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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

PHILIP SERVICES CORPORATION

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

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

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

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

     The number of shares of common stock of the Registrant outstanding at November 11, 2003 was 27,909,342.

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REPORT INDEX
TO FORM 10-Q

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Certain statements contained in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this document, the words “anticipate,” “believe,” “estimate,” “expect”, “probable” and similar expressions and the negative of such expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, the effect of the Company’s proceedings under Chapter 11 of the Bankruptcy Code on its relations with customers, employees, suppliers, and lenders; the adequacy of funding for the Company’s operations; the Company’s ability to continue as a going concern; actions that may be filed by third parties in the United States Bankruptcy Court for the Southern District of Texas, including actions seeking to liquidate rather than reorganize the Company; the Company’s ability to obtain court approval with respect to motions in the bankruptcy case; the Company’s ability to develop and consummate a plan of reorganization with respect to the bankruptcy case; the risks discussed in Item 2., Management’s Discussion and Analysis of Financial Condition and Results of Operations and the risks discussed in Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002; and risks discussed from time to time in the Company’s other filings with the Securities and Exchange Commission and other regulatory authorities. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. The Company does not assume any obligation to update these forward-looking statements.

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PHILIP SERVICES CORPORATION

(DEBTOR-IN-POSSESSION AND SUBSIDIARIES)

CONSOLIDATED CONDENSED BALANCE SHEETS

(IN THOUSANDS)

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

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PHILIP SERVICES CORPORATION

(DEBTOR-IN-POSSESSION AND SUBSIDIARIES)

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

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

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PHILIP SERVICES CORPORATION

(DEBTOR-IN-POSSESSION AND SUBSIDIARIES)

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

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

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PHILIP SERVICES CORPORATION

(DEBTOR-IN-POSSESSION AND SUBSIDIARIES)

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(UNAUDITED)

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

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PHILIP SERVICES CORPORATION

(DEBTOR-IN-POSSESSION AND SUBSIDIARIES)

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

(1)

Organization, Voluntary Reorganization Under Chapter 11, Basis of Presentation and Ability to Continue Operations (in thousands)

Organization and Voluntary Reorganization under Chapter 11

     These Consolidated Condensed Financial Statements contain information relating to Philip Services Corporation (“PSC”), a Delaware corporation, and its subsidiaries (collectively, the “Company”), which has been prepared by management. The Company is an industrial services and metals services company that provides industrial outsourcing, environmental services and metals services to major industry sectors throughout North America. On June 2, 2003 (the “Petition Date”), PSC and substantially all of its U.S.-domiciled subsidiaries (collectively, the “Debtor”), which collectively possessed approximately 78% of the consolidated assets and generated approximately 89% of the consolidated revenues of the Company as of and for the nine months ended September 30, 2003, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”), in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Debtor is currently operating its businesses as debtor-in-possession in accordance with applicable provisions of the Bankruptcy Code and is subject to the jurisdiction of the Bankruptcy Court while a plan of reorganization is pursued. A plan of reorganization sets forth the means for satisfying claims against and interests in a debtor, including the liabilities subject to compromise (See Note 9 of Notes to Consolidated Condensed Financial Statements). Many pre-petition liabilities are subject to settlement or compromise under such a plan of reorganization. The bankruptcy cases are being jointly administered by the Bankruptcy Court under the case number 03-37718-H2-11 (the “Chapter 11 Case”).

     Subsequent to the Petition Date, on September 19, 2003, PSC and certain U.S.-domiciled subsidiaries and all wholly owned Canadian subsidiaries (collectively, the “Canadian Applicants”) initiated proceedings (the “Canadian Proceedings”) under the Canadian Companies’ Creditors Arrangement Act with the Superior Court of Justice in the Province of Ontario (the “Canadian Court”). The Canadian Proceedings have the effect of recognizing the Chapter 11 Case in Canada and effectively staying, in Canada, most legal actions and proceedings against the Canadian Applicants.

     The filing of the voluntary petitions under Chapter 11 constituted a default on substantially all debt and lease obligations of the Debtor. The filing of the bankruptcy petitions automatically stayed most legal actions against the Debtor, including actions to collect pre-petition indebtedness or to exercise control over the property in the Debtor’s estate. Proceedings against PSC’s other subsidiaries that have not filed bankruptcy petitions are not stayed. The Debtor is generally paying merchants and vendors for goods furnished and services provided after the Petition Date. Additionally, under the Bankruptcy Code, the Debtor is permitted in the course of the Chapter 11 Case to reject certain pre-petition executory contracts and unexpired leases. Certain pre-petition liabilities of the Debtor, including, among other things, certain accrued environmental costs, certain insurance claims, deferred taxes, certain accrued asset retirement obligations and certain other accrued liabilities may not be subject to compromise in the Chapter 11 Case. In addition, liabilities of the Company’s subsidiaries that are not subject to the Chapter 11 Case cannot be compromised under the Chapter 11 Case. The assets and liabilities of the wholly-owned Canadian subsidiaries are addressed in the Canadian Proceedings.

     The desired outcome of a case under Chapter 11 of the Bankruptcy Code is the confirmation of a plan of reorganization for the debtor by the bankruptcy court. The Company entered into, and has filed with the Bankruptcy Court, an investment agreement (as amended, the “Investment Agreement”) that establishes a proposed basis for a plan of reorganization and provides for the Debtor’s emergence from bankruptcy. The Investment Agreement is with High River Limited Partnership (“High River”), an affiliate of Icahn Associates Corp. (“Icahn Associates”). Icahn Associates is controlled by Carl C. Icahn who, together with his affiliates, is the Company’s largest stockholder and largest debtholder as of September 30, 2003. The Investment Agreement and the plan of reorganization (the “High River Plan”) were approved for submission to certain classes of impaired creditors by the Bankruptcy Court on September 10, 2003. The disclosure statement, which describes the High River Plan for voting classes, was approved by the Bankruptcy Court on October 27, 2003 and balloting has begun. Ballots must be submitted by November 19, 2003. There can be no assurance that the High River Plan will be confirmed by the Bankruptcy Court, or whether an alternative plan will emerge, or that any such plan will be implemented successfully. A confirmation hearing before the Bankruptcy Court is scheduled to begin on November 24, 2003. Certain approvals of the Canadian Court will also be required for the Debtor to implement the High River Plan.

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Confirmation of the High River Plan will depend not only on the outcome of the balloting, but on the Court’s determination with respect to objections to confirmation that may be voiced by other interested parties, including, but not limited to, state and federal environmental regulators, at the hearing.

     If the plan of reorganization is confirmed, High River will provide a post-emergence operating facility and will emerge, together with other affiliates of Icahn Associates, as the holder of a substantial majority of the common stock of the reorganized Company.

     Under the proposed High River Plan, High River would pay $20,000 for 20% of the capital stock of the reorganized Company and receive an additional 5% of the stock as a commitment fee on the $150,000 exit loan facility that High River would provide. A substantial part of the balance of the common stock would be distributed to lenders under the Company’s term facility (see Note 10(a) of Notes to Consolidated Condensed Financial Statements) who elect to take stock. These lenders may also participate in the initial stock purchase on certain terms if they so choose. If such lenders do not elect to take stock, they would receive junior secured subordinated notes of the Company. Since affiliates of Icahn Associates are the largest debtholders under the term facility, it is probable that, when combined with the 25% described above, affiliates of Icahn Associates would hold significantly more than 50% of the common stock of the reorganized Company. It is not expected that current holders of the common stock of the Company would receive any distribution in respect of their existing common stock or receive any shares of capital stock in the reorganized Company under the High River Plan, any competing plan or any asset sale scenario.

     The foregoing is not intended to be a description of the entire High River Plan, nor does it describe how various classes of claims would be handled. Interested persons are strongly advised to obtain and read (i) the disclosure statement, (ii) the High River Plan and (iii) the Investment Agreement, which are available on the Company’s website (www.contactpsc.com) or, for a small fee, from the Bankruptcy Court website (www.txsb.uscourts.gov). These documents are also filed as exhibits to this Quarterly Report on Form 10-Q.

Debtor-in-Possession Financing

     Prior to the Petition Date, the Company financed its activities in part through borrowings under its revolving operating facility (see Note 10(c) of Notes to Consolidated Condensed Financial Statements). The bankruptcy constituted a default under the revolving operating facility, which also matured by its terms on June 2, 2003, the Petition Date, and borrowings are no longer available thereunder. With the approval of Wells Fargo-Foothill, Inc. (“Wells Fargo-Foothill”), the agent under the revolving operating facility, and the Bankruptcy Court, the Debtor has financed its activities since the Petition Date by using a portion of the cash collateral held by Wells Fargo-Foothill and cash subsequently provided in connection with the conduct of the Company’s business (collectively, the “cash collateral”). The subsequently provided cash is shown as cash collateral receivable on these Consolidated Condensed Financial Statements. Wells Fargo-Foothill held on September 30, 2003, approximately $18,560 in cash as collateral security for the Company’s obligations under the revolving operating facility, which is shown as restricted cash on these Consolidated Condensed Financial Statements. See Note 5 of Notes to Consolidated Condensed Financial Statements.

     On August 4, 2003, the Company also obtained a debtor-in-possession financing facility (“DIP Facility”) as part of the Investment Agreement. The facility was initially for $25,000, which became $35,000 on September 10, 2003 when the High River Plan was approved as the proposed plan of reorganization for submission to certain classes of impaired creditors. DIP Facility loans are advanced as a non-revolving line of credit and only as the cash collateral is exhausted or utilized for certain other purposes. The DIP Facility availability continues until the earlier of December 31, 2003 or the consummation of a plan of reorganization.

     Loans under the DIP Facility bear interest at a rate equal to the base rate under the revolving operating facility (which is based on the Wells Fargo Bank “prime rate”) plus 2.5%. There is a fee equal to 0.5% per annum on the unused portion of the committed DIP Facility, which is payable at maturity or acceleration of the loans under the DIP Facility. A fee of $700 was paid to the Icahn Associates affiliate providing the DIP Facility at closing of the first loan and a fee of $100 was paid to Wells Fargo-Foothill, which acts as agent, at closing. Other fees to Wells Fargo-Foothill continue as they were under the revolving operating agreement. Amounts outstanding under the DIP Facility are entitled to a priority over all claims other than (i) super-priority administrative claims (as yet undetermined); and (ii) amounts outstanding under the revolving operating agreement. See Note 9 of Notes to Consolidated Condensed Financial Statements.

     The foregoing is an abbreviated summary of a complex financing facility, the Chapter 11 Case, and the Canadian Proceedings and does not describe the treatment of claims under the High River Plan or other aspects of the plan which may prove material. Interested parties are strongly cautioned not to rely on the foregoing, but rather to examine documents described above. In addition, the DIP Facility documentation is included as an exhibit to the Bankruptcy Court Order issued on August 4, 2003, which is filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q.

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Basis of Presentation and Ability to Continue Operations

     The Consolidated Condensed Financial Statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). As permitted under such regulations, certain information and footnote disclosures normally included in complete annual financial statements have been condensed or omitted. The Company believes that the presentation and disclosures herein are adequate to make the information not misleading, in any material respect, and the financial statements reflect all elimination entries and normal adjustments that are necessary for a fair statement of the Company’s results for the nine months ended September 30, 2003. There have been no significant changes in the accounting policies of the Company during the periods presented, except as identified in this Note under the caption “New Accounting Treatment”. See Note 2 of Notes to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, for a description of other accounting policies of the Company.

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

     These Consolidated Condensed Financial Statements have been prepared on a “going concern” basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of operations. The appropriateness of the “going concern” assumption is dependent upon, among other things, the successful completion of a plan of reorganization confirmed by the Bankruptcy Court, future profitable operations and the ability to generate sufficient cash from operations and obtain financing arrangements to meet obligations. If the “going concern” basis were not appropriate for these Consolidated Condensed Financial Statements, significant adjustments would need to be made to the carrying value of the assets and liabilities, the reported revenue and expenses and the balance sheet classifications used.

     If the Debtor successfully completes reorganization, the Company may be required to adopt “fresh start” accounting based on the outcome of the plan of reorganization. This accounting would require that assets and liabilities be recorded at fair value, based on values determined in connection with the reorganization. Certain reported asset and liability balances do not yet give effect to the adjustments that may result from the adoption of “fresh-start” accounting and, as a result, would change materially.

New Accounting Treatment

     The Consolidated Condensed Financial Statements have been prepared in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” and on a going-concern basis, which contemplates continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business.

     SOP 90-7 requires that the financial statements for periods subsequent to the filing of a Chapter 11 petition distinguish transactions and events that are directly associated with the reorganization from the operations of the business. Accordingly, revenues, expenses (including professional fees), realized gains and losses, and provisions for losses directly associated with the reorganization and restructuring of the business are reported separately in these Consolidated Condensed Financial Statements. The Consolidated Condensed Balance Sheets distinguish pre-petition liabilities subject to compromise both from those pre-petition liabilities that are not subject to compromise and from post-petition liabilities. Liabilities subject to compromise are reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.

     In addition, as a result of the Chapter 11 Case, the realization of assets and satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainty. While operating as debtor-in-possession under the protection of Chapter 11 of the Bankruptcy Code and subject to approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business, the Debtor may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in these Consolidated Condensed Financial Statements. Further, a plan of reorganization could materially change the amounts and classifications in the historical Consolidated Financial Statements.

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     Pursuant to the Bankruptcy Code, the Debtor must file schedules with the Bankruptcy Court setting forth the assets and liabilities of the Debtor as of the Petition Date. Differences between amounts recorded by the Debtor and claims filed by creditors will be investigated and resolved as part of the Chapter 11 Case. The deadline for filing proofs of claims with the Bankruptcy Court was September 23, 2003, except for governmental claims for which the deadline is December 1, 2003. An interim administrative bar date of November 14, 2003 has been set for administrative claims incurred through September 30, 2003. In certain cases, the period in which creditors may file proofs of claims may be extended with the express approval of the Bankruptcy Court. Accordingly, the ultimate number and allowed amounts of such claims are not currently known. There will be a separate process under the Canadian Proceedings for claims against Canadian subsidiaries.

     The Company incurred $9,583 and $13,214 of reorganization expenses associated with the Debtor’s bankruptcy filing during the three- and nine-month periods ended September 30, 2003, respectively. These reorganization expenses were principally legal and other professional fees.

     Reported interest expense as shown on the Consolidated Condensed Statements of Earnings was $3,709 and $26,788 for the three- and nine-month periods ended September 30, 2003, respectively. Reported interest expense was calculated using the provisions of SOP 90-7 and differs from stated contractual interest expense which would have been $12,106 and $37,935 for the three- and nine-month periods ended September 30, 2003, respectively.

Reclassification

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

(2)

Discontinued Operations (in thousands)

     For the three months ended September 30, 2003 and 2002, the Company recognized income (loss) on discontinued operations of $690 and $(7,841), respectively, and for the nine months ended September 30, 2003 and 2002 the Company recognized a loss on discontinued operations of $17,278 and $7,121, respectively. The before-tax loss on discontinued operations comprises the following:

	•		In January 2003, certain assets of the Company’s Canadian Ferrous Division were sold for proceeds of $6,135, of which $2,000 was in the form of a deferred payment obligation. A gain on the divesture was recorded in the amount of $819. As such, the Company recorded the results of operations of the Canadian Ferrous Division as discontinued on the Consolidated Condensed Statements of Earnings and recorded the remaining assets of the Division as “held for sale” on the September 30, 2003 Consolidated Condensed Balance Sheet. The Company’s Canadian Ferrous Division generated revenue of approximately $17 and $10,655 and before-tax income from discontinued operations of $147 and $487 in the three months ended September 30, 2003 and 2002, respectively, and generated revenue of approximately $5,655 and $30,909 and before-tax income (loss) from discontinued operations, including the aforementioned gain recorded in the first quarter of 2003 on the sale of certain of the Division’s assets, of ($4,078) and $1,248 in the nine months ended September 30, 2003 and 2002, respectively.
	•		On March 2, 2003, the bulk of the businesses of the Company’s Project Services Division were sold to Fluor Enterprises, Inc. (“Fluor”) for proceeds of $21,200, of which $4,000 was in the form of a deferred payment obligation that requires $2,000 be paid to the Company on March 2, 2004 and the remaining $2,000 be paid to the Company on March 2, 2005. The working capital of these businesses of approximately $43,000 was retained by PSC. As a result of the sale, assets with a net book value of $9,416 were transferred to Fluor generating a $8,166 gain on the divestiture, net of transaction and other costs. The Company has recorded the results of operations for these businesses as discontinued on the Consolidated Condensed Statements of Earnings for the three-month and nine-month periods ended September 30, 2003 and 2002. The businesses divested to Fluor generated revenue of approximately $0 and $31,327, and before-tax loss from discontinued operations of $0 and $8,055 in the three months ended September 30, 2003 and 2002, respectively, and generated revenue of approximately $55,896 and $202,928, and before-tax income (loss) from discontinued operations, including the aforementioned gain recorded in the first quarter of 2003 on the sale of the Division’s assets, of $3,166 and ($2,879) in the nine months ended September 30, 2003 and 2002, respectively.
	•		On August 31, 2003, the Company sold the majority of the remaining businesses of the Company’s Project Services Division, specifically operations that perform refractory and union mechanical and turnaround services to Nooter Construction Company (“Nooter”) for proceeds of $5,100, of which $3,721 cash was received. The remainder consists of holdbacks and other settlements. As a result of the sale, assets with a net book value of $1,597 were transferred to Nooter

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			generating a $2,666 gain on the divestiture, net of transaction and other costs. The Company recorded the results of these operations as discontinued operations on the Consolidated Condensed Statements of Earnings for the three-month and nine-month periods ended September 30, 2003 and 2002, respectively. These businesses generated revenue of approximately $5,081 and $19,729, and before-tax income (loss) from discontinued operations, including the aforementioned gain recorded in September 2003 on sale of the divested assets, of $543 and ($273) in the three months ended September 30, 2003 and 2002, respectively, and generated revenue of approximately $36,602 and $51,211, and before-tax loss from discontinued operations of $20,270 and $1,435 in the nine months ended September 30, 2003 and 2002, respectively.
	•		The impairment of assets ultimately sold during the 2002 fiscal year related to the Company’s Demolition and Decommissioning business generated revenues of $0 and a before tax loss of $0 in the three months ended September 30, 2002 and revenues of $3,107 and before-tax loss of $6,913 in the nine months ended September 30, 2002.
	•		The sale of certain assets during the nine months ended September 30, 2002, with a net book value of $2,930 generated a gain of $2,341. These assets generated revenues of $464 and operating income of $203 in the nine months ended September 30, 2002.
	•		A charge of $1,300 for the impairment of assets held for sale was recorded during the nine months ended September 30, 2002. The net book value of the assets was $1,970 after impairment. These assets were ultimately sold during the nine months ended September 30, 2003, generating a loss on sale of $370.

(3)

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

Stockholders’ Deficit and Common Stock

     The Company’s share capital comprised 27,909,342 shares of common stock at September 30, 2003.

Stock-based compensation

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

     SFAS No. 148 defines a fair-value-based method of accounting for employee stock options. Under this fair-value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the exercise period. However, SFAS No. 148, acting as an update to SFAS No. 123, allows an entity to continue to measure compensation cost in accordance with APB No. 25. The Company has elected to measure compensation costs related to stock options in accordance with APB No. 25 and recognizes no compensation expense for stock options granted at or above the grant date stock price. Accordingly, the Company has adopted the disclosure only provisions of SFAS No. 148.

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     The Company has four stock-based compensation plans and one special stock option allotment as described further in Note 17 of Notes to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002. If compensation costs were measured using the fair value of the Company’s stock options on the date of grant, in accordance with SFAS No. 148, the Company would have recognized compensation costs for the three and nine months ended September 30, 2003 and 2002 in the manner exhibited in the below table.

     The compensation costs shown in the above table were calculated using the Black-Scholes option valuation model. The weighted average fair value of options granted during the nine-month period ended September 30, 2003, was $0.01. Such valuation uses the following assumptions: (i) risk free interest rate of 2.78%, (ii) expected volatility of 1.00, (iii) expected option life of approximately 5 years and (iv) no annualized dividend yield. There were no options granted during the nine-month period ended September 30, 2003, thus the additional compensation expense for this period shown in the above table relates only to compensation cost recognized over the option exercise periods related to previously granted awards.

     The Company had reserved 1,000,000 shares of common stock for issuance under its 2001 Officers’ Stock-Based Bonus Plan (“Officers’ Plan”). The Officers’ Plan was replaced on December 19, 2002 by the Philip Services Corporation (2002) Stock-Based Bonus Plan and no further awards will be made under the Officers’ Plan. Under the Officers’ Plan, awards of restricted common stock, options to purchase shares of common stock, stock appreciation rights and/or phantom stock rights could be granted. Participation in the Officers’ Plan was limited to officers of the Company and its subsidiaries. Generally the awards vested evenly over a four-year period from the date of grant. As of September 30, 2003, 252,609 shares of restricted stock had been granted. Of these, 205,219 shares have been forfeited as of September 30, 2003, resulting in a net restricted stock issuance of 47,390 shares as of September 30, 2003.

     Under its 2001 Non-Employee Directors Restricted Stock Plan (“Directors Plan”), the Company has reserved 400,000 shares of common stock for issuance. Under the Directors Plan, shares of restricted common stock with a market value of $2.5 will be granted on the first business day of each fiscal quarter during the term of the Directors Plan to each non-employee director. One-quarter of the shares granted as of each grant date will vest on each of the first four anniversaries of such grant date except with respect to the initial grant of shares. As of September 30, 2003, 157,544 shares of restricted stock had been granted under the Directors Plan. In 2002, because of the low stock price, the Board of Directors of the Company (the “Board”) elected to impose a deemed value of fifty cents per share on the restricted shares granted under the restricted stock plans. Accordingly, each of the restricted stock grants by the Company since October 2002 has had a market value of less than $2.5. As of July 1, 2003 the Board elected to cease paying a portion of the annual retainer in restricted stock and now receives the entire annual retainer in quarterly installments in cash.

     The Company has not granted any restricted stock, options or other stock awards to any of its directors or executive officers since the Petition Date.

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(4)

Accounts Receivable (in thousands)

(5)

Cash Collateral Receivable and Other Current Assets (in thousands)

(a)

The $33,138 cash collateral receivable comprises cash provided in connection with the conduct of the Company’s business between the Petition Date and September 30, 2003, which is held by Wells Fargo-Foothill and available to the Company pursuant to its cash collateral arrangement with Wells Fargo-Foothill. Such amount excludes the approximately $18,560 in cash held by Wells Fargo-Foothill as collateral security for the Company’s obligations under the revolving operating facility, which is shown as restricted cash on these Consolidated Condensed Financial Statements. Access to all foregoing cash collateral is only available to the Company under the conditions provided in the cash collateral arrangement.

(6)

Property, Plant and Equipment (in thousands)

(7)

Other Assets (in thousands)

(a)

The majority of the Company’s restricted investments are controlled by the Company’s wholly owned insurance subsidiary and totaled approximately $42,484 and $39,904 at September 30, 2003, and December 31, 2002, respectively. The insurance subsidiary’s restricted investments have been pledged as security for the Company’s insurance liabilities. The restricted investments are held primarily in US and foreign government and commercial debt instruments rated AA or better by Moody’s and Standard & Poors. At September 30, 2003, restricted investments controlled by the Company’s wholly owned insurance subsidiary comprise $30,462 of cash and cash equivalents and $12,022 in bonds with maturities from April 2003 through December 2007. At December 31, 2002, restricted investments controlled by the Company’s wholly owned insurance subsidiary comprise $29,855 of cash and cash equivalents and $10,049 in bonds with maturities from January 2003 through December 2007.

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(8)

Accrued Liabilities (in thousands)

	Accrued liabilities, which are not subject to compromise in the Chapter 11 Case, consist of the following:

(a)

The Company determines its insurance claims liability using actuarial principles on an undiscounted basis. The Company retains liability for (i) workers’ compensation claims of up to $1,000 for any one occurrence; (ii) auto and general liability claims of up to $1,000 for any one occurrence; and (iii) certain property claims of up to $2,000 for any one occurrence. To the extent that any insurance carrier is unable to meet its obligations under existing insurance policies, the Company could be liable for the defaulted amount. From time to time, other retention amounts apply because claims arise under policies of subsidiary, acquired or predecessor companies.

Various insurance policies prior to June 1999, including workers’ compensation policies, were placed by Philip Services Corp., an Ontario corporation and PSC’s predecessor corporation, with Reliance Insurance Company and/or its former subsidiary companies (“Reliance Insurance”). On October 3, 2001, the Insurance Commissioner of Pennsylvania placed Reliance Insurance into liquidation. State guaranty associations have been ordered to assume the insured obligations of Reliance Insurance, subject to statutory limitations. Until such plans are finalized by the various state associations, there is a risk that the Company could be liable for some portion of the Company’s claims that are contractually covered by Reliance. Cash and letters of credit on deposit with Reliance Insurance are specifically dedicated to the Company’s retained liability up to $500 per occurrence and should not be pooled or otherwise used to settle Reliance Insurance liabilities. The Company has recorded a reserve to reflect the potential exposure pending further clarification of the liabilities by the courts. The reserve balance was $3,700 at September 30, 2003 and December 31, 2002.

(b)	Accrued closure costs related to severance, lease and other pre-bankruptcy restructuring costs are as follows:

     Additions and adjustments to accrued closure costs in 2002 have been recorded as Asset Impairment and Other Unusual Costs in the Consolidated Condensed Statements of Earnings (see Note 13). Adjustments to accrued closure costs in 2003 represent reclassifications to current liabilities – subject to compromise.

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(9)

Pre-Petition Liabilities (in thousands)

     Under Section 362 of the Bankruptcy Code, the filing of the voluntary petitions in the Chapter 11 Case automatically stayed most legal actions against the Debtor, including most actions to collect pre-petition indebtedness or to exercise control over the property in the Debtor’s estate. The initial order obtained in the Canadian Proceedings had a substantially similar effect in Canada, and effectively stayed, in Canada, most legal actions and proceedings against the Canadian Applicants. Proceedings against the Company’s subsidiaries that have not filed bankruptcy petitions are not stayed. Absent an order of the Bankruptcy Court, many pre-petition liabilities of the Debtor are subject to compromise under the plan of reorganization. However, certain pre-petition liabilities of the Debtor, including, among other things, certain accrued environmental costs, certain insurance claims, deferred taxes, certain accrued asset retirement obligations and certain other accrued liabilities may not be subject to compromise in the Chapter 11 Case. There will be a separate process under the Canadian Proceedings for claims against Canadian subsidiaries. Liabilities of the Company’s other subsidiaries that have not filed bankruptcy petitions are not subject to compromise under the Chapter 11 Case or the Canadian Proceedings.

Current liabilities — not subject to compromise

     On a consolidated basis, recorded pre-petition liabilities that management believes may not be subject to compromise under the Chapter 11 Case as of September 30, 2003, totaled $47,807 including $22,929 of insurance claims outstanding (see Note 8(a) for additional information on insurance claim reserves), $6,289 of current accrued environmental costs, $3,800 of Bankruptcy Court approved critical vendor payments, $1,786 of property and commodity taxes, $2,608 of accrued interest, $648 of income taxes payable and $9,747 of other accrued liabilities.

Current liabilities — subject to compromise

     The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below. All amounts below may be subject to future adjustment depending on the Chapter 11 Case, further developments with respect to disputed claims or other events, including reconciliation of claims filed with the Bankruptcy Court to amounts recorded in the accompanying Consolidated Condensed Financial Statements, and the valuation of any collateral securing such claims. Additional pre-petition claims may arise from the rejection by the Debtor of existing executory contracts or unexpired leases. Under a confirmed plan of reorganization, all pre-petition claims subject to compromise may be paid and discharged at amounts substantially less than their allowed amounts. On a consolidated basis, recorded pre-petition liabilities subject to compromise in the Chapter 11 Case as of September 30, 2003, consisted of the following:

Long-term liabilities – not subject to compromise

     On a consolidated basis, recorded pre-petition long-term liabilities that management believes may not be subject to compromise in the Chapter 11 Case as of September 30, 2003, totaled $52,784 which comprised $41,160 accrued environmental costs, $7,587 of accrued asset retirement obligations, $2,996 of deferred taxes and $1,041 of other accrued liabilities.

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Long-term liabilities – subject to compromise

     On a consolidated basis, recorded pre-petition long-term liabilities that management believes may be subject to compromise in the Chapter 11 Case as of September 30, 2003, totaled $12,785 of accrued environmental costs.

(10)

Long-Term Debt (in thousands, except share and per share amounts)