PHILIP SERVICES CORP, 10-K/A, 1998-05-15

PHILIP SERVICES CORP
10-K/A, 1998-05-15
SANITARY SERVICES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A
AMENDMENT No. 2

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-20854

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

<TABLE>
<S> <C>
ONTARIO N/A
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification Number)
or Organization)
100 KING STREET WEST, HAMILTON, ONTARIO L8N 4J6
(Address of Principal Executive Offices) (Zip Code)
</TABLE>

(905) 521-1600
(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 Shares, No Par Value New York 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 Common Shares on the New York
Stock Exchange on May 11, 1998, was approximately $688,517,529 (assumes
officers, directors and all shareholders beneficially owning 5% or more of the
outstanding Common Shares are affiliates).

The number of Common Shares of the Registrant outstanding on May 11, 1998
was 131,146,196.

DOCUMENTS INCORPORATED BY REFERENCE

None.
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INDEX
TO FORM 10-K/A

EXPLANATORY NOTE

This Amendment No. 2 on Form 10-K/A, to the Annual Report on Form 10-K of
Philip Services Corp. ("Philip" or the "Company") for the year ended December
31, 1997, which Form 10-K was previously amended on April 30, 1998 on Form
10-K/A, is filed solely to amend Item 3 (Legal Proceedings), Item 5 (Market for
Registrant's Common Equity and Related Stockholders Matters), Item 6 (Selected
Financial Data), Item 7 (Management's Discussion and Analysis of Financial
Condition and Results of Operations), Item 8 (Financial Statements and
Supplementary Data), Item 10 (Directors and Executive Officers of the
Registrant), and Item 12 (Security Ownership of Certain Beneficial Owners and
Management).

<TABLE>
<CAPTION>
10-K PART AND ITEM NO. PAGE NO.
- ---------------------- --------
<S> <C> <C>
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......... 17

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
Item 6. Selected Financial Data..................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 22
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure...................................... 52

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 53
Item 11. Executive Compensation...................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 58
Item 13. Certain Relationships and Related Transactions.............. 59

PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K....................................................... 61
</TABLE>
<PAGE> 3

PART I

ITEM 1. BUSINESS

INTRODUCTION

Philip Services Corp. ("Philip" or the "Company") is one of North America's
leading suppliers of metals recovery and industrial services. The Company has
one of the largest integrated networks of metals recovery and industrial
services operations, servicing more than 50,000 industrial and commercial
customers from over 320 locations across North America and Europe. The Company
applies proprietary technologies to reduce the cost and downtime associated with
industrial cleaning and plant turnaround activities, and to recover value from
industrial by-products and metal bearing residuals. The Company's primary base
of operations is in the United States. See Note 21 to the audited Consolidated
Financial Statements which appears on pages 49 and 50.

Philip is a company amalgamated under the laws of the Province of Ontario
pursuant to a Certificate and Articles of Amalgamation dated April 15, 1991. On
May 22, 1997, a Certificate and Articles of Amendment under the Business
Corporations Act (Ontario) were issued changing the name of the Company from
Philip Environmental Inc. to Philip Services Corp.

The Company's business is organized into two operating divisions, the
Metals Services Group and the Industrial Services Group. The Metals Services
Group's primary business operations are ferrous (steel), copper and aluminum
processing and recycling and related industrial and mill services. The ferrous
metals operations include the collection and processing of ferrous scrap
materials for shipment to steel mills and the provision of related mill
services. Ferrous operations also include steel service centers that process and
distribute structural steel products. Copper operations are comprised of cold
process mechanical recovery facilities, scrap management, management of material
recycling centers for the telecommunications industry and copper refining. The
group's aluminum recycling operations process aluminum dross, a by-product of
primary aluminum production, and produce aluminum deoxidizing products and
alloys from aluminum scrap. Both the non-ferrous and ferrous operations of
Philip provide significant brokerage capabilities for scrap materials and
primary metals, including steel, copper, aluminum and tin. The Metals Services
Group services the steel, telecommunications, aluminum, wire and cable and
automotive industries. See Note 21 to the Company's audited Consolidated
Financial Statements which appears on pages 49 and 50 of this Form 10-K for the
revenue, income (loss) from operations and identifiable assets of the Metals
Services Group for the fiscal years ended December 31, 1997, 1996 and 1995.

The Company believes its Industrial Services Group is the largest
integrated provider of on-site industrial services, by-products recovery and
environmental services in North America, with a network of approximately 250
facilities. The Industrial Services Group's operations are divided into four
main activities: on-site industrial services, by-products recovery,
environmental services and utilities management. On-site industrial services
include industrial cleaning and maintenance, waste collection and
transportation, container services and tank cleaning, turnaround and outage
services, mechanical contracting and refractory services. By-products recovery
includes distillation, engineered fuel blending, paint overspray recovery,
organic and inorganic processing and polyurethane recycling. Environmental
services include strategic resource management, decommissioning, remediation,
environmental consulting and engineering, and analytical and emergency response
services. See Note 21 to the Company's audited Consolidated Financial Statements
which appears on pages 49 and 50 of this Form 10-K for the revenue, income
(loss) from operations and identifiable assets of the Industrial Services Group
for the fiscal years ended December 31, 1997, 1996 and 1995.

See Note 21 to the Company's audited Consolidated Financial Statements
which appears on pages 49 and 50 of this Form 10-K for a geographic breakdown of
the Company's revenue, income (loss) from operations and total assets.

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RESTATEMENT OF 1997, 1996 AND 1995 FINANCIAL STATEMENTS

The Company's audited Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995 have been restated. See Note 3 to the Company's
audited Consolidated Financial Statements which appears on pages 34 to 36 of
this Form 10-K.

INDUSTRY OVERVIEW

Manufacturers are seeking to improve competitiveness by focusing on their
core business and by reducing costs in non-core, non-revenue producing
activities. Three key trends that have developed as a result are: (i) increased
outsourcing of non-core services, (ii) a reduction by manufacturers in the
number of vendors from which outsourced services are purchased and (iii)
maximizing resource recovery opportunities from waste and by-product streams.
The Company believes that the industrial services and resource recovery
industries are positioned to benefit from these three major trends.

Many non-core activities can be performed on a more cost effective basis by
specialized industrial service and resource recovery providers that have greater
expertise, technology advantages, access to markets for recovered materials and
economies of scale. As a result, companies which outsource non-core activities
are able to lower operating and capital costs, increase access to new
technologies, enhance by-product recovery and reduce liabilities by redirecting
accountability. In addition, by reducing the number of vendors from which
outsourced activities are purchased, and acquiring services from those suppliers
that can provide a "total service" solution on a national basis, manufacturers
can further lower administrative costs, reduce management overhead and increase
supplier accountability while reducing potential liabilities. Recovery of
resources from waste and by-product streams improves manufacturing efficiency by
reducing and reusing manufacturing residuals and by-products, thereby lowering
operating costs, including raw material costs, and reducing environmental
liabilities.

BUSINESS UNITS

METALS SERVICES

The Company's Metals Services Group applies customized process technologies
to recover metals from industrial by-products. The group's three primary
businesses include ferrous (steel), copper and aluminum processing and
recycling. The Company is North America's leading processor of wire and cable
scrap, is the most fully integrated provider of services to the steel industry
in North America and is the largest manufacturer of aluminum deoxidizing
products, an essential element in the manufacture of steel, in the northeastern
United States. The Company is also one of the largest ferrous scrap processors
in the United Kingdom. The Metals Services Group has approximately 3,250
employees.

The following table sets forth acquisitions in 1997 in the Metals Services
Group for which the purchase price, including debt assumed, was in excess of $10
million.

<TABLE>
<CAPTION>
COMPANY OR
CLOSING DATE ASSETS ACQUIRED PRIMARY LOCATION BUSINESS UNIT
------------ --------------- ---------------- -------------
<S> <C> <C> <C>
October 1997......... Steiner-Liff Metals Nashville, Tennessee Metals Services (Ferrous)
October 1997......... Southern Foundry Supply Chattanooga, Tennessee Metals Services (Ferrous)
October 1997......... Luria Brothers Cleveland, Ohio Metals Services (Ferrous)
August 1997.......... Intermetco Limited Hamilton, Ontario Metals Services (Ferrous)
July 1997............ Roth Bros. Smelting Corp. Syracuse, New York Metals Services (Aluminum)
May 1997............. Reynolds Metals Bellwood, Bellwood, Virginia Metals Services (Aluminum)
Virginia facility
February 1997........ Conversion Resources, Inc. Cleveland, Ohio Metals Services (Copper)
February 1997........ Warrenton Resources, Inc. Warrenton, Missouri Metals Services (Copper)
January 1997......... Allied Metals Limited Great Britain Metals Services (Ferrous)
</TABLE>

FERROUS PROCESSING OPERATIONS. The Metals Services Group is a processor
and broker of ferrous scrap to steel mills and foundries located in the lower
Great Lakes region, the Pittsburgh-Ohio corridor, Tennessee and

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in the United Kingdom. As a result of the 1997 acquisitions of the assets of
Luria Brothers, and all of the outstanding shares of Intermetco Inc.,
Steiner-Liff Iron and Metal Company and affiliated companies and Southern
Foundry Supply, Inc., and affiliated companies the Company's processing capacity
increased from 2 million tons in 1996 to more than ten million tons annually.
The Company is also the most fully integrated service provider to the North
American steel industry, supplying scrap steel, deoxidizing product, electric
arc furnace dust management and other services such as mill scale recovery,
industrial vacuum, slag recovery, wastewater treatment, decommissioning and
analytical and emergency response services.

Ferrous scrap is generated as a by-product of automotive stamping and
fabrication and is also derived from post-consumer sources (cars, refrigerators,
etc.). It is processed by baling, separation or shredding during which time the
material is graded and sorted. The primary consumer of ferrous scrap is the
mini-mill steel industry, which uses electric arc furnace technology to reduce
scrap to molten form to produce steel.

The Company's operations are regionally concentrated close to industrial
scrap producers and other suppliers and to local steel mills. Unlike many of the
Company's competitors that secure their supply of ferrous scrap indirectly
through ferrous scrap dealers, the Metals Services Group obtains most of its
ferrous scrap directly from industrial scrap producers pursuant to long standing
relationships. Accordingly, the Metals Services Group has access to consistent
volumes of high quality ferrous scrap from which it can supply the necessary
grades and mixtures required by the steel industry. As production capacity of
the mini-mill industry continues to increase, the Company believes that its
ability to consistently supply required volumes of quality scrap will make it
the supplier of choice in the regions it serves, and that the resulting
relationships will provide opportunities to sell additional services to such
customers.

The Metals Services Group also processes and distributes a broad range of
heavy carbon steel products through distribution and processing facilities
located in Houston, Texas, and five additional distribution centers located
across the southwestern and southeastern United States. The Company is one of
the largest distributors of structural steel products in these regions. Through
its acquisition of Intermetco Inc., the Company also provides processing of
steel coils and produces spiral weld pipe. These operations enable the Company
to provide further services to the steel industry through bulk purchases that
are inventoried and further processed, cut or formed, for resale to steel
purchasers. This service expands the Company's package of integrated services to
the steel industry and provides the Company with another entry point through
which to sell additional services.

The Company has also established itself in the European scrap processing
and mill services industry with its 1997 acquisition of Allied Metals Limited
("Allied Metals") from ASW Holdings PLC ("ASW"). Allied Metals is one of the
largest steel scrap processing and mill services companies in the United
Kingdom. Allied Metals' principal business involves the collection of
post-consumer scrap and the sale of processed metal as a raw material to steel
mills and foundries that use electric arc furnace technology. At its heavy media
separation facility, Allied Metals uses a proprietary process to recover copper,
aluminum and zinc from the residue of its auto shredding operations. Allied
Metals' facilities are concentrated in Southwest England and South Wales from
which it supplies local steel mills and foundries and the export market through
its two seaport facilities. The Company also provides on-site slag management
and electric arc furnace dust recycling at ASW's steel mill.

The Metals Services Group sets and adjusts its prices for ferrous metals
sold based upon prices set monthly by the major steel producers. The Company
manages its commodity price risk by acquiring ferrous metal scrap as it is
needed for its customers and maintaining relatively low inventories of scrap and
processed metals.

COPPER PROCESSING OPERATIONS. The Metals Services Group is North America's
leading processor of wire and cable scrap, processing approximately 500 million
pounds annually. The primary metal recovered is copper. The wire and cable
manufacturing industry is the largest generator of scrap wire and cable in North
America. Other principal generators include the telecommunications industry
(through the dismantling and regeneration of telecommunications lines),
utilities and the automotive industry. The availability of wire and cable scrap
depends upon a number of factors, including the general level of economic
activity in the industries served by the Metals Services Group, many of which
are cyclical in nature, and market prices for copper and
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the other metals recovered. The Metals Services Group has not historically had
difficulties in obtaining volumes of wire and cable scrap. Through its use of
proprietary technology and expertise, the Company believes that its Metals
Services Group is able to recover more components and generate higher yields
from wire and cable scrap than its competitors.

Depending on the grade of the material, recovered copper is either sold as
#1 or #2 scrap, or refined into prime ingots for sale to brass mills or rod
mills, or to copper smelters throughout North America. The Metals Services Group
also negotiates toll and conversion contracts for its wire and cable
manufacturing customers through which scrap materials are exchanged for new raw
materials. Under tolling contracts, the Metals Services Group receives a fee for
processing scrap and returning the recovered metals to the customer. Under
conversion contracts, the Metals Services Group acquires wire and cable scrap
from the customer and delivers back, directly or through secondary metals
processors, specified amounts of merchant copper and other metals. The Metals
Services Group also enters into brokerage contracts to supply merchant copper
and other metals to significant customers where quantities required exceed the
amounts recovered from the scrap supplied. This service results in the customer
having to deal with fewer suppliers.

The Metals Services Group also manages recycling centers for four regional
Bell operating companies under multi-year contracts. Under these contracts, the
Company collects scrap from the dismantling and regeneration of
telecommunications lines, categorizes it and prepares the scrap for resale. In
certain cases, the Company has the first right to purchase the wire and cable
scrap, and in other cases the Company is paid a fee for collecting the material
and may also bid for the scrap once it is collected.

Through Conversion Resources, Inc. of Cleveland, Ohio the Metals Services
Group also provides resource recovery programs that separate and process copper,
brass and aluminum from scrap produced by industrial clients. These metals are
then sold to tube mills, brass mills, foundries, specialty consumers and copper
refineries. Through Warrenton Resources Inc. of Warrenton, Missouri
("Warrenton"), the Metals Services Group refines copper scrap into copper ingots
and other customer specified shapes and is the sole manufacturer of fire-refined
copper ingot in North America. Warrenton uses #2 copper scrap as input for the
production of its ingots, which is generated from the Company's copper wire and
cable chopping operations. Through the Warrenton operations, wire and cable
scrap processing is vertically integrated to include collection, processing and
refining. This integration permits the Company to maximize the value of
recovered copper by enabling it to sell either into the lower grade commodity
markets or into the higher value added refined copper markets, as market
conditions vary.

The Company is exposed to commodity price risk during the period that it
has title to materials that are held in inventory for processing and/or resale.
The Company reduces its commodity price risk through matching purchases of
recoverable materials with current and future physical sales and the use of
certain financial instruments.

ALUMINUM PROCESSING OPERATIONS. Through its Guelph, Ontario and Syracuse,
New York plants, the Company is a leading producer of aluminum alloys for the
automotive industry situated in the Great Lakes region. The Company operates
furnaces for the production of foundry alloys, primarily from aluminum scrap.
The facilities have an annual capacity of approximately 350 million pounds. The
use of lightweight aluminum in automotive production continues to increase as
manufacturers comply with increasingly stringent fuel consumption and air
emission guidelines. The Company's alloys facilities also provide molten
aluminum to its customers, primarily automotive parts manufacturers. The Company
is one of a small number of molten aluminum suppliers which requires the use of
high cost "crucibles" and specialized vehicles to transport the molten aluminum.
This also requires that the Company's facilities be close to those of its
customers, which proximity provides a competitive advantage.

The Company is also a major producer of aluminum deoxidizing product for
the steel industry at facilities located in Painesville, Ohio and Richmond,
Virginia. Aluminum deoxidizing product is used in the manufacture of steel to
eliminate gas bubbles during the production process. The Company's aluminum
deoxidizing product is marketed to over 30 major North American steel mills and
provides another essential product offering to steel mills. Production of the
aluminum deoxidizing product also supports the vertical

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integration of the Company's aluminum operations since aluminum recovered from
dross provides a raw material for aluminum deoxidizing production.

The Metals Services Group aluminum processing operations also recover
aluminum from dross, a by-product formed in the primary smelting of aluminum.
Aluminum producers deliver dross to the Company's rotary kiln furnaces where it
is melted and processed to produce aluminum ingots that are returned to the
customer for a tolling fee. The Metals Services Group operates three rotary kiln
furnaces in two locations in the province of Quebec which service the major
aluminum producers located within the province. Transportation costs associated
with aluminum dross recycling require that the Metals Services Group's recycling
operations be located closely to the primary smelters served. The proximity of
the Metals Services Group's Quebec operations to the aluminum smelters, in
combination with its contractual relationships with the smelters, has resulted
in the absence of significant competitors for the Metals Services Group's
aluminum dross recycling operations.

INDUSTRIAL SERVICES

Through its Industrial Services Group, the Company believes it is the
single largest integrated industrial services provider in North America with
approximately 250 locations and about 10,750 employees and provides a wide range
of services geared towards the industrial customer. The Company is a leading
provider of on-site industrial services and operates the largest network of
solid and liquid industrial by-product recovery facilities. The Industrial
Services Group is headquartered in Houston, Texas.

The increasing focus by industrial enterprises on their core competencies
has led to greater outsourcing of non-core, non-revenue generating activities in
order to reduce costs. Such activities can generally be performed on a more cost
effective basis by specialized industrial service companies which have greater
expertise, technology advantages and economies of scale. Such activities include
industrial cleaning and maintenance, waste management and transportation,
demolition and remediation, and resource recovery. In addition, industrial
customers are evidencing a desire to reduce the number of vendors of industrial
services and to acquire services from those suppliers that can provide a "total
service" solution on a national basis thereby providing further administrative
and cost reductions.

The Company has expanded rapidly through acquisitions to provide it with
the range of products and services and the geographic coverage necessary to
respond to these trends. The acquisitions of Allwaste, Inc. ("Allwaste") and
Serv-Tech, Inc. ("Serv-Tech") have resulted in a significant expansion of
Philip's historical by-products recovery and environmental services businesses
by adding industrial cleaning and maintenance, container services, waste
transportation, refinery turnaround and refactory services. This broader range
of services better positions the Company to take advantage of the vendor
reduction trend. It has also provided the Company with significant cross selling
opportunities to the customer base of each company, since Philip has
historically been strong in the steel, telecommunications, automotive, aluminum,
chemical and paint industries, whereas Allwaste and Serv-Tech serve the
refining, petrochemical, electric utility, pulp and paper and food processing
industries. In addition, Allwaste and Serv-Tech were previously reliant upon
third parties for processing and disposal of wastes generated from their
industrial cleaning and turnaround projects. These waste streams may now be
processed at Philip's network of by-product recovery facilities. This
integration of on-site cleaning and maintenance with transportation, processing
and disposal allows the Company to provide to its customers single source
environmental accountability and competitive pricing.

The acquisitions of Allwaste and Serv-Tech have also given the Company a
significant presence in the heavily industrialized regions of the Gulf coast and
southeastern and southwestern United States, which complements Philip's
concentration in the Great Lakes and industrial northeast regions. The
Industrial Services Group is now organized into six operating regions:
Automotive, Central, Midwest, Northeast, Southeast and Western, each with a
mandate to provide the complement of industrial services to customers in that
region. In addition, many of the Company's specialized services are marketed
across all regions by specialized groups through the coordination of sales,
analysis, delivery and execution, and technical support. These specialized
services include demolition and decommissioning services, turnaround services,
chemical services and products, analytical laboratories, container services and
tank cleaning.

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The following table sets forth acquisitions in 1997 in the Industrial
Services Group for which the purchase price, including debt assumed, was in
excess of $10 million.

<TABLE>
<CAPTION>
COMPANY OR
CLOSING DATE ASSETS ACQUIRED PRIMARY LOCATION BUSINESS UNIT
------------ --------------- ---------------- -------------
<S> <C> <C> <C>
July 1997............ Allwaste, Inc. Houston, Texas Industrial Services
July 1997............ Serv-Tech, Inc. Houston, Texas Industrial Services
July 1997............ 21st Century Environmental Management Providence, Rhode Island Industrial Services
Inc.
July 1997............ International Alliance Services, Inc. Hatfield, Pennsylvania Industrial Services
February 1997........ RMF Global, Inc. Toledo, Ohio Industrial Services
</TABLE>

The Industrial Services Group is divided into four principal divisions:
on-site industrial services, by-products recovery operations; environmental
services and utilities management.

ON-SITE INDUSTRIAL SERVICES. The Industrial Services Group is a leading
provider of on-site industrial services throughout North America. Industries
served include the refining, petrochemical, oil and gas, electric utility, pulp
and paper, automotive, food processing, paint and coatings, and transportation
industries. The Industrial Services Group provides industrial and commercial
customers with a range of industrial and environmental services, including
on-site industrial cleaning and maintenance (including hydroblasting,
gritblasting, air-moving and liquid vacuuming and container services, and tank
cleaning), waste collection and transportation, turnaround and outage services,
refactory services, project management services, inspection and analysis
services, electrical and instrumentation, and other general plant support
services.

Hydroblasting is performed using high pressure pumps to remove hard
deposits from surfaces, such as heat exchangers, boilers, aboveground storage
tanks and pipelines, that may be unsuitable for other conventional cleaning
techniques. Gritblasting utilizes both abrasive and non-abrasive media to clean
surfaces on electrostatic precipitators and boilers and to prepare metal
surfaces for protective coatings and non-destructive testing. Air-moving and
liquid vacuuming remove and handle industrial wastes or salvageable materials
contained in customers' tanks, containers or other process configurations.
Container services include cleaning, inspection and repair of highway
tank-trailers, railcar tanks, intermodal containers and intermediate bulk
containers. The Industrial Services Group also inspects all cleaned containers
in accordance with applicable governmental regulations to ensure no product or
moisture remains in the cleaned container. Tank cleaning involves the removal of
sludge and residual products from the interior of storage tanks to allow
inspection, repair and/or product changeover. The Company believes that the
Industrial Services Group has the most comprehensive mix of tank cleaning
technologies and service capabilities of any contractor in North America.

Waste collection and transportation services provide comprehensive on-site
by-product and waste management programs for facility waste streams. Waste is
tested and classified in order to determine the recyclability of the material
and third party disposal requirements. Manifests and other shipping
documentation are prepared and the waste material is sent to the Company's
recycling and reclamation facilities wherever possible, or to contracted third
party treatment and disposal facilities. The Industrial Services Group operates
a large fleet of collection vehicles.

Turnaround and outage services provide customers in refineries,
petrochemical facilities and power plants a single source integrated package of
turnaround maintenance services and other specialty services for the scheduled
maintenance, repair or replacement of process equipment, operating machinery and
piping systems. Sophisticated maintenance programs play an increasingly
important role in the continuous improvement of performance in plant operations.
Services provided include project management, planning and scheduling,
decontamination, heat exchange maintenance, refactory services and heat treating
services. The Company is a North American leader in providing turnaround
services to the petrochemical industry. This is largely due to its patented
technologies that reduce labor costs and turnaround costs, including those
associated with the cost of down-time. These technologies also significantly
reduce the safety risks associated with heat bundle extraction and cleaning. The
Company intends to expand the application of these technologies to other key
industry sectors, including steel, chemicals and utilities.

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<PAGE> 9

BY-PRODUCTS RECOVERY. The Industrial Services Group's by-products recovery
operations apply customized process technologies to recover or create useable
products from liquid and solid industrial by-products (primarily hazardous and
non-hazardous chemical waste) and thereby reduce the cost and quantity of
materials destined for final disposal. The Industrial Services Group collects
organic industrial by-products which are processed into engineered fuels or
distilled into solvents and also provides on-site waste minimization and
inorganic waste processing.

Producing engineered fuels involves the blending of liquid and solid
industrial by-products into a customized fuel for use in industrial furnaces,
principally cement kilns. Distillation of spent solvents occurs through both
simple and fractional methods with recovered solvents either returned to the
generator or sold to the automotive aftermarket. Inorganic processing
capabilities include the treatment of waste waters and cyanide residuals, and
the recovery of metals from sludges, slags and foundry sands. The Industrial
Services Group also provides wastewater treatment, sludge management and paint
overspray recovery services to automotive and parts manufacturers that use paint
spray booth systems.

The Company's network of facilities and application of proprietary
technologies enables Philip to process higher volumes of by-products at reduced
cost. By developing new technologies or customizing available technologies, the
Company has achieved competitive processing and recovery efficiencies. For
example, the Company has developed a container processing system which enables
it to handle large volumes of drummed by-products quickly and effectively. The
system operates in an inert atmosphere using automatic control and video
monitoring to empty or shred drummed by-products which are then transferred to
feed storage tanks where product separation is controlled. Supplemental fuels
can then be blended from this material. By using this technology, the
by-products recovery facility in Detroit can process approximately 15,000 drums
of material per month. Philip has also established an engineered fuel processing
system ("Super Blender"), which emulsifies solids with liquid chemical
by-products and suspends these solids in a supplemental fuel for industrial use.
Through this process, the Company produces a supplemental fuel that contains up
to 50% solids by weight, providing its customers a more environmentally suitable
and lower cost alternative to the disposal of solid hazardous waste. Super
Blenders are located at the Company's Detroit and Kansas City facilities.

Solid and liquid chemical and industrial waste residues constitute the bulk
of materials managed by the by-products recovery operations. The hazardous waste
management industry, which provides disposal services, including incineration
and hazardous waste landfills, is a significant competitor to the Company for
by-product waste streams. As a result of overbuilding and the success of its
customer's waste minimization efforts, significant excess capacity has developed
in the hazardous waste management industry, leading to downward pricing
pressures in the markets served by the Company's by-products operations. To
counter this situation, the Company continues to develop and employ innovative
technologies that minimize on-site waste generation for its customers and
maximize the value and reuse opportunities for industrial by-products. By
developing increasingly value-added applications for the materials it manages,
in partnership with its key industrial customers, the Company maximizes its
margins and differentiates itself from conventional disposal alternatives.
Examples of this strategy include the patented Emulsion for Paint Overspray
Control ("EPOC") system installed at automotive and equipment manufacturing
facilities. In consultation with automotive manufacturers, the Industrial
Services Group developed the EPOC system for paint overspray recovery. This
technology eliminates the need to landfill paint sludge, a significant waste
stream and production bottleneck in automotive manufacturing. The system
captures paint overspray in an emulsion and then recovers for reuse the active
ingredient in the emulsion, together with the residual paint, at the Company's
dedicated processing facility. The EPOC system improves the efficiency of the
painting process and reduces costs by eliminating build up in the paint booth
and decreasing paint usage. The EPOC system is used in over 20 parts
manufacturing and automotive assembly plants throughout the United States,
including automotive production facilities where the Company provides on-site
operating personnel.

A further example is the Company's association with BASF Company ("BASF")
to recycle rigid polyurethane for the automotive sector. Approximately 2.5
million tons of polyurethanes are produced annually in North America. The
majority are used in flexible foam systems of which approximately 800 million
pounds are recycled. Molded parts made from rigid polyurethanes such as bumpers,
interior panels and steering wheels are not recycled and are disposed of in
landfills. Philip has been chosen by BASF to build
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<PAGE> 10

and operate the first polyurethane recycling facility in North America using
BASF technology. This Detroit based facility has an initial processing capacity
of 10 million pounds per year. At the facility, polyurethane scrap is ground,
chopped and added to a reactor containing solvents such as glycol, catalysts and
other ingredients. It is then thermally treated and cooled to ambient
temperature. The polyol produced from this process can be used as a virgin
material in rigid polyurethane applications.

Philip owns a rock quarry covering approximately 190 acres in Stoney Creek,
Ontario ("Taro-East"). Philip has received regulatory authority to utilize the
Taro-East site as an industrial non-hazardous landfill with a total capacity of
11 million tons and an annual fill rate of 825,000 tons. The site is used for
the disposal of solid non-hazardous residuals from the Company's by-products
management and recovery operations located in Hamilton, Ontario.

ENVIRONMENTAL SERVICES. The Industrial Services Group's environmental
services operations include a broad range of remediation and environmental
services, including strategic resource management, site remediation,
decommissioning and investment recovery, abatement, environmental consulting and
engineering, and analytical and emergency response services.

Site remediation includes project management, risk assessment, demolition,
on-site treatment and transportation services to address environmental
contamination problems. Remediation can range from simple soil excavation and
disposal to complex programs that in some cases involve assumption by the
Company of management of all aspects of its customers' environmental and
regulatory programs. Combined with investment recovery, the Industrial Services
Group's site remediation services not only address environmental problems and
support the closure and decommissioning of facilities, they can generate revenue
for customers.

Decommissioning involves the closing down of operations, removal of process
equipment, buildings and structures and site cleanup and remediation. The
Industrial Services Group provides project planning and management, including
design, planning and control, health and safety, waste reduction, demolition,
and final site rehabilitation. All decommission projects start with an
investment recovery audit. The Company's extensive resource and by-products
recovery capabilities enables it to recover value from equipment, building
components, and ferrous and non ferrous metals. Proceeds from the sale of these
materials reduce the cost of demolition and decommissioning for customers.

The Industrial Services Group operates one of the largest networks of
environmental laboratories in Canada from which it provides analytical testing
for its customers across North America and from as far away as Japan. The
Company provides advanced air quality analysis and dioxin testing. The
Industrial Services Group also provides emergency response services, including
containment, clean-up, remediation and disposal of material resulting from the
inadvertent release of dangerous goods or hazardous materials, and wastes or
spills of material that are unusual to the environment in quantity or quality.

The competitive strengths of the Company's environmental services
operations include its ability to provide integrated cost competitive "back end"
solutions, such as decommissioning, remediation and investment recovery, to
problems identified through the risk assessment and consulting services phase of
the contract. Remediation services focus on proven technical solutions, such as
the treatment of solvent contamination by methane injection, and other acquired
or developed technologies.

UTILITIES MANAGEMENT. The Company provides turnkey wastewater treatment at
customers' facilities, including design, procurement, installation, start-up and
operation. The Company is able to design and construct economical and efficient
treatment systems and provide a guarantee of performance and assurance of
operability. The Company has operational responsibility for over 30 industrial
wastewater treatment facilities.

A portion of the Company's utilities management business is operated
through 70%-controlled Philip Utilities Management Corporation ("PUMC"), which
designs, builds, operates and manages municipal water and wastewater treatment
facilities. PUMC has contracts with eight Ontario municipalities to operate and
manage their water and wastewater treatment facilities. PUMC also designs and
installs supervisory control and data acquisition systems which increase
operating efficiencies of water and wastewater treatment plants and reduce
emergency maintenance and overtime costs.
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<PAGE> 11

The Company also specializes in water and sewer pipeline rehabilitation and
maintenance and services the rapidly growing North American market for
trenchless technologies. Trenchless technologies allow pipeline repairs to take
place through entry and exit points, rather than excavation of entire pipelines.
This results in lower costs and reduces interruption of services. The Company
also cleans commercial and industrial pipelines using high-pressure water
systems and provides pipeline inspection, survey and mapping services using
closed-circuit television and licensed asset management software.

CDM Philip Inc., a joint venture owned 80% by PUMC and 20% by Camp Dresser
& McKee Inc., a large US engineering firm, announced in 1997 that it had signed
a twenty-five year contract to design, build and operate a water treatment
facility for the city of Seattle. The design and build component of the project
is valued at $68 million and is expected to take three years to complete.

IMPACT OF INFLATION, ECONOMIC CONDITIONS AND SEASONALITY

A general economic slowdown over the Christmas holiday period, client year
end shutdowns and weather related circumstances during winter months results in
the Company experiencing lower levels of activity in December and during the
first quarter of its fiscal year. Therefore, first quarter results may not be
indicative of the results that will be achieved during an entire year.

PROPRIETARY TECHNOLOGY

The Company develops and applies proprietary technologies to provide
on-site waste minimization, by-products recovery and industrial services that
reduce customer costs, safety risks and potential environmental liabilities.

In its Metals Services Group, the Company applies proprietary technology to
obtain better yields from scrap and by-products and to develop further uses for
material that would otherwise be landfilled. Development and use of this
technology increases margins, reduces environmental risk for the Company and its
customers and adds to the integrated package of services provided by the
Company, making it more attractive as a single source vendor. For example, the
Company's second stage electrostatic separator used in its copper recovery
operations increases the percentage of copper or aluminum recovered from wire
and cable scrap. This results in a higher yield of metal. Through a joint
venture with Harbison Walker Refactories, the Company has developed a technology
to process the residual material from its dross operations into calcium
aluminate, which acts as a slag conditioner in steel production. This process
increases yield and margin from the dross operations, provides an alternative to
disposal for its customers in the aluminum industry and adds to the Company's
integrated steel services portfolio.

The Industrial Services Group applies proprietary technologies to minimize
waste, increase recovery and reuse of industrial by-products and provide on-site
industrial services that minimize downtime and costs associated with industrial
cleaning, maintenance and turnaround projects. These technologies include
engineered fuel blending, using a "Super Blender" to emulsify solid and liquid
chemical by-products into a fuel for cement kilns, the EPOC paint overspray
recovery system that reduces paint usage and eliminates the landfilling of paint
sludge, and the Company's association with BASF to recycle rigid polyurethane,
primarily generated from automotive production and automotive scrap, into
polyols for reuse in polyurethane applications. Turnaround technologies
primarily for the petrochemical and oil and gas industries include Fast Draw, a
remote control heat exchanger bundle extraction technology, Fast Clean, a
semi-robotic heat exchanger bundle cleaning process, and Life Guard, a
technology for decontaminating hydrocarbons in refinery towers and vessels to
reduce potential health and safety impacts during cleaning and maintenance
activities.

Although the Company possesses patents for certain of its technologies, it
relies primarily on trade secret protection and confidentiality to protect its
proprietary technology. While the time and capital associated with these
technologies provide a barrier to entry, there can be no assurance that the
Company will be able to maintain the confidentiality of its technology.

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<PAGE> 12

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

<TABLE>
<CAPTION>
TECHNOLOGY APPLICATION COMPETITIVE ADVANTAGE INDUSTRY SERVED
- ---------- ----------- --------------------- ---------------
<S> <C> <C> <C>
Fast Draw...................... Remote control extraction of Reduced turnaround time and Petrochemical,
heat exchanger bundles labor, Hydrocarbon
Enhanced safety processing
Fast Clean..................... Semi-robotic cleaning of Reduced turnaround time and Petrochemical,
heat exchanger bundles labor, Hydrocarbon
Enhanced safety processing
Life Guard..................... Decontamination of Elimination of personal Petrochemical,
hydrocarbons in refinery safety risks, Hydrocarbon
towers and vessels Improved heat transfer processing
performance
WeldSmart...................... Welding, Reduces energy consumption All welding
Heat treatment and increases productivity applications
EPOC........................... Paint overspray capture and Reduces paint usage and Automotive and
recovery eliminates landfilling of equipment
paint sludge manufacturers
Super Blender.................. Processing of solid and Reduces disposal costs and Petrochemical,
liquid by-products into eliminates landfilling, Paint,
engineered fuels Automotive,
Cement
Fuel Smart..................... Computer based method to Optimizes combustion, All industrial
regulate industrial minimizes the formation of furnaces
furnaces pollutants uniform furnace
temperatures
Calcium Aluminate Recovery..... Processes aluminum dross Eliminates landfilling, Aluminum,
residuals for reuse Raw material for steel Steel
manufacturing
Electric Arc Furnace ("EAF")
Dust Recycling............... Thermal treatment of EAF to Eliminates landfilling and Steel
produce zinc concentrate reduces disposal costs
Rigid Polyurethane Recycling... Thermal/chemical processing Eliminates landfilling, Automotive,
of rigid polyurethane Supports "recyclable car" Polyurethane
automotive parts into objective of automotive applications
virgin polyols manufacturers
</TABLE>

SALES AND MARKETING

The Company's sales and marketing strategy is focused on establishing close
working relationships with customers, developing a thorough understanding of
their business, working jointly on research and development to achieve waste
reduction and by-products recovery efficiency and bundling services to achieve
maximum efficiencies and cost reductions for customers. Philip strives to become
an integral part of its customers business through redesigning process
technologies, operating resource recovery facilities and delivering a broad
range of industrial outsourcing services.

The Company's relationship managers, who are assigned to industrial
accounts, are critical to the success of the sales and marketing program. These
individuals are responsible for managing all aspects of service delivery to that
customer, ensuring the customer has one point of contact for information,
service and accountability. This individual then consults other Company
specialists drawing upon their expertise as required to provide information and
implement a broad range of services.

The Company places less emphasis on traditional sales approaches and more
on cross selling a broad range of services to its existing large industrial
customer base. The Company has established a large customer
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<PAGE> 13

base in all key industrial sectors. Through the integration process, the Company
identifies services it is providing these customers and opportunities for
additional cross-selling. This process is carried out in conjunction with the
sales or operating personnel who have relationships with these customers.

The Company also participates in competitive bidding processes to obtain
contracts granted by municipalities, local governments or private enterprises
for services such as site redemption and decommissioning contract services.
Contracts are generally awarded on the basis of sealed bids submitted by
interested bidders and competition for these contracts is generally intense.

CUSTOMERS

Philip provides a broad range of metals recovery and industrial services to
major industry sectors including aluminum, automotive, chemical, food and
beverage, oil and gas, paint and coatings, petrochemical, pulp and paper, steel,
telecommunications, transportation, utilities, and wire and cable.

The Company's ferrous processing and mill services operations serve
customers in the steel industry while the processing and distribution operations
primarily serve industrial and commercial construction clients and manufacturing
industries such as barge and ship building, copper processing operations
purchase materials from the wire and cable, automotive and telecommunications
sectors and provide processed copper and materials management services to brass
and copper mills, and the wire and cable, automotive and telecommunications
industries, and aluminum processing operations purchase materials from primary
smelters and industrial aluminum scrap generators and supply aluminum
deoxidizing product, secondary aluminum alloys and recovered aluminum ingots to
the steel, automotive and aluminum industries, respectively. The Company's
industrial services cross a number of industry sectors, primarily automotive,
refining and petrochemical, oil and gas, pulp and paper, steel, transportation
and utilities.

Philip seeks to enter into master service agreements with large customers
to establish the Company as an approved vendor. Master service agreements are a
primary vehicle for large companies to reduce their suppliers while concurrently
establishing high standards of service delivery with fewer suppliers which can
provide more services and which are financially strong and geographically
diverse. In some cases, these agreements approve less than three suppliers in
the area of resource recovery and industrial services, providing the Company
with a strong competitive advantage. In other cases, a number of suppliers are
approved and the master service agreement serves only to assist the Company in
selling its services on a plant by plant basis.

COMPETITION

The metals recovery and industrial services industries are highly
competitive and require substantial capital resources. Competition is both
national and regional in nature and the level of competition faced by the
Company in its various lines of business is significant. Potential customers of
the Company typically evaluate a number of criteria, including price, service,
reliability, prior experience, financial capability and liability management. In
servicing its customers, the Company believes its primary competitive strengths
are: (i) that it offers the broadest range of metals recovery, by-products
recovery and industrial and environmental services in the industry, (ii) its
broad geographic network, (iii) its proprietary technologies, and (iv) the fact
that it is a leading consolidator in the industry due to its financial strength,
focused strategy and multi-service capabilities. Although the Company believes
it is the leading integrated provider of metals recovery and industrial services
in North America, it competes with a variety of companies that may be larger in
particular business lines in which the Company operates.

The primary competitors of the Metals Services Group are other scrap
processors in regions where the Metals Services Group operates. Although the
Metals Services Group competes in both the purchase and sale sides of its
businesses, competition is primarily on the purchase side for access to scrap
which may become more intense during times of scrap scarcity. Availability
depends upon the level of economic activity in the industries from which the
Company acquires its scrap and market prices. The Company believes that its
longstanding relationship with generators of metal bearing scrap give it an
advantage over its competitors, a majority of which purchase scrap from dealers.
In its ferrous metals processing operations, the Company competes for access to
scrap with a small number of larger regional operators as well as a large number
of
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<PAGE> 14

smaller operators. In its copper operations the Metals Services Group competes
for scrap with a limited number of regional competitors in the regions that it
serves. The Company enhances its competitive position through the use of
proprietary technology to separate and recycle the polymer streams, thereby
providing additional service and reducing landfilling costs and liability for
the scrap producing customer. The Company's aluminum dross recycling operations
face limited competition due to their geographic proximity to the primary
aluminum refiners. In its aluminum alloys business, the Company faces
substantial competition for aluminum scrap from a number of larger competitors,
including primary refiners. One advantage the Company has is that it generates
substantial amounts of aluminum scrap internally through its ferrous operations
(e.g., automobile engine blocks). In the Company's aluminum deoxidizing product
business, the Company competes for scrap supply with a number of smaller
regional competitors.

On the sales side of the Metals Services Group, the Company seeks to
enhance its competitive position by enhancing the efficiency of its operations
through economies of scale and increased recovery rates, thereby lowering its
costs which increases margins and gives it pricing flexibility. The Company also
accompanies its product sales with a broad range of services, or vertically
integrates its operations to gain access to multiple markets. In its ferrous
operations, the Company's acquisitions have resulted in economies of scale that
generate efficiencies in its delivery capabilities. The Metals Services Group
also competes on the sale side by offering a more secure supply of high quality
scrap than a majority of its competitors and by providing a broad range of
additional mill services. In its copper operations, the Metals Services Group's
products are generally sold into commodity markets where prices are set by the
marketplace. However, the Company competes through its use of proprietary
technology to maximize yield and margins. In addition, the Company now has the
alternative of selling its processed scrap into the lower grade commodity
markets or refining it and selling it into the higher value added markets as
market conditions vary. In the Company's alloys business, the Company competes
against two competitors whose alloy operations are larger than those of the
Company. In the aluminum deox business, the Company competes against a number of
smaller regional competitors. The Company believes that the size of its
operations and the broad range of aluminum deoxidizing products it supplies
provide it with a competitive advantage.

The industrial services sector is also highly competitive and fragmented.
The Company competes with numerous local, regional and national companies of
varying sizes and financial resources. Competition for industrial services is
based primarily on hourly rates, productivity, safety, innovative approaches and
quality of service. The hazardous waste management industry competes with the
Company's industrial services operations by providing a price competitive
disposal alternative to a number of the Company's waste management and
by-products recovery services. The hazardous waste management industry currently
has substantial excess capacity caused by overbuilding, continuing efforts by
hazardous waste generators to reduce volumes and to manage their waste on-site,
and the uncertain regulatory environment regarding hazardous waste management
and remediation requirements. These factors have led to downward pressure on
pricing in a number of the markets served by the Company's industrial services
operations. The Company expects these conditions to continue for the foreseeable
future. The Company competes by developing and employing innovative technologies
that minimize on-site waste generation for its customers and maximize the value
and reuse opportunities for the industrial by-products. Through developing
increasingly value-added applications for the materials it manages, in
partnership with its key industrial customers, the Company maximizes its margins
and differentiates itself from conventional disposal alternatives. Examples of
this strategy include the patented EPOC system installed at automotive and
equipment manufacturing facilities and the Company's association with BASF to
recycle rigid polyurethane for the automotive sector.

GOVERNMENT REGULATION

The Company is subject to government regulation including stringent
environmental laws and regulations. Among other things, these laws and
regulations impose requirements to control air, soil and water pollution, and
regulate health, safety, zoning, land use and the handling and transportation of
industrial by-products and waste materials. This regulatory framework imposes
compliance burdens and costs on the Company. See Item 7, Capital Expenditures in
the Management's Discussion and Analysis of Financial Condition and Results of
Operation which appears on page 27 of this Form 10-K for a discussion of the

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<PAGE> 15

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 resource recovery and industrial services industry. Laws and
regulations typically provide operating standards for treatment, storage,
management and disposal facilities and monitoring and spill containment
requirements and set limits on the release of contaminants into the environment.
Such laws and regulations, among other things, (i) regulate the nature of the
industrial by-products and wastes that the Company can accept for processing at
its treatment, storage and disposal facilities, and the nature of the treatment
they can provide at such facilities and the location and expansion of such
facilities, (ii) impose liability for remediation and clean-up of environmental
contamination, both on-site and off-site, resulting from past and present
operations at the Company's facilities, and (iii) may require financial
assurance that funds will be available for the closure and post-closure care of
sites. Such laws and regulations also require manifests to be completed and
delivered in connection with any shipment of prescribed materials so that the
movement and disposal of such material can be traced and the persons responsible
for any mishandling of such material identified.

In particular, the regulatory process requires the Company to obtain and
retain numerous governmental approvals, licenses and permits to conduct its
operations, any of which may be subject to revocation, modification or denial.
Operating permits need to be renewed periodically and may be subject to
revocation, modification, denial or non-renewal for various reasons, including
failure of the Company to satisfy regulatory concerns. Adverse decisions by
governmental authorities on permit applications submitted by the Company may
result in abandonment or delay of projects, premature closure of facilities or
restriction of operations, all of which could have a material adverse effect on
the Company's earnings for one or more fiscal quarters or years.

Federal, state, provincial, local and foreign governments have also from
time to time proposed or adopted other types of laws, regulations or initiatives
with respect to the resource recovery and industrial services industry. Included
among them are laws, regulations and initiatives to ban or restrict the
international, interprovincial, intraprovincial, interstate or intrastate
shipment of wastes, impose higher taxes on out-of-state-waste shipments than
in-state shipments, reclassify certain categories of non-hazardous wastes as
hazardous and regulate disposal facilities as public utilities. Certain state
and local governments have promulgated "flow control" regulations which attempt
to require that all waste generated within the state or local jurisdiction must
go to certain disposal sites. From time to time legislation is considered that
would enable or facilitate such laws, regulations or initiatives. Due to the
complexity of regulation of the industry and to public pressure, implementation
of existing or future laws, regulations or initiatives by different levels of
governments may be inconsistent and are difficult to foresee.

Also subject to regulation are spills of certain industrial by-products and
waste materials. While the specific provisions of spills related laws and
regulations vary among jurisdictions, such laws and regulations typically
require that the relevant authorities be notified promptly, that the spill be
cleaned up promptly and that remedial action be taken by the responsible party
to restore the environment to its pre-spill condition. Generally, the
governmental authorities are empowered to act to clean up and remediate spills
and environmental damage and to charge the costs of such clean-up to one or more
of the owners of the property, the person responsible for the spill, the
generator of the contaminant and certain other parties. Such authorities may
also impose a tax or other liens to secure such parties' reimbursement
obligations.

The Company's facilities are subject to periodic unannounced inspection by
federal, provincial, state and local authorities to ensure compliance with
license terms and applicable laws and regulations. The Company works with 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 could be required to close a site.

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 identifica-

13
<PAGE> 16

tion, storage, treatment and disposal of waste materials managed during a
project. Failure to meet these requirements could result in termination of
contracts, substantial fines and other penalties.

Governmental authorities have a variety of administrative enforcement and
remedial orders available to them to cause compliance with environmental laws or
remedy or punish violations of such laws. Such orders may be directed to various
parties, including present or former owners or operators of the concerned sites,
or parties that have or had control over the sites. In certain instances, fines
may be imposed.

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

While, in general, the Company's businesses have benefited substantially
from increased governmental regulation, the resource recovery and industrial
services industry in North America has become subject to extensive and evolving
regulation. The Company makes a continuing effort to anticipate relevant
material regulatory, political and legal developments, but it cannot predict the
extent to which any future legislation or regulation may affect its operations.
The Company believes that with heightened legal, political and citizen awareness
and concerns, all companies in the resource recovery and industrial services
industry may be faced, in the normal course of operating their businesses, with
fines and penalties and the need to expend funds for capital projects, remedial
work and operating activities, such as environmental contamination monitoring,
and related activities. Regulatory or technological developments relating to the
environment may require companies engaged in the industrial services and
resource recovery industry to modify, supplement or replace equipment and
facilities at costs which may be substantial. Because the businesses in which
the Company is engaged are intrinsically connected with the protection of the
environment and the potential discharge of materials into the environment, a
substantial portion of the Company's capital expenditures is expected to relate,
directly or indirectly, to such equipment and facilities. Moreover, it is
possible that future developments, such as increasingly strict requirements of
environmental laws and regulations, and enforcement policies thereunder, could
affect the manner in which the Company operates its projects and conducts its
business, including the handling, processing or disposal of the industrial
by-products and waste materials generated thereby.

HAZARDOUS SUBSTANCES LIABILITY

Canadian and U.S. laws impose liability on the present or former owners or
operators of facilities which release hazardous substances into the environment.
Furthermore, companies may be required by law to provide financial assurances
for operating facilities in order to ensure their performance of obligations
complies with applicable laws and regulations. Similar liability may be imposed
upon the generators and transporters of waste which contain hazardous
substances. All such persons may be liable for waste site investigation costs,
waste site clean-up costs and natural resource damages, regardless of fault, the
exercise of due care or compliance with relevant laws and regulations; such
costs and damages can be substantial.

In the United States, such liability stems primarily from Comprehensive
Environmental Response Compensation and Liability Act of 1980 ("CERCLA") and its
state equivalents (collectively, "Superfund") and 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

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<PAGE> 17

contamination resulting from past or present operations. Such laws also require
that the owner or operator of regulated facilities provide assurance that funds
will be available for the closure and post-closure care of its facilities. Since
the Company has operations in, and has shipped and continues to ship hazardous
waste to disposal sites in the United States, the Company is exposed to
potential liability in the United States under RCRA, CERCLA and their state law
equivalents resulting from the handling and transportation of such wastes and
for alleged environmental damage associated with past, present and future waste
disposal practices.

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

Certain of Philip's and its U.S. subsidiaries' transfer, storage,
processing and disposal facilities are contaminated as a result of operating
practices at the sites, and remediation will be required at a substantial cost.
Investigations of these sites have characterized to varying degrees the nature
and extent of the contamination. Philip and these subsidiaries, in conjunction
with environmental regulatory agencies, have in some instances commenced to
remediate the sites in accordance with approved corrective action plans,
pursuant to permits or other agreements with regulatory authorities. The
Company, in conjunction with an environmental consultant, has developed or is
developing cost estimates for these sites that are periodically reviewed and
updated. Estimated remediation costs, for individual sites and in the aggregate,
are substantial. While the Company maintains reserves for these matters based
upon cost estimates, there can be no assurance that the ultimate cost and
expense of corrective action will not exceed such reserves and have a material
adverse impact on the Company's operations or financial condition.

The Company is required under certain U.S. and Canadian laws and
regulations to demonstrate financial responsibility for possible bodily injury
and property damage to third parties caused by both sudden and non-sudden
occurrences. The Company is also required to provide financial assurance that
funds will be available when needed for closure and post-closure care at certain
of its treatment, storage and disposal facilities, the costs of which could be
substantial. Such laws and regulations allow the financial assurance
requirements to be satisfied by various means, including letters of credit,
surety bonds, trust funds, a financial (net worth) test and a guarantee by a
parent 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 pay post-closure care costs. There can be no
certainty that these costs will not materially exceed the amounts provided
pursuant to financial assurance requirements. In addition, if such a facility is
closed prior to its originally anticipated time, it is unlikely that sufficient
funds will have been accrued over the life of the facility to fund such costs,
and the owner of the facility could suffer a material adverse impact as a
result. Consequently, it may be difficult to close such facilities to reduce
operating costs at times when, as is currently the case in the hazardous waste
services industry, excess treatment, storage or disposal capacity exists.

Subsidiaries acquired by Philip have been named as potentially responsible
or liable parties ("PRPs") under US federal and state Superfund laws, with
respect to several sites. These proceedings are based principally on allegations
that subsidiaries of Philip (or their predecessors) disposed of hazardous
substances at the sites in question. The Company routinely reviews and evaluates
its potential liability at third-party sites based upon its judgment and
experience at similar sites and the advice of environmental consultants and
maintains reserves based upon such review and evaluation. There can be no
assurance that the Company will not subsequently incur liabilities at such sites
or at additional sites that materially exceed the amounts reserved.

Estimates of the Company's liability for remediation of a particular site
and the method and ultimate cost of remediation require a number of assumptions
and are inherently difficult, and the ultimate outcome may differ from current
estimates. As additional information becomes available, estimates are adjusted.
While the Company does not anticipate that any such adjustment would be material
to its financial statements, it is possible that technological, regulatory or
enforcement developments, the results of environmental studies or

15
<PAGE> 18

other factors could alter this expectation and necessitate the recording of
additional liabilities which could be material. Moreover, because the Philip and
various of its subsidiaries have disposed of waste materials at more than 200
third-party disposal facilities, it is possible that Philip and its subsidiaries
will be identified as PRPs at additional sites. The impact of such future events
cannot be estimated at the current time.

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

EMPLOYEES

As at December 31, 1997, Philip employed over 14,000 people, approximately
2,000 of whom are unionized. Of such employees, approximately 3,250 work in the
Metals Services Group, approximately 10,750 work in the Industrial Services
Group and approximately 140 work in the Company's corporate office.

ITEM 2. PROPERTIES

The Company currently operates approximately 320 service locations
primarily in North America, with some locations in South America and Western
Europe. The Company believes that its primary existing facilities are
effectively utilized, well maintained and in good condition. The Company
believes that its facilities are adequate for its current needs and that
suitable additional space will be available as required.

The Company's corporate office is located in Hamilton, Ontario and is
comprised of leased premises occupying 46,982 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 Philip or a wholly-owned subsidiary.

METALS SERVICES GROUP

<TABLE>
<CAPTION>
FACILITY LOCATION NATURE OF SERVICES PROVIDED (1)
-------- -------- -------------------------------
<S> <C> <C>
Philip Metals Recovery (USA), Inc.... Chandler, Arizona material sorting and wire chopping (leased)
Truesdale, Missouri collection, processing and transfer, copper
alloys production
Richmond, Virginia collection, processing and transfer
Painesville, Ohio collection, processing and transfer,
aluminium de-ox production (leased)
Philip Metals Inc.................... Chesterton, Indiana collection, processing and transfer
St. Louis, Missouri collection, processing and transfer
Coatesville, Pennsylvania collection, processing and transfer
Nashville, Tennessee collection, processing and transfer
Memphis, Tennessee collection, processing and transfer
Chattanooga, Tennessee collection, processing and transfer
Cleveland, Ohio collection, processing and transfer
Philip Services (New York), Inc...... Syracuse, New York collection, processing, transfer and
aluminium alloys production
Intsel Southwest Partnership......... Houston, Texas steel distribution
Allied Metals Limited................ Bristol, United Kingdom collection, processing and transfer
Philip Enterprises Inc............... Hamilton, Ontario (4 sites) collection, processing and transfer
Guelph, Ontario collection, processing and transfer
Barrie, Ontario collection, processing and transfer
LaPrairie, Quebec collection, processing and transfer
</TABLE>

16
<PAGE> 19

INDUSTRIAL SERVICES GROUP

<TABLE>
<CAPTION>
FACILITY LOCATION NATURE OF SERVICES PROVIDED (1)
-------- -------- -------------------------------
<S> <C> <C>
Burlington Environmental Inc......... Kansas City, Missouri collection, processing and transfer
Seattle, Washington collection, processing and transfer
Kent, Washington collection, processing and transfer
Tacoma, Washington collection, processing and transfer
Thermal KEM, Inc..................... Rock Hill, South Carolina collection, processing and transfer
Nortru, Inc.......................... Detroit, Michigan collection, processing and transfer
Nortru, Inc.......................... Detroit, Michigan collection, processing and transfer
RMF Global, Inc...................... Toledo, Ohio industrial services contracting
Republic Environmental............... Hatfield, Pennsylvania collection, processing and transfer
Philip Industrial Services Group,
Inc................................ Irving, Texas waste water treatment facility
Philip Environmental Services
Limited............................ Etobicoke, Ontario decommissioning service
Philip Enterprises Inc............... Barrie, Ontario collection, processing and transfer
Rexdale, Ontario collection, processing and transfer
Hamilton, Ontario collection, processing and transfer
</TABLE>

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

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

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is named a defendant in legal actions
arising out of the normal course of business. The Company maintains liability
insurance against risks arising out of the normal course of business. There can
be no assurance that such insurance will be adequate to cover all such
liabilities. The following describes pending legal proceedings other than
ordinary, routine litigation incidental to its business.

In January 1997, the State of Missouri brought an enforcement action
against Solvent Recovery Company and the Company in state court alleging
numerous violations of hazardous waste regulations at the Company's Kansas City,
Missouri facility. Included were allegations that alterations or additions to
the facility's operations had been implemented without required modification of
the facility's hazardous waste permit as well as allegations of numerous
deficiencies under regulations and the permit in the accumulation, record
keeping, inspection, labeling, transportation and handling of such waste. The
Company and the State of Missouri have agreed upon a current payment of
$255,000, with a remaining future payment of $125,000 still the subject of
ongoing negotiations. The Company does not expect that the matter will have a
material adverse effect on the Company's results of operations or financial
position.

As at the date of this Form 10-K, the Company is aware of twenty-three
separate class actions by shareholders of the Company which have been filed
against the Company and various directors and officers. Each action alleges that
Philip's financial disclosures for various time periods between 1995 and 1997
contained material misstatements or omissions in violation of U.S. federal
securities laws (provisions of the Securities Act of 1933 and the Securities
Exchange Act of 1934) and seeks to represent a class of purchasers of Philip's
Common Shares. The Company intends to vigorously defend these actions. There can
be assurance that the outcome of these actions will not have a material adverse
effect upon the financial condition or results of operations of the Company.

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

No matters were submitted to a vote of shareholders of the Company during
the fourth quarter of the fiscal year ended December 31, 1997.

17
<PAGE> 20

PART II

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

MARKET INFORMATION

The Company's Common Shares trade under the symbol "PHV" in the United
States on the New York Stock Exchange (the "NYSE"), and in Canada on The Toronto
Stock Exchange (the "TSE") and the Montreal Exchange. The Company's Common
Shares traded in the United States on the Nasdaq National Market System
("Nasdaq") prior to April 30, 1996. The following table sets forth for the
fiscal periods indicated (based on the fiscal year ending December 31) the high
and low sale prices per share and trading volume of the Company's Common Shares
as reported by the NYSE, Nasdaq and the TSE, the principal Canadian exchange for
the trading of the Company's Common Shares.

<TABLE>
<CAPTION>
PRICE RANGE AND TRADING VOLUME OF THE COMMON SHARES
--------------------------------------------------------------
NYSE & NASDAQ TSE
------------------------------ -----------------------------
HIGH LOW VOLUME HIGH LOW VOLUME
------ ------ ------------ ------ ------ -----------
(CANADIAN
(US DOLLARS) DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
1996
First quarter.................. $ 6.88 $ 6.13 368,900 $ 9.38 $ 8.00 3,399,100
Second quarter................. 8.88 6.50 29,040,400 12.00 8.75 1,760,100
Third quarter.................. 9.75 6.63 8,773,100 13.20 9.25 5,580,800
Fourth quarter................. 15.75 9.38 19,652,000 21.50 12.75 2,781,100
1997
First quarter.................. $18.38 $13.63 26,356,700 $24.75 $18.50 8,232,300
Second quarter................. 16.00 14.00 11,561,000 22.10 19.45 2,858,000
Third quarter.................. 19.94 17.38 9,720,300 27.91 24.00 5,467,100
Fourth quarter................. 19.25 11.81 29,761,000 26.75 17.00 11,244,000
1998
First Quarter.................. 14.31 7.38 118,366,000 20.80 14.75 28,188,000
April.......................... 10.63 7.00 20,939,000 15.00 9.75 3,930,000
Through May 13, 1998........... 8.06 4.93 27,046,000 11.6 7.1 6,569,000
</TABLE>

On May 11, 1998, the last reported sale price on the NYSE of the Common
Shares was $5.25 and the last reported sales price on the TSE was Cdn$7.45. At
May 11, 1998, there were 131,146,196 Common Shares issued and outstanding and
held of record by approximately 1,500 shareholders.

DIVIDEND AND POLICY RECORD

The Company has not declared or paid cash dividends on its Common Shares
during the last five years. The Company currently intends to retain any earnings
for use in its business and does not anticipate paying any cash dividends on its
Common Shares in the foreseeable future. Any future declaration and payment of
dividends will be subject to the discretion of the Company's Board of Directors
and to applicable law and will depend upon the Company's results of operations,
earnings, financial condition, contractual limitations, cash requirements,
future prospects and other factors deemed relevant by the Company's Board of
Directors. The Company's Credit Facility restricts the payment of cash
dividends.

SALES OF UNREGISTERED SECURITIES

(a) On February 2, 1998, the Company issued 1,381 Common Shares in
connection with the conversion of 7.25% Convertible Subordinated
Debentures assumed by Philip pursuant to the Allwaste, Inc.
acquisition. The transaction was exempt under Section 3(a)(9) of the
Securities Act.

18
<PAGE> 21

(b) On October 31, 1997, the Company issued 129,511 Common Shares in
connection with the conversion of a 7% Convertible Subordinated Note
assumed by Philip pursuant to the Allwaste, Inc. acquisition. The
transaction was exempt under Section 3(a)(9) of the Securities Act.

(c) On October 28, 1997, the Company issued 2,963,235 Common Shares in
connection with the acquisition of Steiner-Liff Iron and Metal
Company, Southern alloys and Metals Corp., Southeastern Scrap Trading,
Inc., McKinley Iron, Inc. and Shredders, Inc. The transaction was
exempt under Section 4(2) of the Securities Act.

(d) On October 28, 1997, the Company issued 2,638,234 Common Shares in
connection with the acquisition of Southern Foundry Supply, Inc., Knox
Metals Company and Southern Foundry of Cooksville, Inc. The
transaction was exempt under Section 4(2) of the Securities Act.

(e) On July 31, 1997, the Company issued 286,418 Common Shares in
connection with the acquisition of the stock of D&L, Inc. The
transaction was exempt under Section 4(2) of the Securities Act.

(f) On July 3, 1997, the Company issued 422,331 Common Shares in
connection with the acquisition of the stock of Roth Bros. Smelting
Corp. The transaction was exempt under Section 4(2) of the Securities
Act.

(g) On February 12, 1997, the Company issued 556,390 Common Shares in
connection with the acquisitions of Conversion Resources, Inc. and
Warrenton Resources, Inc. The transactions were exempt under Section
4(2) of the Securities Act.

(h) On February 7, 1997, the Company issued 222,165 Common Shares in
connection with the acquisition of RMF Global, Inc. The transaction
was exempt under Section 4(2) of the Securities Act.

(i) On January 7, 1997, the Company issued 2,222,222 Common Shares in
connection with the acquisition of Luntz Company. The transaction was
exempt under Section 4(2) of the Securities Act.

FOREIGN ISSUER

There are no governmental laws, decrees or regulations in Canada relating
to restrictions on the import of capital or affecting the remittance of
interest, dividends or other payments to non-resident holders of the Company's
Common Shares, except for withholding tax provisions discussed below. There are
no limitations on the right of non-resident or foreign owners to hold or vote
the Common Shares of the Company except as provided in the Investment Canada Act
(the "Act"). The Act provides for the review and approval by the Canadian
government of direct or indirect acquisitions of control of Canadian businesses
where the investment exceeds specified thresholds and for the divestment of
investments which have not been approved. The Company is not aware of any such
control positions held by U.S. investors.

The following paragraphs summarize certain Canadian federal income tax
considerations in connection with the receipt of dividends paid on Common Shares
and a disposition of Common Shares by non-residents of Canada. These tax
considerations are stated in brief and general terms and are based on Canadian
law currently in effect. There are other potentially significant Canadian and
U.S. federal income tax considerations and provincial, state or local income tax
considerations with respect to ownership and disposition of the Common Shares
which are not discussed herein. The tax considerations relative to ownership and
disposition of the Common Shares may vary from taxpayer to taxpayer depending on
the taxpayer's particular status.

Generally, under the Income Tax Act (Canada) (the "Tax Act"), dividends
paid or credited or deemed to be paid or credited on a share of a corporation
resident in Canada to a shareholder who is not resident in Canada, and who does
not use or hold and is not deemed to use or hold such shares in or in the course
of carrying on a business or providing independent personal services in Canada,
are subject to a withholding tax of 25% of the gross amount of such dividends.
However, Article X to the Canada-United States Income Tax Convention, 1980 (the
"Convention") reduces to 15% the rate of such withholding tax where the
beneficial owner of the dividends is resident in the United States for the
purposes of the Convention. The rate of such
19
<PAGE> 22

withholding tax will be further reduced to 5% where the beneficial owner of the
dividends owns at least 10% of the voting stock of the company paying the
dividends.

A shareholder who is not resident in Canada under the Tax Act who holds
Common Shares of the Company as capital property will not be subject to tax in
Canada on capital gains realized on the disposition or deemed disposition of
such Common Shares unless such Common Shares are "taxable Canadian property"
within the meaning of the Tax Act at the time of the disposition or deemed
disposition, as the case may be. Common Shares are generally not taxable
Canadian property provided such shares are listed on a prescribed stock exchange
and at no time within the five-year period immediately preceding the disposition
or deemed disposition did the shareholder, persons with whom the shareholder did
not deal at arm's length, or the shareholder together with such persons, own 25%
or more of the issued shares (and, in the view of Revenue Canada, taking into
account any interest therein or options in respect thereof that belonged to the
shareholder, persons with whom the shareholder did not deal at arm's length, or
the shareholder and such persons) of any class or series of the Company's
shares. A deemed disposition of shares held by a shareholder will arise on the
death of that shareholder. If shares are taxable Canadian property to a
shareholder who is resident in the United States for the purposes of the
Convention, any capital gain realized on the disposition or deemed disposition
of such shares will generally be exempt from tax under the Tax Act by virtue of
the Convention if the value of such shares at the time of the disposition or
deemed disposition is not derived principally from real property situated in
Canada (as defined by the Convention).

Shares of stock in the Company held by a citizen or resident of the United
States would normally be subject to tax on capital gains upon disposition under
the laws of the United States.

NORMAL COURSE ISSUER BID

On March 13, 1998, the Company announced its intention to make a normal
course issuer bid through which Philip will make open market purchases of its
Common Shares on the New York Stock Exchange, The Toronto Stock Exchange and the
Montreal Exchange. The bid commenced on March 17, 1998 and will end on March 16,
1999. Philip may repurchase up to 6,555,830, or approximately 5% of its
outstanding Common Shares from time to time in the open market. Shareholders of
the Company may obtain a copy of the Company's notice of such bid by contacting
the Company's Vice President, Investor Relations at (905) 540-6619.

20
<PAGE> 23

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data of Philip for the
periods indicated, including the accounts of all companies acquired prior to the
end of the respective reporting periods. The companies, all of which were
acquired in transactions accounted for as purchases during the past five years,
are included from their respective dates of acquisition. For all periods
indicated, the selected financial data reflects Philip's former municipal and
commercial solid waste operations, which were sold in August 1996, as a
discontinued operation. See Notes 4 and 5 to the Company's audited Consolidated
Financial Statements which appear on pages 37 and 38.

The selected financial data should be read in conjunction with the
accompanying Consolidated Financial Statements of the Company and the related
Notes thereto. Philip did not pay any cash dividends during the periods set
forth below.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
(RESTATED) (RESTATED) (RESTATED)
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenue........................... $1,750,930 $532,344 $463,244 $358,784 $131,969
Operating expenses................ 1,551,495(a) 413,013 356,699 268,606 83,957
Special charges................... 155,720 65,056 27,179 -- --
Selling, general and
administrative costs............ 130,778 56,063 48,496 37,522 21,103
Depreciation and amortization..... 61,953 24,225 18,587 15,644 8,012
---------- -------- -------- -------- --------
Income (loss) from operations..... (149,016) (26,013) 12,283 37,012 18,897
Interest expense.................. 47,310 16,263 18,621 14,167 6,682
Other income and expense -- net... (14,328) (3,456) (2,688) (1,553) (1,463)
---------- -------- -------- -------- --------
Earnings (loss) from continuing
operations before tax........... (181,998) (38,820) (3,650) 24,398 13,678
Income taxes...................... (55,731) (19,563) (4,790) 6,424 2,630
---------- -------- -------- -------- --------
Earnings (loss) from continuing
operations...................... $ (126,267) $(19,257) $ 1,140 $ 17,974 $ 11,048
========== ======== ======== ======== ========
Basic earnings per share --
continuing...................... $ (1.43) $ (0.39) $ 0.03 $ 0.50 $ 0.34
Diluted earnings per share --
continuing...................... $ (1.43) $ (0.39) $ 0.03 $ 0.40 $ 0.30
Weighted average number of common
shares outstanding (000s)....... 88,191 50,073 37,342 36,209 32,827
BALANCE SHEET DATA: (END OF
PERIOD)
Working capital................... $ 364,739 $139,326 $ 41,805 $ 63,050 $ 15,568
Total assets...................... 2,823,373 953,761 731,234 611,213 539,789
Total debt including current
maturities...................... 1,014,161 302,781 320,220 299,347 244,261
Shareholders' equity.............. 1,216,941 379,010 191,109 181,541 166,288
OTHER DATA:
Amortization...................... $ 17,899 $ 8,085 $ 7,139 $ 5,765 $ 2,725
Depreciation...................... 44,054 16,140 11,448 9,879 5,287
Additions to property, plant and
equipment....................... 62,391 30,004 23,347 17,223 19,236
</TABLE>

Note:

(a) 1997 operating expenses include non-recurring charges for operating losses
in business units to be exited and losses in the copper division of the
Company's Metals Services Group of $78.3 million and inventory costing
errors of $32.9 million. See Note 3 to the Company's audited Consolidated
Financial Statements which appears on pages 34 to 36 of this Form 10-K.

21
<PAGE> 24

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

The following discussion reviews the Company's operations for the years
ended December 31, 1997, 1996 and 1995 and should be read in conjunction with
the Company's audited Consolidated Financial Statements and related notes
thereto included elsewhere herein. The Company reports in US dollars and in
accordance with US generally accepted accounting principles.

INTRODUCTION

The Company is a supplier of metals and industrial services. The Company
has over 320 operating facilities and over 14,000 employees located throughout
North America and Europe, that provide services to more than 50,000 industrial
and commercial customers. The Company has achieved its position in the metals
recovery and industrial services market through internal growth and through the
acquisition and integration of over 40 companies since the beginning of 1996.
The Company's primary base of operations is in the United States. See Note 21 to
the Company's audited Consolidated Financial Statements which appears on pages
49 and 50 of this Form 10-K.

The Company's business is organized into two operating divisions -- the
Metals Services Group and the Industrial Services Group. The Metals Services
Group processes or recycles ferrous (scrap), copper and aluminum materials at 78
locations throughout North America and Europe. The ferrous operations include
the collection and processing of ferrous scrap materials for shipment to steel
mills. The Company also processes and distributes structural steel products.
Copper operations include processing of wire and cable scrap to recover copper,
aluminum, refining of second grade copper into prime ingot, and on-site
management of materials recycling centers for the telecommunications industry.
Aluminum operations process aluminum dross to recover primary aluminum, and
produce aluminum deoxidizing products and alloys from aluminum scrap for reuse
in the steel and automotive industries respectively. Both the ferrous and
non-ferrous operations of Philip provide significant brokerage services for
scrap materials and primary metals including ferrous, copper, and aluminum. The
Metals Services Group services the steel, telecommunications, aluminum, wire and
cable and automotive industry sectors.

The Industrial Services Group provides industrial outsourcing services,
by-products recovery and environmental services through a network of
approximately 250 facilities in North America. The Industrial Services Group's
operations are divided into four main activities: on-site industrial services,
by-products recovery, environmental services and utilities management. On-site
industrial services include cleaning and maintenance, waste collection and
transportation, container services and tank cleaning, turnaround and outage
services, mechanical contracting and refractory services. By-products recovery
includes distillation, fuel blending, paint overspray recovery, organic and
inorganic processing and polyurethane recycling. Environmental services range
from decommissioning and remediation to emergency response and analytical
services. The utilities management business includes the provision of services
to industrial and municipal water and wastewater treatment plants, power plants
and related infrastructure. The Industrial Services Group services the
automotive, chemical, food, beverage, oil and gas, paint and coatings,
petrochemical and pulp and paper industry sectors, as well as public sector
clients responsible for water and wastewater treatment.

The Company earns revenue from the delivery of on-site industrial services,
the sale of recovered commodities and from fees charged to customers for
by-product transfer and processing, collection and disposal services. The
Company receives by-products and, after processing, disposes of the residuals at
a cost lower than the fees charged to its customers. Other sources of revenue
include fees charged for environmental consulting and engineering and other
services, and revenue from the sale of steel products.

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

22
<PAGE> 25

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
($ MILLIONS)
-----------------------------------------------
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Metals Services............................... $1,113.5 64% $275.3 52% $215.9 47%
Industrial Services........................... 637.4 36% 257.0 48% 247.3 53%
-------- ---- ------ ---- ------ ----
1,750.9 100% 532.3 100% 463.2 100%
Operating expenses.............................. 1,551.5 89% 413.0 78% 356.7 77%
Special charges................................. 155.7 9% 65.1 12% 27.2 6%
Selling, general and administrative............. 130.8 7% 56.0 10% 48.5 10%
Depreciation and amortization................... 61.9 4% 24.2 5% 18.5 4%
-------- ---- ------ ---- ------ ----
Income (loss) from operations................... (149.0) (9%) (26.0) (5%) 12.3 3%
Interest expense................................ 47.3 2% 16.3 3% 18.6 4%
Other income and expense-net.................... (14.3) (1%) (3.5) (1%) (2.6) --
-------- ---- ------ ---- ------ ----
Earnings (loss) from continuing operations
before tax.................................... (182.0) (10%) (38.8) (7%) (3.7) (1%)
Income taxes.................................... (55.7) (3%) (19.5) (3%) (4.8) (1%)
-------- ---- ------ ---- ------ ----
Earnings (loss) from continuing operations...... (126.3) (7%) (19.3) (4%) 1.1 --
Discontinued operations (net of tax)............ -- -- (0.7) -- 2.1 1%
-------- ---- ------ ---- ------ ----
Net earnings (loss)............................. $ (126.3) (7%) $(20.0) (4%) $ 3.2 1%
======== ==== ====== ==== ====== ====
</TABLE>

EARNINGS FROM CONTINUING OPERATIONS

For the year ended December 31, 1997, the Company incurred a loss from
continuing operations of $126.3 million or $1.43 per share on a diluted basis.
This compares to a loss of $19.3 million from continuing operations and $0.39
per share on a diluted basis from continuing operations for the year ended
December 31, 1996. For the year ended December 31, 1995, earnings from
continuing operations were $1.1 million and diluted earnings per share were
$0.03.

The results of operations for the years ended December 31, 1997, 1996 and
1995 were impacted by special and non-recurring charges recorded by the Company
and amounting to $266.9 million, $65.1 million and $27.2 million (before tax)
respectively, which are more fully discussed below. Excluding these charges, the
Company had earnings from continuing operations of $59.7 million for the year
ended December 31, 1997 or $0.66 per share on a diluted basis.

REVENUE

Consolidated revenue for the year ended December 31, 1997 compared with
1996 and 1995 is shown in the following table:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
($ MILLIONS)
-----------------------------------------------
1997 % 1996 % 1995 %
-------- ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Metals Services............................ $1,113.5 64% $275.3 52% $215.9 47%
Industrial Services........................ 637.4 36% 257.0 48% 247.3 53%
-------- ---- ------ ---- ------ ----
Total...................................... $1,750.9 100% $532.3 100% $463.2 100%
======== ==== ====== ==== ====== ====
</TABLE>

23
<PAGE> 26

The 229% increase in consolidated revenue for the year ended December 31,
1997 was attributable to internal growth of approximately $66 million and
approximately $1,153 million from acquisitions.

Consolidated revenue in 1996 of $532.3 million represented an increase of
$69 million or 15% over 1995. The increase was attributable to internal growth
of approximately $2 million and approximately $67 million from acquisitions.

The Metals Services Group acquired thirteen new businesses in 1997 and four
new businesses in late 1996 which contributed substantially all of the 1997
revenue increase. The Industrial Services Group revenue for the year ended
December 31, 1997, increased by $380 million compared to the same period in
1996. The acquisition of 20 new businesses, including Allwaste and Serv-Tech
which were completed on July 31, 1997, contributed $314 million of the revenue
increase for the year ended December 31, 1997 compared to the same period in
1996. The remainder of the increase, or approximately $66 million came from the
expansion of service offerings of existing businesses.

OPERATING EXPENSES

Operating expenses for the year ended December 31, 1997 were $1,551.5
million, an increase of $1,138.5 million or 276% over 1996. As a percentage of
revenue, operating expenses increased from 78% in 1996 to 89% in 1997. This
increase is the result of including newly acquired businesses in the Metals
Services Group which generally have higher operating expenses than Industrial
Services Group businesses and the recording of special and non-recurring charges
in operating expenses which are discussed below.

Operating expenses in 1996 were $413.0 million, an increase of $56.3
million or 16% over 1995. These increased costs result from the increased level
of business activity in 1996 and from acquisitions completed during the year.

SPECIAL CHARGES

As at December 31, 1997, the Company recorded a pre-tax charge of $155.7
million ($117.1 million after tax) reflecting the effects of (i) restructuring
decisions made in its Industrial Services Group following the mergers of
Allwaste and Serv-Tech, (ii) integration decisions in various of its acquired
Metals Services Group businesses, the most significant of which were acquired in
late October 1997 and (iii) impairments of fixed assets and related goodwill
resulting both from decisions to exit various business locations and dispose of
the related assets, as well as assessments of the recoverability of fixed assets
and related goodwill of business units in continuing use.

At the end of the second quarter of 1997, the Company monetized
approximately $27.3 million of its copper inventory. Concurrent with this
transaction, the Company entered into an agreement to process this inventory
over a period of future months and also entered into certain copper swap
contracts. In the third and fourth quarter of 1997, the Company incurred
unrealized pre-tax losses as a result of these copper swap contracts, totalling
$10 million ($4.9 million in the third quarter and $5.1 million in the fourth
quarter) which have been recorded in operating expenses. In addition, during the
fourth quarter of 1997, the Company incurred operating losses in business units
to be exited and losses in the copper division of the Company's Metals Services
Group totalling $33.2 million. The copper division losses were incurred
principally because the Company's copper inventory and related operations were
exposed to the downturn in the market price of copper experienced during the
period since the inventory was unhedged in the fourth quarter.

The Company has also recorded a pre-tax charge in 1997 of $32.9 million
($20.4 million after tax) as a result of inventory costing errors, which
occurred in the same copper division and which resulted in the overstatement of
copper inventory for resale and the understatement of operating expenses.

In addition, the Company has recorded a pre-tax charge of $92.2 million
($57.2 million after tax) resulting from speculative trading of copper cathode
outside of the Company's normal business practices. The trading took place
within the copper division of the Company's Metals Services Group over a three
year period ended December 31, 1997. The losses from the trading were deferred
principally through unrecorded liabilities and to a lesser extent were also
improperly recorded through various balance sheet accounts. During 1997, the
previously unrecorded amounts were improperly capitalized into the inventory
accounts. The trading losses were not recorded in the profit and loss records of
the copper division, and therefore were not included in the
24
<PAGE> 27

Consolidated Statement of Earnings of the Company. Net trading losses incurred
during 1997 were immaterial. As a result of the trading losses, the Company has
restated its financial statements for 1996 and 1995 to record as special charges
the previously unrecorded trading losses of $65.1 million and $27.2 million,
respectively.

The Company has also restated its financial statements for 1996 and 1995 to
reflect the recording of revenue in the appropriate periods. The total
adjustment was $22.1 million which resulted in an overstatement of revenue and
an overstatement of accounts receivable in 1996 and 1995 by $13 million and $9.1
million, respectively on a pre-tax basis ($8.1 million and $5.7 million after
tax).

Subsequent to the issuance of the Company's 1997 financial statements, the
Company determined that its copper division did not have a liability recorded at
December 31, 1997 to reflect an outstanding obligation of $26.0 million
(including $0.5 million for accrued interest) for borrowings made under an
August, 1997 product financing arrangement. The Company also determined that a
$4.8 million repayment of the borrowings was improperly capitalized to goodwill.
In addition, in April, 1998 the Company identified accounts receivable which
were based on improperly priced sales invoices and invalid prepaid expenses
which amounted to $4.8 million and related to the Company's copper division. The
financial statements at December 31, 1997 have been restated to reflect these
adjustments.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $130.8 million in 1997
representing an increase of $74.7 million or 133% over 1996. Selling, general
and administrative expenses in 1996 were 15.7% higher than 1995. The increase is
attributable to the consolidation of selling, general and administrative
expenses of companies acquired and to the addition of sales and marketing staff
and corporate staff to manage the increased volume of business. However, as a
percentage of revenue, selling, general and administrative expenses decreased to
7% of consolidated revenue in 1997 compared to 10% in 1996. This is due to the
fact that selling, general and administrative costs in the Metals Services
Group, as a percentage of revenue, were lower than these same costs for
Industrial Services Group businesses.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization of fixed assets and goodwill in 1997 was
$61.9 million, representing an increase of $37.7 million or 156% over 1996. This
increase was due to acquisitions in the year, to a continued high level of fixed
asset additions, and to the full year effect of acquisitions completed by the
Company in the prior year.

Depreciation and amortization of fixed assets and goodwill in 1996 was
$24.2 million, an increase of $5.6 million over 1995. This increase was due
primarily to acquisitions in the year as well as further fixed asset additions
in 1996.

INTEREST EXPENSE

Interest expense in 1997 was $47.3 million, representing an increase of
$31.0 million or 191% over 1996. This increase was primarily attributable to
increased borrowings to finance the Company's growth by acquisition and fixed
asset expansion, together with working capital requirements to support the
Company's increased revenue base.

Aggregate interest expense in 1996 was $16.3 million or $2.3 million lower
than 1995. In May of 1996, the Company issued common shares and used the
proceeds to reduce the amount of long-term debt outstanding. In addition, in
1996, all the remaining 6% convertible subordinated debentures were converted
into Common Shares of the Company, further reducing the Company's outstanding
debt. Both these factors contributed to a lowering of interest costs in 1996
compared to 1995.

OTHER INCOME AND EXPENSE -- NET

Other income and expense -- net for 1997 includes a $2.8 million gain
before tax on the sale of shares received as part of the proceeds on the sale of
the municipal and commercial solid waste business in 1996. The

25
<PAGE> 28

shares which were restricted at the time of receipt, were sold by the Company in
February 1997 following the removal of the restriction.

In addition, a gain of $7.6 million before tax was recorded in 1997 on the
cancellation of a derivative instrument which was put in place in anticipation
of a debt offering which was later abandoned.

INCOME TAXES

The Company recorded income taxes recoverable in each of the years in the
three year period ended December 31, 1997. The amount recoverable resulted
primarily from the deduction, for income tax purposes, of losses arising from
the matters discussed in Note 3 to the Company's audited Consolidated Financial
Statements which appears on pages 34 to 36 of this Form 10-K regarding special
charges. The composition of the income tax recovery in each of the years ended
December 31, 1997, 1996 and 1995 is discussed in Note 14 to the Company's
audited Consolidated Financial Statements which appears on pages 45 to 47 of
this Form 10-K.

DISCONTINUED OPERATIONS

Loss from discontinued operations (net of tax) of $0.7 million for the year
ended December 31, 1996 and income from discontinued operations (net of tax) of
$2.1 million for the year ended December 31, 1995 consists of the Company's
municipal and commercial solid waste business. These operations have been
treated as discontinued as a result of the sale of the Company's municipal and
commercial solid waste business in 1996. See Notes 4 and 5 of the Company's
audited Consolidated Financial Statements which appear on pages 37 and 38 of
this Form 10-K. Interest expense has been allocated to the municipal and
commercial solid waste business segment based upon the relationship of the net
assets of the solid waste business to the Company's consolidated net assets.

FINANCIAL CONDITION

LIQUIDITY AND CREDIT FACILITY

At December 31, 1997, the Company's working capital was $364.7 million,
representing an increase of $225.4 million from December 31, 1996. Inventory for
resale is a significant component of the working capital at December 31, 1997
and increased by $51 million over December 31, 1996. In addition, at December
31, 1997, accounts receivable were $362.0 million higher than December 31, 1996,
due primarily to $345.3 million of accounts receivable acquired as part of new
business combinations.

In August 1997, the Company signed a five year term revolving credit
agreement which was amended in October, 1997 and February, 1998 (the "Credit
Facility") with a syndicate of international lenders which provides up to $1.5
billion in borrowings, subject to compliance with specified availability tests.
Borrowings under the Credit Facility are guaranteed by the Company's
wholly-owned subsidiaries and are secured by a pledge of all of the issued and
outstanding securities and all the present and future assets held by the Company
in all of its subsidiaries.

At December 31, 1997, the Company had undrawn credit capacity under the
Credit Facility of approximately $543 million, net of letters of credit
outstanding, which amounted to $59 million.

The Company believes that cash generated from operations, together with
amounts available under the Credit Facility, will be adequate to meet its
capital expenditures and working capital needs for the foreseeable future,
although no assurance can be given in this regard.

ACQUISITIONS

During 1997, the Company concluded a number of acquisitions the most
significant of which were the following:

On July 31, 1997, the shareholders of Allwaste and Serv-Tech voted in
favour of the mergers which were jointly announced by the companies earlier in
the year. Under the terms of the respective merger agreements, each share of
Allwaste stock was exchanged for 0.611 Common Shares and each share of Serv-Tech
stock was exchanged for 0.403 Common Shares.

26
<PAGE> 29

In October, 1997, the Company acquired the assets of Luria Brothers and all
of the issued and outstanding shares of the Steiner-Liff Metals group of
companies and the Southern Foundry Supply group of companies. The aggregate
purchase price of such acquisitions was $486 million which includes the
assumption of $32.6 million in debt. Part of the purchase price was satisfied by
the issuance of 5.6 million Philip Common Shares.

In addition to the above acquisitions, the Company completed 28 other
acquisitions during the year ended December 31, 1997.

CAPITAL EXPENDITURES

Capital expenditures for continuing operations were $62.4 million during
1997 compared to $30.0 million in 1996 and $23.3 million in 1995.

The Company's capital expenditure program for 1998 is expected to be $114
million. Approximately $20.5 million of the 1998 capital expenditure program is
expected to be spent on environmental compliance matters relating to facilities
operated by the Company.

CAPITAL STRUCTURE

In November 1997, the Company issued 23 million Common Shares at $16.50 per
share. The net proceeds of $362.5 million were used to repay indebtedness
outstanding under the Credit Facility.

In addition to the equity offering in November of 1997, the Company issued
38.2 million common shares during 1997 for a total consideration of $622.5
million. The Common Shares were issued primarily as a result of acquisitions or
as the result of the exercise of employee stock options. The share capital of
the Company increased from $363.1 at December 31, 1996 to $1,348.1 million at
December 31, 1997.

YEAR 2000

Philip has undertaken a review of all of its computer based systems to
mitigate problems that could occur as the result of the year 2000 century
change. This issue affects computer systems that have time sensitive programs
that may not properly recognize the year 2000. A project team has been assembled
and has prepared a plan to address these potential problems. Activities in
support of this plan are in progress to ensure that problems which are
identified from both internal and external sources are addressed before they
present a problem for the Company. The total cost for 1998 associated with any
required modifications which is expected to be $5.0 million, is included as part
of the Company's capital expenditure program discussed above and will be
expensed as incurred.

FORWARD-LOOKING STATEMENTS

This Form 10-K contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the results of operations and businesses of the Company. These forward-looking
statements involve certain risks and uncertainties. Factors that may cause
actual results to differ materially from those contemplated or projected,
forecast, estimated or budgeted in such forward-looking statements include,
among others, the following possibilities: (1) heightened competition, including
the intensification of price competition and the entry of new competitors; (2)
adverse state, federal and Canadian legislation and regulation; (3) failure to
obtain new customers or retain existing customers; (4) inability to carry out
marketing and/or expansion plans; (5) failure to successfully integrate acquired
businesses and/or to acquire additional businesses on favorable terms; (6) loss
of key executives; (7) changes in interest rates; (8) general economic and
business conditions which are less favorable than expected and (9) unanticipated
changes in industry trends. These factors and other risks are discussed in the
Company's Prospectus dated November 6, 1997 included in its Registration
Statement in Form S-1 (File No. 333-36549) and from time to time in the
Company's filings with the Securities and Exchange Commission and other
regulatory authorities.

27
<PAGE> 30

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

To the Shareholders of Philip Services Corp.

We have audited the consolidated balance sheets of Philip Services Corp. as
at December 31, 1997 and 1996 and the consolidated statements of earnings,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1997. Our audit also included the financial schedules included in
the Index at Item 14. These financial statements and financial schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial schedules based on our
audit.

We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1997 and 1996 and the results of its operations and the cash flows for each of
the three years in the period ended December 31, 1997 in accordance with
generally accepted accounting principles.

Also in our opinion, such financial schedules when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.

As discussed in Note 3, the accompanying financial statements for the years
ended December 31, 1995 and 1996 have been restated.

<TABLE>
<S> <C>
Mississauga, Ontario Deloitte & Touche
March 4, 1998 (May 14, 1998 as to Note 3) Chartered Accountants
</TABLE>

28
<PAGE> 31

PHILIP SERVICES CORP.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS)

<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1996
---------- ----------
(RESTATED) (RESTATED)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents...................................... $ 48,809 $ 6,044
Accounts receivable (net of allowance for doubtful
accounts of $25,059; 1996 -- $5,907)................... 535,052 173,021
Inventory for resale...................................... 223,613 172,280
Other current assets...................................... 66,898 44,690
---------- --------
874,372 396,035
Fixed assets (Note 6)....................................... 605,710 254,087
Goodwill.................................................... 1,089,649 235,622
Deferred income taxes (Note 14)............................. 86,468 12,225
Other assets (Note 7)....................................... 167,174 55,792
---------- --------
$2,823,373 $953,761
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 271,726 $189,846
Accrued liabilities (Note 8).............................. 190,741 46,907
Current maturities of long-term debt and loans from
related parties (Notes 9 and 17(b)).................... 47,166 19,956
---------- --------
509,633 256,709
Long-term debt (Note 9)..................................... 966,995 282,825
Other liabilities (Note 11)................................. 129,804 35,217
Contingencies (Note 18)
Shareholders' equity (Note 12).............................. 1,216,941 379,010
---------- --------
$2,823,373 $953,761
========== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.
29
<PAGE> 32

PHILIP SERVICES CORP.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- -------- --------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C>
Revenue (Note 3)........................................ $1,750,930 $532,344 $463,244
Operating expenses (Note 3)............................. 1,551,495 413,013 356,699
Special charges (Note 3)................................ 155,720 65,056 27,179
Selling, general and administrative costs............... 130,778 56,063 48,496
Depreciation and amortization........................... 61,953 24,225 18,587
---------- -------- --------
Income (loss) from operations........................... (149,016) (26,013) 12,283
Interest expense........................................ 47,310 16,263 18,621
Other income and expense -- net......................... (14,328) (3,456) (2,688)
---------- -------- --------
Earnings (loss) from continuing operations before tax... (181,998) (38,820) (3,650)
Income taxes (Note 14).................................. (55,731) (19,563) (4,790)
---------- -------- --------
Earnings (loss) from continuing operations.............. (126,267) (19,257) 1,140
Discontinued operations (net of tax) (Note 5)........... -- (716) 2,109
---------- -------- --------
Net earnings (loss)..................................... $ (126,267) $(19,973) $ 3,249
========== ======== ========
Basic earnings per share (Note 15)
Continuing operations................................. $ (1.43) $ (0.39) $ 0.03
Discontinued operations............................... -- (0.01) 0.06
---------- -------- --------
$ (1.43) $ (0.40) $ 0.09
========== ======== ========
Diluted earnings per share (Note 15)
Continuing operations................................. $ (1.43) $ (0.39) $ 0.03
Discontinued operations............................... -- (0.01) 0.05
---------- -------- --------
$ (1.43) $ (0.40) $ 0.08
========== ======== ========
Weighted average number of common shares outstanding
(000's)............................................... 88,191 50,073 37,342
========== ======== ========
</TABLE>

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
(IN THOUSANDS OF US DOLLARS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- -------- --------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C>
Balance, beginning of year.............................. $ 39,993 $ 59,966 $ 56,717
Net earnings (loss)..................................... (126,267) (19,973) 3,249
---------- -------- --------
Balance, end of year.................................... $ (86,274) $ 39,993 $ 59,966
========== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.
30
<PAGE> 33

PHILIP SERVICES CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US DOLLARS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
------------ ---------- ---------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings(loss) from continuing operations......... $ (126,267) $ (19,257) $ 1,140
Items included in earnings not affecting cash
Depreciation and amortization.................... 47,348 18,630 13,449
Amortization of goodwill......................... 14,605 5,595 5,138
Deferred income taxes............................ (28,942) (15,315) (2,467)
Net gain on sale of assets....................... (2,559) (1,645) (885)
Special charges (net of tax) (Note 3)............ 117,081 -- --
------------ ---------- ---------
Cash flow from continuing operations.................. 21,266 (11,992) 16,375
Changes in non-cash working capital (Note 13)......... (201,169) (35,139) (850)
------------ ---------- ---------
Cash provided by (used in) continuing operating
activities.......................................... (179,903) (47,131) 15,525
Cash provided by discontinued operating activities.... -- 21,161 11,012
------------ ---------- ---------
Cash provided by (used in) operating activities....... (179,903) (25,970) 26,537
------------ ---------- ---------
INVESTING ACTIVITIES
Proceeds from sale of solid waste operations
(Notes 4 and 5)..................................... 19,800 137,632 --
Acquisitions -- including acquired cash (bank
indebtedness) (Note 4).............................. (596,574) (111,437) (2,832)
Purchase of fixed assets.............................. (62,391) (30,004) (23,347)
Other -- net.......................................... 3,965 (32,509) (22,441)
------------ ---------- ---------
Cash used in continuing investing activities.......... (635,200) (36,318) (48,620)
Cash used in investing activities of discontinued
operations.......................................... -- (12,703) (11,102)
------------ ---------- ---------
Cash used in investing activities..................... (635,200) (49,021) (59,722)
------------ ---------- ---------
FINANCING ACTIVITIES
Proceeds from long-term debt.......................... 1,778,880 216,398 32,484
Principal payments on long-term debt.................. (1,301,249) (187,841) (8,690)
Common shares issued for cash......................... 380,237 61,787 138
------------ ---------- ---------
Cash provided by continuing financing activities...... 857,868 90,344 23,932
Cash used in financing activities of discontinued
operations.......................................... -- (9,309) (2,036)
------------ ---------- ---------
Cash provided by financing activities................. 857,868 81,035 21,896
------------ ---------- ---------
Net change in cash for the year....................... 42,765 6,044 (11,289)
Cash and equivalents, beginning of year............... 6,044 -- 11,289
------------ ---------- ---------
Cash and equivalents, end of year..................... $ 48,809 $ 6,044 $ --
============ ========== =========
</TABLE>

The accompanying notes are an integral part of these financial statements.
31
<PAGE> 34

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Philip Services Corp. (the "Company") is an integrated metals recovery and
industrial services company, which provides metal recovery and processing
services, by-products recovery, and industrial services to major industry
sectors throughout North America and Europe.

2. SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in US dollars
using accounting principles generally accepted in the United States ("US GAAP").

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingencies at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from the Company's estimates.

For all periods presented, the Consolidated Financial Statements and Notes
to the Consolidated Financial Statements disclose the Company's municipal and
commercial solid waste business as discontinued operations, as discussed in Note
5.

PRINCIPLES OF CONSOLIDATIONS

These consolidated financial statements include the accounts of the Company
and all of its subsidiaries. The equity method of accounting is used for
investment ownership ranging from 20 percent to 50 percent and where the Company
has the ability to exercise significant influence over the investee.

REVENUE RECOGNITION

Revenue from industrial services are 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 upon receipt and acceptance of
materials for processing since the Company accepts title to the materials at
such time and provides contractual indemnification to customers against future
liability with respect to the materials. Treatment, transportation and disposal
costs are accrued when the related revenue is recognized.

Revenue from the sale of recovered commodities and steel products is
recognized at the time of shipment. For contracts where the Company brokers
materials between two parties, only the commission on the transaction is
recorded.

CASH AND EQUIVALENTS

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

INVENTORY

Inventory is recorded at the lower of average purchased cost and net
realizable value.

FIXED ASSETS

Fixed assets are stated at cost and are depreciated over their estimated
useful lives generally on the following basis: buildings 20 to 40 years
straight-line; equipment 5% to 30% straight-line. Landfill sites and
improvements thereto are recorded at cost and amortized over the life of the
landfill site based on the estimated landfill capacity 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.

32
<PAGE> 35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company periodically reviews the carrying value of its fixed assets to
determine whether such values are recoverable. Any resulting write-downs are
charged to earnings.

GOODWILL

Goodwill represents the excess of the purchase price of businesses acquired
over the fair value of the identifiable assets acquired and is amortized over
periods not exceeding 40 years. At each balance sheet date management assesses
the appropriateness of the goodwill balance based on the undiscounted future
cash flow from operating results.

OTHER ASSETS

Deferred financing costs are amortized over the life of the related debt
instrument. Other intangibles such as non-compete agreements are amortized over
periods relating to the terms of the agreements.

ENVIRONMENTAL LIABILITY

The Company accrues the estimated costs relating to the closure and
post-closure monitoring of its landfill sites as well as remediation costs
associated with its transfer and processing facilities. The Company charges
earnings with these estimated future costs based on engineering estimates over
the fill rate of landfill sites. The accrued liability for environmental and
closure costs is disclosed in the consolidated balance sheet under other
liabilities. Amounts required to dispose of waste materials located at the
Company's transfer and processing facilities are included in accounts payable
and accrued liabilities.

INTEREST CAPITALIZATION

The Company includes, as part of the cost of its fixed assets, all
financing costs incurred prior to the asset becoming available for operation.

FOREIGN CURRENCY TRANSLATION

In 1997, the Company changed the designation of the parent company's
functional currency to the US dollar. The Company designates as its functional
currency the Canadian dollar for all its Canadian based operations and the US
dollar for all operations based in the United States. The assets and liabilities
denominated in a foreign currency for foreign operations, all of which are
self-sustaining, are translated at exchange rates in effect at the balance sheet
date. Revenue and expense items are translated at average exchange rates
prevailing during the period. The resulting gains and losses are accumulated in
a separate component of shareholders' equity.

CONCENTRATION OF CREDIT RISK

The Company's accounts receivable constitute financial instruments. The
Company's accounts receivable approximated their fair value as at December 31,
1997 and 1996. Concentration of credit risk in accounts receivable is limited,
due to the large number of customers the Company services throughout North
America. The Company performs ongoing credit evaluations of its customers, but
does not require collateral to support customer accounts receivable. The Company
establishes an allowance for doubtful accounts based on the credit risk
applicable to particular customers, historical and other information.

DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS

Interest rate swaps and collars are designated as hedges, with net cash
settlement accrued as an adjustment to interest expense, when their interest
rate characteristics are opposite from the debt instrument they hedge.
Derivative commodity futures and collars are designated as hedges when the
Company can establish a high degree of inverse correlation between changes in
the market value of inventory being hedged and the market value of the
derivative instrument. Such instruments are marked to market with unrealized
gains and losses deferred and reflected in the balance sheet as a basis
adjustment of inventory. Upon

33
<PAGE> 36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (continued)
settlement or termination, gains and losses on these hedge instruments are
recorded in the statement of earnings as operating expenses. Premiums paid for
purchased commodity put options are amortized over the life of the options with
any gains on settlement recorded as an adjustment to the basis of inventory.
Changes in the market value of written commodity call options are accrued as
operating expenses.

Derivative instruments and contracts not qualifying for hedge accounting
are marked to market and recorded in the statement of earnings.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" which is effective for fiscal years
beginning after December 15, 1997. Comprehensive income is defined as the change
in equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources and includes all changes in
equity during a period except those resulting from investment by owners and
distributions to owners. Comprehensive income for the Company would not be
materially different than the net earnings disclosed for the year ended December
31, 1997.

3. SPECIAL CHARGES (in thousands)

(a) Special and non-recurring charges

The following table summarizes the special and non-recurring charges
recorded by the Company in 1997, and identifies where they are disclosed in the
Statements of Earnings:

<TABLE>
<S> <C>
Non-recurring charges and asset impairments recorded as
special charges........................................... $155,720
Non-recurring charges recorded as operating expenses........ 78,260
Costing errors recorded as operating expenses............... 32,875
--------
Pre-tax..................................................... $266,855
========
After tax................................................... $185,976
========
</TABLE>

As at December 31, 1997, the Company recorded a pre-tax charge of $155,720
($117,081 after tax) reflecting the effects of (i) restructuring decisions made
in its Industrial Services Group following the mergers of Allwaste and
Serv-Tech, (ii) integration decisions in various of its acquired Metal Services
Group businesses, the most significant of which were acquired in late October
1997 and (iii) impairments of fixed assets and related goodwill resulting both
from decisions to exit various business locations and dispose of the related
assets, as well as assessments of the recoverability of fixed assets and related
goodwill of business units in continuing use.

All businesses assessed for asset impairment were acquired in purchase
business combinations and, accordingly, the goodwill that arose in those
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.

34
<PAGE> 37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. SPECIAL CHARGES (in thousands) (continued)
Special and non-recurring charges relate to the impairment of fixed assets
and related goodwill and are comprised of the following items:

<TABLE>
<S> <C>
Business units, locations or activities to be exited:
Goodwill written off...................................... $ 10,032
Fixed assets written down to estimated net realizable
value of $4,843........................................ 47,584
Unavoidable future lease and other costs associated with
properties............................................. 9,358
Other assets to be disposed, including $7,800 accrued
disposal costs......................................... 17,740
Business units to be continued:
Goodwill impairment....................................... 49,558
Fixed assets written down to estimated net realizable
value of $8,810........................................ 10,984
Severance, $2,000 paid before year end...................... 4,464
Accrued costs............................................... 6,000
--------
$155,720
========
</TABLE>

At the end of the second quarter of 1997, the Company monetized
approximately $27,300 of its copper inventory. Concurrent with this transaction,
the Company entered into an agreement to process this inventory over a period of
future months and also entered into certain copper swap contracts. In the third
and fourth quarter of 1997, the Company incurred unrealized pre-tax losses as a
result of these copper swap contracts, totalling $10,000 ($4,900 in the third
quarter and $5,100 in the fourth quarter) which have been recorded in operating
expenses. In addition, during the fourth quarter of 1997, the Company incurred
operating losses in business units to be exited and losses in the copper
division of the Company's Metals Services Group totalling $33,241. The copper
division losses were incurred principally because the Company's copper inventory
and related operations were exposed to the downturn in the market price of
copper experienced during the period since the inventory was unhedged in the
fourth quarter.

As described in part (b) of this note, the Company has also restated the
1997 financial statements to record in operating expenses, $35,019 ($22,026
after tax) relating to improperly recorded transactions identified in April,
1998.

The Company has also recorded a pre-tax charge in 1997 of $32,875 ($20,383
after tax) as a result of inventory costing errors, which occurred in the same
copper division and which resulted in the overstatement of copper inventory for
resale and the understatement of operating expenses.

(b) Restatements

In January, 1998, the Company discovered previously incurred but unrecorded
trading losses amounting to $92,235 on a pre-tax basis ($57,186 after tax)
resulting from speculative trading of copper cathode outside of the Company's
normal business practices. The trading took place within the copper division of
the Company's Metals Services Group over a three year period ended December 31,
1997. The losses from the trading were deferred principally through unrecorded
liabilities and to a lesser extent were also improperly recorded through various
balance sheet accounts. During 1997, the previously unrecorded amounts were
improperly capitalized into the inventory accounts. The trading losses were not
recorded in the profit and loss accounts of the copper division, and therefore
were not included in the Consolidated Statement of Earnings of the Company. Net
trading losses incurred during 1997 were immaterial. As a result of the trading
losses, the Company has restated its financial statements for 1996 and 1995 to
record as special charges the previously unrecorded trading losses of $65,056
and $27,179, respectively.

The Company has also restated its financial statements for 1996 and 1995 to
reflect the recording of revenue in the appropriate periods. The total
adjustment was $22,114 which resulted in an overstatement of

35
<PAGE> 38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. SPECIAL CHARGES (in thousands) (continued)
revenue and an overstatement of accounts receivable in 1996 and 1995 by $13,000
and $9,114, respectively on a pre-tax basis ($8,060 and $5,652 after tax).

Subsequent to the issuance of the Company's 1997 financial statements, the
Company determined that its copper division did not have a liability recorded at
December 31, 1997 to reflect an outstanding obligation of $25,973 (including
$503 for accrued interest) for borrowings made under an August, 1997 product
financing arrangement. The Company also determined that a $4,752 repayment of
the borrowings was improperly capitalized to goodwill. In addition, in April,
1998 the Company identified accounts receivable which were based on improperly
priced sales invoices and invalid prepaid expenses which amounted to $4,797 and
related to the Company's copper division. The financial statements at December
31, 1997 have been restated to reflect these adjustments.

The following table summarizes the foregoing restatement adjustments
recorded by the Company:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
INCREASE (DECREASE)
---------------------------------
<S> <C> <C> <C>
BALANCE SHEETS:
Current assets........................................... $ (4,797) $ (35,700) $ --
Current liabilities...................................... 25,973 78,649 36,293
Goodwill................................................. (4,752) -- --
Deferred taxes........................................... 13,496 (43,452) (13,791)
Shareholders' equity..................................... (22,026) (70,897) (22,502)
STATEMENTS OF EARNINGS:
Revenue.................................................. $ -- $ (13,000) $ (9,114)
Operating expenses....................................... 35,019 -- --
Special charges.......................................... -- 65,056 27,179
Interest expense......................................... 503 -- --
--------- --------- ---------
Earnings (loss) from continuing operations............... (35,522) (78,056) (36,293)
Income taxes............................................. (13,496) (29,661) (13,791)
--------- --------- ---------
Net income............................................... $ (22,026) $ (48,395) $ (22,502)
========= ========= =========
Effect on diluted earnings per share..................... $ (0.25) $ (0.90) $ (0.46)
========= ========= =========
</TABLE>

36
<PAGE> 39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. ACQUISITIONS AND DIVESTITURES (in thousands)

During 1997, the Company acquired over 30 businesses, including Allwaste
Inc. ("Allwaste") and Luria Brothers ("Luria"). Allwaste, an integrated provider
of industrial and environmental services based in Houston, Texas was acquired on
July 31, 1997 for a total consideration of $443.8 million, paid for by the
issuance of approximately 23 million common shares. Luria, based in Cleveland,
Ohio was acquired on October 10, 1997 for total cash consideration of $175.3
million. In 1996, the Company acquired eleven businesses, including Intsel
Southwest Limited Partnership ("Intsel") and Luntz Corporation ("Luntz"). During
1995, six businesses were acquired. All business combinations have been
accounted for using the purchase method of accounting and are summarized below:

<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------- -------- --------
ALLWASTE LURIA OTHER TOTAL
-------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PURCHASE CONSIDERATION
Cash........................... $ -- $163,001 $397,488 $ 560,489 $109,301 $ 1,869
Company's common shares........ 391,719 -- 210,913 602,632 29,571 1,239
Deferred payments and long-term
debt........................ -- -- 22,828 22,828 22,373 4,474
Acquisition costs and
accruals.................... 52,047 12,300 19,158 83,505 3,875 687
-------- -------- -------- ---------- -------- --------
$443,766 $175,301 $650,387 $1,269,454 $165,120 $ 8,269
======== ======== ======== ========== ======== ========
FAIR VALUE OF NET ASSETS ACQUIRED
Cash (bank indebtedness)....... $ 8,601 $ 688 $ (7,645) $ 1,644 $ 1,849 $ (275)
Long-term debt................. (142,363) -- (86,002) (228,365) (14,513) (246)
Assets, excluding cash &
intangibles................. 267,720 115,556 495,184 878,460 171,861 14,104
Liabilities.................... (77,318) (44,673) (228,010) (350,001) (63,092) (13,436)
Goodwill....................... 387,126 101,130 452,278 940,534 63,535 7,510
Other intangibles.............. -- 2,600 24,582 27,182 5,480 612
-------- -------- -------- ---------- -------- --------
$443,766 $175,301 $650,387 $1,269,454 $165,120 $ 8,269
======== ======== ======== ========== ======== ========
</TABLE>

The unaudited pro forma information set forth below assumes the
acquisitions of Allwaste and Luria and the material acquisitions in 1996 of
Luntz and Intsel, occurred at the beginning of 1996. The unaudited pro forma
information is presented for informational purposes only and is not necessarily
indicative of the results of operations that would have resulted if the
acquisitions had occurred on January 1, 1996.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1997 1996
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $2,062,027 $1,316,149
Earnings (loss) from continuing operations.................. $ (125,201) $ (15,770)
Basic earnings per share from continuing operations......... $ (1.18) $ (0.21)
</TABLE>

In November 1995, the Company reached an agreement to sell its Greater
Montreal Area solid waste collection and transfer business (the "Intersan
Business") for $31,685. As part of the sale of the Intersan Business, the
Company entered into a disposal services agreement with the purchaser and
received proceeds of $7,947. The proceeds from the sale of the Intersan
Business, which amounted to $39,632, were received in January 1996.

37
<PAGE> 40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. DISCONTINUED OPERATIONS (in thousands)

In August 1996, the Company sold its municipal and commercial solid waste
business (the "Solid Waste Business") for a total consideration of $115,000 to
USA Waste Services, Inc. ("USA Waste"). The consideration included $60,000 in
cash, $38,000 in unrestricted common shares of USA Waste, and $17,000 in
restricted common shares of USA Waste (in total, representing less than 2% of
USA Waste's voting stock). The unrestricted common shares of USA Waste were sold
in September 1996 for $39,508, resulting in a gain of $1,508 which is included
in Other Income and Expense -- net in the Consolidated Statements of Earnings.
The restriction on the $17,000 common shares of USA Waste was removed in January
1997 and in February 1997, the Company sold these shares for $19,800, resulting
in a further gain before tax of $2,800.

The sale of the Solid Waste Business in 1996 included the remaining portion
of the Quebec solid waste division, and the related disposal services agreement,
as described in Note 4.

Revenue of the Solid Waste Business, net of intercompany revenue, was
$38,140 and $61,093 for the fiscal years ended December 31, 1996 and 1995,
respectively. Income from discontinued operations in the Consolidated Statements
of Earnings is presented net of allocated interest expense of $3,768 and $5,100
and net of applicable income taxes of $3,225 and $1,722 for the fiscal years
ended December 31, 1996 and 1995, respectively. Interest was allocated based
upon the ratio of the net assets of the Solid Waste Business to the Company's
consolidated net assets. No general corporate overhead was allocated to the
discontinued operations.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Loss on sale of Solid Waste Business, net of income taxes
recoverable of $2,568..................................... $ -- $(5,588) $ --
Income from discontinued operations (net of tax)............ -- 4,872 2,109
------- ------- ------
Discontinued operations..................................... $ -- $ (716) $2,109
======= ======= ======
</TABLE>

6. FIXED ASSETS (in thousands)

<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
ACCUMULATED NET BOOK ACCUMULATED NET BOOK
COST DEPRECIATION VALUE COST DEPRECIATION VALUE
-------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Land................. $ 73,329 $ -- $ 73,329 $ 40,030 $ -- $ 40,030
Landfill sites....... 22,855 2,950 19,905 15,534 651 14,883
Buildings............ 128,924 11,417 117,507 59,375 7,807 51,568
Equipment............ 447,938 87,212 360,726 186,033 54,094 131,939
Assets under
development........ 34,243 -- 34,243 15,667 -- 15,667
-------- -------- -------- -------- ------- --------
$707,289 $101,579 $605,710 $316,639 $62,552 $254,087
======== ======== ======== ======== ======= ========
</TABLE>

38
<PAGE> 41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. OTHER ASSETS (in thousands)

<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Restricted investments (a).................................. $ 27,970 $23,667
Deferred financing costs.................................... 19,616 11,087
Investments (b)............................................. 53,685 4,739
Other intangibles........................................... 35,426 6,698
Due from an officer and director............................ -- 538
Other....................................................... 30,477 9,063
-------- -------
$167,174 $55,792
======== =======
</TABLE>

(a) Restricted investments support the Company's self-insurance program and are
invested and managed by the Company's wholly-owned insurance subsidiary.

(b) Investments in 1997 include:

(i) a 29.9% interest in Innovative Valve Technologies Inc. ("Invatec")
representing 2,340,716 common shares amounting to $30.8 million. The
Invatec investment is accounted for using the equity method of
accounting. The difference between the carrying value of the
investment and the underlying equity in the net assets which is
approximately $12.8 million will be amortized over a period not
exceeding forty years. Invatec is a publicly traded company providing
comprehensive maintenance, repair, replacement and value added
distribution services of industrial valves and process system
components. The quoted market price of the Invatec shares at December
31, 1997 was $20.25 per share,

(ii) a $9.7 million investment in Strategic Holdings Inc. which was
obtained on the acquisition of Allwaste, Inc. The investment, which
is accounted for at cost, represents $8.1 million in redeemable
preferred stock with a dividend rate of $0.06 per share, redeemable
beginning in 2002, $1.5 million of common stock warrants with
exercise prices ranging from $0.4643 to $1.50 per share and $0.1
million of common shares.

8. ACCRUED LIABILITIES (in thousands)

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Accrued employee compensation and benefit costs............. $ 47,062 $11,478
Accrued purchases........................................... 26,212 20,085
Accrued insurance costs..................................... 19,078 4,262
Income taxes payable........................................ 11,629 --
Accrued restructuring costs (Note 3)........................ 25,622 --
Accrued other............................................... 61,138 11,082
-------- -------
$190,741 $46,907
======== =======
</TABLE>

39
<PAGE> 42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. LONG-TERM DEBT (in thousands)

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Bank term loan (a).......................................... $897,352 $248,119
Convertible subordinated debentures (b)..................... 25,625 --
Loans collateralized by certain assets of subsidiaries of
the Company having a net book value of $33,865 bearing
interest at a weighted average fixed rate of 6.6% (1996
-- 5.7%) maturing at various dates up to 2020............. 19,627 5,175
Loans collateralized by certain assets of subsidiaries of
the Company having a net book value of $18,340 bearing
interest at prime plus a weighted average floating rate of
0.8% (1996 -- 1.9%) maturing at various dates up to
2007...................................................... 6,582 5,481
Loans unsecured, bearing interest at prime plus a weighted
average floating rate of 5.4% (1996 -- 3.4%) maturing at
various dates up to 2001.................................. 21,908 26,060
Obligations under capital leases on equipment bearing
interest at rates varying from 6% to 12% maturing at
various dates to 2004..................................... 15,793 14,484
Product financing loan (Note 3(b)).......................... 25,973
Other....................................................... 1,301 2,636
-------- --------
1,014,161 301,955
Less current maturities of long-term debt (c)............... 47,166 19,130
-------- --------
$966,995 $282,825
======== ========
</TABLE>

(a) In August 1997, the Company signed a $1.5 billion revolving credit agreement
which was amended in October, 1997 and February, 1998 (the "Credit
Facility") with a syndicate of international lenders which replaced the 1996
revolving term loan agreement and refinanced certain other long-term debt.
The Credit Facility expires in August of 2002, and contains certain
restrictive covenants and financial covenants including the following:

- the Company must meet an interest ratio coverage test as well as total
debt and fixed charge ratio coverage tests

- the Company must maintain a prescribed level of working capital

- acquisitions by the Company are subject to lenders approval

At December 31, 1997 the Company is in compliance with all of the covenants
of the Credit Facility.

Borrowings under the Credit Facility are guaranteed, jointly and severally
by the Company's wholly owned subsidiaries and are secured by a pledge of
all of the issued and outstanding securities, and all the present and
future assets, held by the Company in all of its subsidiaries. The Credit
Facility bears interest based on a moving grid. At December 31, 1997, the
Company was paying approximately 7.1%, on these borrowings.

At December 31, 1997, the Company had undrawn credit capacity under the
Credit Facility of approximately $543 million net of outstanding letters of
credit which amounted to $59 million.

In February of 1998, the Company signed an amending agreement to the
revolving credit agreement which would permit the Company to draw up to
$210 million by way of subordinated debt to finance the Company's equity
interest in SK Parent Corp. (Note 18).

(b) On the acquisition of Allwaste, the Company assumed the indenture with
respect to Allwaste's 7 1/4% Convertible Subordinated Debentures
("debenture") which are due 2014. At any time up to and including June 1,
2014 the holder of any debenture will have the right to convert the
principal amount of such debenture into common shares equal to the principal
amount of the debenture surrendered for conversion divided by $19.5376. The
debentures are redeemable for cash at the option of the Company. The
debentures provide for annual mandatory sinking fund payments equal to 5% of
the aggregate

40
<PAGE> 43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. LONG-TERM DEBT (continued)
principal amount of the debenture issued, commencing June 1, 1999. Interest
is payable semi-annually on June 1 and December 1.

The Company's acquisition of Allwaste constituted a "redemption event"
pursuant to the indenture. Accordingly, each holder of the debentures had
the right to require the redemption of all or any portion of such holder's
debenture for cash to the 90(th) day following the acquisition. During the
90 day period, $3.3 million of debentures were redeemed.

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

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

The Company utilizes 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. Additionally, the Company hedges the market risk of
foreign currency exchange rate movements on debt denominated in Canadian
currency through the forward purchase of Canadian dollars. The credit risk of
counterparty fulfillment on all such contracts is mitigated by dealing only with
credit worthy major public financial institutions.

The speculative copper trading activities referred to in Note 3 consisted
primarily of physical forward purchase and sale contracts for copper cathode and
copper scrap entered into with various counterparties. In many instances, the
final settlement pricing on these contracts remained open after the delivery of
the underlying copper commodity. At December 31, 1996 the Company had sold and
delivered 7,145 pounds of copper cathode on which settlement pricing was not
finalized until 1997. Additionally, at December 31, 1996, the Company was
obligated to deliver 23,573 pounds of copper cathode and 25,471 pounds of copper
scrap. At December 31, 1997, there were no remaining open positions on such
contracts and the Company is no longer engaged in copper trading except as
described in the following paragraphs.

At December 31, 1997, the Company had outstanding 31,500 lbs of copper swap
contracts entered into in connection with the processing agreement associated
with the monetization of the copper inventory referred to in Note 3. Under these
swaps the Company is obligated to pay the counterparty an average fixed price of
$0.87/lb and receives a variable price based upon the market price of copper.
These swaps have no carrying value and resulted in a mark to market loss of
$10,000 at December 31, 1997.

The Company enters into copper and aluminum collar and purchased put option
contracts, as well as written covered call option contracts with major public
financial institutions to hedge market price fluctuations in its copper and
aluminum inventories.

The Company also has forward physical copper sales commitments to customers
totalling 22,000 lbs. during 1998 and copper futures purchase contracts with
major public broker dealers which are, collectively designated as hedges in its
copper processing operations and inventory.

41
<PAGE> 44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS (in thousands except
rate/strike price and term) (continued)
The following table summarizes outstanding derivative instruments:

<TABLE>
<CAPTION>
1997 1996
---------------------------------------------- ---------------------------------------------
CONTRACT/ TERM CONTRACT/ TERM
INSTRUMENTS NOTIONAL AMOUNT (YEARS) RATE/STRIKE PRICE NOTIONAL AMOUNT (YEARS) RATE/STRIKE PRICE
----------- --------------- ------- ------------------ --------------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate swaps / collars... $ 319,406 0.7 5.91% $189,800 0.7 5.91%
Forward Canadian dollar
purchases..................... $ 99,393 0.2 Cdn$1.42/$1US 73,966 0.1 Cdn$1.34/$1US
Copper swaps.................... 31,500 lbs. 0.5 $0.87/lb. -- -- --
Copper price collars............ 45,000 lbs. 0.1 $0.75 to $0.95/lb. -- n/a n/a
Written copper call options..... 51,750 lbs. 0.2 $0.88/lb. -- n/a n/a
Purchased copper put options.... 13,500 lbs. 0.5 $0.78/lb. -- n/a n/a
Aluminum price collars.......... 10,000 lbs. 0.1 $0.65 to $0.74/lb. -- n/a n/a
Written aluminum call options... 10,000 lbs. 0.2 $0.72/lb. -- n/a n/a
Copper futures purchases........ 11,805 lbs. 0.4 $0.89/lb. -- n/a n/a
</TABLE>

Other than the copper swaps discussed in the above paragraphs, neither the
carrying value nor the related fair value of the instruments summarized in the
above table were individually or collectively material at December 31, 1997 or
1996.

11. OTHER LIABILITIES (in thousands)

<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Deferred payments (a)....................................... $ 15,839 $ 11,774
Accrued environmental costs................................. 59,638 18,848
Other....................................................... 54,327 4,595
----------- ----------
$ 129,804 $ 35,217
=========== ==========
</TABLE>

(a) Deferred payments relate to acquisitions (see Note 4), whereby the former
owners of the businesses have agreed to accept part of their payment over
future periods of time. All such amounts are non-interest bearing and are
unsecured.

12. SHAREHOLDERS' EQUITY (in thousands except number of shares/options and per
share amounts)

<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Share capital............................................... $ 1,348,066 $ 363,079
Retained earnings (deficit)................................. (86,274) 39,993
Cumulative foreign currency translation adjustment.......... (44,851) (24,062)
------------ -----------
$ 1,216,941 $ 379,010
============ ===========
SHARE CAPITAL CONSISTS OF:
AUTHORIZED
Unlimited number of common shares
ISSUED
Common shares and equivalents
Number...................................................... 131,058,393 69,876,868
Dollars..................................................... $ 1,348,066 $ 363,079
</TABLE>

42
<PAGE> 45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. SHAREHOLDERS' EQUITY (in thousands except number of shares/options and per
share amounts) (continued)
The issued share capital of the Company is comprised of the following:

<TABLE>
<CAPTION>
COMMON SHARES
-------------------------
NUMBER AMOUNT
----------- ----------
<S> <C> <C>
Balance -- December 31, 1994................................ 37,271,522 $ 152,881
Shares issued in respect of acquisitions during 1995........ 194,116 1,239
Shares cancelled............................................ (68,404) (527)
Other....................................................... 32,985 189
Share options exercised for cash............................ 23,614 138
----------- ----------
Balance -- December 31, 1995................................ 37,453,833 153,920
Shares issued in respect of acquisitions during 1996........ 3,600,102 29,571
Shares issued on conversion of convertible subordinated
debentures................................................ 19,180,000 117,720
Shares issued for cash...................................... 8,625,000 55,345
Share options exercised for cash............................ 953,724 6,159
Other....................................................... 64,209 364
----------- ----------
Balance -- December 31, 1996................................ 69,876,868 363,079
Shares issued in respect of acquisitions during 1997........ 35,880,758 602,632
Shares issued on conversion of convertible subordinated
debentures................................................ 129,511 1,550
Shares issued for cash...................................... 23,000,000 362,501
Share options exercised for cash............................ 1,774,414 12,657
Other....................................................... 396,842 5,647
----------- ----------
Balance -- December 31, 1997................................ 131,058,393 $1,348,066
=========== ==========
</TABLE>

STOCK OPTIONS

Common share options issued and outstanding are as follows:

<TABLE>
<CAPTION>
NUMBER $/SHARE
--------- --------------------
<S> <C> <C>
Employee stock option plans (a)
Year of grant
1992..................................................... 30,000 Cdn $ 8.00 to 10.375
1993..................................................... 57,000 Cdn $ 9.00
1994..................................................... 514,088 Cdn $ 6.75 to 8.00
1995..................................................... 619,504 Cdn $ 9.88
1996..................................................... 1,024,650 Cdn $ 10.90 to 11.90
1997..................................................... 3,821,500 Cdn $ 18.10 to 22.70
1997 Serv-Tech acquisition............................... 400,010 $7.44 to 22.64
1997 Allwaste acquisition................................ 1,742,194 $6.55 to 17.80
Issued in conjunction with the acquisition of Philip
Environmental Corporation (c).......................... 776,386 Cdn $ 7.05 to 8.00
Issued to a director of the Company (b)(c)............... 200,000 Cdn $ 7.35
---------
Total outstanding December 31,1997....................... 9,185,332
=========
</TABLE>

(a) The Company has allotted and reserved 10,257,149 common shares under its
1991 and 1997 Employee Stock Option Plans and 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. Under the stock
option plans, options may be

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

12. SHAREHOLDERS' EQUITY (in thousands except number of shares/options and per
share amounts) (continued)
granted to purchase common shares of the Company at the then current market
price. All options currently expire five to ten years from the date of
grant. All the options outstanding were issued at the then current market
price.

(b) These options were issued in 1991 at a discount to the then current market
price.

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 Statements No.
25 ("APB 25"). The Company has elected to measure compensation costs related to
stock options in accordance with ABP 25 and recognizes no compensation expense
for stock options granted. Accordingly, the Company has adopted the disclosure
only provisions of SFAS No. 123.

If compensation costs were measured using the fair value of the stock
options on the date of grant, during 1995, 1996 and 1997, in accordance with
SFAS No. 123, the Company's net earnings would be as follows:

<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- ----------------------
AS REPORTED PROFORMA AS REPORTED PROFORMA AS REPORTED PROFORMA
----------- --------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net earnings.................... $(126,267) $(131,311) $(19,973) $(22,210) $3,249 $2,328
Basic earnings per share........ $ (1.43) $ (1.49) $ (0.40) $ (0.44) $ 0.09 $ 0.06
Diluted earnings per share...... $ (1.43) $ (1.49) $ (0.40) $ (0.44) $ 0.08 $ 0.06
</TABLE>

The weighted average fair value of options granted in 1997, 1996 and 1995
were $1.33, $1.45 and $1.19 respectively. The fair value of each option was
determined using the Black-Scholes option valuation model with the following
assumptions for 1997, 1996 and 1995: (i) risk free interest rate of 5.62, 6.96,
and 7.58 percent, respectively, (ii) expected volatility of 46.28, 32.74 and
23.95 percent, respectively, (iii) expected option life ranging from 5 to 10
years and (iv) no annualized dividend yield.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Accounts receivable..................................... $ (75,369) $(10,633) $(19,729)
Inventory for resale.................................... 8,116 (45,502) (24,132)
Other................................................... (22,695) (17,893) (12,714)
Accounts payable and accrued liabilities................ (113,439) 43,057 50,149
Income taxes............................................ 2,218 (4,168) 5,576
--------- -------- --------
Additional working capital provided by changes in
non-cash working capital.............................. $(201,169) $(35,139) $ (850)
========= ======== ========
</TABLE>

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

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

The supplemental cash flow disclosures and non-cash transactions for the
years ended December 31, 1997, 1996 and 1995.

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Interest paid........................................... $ 45,632 $ 19,476 $27,469
Income taxes paid....................................... 4,035 1,119 2,308
NON CASH TRANSACTIONS:
Common stock issued on acquisitions..................... 602,632 29,571 1,239
Capital leases and debt obligations for the purchase of
property and equipment............................... 7,708 13,924 3,623
Debt and liabilities incurred or assumed in
acquisitions......................................... 67,064 25,473 4,474
Debt converted to common stock.......................... 2,130 117,720 --
Common stock issued for property........................ 5,084 -- --
</TABLE>

14. 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 Ontario, Canada and it is
regarded as a Canadian domestic corporation for the purposes of this note.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Canadian -- federal and provincial
Current................................................. $ 702 $ (5,407) $(3,029)
Deferred................................................ (47,237) (14,759) (3,511)
-------- -------- -------
(46,535) (20,166) (6,540)
Foreign
Current................................................. 6,735 1,159 706
Deferred................................................ (15,931) (556) 1,044
-------- -------- -------
(9,196) 603 1,750
-------- -------- -------
$(55,731) $(19,563) $(4,790)
======== ======== =======
</TABLE>

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

14. INCOME TAXES (in thousands) (continued)
The Company's income tax benefit is comprised of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income tax expense (benefit)
based on Canadian Federal
and Provincial effective
income tax rates....................................... $(81,207) $(17,321) $ (1,628)
(Increase) decrease in
income tax benefit resulting from:
Lower income tax rates in
the USA and other jurisdictions................ (5,229) (4,393) (3,824)
Manufacturing and processing allowances................ 6,586 425 (20)
Non-deductible expenses for income tax purposes,
principally
goodwill and amortization........................... 4,796 2,420 1,970
Utilization of unrecognized loss carryforwards......... -- -- (845)
Other non-deductible expenses
relating to special charges............................ 20,353 -- --
Other.................................................... (1,030) (694) (443)
-------- -------- --------
Income tax recovery...................................... $(55,731) $(19,563) $ (4,790)
======== ======== ========
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Difference in fixed assets and goodwill basis............... $ 65,829 $ 44,528
Net operating loss carryforwards............................ (108,229) (59,134)
Accruals not yet deductible................................. (44,630) 423
Other....................................................... 562 1,958
-------- --------
Net deferred tax asset...................................... $(86,468) $(12,225)
======== ========
</TABLE>

The net operating loss carryforwards expire between the years 2001 and
2012. 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.
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, management believes it is more likely than not that the Company will
realize the benefits of these deferred tax assets and therefore, has recorded no
valuation allowance. The amount of the deferred tax asset considered realizable,
however, could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced.

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

14. INCOME TAXES (in thousands) (continued)
Deferred income tax expense (benefit) results principally from the use of
different revenue and expense recognition methods for tax and financial
accounting purposes, and the deferral of loss carryforwards for tax purposes.
The sources of these temporary differences and related tax effects are as
follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Depreciation and amortization............................ $(18,211) $ 2,005 $ 3,113
Accruals and reserves not deductible until paid.......... (1,085) -- 1,183
Deferred revenue......................................... 3,151 -- --
Losses carried forward................................... (45,292) (14,628) (15,117)
Other, net............................................... (1,731) (2,692) 8,354
-------- -------- --------
Total deferred income tax benefit........................ $(63,168) $(15,315) $ (2,467)
======== ======== ========
</TABLE>

15. COMPUTATION OF EARNINGS PER SHARE (in thousands)

<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Net earnings (loss) for the period -- basic and
diluted............................................... $(126,267) $(19,973) $ 3,249
========= ======== ========
Number of common shares outstanding..................... 131,058 69,877 37,454
Effect of using weighted average number of common shares
outstanding........................................... (42,867) (19,804) (112)
--------- -------- --------
Basic weighted average number of commons shares
outstanding........................................... 88,191 50,073 37,342
Effect from conversion of common stock equivalents...... -- -- 4,666
--------- -------- --------
Diluted weighted average number of common shares
outstanding........................................... 88,191 50,073 42,008
========= ======== ========
</TABLE>

16. INTEREST CAPITALIZATION (in thousands)

During the years ended December 31, 1997, 1996 and 1995 the Company
included $699, $2,219 and $1,778 respectively of financing costs as part of the
cost of assets under development.

17. RELATED PARTIES (in thousands)

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

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Advances from (repayments to) directors.................. $ (826) $ (2,894) $(13,341)
-------- -------- --------
Interest paid to directors............................... $ 21 $ 196 $ 1,378
-------- -------- --------
Services acquired from a company controlled by an officer
and director........................................... $ 2,387 $ 839 --
-------- -------- --------
Property purchased from a company partially owned by a
director............................................... $ 5,084 -- --
-------- -------- --------
Unsecured advances to an officer and director -- net..... -- $ (38) $ (36)
-------- -------- --------
</TABLE>

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

17. RELATED PARTIES (in thousands) (continued)
(b) Loans from related parties consist of:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Note payable to the former owner of an acquired company who
is a director of the Company.............................. $ -- $ 826
Less current maturities of loans............................ -- 826
------- -------
$ -- $ --
======= =======
</TABLE>

(c) An amount due from an officer and a director at December 31, 1997 of $515
has been included in other current assets. The loan is unsecured,
non-interest bearing and payable on demand. The amount outstanding at
December 31, 1996 of $538 was included, in other long-term assets.

18. CONTINGENCIES (in thousands except per share amounts)

(a) On November 20, 1997, SK Parent Corp., a corporation equally owned by the
Company, affiliates of Apollo Management, LP and affiliates of The
Blackstone Group entered into a merger agreement to acquire Safety-Kleen
Corp. ("Safety-Kleen") pursuant to which Safety-Kleen shareholders would
receive $27 per share. Subsequent to the year-end, a meeting of the
shareholders of Safety-Kleen to consider the approval of the merger was
held. At the meeting, the necessary two-thirds ( 2/3) approval from
Safety-Kleen shareholders was not obtained and the merger agreement was
terminated.

(b) The Company in the normal course of its business expends funds for
environmental protection and remediation but does not expect these
expenditures to have a materially adverse effect on it's financial
condition or results of operations since its business is based on
compliance with environmental laws and regulations.

Certain of the Company's facilities are contaminated as a result of
operating practices at the sites prior to their acquisition by the Company.
The Company has established procedures to routinely evaluate these sites
giving consideration to the nature and extent of the contamination. The
Company has provided for the remediation of these sites based upon
management's judgement and prior experience. The Company has estimated the
liability to remediate these sites to be $59,967 (1996 -- $19,455).

As well, certain subsidiaries acquired by the Company have been named as a
potentially responsible or liable party in connection with sites listed on
the Superfund National Priority List ("NPL") In the majority of situations
the Company's connection with NPL sites relates to allegations that its
subsidiaries or their predecessors transported waste to the site in
question. The Company has reviewed the nature and extent of its alleged
connection to these sites, the number, connection and financial ability of
other named and unnamed potentially responsible parties and the nature and
estimated cost of the likely remedy. Based on its review, the Company has
estimated its liability to remediate these sites to be $5,086 (1996 --
$419).

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

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accrued liabilities......................................... $ 5,415 $ 1,026
Accrued environmental costs (Note 11)....................... 59,638 18,848
------- -------
$65,053 $19,874
======= =======
</TABLE>

(c) As of March 4, 1998, the Company is aware of sixteen separate class actions
which have been filed against it and various directors and officers. Each
action alleges that Philip's financial disclosures in relation to 1997
contained material misstatements or omissions in violation of US federal
securities laws

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

18. CONTINGENCIES (in thousands except per share amounts)(continued)
(provisions of the Securities Act of 1933 and of the Securities and
Exchange Act of 1934) and seeks to represent a class of purchasers of
Philip's common stock. The Company has conducted a review of the claims and
has determined that it is premature to express an opinion in respect of the
claims. The Company intends to vigorously defend all claims.

(d) The Company is named as a defendant in several lawsuits which have arisen in
the ordinary course of its business. Management believes that none of these
suits is likely to have a material adverse effect on the Company's business
or financial condition and therefore has made no provision in these
financial statements for the potential liability if any.

19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (in thousands)

The carrying value of long-term debt is estimated to approximate fair value
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.

The Company's fair value obligation for all interest rate derivative
contracts disclosed in Note 10 to the Consolidated Financial Statements as of
December 31, 1997 and December 31, 1996 approximate the face value due to the
short-term nature of these instruments.

20. COMMITMENTS (in thousands)

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

<TABLE>
<S> <C>
1998........................................................ $22,844
1999........................................................ 18,193
2000........................................................ 18,182
2001........................................................ 12,406
2002 and thereafter......................................... 11,003
</TABLE>

Letters of credit issued in relation to various supply contracts and third
party insurance policies amounted to $58,960 as at December 31, 1997 (1996 --
$13,432).

21. SEGMENTED INFORMATION (in thousands)

The Company operates in one business segment but has a significant
component of US based revenues and earnings. The geographic segmentation of the
Company's business is as follows:

<TABLE>
<CAPTION>
INCOME (LOSS) FROM
REVENUE OPERATIONS TOTAL ASSETS
---------- ------------------ ------------
<S> <C> <C> <C>
1997
United States................................... $1,209,783 $ (11,318) $2,129,532
Canada.......................................... 442,663 (142,046) 606,495
Europe.......................................... 98,484 4,348 87,346
1996
United States................................... 230,430 4,110 408,317
Canada.......................................... 301,914 (30,123) 545,444
Europe.......................................... -- -- --
1995
United States................................... 155,523 20,376 217,850
Canada.......................................... 307,721 (8,093) 513,384
Europe.......................................... -- -- --
</TABLE>

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

21. SEGMENTED INFORMATION (in thousands) (continued)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information". The Company has reviewed its definition of
segments under the new standard and has determined that in the future, it will
report two business segments, Industrial Services and Metals Services. The
Industrial Services segment provides on-site industrial services, by-products
recovery, environmental services and utilities management. The Metals Services
segment has three primary business operations: ferrous, copper and aluminum
processing and recycling. Segmentation of the business is as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ---------------------- ----------------------
INDUSTRIAL METALS INDUSTRIAL METALS INDUSTRIAL METALS
SERVICES SERVICES SERVICES SERVICES SERVICES SERVICES
---------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues............. $ 637,448 $1,113,482 $256,627 $275,717 $247,378 $215,866
Income (loss) from
operations......... (50,606) (83,102) 6,591 (16,803) 25,315 152
Total assets......... 1,934,924 1,502,311 402,976 434,091 344,472 155,081
Depreciation and
amortization....... 34,745 15,650 14,401 2,019 11,760 834
Capital
expenditures....... 20,417 27,866 16,601 5,869 14,471 4,034
</TABLE>

The following is a reconciliation of income from operations by business
segments to the Company's consolidated income from operations.

<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
INCOME FROM OPERATIONS:
Industrial Services..................................... $ (50,606) $ 6,591 $ 25,315
Metals Services......................................... (83,102) (16,803) 152
Corporate selling, general and administrative expense... (15,308) (15,801) (13,184)
--------- -------- --------
$(149,016) $(26,013) $ 12,283
========= ======== ========
</TABLE>

50
<PAGE> 53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. 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, 1997 and 1996, with the municipal and
commercial solid waste operations, which were sold in August 1996 shown as
discontinued operations. The quarterly financial statements have been restated
as a result of the special and non-recurring charges described in Note 3.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
1997
Revenue...................................... $269,601 $353,757 $506,780 $ 620,792
Income from operations....................... 10,825 16,622 39,374 (215,837)
Earnings (loss) from continuing operations... 6,388 7,486 19,463 (159,604)
Discontinued operations...................... -- -- -- --
-------- -------- -------- ---------
Net earnings (loss).......................... 6,388 7,486 19,463 (159,604)
======== ======== ======== =========
Basic earnings per share
Continuing................................. $ 0.09 $ 0.11 $ 0.21 $ (1.34)
Discontinued............................... -- -- -- --
-------- -------- -------- ---------
$ 0.09 $ 0.11 $ 0.21 $ (1.34)
======== ======== ======== =========
Diluted earnings per share
Continuing................................. $ 0.09 $ 0.10 $ 0.21 $ (1.34)
Discontinued............................... -- -- -- --
-------- -------- -------- ---------
$ 0.09 $ 0.10 $ 0.21 $ (1.34)
======== ======== ======== =========
1996
Revenue...................................... $113,376 $123,130 $145,153 $ 150,685
Income from operations....................... 1,304 (992) 11,541 (37,866)
Earnings (loss) from continuing operations... (1,366) (2,224) 7,455 (23,122)
Discontinued operations...................... 463 4,835 (6,014) --
-------- -------- -------- ---------
Net earnings (loss).......................... (903) 2,611 1,441 (23,122)
======== ======== ======== =========
Basic earnings per share
Continuing................................. $ (0.03) $ (0.05) $ 0.14 $ (0.35)
Discontinued............................... 0.01 0.11 (0.11) --
-------- -------- -------- ---------
$ (0.02) $ 0.06 $ 0.03 $ (0.35)
======== ======== ======== =========
Diluted earnings per share
Continuing................................. $ (0.03) $ (0.05) $ 0.14 $ (0.35)
Discontinued............................... 0.01 0.11 (0.11) --
-------- -------- -------- ---------
$ (0.02) $ 0.06 $ 0.03 $ (0.35)
======== ======== ======== =========
</TABLE>

51
<PAGE> 54

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

None.

52
<PAGE> 55

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

The name, age and position of each of the directors and executive officers
of the Company as of the date hereof, are as follows:

<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF RESIDENCE AGE POSITION WITH PHILIP
---------------------------------- --- --------------------
<S> <C> <C>
ROY CAIRNS...................................... 73 Director
St. Catharines, Ontario
NORMAN FOSTER................................... 60 Director
Bloomfield Hills, Michigan
ALLEN FRACASSI.................................. 45 Executive Vice-Chairman and Director
Ancaster, Ontario
PHILIP FRACASSI................................. 38 Director
Ancaster, Ontario
WILLIAM E. HAYNES............................... 54 Director
Houston, Texas
ROBERT L. KNAUSS................................ 67 Chairman and Director
Houston, Texas
FELIX PARDO..................................... 60 President, Chief Executive Officer and
Cambridge, Massachusetts Director
DERRICK ROLFE................................... 43 Director
Toronto, Ontario
HERMAN TURKSTRA................................. 64 Director
Hamilton, Ontario
PETER CHODOS.................................... 46 Executive Vice-President, Corporate
Toronto, Ontario Development
ANTONIO PINGUE.................................. 48 Executive Vice-President, Corporate and
Niagara Falls, Ontario Regulatory Affairs
COLIN SOULE..................................... 42 Executive Vice-President, General Counsel and
Toronto, Ontario Corporate Secretary
JOHN WOODCROFT.................................. 39 President, Industrial Services Group
Dundas, Ontario
</TABLE>

MR. CAIRNS has been a director of Philip since December 1990. Mr. Cairns
has been counsel to, and was previously a partner with, Chown, Cairns, a law
firm.

MR. FOSTER has been a director of Philip since January 1994. Mr. Foster was
the President, By-Products Recovery Group, of Philip from February 1996 to July
1997. Mr. Foster was President and Chief Executive Officer of Nortru, Inc. from
prior to 1991 to July 1997 and President and Chief Executive Officer of
Burlington Environmental Inc. from December 1993 to July 1997.

MR. ALLEN FRACASSI was the President and Chief Executive Officer of Philip
from December, 1990 until his appointment as Executive Vice-Chairman on May 7,
1998. He has been a director of Philip since December 1990. Allen Fracassi and
Philip Fracassi, the founders of the Company, are brothers.

MR. PHILIP FRACASSI has been a director of Philip since December 1990. Mr.
Fracassi was President, Metals Services Group from March 5, 1998 to May 7, 1998
and previously, was Executive Vice-President and

53
<PAGE> 56

Chief Operating Officer from December, 1990. Philip Fracassi and Allen Fracassi,
the founders of the Company, are brothers.

MR. HAYNES has been a director of Philip since August 6, 1997 and until
July 31, 1997 was a director of Allwaste, Inc. from June 1996. He is the
Chairman, President and Chief Executive Officer and director of Innovative Valve
Technologies, Inc., a publicly traded industrial valve repair and distribution
company in which Philip owns a minority equity interest. He served as the
President and Chief Executive Officer of LYONDELL-CITGO Refining Company Ltd.
from July 1992 to December 1995.

MR. KNAUSS has been a director of Philip since August 6, 1997 and was
appointed Chairman of Philip on May 7, 1998. Until July 31, 1997 he was a
director of Allwaste, Inc. from March 1988. He is the President and Chief
Executive Officer of Baltic International U.S.A., Inc., an aviation investment
company, and a director of the Mexico Fund, Inc., an investment fund based in
Mexico City, and Equus II, Inc., an investment fund based in Houston, Texas. Mr.
Knauss served for twelve years as the Dean and Distinguished University
Professor at the University of Houston Law Center.

MR. PARDO has been a director of Philip since March 1994 and the Chief
Operating Officer since March 5, 1998 until his appointment as President and
Chief Executive Officer of Philip on May 7, 1998. From May 1992 to March 1998,
Mr. Pardo was the President and Chief Executive Officer of Ruhr-American Coal
Corporation. From 1992, Mr. Pardo was Chairman of Newalta Corporation, an oil
field waste management company and a partner and director of Quorum Funding, an
investment company. Mr. Pardo is a director of Ruhr-American Coal Corporation,
Dyckerhoff Inc., Ruetgers Nease and Newalta corporation.

MR. ROLFE has been a director of Philip since January 1991. Since 1992, Mr.
Rolfe has been the President and Chief Executive Officer of RM Capital
Corporation, an investment company. Mr. Rolfe is also a director of Consolidated
Envirowaste Inc., an organic waste processing company.

MR. TURKSTRA has been a director of Philip since September, 1996 and has
been an associate of Turkstra, Mazza, Associates, a law firm, since 1959.

MR. CHODOS has been Executive Vice-President, Corporate Development, of
Philip since June 1996. Prior to that, he was a Vice President and Director of
BZW Canada, an investment bank, from May 1992 to June 1996 and was a Managing
Partner of Loewen, Ondaatje, McCutcheon & Company Limited, an investment bank,
from May 1983 to April 1992. Mr. Chodos is a director of Enscor Inc.

MR. PINGUE has been Executive Vice-President, Corporate and Regulatory
Affairs since May 1997. Prior to that he was Senior Vice-President, Corporate &
Government Affairs, of Philip from March 1995. Prior to that, he was Senior-Vice
President, Environmental Services and Regulatory Affairs of the Company from
January 1994, and was Vice-President, Environmental and Regulatory Affairs, of
the Company from 1991 to December 1993.

MR. SOULE has been the General Counsel of Philip since October 1991, was
appointed Corporate Secretary of Philip in January 1992, was appointed Senior
Vice-President of Philip in May 1994 and Executive Vice-President of Philip in
May 1997.

MR. WOODCROFT was the Executive Vice-President, Operations from May 1997 to
his appointment as President, Industrial Services Group effective March 5, 1998.
Prior to that he was Senior Vice President, Operations, of Philip from January
1994 and was Vice-President, Acquisitions and Development, of Philip from May
1991 to December 1993.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, and its rules and
regulations thereunder require the Company's executive officers and directors,
and persons who beneficially own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes of
ownership with the Securities and Exchange Commission. Copies of those reports
are to be furnished to the Company. Based

54
<PAGE> 57

solely on its review of copies of the reports received by it, or written
representations from certain reporting persons, the Company believes that during
1997 all such filing requirements were satisfied on a timely basis.

ITEM 11. EXECUTIVE COMPENSATION

The table below sets forth the compensation in respect of each of the last
three fiscal years earned by the President and Chief Executive Officer and the
four other most highly compensated executive officers of the Company (the "Named
Executive Officers"). All dollar amounts stated below are expressed in U.S.
dollars, except where otherwise indicated.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------ ------------------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS/SARS COMPENSATION(3)
- --------------------------- ---- ------- ------- --------------- ------------ ---------------
($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
ALLEN FRACASSI(4)............. 1997 559,910 -- 19,438(2) 400,000 4,724
President and Chief Executive 1996 365,043 584,070 32,590(2) 75,000 3,468
Officer 1995 366,166 406,078 45,517(2) -- 5,126
PHILIP FRACASSI(5)............ 1997 419,933 -- -- 300,000 4,724
President, Metals Services 1996 292,035 438,052 -- 75,000 4,289
Group 1995 292,933 313,713 -- -- 5,309
JOHN WOODCROFT................ 1997 349,944 -- -- 250,000 4,724
President, Industrial Services 1996 200,774 328,539 -- 60,000 5,019
Group 1995 164,775 98,865 -- 30,000 4,943
ROBERT WAXMAN(6).............. 1997 279,955 -- -- 250,000 4,724
President 1996 244,579 244,579 -- 50,000 7,351
Metals Services Group 1995 183,083 205,053 -- 30,000 5,561
MARVIN BOUGHTON(7)............ 1997 244,961 -- -- 250,000 4,724
Executive Vice President and 1996 193,473 255,530 -- 60,000 4,499
Chief Financial Officer 1995 194,068 97,034 -- 30,000 5,282
</TABLE>

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

NOTES:

(1) Except as noted, perquisites and other personal benefits do not exceed the
lesser of $50,000 and 10% of the total annual salary and bonus for the Named
Executive Officers.

(2) Represents imputed interest benefit on housing loan.

(3) Represents Company's contribution to retirement savings plan or registered
pension plan.

(4) Allen Fracassi resigned from the position of President and Chief Executive
Officer on May 7, 1998 and was appointed Executive Vice-Chairman on the same
date.

(5) Philip Fracassi resigned from the position of President, Metals Services
Group, on May 7, 1998.

(6) Robert Waxman resigned from the position of President, Metals Services Group
on January 5, 1998.

(7) Marvin Boughton resigned from the position of Executive Vice President and
Chief Financial Officer on May 7, 1998.

(8) Robert Chiste, Executive Vice President of Philip, had a total annualized
salary and bonus for 1997 equal to $775,315, plus was paid change in control
payments upon the acquisition of Allwaste, Inc. by Philip, however Mr.
Chiste commenced employment with Philip effective August 1, 1997 and
therefore is not included as a Named Executive Officer during 1997.

55
<PAGE> 58

(9) All amounts have been converted to U.S. dollars based upon the exchange
rates for Canadian dollars per $1.00 on December 31, 1997, December 31, 1996
and December 31, 1995 of $1.4288, $1.3697, and $1.3655, respectively.

STOCK OPTIONS

The table below sets forth the options granted to the Named Executive
Officers under the Company's stock option plans during the fiscal year ended
December 31, 1997.

<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS GRANTED
SECURITIES UNDERLYING TO EMPLOYEES IN EXERCISE OR GRANT DATE
NAME OPTIONS GRANTED(1) FISCAL YEAR(2) BASE PRICE VALUE EXPIRATION DATE
---- --------------------- --------------- --------------- --------------- ---------------
(#) (CDN$/SECURITY) (CDN$/SECURITY)
<S> <C> <C> <C> <C> <C>
ALLEN FRACASSI................ 400,000 10.5% 18.10 18.10 May 9, 2007
PHILIP FRACASSI............... 300,000 8% 18.10 18.10 May 9, 2007
JOHN WOODCROFT................ 250,000 6.5% 18.10 18.10 May 9, 2007
ROBERT WAXMAN................. 250,000 6.5% 18.10 18.10 May 9, 2007
MARVIN BOUGHTON............... 250,000 6.5% 18.10 18.10 May 9, 2007
</TABLE>

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

NOTES:

(1) The Company's employee stock option plans provide for the granting of stock
options to purchase Common Shares of the Company to employees and directors
of the Company at the discretion of the Board of Directors. All options are
subject to certain conditions of service and the provision of a non-
competition agreement. Options granted to the Named Executive Officers in
fiscal 1997 vest in equal monthly amounts over 36 months from the date they
were granted.

(2) A total of 3,821,500 options were granted under the Company's employee stock
option plans during the fiscal year ending December 31, 1997.

The table below sets forth each exercise of options during the fiscal year
ended December 31, 1997 by the Named Executive Officers.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SECURITIES AGGREGATE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE OPTIONS AT DECEMBER 31, 1997
NAME ON EXERCISE REALIZED(3) DECEMBER 31, 1997 (CDN $)(4)
---- ----------- ----------- ------------------------- -----------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(#) (CDN $)
<S> <C> <C> <C> <C>
ALLEN FRACASSI(1)............. -- -- 121,111/363,889 2,506,998/7,532,502
PHILIP FRACASSI(2)............ -- -- 101,666/283,334 2,104,486/5,865,014
JOHN WOODCROFT................ 30,000 254,759 108,611/241,389 2,248,248/4,996,752
ROBERT WAXMAN................. -- -- 94,166/235,834 1,949,236/4,881,764
MARVIN BOUGHTON............... 21,000 163,874 127,611/241,389 2,641,548/4,996,752
</TABLE>

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

NOTES:

(1) Allen Fracassi holds an additional 389,031 exercisable options to acquire
Common Shares which were granted to him in connection with his sale to the
Company in 1990 of his interest in Philip Environmental Company.

(2) Philip Fracassi holds an additional 387,355 exercisable options to acquire
Common Shares which were granted to him in connection with his sale to the
Company in 1990 of his interest in Philip Environmental Company.

(3) All amounts have been converted to U.S. dollars based upon the exchange rate
of Canadian dollars per $1.00 of $1.4288 on December 31, 1997.

(4) The closing price of the Company's Common Shares on The Toronto Stock
Exchange on December 31, 1997 was Cdn20.70.

56
<PAGE> 59

COMPENSATION OF DIRECTORS

Each director of the Company who is not a salaried officer or employee of
the Company is paid an annual fee of Cdn$25,000 and a fee of Cdn$1,000 per
meeting (including committee meetings) attended, and each director, when first
appointed to the Board of Directors, receives a one time award of 20,000 options
to acquire Common Shares of the Company. In addition, during 1997, a one time
grant of 20,000 options to acquire Common Shares was granted to each
non-employee Director. The options are granted at an exercise price equal to the
closing price of the Common Shares on The Toronto Stock Exchange on the last
trading day preceding the date of the grant and vest over a period of three
years from the date of the grant. For acting as Chairman of the Board of
Directors during 1997, Howard L. Beck was paid a fee of Cdn$150,000 during 1997.
On May 7, 1998, Mr. Beck resigned from the position of Chairman and Director of
Philip.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of the Named
Executive Officers. The agreements set forth the benefits to which a Named
Executive Officer would be entitled in the event of termination without cause
before or after an event which gives rise to a change of control of the Company
or in the event of a change in the executive's responsibilities, title,
authority or compensation after an event which gives rise to a change of control
of the Company. In the event of termination without cause prior to a change of
control, a Named Executive Officer would be entitled to a severance payment
equal to two times his base salary plus two times the annual average bonus and
cash value of benefits earned by the Named Executive Officer in the previous two
years. In the event of termination without cause after a change of control or in
the event of a change in the Named Executive Officer's\ responsibilities, title,
authority or compensation within two years of a change in control, a Named
Executive Officer would be entitled to a severance payment equal to three times
his base salary plus three times the annual average of the bonus and cash value
of benefits earned by the Named Executive Officer in the previous two years. In
addition, stock options granted to the Named Executive Officer will fully vest
on termination and will remain exercisable until the expiry of the original term
of such options.

DIRECTORS' AND OFFICERS' LIABILITY INSURANCE

The Company provides insurance for the benefit of directors and officers of
the Company against liability incurred by, arising from or against them for
certain of their acts, errors or omissions. These policies provide maximum
coverage in any one policy year of an aggregate of $100,000,000 subject to a
$500,000 deductible. In the last completed fiscal year the total premium for
directors' and officers' liability insurance was $571,850. The premiums for the
policy are not allocated between directors and officers as separate groups.

57
<PAGE> 60

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Shares as of April 30, 1998 by (i) each director of the
Company, (ii) the executive officers of the Company, and (iii) all current
directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
DIRECTORS AND EXECUTIVE OFFICERS(1)(2) BENEFICIALLY OWNED BENEFICIALLY OWNED
-------------------------------------- ------------------ --------------------
<S> <C> <C>
Roy Cairns(3)............................................. 927,222 *
Norman Foster(4).......................................... 271,088 *
Allen Fracassi(5)......................................... 2,440,963 1.8%
Philip Fracassi(6)........................................ 2,094,485 1.6%
William E. Haynes(7)...................................... 2,156 *
Robert L. Knauss(8)....................................... 49,505 *
Felix Pardo(9)............................................ 192,888 *
Derrick Rolfe(10)......................................... 27,222 *
Herman Turkstra(11)....................................... 40,215 *
Peter Chodos(12).......................................... 137,501 *
Antonio Pingue(13)........................................ 195,278 *
Colin Soule(14)........................................... 160,278 *
John Woodcroft(15)........................................ 165,278 *
All Directors and Executive Officers as a Group (13
persons)................................................ 6,704,079 5%
</TABLE>

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

* Indicates less than 1.0%.

(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from April 30, 1998, whether
pursuant to the exercise of options, conversion of securities or otherwise.
Each beneficial owner's percentage of ownership is determined by assuming
that options to purchase Common Shares that are held by such person and
which are exercisable within 60 days of April 30, 1998 have been exercised.
Unless otherwise noted in the footnotes below, the Company believes all
persons named in the table have sole voting power and investment power with
respect to all Common Shares beneficially owned by them. Options to acquire
Common Shares which vest after 60 days after April 30, 1998 are indicated
separately in the notes that follow.

(2) The address of each of the directors and executive officers is 100 King
Street West, P.O. Box 2440 LCD1, Hamilton, Ontario, Canada L8N 4J6.

(3) Includes 27,222 Common Shares issuable upon the exercise of employee stock
options. Does not include 12,778 Common Shares subject to options which are
not exercisable within 60 days.

(4) Includes 100,000 Common Shares issuable upon the exercise of employee stock
options.

(5) Includes 589,308 Common Shares issuable upon the exercise of employee stock
options. Does not include 284,723 Common Shares subject to options which
are not exercisable within 60 days.

(6) Includes 551,521 Common Shares issuable upon the exercise of employee stock
options. Does not include 220,834 Common Shares subject to options which
are not exercisable within 60 days.

(7) Does not include 20,000 Common Shares subject to options which are not
exercisable within 60 days.

(8) Includes 39,712 Common Shares issuable upon the exercise of employee stock
options. Does not include 20,000 Common Shares subject to options which are
not exercisable within 60 days.

(9) Includes 188,888 Common Shares issuable upon the exercise of employee stock
options. Does not include 346,112 Common Shares subject to options which
are not exercisable within 60 days.

(10) Includes 27,222 Common Shares issuable upon the exercise of employee stock
options. Does not include 12,778 Common Shares subject to options which are
not exercisable within 60 days.

58
<PAGE> 61

(11) Includes 18,889 Common Shares issuable upon the exercise of employee stock
options. Does not include 21,111 Common Shares subject to options which are
not exercisable within 60 days.

(12) Includes 137,501 Common Shares issuable upon the exercise of employee stock
options. Does not include 187,499 Common Shares subject to options which
are not exercisable within 60 days.

(13) Includes 195,278 Common Shares issuable upon the exercise of employee stock
options. Does not include 184,722 Common Shares subject to options which
are not exercisable within 60 days.

(14) Includes 160,278 Common Shares issuable upon the exercise of employee stock
options. Does not include 184,722 Common Shares subject to options which
are not exercisable within 60 days.

(15) Includes 165,278 Common Shares issuable upon the exercise of employee stock
options. Does not include 184,722 Common Shares subject to options which
are not exercisable within 60 days.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.

Based upon publicly available information filed with the Securities and
Exchange Commission, no person beneficially owns more than 5% of the outstanding
Common Shares as of April 30, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with the December 1993 acquisition of Nortru, Inc. ("Nortru")
from Norman Foster, a director of the Company, the Company guaranteed a
$5,950,000 note payable by a wholly-owned subsidiary of the Company to Mr.
Foster. The note, which was unsecured, bore interest at U.S. prime plus 2% and
was payable in equal monthly installments of $165,000 plus interest maturing on
May 20, 1997. The outstanding balance of the note was paid in full by the
Company on May 21, 1997. In addition, in December, 1993, the Company entered
into a non-competition and retention agreement with Mr. Foster, pursuant to
which the Company agreed to pay Mr. Foster an aggregate of $7 million in
consideration for certain non-compete and employment covenants from Mr. Foster.
One payment of $1.4 million due under this agreement was paid in January, 1997,
another payment of 1.4 million was paid in January, 1998 and the final payment
under this agreement is due on December 31, 1998. During 1997, the Company paid
$323,520 in rental payments to Mr. Foster or entities which he controls or has
an ownership interest for properties utilized by the Company in the operation of
its business.

In 1997, a wholly-owned subsidiary of the Company purchased an interest in
certain real property and associated royalty rights adjacent to its Taro
landfill, located in Stoney Creek, Ontario for a purchase price of $5.08 million
from AIC Holdings Inc., a company in which Roy Cairns, a director of the
Company, owns a part interest.

During 1997, the Company paid approximately $2.4 million to Cole Carriers
Corp. ("Coles"), a commercial trucking company controlled by Philip Fracassi and
Allen Fracassi, officers and directors of the Company, for truck transportation
services rendered by Coles to the Company.

The law firm of Turkstra, Mazza, Associates, of which Herman Turkstra is an
associate, provided services to the Company in 1997. Fees paid to members of the
firm in 1997 totalled Cdn$570,212.

As at May 15, 1998, the aggregate amount of indebtedness due to the Company
from all current or former officers, directors and employees was $515,000,
consisting of the outstanding balance of a loan made to Allen Fracassi, the
President and Chief Executive Officer of the Company, for the purpose of
purchasing a home. The loan is unsecured, non-interest bearing and payable on
demand.

INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS

As at May 15, 1998, the aggregate amount of indebtedness (other than
routine indebtedness) due to the Corporation from all current or former
officers, directors and employees was $515,000.

59
<PAGE> 62

TABLE OF INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS

<TABLE>
<CAPTION>
LARGEST AMOUNT
OUTSTANDING DURING
INVOLVEMENT OF FISCAL YEAR ENDED AMOUNT OUTSTANDING
NAME AND PRINCIPAL POSITION ISSUER OR SUBSIDIARY DECEMBER 31, 1997 AS AT MAY 15, 1998
--------------------------- -------------------- ------------------ ------------------
<S> <C> <C> <C>
ALLEN FRACASSI(1)(2).................. Lender $515,000 $515,000
President and Chief Executive Officer
</TABLE>

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

NOTES:

(1) The loan was made for the purpose of purchasing a home, is unsecured,
non-interest bearing and is due on demand.

(2) Allen Fracassi resigned from the position of President and Chief Executive
Officer on May 7, 1998 and was appointed Executive Vice Chairman of Philip
on same date.

60
<PAGE> 63

PART IV

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

ITEM 14(A)1. LIST OF FINANCIAL STATEMENTS

The following consolidated financial statements of the Company are filed as
part of this Form 10-K.

<TABLE>
<CAPTION>
REPORT NAME PAGE NO.
----------- --------
<S> <C>
Report of Deloitte & Touche, Independent Auditors........... 28
Consolidated Balance Sheets for the fiscal years ended
December 31, 1997 and 1996................................ 29
Consolidated Statements of Earnings for the fiscal years
ended December 31, 1997, 1996 and 1995.................... 30
Consolidated Statements of Retained Earnings (Deficit) for
the fiscal years ended December 31, 1997, 1996 and 1995... 30
Consolidated Statements of Cash Flow for the fiscal years
ended December 31, 1997, 1996 and 1995.................... 31
Notes to the Consolidated Financial Statements.............. 32
</TABLE>

ITEM 14(A)2. FINANCIAL STATEMENT SCHEDULE

The Financial Statement Schedule appears on page 64 of this Form 10-K.

61
<PAGE> 64

ITEM 14(A)3. LIST OF EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER NOTES DESCRIPTION
- ------- ----- -----------
<C> <C> <S>
3.1* Articles of Amalgamation of Lincoln Waste Management Inc.
(previous name of the Registrant) dated April 15, 1991
3.2* Articles of Amendment of the Registrant dated June 26, 1991
3.3* Articles of Amendment of the Registrant dated July 10, 991
3.4* Articles of Amendment of the Registrant dated May 22, 1997
3.5* Bylaws of Lincoln Waste Management Inc. (previous name of
the Registrant) dated August 16, 1990
4.1* Indenture dated as of June 1, 1989, 7% Convertible
Subordinated Debentures due 2014 between Allwaste, Inc. and
Texas Commerce Trust Company of New York
4.2* Specimen of Common Stock Certificate
10.1* 1991 Stock Option Plan
10.2* 1997 Amended and Restated Stock Option Plan
10.3* Amended and Restated Shareholder Rights Plan Agreement dated
as of May 19, 1995 between Philip Environmental Inc.
(previous name of Registrant) and Montreal Trust Company of
Canada
10.4+ Credit Agreement dated as of August 11, 1997 among Philip
Services Corp., Philip Environmental (Delaware), Inc.,
Canadian Imperial Bank of Commerce, Bankers Trust Company,
Dresdner Bank of Canada, Dresdner Bank AG/New York/New York
Branch), Royal Bank of Canada and the various persons from
time to time subject to the Credit Agreement as Lenders
10.5* Amending Agreement No. 1 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of October 31, 1997
10.6* Amending Agreement No. 2 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of February 19, 1998
21 * Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>

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

+ incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-1
(Registration Statement No. 333-36549)

* filed previously

ITEM 14(B).

Form 8-K dated August 15, 1997 relating to the acquisitions of Allwaste,
Inc. and Serv-Tech, Inc.

Form 8-K dated September 8, 1997 relating to its quarterly report for the
six month period ended June 30, 1997.

Form 8-K dated September 29, 1997 relating to the issuance of Common Shares
to A-C-I Holdings, Inc. pursuant to Regulation S.

Form 8-K dated October 27, 1997 relating to the acquisition of the assets
of Luria Bros.

Form 8-K/A dated December 24, 1997 amending the October 27, 1997 8-K
relating to the Luria Bros. acquisition.

Form 8-K dated January 27, 1998 relating to the Company's press releases in
relation to its strategic plan for 1998 and 1997 year end charge to earnings.

Form 8-K dated April 24, 1998 relating to the Company's press release in
relation to its financial statements for the fiscal year ended December 31,
1997.

62
<PAGE> 65

SIGNATURES

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

Dated May 15th, 1998 PHILIP SERVICES CORP.

By: /s/ COLIN SOULE
Colin Soule
Executive Vice President
General Counsel and Company
Secretary

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

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ ROY CAIRNS Director May 15th, 1998
- ---------------------------------------------
Roy Cairns

/s/ NORMAN FOSTER Director May 15th, 1998
- ---------------------------------------------
Norman Foster

/s/ ALLEN FRACASSI Executive Vice-Chairman and May 15th, 1998
- --------------------------------------------- Director
Allen Fracassi

/s/ PHILIP FRACASSI Director May 15th, 1998
- ---------------------------------------------
Philip Fracassi

/s/ WILLIAM E. HAYNES Director May 15th, 1998
- ---------------------------------------------
William E. Haynes

/s/ ROBERT L. KNAUSS Chairman and Director May 15th, 1998
- ---------------------------------------------
Robert L. Knauss

/s/ FELIX PARDO Director May 15th, 1998
- ---------------------------------------------
Felix Pardo

/s/ DERRICK ROLFE Director May 15th, 1998
- ---------------------------------------------
Derrick Rolfe

/s/ HERMAN TURKSTRA Director May 15th, 1998
- ---------------------------------------------
Herman Turkstra
</TABLE>

63
<PAGE> 66

PHILIP SERVICES CORP.

VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C -- ADDITIONS COLUMN D COLUMN E
-------- ------------ -------------------------- -------------- ------------
BALANCE, CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE, END
DESCRIPTION PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) OF PERIOD
----------- ------------ ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 31, 1997................ (5,906,845) (11,858,056) (13,652,894) 6,358,894 (25,058,901)
December 31, 1996................ (4,057,582) (1,947,220) (728,809) 826,766 (5,906,845)
December 31, 1995................ (3,548,511) (1,369,863) -- 860,792 (4,057,582)
</TABLE>

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

(1) Opening balances in companies acquired in the year

(2) Write-off of uncollectible accounts

64
<PAGE> 67

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S> <C>
3.1* Articles of Amalgamation of Lincoln Waste Management Inc.
(previous name of the Registrant) dated April 15, 1991......
3.2* Articles of Amendment of the Registrant dated June 26,
1991........................................................
3.3* Articles of Amendment of the Registrant dated July 10,
1991........................................................
3.4* Articles of Amendment of the Registrant dated May 22,
1997........................................................
3.5* Bylaws of Lincoln Waste Management Inc. (previous name of
the Registrant) dated August 16, 1990.......................
4.1* Indenture dated as of June 1, 1989, 7% Convertible
Subordinated Debentures due 2014 between Allwaste, Inc. and
Texas Commerce Trust Company of New York....................
4.2* Specimen of Common Stock Certificate........................
10.1* 1991 Stock Option Plan......................................
10.2* 1997 Amended and Restated Stock Option Plan.................
10.3* Amended and Restated Shareholder Rights Plan Agreement dated
as of May 19, 1995 between Philip Environmental Inc.
(previous name of Registrant) and Montreal Trust Company of
Canada......................................................
10.4+ Credit Agreement dated as of August 11, 1997 among Philip
Services Corp., Philip Environmental (Delaware), Inc.,
Canadian Imperial Bank of Commerce, Bankers Trust Company,
Dresdner Bank of Canada, Dresdner Bank AG/New York/New York
Branch), Royal Bank of Canada and the various persons from
time to time subject to the Credit Agreement as Lenders.....
10.5* Amending Agreement No. 1 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of October 31, 1997......................................
10.6* Amending Agreement No. 2 to the Credit Agreement dated as of
August 11, 1997 among Philip Services Corp., Philip Services
(Delaware), Inc. and Canadian Imperial Bank of Commerce made
as of February 19, 1998.....................................
21 * Subsidiaries of the Registrant..............................
27 Financial Data Schedule.....................................
</TABLE>

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

+ incorporated by reference to the exhibits filed with the Company's
Registration Statement on Form S-1
(Registration Statement No. 333-36549)

* filed previously

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 48,809
<SECURITIES> 0
<RECEIVABLES> 560,111
<ALLOWANCES> (25,059)
<INVENTORY> 223,613
<CURRENT-ASSETS> 874,372
<PP&E> 605,710
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,823,373
<CURRENT-LIABILITIES> 509,633
<BONDS> 0
<COMMON> 1,348,066
0
0
<OTHER-SE> (131,125)
<TOTAL-LIABILITY-AND-EQUITY> 2,823,373
<SALES> 0
<TOTAL-REVENUES> 1,750,930
<CGS> 0
<TOTAL-COSTS> 1,551,495
<OTHER-EXPENSES> 348,451
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,310
<INCOME-PRETAX> (181,998)
<INCOME-TAX> (55,731)
<INCOME-CONTINUING> (126,267)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (126,267)
<EPS-PRIMARY> (1.43)
<EPS-DILUTED> (1.43)

</TABLE>