202,570
Principal payments on long-term debt.....        (55,217)     |          (1,205)              (75,982)             (103,624)
Common stock issued for cash.............            250      |              --                    --                   566
                                                --------      |        --------             ---------           -----------
Cash provided by (used in) continuing                         |
  financing activities...................        (54,967)     |          (1,205)              (75,842)               99,512
Cash provided by (used in) financing                          |
  activities of discontinued                                  |
  operations.............................             --      |             (92)                2,444               (22,988)
                                                --------      |        --------             ---------           -----------
Cash provided by (used in) financing                          |
  activities.............................        (54,967)     |          (1,297)              (73,398)               76,524
                                                --------      |        --------             ---------           -----------
Net change in cash for the period........          6,631      |         (11,862)              (12,411)               33,336
Cash and cash equivalents, beginning of                       |
  period.................................         32,116      |          48,316                60,727                27,391
                                                --------      |        --------             ---------           -----------
Cash and cash equivalents, end of                             |
  period.................................       $ 38,747      |        $ 36,454             $  48,316           $    60,727
                                                ========      |        ========             =========           ===========
</TABLE>

    These consolidated financial statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company"), which has been prepared by management, and
information relating to Philip Services Corp. ("Oldco"), an Ontario company, and
its subsidiaries (collectively 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
consolidated financial information of the Predecessor Company may be of limited
interest to the stockholders of PSC and has therefore included such information
in this document. The consolidated financial information of the Predecessor
Company does not reflect the effects of the application of fresh start reporting
and is unaudited. Readers should, therefore, review this material with caution
and not rely on the information disclosed for the Predecessor Company.
   The accompanying notes are an integral part of these financial statements.
                                        41
<PAGE>   44

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

     These Consolidated Financial Statements contain information relating to
Philip Services Corporation ("PSC"), a Delaware corporation and its subsidiaries
(collectively the "Company"), which has been prepared by management, and
information relating to Philip Services Corp. ("Oldco"), an Ontario company, and
its subsidiaries (collectively 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 information of the Predecessor Company may be of limited interest to
the stockholders of PSC and has therefore included such information in this
document. The consolidated financial information of the Predecessor Company does
not reflect the effects of the application of fresh start reporting and is
unaudited. Readers should, therefore, review this material with caution and not
rely on the information disclosed for the Predecessor Company.

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

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

     For all periods presented, the Consolidated Financial Statements and notes
to the Consolidated Financial Statements disclose the utilities management
division sold in May 1999 and the copper and non-ferrous operations discontinued
in 1998 as discontinued operations as discussed in Note 3.

BANKRUPTCY FILING AND PLAN OF REORGANIZATION

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

     On July 12, 1999, the U.S. Debtors filed a Joint Plan of Reorganization
(the "U.S. Plan") with the U.S. Court and on July 15, 1999, the Canadian Debtors
filed a Plan of Compromise and Arrangement (the "Canadian Plan") with the
Canadian Court. In August 1999, a number of motions were brought before the
Canadian Court challenging the fairness of the Canadian Plan. As a result, Oldco
filed an amended plan in the U.S. Court on September 21, 1999 (the "Amended U.S.
Plan") and an amended plan in the Canadian Court on September 24, 1999 (the
"Amended Canadian Plan"). On November 2, 1999, Oldco filed a Supplement to the
Amended Canadian Plan (the "Canadian Plan Supplement"). The Canadian Plan
Supplement amended and restated the Amended Canadian Plan and provided that
substantially all of the assets of the Canadian Debtors be transferred to new
companies that, on the implementation of the Amended U.S. Plan became wholly
owned subsidiaries of PSC. All the shares held by Oldco in PSC were cancelled
                                        42
<PAGE>   45
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.   BASIS OF PRESENTATION (continued)

under the Amended U.S. Plan. On November 5, 1999, Oldco's lenders voted to
approve the Canadian Plan Supplement. On November 26, 1999, a hearing was held
in the Canadian Court at which the Canadian Plan Supplement was sanctioned. On
November 30, 1999, the Amended U.S. Plan was confirmed in the U.S. Court. On
March 8, 2000, the Canadian Plan Supplement was amended to permit the sale of
the UK Metals business and to address certain tax restructuring issues. On March
20, 2000, a similar amendment was made by the U.S. Court with respect to the
Amended U.S. Plan. The Amended U.S. Plan and the Canadian Plan Supplement
(collectively the "Plan") became effective on April 7, 2000. Under the Plan, PSC
emerged from bankruptcy protection as a new public entity.

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

FRESH START REPORTING

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

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

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

                                        43
<PAGE>   46
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.   BASIS OF PRESENTATION (continued)

RECLASSIFICATION

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

2.   SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

PRINCIPLES OF CONSOLIDATION

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

REVENUE RECOGNITION

     Revenue from industrial services is recorded as the services are performed,
using the percentage of completion basis for fixed rate contracts and as the
related service is provided for time and material contracts. Revenue from
by-product recovery operations is recognized along with the related costs of
treatment, disposal and transportation at the time of performance of services.
Costs to dispose of waste materials located at the Company's industrial services
facilities are included in accrued liabilities.

     Revenue from the sale of recovered commodities and steel products is
recognized at the time of customer acceptance. For contracts where the Company
brokers materials between two parties, takes title to the product and assumes
the risks and rewards of ownership, the revenue is recognized at the time of
customer acceptance. If the Company is acting as an agent in those transactions,
then only the commission on the transaction is recorded.

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

CASH AND CASH EQUIVALENTS

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

INVENTORY

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

PROPERTY, PLANT AND EQUIPMENT

     In accordance with Fresh Start reporting, property, plant and equipment
were reflected at their fair value as of March 31, 2000. Additions to property,
plant and equipment subsequent to this date are recorded at cost. Property,
plant and equipment are depreciated over their estimated useful lives generally
on the following

                                        44
<PAGE>   47
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.   SIGNIFICANT ACCOUNTING POLICIES (continued)

basis: buildings 20 to 40 years straight-line; equipment 3 to 20 years
straight-line. Landfill sites and improvements thereto are recorded at cost and
amortized over the life of the landfill site based on the estimated landfill
capacity utilized during the year. Operating costs associated with landfill
sites are charged to operations as incurred. Assets under development include
the direct cost of land, buildings and equipment acquired for future use
together with engineering, legal and other costs incurred before the assets are
brought into operation.

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

     The Company includes as part of the cost of its property, plant and
equipment, all financing costs incurred prior to the asset becoming available
for operation.

     The Company periodically reviews the carrying value of its property, plant
and equipment based on the undiscounted future cash flow from operating results
to determine whether such values are recoverable. Any resulting write-downs are
charged to earnings.

RESTRICTED INVESTMENTS

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

ENVIRONMENTAL LIABILITY

     The Company accrues future site-restoration and site closure costs based on
independent environmental studies carried out at the time of acquiring a
specific site. Changes in the estimated costs are charged against earnings of
the related business operation or capitalized and depreciated depending on their
future economic benefits. Actual site-restoration and site closure expenditures
are charged against the related liability.

     The Company also accrues the costs for environmental remediation where an
assessment has indicated that cleanup costs are probable and can be reasonably
estimated. Such accruals are based on currently available information, estimated
timing of remedial actions, existing technology and enacted laws and
regulations. Costs are recorded on a gross basis and are not reduced for
potential insurance recoveries. These recoveries are recorded in the year they
are received and are offset against the environmental expense.

FOREIGN CURRENCY TRANSLATION

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

FINANCIAL INSTRUMENTS

     The Company's accounts receivable, accounts payable and long-term debt
constitute financial instruments. The Company's accounts receivable, accounts
payable and long-term debt approximated their fair value as at December 31, 2000
and March 31, 2000. Concentration of credit risk in accounts receivable is
limited, due to the large number of customers the Company services throughout
North America. The

                                        45
<PAGE>   48
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.   SIGNIFICANT ACCOUNTING POLICIES (continued)

Company performs ongoing credit evaluations of its customers, but does not
require collateral to support customer accounts receivable. The Company
establishes an allowance for doubtful accounts based on the credit risk
applicable to particular customers, historical and other information.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In November 2000, Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs," which states that
all amounts billed to a customer in a sale transaction related to shipping and
handling represent revenues earned for goods provided and, accordingly, should
be classified as revenue. Issue No. 00-10 also addresses disclosure of the
classification of shipping and handling costs. In addition, if shipping and
handling costs are significant and are not included as part of cost of sales,
disclosure should be made for both the amount of such costs and the line items
on the income statement that include them. As the Company records shipping and
handling revenue and costs on a gross basis, no changes were required under No.
00-10.

     In June 2000, the Financial Accounting Standards Board issued SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
an amendment of SFAS No. 133. In June 1999, FASB issued SFAS No. 137 to defer
the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" establishes accounting and reporting
standards for derivative instruments and hedging activities and requires that an
entity recognize these items as assets or liabilities in the statement of
financial position and measure them at fair value. Changes in fair value of the
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designed as part of a hedge
transaction, and, if it is, the type of hedge transaction. Adoption of the
standard in 2000 had no effect on the Company's financial position as the
Company had no derivative instruments or hedging activities at that time.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") on revenue recognition. In order to
comply with SAB 101, the Company has changed its accounting policy for contracts
where it collects and processes waste material. In accordance with SAB 101,
revenue is now recognized only after the waste has been disposed of in
accordance with the customer contracts. The Company adopted SAB 101 in the
fourth quarter of 2000. There was no significant impact on the Company's
financial statements.

     The Predecessor Company also changed its accounting policy for contracts
where it brokers material between two parties. The revenue and operating
expenses are recorded on a gross basis rather than recording only the net
commission as had previously been done. This change in accounting policy does
not effect net earnings and has been applied retroactively. The revenues and
operating expenses for the years ended December 31, 1999 and 1998 have been
increased by $498 million and $213 million, respectively.

3.   DISCONTINUED OPERATIONS (in thousands)

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

     Revenue from the non-ferrous, copper and utilities management operations,
net of intercompany revenue, was $3,730 and $2,347 for the three months ended
March 31, 2000 and nine months ended December 31,

                                        46
<PAGE>   49
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3.   DISCONTINUED OPERATIONS (in thousands) (continued)

2000, respectively, and $74,682 and $492,413 for the fiscal years ended December
31, 1999 and 1998, respectively. Net earnings from discontinued operations in
the Consolidated Statements of Earnings is presented net of applicable income
tax provision of $0 for the three months ended March 31, 2000 and nine months
ended December 31, 2000 and $674 and $46,354 for the fiscal years ended December
31, 1999 and 1998, respectively.

4.   OTHER CURRENT ASSETS (in thousands)

<TABLE>
<CAPTION>
                                                                                      |  PREDECESSOR
                                                                         FRESH START  |    COMPANY
                                                                         -----------  |  ------------
                                                         DECEMBER 31,     MARCH 31,   |  DECEMBER 31,
                                                             2000           2000      |      1999
                                                         ------------    -----------  |  ------------
                                                                                      |  (UNAUDITED)
<S>                                                      <C>             <C>          |  <C>
Costs in excess of billings..........................      $24,048        $ 15,384    |    $ 12,568
Non-trade receivables................................       16,835          15,298    |      13,676
Consumable supplies..................................       14,585          15,844    |      15,890
Proceeds receivable on sale of UK Metals                                              |
  business(a)........................................        3,281          47,684    |          --
Restricted cash(b)...................................           --          20,937    |      48,028
Other................................................       16,093          15,648    |      17,526
                                                           -------        --------    |    --------
                                                           $74,842        $130,795    |    $107,688
                                                           =======        ========    |    ========
</TABLE>

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

(b) Restricted cash represented funds used as collateral for letters of credit,
    and proceeds from the sale of assets, which were held by Oldco's lenders.
    These funds were released to the Company in April, 2000.

5.   PROPERTY, PLANT AND EQUIPMENT (in thousands)

<TABLE>
<CAPTION>
                                                                                               |         PREDECESSOR COMPANY
                                                                       FRESH START             |  ----------------------------------
                                                            ---------------------------------- |          DECEMBER 31, 1999
                               DECEMBER 31, 2000                      MARCH 31, 2000           |  ----------------------------------
                       ----------------------------------   ---------------------------------- |             (UNAUDITED)
                                  ACCUMULATED    NET BOOK              ACCUMULATED    NET BOOK |             ACCUMULATED    NET BOOK
                         COST     DEPRECIATION    VALUE       COST     DEPRECIATION    VALUE   |    COST     DEPRECIATION    VALUE
                       --------   ------------   --------   --------   ------------   -------- |  --------   ------------   --------
<S>                    <C>        <C>            <C>        <C>        <C>            <C>      |  <C>        <C>            <C>
Land.................  $ 42,815     $    --      $42,815    $ 47,062     $     --     $47,062  |  $ 53,317     $     --     $ 53,317
Landfill sites.......    11,120       1,280        9,840      10,972           --      10,972  |    15,995        5,543       10,452
Buildings............    68,837       5,548       63,289      71,072           --      71,072  |    99,723       24,915       74,808
Equipment............   185,062      27,122      157,940     150,094           --     150,094  |   334,243      172,226      162,017
Assets under                                                                                   |
  development........     3,687          --        3,687       2,212           --       2,212  |     3,045           --        3,045
                       --------     -------      --------   --------     --------     -------- |  --------     --------     --------
                       $311,521     $33,950      $277,571   $281,412     $     --     $281,412 |  $506,323     $202,684     $303,639
                       ========     =======      ========   ========     ========     ======== |  ========     ========     ========
</TABLE>

     In accordance with fresh start reporting, the cost of fixed assets at March
31, 2000, was adjusted to fair value which approximated the net book value of
the assets on that date.

                                        47
<PAGE>   50
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6.   OTHER ASSETS (in thousands)

<TABLE>
<CAPTION>
                                                                                      |  PREDECESSOR
                                                                         FRESH START  |    COMPANY
                                                                         -----------  |  ------------
                                                         DECEMBER 31,     MARCH 31,   |  DECEMBER 31,
                                                             2000           2000      |      1999
                                                         ------------    -----------  |   ------------
                                                                                      |  (UNAUDITED)
<S>                                                      <C>             <C>          |  <C>
Restricted investments(a)............................      $40,920         $39,025    |    $33,412
Other................................................       11,212          15,625    |     24,144
                                                           -------         -------    |    -------
                                                           $52,132         $54,650    |    $57,556
                                                           =======         =======    |    =======
</TABLE>

(a) Restricted investments are controlled by the Company's captive insurance
    subsidiary, and as at December 31, 2000, approximately $31,183 (March 31,
    2000 -- $28,500) has been pledged as security for the Company's insurance
    liabilities.

7.   ACCRUED LIABILITIES (in thousands)

     Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                                                      |  PREDECESSOR
                                                                         FRESH START  |    COMPANY
                                                                         -----------  |  ------------
                                                         DECEMBER 31,     MARCH 31,   |  DECEMBER 31,
                                                             2000           2000      |      1999
                                                         ------------    -----------  |  ------------
                                                                                      |  (UNAUDITED)
    <S>                                                  <C>             <C>          |  <C>
    Insurance claims outstanding(a)..................      $ 44,332       $ 38,553    |    $ 39,473
    Accrued employee compensation and benefit                                         |
      costs..........................................        30,852         33,025    |      26,745
    Accrued purchases................................        11,769         26,498    |      16,523
    Accrued facility closure costs...................         6,019         13,189    |      13,956
    Billings in excess of costs......................         5,837          7,528    |      10,304
    Accrued special charges..........................         5,482             --    |          --
    Accrued waste material disposal costs............         4,672          6,208    |       4,205
    Accrued environmental costs......................         1,967          6,161    |       6,143
    Accrued other....................................        21,528         16,976    |      24,102
    Income taxes payable.............................           779          1,714    |          --
                                                           --------       --------    |    --------
                                                           $133,237       $149,852    |    $141,451
                                                           ========       ========    |    ========
</TABLE>

(a) The Company determines its insurance claims liability using actuarial
    principles on an undiscounted basis. The Company retains liability for (i)
    workers' compensation claims of up to $500 for any one occurrence; (ii) auto
    and general liability claims of up to $250 for any one occurrence; and (iii)
    certain environmental liabilities up to $2,100 for any one occurrence. The
    Company purchases additional insurance that limits the Company's aggregate
    exposure in any one year to losses of $1,500 for auto and general liability
    claims (above the $100 retention per claim); $5,000 for insured
    environmental liabilities (above the $100 retention per claim); and $14,000
    for workers' compensation claims (without retention). To the extent that any
    insurance carrier is unable to meet its obligations under existing insurance
    policies, the Company could be liable for the defaulted amount.

                                        48
<PAGE>   51
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

<TABLE>
<CAPTION>
                                                                                      |  PREDECESSOR
                                                                         FRESH START  |    COMPANY
                                                                         -----------  |  ------------
                                                         DECEMBER 31,     MARCH 31,   |  DECEMBER 31,
                                                             2000           2000      |      1999
                                                         ------------    -----------  |  ------------
                                                                                      |  (UNAUDITED)
<S>                                                      <C>             <C>          |  <C>
Credit facility                                                                       |
  Term debt(a).......................................      $188,598       $235,825    |    $    --
  Convertible Payment-in-kind debt(a)................       107,660        100,000    |         --
Unsecured Payment-in-kind notes(b)...................        39,228         36,000    |         --
Loans collateralized by certain assets having a net                                   |
  book value of $7,124 bearing interest at a weighted                                 |
  average fixed rate of 6.4% (1999 - 5.6%) maturing                                   |
  at various dates up to 2020........................         4,703          9,551    |      9,712
Loans collateralized by certain assets having a net                                   |
  book value of $2,261 bearing interest at prime plus                                 |
  a weighted average floating rate of                                                 |
  1.5%(1999 - 0.5%) maturing at various dates up to                                   |
  2003...............................................         2,298          1,048    |      1,279
Obligations under capital leases on equipment bearing                                 |
  interest at rates varying from 6% to 12% maturing                                   |
  at various dates to 2005...........................         4,783          7,277    |      6,194
                                                           --------       --------    |    -------
                                                            347,270        389,701    |     17,185
Less current maturities of long-term debt............         4,358          5,161    |     11,917
                                                           --------       --------    |    -------
                                                           $342,912       $384,540    |    $ 5,268
                                                           ========       ========    |    =======
</TABLE>

(a) Term debt and Convertible Payment-in-kind debt

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

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

     (i)   75% of the net asset sale proceeds from the disposition of assets
           sold not in the ordinary course of business;

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

     (iii) the net proceeds from the sale of the UK Metals business, which
           occurred in April, 2000.

                                        49
<PAGE>   52
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

     During 2000, the Company made mandatory prepayments of the term debt
     relating to net asset sales of $47,227, including the sale of the UK Metals
     business, reducing the term debt to $188,598.

     The credit facility, subject first to the revolving operating facility, is
     guaranteed jointly and severally by PSC and substantially all of its direct
     and indirect wholly owned subsidiaries and is collateralized by security
     interests in the assets of PSC and substantially all of its direct and
     indirect wholly owned subsidiaries and a pledge of securities of
     substantially all of its direct and indirect wholly owned subsidiaries.

     The credit facility contains certain restrictive covenants, including
     limitations on the incurrence of indebtedness, the sale of assets, the
     incurrence of liens, the making of specified investments, and the payment
     of cash dividends. In addition, the Company is required to satisfy, among
     other things, certain financial covenants calculated quarterly on a
     12-month rolling basis, including specified interest coverage ratio,
     specified amounts of EBITDA, and maximum capital expenditures.

     The credit facility and the revolving operating facility contain cross
     default provisions whereby a default in one agreement causes a default in
     the other agreement.

     At December 31, 2000, the Company was in compliance with the covenants of
     its credit facility and its revolving operating facility, see Note 8(c).
     During 2000, the Company had undertaken a significant project to operate
     more efficiently, share information and install best practices. This
     project, the PSC Way, includes defining common business processes related
     to transactional functions as well as client relationships and includes
     establishing a common management systems platform. The PSC Way is vital to
     the Company's future business success, but was not contemplated at the time
     the covenants were established. The total cash costs for the PSC Way in
     2000 were $8,636, of which $3,193 was capitalized to property, plant and
     equipment and $5,443 was included in special charges as process
     re-engineering costs.

     Accordingly, the Company sought and received from its lenders on March 28,
     2001, amendments to both the facilities to reduce the EBITDA and interest
     coverage ratio requirements for periods beginning with the 12 months ending
     March 31, 2001, to allow leeway to pursue the PSC Way. In addition, the
     Company sought certain other technical amendments to the facilities.

     During the first quarter 2001, pressure on the Company's businesses,
     particularly the metals business, led management to recognize that the
     Company might have difficulty complying with the amended EBITDA covenants
     under the facilities. In light of this development, the Company undertook
     an intensive review of its business prospects and spending for 2001 to
     determine if the covenant relief would be adequate not only through the
     sharp slowdown being experienced in the first quarter, but throughout 2001.
     The Company used what it believes are reasonable assumptions within the
     bounds of its knowledge. The Company currently expects that it will remain
     in compliance with the amended covenants. In the event it is unable to
     comply with the amended covenants, the Company will renegotiate with its
     lenders or seek alternate financing.

(b) Unsecured Payment-in-kind notes

     Under the Plan, the Company issued an aggregate amount of $48,000 of
     unsecured payment-in-kind notes ("unsecured notes"). The unsecured notes
     mature on April 15, 2010 and bear interest at a fixed rate of 6%. The
     interest is payable semi-annually on April 15 and October 15, and can be
     paid up to April 15, 2005 in cash or additional unsecured notes, at the
     option of the Company. If a change in control occurs, the Company is
     required to make an offer to purchase an amount of unsecured notes equal to
     the present value of the remaining scheduled payments of principal and
     interest, discounted at 16%, plus
                                        50
<PAGE>   53
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

     accrued interest thereon. The unsecured notes will bear interest at a rate
     of 12% from the date of a change in control until such time as the
     unsecured notes are redeemed. The unsecured notes provide for annual
     mandatory sinking fund payments equal to 20% of the aggregate principal
     amount of the outstanding unsecured notes at April 15, 2005, plus all
     accrued and unpaid interest thereon, commencing April 15, 2006. At December
     31, 2000, the unsecured notes are recorded at $34,354 based on a discount
     rate of 12% which approximates fair value.

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

(c) Revolving Operating Facility

     The revolving operating facility provides for a revolving line of credit,
     subject to a borrowing base formula calculated on accounts receivable, of
     up to $175,000 divided into Tranche A for up to $100,000 and Tranche B for
     $75,000. The revolving operating facility matures on September 30, 2002. If
     the Company elects to terminate the revolving operating facility at any
     time before April 7, 2001 then it must pay a termination fee equal to 0.75%
     times the sum of the Tranche A advances and letters of credit outstanding,
     and, if the Company elects to terminate such facility between April 7, 2001
     and October 7, 2001, then it must pay a termination fee equal to 0.375%
     times the sum of the Tranche A advances and letters of credit outstanding.

     Borrowings under the revolving operating facility bear interest at a rate
     equal to the base rate (which is based on the Wells Fargo Bank "prime
     rate") plus 1% on Tranche A advances and 3% on Tranche B advances or at the
     option of the Company on Tranche A advances at a rate equal to the Libor
     rate plus 3%. A letter of credit fee of 2.75% is charged on the amount of
     all outstanding letters of credit.

     The Company is required to pay annually an agency fee and an annual fee
     equal to $150 and $750, respectively, and a monthly loan servicing fee of
     $20. In addition, the Company is required to pay monthly an unused line of
     credit fee equal to 0.375% and 0.75% per annum on the average unused
     portion of Tranche A and Tranche B, respectively, under the revolving
     operating facility.

     The revolving operating facility contains certain restrictive covenants,
     including limitations on the incurrence of indebtedness, the sale of
     assets, the incurrence of liens, the making of specified investments, and
     the payment of cash dividends. In addition, the Company is required to
     satisfy, among other things, certain financial covenants calculated
     quarterly on a 12-month rolling basis including specified interest coverage
     ratio, specified amounts of EBITDA, and maximum capital expenditures.

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

                                        51
<PAGE>   54
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

     At December 31, 2000, the Company's borrowing base formula limits the
     availability of the revolving operating facility to $150,000. The Company
     had undrawn capacity under the revolving operating facility of
     approximately $80,474 net of outstanding letters of credit of approximately
     $69,526.

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

<TABLE>
    <S>                                                             <C>
    2001........................................................    $  4,358
    2002........................................................       2,257
    2003........................................................       2,139
    2004........................................................         661
    2005........................................................     296,876
    Thereafter..................................................      40,979
</TABLE>

9.   OTHER LIABILITIES (in thousands)

<TABLE>
<CAPTION>
                                                                                      |  PREDECESSOR
                                                                         FRESH START  |    COMPANY
                                                                         -----------  |  ------------
                                                         DECEMBER 31,     MARCH 31,   |  DECEMBER 31,
                                                             2000           2000      |      1999
                                                         ------------    -----------  |  ------------
                                                                                      |  (UNAUDITED)
<S>                                                      <C>             <C>          |  <C>
Accrued environmental costs............................    $74,821         $77,053    |    $78,772
Other..................................................      7,108          11,455    |     13,054
                                                           -------         -------    |    -------
                                                           $81,929         $88,508    |    $91,826
                                                           =======         =======    |    =======
</TABLE>

10. LIABILITIES SUBJECT TO COMPROMISE

<TABLE>
<CAPTION>
                                                                 PREDECESSOR
                                                                   COMPANY
                                                                --------------
                                                                 DECEMBER 31,
                                                                     1999
                                                                --------------
                                                                (IN THOUSANDS)
                                                                 (UNAUDITED)
<S>                                                             <C>
Bank term loan(a)...........................................      $1,004,086
Convertible subordinated debentures(b)......................          27,609
Other long-term debt(c).....................................          25,910
Accrued liabilities.........................................          26,317
Other long-term liabilities.................................          28,068
Liabilities of discontinued operations......................          24,478
                                                                  ----------
                                                                  $1,136,468
                                                                  ==========
</TABLE>

(a) In August 1997, Oldco signed a $1.5 billion revolving credit agreement,
    which was amended in October 1997, February 1998, June 1998, October 1998
    and December 1998 (the "Syndicate Debt") with a syndicate of international
    lenders. Since June 30, 1998, Oldco was not in compliance with certain
    covenants in the Syndicate Debt, including the financial covenants, which
    required Oldco to maintain a specified interest coverage ratio, a debt to
    EBITDA ratio, a fixed charge ratio and a working capital ratio.

     Borrowings under the Syndicate Debt were guaranteed, jointly and severally
     by Oldco and its direct and indirect wholly owned subsidiaries and were
     secured by a pledge of the issued and outstanding securities of Oldco's
     direct and indirect wholly owned subsidiaries, and a charge over the
     present and future assets of Oldco and its direct and indirect wholly owned
     subsidiaries. In November 1998, Oldco suspended

                                        52
<PAGE>   55
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. LIABILITIES SUBJECT TO COMPROMISE (continued)

     payments of interest on the Syndicate Debt. The total interest that was
     accrued but unpaid for the fiscal year ended December 31, 1999 was $49.5
     million. Interest on the borrowings under the Syndicate Debt ceased to
     accrue as at June 25, 1999, being the date of the filing of the petition
     for reorganization under Chapter 11.

     The Plan set forth a new capital structure for the Company and the
     conditions that governed the restructuring of approximately $1.0 billion in
     secured term loans outstanding, which included accrued but unpaid interest,
     under the Syndicate Debt. Under the terms of the Plan, Syndicate Debt of
     Oldco of $1.0 billion has been 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 PSC. The secured payment-in-kind debt
     is convertible into 25% of the shares of common stock of PSC on a fully
     diluted basis as at the Plan effective date of April 7, 2000. The senior
     secured debt and the secured payment-in-kind debt each has a term of five
     years.

(b) On the acquisition of Allwaste, Inc. ("Allwaste") Oldco assumed the
    obligation under an indenture with respect to Allwaste's 7 1/4% Convertible
    Subordinated Debentures ("debentures") which were due 2014. Effective
    December 1, 1998, Oldco suspended payments of interest on the debentures,
    which created a default under the indenture. Interest accrued in 1999 to
    June 25, 1999, being the date of the filing of the petition for
    reorganization under Chapter 11 was approximately $2 million. Interest on
    the debentures ceased to accrue as of the filing date.

(c) Included in other long-term debt are promissory notes, relating to certain
    1996 and 1997 acquisitions, totaling $16,000 which were in default as
    principal repayments required were not made.

     The Plan provided for the conversion of certain specified impaired
unsecured claims, including those in (b) and (c) above into $60 million of
unsecured payment-in-kind notes and 5% of the shares of common stock of PSC as
of April 7, 2000, the Plan effective date. The Plan allowed certain holders of
the unsecured claims to receive $1.50 in face amount of unsecured convertible
notes in exchange for every $1.00 in face amount of unsecured payment-in-kind
notes that such holder would have received under the Plan. The aggregate amount
of unsecured convertible notes issued was not to exceed $18 million.

11. CHANGE IN NON-CASH WORKING CAPITAL (in thousands)

<TABLE>
<CAPTION>
                                                     |                PREDECESSOR COMPANY
                                                     |  ------------------------------------------------
                                   NINE MONTHS ENDED |  THREE MONTHS ENDED    YEAR ENDED     YEAR ENDED
                                     DECEMBER 31,    |      MARCH 31,        DECEMBER 31,   DECEMBER 31,
                                         2000        |         2000              1999           1998
                                   ----------------- |  ------------------   ------------   ------------
                                                     |     (UNAUDITED)       (UNAUDITED)    (UNAUDITED)
<S>                                <C>               |  <C>                  <C>            <C>
Accounts receivable.............        $74,354      |       $(22,017)         $(19,523)     $  97,579
Inventory for resale............         (7,254)     |         (1,515)           (6,223)        31,338
Proceeds from sale of UK Metals                      |
  business......................         44,587      |             --                --             --
Other...........................         15,496      |          2,305            80,991        (58,883)
Accounts payable and accrued                         |
  liabilities...................        (38,076)     |          7,666            10,090       (130,690)
Income taxes payable............           (935)     |          1,939            (8,714)         8,911
                                        -------      |       --------          --------      ---------
                                        $88,172      |       $(11,622)         $ 56,621      $ (51,745)
                                        =======      |       ========          ========      =========
</TABLE>

                                        53
<PAGE>   56
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. CHANGE IN NON-CASH WORKING CAPITAL (in thousands) (continued)
STATEMENTS OF CASH FLOWS

     The supplemental cash flow disclosures and non-cash transactions for the
nine months ended December 31, 2000 and the three months ended March 31, 2000
and for the years ended December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                     |                PREDECESSOR COMPANY
                                                     |  ------------------------------------------------
                                   NINE MONTHS ENDED |  THREE MONTHS ENDED    YEAR ENDED     YEAR ENDED
                                     DECEMBER 31,    |      MARCH 31,        DECEMBER 31,   DECEMBER 31,
                                         2000        |         2000              1999           1998
                                   ----------------- |  ------------------   ------------   ------------
                                                     |     (UNAUDITED)       (UNAUDITED)    (UNAUDITED)
<S>                                <C>               |  <C>                  <C>            <C>
Supplemental Disclosures:                            |
Interest paid...................        $13,502      |        $  951            $2,464        $63,344
Income taxes paid...............          3,668      |         2,248             7,687          3,920
Debt incurred on the purchase of                     |
  property and equipment........          1,785      |         2,782                --          2,764
Notes receivable issued/paid on                      |
  the sale/purchase of                               |
  equipment.....................          1,610      |            --             1,875             --
Debt and liabilities incurred or                     |
  assumed in acquisitions.......             --      |            --                --            189
</TABLE>

12. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

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

13. SPECIAL CHARGES (in thousands)

2000

     The special charges comprise the following:

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

     During 2000, the Company embarked on an initiative to standardize business
processes to allow it to operate more efficiently and share information and best
practices - the PSC Way. This initiative includes defining common business
processes related to transactional functions as well as client relationships and
includes establishing a management systems platform. The total cash costs for
the PSC Way initiative in 2000 were $8,636 of which $3,193 was capitalized to
property, plant and equipment and $5,443 is included in special charges as
process re-engineering costs.

                                        54
<PAGE>   57
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SPECIAL CHARGES (in thousands) (continued)

     In the fourth quarter of 2000, the Company also 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 $4,057 in non-cash charges for asset impairments
and $757 in cash costs related to severance and other exit costs.

     The Company has also made the decision to close and/or consolidate several
locations including the consolidation of the previous three business segments,
Industrial Outsourcing Services, By-Products Management and Specialty Businesses
into the Industrial Outsourcing Group and the By-Products Services Group.
Included in special charges are cash costs of $5,234 for severance and other
exit costs and $1,626 in non-cash costs relating to asset impairments.

     Approximately 132 employees are being terminated as a result of these
restructurings. At December 31, 2000 $5,482 remained for severance accruals and
other exit costs.

1998 (unaudited)

     The following table summarizes the special charges recorded by the
Predecessor Company in 1998 and identifies where they are disclosed in the
Consolidated Statements of Earnings:

<TABLE>
<S>                                                             <C>
Asset impairments and other costs recorded as special
  charges(a)................................................    $1,109,877
Costs recorded as selling, general and administrative
  expenses(b)...............................................        61,014
Writedowns of investments recorded as other income and
  expenses(c)...............................................        38,250
                                                                ----------
Pre-tax.....................................................    $1,209,141
                                                                ----------
After tax...................................................    $1,209,141
                                                                ==========
</TABLE>

(a) For the year ended December 31, 1998, the Predecessor Company recorded a
    charge of $1,109,877 reflecting the effects of (i) decisions made with
    respect to the potential disposition of certain operations, (ii) impairments
    of property, plant and equipment and related goodwill resulting both from
    decisions to exit various business locations or activities and dispose of
    the related assets, and (iii) assessments of the recoverability of property,
    plant and equipment and the related goodwill of business units in continuing
    use as a result of the significant deterioration in metal markets and
    business operations of the Predecessor Company during 1998.

     The Predecessor Company reviewed its long-lived assets and intangibles such
     as goodwill, to assess whether the events and changes in circumstances
     described in the Financial Condition section indicated that the carrying
     amounts of assets might not be recoverable. In making these estimates,
     management utilized the assessments, calculations and determinations made
     in preparing the plan of reorganization filed with the appropriate courts
     in Canada and the United States, including estimates of overall enterprise
     value. Where the reorganization plan or estimates of enterprise value
     raised doubts as to the recoverability of the assets, management estimated
     the future cash flows from the asset and its eventual disposition. If these
     estimates of future cash flow did not provide a reasonable level of
     assurance as to the recoverability of the carrying value of the asset, the
     carrying value was written down to its estimated recoverable amount.

     All businesses assessed for asset impairment were acquired in purchase
     business combinations and, accordingly, the goodwill that arose in the
     transactions was included in the tests for recoverability. Assets to be
     disposed of were valued at their estimated net realizable value while the
     value of the assets of the business units to be continued were assessed at
     fair value principally using discounted cash flow methods.

                                        55
<PAGE>   58
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. SPECIAL CHARGES (in thousands) (continued)

     The special charges related to asset impairments and other costs comprise
the following:

<TABLE>
    <S>                                                             <C>
    Business units, locations or activities to be exited:
      Goodwill written off......................................    $   40,000
    Property, plant and equipment written down to estimated net
      realizable value of $6,500................................        18,863
    Future lease and other exiting costs........................        24,254
    Business units, locations or activities to be continued:
      Goodwill written off......................................       951,660
    Property, plant and equipment written down to estimated net
      realizable value of $99,816...............................        52,360
    Other intangibles impairment................................        22,740
                                                                    ----------
                                                                    $1,109,877
                                                                    ==========
</TABLE>

(b) Included in selling, general and administrative costs are costs of $28,000
    relating to charges for financing fees and debt restructuring costs.
    Deferred financing costs that were previously amortized over the life of the
    syndicate debt were written off as the existing syndicate debt was replaced.
    The Predecessor Company's financial position, its planned divestitures,
    litigation with debtors, unexpected financial difficulties of certain
    customers and a general deterioration in market conditions necessitated
    recording an additional provision for doubtful accounts of $25,000. The
    remainder of the charges recorded in selling, general and administrative
    costs related to severance payments and other costs resulting from ongoing
    cost reduction measures and restructuring.

(c) The Predecessor Company's 24.2% investment in Innovative Valve Technologies
    Inc. ("Invatec"), was accounted for using the equity method of accounting.
    Invatec is a publicly traded company that provides comprehensive maintenance
    repair, replacement and value-added distribution services of industrial
    valves and process system components. The reduction in carrying value of
    $25,000 recognizes a long-term impairment in value that was reflected by the
    then-current market performance of Invatec's shares. In 1999, the
    Predecessor Company sold the investment.

(d) The Predecessor Company's investment in Strategic Holdings Inc., which was
    accounted for at cost, was divested in 1998 for less than its book value.
    Accordingly, a writedown of the investment of $13,250 was recorded in 1998
    as part of "Other income and expense-net".

14. REORGANIZATION COSTS (in thousands)

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

<TABLE>
<CAPTION>
                                                                      PREDECESSOR COMPANY
                                                            ---------------------------------------
                                                            THREE MONTHS ENDED       YEAR ENDED
                                                              MARCH 31, 2000      DECEMBER 31, 1999
                                                            ------------------    -----------------
                                                               (UNAUDITED)           (UNAUDITED)
<S>                                                         <C>                   <C>
Assets and liabilities adjusted to net realizable
  value.................................................         $    --              $118,137
Professional fees.......................................          17,908                20,127
Employee retention and severance........................              --                12,563
Provision for litigation claims.........................              --                 6,360
Provision for future lease rejections...................              --                 6,164
Other...................................................           2,699                   854
                                                                 -------              --------
                                                                 $20,607              $164,205
                                                                 =======              ========
</TABLE>

                                        56
<PAGE>   59
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. EARNINGS PER SHARE (in thousands)

<TABLE>
<CAPTION>
                                                  |                     PREDECESSOR COMPANY
                                                  |  ----------------------------------------------------------
                                                  |       FOR THE              FOR THE             FOR THE
                                NINE MONTHS ENDED |  THREE MONTHS ENDED      YEAR ENDED          YEAR ENDED
                                DECEMBER 31, 2000 |    MARCH 31, 2000     DECEMBER 31, 1999   DECEMBER 31, 1998
                                ----------------- |  ------------------   -----------------   -----------------
                                                  |     (UNAUDITED)          (UNAUDITED)         (UNAUDITED)
<S>                             <C>               |  <C>                  <C>                 <C>
Net earnings (loss) for the                       |
  period -- basic and                             |
  diluted.....................      $(45,509)     |       $ 45,759            $(252,643)         $(1,586,872)
                                    ========      |       ========            =========          ===========
Number of shares of common                        |
  stock outstanding...........        24,042      |        131,144              131,144              131,144
Effect of using weighted                          |
  average shares of common                        |
  stock outstanding...........            (5)     |             --                   --                  (14)
                                    --------      |       --------            ---------          -----------
Basic and diluted weighted                        |
  average number of shares of                     |
  common stock outstanding....        24,037      |        131,144              131,144              131,130
                                    ========      |       ========            =========          ===========
</TABLE>

16.  DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS (in thousands except
rate/strike price and term)

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

     The following table summarizes the outstanding derivative instruments at
December 31:

<TABLE>
<CAPTION>
                                                       PREDECESSOR COMPANY (UNAUDITED)
                             -----------------------------------------------------------------------------------
                                               1999                                       1998
                             ----------------------------------------   ----------------------------------------
                                CONTRACT/       TERM        RATE/          CONTRACT/       TERM        RATE/
INSTRUMENTS                  NOTIONAL AMOUNT   (YEARS)   STRIKE PRICE   NOTIONAL AMOUNT   (YEARS)   STRIKE PRICE
-----------                  ---------------   -------   ------------   ---------------   -------   ------------
<S>                          <C>               <C>       <C>            <C>               <C>       <C>
Interest rate
  swaps/collars............    $        --        --             --      $    130,000       0.4          6.95%
Copper futures purchases...     3,250 lbs.       0.2      $0.81/lb.       11,575 lbs.       0.3      $0.73/lb.
</TABLE>

     The Predecessor Company had forward physical copper sales commitments to
customers totaling 7,157 lbs. and 7,500 lbs. at December 31, 1999 and 1998,
respectively and copper futures purchase contracts with major public broker
dealers which were, collectively designated as hedges for its copper processing
operations and inventory.

                                        57
<PAGE>   60
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. STOCKHOLDERS' EQUITY (DEFICIT)
     (in thousands except number of shares/options and per share amounts)

<TABLE>
<CAPTION>
                                                                                   |  PREDECESSOR
                                                                                   |    COMPANY
                                                                                   |  ------------
                                                         DECEMBER 31,   MARCH 31,  |  DECEMBER 31,
                                                             2000          2000    |      1999
                                                         ------------   ---------- |  ------------
                                                                                   |  (UNAUDITED)
<S>                                                      <C>            <C>        |  <C>
Share capital consists of:                                                         |
Authorized                                                                         |
  10,000,000 shares of preferred stock                                             |
  90,000,000 shares of common stock                                                |
Outstanding                                                                        |
Shares of common stock                                                             |
  Number..............................................    24,041,946    24,000,000 |  131,144,013
  Dollars.............................................    $  118,544    $  118,294 |  $ 1,351,482
</TABLE>

     The outstanding share capital of the Company and Predecessor Company
comprises the following:

<TABLE>
<CAPTION>
                                                                      COMMON STOCK
                                                                -------------------------
                                                                  NUMBER         AMOUNT
                                                                -----------    ----------
<S>                                                             <C>            <C>
Philip Services Corporation:
  Balance - March 31, 2000..................................     24,000,000    $  118,294
  Shares issued for cash....................................         41,946           250
                                                                -----------    ----------
  Balance - December 31, 2000...............................     24,041,946    $  118,544
                                                                ===========    ==========
_____________________________________________________________________________________________

Predecessor Company: (unaudited)
  Balance - December 31, 1998...............................    131,144,013    $1,351,482
                                                                ===========    ==========
  Balance - December 31, 1999...............................    131,144,013    $1,351,482
                                                                ===========    ==========
  Balance - March 31, 2000..................................    131,144,013    $1,351,482
                                                                ===========    ==========
</TABLE>

STOCK OPTIONS -- PHILIP SERVICES CORPORATION

     On the Plan effective date, the Company issued 1,000,000 common share
options to the President and Chief Executive Officer at exercise prices ranging
from $5.96 to $8.69 per common share. These prices were in excess of the
Company's fair market value on a per share basis as at the Plan effective date
determined based on an enterprise valuation as discussed in Note 1. The options
are exercisable evenly over the next four years and expire on April 6, 2010.

     The Company has also allotted and reserved 1,040,000 shares of common stock
under its 2000 Stock Option Plan ("Option Plan") Under the Option Plan, options
may be granted to purchase shares of common stock of the Company at the
then-current market price. The options have a term of not more than ten years
from the date of grant. Options granted under the Option Plan may be either
incentive stock options, which are intended to meet the requirement of Section
422 of the Internal Revenue Code, or non qualified stock options. The Company
had granted 874,500 options as at December 31, 2000 at an exercise price of
$6.83.

     The Company has allotted and reserved 9,132,423 shares of common stock
issuable under the PIK debt and the unsecured convertible notes.

                                        58
<PAGE>   61
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. STOCKHOLDERS' EQUITY (DEFICIT)
     (in thousands except number of shares/options and per share amounts)
    (continued)

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

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

<TABLE>
<CAPTION>
                                                                   NINE MONTHS ENDED
                                                                   DECEMBER 31, 2000
                                                                -----------------------
                                                                AS REPORTED    PROFORMA
                                                                -----------    --------
<S>                                                             <C>            <C>
Net loss....................................................     $(45,509)     $(46,657)
Basic and diluted loss per share............................     $  (1.89)     $  (1.94)
</TABLE>

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

STOCK OPTIONS -- PREDECESSOR COMPANY (UNAUDITED)

     On the effective date of the reorganization, all options of the Predecessor
Company were cancelled.

     Common share options issued and outstanding were as follows:

<TABLE>
<CAPTION>
                                                               NUMBER            $/SHARE
                                                              ---------    -------------------
<S>                                                           <C>          <C>
Employee stock option plans(a)
Year of grant
1995........................................................    575,104              Cdn $9.88
1996........................................................    968,300     Cdn $8.50 to 11.90
1997........................................................  3,576,000    Cdn $18.10 to 22.75
1997 Serv-Tech acquisition..................................    246,981         $7.44 to 22.64
1997 Allwaste acquisition...................................  1,283,961         $6.96 to 10.64
1998........................................................  2,277,500     Cdn $3.95 to 22.85
Issued in conjunction with the acquisition of Philip
  Environmental Corporation(b)..............................    776,386      Cdn $7.05 to 8.00
                                                              ---------
Total outstanding December 31, 1999.........................  9,704,232
                                                              =========
</TABLE>

(a) The Predecessor Company allotted and reserved 10,257,149 common shares under
    its 1991 and 1997 Employee Stock Option Plans, the Serv-Tech Long Term
    Incentive Plan, the Serv-Tech Amended and Restated 1989 Incentive Stock
    Option Plan and the Allwaste Amended and Restated 1989 Replacement
    Non-Qualified Stock Option Plan and any supplements thereto. All options
    expired five to ten years from the date of grant. All the options
    outstanding were issued at the then current market price.

(b) These options expired on November 26, 2000.

                                        59
<PAGE>   62
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. STOCKHOLDERS' EQUITY (DEFICIT)
     (in thousands except number of shares/options and per share amounts)
    (continued)

     If compensation costs were measured using the fair value of the stock
options on the date of grant, during 1999 and 1998, in accordance with SFAS No.
123 the Predecessor Company's net loss would have been as follows:

<TABLE>
<CAPTION>
                                                     1999                         1998
                                           ------------------------    --------------------------
                                           AS REPORTED    PROFORMA     AS REPORTED     PROFORMA
                                           -----------    ---------    -----------    -----------
                                           (UNAUDITED)                 (UNAUDITED)
<S>                                        <C>            <C>          <C>            <C>
Net loss.................................   $(252,643)    $(261,144)   $(1,586,872)   $(1,596,472)
Basic and diluted loss per share.........   $   (1.93)    $   (1.99)   $    (12.10)   $    (12.17)
</TABLE>

     The weighted average fair value of options granted in 1999 and 1998 was nil
and $1.55, respectively. The fair value of each option was determined using the
Black-Scholes option valuation model with the following assumptions for 1998:
(i) risk free interest rate of 5.44 (ii) expected volatility of 94.94, (iii)
expected option life ranging from 5 to 10 years and (iv) no annualized dividend
yield.

18. INCOME TAXES (in thousands)

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

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

     The Company has net operating loss carryforwards in the U.S. of
approximately $180,000. The US net operating loss carryforwards expire between
the years 2001 and 2020. The Company has approximately $103,000 in excess
interest deductions carryforwards which carry forward indefinitely.

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

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

<TABLE>
<CAPTION>
                                                  |                PREDECESSOR COMPANY
                                                  |  ------------------------------------------------
                                                  |                                YEAR ENDED
                               NINE MONTHS ENDED  |  THREE MONTHS ENDED           DECEMBER 31,
                                 DECEMBER 31,     |      MARCH 31,         --------------------------
                                     2000         |         2000              1999           1998
                               -----------------  |  ------------------    -----------    -----------
                                                  |     (UNAUDITED)        (UNAUDITED)    (UNAUDITED)
<S>                            <C>                |  <C>                   <C>            <C>
Earnings (loss) from                              |
  continuing operations                           |
  before tax and                                  |
  reorganization costs                            |
U.S. ......................        $(32,813)      |       $13,259          $  (125,433)   $(1,062,474)
Non U.S. ..................          (6,247)      |         7,200                3,479       (226,010)
                                   --------       |       -------          -----------    -----------
Total......................        $(39,060)      |       $20,459          $  (121,954)   $(1,288,484)
                                   ========       |       =======          ===========    ===========
</TABLE>

                                        60
<PAGE>   63
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. INCOME TAXES (in thousands) (continued)

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

<TABLE>
<CAPTION>
                                                     |                PREDECESSOR COMPANY
                                                     |  ------------------------------------------------
                                                     |                                YEAR ENDED
                                  NINE MONTHS ENDED  |  THREE MONTHS ENDED           DECEMBER 31,
                                    DECEMBER 31,     |      MARCH 31,         --------------------------
                                        2000         |         2000              1999           1998
                                  -----------------  |  ------------------    -----------    -----------
                                                     |     (UNAUDITED)        (UNAUDITED)    (UNAUDITED)
<S>                               <C>                |  <C>                   <C>            <C>
U.S. -- Federal and state                            |
  Current.....................         $1,124        |         $690             $   417        $ 3,721
  Deferred....................             --        |           --                  --         18,897
                                       ------        |         ----             -------        -------
                                        1,124        |          690                 417         22,618
                                       ------        |         ----             -------        -------
Non U.S.                                             |
  Current.....................            202        |          166              (6,033)         5,294
  Deferred....................          2,849        |           --                  --         13,531
                                       ------        |         ----             -------        -------
                                        3,051        |          166              (6,033)        18,825
                                       ------        |         ----             -------        -------
Total.........................         $4,175        |         $856             $(5,616)       $41,443
                                       ======        |         ====             =======        =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                     |                PREDECESSOR COMPANY
                                                     |  ------------------------------------------------
                                                     |                                YEAR ENDED
                                  NINE MONTHS ENDED  |  THREE MONTHS ENDED           DECEMBER 31,
                                    DECEMBER 31,     |      MARCH 31,         --------------------------
                                        2000         |         2000              1999           1998
                                  -----------------  |  ------------------    -----------    -----------
                                                     |     (UNAUDITED)        (UNAUDITED)    (UNAUDITED)
<S>                               <C>                |  <C>                   <C>            <C>
Income tax expense (benefit)                         |
  based on statutory effective                       |
  income tax rates............        $(13,671)      |       $    43           $(128,373)     $(575,112)
(Increase) decrease in income                        |
  tax benefit resulting from:                        |
  Tax rate differentials in                          |
     other jurisdictions......             480       |          (269)              4,613         71,298
  Domestic taxes on foreign                          |
     earned income............           1,998       |            --                  --             --
  Non-deductible expenses                            |
     goodwill and                                    |
     amortization.............             933       |           113               2,618         13,597
Other non-deductible expenses                        |
  relating to special                                |
  charges.....................             839       |           988              15,685        329,598
Valuation allowance...........          14,184       |         1,140             104,924        202,408
Other.........................            (588)      |        (1,159)             (5,083)          (346)
                                      --------       |       -------           ---------      ---------
Income tax expense                                   |
  (benefit)...................        $  4,175       |       $   856           $  (5,616)     $  41,443
                                      ========       |       =======           =========      =========
</TABLE>

                                        61
<PAGE>   64
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. INCOME TAXES (in thousands) (continued)

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

<TABLE>
<CAPTION>
                                                                 |         PREDECESSOR COMPANY
                                                                 |  ----------------------------------
                                              NINE MONTHS ENDED  |  THREE MONTHS ENDED     YEAR ENDED
                                                DECEMBER 31,     |      MARCH 31,         DECEMBER 31,
                                                    2000         |         2000               1999
                                              -----------------  |  ------------------    ------------
                                                                 |     (UNAUDITED)        (UNAUDITED)
<S>                                           <C>                |  <C>                   <C>
Net operating loss and excess interest                           |
  deduction carryforwards.................        $(105,914)     |       $(83,646)         $(142,785)
Accruals not yet deductible and asset                            |
  basis differences.......................          (86,678)     |        (37,618)          (140,035)
Other.....................................             (177)     |          6,580            (19,492)
Valuation allowance.......................          201,751      |        121,264            307,332
                                                  ---------      |       --------          ---------
Net deferred tax liability................        $   8,982      |       $  6,580          $   5,020
                                                  =========      |       ========          =========
</TABLE>

     The net operating loss carryforwards expire between the years 2001 and
2020. In assessing the value of the deferred tax assets, management considers
whether it is more likely than not that all of the deferred tax assets will be
realized. Projected future income tax planning strategies and the expected
reversal of deferred tax liabilities are considered in making this assessment.
In 2000, based on the level of historical taxable income and projections for
future taxable income over the periods in which the net operating losses are
deductible, it was determined that, at this time, it is more likely than not
that the Company will not realize the benefits of deferred tax assets. The
valuation allowance increased by $80,487 for the nine months ended December 31,
2000, of which $14,184 relates to the change in deferred tax assets related to
the nine month period and $66,303 relates to the adjustment of deferred tax
assets and liabilities resulting from an analysis of book and tax basis
differences as of the fresh start reporting date.

     Provisions have not been made for U.S. income taxes or foreign withholding
taxes on approximately $22,600 of undistributed earnings of foreign subsidiaries
as these earnings are considered indefinitely reinvested. These earnings could
become subject to U.S. income taxes and foreign withholding taxes if they were
remitted as dividends, were loaned to the Company or a U.S. subsidiary, or if
the Company should sell its stock in the subsidiaries. If such earnings were not
considered indefinitely reinvested, deferred U.S. income taxes and foreign
withholding taxes would have been provided of approximately $8,000.

19. RELATED PARTIES (in thousands)

(a) The following transactions were recorded with the directors and officers of
     the Company and Predecessor Company:

<TABLE>
<CAPTION>
                                                                        |     PREDECESSOR COMPANY
                                                                        |  --------------------------
                                                     NINE MONTHS ENDED  |   YEAR ENDED DECEMBER 31,
                                                       DECEMBER 31,     |  --------------------------
                                                           2000         |     1999           1998
                                                     -----------------  |  -----------    -----------
                                                                        |  (UNAUDITED)    (UNAUDITED)
<S>                                                  <C>                |  <C>            <C>
Repayments from (to) directors...................         $    --       |  $        53      $(1,400)
                                                          -------       |  -----------      -------
Services acquired from companies controlled by                          |
  officers and directors.........................         $    --       |  $     2,124      $ 3,724
                                                          -------       |  -----------      -------
</TABLE>

(b) An amount due from an officer and a director of the Predecessor Company at
     December 31, 1999 and 1998 of $428 and $481 respectively has been included
     in other current assets. The loan is unsecured, non-interest bearing and
     payable on demand. As of December 31, 2000, this amount has been repaid in
     full.

                                        62
<PAGE>   65
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20. COMMITMENTS (in thousands)

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

<TABLE>
<S>                                                             <C>
2001........................................................    $22,624
2002........................................................     16,674
2003........................................................     11,978
2004........................................................      8,684
2005 and thereafter.........................................     11,117
</TABLE>

     Letters of credit issued amounted to $69,526 as at December 31, 2000 (March
31, 2000 -- $84,899). The Company has guaranteed a loan of approximately $2,000
for a minority investee.

21. SEGMENTED INFORMATION (in thousands)

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

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

     -  By-Products Services Group, which includes industrial by-product
        collection, recycling, processing and disposal, as well as analytical
        services, container and tank cleaning and emergency response services.

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

<TABLE>
<CAPTION>
                                                    NINE MONTHS ENDED DECEMBER 31, 2000
                                      ----------------------------------------------------------------
                                                                                SHARED
                                      INDUSTRIAL    BY-PRODUCTS    METALS     SERVICES &
                                      OUTSOURCING    SERVICES     SERVICES   ELIMINATIONS     TOTAL
                                      -----------   -----------   --------   ------------   ----------
<S>                                   <C>           <C>           <C>        <C>            <C>
Revenue............................    $496,870      $216,068     $443,169     $     --     $1,156,107
Income (loss) from operations......      11,848        11,608        3,836      (42,421)       (15,129)
Income (loss) from operations
  before special charges...........      18,866        12,731        3,836      (33,445)         1,988
Total assets.......................     212,449       178,953      222,331      108,816        722,549
Depreciation and amortization......      13,947         9,848        7,709        3,410         34,914
Capital expenditures...............      16,173        10,115        9,837        5,072         41,197
Equity investments.................          --            --        2,978        1,637          4,615
Total assets - Fresh start - March
  31, 2000.........................    $234,627      $173,825     $254,161     $184,719     $  847,332
</TABLE>

                                        63
<PAGE>   66
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. SEGMENTED INFORMATION (in thousands) (continued)

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

<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED         FRESH START
                                                           DECEMBER 31, 2000        MARCH 31, 2000
                                                        ------------------------    --------------
                                                                      LONG-LIVED      LONG-LIVED
                                                         REVENUE        ASSETS          ASSETS
                                                        ----------    ----------    --------------
<S>                                                     <C>           <C>           <C>
United States........................................   $  992,342     $218,046        $215,656
Canada...............................................      153,453       62,712          66,127
Other................................................       10,312       45,002          48,002
                                                        ----------     --------        --------
                                                        $1,156,107     $325,760        $329,785
                                                        ==========     ========        ========
</TABLE>

_____________________________________________________________________________

<TABLE>
<CAPTION>
                                                          PREDECESSOR COMPANY
                                                ---------------------------------------
                                             THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
                                  -------------------------------------------------------------------
                                                                              SHARED
                                  INDUSTRIAL    BY-PRODUCTS     METALS      SERVICES &
                                  OUTSOURCING    SERVICES      SERVICES    ELIMINATIONS      TOTAL
                                  -----------   -----------   ----------   ------------   -----------
<S>                               <C>           <C>           <C>          <C>            <C>
Revenue.........................  $  186,048    $   57,940    $  236,398    $      --     $   480,386
Income (loss) from operations...      13,154           230         9,470      (11,041)         11,813
Total assets....................     234,627       176,502       295,085      161,541         867,755
Depreciation and amortization...       4,599         3,285         3,831          721          12,436
Capital expenditures............       3,592         2,527         2,255           29           8,403
Equity investments..............          --            --         5,848           --           5,848
</TABLE>

<TABLE>
<CAPTION>
                                                           PREDECESSOR COMPANY
                                                 ---------------------------------------
                                                YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
                                   ------------------------------------------------------------------
                                                                               SHARED
                                   INDUSTRIAL    BY-PRODUCTS     METALS      SERVICES &
                                   OUTSOURCING    SERVICES      SERVICES    ELIMINATIONS     TOTAL
                                   -----------   -----------   ----------   ------------   ----------
<S>                                <C>           <C>           <C>          <C>            <C>
Revenue..........................  $  646,002    $  266,146    $  708,953    $      --     $1,621,101
Income (loss) from operations....     (13,558)        4,199         2,494      (66,087)       (72,952)
Total assets.....................     211,596       182,848       306,625      160,510        861,579
Depreciation and amortization....      21,995        14,642        15,047        2,102         53,786
Capital expenditures.............      11,743         7,823         7,496        2,251         29,313
Equity investments...............       2,728            --         5,348           --          8,076
</TABLE>

                                        64
<PAGE>   67
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

21. SEGMENTED INFORMATION (in thousands) (continued)

<TABLE>
<CAPTION>
                                                           PREDECESSOR COMPANY
                                                 ---------------------------------------
                                                YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
                                   ------------------------------------------------------------------
                                                                               SHARED
                                   INDUSTRIAL    BY-PRODUCTS     METALS      SERVICES &
                                   OUTSOURCING    SERVICES      SERVICES    ELIMINATIONS     TOTAL
                                   -----------   -----------   ----------   ------------   ----------
<S>                                <C>           <C>           <C>          <C>            <C>
Revenue..........................  $  825,191    $  301,152    $1,283,334    $      --     $2,409,677
Income (loss) from operations....    (412,145)      (48,126)     (516,041)    (237,388)    (1,213,700)
Income (loss) from operations
  before special charges.........      37,421         8,317        (2,367)     (86,180)       (42,809)
Total assets.....................     270,529     1,005,487       427,358     (604,517)     1,098,857
Depreciation and amortization....      28,561        17,847        33,582       17,239         97,229
Capital expenditures.............      12,977        11,553        29,638        4,885         59,053
Equity investments...............       7,766            --         3,776           --         11,542
</TABLE>

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

<TABLE>
<CAPTION>
                                                            PREDECESSOR COMPANY
                                 -------------------------------------------------------------------------
                                  THREE MONTHS ENDED           YEAR ENDED                YEAR ENDED
                                    MARCH 31, 2000          DECEMBER 31, 1999         DECEMBER 31, 1998
                                 ---------------------   -----------------------   -----------------------
                                            LONG-LIVED                LONG-LIVED                LONG-LIVED
                                 REVENUE      ASSETS      REVENUE       ASSETS      REVENUE       ASSETS
                                 --------   ----------   ----------   ----------   ----------   ----------
                                      (UNAUDITED)              (UNAUDITED)               (UNAUDITED)
<S>                              <C>        <C>          <C>          <C>          <C>          <C>
United States..................  $398,660    $215,656    $1,308,159    $219,471    $2,008,391    $281,024
Canada.........................    47,566      72,007       212,067      74,936       290,854     144,301
Other..........................    34,160      65,111       100,875      60,471       110,432      64,713
                                 --------    --------    ----------    --------    ----------    --------
                                 $480,386    $352,774    $1,621,101    $354,878    $2,409,677    $490,038
                                 ========    ========    ==========    ========    ==========    ========
</TABLE>

22. CONTINGENCIES (in thousands)

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

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

     Certain of the Company's facilities require accruals for expected site
     restoration costs as a result of operating practices at the sites prior to
     their acquisition by the Company. The Company has established procedures to
     periodically evaluate these sites, giving consideration to the nature and
     extent of the expected site restoration or site closure and at December 31,
     2000 has estimated the liability to remediate these sites to be $55,457
     (March 31, 2000 -- $60,536, December 31, 1999 -- $63,782

                                        65
<PAGE>   68
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. CONTINGENCIES (in thousands) (continued)

     (unaudited)). If it is determined that more expensive restoration
     approaches may be required in the future, the Company could incur
     additional obligations which could be material.

     The Company has been named as a potentially responsible or liable party
     under U.S. federal and state superfund laws in connection with various
     sites. It is alleged that the Company or its predecessors transported waste
     to the sites, disposed of waste at the sites, or operated the sites in
     question. 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 ("Preferred Remedy") is expected to be the final
     remedy to be followed by post-closure monitoring for approximately 30
     years. Ecology presented the parties with draft agreed orders in June 2000
     covering two separate scopes of work. One scope of work relates to the
     closure and post-closure monitoring of the sanitary landfill portion of the
     site. The other scope of work covers the remediation and monitoring of the
     industrial waste burial zones. Cooperating PLPs, including the Company,
     have executed the agreed orders. The Company has reached agreement with the
     industrial waste area generator PLPs with respect to funding allocation for
     remediation of all but one of the industrial waste zones. The Company has
     also entered into negotiations with the sanitary landfill PLPs, including
     certain municipalities that may have access to grant funding for the
     closure of the landfill. Preferred Remedy activities are expected to
     commence in 2001. The cost of cleanup is estimated to be in the range of
     $14,000 to $17,000. The Company's share of such costs cannot be
     definitively determined at this time, but preliminary estimates indicate
     that the Company may be liable for more than 50% of such costs. The Company
     is investigating whether insurance coverage may be available to cover the
     Company's costs for the cleanup. The Company has reviewed the nature and
     extent of the allegations, the number, connection and financial ability of
     other named and unnamed potentially responsible parties and the nature and
     estimated cost of the likely remedy. Based on its review, at December 31,
     2000, the Company has accrued its estimate of its liability to remediate
     these sites at $21,331 (March 31, 2000 -- $22,678, December 31, 1999 --
     $22,519 (unaudited)). If it is determined that more expensive remediation
     approaches may be required in the future, the Company could incur
     additional obligations which could be material.

     The liabilities discussed above are disclosed in the Consolidated Balance
     Sheets at December 31, 2000 as follows:

<TABLE>
    <S>                                                           <C>
    Accrued liabilities........................................   $ 1,967
    Other liabilities..........................................    74,821
                                                                  -------
                                                                  $76,788
                                                                  =======
</TABLE>

(b)  In October 1999, Exxon Corporation ("Exxon") commenced an action in the
     District Court, Harris County, Texas against International Catalyst, Inc.
     ("INCAT"), an indirect wholly owned subsidiary of PSC, for damages of
     approximately $32,100 arising from certain work conducted by INCAT at
     Exxon's Baytown, Texas chemical plant. Exxon alleges that INCAT was
     responsible for the purchase and installation in 1996 of improper gasket
     materials in the internal bed piping flange joints of the Baytown plant
     which caused damages to the facility and consequential losses arising from
     the shutdown of the plant while repairs were made. The Company has
     conducted a review of the allegations and determined that it is not
     feasible to predict the final outcome of the proceedings or what portion of
     any Company liability in the proceeding will be covered by applicable
     insurance policies or recovery against other parties.

(c)  On April 14, 2000, Maxus Energy Corporation et al. ("Maxus") commenced an
     action in the United States District Court for Northern District of Ohio
     against various parties, including Philip Metals Recovery (USA), Inc.
     ("PMR"), an indirect wholly owned subsidiary of PSC. The action is brought

                                        66
<PAGE>   69
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. CONTINGENCIES (in thousands) (continued)

     under CERCLA for the recovery of past response costs relating to the
     releases and threatened releases of hazardous substances at the Diamond
     Shamrock superfund site located in Painesville, Ohio. The plaintiffs allege
     that they have incurred more than $19,500 in response costs in connection
     with the site. The site is approximately 1,100 acres in size and, since
     July of 1996, PMR has operated a secondary aluminum smelter on
     approximately 24 acres of property within the site. The Company has
     conducted a preliminary review of the claims made in the action and
     determined that it is not feasible to predict the final outcome of the
     proceedings.

(d)  On June 6, 2000, a lawsuit was filed in the United States District Court
     for the Eastern District of Texas against SECO, Inc. ("SECO"), an indirect
     wholly owned subsidiary of PSC, by a former employee of SECO for unpaid
     overtime wages under the Fair Labor Standards Act ("FLSA"). The plaintiff
     alleges that SECO knowingly attempted to artificially characterize a
     portion of the hourly wage rate as "per diem" reimbursement, thereby,
     reducing the hourly rate for purposes of calculating overtime pay. The
     court has ruled that the case will proceed as an FLSA "collective action".
     The Company is currently reviewing the potential exposure in this case
     based upon the possibility of a national class of claimants.

(e)  On December 21, 2000, an action was commenced in the United States District
     Court for the Southern District of Texas against Chemical Reclamation
     Services, Inc. ("CRS") and PSC alleging that faulty equipment on a tank car
     utilized by CRS to dispose of waste paint and solvent caused a spill of
     waste material. The plaintiff alleges that the spill, which occurred in
     1999, resulted in more than $1,400 in costs for emergency removal action
     and subsequent environmental evaluation of the spill site. This case is in
     an early stage, and at this time, the Company is unable to predict its
     potential exposure.

(f)  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 allege negligence on the part of RMI and the Company in the
     removal of sodium from the filter on RMI's premises. Plaintiffs are seeking
     actual and punitive damages and their attorneys are applying 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
     has demanded indemnification from PSC under the terms of the contract
     pursuant to which the work was performed. The Company has a retained
     liability of $2,100 before insurance coverage is available. The Company has
     conducted a preliminary review of the claims made in the action and
     determined that it is not feasible to predict the outcome of the
     proceedings.

(g)  The Company is a defendant in lawsuits for which the Company has insurance
     coverage. Each of these suits is, in the event of an adverse verdict,
     subject to a deductible. Although the Company does not believe that the
     uninsured liability from any of these suits would be material, it is not
     possible to predict the effect of the cumulative deductibles. The Company
     is named as a defendant in a number of other lawsuits which have arisen in
     the ordinary course of its business. The Company believes that except as
     otherwise reported herein, neither the insured litigation nor the other
     litigation is likely to have a material adverse effect on its business or
     financial condition and therefore, has made no provision in these financial
     statements for the potential liability, if any.

                                        67
<PAGE>   70
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

     The table below sets forth consolidated operating results by fiscal quarter
for the years ended December 31, 2000 and 1999.

<TABLE>
<CAPTION>
                                                               |                   PREDECESSOR COMPANY
                                                               |  -----------------------------------------------------
                                             2000              |    2000                        1999
                                ------------------------------ |  --------   ------------------------------------------
                                 FOURTH     THIRD      SECOND  |   FIRST      FOURTH      THIRD      SECOND     FIRST
                                QUARTER    QUARTER    QUARTER  |  QUARTER     QUARTER    QUARTER    QUARTER    QUARTER
                                --------   --------   -------- |  --------   ---------   --------   --------   --------
<S>                             <C>        <C>        <C>      |  <C>        <C>         <C>        <C>        <C>
Revenue......................   $369,430   $359,313   $427,364 |  $480,386   $ 425,132   $383,413   $397,012   $415,544
Operating expenses...........    327,014    316,404    373,904 |   419,094     396,533    350,287    352,941    362,587
Special charges..............     12,945      2,627      1,545 |        --          --         --         --         --
Selling, general and                                           |
  administrative costs.......     34,566     30,647     36,670 |    37,043      41,675     36,167     50,408     49,669
Depreciation and                                               |
  amortization...............     12,548     11,220     11,146 |    12,436      12,122     13,259     13,688     14,717
                                --------   --------   -------- |  --------   ---------   --------   --------   --------
Income (loss) from                                             |
  operations.................    (17,643)    (1,585)     4,099 |    11,813     (25,198)   (16,300)   (20,025)   (11,429)
Interest expense.............      9,963      9,755      9,408 |       952         284        591     25,375     26,524
Other income and expense --                                    |
  net........................     (1,814)    (2,366)    (1,015)|    (9,598)       (363)    (1,981)      (686)      (742)
                                --------   --------   -------- |  --------   ---------   --------   --------   --------
Income (loss) from continuing                                  |
  operations before tax and                                    |
  reorganization costs.......    (25,792)    (8,974)    (4,294)|    20,459     (25,119)   (14,910)   (44,714)   (37,211)
Reorganization costs.........         --         --         -- |    20,607      85,849     64,032     14,324         --
Income taxes.................      2,064      1,548        563 |       856     (11,203)     1,237      2,650      1,700
                                --------   --------   -------- |  --------   ---------   --------   --------   --------
Income (loss) from continuing                                  |
  operations.................    (27,856)   (10,522)    (4,857)|    (1,004)    (99,765)   (80,179)   (61,688)   (38,911)
Cumulative effect of change                                    |
  in accounting principle....         --         --         -- |        --          --         --         --     (1,543)
Discontinued operations......     (1,220)    (1,054)        -- |     1,473      (5,225)    (3,064)    39,175     (1,443)
Fresh start adjustments......         --         --         -- |    45,290          --         --         --         --
                                --------   --------   -------- |  --------   ---------   --------   --------   --------
Net earnings (loss)..........   $(29,076)  $(11,576)  $ (4,857)|  $ 45,759   $(104,990)  $(83,243)  $(22,513)  $(41,897)
                                ========   ========   ======== |  ========   =========   ========   ========   ========
Basic and diluted earnings                                     |
  (loss) per share                                             |
Continuing operations........   $  (1.16)  $  (0.44)  $  (0.20)|  $  (0.01)  $   (0.76)  $  (0.61)  $  (0.47)  $  (0.30)
Discontinued operations......      (0.05)     (0.04)        -- |      0.01       (0.04)     (0.02)      0.30      (0.01)
Other........................         --         --         -- |      0.35          --         --         --      (0.01)
                                --------   --------   -------- |  --------   ---------   --------   --------   --------
                                $  (1.21)  $  (0.48)  $  (0.20)|  $   0.35   $   (0.80)  $  (0.63)  $  (0.17)  $  (0.32)
                                ========   ========   ======== |  ========   =========   ========   ========   ========
</TABLE>

                                        68
<PAGE>   71

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

     None.

                                    PART III

ITEM 10, 11, 12 AND 13.

     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION;
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Items 10, 11, 12 and 13 will be contained in a
definitive proxy statement that the registrant anticipates will be filed no
later than April 2, 2001, and is incorporated herein by reference in accordance
with General Instruction G(3) to Form 10-K.

                                    PART IV

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

ITEM 14(A)1.  FINANCIAL STATEMENTS

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

     (i)   Report of Independent Accountants

     (ii)  Consolidated Balance Sheets

     (iii) Consolidated Statements of Earnings

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

     (v)  Consolidated Statements of Cash Flows

     (vi) Notes to the Consolidated Financial Statements

ITEM 14(A)2.  FINANCIAL STATEMENT SCHEDULE

     Schedule II Valuation and Qualifying Accounts

                                        69
<PAGE>   72

ITEM 14(A)3.  EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
  3.1     Amended and Restated Certificate of Incorporation
          (incorporated by reference to Exhibit 3.1 to the
          registrant's Report on Form 10-Q filed August 14, 2000).
  3.2     Amended By-Laws
 10.1     Credit Agreement, dated as of March 31, 2000, between the
          registrant and various of its lenders, with Canadian
          Imperial Bank of Commerce acting as Administrative Agent
          (incorporated by reference to Exhibit 99.1 to the
          registrant's Current Report on Form 8-K filed May 8, 2000).
 10.2     Loan Agreement, dated as of March 31, 2000, between the
          registrant and certain of its lenders, with Foothill Capital
          Corporation acting as Arranger and Administrative Agent
          (incorporated by reference to Exhibit 99.2 to the
          registrant's Current Report on Form 8-K filed May 8, 2000).
 10.3     Registration Rights Agreement, dated as of March 31, 2000,
          between the registrant and certain securities holders
          (incorporated by reference to Exhibit 99.3 to the
          registrant's Current Report on Form 8-K filed May 8, 2000).
 10.4     Registration Rights Agreement, dated as of March 31, 2000,
          between the registrant and certain securities holders
          (incorporated by reference to Exhibit 99.4 to the
          registrant's Current Report on Form 8-K filed May 8, 2000).
 10.5     Registration Rights Agreement, dated as of March 31, 2000,
          between the registrant and certain securities holders
          (incorporated by reference to Exhibit 99.5 to the
          registrant's Current Report on Form 8-K filed May 8, 2000).
 10.6     Shareholder Rights Agreement, dated as of March 31, 2000,
          between the registrant and American Securities Transfer &
          Trust, Inc. (incorporated by reference to Exhibit 99.6 to
          the registrant's Current Report on Form 8-K filed May 8,
          2000).
 10.7     Philip Services Corporation Stock Option Plan (incorporated
          by reference to Exhibit 99.7 to the registrant's Current
          Report on Form 8-K filed May 8, 2000).
 10.8     First amendment to Credit Agreement, dated as of March 8,
          2001, between the registrant and various of its lenders,
          with Canadian Imperial Bank of Commerce acting as
          Administrative Agent.
 10.9     Second amendment to Credit Agreement, dated as of March 28,
          2001 between the registrant and various of its lenders, with
          Canadian Imperial Bank of Commerce acting as Administrative
          Agent.
 10.10    Amendment Number One, dated March 28, 2001, to Loan
          Agreement between the registrant and certain of its lenders,
          with Foothill Capital Corporation acting as Arranger and
          Administrative Agent.
 21       Subsidiaries of the registrant
 24       Powers of attorney
</TABLE>

(b) No Reports on Form 8-K were filed during the fiscal quarter ended December
     31, 2000.

                                        70
<PAGE>   73

                                 SIGNATURE PAGE

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

     Dated: March 28, 2001

                                          PHILIP SERVICES CORPORATION

                                          By:   /s/ ANTHONY G. FERNANDES
                                            ------------------------------------
                                            Anthony G. Fernandes
                                            President and Chief Executive
                                             Officer
                                            (Principal Executive and Financial
                                             Officer)

                                          By:   /s/ KENNETH J. GIACOMINO
                                            ------------------------------------
                                            Kenneth J. Giacomino
                                            Vice President and Corporate
                                              Controller
                                            (Principal Accounting Officer)

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

<TABLE>
<CAPTION>
                  SIGNATURE                                    TITLE                       DATE
                  ---------                                    -----                       ----
<C>                                              <S>                                <C>
          /s/ ANTHONY G. FERNANDES               President, Chief Executive         March 28, 2001
---------------------------------------------    Officer and Director
            Anthony G. Fernandes

                      *                          Director                           March 28, 2001
---------------------------------------------
                Harold First

                      *                          Director                           March 28, 2001
---------------------------------------------
               Edmund B. Frost

                      *                          Chairman and Director              March 28, 2001
---------------------------------------------
              Robert L. Knauss

                      *                          Director                           March 28, 2001
---------------------------------------------
           Richard L. Marcantonio

                      *                          Director                           March 28, 2001
---------------------------------------------
               Peter Offermann

                      *                          Director                           March 28, 2001
---------------------------------------------
                 Felix Pardo

                      *                          Director                           March 28, 2001
---------------------------------------------
             R. William Van Sant

                      *                          Director                           March 28, 2001
---------------------------------------------
            Nathaniel D. Woodson

       *By:  /s/ ANTHONY G. FERNANDES
---------------------------------------------
            Anthony G. Fernandes
              Attorney-in-fact
</TABLE>

                                        71
<PAGE>   74

                          PHILIP SERVICES CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

                                  SCHEDULE II

<TABLE>
<CAPTION>
COLUMN A                         COLUMN B       COLUMN C -- ADDITION        COLUMN D        COLUMN E
--------                       ------------   -------------------------   -------------   -------------
                                 BALANCE       CHARGE TO     CHARGE TO
                               BEGINNING OF    COSTS AND       OTHER                        BALANCE,
         DESCRIPTION              PERIOD       EXPENSES     ACCOUNTS(1)   DEDUCTIONS(2)   END OF PERIOD
         -----------           ------------   -----------   -----------   -------------   -------------
<S>                            <C>            <C>           <C>           <C>             <C>
ALLOWANCE FOR DOUBTFUL
  ACCOUNTS:
PHILIP SERVICES CORPORATION
  December 31, 2000..........  (14,298,532)   (10,202,916)         --       3,521,203      (20,980,245)
                               -----------    -----------     -------      ----------      -----------
-------------------------------------------------------------------------------------------------------
PREDECESSOR COMPANY
  (UNAUDITED)
  March 31, 2000.............  (23,938,004)    (4,048,662)         --       4,574,976      (23,411,690)
  December 31, 1999..........  (24,353,674)   (10,298,302)    150,000      10,563,972      (23,938,004)
  December 31, 1998..........  (17,643,048)   (28,759,609)    113,746      21,935,237      (24,353,674)
</TABLE>

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

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

(2) Write-off of uncollectible accounts

                                        72
<PAGE>   75

                                     (LOGO)

                                                               PRINTED IN CANADA
                                                                    T26158
<PAGE>   76

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>                                                           <C>
  3.1     Amended and Restated Certificate of Incorporation
          (incorporated by reference to Exhibit 3.1 to the
          registrant's Report on Form 10-Q filed August 14, 2000).....
  3.2     Amended By-Laws.............................................
 10.1     Credit Agreement, dated as of March 31, 2000, between the
          registrant and various of its lenders, with Canadian
          Imperial Bank of Commerce acting as Administrative Agent
          (incorporated by reference to Exhibit 99.1 to the
          registrant's Current Report on Form 8-K filed May 8,
          2000).......................................................
 10.2     Loan Agreement, dated as of March 31, 2000, between the
          registrant and certain of its lenders, with Foothill Capital
          Corporation acting as Arranger and Administrative Agent
          (incorporated by reference to Exhibit 99.2 to the
          registrant's Current Report on Form 8-K filed May 8,
          2000).......................................................
 10.3     Registration Rights Agreement, dated as of March 31, 2000,
          between the registrant and certain securities holders
          (incorporated by reference to Exhibit 99.3 to the
          registrant's Current Report on Form 8-K filed May 8,
          2000).......................................................
 10.4     Registration Rights Agreement, dated as of March 31, 2000,
          between the registrant and certain securities holders
          (incorporated by reference to Exhibit 99.4 to the
          registrant's Current Report on Form 8-K filed May 8,
          2000).......................................................
 10.5     Registration Rights Agreement, dated as of March 31, 2000,
          between the registrant and certain securities holders
          (incorporated by reference to Exhibit 99.5 to the
          registrant's Current Report on Form 8-K filed May 8,
          2000).......................................................
 10.6     Shareholder Rights Agreement, dated as of March 31, 2000,
          between the registrant and American Securities Transfer &
          Trust, Inc. (incorporated by reference to Exhibit 99.6 to
          the registrant's Current Report on Form 8-K filed May 8,
          2000).......................................................
 10.7     Philip Services Corporation Stock Option Plan (incorporated
          by reference to Exhibit 99.7 to the registrant's Current
          Report on Form 8-K filed May 8, 2000).......................
 10.8     First Amendment to Credit Agreement, dated as of March 8,
          2001, between the registrant and various of its lenders,
          with Canadian Imperial Bank of Commerce acting as
          Administrative Agent........................................
 10.9     Second Amendment to Credit Agreement, dated as of March 28,
          2001, between the registrant and various of its lenders,
          with Canadian Imperial Bank of Commerce acting as
          Administrative Agent........................................
 10.10    Amendment Number One, dated March 28, 2001, to Loan
          Agreement between the registrant and certain of its lenders,
          with Foothill Capital Corporation acting as Arranger and
          Administrative Agent........................................
 21       Subsidiaries of the registrant..............................
 24       Powers of attorney..........................................
</TABLE>