UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended August 31, 1998
Commission File Number 1-8368
LAIDLAW ENVIRONMENTAL SERVICES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0228924
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
- --------------------------------------------------------------------------------
1301 Gervais Street, Columbia, South Carolina 29201
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 933-4200
Securities Registered pursuant to Section 12(b)4 of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock New York Stock Exchange
Par Value $1.00 Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of the
registrant was $554,789,650 as of October 16, 1998.
The number of shares of the issuer's common stock outstanding as of October 23,
1998 was 350,984,971.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended August
31, 1998 are incorporated in Parts I and II of Form 10-K.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held November 24, 1998 are incorporated in Part III of Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Laidlaw Environmental Services, Inc. d/b/a Safety-Kleen Corp. (the
"Company", the "Registrant" or "Safety-Kleen") provides industrial waste
services designed to collect, process, recycle and dispose of hazardous and
industrial waste streams. The Company provides these services from approximately
250 collection locations and 53 processing facilities located in 45 states,
seven Canadian provinces and seven Western European countries.
The Registrant was incorporated in Delaware in 1968. Its principal
executive office is located at 1301 Gervais Street, Suite 300, Columbia, South
Carolina 29201 and its telephone number is 803-933-4200.
On April 1, 1998, the Company announced that the former Safety-Kleen Corp.
("Old Safety-Kleen") shareholders had accepted its exchange offer, as amended on
March 16, 1998, relating to the acquisition of Old Safety-Kleen by the Company.
Under the terms of the offer, the Company exchanged $18.30 and 2.8 common shares
of Company stock for each Old Safety-Kleen share tendered. In May 1998, the
Company completed the acquisition of Old Safety-Kleen (the "Safety-Kleen
Acquisition") through a back-end merger, approved by the Old Safety-Kleen
shareholders on May 18, 1998. The total consideration of approximately $2.2
billion, including debt assumed and estimated transaction costs, was comprised
of $1.5 billion cash and 166.5 million shares of Company common stock. The cash
consideration and the refinancing of certain existing indebtedness was financed
from the proceeds of a $2.2 billion Senior Credit Facility.
The Safety-Kleen Acquisition has been accounted for under the purchase
method of accounting and accordingly, the financial statements include the
results of operations of the acquired business from April 1, 1998. As a result
of the Safety-Kleen Acquisition, as of July 1, 1998, the Company began doing
business as Safety-Kleen Corp.
On May 15, 1997, pursuant to a February 6, 1997, stock purchase agreement
(the "Stock Purchase Agreement") between Rollins Environmental Services, Inc.
("Rollins") and Laidlaw Inc. ("Laidlaw"), Rollins acquired the hazardous and
industrial waste operations of Laidlaw ("Old LESI" or the "Accounting Acquirer")
(the "Rollins Acquisition"). The business combination was accounted for as a
reverse acquisition using the purchase method of accounting. Rollins issued 120
million common shares and a $350 million 5% subordinated convertible debenture,
and paid $349.1 million in cash ($400 million, less debt of $50.9 million
assumed), to Laidlaw to consummate the Rollins Acquisition. Coincident with the
closing of the Rollins Acquisition, the continuing legal entity changed its name
from Rollins Environmental Services, Inc. to Laidlaw Environmental Services,
Inc. The Company accordingly adopted the Accounting Acquirer's fiscal year-end
of August 31.
Old LESI consisted of all direct and indirect subsidiaries of Laidlaw
engaged in the hazardous and industrial waste business, other than JTM
Industries, Inc. and its subsidiary, KBK Enterprises, Inc. Prior to the Rollins
Acquisition, Old LESI provided hazardous and industrial waste services from 85
service locations in 26 states and seven Canadian provinces. Although Old LESI
was a conglomerate of separate entities, these entities conducted such services
primarily under the name "Laidlaw Environmental Services".
The Company, in providing industrial waste services, is engaged in three
primary lines of business: (a) Collection and Recovery, (b) Treatment
and Disposal and (c) European Operations. The Collection and Recovery
Component is further defined by the markets for which it provides services:
Industrial Services and Commercial and Institutional Services. Treatment and
Disposal Services is further defined by the technologies employed: Thermal
Treatment, Landfill and Specialty Services. The Company's European Operations
component represents all services provided to customers within the Company's
Western European business territories.
The Company's revenues and income are derived from one industry segment
which includes the collection, transportation, processing, recycling, treatment
and disposal of hazardous and industrial wastes, principally from customers in
the United States. The Company renders services to a variety of commercial,
industrial, governmental and residential customers. Substantially all revenues
represent income from unaffiliated customers.
The percentages of the Company's revenue contributed by its primary
business components and their respective sub-components for the last three
fiscal years ended August 31, were as follows:
1998 1997 1996
- -------------------------------------------------------------------------
Collection and Recovery Component
Industrial Services 50% 58% 58%
Commercial and Institutional Services 19% 0% 0%
----------------------------
Total Collection and Recovery 69% 58% 58%
Treatment and Disposal Component
Thermal Treatment 9% 8% 3%
Landfill 8% 21% 27%
Specialty Services 10% 13% 12%
----------------------------
Total Treatment and Disposal 27% 42% 42%
European Operations 4% 0% 0%
----------------------------
Total Revenue 100% 100% 100%
============================
COLLECTION AND RECOVERY SERVICES
Safety-Kleen provides Collection and Recovery Services in North America
primarily through a network of 195 locations. Collection and Recovery Services
are further differentiated by those services provided to industrial customers
and those provided to commercial and institutional customers.
INDUSTRIAL SERVICES
The Company markets two major categories of service to its Industrial
Services customers: its Parts Cleaner Service and its Industrial Waste Services.
In Safety-Kleen's Parts Cleaner Service, the Company's service representative
places parts cleaner equipment and solvent with a customer. The service
representative then makes service calls at regular intervals to clean and
maintain the equipment and to remove the dirty solvent and replace it with clean
solvent. The majority of the dirty solvent is recycled for reuse. The Company
provides a choice of several models of parts cleaners to customers for their use
as part of the Parts Cleaner Service and also provides service to customers who
own their own parts cleaner equipment. As an alternative to solvent-based
systems, Safety-Kleen also offers a line of water-based cleaning systems through
its Parts Cleaner Service.
The Company's Industrial Waste Services consist primarily of the
collection of a wide variety of liquid and solid wastes, hazardous or
non-hazardous, typically in drum containers from a customer's location.
Depending upon the type of customer, the Company may make frequent
pickups of large quantities or may pick up only one or a few 55-gallon drums
on a scheduled periodic basis. Depending upon the content, the material
collected by the Company may be recycled into usable solvent, processed
into a waste-derived fuel for use in the cement manufacturing industry,
or disposed of through incineration or landfill methods.
The Industrial Waste Services group also provides other comprehensive
environmental and technical service. Technical Field Services includes
offerings such as Lab Pack Services and In-Plant Services. The primary
focus of Lab Pack Services is the collection and proper management of
miscellaneous, and often unidentified, chemicals stored in small containers.
Since the list of Lab Pack chemicals removed from a particular site can be
extensive and vary widely in characteristics and quantities, the knowledge and
abilities of Company field chemists are often required. In-Plant Services
encompass a variety of services provided by Safety-Kleen personnel at the
generator's location. In-Plant Services are customized to the specific needs
of the customer. With Technical Field Services, Safety-Kleen often prepares
the paperwork, packages the waste for shipment and provides for transportation
and disposal management.
Waste streams collected through one or more of Safety-Kleen's Industrial
Services offerings may be routed to one of the Company's 21 service centers or
16 accumulation centers where they are temporarily stored or consolidated with
compatible waste streams for more efficient transportation to final treatment or
disposal destinations. All of the Company's service centers in the United States
have Part B permits under the United States Resource Conservation and Recovery
Act ("RCRA") that, among other things, allow the Company to store waste for up
to one year for bulking or transfer purposes. Service centers are the largest
source of waste streams for the Company's treatment and disposal facilities. In
1998 the Company, excluding Old Safety-Kleen, directed 76% of its waste streams
to internal disposal locations.
COMMERCIAL AND INSTITUTIONAL SERVICES
The Company provides several specialized services to commercial and
institutional customers. The largest component of the Company's Commercial and
Institutional Services is its Parts Cleaner Service. Safety-Kleen furnishes
service stations, car and truck dealers, small engine repair shops, fleet
maintenance shops and other automotive and retail repair customers with the same
high quality Parts Cleaner Service that it provides to its Industrial Services
customers.
Other Commercial and Institutional Service offerings include Paint
Refinishing Services, Imaging Services, Dry Cleaner Services, Vacuum
Services, Integrated Customer Compliance Services and Used Oil Collection and
Re-Refining Services. These additional offerings utilize the same facility
network and many of the same customer relationships as have been developed for
the traditional Parts Cleaner Service.
The Company's Paint Refinishing Services are supplied to new and used car
dealers, auto body repair and paint shops and fiberglass product manufacturers.
Company representatives place a machine, specially designed to clean paint spray
guns, and solvent with each customer, maintain the machine and regularly remove
the contaminated solvent and replace it with clean solvent. The Company either
recycles the contaminated solvent into clean solvent for reuse or blends it into
fuel used by cement kilns or incinerators. Waste paint and paint booth filters
are also collected from these customers and blended into fuel for cement kilns
or incinerators. Company representatives also provide clean buffing pads and
remove used pads during regularly scheduled service calls. The used pads are
washed, dried, inspected and returned to the Company's distribution system.
The Company's Imaging Service provides health care, printing, photo
processing and other businesses and industries with on-site recycling of
photochemical solutions, as well as film, plate and silver recovery services.
Imaging Services recovers the silver contained in the spent photochemical
solutions it collects from customers. These solutions are then further treated
and processed until they can be discharged as wastewater into publicly owned
treatment works in compliance with applicable laws and regulations. Silver is
also recovered from photographic film by outside processors.
Dry Cleaner Services collect and recycle contaminated dry cleaning wastes
consisting of used filter cartridges and sludge containing perchloroethylene and
mineral spirits.
Vacuum Services utilizes specialized vacuum trucks to remove
residual oil and sludge from underground oil/water separators found at many
automotive repair and small industrial locations. Collected oil is recycled or
reused as a fuel source.
The Company provides Integrated Customer Compliance Services to its
customers. Service offerings in this area include Material Safety Data Sheets
("MSDS") Fax on Demand, an electronic MSDS management program; Department of
Transportation Shipping Paper Services, which provides appropriate shipping
papers for hazardous waste shipments; regulatory training; spill and poison
control hotlines; and on-site facility assessments. Integrated Customer
Compliance offers single services and bundled full service programs in
accordance with customer requests.
Safety-Kleen also provides Used Oil Collection and Re-Refining Services.
The Company collects used lubricating oils from automobile and truck dealers,
automotive garages, oil change outlets, service stations, industrial plants and
other businesses. The used oil is then transferred to a re-refining plant where
most of the product is converted into high-quality base lubricating oil. The
Company derives revenues both from fees it charges customers to haul away used
oil, oily water and glycol and from the sale of products it produces by
processing the used oil. The Company's extensive branch network enables it to
collect waste oil in sufficient volume to support oil re-refining operations,
which produce lubricating oil that can be sold at significantly higher prices
than industrial fuels. The Company operates oil re-refining plants in Breslau,
Ontario and East Chicago, Indiana. The plants in Breslau and East Chicago have
annual re-refining capacities of 40 and 92 million gallons of used oil per year,
respectively. Used oil collected in excess of the capacity of the Company's
re-refining facilities is either processed into industrial fuels or sold
unprocessed for direct use as a fuel in certain industrial applications.
TREATMENT AND DISPOSAL SERVICES
Safety-Kleen provides final Treatment and Disposal Services designed to
properly manage hazardous and non-hazardous wastes which cannot be otherwise
economically recycled or reused. Thermal Treatment and Landfill facilities
provide such solutions for the majority of industrial waste streams. The
Company's Specialty Services provide a compliment of other technologies for more
specialized or economical handling of certain waste streams.
THERMAL TREATMENT
The Company offers a wide range of technological capabilities and
locations to customers through its collection of incineration facilities.
Incineration is the preferred method for the treatment of organic hazardous
waste, because it effectively destroys the contaminants at temperatures in
excess of 2,000 degrees Fahrenheit. High temperature incineration effectively
eliminates organic wastes such as herbicides, plastics, halogenated solvents,
pesticides, and pharmaceutical and refinery wastes, regardless of whether they
are gases, liquids, sludges or solids. Federal and state incineration
regulations require a destruction and removal efficiency of 99.99% for most
organic wastes and 99.9999% for PCBs and dioxin.
The Company operates four solids and liquids capable incineration
facilities with a combined annual capacity of over 250,000 tons and two lower
volume specialty incineration facilities in the United States, as well as two
hazardous waste liquid injection incinerators in Canada.
The Company's incineration facilities in Bridgeport, New Jersey; Deer
Park, Texas; Coffeyville, Kansas; and Aragonite, Utah, are designed to process
liquid organic wastes, sludges, solids, soil and debris. The Deer Park facility
has two kilns and a rotary reactor. Additionally, the Deer Park facility has an
on-site landfill for the disposal of ash and other waste material produced as a
result of the incineration process. The landfill is built and permitted to RCRA
hazardous waste standards.
The Company's incineration facilities in Mercier, Quebec and Sarnia,
Ontario are liquid injection incinerators, designed primarily for the
destruction of liquid organic waste. The Mercier facility also has a system to
blend and destroy pumpable sludges. Typical waste streams include wastewater
containing concentrated organic levels not amenable to conventional physical or
chemical waste treatment, pesticide and herbicide waste, waste with high
chlorinated organic concentrations and flammable materials.
All of the Company's United States incineration facilities have received
Part B permits under RCRA. Part B permits are generally issued for periods of
five or ten years, after which the permit must be reviewed by state or federal
regulators or both before the permit can be renewed for additional terms.
Management is not aware of any issues at any of the Company's sites that would
preclude the renewal of any of its Part B permits.
During fiscal 1997, the Company closed its less efficient and
redundant incineration facilities at Baton Rouge, Louisiana, and Clive, Utah.
During fiscal 1998, the Company closed its incinerator at Roebuck, South
Carolina, further reducing excess capacity. These three closures have eliminated
approximately 215,000 tons of practical capacity from the off-site commercial
incineration market. The industry's total off-site commercial incinerator
practical capacity was estimated at 1.0 million tons in 1997, according to
"EI Digest".
LANDFILL
The Company operates 11 landfills located throughout the United States and
Canada. A total of eight landfills are designed and permitted for the disposal
of hazardous wastes. Three landfills are operated for non-hazardous industrial
waste disposal, and to a lesser extent, municipal solid waste.
The Company operates eight of the 23 permitted hazardous waste landfills
in North America, with 61 million cubic yards of remaining permitted capacity
(which at current fill rates represents in excess of 65 years of capacity). Of
these facilities, six are located in the United States and two in Canada.
In the United States, the Company's hazardous waste landfills have been
issued RCRA Subtitle C permits. The EPA's permitting process for RCRA Subtitle C
landfills is very rigorous. Before a permit can be issued, the applicant must
provide detailed waste analysis, spill prevention and control counter-measure
plans, detailed design specifications (which include liner design, leak
detection systems and rainwater removal systems), groundwater monitoring,
employee training and geologic and hydrogeologic investigations. Furthermore,
the applicant must post financial assurance instruments for landfill cell and
site closure and post-closure care. All six of the Company's United States
hazardous waste landfills have received Part B landfill permits and meet or
exceed Subtitle C requirements. These permits are generally issued for periods
of five or ten years, after which the permit must be reviewed by state or
federal regulators or both before the permit can be renewed for additional
terms. Management is not aware of any issues at any of the Company's sites that
would preclude the renewal of its Part B landfill permits. During fiscal year
1998, approximately 0.9 million cubic yards of hazardous wastes were disposed of
in these landfills.
In addition to its hazardous waste landfill sites, the Company operates
three non-hazardous industrial landfills with over 7 million cubic yards of
remaining permitted capacity. The Company's non-hazardous landfill facilities
are permitted to accept commercial industrial waste, including wastes from
foundries, demolition and construction, machine shops, automobile manufacturing,
printing, metal fabrications and recycling. During fiscal year 1998, 0.2 million
cubic yards of non-hazardous wastes were disposed of in these landfills.
On December 18, 1997, the Company sold its municipal solid waste landfill
in Carbon County, Utah.
SPECIALTY SERVICES
Specialty Services provided by the Company include PCB management
services, wastewater treatment, harbor and channel dredging, consulting and
analytical services, and transportation services.
The Company recycles PCB contaminated oils and reclaims metals from PCB
contaminated equipment. The Company accomplishes this recycling and reclamation
through a de-chlorination process operated from seven facilities mainly in the
eastern United States and Canada.
Safety-Kleen offers a range of wastewater treatment technology facilities
and customer services. Wastewater treatment is provided from four facilities and
consists of four basic business lines: hazardous wastewater treatment, mobile
treatment, sludge dewatering or drying and non-hazardous wastewater treatment.
These services include the reduction, treatment and disposal of both hazardous
and non-hazardous wastewater, sludges and solids for both bulk and drummed
waste. The Company removes hazardous components from hazardous industrial
liquids and chemically or physically makes hazardous industrial liquids
non-hazardous through blending and treatment technology. Specialized techniques
reduce residues by recycling or reusing spent products. Batch treatment
technologies also enable the Company to handle hard-to-treat wastewater streams.
Safety-Kleen performs services designed to dredge, treat, and provide for
the beneficial reuse of, sediments found in harbors, channels and other
waterways. The Company contracts with federal, state and local agencies and port
authorities for the cleanup of sediments resulting from downstream accumulation
and waterway widening and deepening projects. These services are provided as an
environmentally sound alternative to historical sea dumping methods.
The Company provides a variety of consulting and analytical services which
utilize Safety-Kleen's laboratories, specialized equipment and personnel. Such
services are typically customized for the customer's specific project or
requirements.
The Company's transportation operations facilitate the movement of
materials between and occasionally amongst the Company's network of Collection
and Recovery locations and its Treatment and Disposal facilities. Transportation
may be accomplished by truck, rail or other mode, with Company-owned assets or
in conjunction with third-party transporters. Specially designed containment
systems, vehicles and other equipment permitted for hazardous and industrial
waste transport, together with drivers trained in transportation skills and
waste handling procedures, provide for the movement of customer waste streams.
EUROPEAN OPERATIONS
Safety-Kleen subsidiaries have wholly-owned operations in seven countries
in Western Europe. The Company primarily provides its Commercial and
Institutional Services, excluding Used Oil Collection and Re-Refining Services,
in Europe. The Company also provides selected Industrial Services in Germany and
the United Kingdom.
COMPETITIVE CONDITIONS
The hazardous and industrial waste management industry is highly
competitive. The sources of competition vary by locality and by type of service
rendered, with competition coming from the other major waste services companies
and hundreds of privately owned firms which offer waste services. The Company
also competes with municipalities and larger plants which provide "on site"
waste services for their own waste materials. The principal methods of
competition for all of the Company's services are price, quality, reliability of
service rendered and technical proficiency in handling industrial and hazardous
wastes properly.
The Company estimates total industry revenues associated with the offsite
services it provides in North America, excluding Used Oil Collection and
Re-Refining, to be $7.4 billion. Of this market, the pro forma combined revenues
of the Company, including inter-company receipts at disposal locations, for the
year ended August 31, 1998, would account for a 22% market share.
Because, in the United States, the original generators of hazardous waste
remain liable under federal and state environmental laws for improper disposal
of such wastes, even if they employ companies which have proper permits and
licenses, knowledgeable customers are interested in the reputation and financial
strength of the companies they use for management of their hazardous wastes. The
Company believes that its technical proficiency, reputation and financial
strength are important considerations to its customers in selecting and
continuing to utilize the Company's services.
The Company is the market leader in the United States in its Parts
Cleaner, Paint Refinishing and Dry Cleaner Services. In these services, the
Company competes with local or smaller regional companies. In its Industrial
Waste Services, the Company competes with many firms engaged in the
transportation, brokerage and disposal of hazardous wastes through recycling,
fuels programs, thermal treatment or landfilling.
The Company is the market leader in North America in its Used Oil
Collection and Re-Refining Services. The price at which Safety-Kleen sells its
re-refined lube oil is primarily dictated by a market dominated by large
multinational oil companies and has been positively correlated to crude oil
prices over the long-term. The selling price of re-refined lube oil is also
affected by lube oil refinery capacity changes in North America, which do not
necessarily bear a relationship to the movement of crude oil price changes.
Competitors operate large-scale incinerators at eight locations throughout
North America. Other companies have applied for or received permits to construct
and operate hazardous waste incinerators. Competition is also encountered from
certain cement kilns, which use hazardous waste-derived fuel as a supplemental
fuel source. Generator-owned thermal treatment operations and mobile thermal
treatment units also compete with the Company's fixed-location facilities.
Ten of the 15 U.S. hazardous waste landfills not operated by the Company
are operated by three competitors with landfill facilities spread throughout the
United States. Significant competition exists for waste volumes generated by
remedial cleanups and other project-based events.
CUSTOMERS
The Company conducts business with more than 500,000 customers. These
customers represent diverse industries, including automotive repair, dry
cleaning, photo imaging, automobile manufacturing and distribution, chemical and
petrochemical manufacturing, computer and micro-processor manufacturing, and
primary metals, paper, furniture, aerospace and pharmaceutical manufacturing.
The Company's customers are located throughout the United States, Canada and
Western Europe. During fiscal 1998, no one customer accounted for more than
three percent of the Company's consolidated revenues.
The hazardous and industrial waste management business is cyclical to the
extent that it is dependent upon a stream of waste from cyclical industries. If
those cyclical industries slow significantly, the business that the Company
receives from those industries is likely to slow.
SEASONALITY
Adverse winter weather moderately affects some of the Company's
operations, particularly during the second fiscal quarter. The main reason for
this effect is reduced volumes of waste being received at the Company's
facilities and higher operating costs associated with operating in sub-freezing
weather and high levels of snowfall.
REGULATIONS
OVERVIEW
Domestic and foreign governmental regulations applicable to the Company's
business govern, among other things: the handling of a number of substances
collected by the Company which are classified as hazardous or industrial solid
wastes under these regulations; the operation of the facilities at which the
Company stores or processes the substances it collects; and the ultimate
disposal of waste the Company removes from the substances it collects. An
increase in governmental requirements for the treatment of any particular
material generally increases the value of the Company's services to its
customers, but may also increase the Company's costs.
Various permits are required by federal and state environmental agencies
for the Company's branch, accumulation center, solvent recycling, fuel blending
and oil processing facilities, landfills and incinerators. Most of these permits
must be renewed periodically and the governmental authorities involved have the
power, under various circumstances, to revoke, modify or deny issuance or
renewal of these permits. Zoning, land use and siting restrictions also apply to
these facilities. Regulations also govern matters such as the disposal of
residual chemical wastes, operating procedures, stormwater and wastewater
discharges, fire protection, worker and community right-to-know and emergency
response plans. Air and water pollution regulations govern certain operations at
the Company's facilities. Safety standards under the Occupational Safety and
Health Act in the United States and similar foreign laws are also applicable to
such facilities. Governmental regulations apply to the operation of vehicles
used by the Company to transport the substances it collects and distributes,
including licensing requirements for the vehicles and the drivers, vehicle
safety requirements, vehicle weight limitations, shipment manifesting and
vehicle placarding requirements. Governmental authorities have the power to
enforce compliance and violators are subject to civil and criminal penalties.
Private individuals may also have the right to sue to enforce compliance with
certain of the governmental requirements.
The Company has an internal staff of engineers, geologists,
hydrogeologists, chemists, lawyers and other environmental and safety
professionals whose responsibility is to continuously improve the procedures and
practices to be followed by the Company to comply with various federal, state
and local laws and regulations involving the protection of the environment and
worker health and safety and to monitor compliance.
HAZARDOUS AND SOLID WASTE REQUIREMENTS
Safety-Kleen's services involve the collection, transportation, storage,
processing, recycling and disposal of commercial, institutional and industrial
hazardous and nonhazardous materials. Substantially all of these materials are
regulated in the United States as "solid wastes" under RCRA. In addition to
being regulated as solid wastes, many of these materials are further regulated
as "hazardous wastes". Accordingly, the Company is subject to federal and state
regulations governing hazardous and solid wastes. RCRA established a national
program which classified various substances as "hazardous wastes," established
requirements for storage, treatment and disposal of hazardous wastes and imposed
requirements for facilities used to store, treat or dispose of such wastes. RCRA
was amended in 1984 by the Hazardous and Solid Waste Amendments ("HSWA") which
expanded the scope of RCRA to include businesses which generate smaller
quantities of waste materials (so-called "small quantity generators"), expanded
the substances classified as hazardous wastes by RCRA and prohibited direct
disposal of those wastes in landfills (thereby, in effect, requiring that the
wastes be recycled, treated or destroyed).
Hazardous and solid waste regulations impose requirements which must be
met by facilities used to store, treat and dispose of these wastes. Operators of
hazardous waste storage, disposal and treatment facilities, such as
Safety-Kleen, must obtain a RCRA permit from federal or authorized state
governmental authorities to operate those facilities. States may also require a
solid waste permit. The Company has over 100 RCRA-permitted facilities. The
Company believes that each of its facilities operating under temporary
authorization provisions of RCRA will be issued its final RCRA permit and that
each permit will be renewed at the end of its existing term. At the present time
the Company does not intend to pursue RCRA permits for facilities which do not
currently have a RCRA permit or interim status and will limit the activities of
those facilities to activities that are not regulated by RCRA.
In September 1992, the United States Environmental Protection Agency
("EPA") finalized regulations that govern the management of used oils. Although
used oil is not classified as a hazardous waste under federal law, certain
states do regulate used oil as hazardous. The Company builds and operates its
used oil facilities to standards similar to those required for hazardous waste
facilities, and believes that its oil management standards are more protective
of human health and the environment than current federal standards.
Materials collected by the Company through its industrial services
operations may be recycled for reuse, processed into waste-derived fuel to be
burned in kilns used in the production of cement or incinerated in the Company's
incinerators. Much of the waste-derived fuel is supplied to cement kilns with
which the Company has exclusive supply contracts with respect to such fuel.
Cement kilns are subject to regulations which govern the burning of hazardous
wastes in boilers and industrial furnaces ("Boiler and Industrial Furnace
Regulations" or "BIF regulations"). Incinerators are currently subject to
regulations contained in 40 CFR part 264 Subpart O. Using its omnibus authority,
EPA requires incinerators to comply with provisions that are similar to those in
the BIF regulations. Facilities covered by the BIF regulations are required to
submit periodic certifications of compliance. Every BIF facility that elects to
continue to burn hazardous waste will also be required to obtain a RCRA
operating permit. All of the kilns with which the Company has exclusive supply
contracts and all of the Company's incinerators have met their initial
compliance certification requirements, and intend to continue to meet their
periodic certification requirements in the future. The cement kilns that the
Company does business with are also in the process of obtaining their RCRA
operating permits. None of the kilns utilized by the Company for disposition of
the waste it collects are owned by the Company. The Company is assisting the
kilns with which it has exclusive contracts in complying with such regulations.
On April 19, 1996, the EPA published its proposed Hazardous Waste
Combustor Rule, which when finalized will supersede the existing BIF and Subpart
O regulations. This proposed rule will set emissions standards for incinerators,
cement kilns and lightweight aggregate kilns that burn hazardous waste. As
proposed, these standards would require cement kilns, which are major outlets
for the Company's waste-derived fuels, to make capital improvements that would
increase the cost of burning such fuels in cement kilns. The incinerators owned
by the Company will also be affected by the proposed rule once it is finalized.
Although these incinerators already meet the majority of the emission and
management requirements of the proposed rule, additional capital may be needed
to install specific monitoring devices which will provide assurance that the
requirements are being met on a continuous basis. Due to the complexity of the
proposed rule, the lengthy adoption process to which it is subject and the
likelihood that the rule will undergo changes prior to its adoption, the effect
of the final rule is unknown.
The EPA is also developing regulations which will establish management
standards for cement kiln dust ("CKD"). The Company and the kilns to which it
sends waste-derived fuel have developed programs for analyzing and
characterizing CKD in anticipation of these new management standards; however,
at this time it is not clear what impact these CKD regulations will have on the
Company.
CLEAN AIR ACT
The Clean Air Act was passed by Congress to control the emissions of
pollutants to the air, and requires permits to be obtained for certain sources
of air toxic emissions or criteria pollutants, such as carbon monoxide. In 1990,
Congress amended the Clean Air Act to require further reductions of air
pollutants with specific targets for nonattainment areas in order to meet
certain ambient air quality standards. These amendments also require the EPA to
promulgate regulations which: (i) control emissions of 189 toxic air pollutants;
(ii) create uniform operating permits for major industrial facilities similar to
RCRA operating permits; (iii) mandate the phase-out of ozone depleting
chemicals; and (iv) provide for enhanced enforcement. The Company believes each
of its operating facilities complies in all material respects with the
applicable requirements.
The Clean Air Act required regulations which resulted in the reduction of
volatile organic compound ("VOC") emissions in order to meet certain ozone
attainment standards under the Act. The Company has installed control technology
to meet its obligations under the Act. Additional emission reductions at the
Company's recycle centers and branches could be required as the Company
completes its air permitting program. In addition, the United States EPA has
developed Maximum Achievable Control Technology ("MACT") standards under the
Clean Air Act which impose additional restrictions on the emission of certain
toxic air pollutants. These standards will impact certain of the Company's
facilities and the cement kilns to which the Company sends its waste-derived
fuels.
In order to comply with these regulations, the Company has instituted a
program to augment the air emission control equipment at its affected facilities
and to obtain operating permits, where required. The Company is also working
with the United States EPA and appropriate state and local agencies regarding
the regulation of its parts cleaner and paint spray gun cleaner operations.
The South Coast Air Quality Management District ("SCAQMD"), the air
district for the greater Los Angeles, California area, has amended its rule
setting the allowable volatile organic compound ("VOC") content of materials
used for remote reservoir repair and maintenance cleaning. The amended rule
will, in effect, ban remote reservoir parts cleaning with solutions containing
VOCs in excess of fifty grams per liter as of January 1, 1999, except in certain
applications. Substantially all of the Company's parts cleaners currently placed
with SCAQMD customers utilize solvents containing VOCs in excess of fifty grams
per liter. The Company offers aqueous parts cleaning systems which meet the 1999
SCAQMD requirements and is working with its SCAQMD customers to identify which
customers will need to convert their solvent parts cleaners to an alternative
cleaning solvent or solution prior to January 1, 1999. In addition, the Company
will continue to work actively with the SCAQMD to identify appropriate
exemptions and develop alternatives to the 1999 VOC limits for materials used
for remote reservoir parts cleaning. The Company expects other Clean Air Act
nonattainment municipalities to consider adopting similar rules.
CLEAN WATER ACT
The Clean Water Act regulates the discharge of pollutants into surface
waters and sewers from a variety of sources, including disposal sites and
treatment facilities. The Company is required to obtain discharge permits and
conduct sampling and monitoring programs. The Company believes each of its
operating facilities complies in all material respects with the applicable
requirements.
CERCLA AND RELATED REQUIREMENTS
The Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA") was originally enacted in December 1980, and amended in 1986
by the Superfund Amendments and Reauthorization Act ("SARA"). CERCLA creates a
fund of monies ("Superfund") which can be used by the EPA and state governments
to clean up hazardous waste sites pending recovery of those costs from defined
categories of "potentially responsible parties" ("PRPs"). Most EPA cleanup
efforts are at sites listed or proposed for listing on the National Priorities
List ("NPL"). Various states have also enacted statutes which contain provisions
substantially similar to CERCLA.
Generators and transporters of hazardous substances, as well as past and
present owners and operators of sites where there has been a release of
hazardous substances, are made strictly, jointly and severally liable for the
clean-up costs resulting from releases and threatened releases of
CERCLA-regulated "hazardous substances". Under CERCLA, these responsible parties
can be ordered to perform a clean-up, can be sued for costs associated with
private party or public agency clean-up, or can voluntarily settle with the
government concerning their liability for clean-up costs.
A portion of the materials collected by the Company are recycled or
converted into materials, such as industrial fuels, which may be used for
another purpose. The amount of material that the Company deposits at waste sites
is accordingly small in relation to the volume of materials collected by the
Company, and the Company is actively engaged in a waste minimization program to
reduce this small amount even further. The Company also sends some of the
materials it collects to selected third party facilities for further treatment,
processing and/or disposal. The Company audits facilities where it desires to
ship materials in an attempt to minimize its potential Superfund liability at
these sites.
COSTS OF INCREASING REGULATIONS AND HIGHER FEES AND TAXES
The Company continues to be subject to legislation and regulations adopted
by federal, state and local authorities which may impose stricter operating and
performance standards and increased taxes, assessments and fees upon emission
sources and the generators, transporters and handlers of hazardous and
nonhazardous waste. The Company may not be able to pass on the costs associated
with such legislation and regulations to its customers through price increases.
ENVIRONMENTAL LIABILITIES AND CAPITAL EXPENDITURES
A portion of the Company's capital expenditures are related to compliance
with environmental laws and regulations. The Company estimates capital spending
of approximately $3.6 million for fiscal year 1999, and $9.5 million in the
aggregate for the fiscal years 2000 through 2002 in order to comply with RCRA,
the Clean Air Act and other environmental laws and regulations currently in
effect.
In addition to these capital expenditures, the Company may incur costs in
connection with closure activities at certain of its sites. When the Company
discontinues using or changes the use of a hazardous waste management unit,
formal closure procedures must be followed, and such procedures must be approved
by federal or state environmental authorities. In some cases, costs are incurred
to complete remedial clean-up work at the site. In addition at certain of the
Company's other operating sites, remedial clean-up work is required as part of
the RCRA Corrective Action Program or other state and federal programs. As shown
in the Company's Consolidated Balance Sheet and more fully described in Note 7
of the Notes to Consolidated Financial Statements, incorporated herein by
reference, the Company has recorded liabilities of $266.1 million as of August
31, 1998, for remedial cleanup work, Superfund site liability, closure
activities and certain other environmental expenses related to its operating and
previously closed sites.
With respect to various operating facilities, the Company is required to
provide financial assurance with respect to certain statutorily required closure
and post-closure obligations totaling $560 million at August 31, 1998. The
Company provides most of the required financial assurance through a combination
of performance bonds and insurance policies, as allowed by the applicable
regulatory authorities.
EMPLOYEES
As of August 31, 1998, approximately 11,500 employees provided the
Company's hazardous and industrial waste services. As part of the Company's
acquisition consolidation efforts, it has identified approximately 700 positions
which are scheduled for termination during fiscal 1999. Approximately 8% of
the Company's employees were represented by various collective bargaining
groups. Management believes that its relations with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with respect to the executive
officers of the Company:
NAME AGE POSITION HELD
Kenneth W. Winger 60 President and Chief
Executive Officer
Michael J. Bragagnolo 52 Executive Vice President
and Chief Operating Officer
Paul R. Humphreys 39 Senior Vice President,
Finance and Chief
Financial Officer
Henry H. Taylor 54 Vice President, General
Counsel and Secretary
Kenneth W. Winger became President and Chief Executive Officer on May 15,
1997. Mr. Winger served as President and Chief Operating Officer of Laidlaw
Environmental Services (US), Inc. ("Old LESI") from July 1995 until May 1997. He
served as Executive Vice President for Business Development of Laidlaw Waste
Systems, Ltd., a former subsidiary of Laidlaw Inc. ("Laidlaw"), from January
1995 until July 1995. Prior to that, Mr. Winger served as Senior Vice President
for Corporate Development with Laidlaw from May 1991.
Michael J. Bragagnolo became Executive Vice President and Chief Operating
Officer on May 15, 1997. He joined Old LESI in January of 1997 as the Executive
Vice President after serving as Executive Vice President of U.S. Operations for
Laidlaw Waste Systems, Ltd. since 1992.
Paul R. Humphreys became Senior Vice President, Finance and Chief
Financial Officer on May 15, 1997. He joined Old LESI in January 1995 as Vice
President of Finance. He previously served as Manager of Finance for Laidlaw for
more than five years.
Henry H. Taylor became Vice President, General Counsel and Secretary on May
15, 1997. He served as Vice President of Legal and Regulatory Affairs and
Secretary of Old LESI since September 1995. Mr. Taylor joined Old LESI in May
1990 as Vice President of Legal Affairs.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The provisions of the Private Securities Litigation Reform Act of 1995
(the "Act"), which became law in late 1995, provides companies with a "safe
harbor" when making forward-looking statements. This "safe harbor" encourages
companies to provide prospective information about their companies without fear
of litigation. The Company wishes to take advantage of the "safe harbor"
provisions of the Act and is including this section in its Annual Report on Form
10-K in order to do so. Statements that are not historical facts, including
statements about management's expectations for fiscal year 1999 and beyond, are
forward-looking statements and involve various risks and uncertainties. Factors
that could cause the Company's actual results to differ materially from
management's projections, forecasts, estimates and expectations include, but are
not limited to, the following:
UNCERTAINTIES IN INTEGRATING OPERATIONS AND ACHIEVING COST SAVINGS
The Company, including its subsidiaries, is a large enterprise with
operations in different markets. The success of any business combination,
including the Company's recent acquisition of Old Safety-Kleen, is in part
dependent on the Company's ability following the acquisition to consolidate
operations and integrate departments, systems and procedures and thereby obtain
business efficiencies, economies of scale and related cost savings. The
consolidation of operations, the integration of departments, systems and
procedures and the reallocation of staff present significant management
challenges. There can be no assurance that future consolidated results will
improve as a result of the Safety-Kleen Acquisition, or as to the timing or
extent to which cost savings and efficiencies anticipated by the Company will be
achieved. The Company cannot presently quantify the impact of achieving or
failing to achieve anticipated synergies on the Company's earnings per share.
ABILITY TO EXERT SIGNIFICANT INFLUENCE
As of October 23, 1998, Laidlaw beneficially owned 35.8% of the
Company's outstanding Common Stock. Laidlaw also holds a $350 million, 5%
Subordinated Convertible Pay-In-Kind Debenture due 2009 of the Company (the "PIK
Note"). For the first two years from the issuance of the Senior Credit Facility,
interest is automatically paid in Company Common Stock and thereafter principal
and interest may be paid in Company Common Stock or cash at the election of the
Company. The number of shares of Company Common Stock for each such payment
shall be equal to the dollar amount in accrued interest or principal due divided
by the average of the daily closing prices of a share of Company Common Stock on
the NYSE-Composite Transactions for the ten consecutive trading days selected by
the Company commencing not more than 20 days before, and ending not later than,
the date such payment is due. Beginning on May 15, 2002, and continuing until
the business day prior to the repayment of the PIK Note, the PIK Note is
convertible, in whole or in part, at the option of the holder, into shares of
Company Common Stock. The conversion will be at a price of $3.75 per share,
subject to adjustment under certain circumstances. Assuming that the entire
principal amount of the PIK Note is outstanding and the conversion price
is $3.75 per share, the PIK Note is convertible into 93,333,333 shares of
Company Common Stock. Future sales by Laidlaw of substantial amounts of Company
Common Stock in the public market (depending on how and when such sales are
made), or the perception that such sales could occur, could adversely affect the
market price of the Company Common Stock. Future sales by Laidlaw would increase
the public float of Company Common Stock, which increase could have a positive
impact on the market for, and market price of, Company Common Stock.
LEVERAGE
The Company is highly leveraged with substantial debt service obligations.
Principal and repayment obligations with respect to the long term debt
aggregates $540.7 million over the next five years. Thus the Company is
particularly susceptible to adverse changes in its industry, the economy and the
financial markets. In addition, the Company's ability to obtain
additional debt financing will be limited by restrictive covenants under the
terms of its credit agreements and any other debt instruments. Those limits on
financing may limit the Company's ability to service its existing debt
obligations through additional debt financing if cash flow from operations is
insufficient to service such obligations.
ENVIRONMENTAL REGULATION AND LEGAL PROCEEDINGS
The operations of businesses of the Company are subject to certain
federal, state, territorial, provincial and local requirements which regulate
health, safety, environment, zoning and land-use. Operating and other permits
are generally required for incinerators, landfills, transfer and storage
facilities, certain collection vehicles, storage tanks and other facilities
owned or operated by the Company, and these permits are subject to revocation,
modification and renewal. Although the Company believes its facilities
meet federal, state and local requirements in all material respects
and have all of the required operating and other permits, it may be necessary to
expend considerable time, effort and money to keep existing or acquired
facilities in compliance with applicable requirements, including new
regulations, and to maintain existing permits and approvals and to obtain the
permits and approvals necessary to increase their capacity. Applicable
requirements are enforceable by injunctions and fines or penalties, including
criminal penalties. These regulations are administered by the EPA and various
other federal, state and local environmental and health and safety agencies and
authorities, including the Occupational Safety and Health Administration of the
United States Department of Labor and by the provincial environmental ministries
in Canada.
CERCLA imposes liability for damages and the cleanup of sites, from which
there is a release or threatened release of a hazardous substance into the
environment, on generators and transporters as well as current and former owners
and operators of such sites. Given the substantial costs involved in a CERCLA
cleanup and the difficulty of obtaining insurance for environmental impairment
liability, such liability could have a material impact on the Company's
business, financial condition and future prospects.
The Company is required to provide certain financial assurances with
respect to certain statutorily required closure and post-closure obligations
related to various operating facilities. These financial assurances may take the
form of insurance, guarantees, bonds, letters of credit or deposits of cash, to
the extent acceptable to the United States, Canadian or other foreign, state,
territorial, federal, provincial or local courts, executive offices,
legislatures, governmental agencies or ministries, commissions, or
administrative, regulatory or self-regulatory authorities or instrumentalities
("Governmental Entities") requiring such assurances. There is no guarantee
that the Company will be able to provide the required financial assurances,
without increased cost, or at all.
In addition to the costs of complying with environmental regulations,
hazardous waste treatment companies generally will continue to be involved in
legal proceedings in the ordinary course of business. Alleged failure by the
Company to comply with laws and regulations may lead to the imposition of fines
or the denial, revocation or delay of the renewal of permits and licenses by
Governmental Entities. In addition, such Governmental Entities as well as
surrounding landowners may claim that the Company is liable for environmental
damages. Citizens groups have become increasingly active in challenging the
grant or renewal of permits and licenses for hazardous waste facilities and
responding to such challenges has further increased the costs associated with
establishing new facilities or expanding current facilities. A significant
judgment against the Company, the loss of a significant permit or license or the
imposition of a significant fine could have a material adverse effect on the
Company's business, financial condition and future prospects. The Company is
currently a party to various legal proceedings, as well as environmental
proceedings, which have arisen in the ordinary course of its business.
Based on its past experience and its knowledge of pending cases, the
Company believes it is unlikely that the Company's actual liability on cases now
pending (including enforcement actions of the type described above and CERCLA or
state superfund cases) will be materially adverse to the Company's financial
condition. It should be noted, however, that many environmental laws are written
and enforced in a way in which the potential liability can be large, and it is
always possible that the Company's actual liability in any particular case or
claim will prove to be larger than anticipated and accrued for by the Company.
It is also possible that expenses incurred in any particular reporting period
for remediation costs or for fines, penalties, or judgments could have a
material impact on the Company's results of operations for that period.
COMPETITIVE ENVIRONMENT
The Company operates in highly competitive environments. In addition, the
hazardous waste industry is changing as a result of rapid consolidation. The
future success of the Company will be affected by such changes, the nature of
which cannot be forecast with certainty. There can be no assurance that such
developments will not create additional competitive pressures on the Company's
business.
INTERNATIONAL OPERATIONS
The Company has business operations in the United States, Canada and
Western Europe. Certain risks are inherent in international operations,
including the risks of differing regulation, currency fluctuations and differing
tax treatment. The Company is subject to Canadian, United States and
European-based environmental and other regulations. Also, the relative value of
United States dollar, Canadian dollar and European currencies could change. The
impact of future exchange rate fluctuations on the results of operations cannot
be accurately predicted. The Company is subject to United States, European and
Canadian tax laws and regulations. The application of United States and foreign
tax laws and regulations to Company and to intercompany relationships is subject
to audit and review by independent national tax authorities. In addition,
business practices or laws in Europe may impose costs, restrictions or
requirements on such activities that differ in significant respects from the
United States business environment.
CYCLICAL AND SEASONAL NATURE OF BUSINESS
The hazardous waste business is cyclical to the extent that it is
dependent upon a stream of waste from cyclical industries. If those cyclical
industries slow significantly, the business that the Company receives from those
industries is likely to slow. Also, the Company's business is somewhat seasonal
in that generally less waste is received in winter months.
DIVIDENDS
The Company has not paid cash dividends during the past two fiscal
years and does not presently anticipate paying any cash dividends in the future.
In addition, the Company's existing credit facility precludes the payment of
cash dividends.
ITEM 2. PROPERTIES
In North America, the Company operates in 45 states, seven Canadian
provinces and Puerto Rico. In Western Europe, the Company operates in the United
Kingdom, the Republic of Ireland, Belgium, France, Italy, Spain and Germany.
In North America and Europe, the Company's sales and service
representatives operate out of approximately 230 branch facilities. Of these,
approximately half are leased and half are owned. A typical branch is
approximately 8,000 square feet.
The Company has 21 service centers across the United States and Canada. Of
these, 19 service centers and 12 accumulation centers are owned. These locations
serve branches by accumulating shipments of waste from the Industrial Services
and Commercial and Institutional Service offerings. As truckload quantities are
collected, they are transported from these locations to the treatment and
disposal or recycling plants.
The Company owns 13 solvent recycling plants in the United States, Canada,
Puerto Rico, the United Kingdom and Germany. In total, these plants have an
annual recycling capacity of 67 million gallons of parts cleaner solvents and 41
million gallons of halogenated, fluorinated and flammable solvents. The total
storage capacity of these plants is approximately 9.4 million gallons. In
addition, the Company owns 2 fuel blending facilities, located on leased land,
and has an exclusive supply arrangement for its waste-derived fuel with a third
facility. These three facilities have combined storage capacity of approximately
2 million gallons.
The Company owns two oil re-refining plants with a combined annual
re-refining capacity of 132 million gallons. These plants are located in
Breslau, Ontario and East Chicago, Indiana.
The Company leases 5 distribution facilities and owns 3 distribution
facilities in the United States, United Kingdom and Germany, averaging
approximately 45,000 square feet.
The Company operates eight commercial incineration facilities and 11
landfills throughout the United States and Canada, all of which are owned. The
Company also operates 17 other treatment and disposal facilities, of which all
but 9 are owned.
The Company operates approximately 2,900 vans or straight trucks, 650 tank
and vacuum trucks, 1,000 over the road type trucks and 1,900 trailer units, most
of which are owned by the Company. The Company also operates approximately 1,250
leased railroad tanker cars.
The Company owns a 106,000 square foot plant in New Berlin, Wisconsin
where parts cleaner machines are assembled and buffing pads are manufactured.
The Company owns a 66,000 square foot technical center located in Elk
Grove Village, Illinois.
The Company owns a 285,000 square foot administrative office building
located in Elgin, Illinois. The building was the premises for Old
Safety-Kleen's corporate headquarters. The Company intends to sell this
property.
The Company leases its corporate headquarters office space in Columbia,
South Carolina.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The business of the Company's hazardous and industrial waste services is
continuously regulated by federal, state, provincial and local provisions that
have been enacted or adopted, regulating the discharge of materials into the
environment or primarily for the purpose of protecting the environment. The
nature of the Company's businesses results in its frequently becoming a party to
judicial or administrative proceedings involving all levels of governmental
authorities and other interested parties. The issues that are involved generally
relate to applications for permits and licenses by the Company and their
conformity with legal requirements and alleged technical violations of existing
permits and licenses. The Company does not believe that these issues will be
material to the Company's operations or financial condition. At August 31, 1998,
subsidiaries of the Company were involved in nine proceedings of the latter type
relating primarily to activities at waste treatment, storage and disposal
facilities where the Company believes sanctions involved in each instance may
exceed $100,000. The Company believes that the ultimate disposition of these
issues will not have a materially adverse effect upon the Company's consolidated
financial position or results of operations.
In the United States, CERCLA imposes financial liability on persons who
are responsible for the release of hazardous substances into the environment.
Present and past owners and operators of sites which release hazardous
substances, as well as generators and transporters of the waste material, are
jointly and severally liable for remediation costs and environmental damage. At
August 31, 1998, the Company had been notified that it was a potentially
responsible party in connection with 44 locations in its hazardous waste
management and other businesses. The Company continually reviews its status with
respect to each location and the extent of its alleged contribution to the
volume of waste at the location, the available evidence connecting the Company
to that location, and the numbers and financial soundness of other potentially
responsible parties at the location. Based upon presently available information,
the Company does not believe that potential liabilities arising from its
involvement with these locations will be material to the Company's operations or
financial condition.
VILLE MERCIER FACILITY
On May 10, 1991, representatives of the Ministry of the Environment of the
Province of Quebec conducted a search on property of a subsidiary of the Company
in Ville Mercier pursuant to a search warrant issued on the basis of allegations
that the subsidiary, prior to its acquisition, had during the years 1973, 1974
and 1975, illegally buried between 500 and 600 barrels of industrial waste in
the ground on the site. As a result of that search and the finding of barrels of
industrial waste, the subsidiary immediately undertook an investigation and
submitted a restoration plan to the Ministry of the Environment and in fact,
commenced the restoration activity. On May 24, 1991, the Minister of the
Environment issued an order under the provisions of the Environment Quality Act,
ordering the subsidiary to collect all the contaminants dumped, emitted, issued
or discharged into the environment. This order was issued without notice to the
subsidiary at a time when the subsidiary was already carrying out its
restoration plan. The subsidiary filed a motion in the Superior Court in the
Province of Quebec and the District of Montreal seeking an order to, among other
things, cancel and annul the order on the basis, that the burial of the barrels
between 1973 and 1975 did not constitute an actual and current discharge,
emission or deposit of contaminants into the environment, justifying the 1991
order under the law and that the order did not identify the contaminants that
the subsidiary was required to remove, their location, or a time frame in which
this should be accomplished. Following implementation of the restoration plan,
these proceedings were suspended. Management believes that the restoration plan
submitted by the subsidiary as amended after consultation with the Ministry of
the Environment has been implemented and that any contamination resulting from
the barrels of industrial waste has been remediated.
Unrelated to the barrels of industrial waste referred to above,
in a letter dated June 19, 1992, the Quebec Ministry of the Environment
requested the subsidiary to advise the Ministry, within 30 days of
receipt of the request, of its intentions concerning the carrying out of
certain characterization studies of soil and water and restoration work
with respect to certain areas of the Ville Mercier property. In 1968,
the Quebec government issued two permits to an unrelated company to dump
organic liquids into lagoons on the Ville Mercier property. By 1971,
groundwater contamination had been identified. In 1972, the
Quebec government provided an alternate water supply to Ville Mercier. In the
same year, the permit authorizing the dumping of liquids was terminated and a
permit to operate an organic liquids incinerator on the property was granted to
an entity which was indirectly acquired by the Company in 1989. In 1973, the
Quebec government contracted with the incinerator operator to incinerate the
pumpable liquids in the lagoons. In 1980, the incinerator operator removed,
solidified and disposed of the non-pumpable material from the lagoons in a
secure cell and completed the closure of the lagoons at its own expense. In
1983, the Quebec government constructed and continues to operate, a groundwater
pumping and treatment facility near the lagoons. The Company believes that its
subsidiary is not the party responsible for the lagoon and groundwater
contamination. By letter dated July 17, 1992, the subsidiary responded by first
denying any responsibility for the decontamination and restoration of its site
and secondly, by proposing that the Quebec Ministry of the Environment and the
subsidiary form a working group to find the most appropriate technical solution
to the contamination problem. On November 16 and 25, 1992, the Minister of the
Environment, pursuant to the provisions of the Environment Quality Act, served
the subsidiary with two Notices alleging that the subsidiary was responsible for
the presence of contaminants on its property and that of its neighbor and
ordering the subsidiary to take all the necessary measures to excavate,
eliminate or treat all of the contaminated soils and residues located within the
areas defined in the Notices and to recover and treat all of the contaminated
waters resulting from the aforementioned measures. The Notices further provided
that failing the receipt by the Department of Environment, within ten days of
the date of service of the Notices, of an undertaking by the subsidiary to carry
out the aforementioned measures, the Minister of the Environment would proceed
to do the work and would claim from the subsidiary the direct and indirect costs
relating to such work.
By letter dated November 25, 1992, the subsidiary responded by
reiterating its position that it had no responsibility for the
contamination associated with the discharges of wastes into the former Mercier
Lagoons between 1968 and 1972 and proposing to submit the question of
responsibility to the Courts for determination as expeditiously as possible
through the cooperation of the parties' respective attorneys. Concurrently, the
subsidiary undertook to prepare and submit to the Department of the Environment
a technical plan to address the contamination on the site identified in the
notices. This plan was developed with the assistance of highly qualified experts
from Quebec and elsewhere in North America drawing upon all available
information and was submitted to the Minister of the Environment. By letter
dated December 7, 1992, the subsidiary submitted to the Minister of the
Environment a document entitled "Detailed Scope of Work for the Groundwater
Contamination Panel Ville Mercier, Quebec". This proposal by the subsidiary was
refused by the Minister of the Environment by letter dated December 22, 1992 on
the grounds that it did not meet the terms of the above-mentioned Notices issued
against the subsidiary. The Minister published a request for tenders for the
preparation of plans and specifications with respect to the excavation and
storage of the contaminated soils. The Minister also retained six independent
experts to review the subsidiary's technical plan. This panel of experts
subsequently submitted to the Minister of the Environment its recommended
methodology to address the contamination on the site.
The Minister of the Environment convened a public hearing which reviewed
the report submitted to the Minister by the experts he retained and recommended
to the Minister what remedial plan should be instituted to address the
contamination on the site.
The subsidiary filed legal proceedings seeking a court determination of
the liability associated with the contamination of the former Mercier lagoons.
The subsidiary asserted that it has no responsibility for the contamination on
the site. The Minister claimed that the subsidiary is responsible for the
contamination and should reimburse the Province of Quebec for costs incurred to
the present in the amount of $17.4 million Canadian and should be responsible
for future remediation costs.
Pursuant to the Stock Purchase Agreement (as described in Part I Item 1 of
this report), Laidlaw Inc. and Laidlaw Transportation, Inc. agreed to indemnify
and hold harmless the Company and its subsidiaries for any damages resulting
from the remediation of contaminated soils and water arising from the former
lagoon sites and the operation of the incinerator at Mercier, Quebec. The
indemnification is only to the extent that the aggregate cash expenditure
with respect to such damages exceeds in the aggregate (i) $1 million during
such year and (ii) since 1997, an amount equal to the product of $1 million
times the number of years that have elapsed since 1997; however, there shall
be no indemnification for any cash expenditures incurred more than six years
after 1997. The Company believes that the ultimate disposition of these issues
will not have a materially adverse effect upon the Company's consolidated
financial position or results of operations.
SAFETY-KLEEN (PINEWOOD), INC. FINANCIAL ASSURANCE.
A subsidiary of the Company, Safety-Kleen (Pinewood), Inc. ("Pinewood"),
owns and operates a hazardous waste landfill near the Town of Pinewood in Sumter
County, South Carolina. South Carolina law requires that hazardous waste
facilities provide evidence of financial assurance for potential environmental
cleanup and restoration in form and amount to be determined by the South
Carolina Department of Health and Environmental Control ("DHEC").
In its order dated May 19, 1994, the Board of DHEC (the "Board") decided
that over a ten year period Pinewood must establish a cash funded trust in the
amount of $133 million, adjusted for inflation, as financial assurance for
potential environmental cleanup and restoration. In August 1994, Pinewood paid
approximately $14 million cash into the trust fund as a first installment. The
cash funded trust now stands at approximately $18 million. Pinewood appealed to
the South Carolina Circuit Court contesting the legality of the Board's
determination.
In June 1995, DHEC promulgated, and the South Carolina legislature
approved, regulations governing financial assurance for environmental cleanup
and restoration giving owner/operators of hazardous waste facilities the right
to choose from among six options for providing financial assurance. The options
include insurance, a bond, a letter of credit, a cash trust fund and a corporate
guaranty with a financial test.
In June 1995, under authority of the new regulations, Pinewood submitted
financial assurance for potential environmental cleanup and restoration composed
of a combination of the existing State Permitted Sites Fund (this is a state
of South Carolina fund created by statute and funded by hazardous waste disposal
taxes) in the amount of approximately $8 million and the balance of a total
package of $135 million by way of a corporate guaranty by Laidlaw Inc. in the
amount of approximately $127 million. Pinewood also left in place the existing
cash trust fund in the amount of approximately $16 million. DHEC accepted
Pinewood's financial submittal. On September 15, 1995, DHEC issued a declaratory
ruling finding the new regulations applicable to financial assurance
requirements for Pinewood. A group of parties opposed to the ruling appealed the
declaratory ruling to the South Carolina Circuit Court. The opposing parties
include Citizens Asking for a Safe Environment, Energy Research Foundation,
County of Sumter, Sierra Club, County of Clarendon, The Sumter County
Legislative Delegation, the South Carolina Department of Natural Resources and
the South Carolina Public Service Authority. In June 1996, Pinewood submitted
and DHEC accepted a similar financial assurance package for the state fiscal
year ended June 30, 1997. In June 1997, Pinewood submitted a financial assurance
package consisting of the State Permitted Sites Fund (approximately $9 million),
the cash trust fund in the amount of approximately $17 million and the balance
of a total package of approximately $135 million in insurance coverage. This
submittal is pending acceptance by DHEC. In June, 1998 Pinewood submitted a new
financial assurance package to DHEC consisting of State Permitted Sites Fund
(approximately $11 million), the cash trust fund in the amount of approximately
$18 million and the balance of a total package of approximately $140 million in
insurance coverage. This submittal is also pending acceptance by DHEC.
Pinewood's appeal of the May 19, 1994 DHEC order and the opposing parties'
appeal of the September 15, 1995 DHEC declaratory ruling were consolidated in
the South Carolina Circuit Court in the case captioned Laidlaw Environmental
Services of South Carolina, Inc. et. al., Petitioners vs. South Carolina
Department of Health and Environmental Control and South Carolina Board of
Health and Environmental Control, Respondents - Energy Research Foundation, et
al., Intervenors, Docket Numbers C/A 94-CP-43-175, 94-CP-43-178, 94-CP-40-1412
and 94-CP-40-1859. A decision was issued by the Circuit Court on August 19, 1997
finding the regulation legally valid and applicable to financial assurance
requirements of the Pinewood landfill. Opposing parties have appealed the
decision to the South Carolina Court of Appeals. A decision adverse to the
Company could result in the reinstatement of the May 19, 1994 DHEC order. The
Company believes that the regulations promulgated in June 1995 are legally valid
and applicable to financial assurance requirements for the Pinewood landfill.
The Company believes that the ultimate disposition of these issues will not have
a materially adverse effect upon the Company's consolidated financial position
or results of operations.
TAX MATTERS
Laidlaw's United States subsidiaries petitioned the United States Tax
Court (captioned as Laidlaw Transportation, Inc. and Subsidiaries et al v.
Commissioner of Internal Revenue, Docket Nos. 9361-94 and 9362-94) with respect
to their consolidated federal income tax returns (which until May 15, 1997
included certain of the Company's United States subsidiaries) for the fiscal
years ended August 31, 1986, 1987 and 1988. The principal issue involved related
to the timing and deductibility for tax purposes of interest attributable to
loans owing to related foreign persons. Judge John O. Colvin issued an opinion
on June 30, 1998 concluding that advances from Laidlaw's related foreign entity,
were equity rather than debt and that interest deductions claimed were
disallowed. Based on this opinion, taxes of $46.2 million (plus interest of
approximately $88.8 million as of August 31, 1998) would be payable.
Similar claims have been asserted with respect to Laidlaw's consolidated
federal income tax returns for the fiscal years ended August 31, 1989, 1990 and
1991. A petition has been filed with the United States Tax Court with respect to
these years (captioned as Laidlaw Transportation, Inc. and Subsidiaries v.
Commissioner of Internal Revenue, Docket No. 329-98). The income taxes at issue
for these years is approximately $143.5 million (plus interest of approximately
$156.7 million as of August 31, 1998).
In September 1998, Laidlaw's United States subsidiaries received a thirty
day letter proposing that the subsidiaries pay additional taxes of approximately
$96.0 million (plus interest of approximately $51.2 million as of August 31,
1998) relating to disallowed deductions in federal income tax returns for the
fiscal years ended August 31, 1992, 1993 and 1994 based on the same issues.
Entry of the decision relating to the Tax Court opinion has been deferred
to allow Laidlaw and the Commissioner of Internal Revenue to engage in
discussions to resolve issues relating to all fiscal years from 1986
through 1994. Should these negotiations be unsuccessful, the Company expects
Laidlaw to appeal the opinion of the Tax Court and vigorously contest the
claimed deficiencies for subsequent fiscal years. Should Laidlaw's United
States subsidiaries ultimately be required to pay all claims on these issues,
the cost (including interest as of August 31, 1998) could be approximately
$500 million.
Pursuant to the Stock Purchase Agreement, Laidlaw and LTI are responsible
for any tax liabilities resulting from these matters. The Company believes that
the ultimate disposition of these issues will not have a materially adverse
effect upon the Company's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the
fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section entitled "Shareholder Information" appearing in
the Company's 1998 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Financial Highlights and Selected Financial Data"
appearing in the Company's 1998 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing in the Company's 1998 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has no material information to disclose.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto set forth in the Company's 1998
Annual Report to Stockholders are incorporated herein by reference, and indexed
under Item 14(a)(1). See also the financial statement schedules appearing
herein, as indexed under Item 14(a)(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Executive Officers of the Registrant" in Part I,
Item 1 of this Annual Report on Form 10-K and the section entitled "Section
16(a) Beneficial Ownership Reporting Compliance" and "Proposal 1: Election of
Directors" in the Company's definitive proxy statement to be filed pursuant to
Regulation 14A for the Annual Meeting of Stockholders to be held on November 24,
1998 (the "Proxy Statement"), are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Compensation of Officers and Directors" and
"Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Beneficial Ownership" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Compensation Committee Interlocks and Insider
Participation" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a). The following documents are filed as part of this report:
(1). Financial statements and the notes thereto set forth in the Company's
1998 Annual Report to Stockholders which are incorporated herein by reference:
Report of Independent Accountants to the Stockholders (page 20).
Consolidated Statements of Income for the three fiscal years ended August
31, 1998, 1997 and 1996 (page 21).
Consolidated Balance Sheets as of August 31, 1998 and 1997 (page 22).
Consolidated Statements of Cash Flows for each of the three fiscal years
ended August 31, 1998, 1997 and 1996 (pages 23-24).
Consolidated Statements of Stockholders' Equity for each of the three
fiscal years ended August 31, 1998, 1997 and 1996 (page 24).
Notes to Consolidated Financial Statements (pages 25-42).
The Company's 1998 Annual Report to Stockholders is not to be deemed filed
as part of this report except for those parts thereof specifically incorporated
by reference herein.
(2). Financial statement schedule required to be filed by Item 8 of this
form:
Schedule II -- Valuation and qualifying accounts.
Independent accountant's report on financial statement schedule.
All other schedules have been omitted since they are inapplicable or not
required, or the information has been included in the financial statements or
the notes thereto.
(3). Exhibits:
(3)(a) Restated Certificate of Incorporation of the Company dated May 13, 1997
and Amendment to Certificate of Incorporation dated May 15, 1997 filed as
Exhibit 3(a) to the Registrant's Form 10-Q for the Quarter ended May 31, 1997
and incorporated herein by reference
(3)(a)(i) Certificate of Correction Filed to Correct a Certain Error in the
Restated and Amended Certificate of Incorporation of the Company dated October
15, 1997 filed as Exhibit (3)(a)(i) to the Registrant's Form 10-K for the Year
ended August 31, 1997, and incorporated herein by reference.
(3)(a)(ii) Certificate of Amendment of Restated Certificate of Incorporation of
the Company dated February 19, 1998, filed as Exhibit (3)(a)(ii) to the
Registrant's Form 10-Q for the Quarter ended February 28, 1998 and incorporated
herein by reference.
(3)(b) Amended and Restated Bylaws of the Company filed as Exhibit 4(ii) to the
Registrant's Current Report on Form 8-K dated July 29, 1997 and incorporated
herein by reference.
(4)(a) Registration Rights Agreement dated as of May 29, 1998 between LES, Inc.,
the Registrant, subsidiary guarantors of the Registrant, TD Securities (USA)
Inc. and NationsBanc Montgomery Securities LLC filed as Exhibit 4(a) to the
Registrant's Form S-4 Registration Statement No. 333-57587 filed June 24, 1998
and incorporated herein by reference.
(4)(b) Indenture dated as of May 29, 1998 between LES, Inc., Registrant,
subsidiary guarantors of the Registrant and The Bank of Nova Scotia Trust
Company of New York, as trustee filed as Exhibit 4(b) to the Registrant's Form
S-4 Registration Statement No. 333-57587 filed June 24, 1998 and incorporated
herein by reference.
(4)(c) Rights Agreement dated as of June 14, 1989 between the Company and First
Chicago Trust Company as successor to Registrar and Transfer Company, as Rights
Agent filed as Exhibit 4(e) to the Registrant's Current Report on Form 8-K filed
on June 13, 1995 and incorporated herein by reference.
(4)(d) Amendment No. 1 dated as of March 31, 1995 to the Rights Agreement
between the Company and First Chicago Trust Company as successor to Registrar
and Transfer Company, as Rights Agent filed as Exhibit 4(f) to the Registrant's
Current Report on Form 8-K on June 13, 1995 and incorporated herein by
reference.
(4)(e) Amendment No. 2 dated as of April 30, 1997 to the Rights Agreement
between the Company and First Chicago Trust Company as successor to Registrar
and Transfer Company, as Rights Agent, filed as Exhibit 4(c) to the Registrant's
Form 10-Q for the quarter ended November 30, 1997, and incorporated herein by
reference.
(4)(f) Amended and Restated Credit Agreement among Laidlaw Chem-Waste, Inc.,
Laidlaw Environmental Services (Canada) Ltd., Toronto Dominion (Texas) Inc., The
Toronto-Dominion Bank, TD Securities (USA) Inc., the Bank of Nova Scotia,
NationsBank, N.A. and The First National Bank of Chicago and NationsBank, N.A.
as Syndication Agent dated as of April 3, 1998, filed as Exhibit 4(q) to the
Registrant's Form S-4 Registration Statement No. 333-49929 filed April 10, 1998,
and incorporated herein by reference.
(4)(g) Supplement to the Amended and Restated Credit Agreement among Laidlaw
Chem-Waste, Inc., Laidlaw Environmental Services (Canada) Ltd., Toronto Dominion
(Texas) Inc., The Toronto-Dominion Bank, TD Securities (USA) Inc., the Bank of
Nova Scotia, NationsBank, N.A. and The First National Bank of Chicago and
NationsBank, N.A. as Syndication Agent dated as of April 3, 1998, filed as
Exhibit 4(e) to a subsidiary of the Registrant's Form S-4 Registration Statement
No. 333-57587 filed June 24, 1998 and incorporated herein by reference.
(4)(h) Waiver and First Amendment to the Amended and Restated Credit Agreement
dated as of May 15, 1998 among LES, Inc., Laidlaw Environmental Services
(Canada) Ltd., the Lenders, Toronto Dominion (Texas), Inc., The Toronto Dominion
Bank, TD Securities (USA) Inc., The Bank of Nova Scotia, NationsBank, N.A., The
First National Bank of Chicago and Wachovia Bank filed as Exhibit 4(f) to a
subsidiary of the Registrant's Form S-4 Registration Statement No. 333-57587
filed June 24, 1998 and incorporated herein by reference.
(4)(i) Commitment to Increase Supplement to the Amended and Restated Credit
Agreement dated as of June 3, 1998 among LES, Inc., Laidlaw Environmental
Services (Canada) Ltd., the Lenders, Toronto Dominion (Texas), Inc., The Toronto
Dominion Bank, TD Securities (USA) Inc., The Bank of Nova Scotia, NationsBank,
N.A., The First National Bank of Chicago and Wachovia Bank filed as Exhibit 4(g)
to a subsidiary of the Registrant's Form S-4 Registration Statement No.
333-57587 filed June 24, 1998 and incorporated herein by reference.
(4)(j) $350,000,000 5% Subordinated Convertible Pay-In-Kind Debenture due 2009
issued by Registrant on May 15, 1997 to Laidlaw Transportation, Inc. the form of
which was included as an appendix to the Registrant's Definitive Proxy Statement
on Form DEF 14A, filed on May 1, 1997 and incorporated herein by reference.
(4)(k) Registration Rights Agreement dated May 15, 1997 between Registrant,
Laidlaw Transportation, Inc. and Laidlaw Inc. included as an appendix to the
Registrant's Definitive Proxy Statement on Form DEF 14A, the form of which was
filed on May 1, 1997 and incorporated herein by reference.
(4)(l) Indenture dated as of May 1, 1993 between the Industrial Development
Board of the Metropolitan Government of Nashville and Davidson County
(Tennessee) and NationsBank of Tennessee, N.A., filed as Exhibit 4(f) to the
Registrant's Form 10-Q for the Quarter ended May 31, 1997, and incorporated
herein by reference.
(4)(m) Indenture of Trust dated as of August 1995 between Tooele County, Utah
and West One Bank, Utah, now known as U.S. Bank, as Trustee, filed as Exhibit
4(h) to the Registrant's form 10-Q for the Quarter ended May 31, 1997, and
incorporated herein by reference.
(4)(n) Indenture of Trust dated as of July 1, 1997 between Carbon County, Utah
and U.S. Bank, a national banking association, as Trustee, filed as Exhibit 4(i)
to the Registrant's Form 10-Q for the Quarter ended May 31, 1997, and
incorporated herein by reference.
(4)(o) Indenture of Trust dated as of July 1, 1997 between Tooele County, Utah
and U.S. Bank, a national banking association, as Trustee, filed as Exhibit 4(j)
to the Registrant's Form 10-Q for the Quarter ended May 31, 1997, and
incorporated herein by reference.
(4)(p) Indenture of Trust dated as of July 1, 1997 between California Pollution
Control Financing Authority and U.S. Bank, a national banking association, as
Trustee, filed as Exhibit 4(k) to the Registrant's Form 10-Q for the Quarter
ended May 31, 1997, and incorporated herein by reference.
(4)(q) Promissory Note dated May 15, 1997 for $60,000,000 from Laidlaw
Environmental Services, Inc. to Westinghouse Electric Corporation, filed as
Exhibit 4(n) to the Registrant's Form 10-Q for the Quarter ended May 31, 1997,
and incorporated herein by reference.
(4)(r) Guaranty Agreement dated May 15, 1997 by Laidlaw Inc. to Westinghouse
Electric Corporation guaranteeing Promissory Note dated May 15, 1997 (as
referenced in Exhibit (4)(o)) from Laidlaw Environmental Services, Inc. to
Westinghouse Electric Corporation, filed as Exhibit 4(o) to the Registrant's
Form 10-Q for the Quarter ended May 31, 1997, and incorporated herein by
reference.
(4)(s) Other instruments defining the rights of holders of debt of the
Registrant have been omitted from this exhibit list because the amount of debt
authorized under any such instrument does not exceed 10% of the total assets of
the Registrant and its subsidiaries. The Registrant agrees to furnish a copy of
any such instrument to the Commission upon request.
(10)(a) Agreement and Plan of Merger dated as of March 16, 1998 by and among
Registrant, LES Acquisition, Inc., and Safety-Kleen Corp. included as Annex A of
Safety-Kleen's Revised Amended Prospectus on Form 14D-9 filed as Exhibit 62 to
Safety-Kleen's Amendment No. 28 to Schedule 14-9A on March 17, 1998, and
incorporated herein by reference.
(10)(b) Stock Purchase Agreement between Westinghouse Electric Corporation
(Seller) and Rollins Environmental Services, Inc. (Buyer) for National Electric,
Inc. dated March 7, 1995 filed as Exhibit 2 to the Registrant's Current Report
on Form 8-K filed on June 13, 1995 and incorporated herein by reference.
(10)(c) Second Amendment to Stock Purchase Agreement (as referenced in Exhibit
(4)(q) above), dated May 15, 1997 among Westinghouse Electric Corporation,
Rollins Environmental Services, Inc. and Laidlaw Inc., filed as Exhibit 4(m) to
the Registrant's Form 10-Q for the Quarter ended May 31, 1997, and incorporated
herein by reference.
(10)(d) Rollins Environmental Services, Inc. 1982 Incentive Stock Option Plan
filed with Amendment No. 1 to the Company's Registration Statement No. 2-84139
on Form S-1 dated June 24, 1983 and incorporated herein by reference.
(10)(e) Rollins Environmental Services, Inc. 1993 Stock Option Plan filed with
the Company's Proxy Statement for the Annual Meeting of Shareholders held
January 28, 1994 and incorporated herein by reference.
(10)(f) Registrant's 1997 Stock Option Plan, filed as Exhibit 4.4 to the
Company's Registration Statement No. 333-41859 on Form S-8 dated December 10,
1997 and incorporated herein by reference.
(10)(g) Registrant's Director's Stock Option Plan, filed as Exhibit 4.5 to the
Company's Registration Statement No. 333-41859 on Form S-8 dated December 10,
1997 and incorporated herein by reference.
(10)(h) Stock Purchase Agreement dated February 6, 1997 among the Registrant,
Laidlaw Inc., and Laidlaw Transportation, Inc. included as an appendix to the
Definitive Proxy Statement on Form DEF 14A filed on May 1, 1997 and incorporated
herein by reference.
(10)(i) Management Incentive Plan for fiscal year 1998, filed as Exhibit 10(f)
to the Registrant's 10-Q for the quarter ended November 30, 1997, and
incorporated herein by reference.
(10)(j) Laidlaw Environmental Services, Inc. U.S. Supplemental Executive
Retirement Plan filed as Exhibit 10(g) to the Registrant's 10-Q for the quarter
ended November 30, 1997, and incorporated herein by reference.
(10)(k) Form of Change of Control Agreement LES-A1.
(10)(l) Form of Change of Control Agreement LES-B-1.
(10)(m) Change of Control Agreement LES-C1.
(12) Statement Re: Computation of Ratios
(13) The Company's 1998 Annual Report to Stockholders, certain portions of which
have been incorporated herein.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on June 25, 1998, which contained
Item 5 related to the Company doing business as Safety-Kleen Corp. and changing
its ticker symbol.
The Company filed a Current Report on Form 8-K on July 9, 1998, which contained
Item 5 related to information about how the Company would present financial
results in public disclosure documents.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE: LAIDLAW ENVIRONMENTAL SERVICES, INC.
October 28, 1998 ------------------------------------
(Registrant)
/s/ K. W. Winger
----------------------------
Kenneth W. Winger
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ J. R. BULLOCK Chairman of the October 6, 1998
- ------------------- Board and Director
James R. Bullock
/S/ KENNETH W. WINGER President, Chief October 6, 1998
- --------------------- Executive Officer and
Kenneth W. Winger Director
/S/ PAUL R. HUMPHREYS Senior Vice President, October 6, 1998
- --------------------- Finance and Chief
Paul R. Humphreys Financial Officer
/S/ J. R. GRAINGER Director October 6, 1998
- ------------------
John R. Grainger
/S/ L. W. HAWORTH Director October 6, 1998
- -----------------
Leslie W. Haworth
/S/ JOHN W. ROLLINS, SR. Director October 6, 1998
- ------------------------
John W. Rollins, Sr.
/S/ JOHN W. ROLLINS, JR. Director October 6, 1998
- -----------------------
John W. Rollins, Jr.
/S/ DAVID E. THOMAS, JR. Director October 6, 1998
- ------------------------
David E. Thomas, Jr.
/S/ HENRY B. TIPPIE Director October 6, 1998
- -------------------
Henry B. Tippie
/S/ JAMES L. WAREHAM Director October 6, 1998
- --------------------
James L. Wareham
/S/ GROVER C. WRENN Director October 6, 1998
- -------------------
Grover C. Wrenn
Exhibit 10(k)
_________________(date)
PRIVATE AND CONFIDENTIAL
[FirstName] [LastName]
[Address1]
[City] [State] [PostalCode]
Dear [FirstName]:
Laidlaw Environmental Services, Inc. (the "Corporation") considers it
essential and in the best interests of its shareholders to foster the continuous
employment of key management personnel. In this regard, the board of directors
of the Corporation (the "Board") has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of the
members of senior management of the Corporation, including yourself, to their
assigned duties without distraction in the face of potentially disturbing
circumstances arising from any possible change in control of the Corporation.
In order to induce you to remain in the employ of the Corporation, the
Corporation has agreed with you that you shall receive the severance benefits
set forth in this letter agreement (this "Agreement") in the event your
employment with the Corporation is terminated subsequent to a Change in Control
(as defined below) under the circumstances described below.
1. CHANGE IN CONTROL. No benefits shall be payable hereunder unless there
shall have been a "Change in Control", which, for purposes of this
Agreement, shall mean Laidlaw Inc. ceasing to be the beneficial owner,
directly or indirectly of 51 per cent or more of the voting shares of
the Corporation and another party or parties acting alone or in concert
with others controls a block or blocks of shares which in the aggregate
represent a larger number of voting shares than those held by Laidlaw
Inc.
2. TERMINATION FOLLOWING CHANGE IN CONTROL. If a Change in Control shall
have occurred, you shall be entitled to the benefits provided for
herein upon the subsequent termination of your employment
("Termination") during the period ("Window Period") beginning upon the
date of the Change in Control and ending on the second anniversary
thereof, unless such Termination is because of your death or
retirement, by the Corporation for Cause or by you other than for Good
Reason. For purposes of this paragraph:
a) "Cause" shall mean:
(I) the willful and continued failure by you
substantially to perform your duties with the
Corporation (other than any such failure resulting
from your incapacity due to physical or mental
illness or any such actual or anticipated failure
resulting from Termination by you for Good Reason, as
hereinafter defined) after a written demand for
substantial performance is delivered to you by the
Corporation's board of directors ("Corporation's
Board") or executive management, which demand
specifically identifies the manner in which the
Corporation's Board believes that you have not
substantially performed your duties and you failed to
correct such failure to perform your duties within 30
days after such written demand is delivered to you;
or
(II) the willful engaging by you in conduct that is
demonstrably and materially injurious to the
Corporation, monetarily or otherwise, and no act or
failure to act on your part shall be deemed "willful"
unless done, or omitted to be done, by you not in
good faith and without reasonable belief that your
action or omission was in the best interests of the
Corporation;
b) "Good Reason" shall mean the occurrence, without your
express written consent, of any of the following:
(I) INCONSISTENT DUTIES - a meaningful and
detrimental alteration in your position or in the
nature or status of your responsibilities from those
in effect immediately prior to the Change in Control;
(II) REDUCTION IN REMUNERATION - a reduction by the
Corporation in your annual base salary as in effect
immediately prior to the Change in Control or at any
time during the window period; or a reduction by the
Corporation in long term incentive opportunity as in
effect immediately prior to the Change in Control or
at any time during the window period; or a reduction
by the Corporation in bonus opportunity as in effect
immediately prior to the Change in Control or at any
time during the window period;
(III) RELOCATION - the relocation of the office of
the Corporation where you are employed at the time of
the Change in Control ("the CIC Location") to a
location that is more than 100 miles away from the
CIC Location, or the Corporation requiring you to be
based more than 100 miles away from the CIC Location
(except for required travel on the Corporation's
business to an extent substantially consistent with
your customary business travel
obligations in the ordinary course of your business
during the year immediately prior to the
Change in Control);
(IV) BENEFITS AND PERQUISITES - the failure by the
Corporation to continue to provide you with benefits
and perquisites at least as favorable as those
enjoyed by you immediately prior to the Change in
Control as may be increased thereafter and prior to
the expiry of the Window Period.
3. TERMINATION PAYMENT. If any event of Termination shall have occurred
during the Window Period and prior to the expiry of the Term
of this Agreement, and you shall have provided written
notice to that effect to the Corporation, you shall be entitled to a
payment ("the Termination Payment") in a lump sum (subject to
mandatory statutory tax withholding) in the amount of one month's
average compensation for each year of service subject to a minimum of
36. Average compensation is equal to the average aggregate monthly
salary and bonus paid to you and cash value of your benefits
(excluding the Laidlaw Environmental Services Supplementary Executive
Retirement Plan) and perquisites during the two fiscal years of the
Corporation ended immediately prior to the date ("Termination Payment
Date") on which the Termination Payment shall be due.
4. LAIDLAW ENVIRONMENTAL SERVICES SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN.
In the event that the Termination Payment shall become payable to you
hereunder your service under the Laidlaw Environmental Services
Supplementary Retirement Plan shall be extended for the purposes of
calculating pension entitlement by the number of months used to
determine the Termination Payment and your earnings for the purposes of
determining your pension entitlement as defined by the plan for such
period shall be the Termination Payment reduced by the value of
benefits and perquisites.
5. EMPLOYEE STOCK OPTIONS. Notwithstanding any provision to the contrary
contained in the Terms, Conditions and Restrictions relating to any
applicable Stock Option Plan ("TCR"), in the event that the Termination
Payment shall become payable to you hereunder, all employee stock
options of the Corporation heretofore granted to you fully vest. All
stock options which are thus fully vested shall lapse if not exercised
within ninety days following the date of Termination and within ten
years of the grant of the options.
6. LEGAL COUNSEL FEES. If the Corporation shall fail to comply with its
obligations hereunder or call into question the legal validity of this
Agreement, all reasonable legal counsel fees incurred by you in the
course of seeking to enforce this Agreement shall be for the account
and payable by the Corporation, except to the extent that a court shall
determine that your action in seeking to enforce this Agreement was
frivolous.
7. OUTPLACEMENT EXPENSES. In the event that the Termination Payment shall
become payable hereunder, the Corporation shall pay, on your behalf,
the fees and expenses of "outplacement" services on your behalf which
shall have been arranged by you, to a maximum of $25,000.
8. TERM. This Agreement shall terminate on the later of (a) the third
anniversary of the date hereof and (b) the expiry of the Window Period
in respect of the last Change in Control which shall have occurred
prior to the third anniversary of the date hereof.
9. FINAL AGREEMENT. It is the intention of the Corporation and you that
the compensation and benefits to be provided to you under this
Agreement shall be the only compensation and benefits to you provided
by the Corporation in the event of your Termination of employment
following the Change in Control, and by your acceptance hereof, you
hereby waive any and all other rights which you might have as a result
of such Termination of employment.
10. NOTICE. For purposes of this Agreement, notices and all other
communications shall be in writing and shall be hand delivered and
shall be deemed given when delivered and received addressed to Laidlaw
Environmental Services, 1301 Gervais Street, Suite 300, Columbia, South
Carolina 29201, Attention: Vice President, Administration or to you at
the address set forth on the first page of this Agreement or to such
other address as either party may have furnished to the other in
writing in accordance herewith.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of South Carolina applicable
therein.
12. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not effect the validity or enforceability of any
other provision of this Agreement which shall remain in full force and
effect.
13. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but both of which together
shall constitute one and the same instrument.
14. NO CONTRACT OF EMPLOYMENT. Nothing in this Agreement shall be construed
as giving you any right to be retained in the employment of the
Corporation.
If the foregoing sets forth our agreement on the subject matter hereof,
kindly sign in the space provided below and return to the Vice President of
Administration of the Corporation for execution by the Corporation. One fully
executed copy of this Agreement shall be returned to you.
Yours truly,
Laidlaw Environmental Services, Inc.
By:__________________________
By:__________________________
Agreed to this day of
, 1998
- ------------------------
Exhibit 10(l)
(LES-B-1)
May 27, 1998
PRIVATE AND CONFIDENTIAL
[FirstName] [LastName]
[Address1]
[City] [State] [PostalCode]
Dear [JobTitle]:
Laidlaw Environmental Services, Inc. (the "Corporation") considers it
essential and in the best interests of its shareholders to foster the continuous
employment of key management personnel. In this regard, the board of directors
of the Corporation (the "Board") has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of the
members of senior management of the Corporation, including yourself, to their
assigned duties without distraction in the face of potentially disturbing
circumstances arising from any possible change in control of the Corporation.
In order to induce you to remain in the employ of the Corporation, the
Corporation has agreed with you that you shall receive the severance benefits
set forth in this letter agreement (this "Agreement") in the event your
employment with the Corporation is terminated subsequent to a Change in Control
(as defined below) under the circumstances described below.
1. CHANGE IN CONTROL. No benefits shall be payable hereunder unless there
shall have been a "Change in Control", which, for purposes of this
Agreement, shall mean Laidlaw Inc. ceasing to be the beneficial owner,
directly or indirectly of 51 per cent or more of the voting shares of the
Corporation and another party or parties acting alone or in concert with
others controls a block or blocks of shares which in the aggregate
represent a larger number of voting shares than those held by Laidlaw Inc.
2. TERMINATION FOLLOWING CHANGE IN CONTROL. If a Change in Control shall have
occurred, you shall be entitled to the benefits provided for herein upon
the subsequent termination of your employment ("Termination") during the
period ("Window Period") beginning upon the date of the Change in Control
and ending on the second anniversary thereof, unless such Termination is
because of your death or retirement, by the Corporation for Cause or by you
other than for Good Reason. For purposes of this paragraph:
a) "Cause" shall mean:
(I) the willful and continued failure by you
substantially to perform your duties with the
Corporation (other than any such failure resulting
from your incapacity due to physical or mental
illness or any such actual or anticipated failure
resulting from Termination by you for Good Reason, as
hereinafter defined) after a written demand for
substantial performance is delivered to you by the
Corporation's board of directors ("Corporation's
Board") or executive management, which demand
specifically identifies the manner in which the
Corporation's Board believes that you have not
substantially performed your duties and you failed to
correct such failure to perform your duties within 30
days after such written demand is delivered to you;
or
(II) the willful engaging by you in conduct that is
demonstrably and materially injurious to the
Corporation, monetarily or otherwise, and no act or
failure to act on your part shall be deemed "willful"
unless done, or omitted to be done, by you not in
good faith and without reasonable belief that your
action or omission was in the best interests of the
Corporation;
b) "Good Reason" shall mean the occurrence, without your
express written consent, of any of the following:
(I) INCONSISTENT DUTIES - a meaningful and
detrimental alteration in your position or in the
nature or status of your responsibilities from those
in effect immediately prior to the Change in Control;
(II) REDUCTION IN REMUNERATION - a reduction by the
Corporation in your annual base salary as in effect
immediately prior to the Change in Control or at any
time during the window period; or a reduction by the
Corporation in long term incentive opportunity as in
effect immediately prior to the Change in Control or
at any time during the window period; or a reduction
by the Corporation in bonus opportunity as in effect
immediately prior to the Change in Control or at any
time during the window period;
(III) RELOCATION - the relocation of the office of
the Corporation where you are employed at the time of
the Change in Control ("the CIC Location") to a
location that is more than 100 miles away from the
CIC Location, or the Corporation requiring you to be
based more than 100 miles away from the CIC Location
(except for required travel on the Corporation
business to an extent substantially consistent with
your customary business travel obligations in the
ordinary course of your business during the year
immediately prior to the Change in Control);
(IV) BENEFITS AND PERQUISITES - the failure by the
Corporation to continue to provide you with benefits
and perquisites at least as favorable as those
enjoyed by you immediately prior to the Change in
Control as may be increased thereafter and prior to
the expiry of the Window Period.
3. TERMINATION PAYMENT. If any event of Termination shall have occurred
during the Window Period and prior to the expiry of
the Term of this Agreement, and you shall have provided written notice
to that effect to the Corporation, you shall be entitled to a payment
("the Termination Payment") in a lump sum (subject to mandatory
statutory tax withholding) in the amount of one month's average
compensation for each year of service subject to a minimum of 18.
Average compensation is equal to the average aggregate monthly salary
and bonus paid to you and cash value of your benefits (excluding
the Laidlaw Environmental Services Supplementary Executive Retirement
Plan) and perquisites during the two fiscal years of the Corporation
ended immediately prior to the date ("Termination Payment Date") on
which the Termination Payment shall be due.
4. LAIDLAW ENVIRONMENTAL SERVICES SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN. In
the event that the Termination Payment shall become payable to you
hereunder your service under the Laidlaw Environmental Services
Supplementary Retirement Plan shall be extended for the purposes of
determining your pension entitlement by the number of months used to
determine the Termination Payment and your earnings for the purposes of
determining your pension entitlement as defined by the plan for such period
shall be the Termination Payment reduced by the value of benefits and
perquisites.
5. EMPLOYEE STOCK OPTIONS. Notwithstanding any provision to the contrary
contained in the Terms, Conditions and Restrictions relating to any
applicable Stock Option Plan ("TCR"), in the event that the Termination
Payment shall become payable to you hereunder, all employee stock options
of the Corporation heretofore granted to you fully vest. All stock options
which are thus fully vested shall lapse if not exercised within ninety days
following the date of Termination and within ten years of the grant of the
options.
6. LEGAL COUNSEL FEES. If the Corporation shall fail to comply with its
obligations hereunder or call into question the legal validity of this
Agreement, all reasonable legal counsel fees incurred by you in the course
of seeking to enforce this Agreement shall be for the account and payable
by the Corporation, except to the extent that a court shall determine that
your action in seeking to enforce this Agreement was frivolous.
7. OUTPLACEMENT EXPENSES. In the event that the Termination Payment shall
become payable hereunder, the Corporation shall pay, on your behalf, the
fees and expenses of "outplacement" services on your behalf which shall
have been arranged by you, to a maximum of $25,000.
8. TERM. This Agreement shall terminate on the later of (a) the third
anniversary of the date hereof and (b) the expiry of the Window Period in
respect of the last Change in Control which shall have occurred prior to
the third anniversary of the date hereof.
9. FINAL AGREEMENT. It is the intention of the Corporation and you that the
compensation and benefits to be provided to you under this Agreement shall
be the only compensation and benefits to you provided by the Corporation in
the event of your Termination of employment following the Change in
Control, and by your acceptance hereof, you hereby waive any and all other
rights which you might have as a result of such Termination of employment.
10. NOTICE. For purposes of this Agreement, notices and all other
communications shall be in writing and shall be hand delivered and shall be
deemed given when delivered and received addressed to Laidlaw Environmental
Services, 1301 Gervais Street, Suite 300, Columbia, South Carolina 29201,
Attention: Vice President, Administration or to you at the address set
forth on the first page of this Agreement or to such other address as
either party may have furnished to the other in writing in accordance
herewith.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of South Carolina applicable therein.
12. SEVERABILITY. The invalidity or unenforceability of any provision of this
Agreement shall not effect the validity or enforceability of any other
provision of this Agreement which shall remain in full force and effect.
13. COUNTERPARTS. This Agreement may be executed in counterparts, each of which
shall be deemed to be an original but both of which together shall
constitute one and the same instrument.
14. NO CONTRACT OF EMPLOYMENT. Nothing in this Agreement shall be construed as
giving you any right to be retained in the employment of the Corporation.
If the foregoing sets forth our agreement on the subject matter hereof,
kindly sign in the space provided below and return to the President and
Chief Executive Officer of the Corporation for execution by the
Corporation. One fully executed copy of this Agreement shall be returned to
you.
Yours truly,
Laidlaw Environmental Services, Inc.
By:__________________________
By:__________________________
Agreed to this day of
, 1998
- ------------------------
Exhibit 10(m)
(LES-C1)
May 27, 1998
PRIVATE AND CONFIDENTIAL
[FirstName] [LastName]
[Address1]
[City] [State] [PostalCode]
Dear [JobTitle]:
Laidlaw Environmental Services, Inc. (the "Corporation") considers it
essential and in the best interests of its shareholders to foster the continuous
employment of key management personnel. In this regard, the board of directors
of the Corporation (the "Board") has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of the
members of senior management of the Corporation, including yourself, to their
assigned duties without distraction in the face of potentially disturbing
circumstances arising from any possible change in control of the Corporation.
In order to induce you to remain in the employ of the Corporation, the
Corporation has agreed with you that you shall receive the severance benefits
set forth in this letter agreement (this "Agreement") in the event your
employment with the Corporation is terminated subsequent to a Change in Control
(as defined below) under the circumstances described below.
1. CHANGE IN CONTROL. No benefits shall be payable hereunder unless there
shall have been a "Change in Control", which, for purposes of this
Agreement, shall mean Laidlaw Inc. ceasing to be the beneficial owner,
directly or indirectly of 51 per cent or more of the voting shares of the
Corporation and another party or parties acting alone or in concert with
others controls a block or blocks of shares which in the aggregate
represent a larger number of voting shares than those held by Laidlaw Inc.
2. TERMINATION FOLLOWING CHANGE IN CONTROL. If a Change in Control shall have
occurred, you shall be entitled to the benefits provided for herein upon
the subsequent termination of your employment ("Termination") during the
period ("Window Period") beginning upon the date of the Change in Control
and ending on the second anniversary thereof, unless such Termination is
because of your death or retirement, by the Corporation for Cause or by you
other than for Good Reason. For purposes of this paragraph:
a) "Cause" shall mean:
(I) the willful and continued failure by you
substantially to perform your duties with the
Corporation (other than any such failure resulting
from your incapacity due to physical or mental
illness or any such actual or anticipated failure
resulting from Termination by you for Good Reason, as
hereinafter defined) after a written demand for
substantial performance is delivered to you by the
Corporation's board of directors ("Corporation's
Board") or executive management, which demand
specifically identifies the manner in which the
Corporation's Board believes that you have not
substantially performed your duties and you failed to
correct such failure to perform your duties within 30
days after such written demand is delivered to you;
or
(II) the willful engaging by you in conduct that is
demonstrably and materially injurious to the
Corporation, monetarily or otherwise, and no act or
failure to act on your part shall be deemed "willful"
unless done, or omitted to be done, by you not in
good faith and without reasonable belief that your
action or omission was in the best interests of the
Corporation;
b) "Good Reason" shall mean the occurrence, without your
express written consent, of any of the following:
(I) INCONSISTENT DUTIES - a meaningful and
detrimental alteration in your position or in the
nature or status of your responsibilities from those
in effect immediately prior to the Change in Control;
(II) REDUCTION IN REMUNERATION - a reduction by the
Corporation in your annual base salary as in effect
immediately prior to the Change in Control or at any
time during the window period; or a reduction by the
Corporation in long term incentive opportunity as in
effect immediately prior to the Change in Control or
at any time during the window period; or a reduction
by the Corporation in bonus opportunity as in effect
immediately prior to the Change in Control or at any
time during the window period;
(III) RELOCATION - the relocation of the office of
the Corporation where you are employed at the time of
the Change in Control ("the CIC Location") to a
location that is more than 100 miles away from the
CIC Location, or the Corporation requiring you to be
based more than 100 miles away from the CIC Location
(except for required travel on the Corporation
business to an extent substantially consistent with
your customary business travel obligations in the
ordinary course of your business during the year
immediately prior to the Change in Control);
(IV) BENEFITS AND PERQUISITES - the failure by the
Corporation to continue to provide you with benefits
and perquisites at least as favorable as those
enjoyed by you immediately prior to the Change in
Control as may be increased thereafter and prior to
the expiry of the Window Period.
3. TERMINATION PAYMENT. If any event of Termination shall have occurred
during the Window Period and prior to the expiry of
the Term of this Agreement, and you shall have provided written notice
to that effect to the Corporation, you shall be entitled to a payment
("the Termination Payment") in a lump sum (subject to mandatory statutory
tax withholding) in the amount of one month's average compensation for
each year of service subject to a minimum of 12. Average compensation
is equal to the average aggregate monthly salary and bonus paid to you and
cash value of your benefits (excluding the Laidlaw Environmental Services
Supplementary Executive Retirement Plan) and perquisites during the two
fiscal years of the Corporation ended immediately prior to the date
("Termination Payment Date") on which the Termination Payment shall be
due.
4. LAIDLAW ENVIRONMENTAL SERVICES SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN. In
the event that the Termination Payment shall become payable to you
hereunder your service under the Laidlaw Environmental Services
Supplementary Retirement Plan shall be extended for the purposes of
determining your pension entitlement by the number of months used to
determine the Termination Payment and your earnings for the purposes of
determining your pension entitlement as defined by the plan for such period
shall be the Termination Payment reduced by the value of benefits and
perquisites.
5. EMPLOYEE STOCK OPTIONS. Notwithstanding any provision to the contrary
contained in the Terms, Conditions and Restrictions relating to any
applicable Stock Option Plan ("TCR"), in the event that the Termination
Payment shall become payable to you hereunder, all employee stock options
of the Corporation heretofore granted to you and that would become vested
in two years following the Termination Payment Date shall, fully vest. All
stock options which are thus fully vested shall lapse if not exercised
within ninety days following the date of Termination and within ten years
of the grant of the options.
LEGAL COUNSEL FEES. If the Corporation shall fail to comply with its
obligations hereunder or call into question the legal validity of this
Agreement, all reasonable legal counsel fees incurred by you in the course
of seeking to enforce this Agreement shall be for the account and payable
by the Corporation, except to the extent that a court shall determine that
your action in seeking to enforce this Agreement was frivolous.
7. OUTPLACEMENT EXPENSES. In the event that the Termination Payment shall
become payable hereunder, the Corporation shall pay, on your behalf, the
fees and expenses of "outplacement" services on your behalf which shall
have been arranged by you, to a maximum of $25,000.
8. TERM. This Agreement shall terminate on the later of (a) the third
anniversary of the date hereof and (b) the expiry of the Window Period
in respect of the last Change in Control which shall have occurred
prior to the third anniversary of the date hereof.
9. FINAL AGREEMENT. It is the intention of the Corporation and you that
the compensation and benefits to be provided to you under this
Agreement shall be the only compensation and benefits to you provided
by the Corporation in the event of your Termination of employment
following the Change in Control, and by your acceptance hereof, you
hereby waive any and all other rights which you might have as a result
of such Termination of employment.
10. NOTICE. For purposes of this Agreement, notices and all other
communications shall be in writing and shall be hand delivered and
shall be deemed given when delivered and received addressed to Laidlaw
Environmental Services, 1301 Gervais Street, Suite 300, Columbia, South
Carolina 29201, Attention: Vice President, Administration or to you at
the address set forth on the first page of this Agreement or to such
other address as either party may have furnished to the other in
writing in accordance herewith.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of South Carolina applicable
therein.
12. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not effect the validity or enforceability of any
other provision of this Agreement which shall remain in full force and
effect.
13. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but both of which together
shall constitute one and the same instrument.
14. NO CONTRACT OF EMPLOYMENT. Nothing in this Agreement shall be construed
as giving you any right to be retained in the employment of the
Corporation.
If the foregoing sets forth our agreement on the subject matter hereof,
kindly sign in the space provided below and return to the President and Chief
Executive Officer of the Corporation for execution by the Corporation. One fully
executed copy of this Agreement shall be returned to you.
Yours truly,
Laidlaw Environmental Services, Inc.
By:__________________________
By:__________________________
Agreed to this day of
, 1998
- ------------------------
EXHIBIT 12
<TABLE>
<CAPTION>
Laidlaw Environmental Services, Inc.
Ratio of Earnings to Fixed Charges
($ in thousands)
YEAR ENDED AUGUST 31 1998 1997 1996 1995 1994
- -------------------- ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations before
income tax ...................... $20,352 $(306,122) $11,860 $21,684 $25,731
Add:
Portion of rents representative
of the interest factor ........ 16,841 12,033 11,967 11,800 8,577
Interest on indebtedness,
including amortization of
deferred financing charges..... 107,697 44,273 46,850 41,142 34,000
------- ------ ------ ------ -------
Income as adjusted $144,890 $(249,816) $70,677 $74,626 $68,308
========= ========== ======= ======== =======
Fixed charges:
Portion of rents representative
of the interest factor........ $16,841 $12,033 $11,967 $11,800 $8,577
Interest on indebtedness,
including amortization of
deferred financing charges.... 107,697 44,273 46,850 41,142 34,000
-------- -------- ------- ------- -------
Total fixed charges $124,538 $56,306 $58,817 $52,942 $42,577
======== ======= ======= ======== =======
Ratio of earnings to
fixed charges 1.16 (4.44) 1.20 1.41 1.60
==== ====== ==== ===== ====
</TABLE>
REPORT OF INDEPENDENT ACCOUNTS
To the Stockholders and Directors of
Laidlaw Environmental Services, Inc.
d/b/a Safety-Kleen Corp.
Our report on the consolidated financial statements of Safety-Kleen Corp. has
been incorporated by reference in this Form 10-K from page 20 of the 1998
Annual Report to Stockholders of Safety-Kleen Corp. In connection with our
audits of such financial statements, we have also audited the related
financial statement schedule listed in the exhibit index in this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
October 6, 1998
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights & Selected Financial Data
YEAR ENDED AUGUST 31 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues ...................... $ 1,185,473 $ 678,619 $ 652,973 $ 599,241 $ 517,804
Operating income (loss)* ...... $ 120,392 $ (264,714) $ 57,319 $ 59,859 $ 45,548
Income (loss) from
continuing operations* ...... $ 11,488 $ (183,452) $ 6,714 $ 16,765 $ 22,531
Income (loss) per share
from continuing operations... $ 0.05 $ (1.33) $ 0.06 $ 0.14 $ 0.19
Dividends per common share..... $ -- $ -- $ -- $ -- $ --
Total assets .................. $ 4,468,895 $ 1,610,878 $ 1,491,294 $ 1,367,411 $ 974,053
Long-term debt ................ $ 1,930,168 $ 540,096 $ 55,838 $ 64,256 $ 18,454
Weighted average common
stock outstanding (000's).... 249,287 138,033 120,000 120,000 120,000
*Includes restructuring and other charges of $65.8 million in 1998
and $331.7 million in 1997.
</TABLE>
<PAGE>
12
safety-kleen corp.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related notes thereto included
elsewhere herein.
The historical financial information included herein is that of the
hazardous and industrial waste operations ("Old LESI" or the "Accounting
Acquirer") of Laidlaw Inc. ("Laidlaw"). As a result of the reverse acquisition
of Rollins Environmental Services, Inc. ("Rollins") on May 15, 1997 (the
"Rollins Acquisition"), the results of the operations of Rollins have been
included from the date of the Rollins Acquisition.
Results associated with the acquired operations of Safety-Kleen Corp.
("Old Safety-Kleen") have been included as of April 1, 1998, the date of the
acquisition (the "Safety-Kleen Acquisition").
The following discussion and analysis includes statements that are
considered forward-looking based on the Company's expectations and, as such,
these statements are subject to uncertainty and risk. See "Factors That May
Affect Future Results" below.
RESULTS OF OPERATIONS:
Operating results, before restructuring and other charges and extraordinary
items, are as follows ($ in millions):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues .................................... $ 1,185.5 100.0% $ 678.6 100.0%
Operating expense ........................... 797.4 67.3% 485.1 71.5%
Depreciation and amortization ............... 93.1 7.8% 53.5 7.9%
Selling, general and administrative ......... 108.8 9.2% 73.1 10.7%
- ----------------------------------------------------------------------------------------------
Operating income ............................ $ 186.2 15.7% $ 66.9 9.9%
- ----------------------------------------------------------------------------------------------
Revenues
Components of revenue ($ in millions):
FISCAL YEAR ENDED AUGUST 31 1998 1997
- ----------------------------------------------------------------------------------------------
Collection and Recovery
Industrial Services ....................... $ 585.3 50% $ 394.1 58%
Commercial and Institutional Services ..... 227.7 19% 0.0 0%
- ----------------------------------------------------------------------------------------------
Total Collection and Recovery ............... 813.0 69% 394.1 58%
Treatment and Disposal
Thermal Treatment ......................... 106.9 9% 54.3 8%
Landfill .................................. 93.7 8% 141.8 21%
Specialty Services ........................ 124.0 10% 88.4 13%
- ----------------------------------------------------------------------------------------------
Total Treatment and Disposal ................ 324.6 27% 284.5 42%
European Operations ......................... 47.9 4% 0.0 0%
- ----------------------------------------------------------------------------------------------
Total revenues .......................... $1,185.5 100% $ 678.6 100%
- ----------------------------------------------------------------------------------------------
</TABLE>
Revenues increased $506.9 million, or 74.7%, during the fiscal year
ended August 31, 1998, compared to the fiscal year ended August 31, 1997.
Revenue from collection and recovery services to industrial customers increased
$191.2 million, or 48.5%, while the addition of collection and recovery services
to commercial and institutional customers generated an additional $227.7
million. Increased revenue from industrial services reflects the inclusion of
the acquired Old Safety-Kleen and Rollins businesses while the commercial and
institutional component reflects business acquired with Old Safety-Kleen
exclusively. Revenue from treatment and disposal services increased $40.1
million, or 14.1% , primarily due to the acquired Rollins business as well as
increased harbor related dredging, treatment and disposal activities. Landfill
disposal revenue declined due to a shortfall in remedial and other project work
providing volumes destined for hazardous waste landfill sites and due to the
sale of an industrial and solid waste landfill on December 18, 1997. The
acquired European operations of Old Safety-Kleen provided an additional $47.9
million in revenue. European operations derives its revenue from collection and
recovery services.
<PAGE>
13
safety-kleen corp.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company eliminates inter-company revenues in presenting consolidated
financial results. The majority of such eliminations occur at the Company's
disposal facilities which receive waste streams from the Company's collection
and recovery services network.
For comparison purposes, the operations of the Company, excluding those
operations of Old Safety-Kleen, directed 76% of its waste streams to internal
disposal locations, up from 68% in the prior year.
Management's estimate of the components of the changes in the Company's
consolidated revenue are as follows:
PERCENTAGE INCREASE (DECREASE)
- ------------------------------------------------------------------------------
Expansion of customer base by acquisition ........................ 80.4 %
Other, primarily through volume and price changes ................ 3.0 %
Divestitures and closures ........................................ (7.9)%
Foreign exchange rate changes .................................... (0.8)%
- ------------------------------------------------------------------------------
Total ............................................................ 74.7 %
The comparative increase in revenue for the fiscal year ended August
31, 1998 was primarily due to the inclusion of the acquired operations of Old
Safety-Kleen from April 1, 1998 and the inclusion of Rollins for the full fiscal
year compared to its inclusion as of May 15, 1997 in the prior year. Current
revenues from existing operations grew as a result of increased activity at the
Company's harbor-related dredging, treatment and placement operations but were
partially offset by reduced volumes at certain hazardous waste landfills. Prior
year revenues included contributions from an industrial and municipal solid
waste landfill which was divested on December 18, 1997. A reduction in revenues
due to foreign exchange rate changes resulted from a relative decline in the
Canadian dollar translation rate.
The Company believes that the Safety-Kleen Acquisition will provide an
opportunity to achieve revenue growth of 10-12% by the end of fiscal year 1999.
This projected growth will primarily benefit the industrial services component,
where the Company expects to increase its market share by offering an expanded
scope of waste services, primarily due to the extensive capabilities of the Old
LESI facilities, to the existing 120,000 Old Safety-Kleen industrial services
customers, as well as continuing to penetrate the industrial parts cleaner
market with new aqueous-based units. Growth in the commercial and institutional
services component is expected to be realized through the expansion of new
service offerings to existing customers, such as vacuum services and paint gun
cleaning units, and by continuing to expand into new markets, such as imaging
services, where both internal growth and tuck-in acquisitions are expected to
result in significant revenue growth opportunities.
Historically, Old LESI and Old Safety-Kleen have generated internal
revenue growth of 3-5%. The Company's ability to achieve the 10-12% revenue
growth outlined above will be affected by market conditions and the success of
the integration of the Old LESI disposal facility capabilities and the Old
Safety-Kleen sales and service network.
Based on Old Safety-Kleen's historical trends and current market
conditions, the Company expects price growth to average 2-3%, with the balance
of the revenue growth coming from increased market share.
The Company expects that the inclusion of the Old Safety-Kleen
operations for a full year will result in the following allocation of revenue
between the identified components: industrial services 46%, commercial and
institutional services 29%, treatment and disposal services 19%, and European
operations 6%.
OPERATING EXPENSES
Operating expenses increased $312.3 million, or 64.4%, during the fiscal year
ended August 31, 1998, compared to the fiscal year ended August 31, 1997. The
increase was primarily attributable to additional business obtained as part of
the acquisitions of Old Safety-Kleen and Rollins. As a percentage of revenue,
operating expense decreased to 67.3% from 71.5% in the prior year, primarily due
to stabilized pricing, the increased utilization of existing facilities and
acquisition related cost reduction measures.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $39.6 million, or 74.0%, during
the fiscal year ended August 31, 1998, compared to the prior year. The increase
related to the acquired operations of Old Safety-Kleen and Rollins. As a
percentage of revenue, depreciation and amortization expense was relatively
unchanged at 7.8%, compared to 7.9% in the prior year.
<PAGE>
14
safety-kleen corp.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $35.7 million, or 48.8%
during the fiscal year ended August 31, 1998, compared to the prior year. As
a percentage of revenue, selling, general and administrative expenses decreased
to 9.2% from 10.7% in the prior year due to cost reduction measures and
economies of scale gained through the Safety-Kleen and Rollins Acquisitions.
RESTRUCTURING AND OTHER CHARGES
A one-time restructuring charge of $65.8 million ($39.5 million after tax, or
$0.12 per share on a diluted basis) impacted the current year earnings. The
charge included the costs associated with the closing and remediation of certain
of the existing operating facilities that have become redundant and other exit
activities as a result of the Safety-Kleen Acquisition. $31.8 million of the
charge relates to the non-cash write-off of existing facility carrying values,
and $34.0 million represents cash costs to be expended during subsequent
periods. Based upon the historical operating levels for Old Safety-Kleen and Old
LESI, management anticipates that the Company can achieve cash cost reductions
related to the Safety-Kleen Acquisition of approximately $165 million annually,
within twelve months of the Safety-Kleen Acquisition. The cash reductions are
expected to be generated by the elimination of duplicative administrative
functions; the benefits of internalizing waste disposal activities and the
consolidation and closure of branch and processing operations. The Company's
ability to achieve the cash cost reductions will be affected by various factors,
including market conditions, successful implementation of the Company's
integration strategy, and obtaining certain regulatory approvals.
In fiscal 1997, the Company recorded a restructuring charge of $331.7
million, ($200.0 million after tax) related to the Rollins Acquisition, of which
the expected cash costs were $25 million. The Company has subsequently charged
cash expenditures of $14.4 million against the 1997 Rollins restructuring
reserves, leaving a balance of $10.6 million for which cash expenditures related
primarily to environmental accruals will be expended in subsequent periods. See
Liquidity for a discussion of the cash expenditures expected to be incurred in
fiscal year 1999 related to both the Rollins and Safety-Kleen Acquisitions.
INTEREST EXPENSE
Interest expense increased $63.4 million, or 143.3%, during the fiscal year
ended August 31, 1998 over the prior year, primarily as a result of the
recapitalizations related to the Safety-Kleen and Rollins Acquisitions. Prior to
May 15, 1997, interest expense was allocated from the parent corporation,
Laidlaw.
Based on existing market conditions, the Company's average interest rate
is approximately 8.0% of which 56% was fixed at August 31, 1998. The Company
capitalized $4.1 million of interest costs during the year.
OTHER INCOME
Other income increased by $4.8 million from the prior fiscal year, due primarily
to an increase in funds available for short term investment, as a result of the
recapitalizations related to the Safety-Kleen and Rollins Acquisitions. Interest
income earned on a promissory note received on the sale of a Utah landfill also
contributed to the increase over 1997.
INCOME TAX EXPENSE
Prior to May 15, 1997, income tax expense was allocated from the parent
corporation using applicable income tax rates on income for tax purposes on a
separate return basis. Effective May 15, 1997, the Company began filing federal
and state income tax returns separately.
EXTRAORDINARY LOSS
In April 1998, the Company replaced its existing Bank Credit Facility with a
Senior Credit Facility and recognized an extraordinary charge of $18.8 million
($11.3 million after tax or $0.03 per share on a diluted basis) related to the
write-off of previous deferred debt issuance costs and repayment penalties.
<PAGE>
15
safety-kleen corp.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS:
Operating results, before the restructuring charge, are as follows ($ in
millions):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues ................................ $ 678.6 100.0% $ 653.0 100.0%
Operating expense ........................ 485.1 71.5% 473.6 72.5%
Depreciation and amortization ............ 53.5 7.9% 48.3 7.4%
Selling, general and administrative ...... 73.1 10.7% 73.8 11.3%
- ----------------------------------------------------------------------------------------------
Operating income ......................... $ 66.9 9.9% $ 57.3 8.8%
- ----------------------------------------------------------------------------------------------
REVENUES
Components of revenue ($ in millions)
FISCAL YEAR ENDED AUGUST 31 1997 1996
- ----------------------------------------------------------------------------------------------
Collection and Recovery
Industrial Services .................... $ 394.1 58% $ 375.5 58%
Commercial and Institutional Services .. 0.0 0% 0.0 0%
- ----------------------------------------------------------------------------------------------
Total Collection and Recovery ............ 394.1 58% 375.5 58%
Treatment and Disposal
Thermal Treatment ...................... 54.3 8% 22.0 3%
Landfill ............................... 141.8 21% 174.7 27%
Specialty Services ..................... 88.4 13% 80.8 12%
- ----------------------------------------------------------------------------------------------
Total Treatment and Disposal ............. 284.5 42% 277.5 42%
Total revenues ......................... $ 678.6 100% $ 653.0 100%
- ----------------------------------------------------------------------------------------------
</TABLE>
Revenues increased by $25.6 million, or 3.9%, during the fiscal year
ended August 31, 1997, compared to the fiscal year ended August 31, 1996,
supported primarily by increases in the industrial services and thermal
treatment lines of business. Revenue for industrial services increased 5.0% from
fiscal year 1996 reflecting the inclusion of the acquired Rollins facilities
effective May 15, 1997. Thermal treatment revenue increased 146.8% over the
prior year, also reflecting the Rollins Acquisition. Landfill revenue decreased
18.8% primarily due to non-recurring event projects performed in the prior year
period by the Company's industrial landfill in Utah. Specialty services revenue
increased 9.4% from the prior year primarily due to increased harbor related
dredging, treatment and placement activity.
The Company eliminates inter-company revenues in presenting consolidated
financial results. The majority of such eliminations occur at the Company's
disposal facilities which receive waste streams from the Company's collection
and recovery services network. For the fiscal year ended August 31, 1997, the
Company directed 68% of its waste streams to internal locations, up from 60% in
the prior year.
Management's estimate of the components of the changes in the Company's
consolidated revenue are as follows:
PERCENTAGE INCREASE (DECREASE)
- -------------------------------------------------------------------------------
Expansion of customer base by acquisition .......................... 6.7 %
Other, primarily through volume and price changes .................. (1.6)%
Divestitures and closures .......................................... (1.1)%
Foreign exchange rate changes ...................................... (0.1)%
- -------------------------------------------------------------------------------
Total .............................................................. 3.9 %
- -------------------------------------------------------------------------------
The comparative increase in revenue for the year ended August 31, 1997
was primarily due to the inclusion of acquired operations, the majority of which
related to the Rollins Acquisition. The increase was partially offset by lower
pricing and volumes received in the early portion of fiscal 1997. Lower volumes
were primarily related to dredging activities performed throughout the prior
year by the Company's industrial waste landfill in Utah. Revenue decreased due
to pricing and volume reductions at the Company's government services locations,
the closure of a wastewater facility in May 1997, and the Company's planned
downsizing of its Gulf Coast remedial operations. The negative effect of these
reductions from price, volume and closure were diminished in the aggregate due
to improvements from increased activity at certain of the Company's landfills
and at its PCB management operations.
<PAGE>
16
safety-kleen corp.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
OPERATING EXPENSES
Operating expenses for the year ended August 31, 1997 increased $11.5 million,
or 2.4%, from the year ended August 31, 1996. The increase was primarily due to
the Rollins Acquisition. As a percentage of revenue, operating expense decreased
to 71.5% from 72.5% in the prior year due to economies of scale gained through
the Rollins Acquisition and ongoing cost reduction initiatives.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased $5.2 million, or 10.8%, during
the year ended August 31, 1997 compared to the year ended August 31, 1996. The
increase was associated with increased hazardous landfill cell consumption and
related amortization; the inclusion of the Clive, Utah incineration facility
depreciation expense as of September 1, 1996, and depreciation and amortization
expense related to the Rollins Acquisition as of May 15, 1997. As a
percentage of revenue, depreciation and amortization expense increased to
7.9% from 7.4% during the prior year period due in part to the higher hazardous
landfill disposal as a proportion of total revenue and the inclusion of the
Clive facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $0.7 million, or 1.0%,
during the year ended August 31, 1997, versus the prior year. The decrease was
attributable to a number of cost reduction initiatives implemented and completed
during the period. As a percentage of revenue, selling, general and
administrative expenses decreased to 10.7% from 11.3% in the prior year due to
cost reduction measures and economies of scale gained through the Rollins
Acquisition.
RESTRUCTURING CHARGE
A one-time restructuring charge of $331.7 million ($200 million after tax, or
$1.45 per share) impacted fiscal 1997 earnings. The charge reflected the closing
of certain of the operating facilities that had become redundant and an
impairment in the carrying value of certain operating facilities due to lower
expected future cash flows, as a result of the Rollins Acquisition.
ALLOCATED INTEREST EXPENSE
Allocated interest expense decreased $17.5 million primarily as a result of the
recapitalization related to the Rollins Acquisition. Prior to May 15, 1997,
interest expense was allocated to Old LESI from the parent corporation, Laidlaw.
INTEREST EXPENSE
Interest expense increased by $14.9 million from the prior fiscal year primarily
as a result of the recapitalization related to the Rollins Acquisition.
Effective May 15, 1997, interest expense includes financing costs associated
with the Bank Credit Facility, other long-term debt and the Subordinated
Convertible Debenture.
OTHER INCOME
Other income increased by $1.5 million from the prior fiscal year primarily as a
result of the recapitalization related to the Rollins Acquisition and a
resultant increase in funds available for short-term investment.
INCOME TAX EXPENSE (BENEFIT)
Prior to May 15, 1997, income tax expense was allocated from the parent
corporation using applicable income tax rates on income for tax purposes on a
separate return basis. Effective May 15, 1997, the Company began filing federal
and state income tax returns separately.
EARNINGS PER SHARE
Basic earnings per share ("EPS") for fiscal 1998 on reported net income of nil,
comprises a $0.05 loss for the extraordinary item, a $0.16 (net of tax) loss for
the restructuring and other charges, and $0.21 for income from continuing
operations before the restructuring and other charges. Diluted EPS from
continuing operations before the restructuring and other charges were $0.18.
<PAGE>
17
safety-kleen corp.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report contains various forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including financial,
operating and other projections. These statements are based on current plans and
expectations of the Company and involve risks and uncertainties that could cause
actual future activities and results of operations to be materially different
from those set forth in the forward-looking statements.
Important factors that could cause actual results to differ include,
among others, risks associated with acquisitions and achieving targeted cost
savings levels, fluctuations in operating results because of acquisitions,
changes in applicable government regulations (environmental and other), the
impact of litigation, competition, changes in prices for petroleum-based
products, and risks associated with the operations and growth of the newly
acquired business of Old Safety-Kleen and Rollins and other factors described in
Part I, Item 1 of the Company's report on Form 10-K for the fiscal year ended
August 31, 1998. As a result of these factors, the Company's revenue and income
could vary significantly from quarter to quarter, and past financial performance
should not be considered a reliable indicator of future performance.
CAPITALIZATION
On April 1, 1998, the Company announced that Old Safety-Kleen shareholders had
accepted its exchange offer, as amended on March 16, 1998, relating to the
acquisition of Old Safety-Kleen by the Company. Under the terms of the offer,
the Company exchanged $18.30 and 2.8 common shares of Company stock for each Old
Safety-Kleen share tendered. In May 1998, the Company completed the acquisition
of Old Safety-Kleen through a back-end merger, approved by the Old Safety-Kleen
shareholders on May 18, 1998. The total consideration of approximately $2.2
billion, including debt assumed and estimated transaction costs, was comprised
of $1.5 billion cash and 166.5 million shares of Company common stock. The cash
consideration and the refinancing of certain existing indebtedness was financed
from the proceeds of a $2.2 billion Senior Credit Facility (the "Senior Credit
Facility").
On May 29, 1998, Safety-Kleen Services, Inc., a wholly-owned subsidiary
of the Company, issued $325 million of 9.25% Senior Subordinated Notes due 2008
(the "Notes") in a private offering. Net proceeds from the sale of the Notes,
after the underwriting discount and other expenses, were approximately $316
million. The proceeds were used to repay a portion of the borrowings outstanding
under the Senior Credit Facility.
LIQUIDITY
The cash provided by continuing operations during fiscal years 1998, 1997 and
1996 was $87.6 million, $37.0 million and $21.9 million, respectively. In 1998,
cash from operations was comprised of $192.0 million from operations before
financing working capital requirements of $47.1 million and $57.3 million
related to spending on acquisitions liabilities.
As a direct result of the personnel reductions and facility closures
related to the Rollins and Safety-Kleen Acquisitions, the Company plans to incur
salary and benefit related costs and closure costs in fiscal year 1999 of
approximately $60 million. A significant portion of these cash costs will be
offset by the anticipated proceeds from disposal of Old Safety-Kleen facilities
during fiscal 1999.
The Company believes that the existing level of working capital of $11
7.4 million is adequate for normal growth and operating needs. Trade and other
accounts receivable continues to represent the largest portion of current
assets, totaling $320.0 million at August 31, 1998. The average days sales
outstanding reduced to 66 days, from 93 days at August 31, 1997 primarily
attributable to the lower average days outstanding of the Old Safety-Kleen
operations. The Company's primary sources of liquidity are cash flows from
operations, existing cash and short-term investments of $16.3 million,
short-term unused working capital bank lines of $45.0 million and the unused
cash portion of the Senior Credit Facility's revolver tranche of $192.0 million.
Interest payments for the Company's Pay In Kind (PIK) convertible debentures are
due semiannually, on November 15 and May 15 until its maturity on May 15, 2009.
Interest payments due during the first two years after the Safety-Kleen
Acquisition are required to be satisfied by the issuance of the Company's common
shares, based on the market price of the common shares at the time the interest
payments are due. At the Company's option, any other interest or principal
payments (other than optional early redemption) may be satisfied by issuing
common shares, based on the market price at the time such payments are due.
<PAGE>
18
safety-kleen corp.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company expects to fund the debt repayment and environmental
liability requirements outlined in Notes 5 and 7 of the Notes to Consolidated
Financial Statements from cash flows from operations.
The Company has not paid dividends during the reported periods, and does
not intend to pay dividends in the foreseeable future. Additionally, the Senior
Credit Facility prohibits the payment of dividends (unless a given percentage of
lenders otherwise agree).
CAPITAL EXPENDITURES AND CAPITAL RESOURCES
Investing activities from continuing operations used cash of $1,293.3 million,
$21.9 million and $114.9 million in fiscal years 1998, 1997 and 1996,
respectively. In 1998, $1,281.5 million was incurred in connection with the
Safety-Kleen Acquisition. Net expenditures for the purchase of fixed assets for
normal replacement requirements and increases in services were $50.8 million,
$36.1 million and $104.3 million in fiscal years 1998, 1997 and 1996,
respectively. The Company's projected capital expenditures for fiscal 1999 are
approximately $80.0 million. The Company believes that it has adequate resources
to finance these expenditures.
The Senior Credit Facility also contains negative, affirmative and
financial covenants customarily found in credit agreements for financings
similar to the financing provided under the Senior Credit Facility, including
covenants limiting annual capital expenditures, restricting debt, guaranties,
liens, mergers and consolidations, sales of assets and payment of dividends. The
Company was in compliance with all of its covenants at August 31, 1998.
INFLATION
During the periods presented herein, the Company's business has not been and is
not expected in the near future to be, significantly affected by inflation.
YEAR 2000 ISSUES
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer programs
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
During fiscal 1997 the Company developed a three-phase program for Y2K systems
compliance. Phase I identified those systems with respect to which the Company
has exposure to Y2K issues. Phase II was the development and implementation of
action plans for Y2K compliance. Phase III, to be completed by mid-calendar year
1999, is the final testing of the appropriate major areas of exposure to ensure
compliance.
Phase I was completed in early fiscal 1998 and identified three major
areas of Y2K non-compliance:
(1) certain modules of the Company's financial and operational systems,
(2) incinerator distributed control systems, and
(3) third-party vendor relationships.
The Phase II action plans have been developed and the Company is
currently implementing those remedial plans. The Company's plan to bring
deficient financial systems into compliance through the previously scheduled
purchase of software upgrades has been accomplished and these upgrades have
tested satisfactorily. Remediation of the operational systems is substantially
complete. Work on the final three operational systems is underway and is
expected to be completed by the first quarter of calendar year 1999. The
deficiencies in the incinerator distributed control systems will be remedied by
the installation of upgrades purchased from the systems vendors. With respect to
the third-party vendors, the Company has contacted most of its major suppliers
and has received indications that they are either compliant or intend to be
compliant by mid-calendar year 1999.
<PAGE>
19
safety-kleen corp.
Management's Discussion and Analysis of Financial Condition and Results
of Operations
In April 1998, the Company acquired Old Safety-Kleen. Old Safety-Kleen
had been following a similar process as the Company to identify its exposure to
Y2K issues. Phase I had been completed prior to the Safety-Kleen Acquisition and
Old Safety-Kleen was proceeding with Phases II and III. Subsequent to the
Safety-Kleen Acquisition, the Phase II plans have been modified to reflect the
integration of the financial and operational systems of the two companies. The
two major areas that were identified as critical for Old Safety-Kleen's Y2K
compliance are:
(1) the operating systems, and
(2) third-party vendor relationships.
Phase II work began in the fourth quarter of calendar year 1997 and will
be accomplished through a combination of hardware and software upgrades and
program changes. The Company expects this process to be completed by
mid-calendar year 1999. With respect to the third-party vendors, the Company has
contacted most of Old Safety-Kleen's major suppliers and has received
indications that they are either compliant or intend to be compliant by
mid-calendar year 1999.
The Company believes it will spend approximately $10 million for Y2K
compliance and will require 20,000 programming man days to bring the Company's
computer systems into compliance, including Old Safety-Kleen issues. To date,
the Company has completed approximately 13,000 programming man days towards this
effort. Including Old Safety-Kleen issues, $ 1.4 million was incurred in fiscal
year 1998, with the balance to be incurred in fiscal year 1999.
The Company believes that the action plans that have been developed and
the implementation time frames that have been established adequately allow for
unexpected issues that could arise, therefore, contingency plans have not been
prepared. The Company will monitor the remaining time to complete the
implementation and will review the requirement to prepare contingency plans on a
monthly basis.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), effective for periods
beginning after December 15, 1997. SFAS 130, which will be adopted in the first
quarter of the year ending August 31, 1999, establishes standards for reporting
and displaying comprehensive income and its components. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources and includes all changes in
equity during a period except those resulting from investments by and
distributions to owners. Adoption of this standard will only require additional
financial statement disclosures.
In June 1997, FASB issued Statement No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"), effective for periods
beginning after December 15, 1997. SFAS 131, which will be adopted as of August
31, 1999, establishes standards for the reporting by public business enterprises
of information about operating segments in interim and annual financial
statements. The Company is currently evaluating the impact, if any, the
implementation of this standard will have on the disclosures in the consolidated
financial statements.
In June 1998, FASB issued Statement No. 133, "Accounting of Derivative
Instruments and Hedging Activities" ("SFAS 133"), effective for periods
beginning after June 15, 1999. SFAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of the derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction, and if it is, the type of hedge transaction. The Company
anticipates that the adoption of this standard will not have a significant
effect on the Company's results of operations or its financial position.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), effective for
periods beginning after December 15, 1998. SOP 98-1 provides guidance on
defining internal use software and the accounting for the costs thereof.
The Company anticipates that the adoption of this statement will not have a
significant effect on the Company's results of operations or its
financial position.
<PAGE>
20
safety-kleen corp.
Report of Independent Accountants
TO THE STOCKHOLDERS AND DIRECTORS OF SAFETY-KLEEN CORP.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows, and changes in stockholders'
equity present fairly, in all material respects, the financial position of
Safety-Kleen Corp. and its subsidiaries at August 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
CHARLOTTE, NORTH CAROLINA
OCTOBER 6, 1998
<PAGE>
21
safety-kleen corp.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED AUGUST 31 1998 1997 1996
- --------------------------------------------------------------------------------
($ in thousands, except per share amounts)
Revenues ............................... $1,185,473 $ 678,619 $ 652,973
- --------------------------------------------------------------------------------
Expenses:
Operating .......................... 797,382 485,062 473,563
Depreciation and amortization ...... 93,051 53,506 48,291
Selling, general and administrative 108,817 73,068 73,800
Restructuring and other charges ....... 65,831 331,697 --
- --------------------------------------------------------------------------------
Total expenses ........................ 1,065,081 943,333 595,654
- --------------------------------------------------------------------------------
Operating income (loss) ................... 120,392 (264,714) 57,319
Allocated interest expense ................ -- 24,030 41,506
Interest expense .......................... 107,697 20,243 5,344
Other income .............................. 7,657 2,865 1,391
- --------------------------------------------------------------------------------
Income (loss) from continuing operations
before income tax ..................... 20,352 (306,122) 11,860
Income tax expense (benefit) .............. 9,133 (122,789) 2,500
- --------------------------------------------------------------------------------
Income (loss) from continuing operations
before minority interest .............. 11,219 (183,333) 9,360
Minority interest, net of tax ............. 269 (119) (2,646)
- --------------------------------------------------------------------------------
Income (loss) from continuing operations 11,488 (183,452) 6,714
Income from discontinued operations,
net of tax ............................ -- 20 1,496
- --------------------------------------------------------------------------------
Income (loss) before extraordinary items 11,488 (183,432) 8,210
Extraordinary loss, net of tax of $7,494... (11,283) -- --
- --------------------------------------------------------------------------------
Net income (loss) ..................... $ 205 $(183,432) $ 8,210
- --------------------------------------------------------------------------------
Basic and diluted income (loss) per share:
Income (loss) from continuing
operations........................... $ 0.05 $ (1.33) $ 0.06
Income from discontinued operations ... -- -- 0.01
Extraordinary loss, net of tax ........ (0.05) -- --
- --------------------------------------------------------------------------------
Net income (loss) ..................... $ - $ (1.33) $ 0.07
- --------------------------------------------------------------------------------
Weighted average common stock
outstanding (000's).................... 249,287 138,033 120,000
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
22
safety-kleen corp.
CONSOLIDATED BALANCE SHEETS
YEAR ENDED AUGUST 31 1998 1997
- --------------------------------------------------------------------------------
($ in thousands)
ASSETS
Current assets
Cash and cash equivalents ....................... $ 16,333 $11,160
Trade and other accounts receivable
(net of allowance for doubtful accounts
of $10,816 in 1998; $7,236 in 1997) ........... 320,048 210,914
Inventories and supplies ........................ 53,759 7,927
Income taxes recoverable ........................ 37,495 --
Deferred income taxes ........................... 69,426 13,027
Other current assets ............................ 45,273 8,512
- --------------------------------------------------------------------------------
Total current assets .......................... 542,334 251,540
- --------------------------------------------------------------------------------
Long-term investments 35,926 51,909
- --------------------------------------------------------------------------------
Land, landfill sites and improvements ............... 504,308 499,326
Buildings ........................................... 1,115,137 412,070
Machinery and equipment ............................. 1,495,643 607,296
Leasehold improvements .............................. 32,815 7,709
Construction in process ............................. 14,965 15,608
- --------------------------------------------------------------------------------
Property, plant and equipment ................... 3,162,868 1,542,009
Less: Accumulated depreciation
and amortization .............................. (312,366) (305,440)
- --------------------------------------------------------------------------------
Net property, plant and equipment ................... 2,850,502 1,236,569
- --------------------------------------------------------------------------------
Goodwill, at cost (net of accumulated amortization
of $23,345 in 1998; $11,669 in 1997) ............ 1,023,154 70,527
Other assets ........................................ 16,979 333
- --------------------------------------------------------------------------------
Total assets .................................... $4,468,895 $1,610,878
- --------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable ................................ $ 128,560 $ 48,148
Accrued liabilities 219,352 115,211
Current portion of long-term debt ............... 77,004 12,086
- --------------------------------------------------------------------------------
Total current liabilities ..................... 424,916 175,445
Environmental and other long-term liabilities ....... 259,459 179,668
Long-term debt ...................................... 1,853,164 528,010
Subordinated convertible debenture .................. 350,000 350,000
Deferred income taxes ............................... 566,650 49,790
- --------------------------------------------------------------------------------
Total liabilities ............................... 3,454,189 1,282,913
- --------------------------------------------------------------------------------
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share;
authorized 750,000,000, issued and
outstanding 350,984,971 in 1998,
180,435,311 in 1997 ............................... 350,985 180,435
Additional paid-in capital .......................... 919,308 385,200
Cumulative foreign currency translation adjustment... (18,828) (706)
Accumulated deficit ................................. (236,759) (236,964)
- --------------------------------------------------------------------------------
Total stockholders' equity .................... 1,014,706 327,965
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity ...... $4,468,895 $1,610,878
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
23
safety-kleen corp.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
($ in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ...................................... $ 205 $ (183,432) $ 8,210
Adjustments to reconcile net income (loss) to net
cash provided by continuing operations:
Income from discontinued operations ................ -- (20) (1,496)
Extraordinary loss, net of applicable income tax ... 11,283 -- --
Restructuring charge, net of applicable income taxes 39,499 200,000 --
Depreciation and amortization ...................... 93,051 53,506 48,291
Deferred income taxes .............................. 21,681 37,507 783
Change in accounts receivable ...................... 7,902 (8,151) (1,719)
Change in accounts payable and accrued
and long-term liabilities ........................ (18,617) (52,632) (30,692)
Decrease in liabilities assumed upon acquisition ... (40,922) (17,945) --
Restructuring and other charge payments ............ (16,338) -- --
Change in other, net ............................... (10,117) 8,126 (1,428)
- ------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations ............. 87,627 36,959 21,949
Net cash provided by discontinued operations ........... -- 425 3,199
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities .......... 87,627 37,384 25,148
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash acquired (expended) on acquisition of business (1,281,495) 15,451 (8,000)
Purchase of property, plant and equipment .......... (50,754) (36,097) (104,284)
Increase in long-term investments .................. (2,478) (2,837) --
Proceeds from sales of property, plant and equipment 13,433 1,596 3,319
Proceeds from sale of business ..................... 33,675 -- --
Change in other, net ............................... (5,716) -- (5,984)
- ------------------------------------------------------------------------------------------------------
Net cash used in continuing operations ................. (1,293,335) (21,887) (114,949)
Net cash used in discontinued operations ............... -- (1,887) (5,026)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities .............. (1,293,335) (23,774) (119,975)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock on exercise
of stock options ................................... 509 -- --
Borrowings of long-term debt ....................... 1,856,814 451,622 --
Bank financing fees and expenses ................... (50,538) (18,788) --
Bank overdraft ..................................... 12,992 (32,188) 21,880
Repayment of long-term debt ........................ (604,684) (61,542) (7,548)
Payment to Laidlaw Inc. ............................ -- (349,116) --
Advances from Laidlaw Inc. ......................... -- 7,562 82,913
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing operations ... 1,215,093 (2,450) 97,245
Net cash used in discontinued operations ............... -- -- (2,418)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in)financing activities . 1,215,093 (2,450) 94,827
- ------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash ................ (4,212) -- --
- ------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents .............. 5,173 11,160 --
Cash and cash equivalents at:
Beginning of period ................................ 11,160 -- --
- ------------------------------------------------------------------------------------------------------
End of period ...................................... $ 16,333 $ 11,160 $ --
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest ........................................... $ 78,008 $ 26,660 $ 34,050
- ------------------------------------------------------------------------------------------------------
Income taxes ....................................... $ 1,253 $ -- $ --
- ------------------------------------------------------------------------------------------------------
<PAGE>
24
safety-kleen corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS-CONTINUED
YEAR ENDED AUGUST 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------
($ in thousands)
NON-CASH INVESTING AND FINANCING ACTIVITIES
Business combinations
Fair value of assets acquired ................... $ 2,949,100 $ 495,168 $ --
Fair value of liabilities assumed ............... 968,498 329,134 --
Less, cash paid ................................. (1,295,953) -- --
- ---------------------------------------------------------------------------------------------
Fair value of stock issued on acquisition ....... $ 686,649 $ 166,034 $ --
- ---------------------------------------------------------------------------------------------
Issuance of subordinated convertible debenture
to Laidlaw Inc. ................................. $ -- $ 350,000 $ --
- ---------------------------------------------------------------------------------------------
Issuance of common stock to satisfy interest
payment due on subordinated convertible debenture $ 17,500 $ -- $ --
- ---------------------------------------------------------------------------------------------
Accounts payable related to fixed assets ............ $ -- $ -- $ 8,992
- ---------------------------------------------------------------------------------------------
Non-cash transactions arising from sale of business:
Promissory note receivable ...................... $ 8,000 $ -- $ --
Reduction of debt ............................... 40,814 -- --
- ---------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CUMULATIVE
COMMON ADDITIONAL FOREIGN ACCUMULATED
AUGUST 31 STOCK PAID-IN CURRENCY DEFICIT TOTAL
CAPITAL TRANSLATION STOCKHOLDERS'
ADJUSTMENT EQUITY
- -----------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at September 1, 1995 ....... $ 120,000 $ 998,008 $-- $ (61,742) $ 1,056,266
Net income ......................... -- -- -- 8,210 8,210
Net additional investment
by Laidlaw Inc. ................ -- 30,301 -- -- 30,301
- -----------------------------------------------------------------------------------------------------------------
Balance at August 31, 1996 ......... 120,000 1,028,309 -- (53,532) 1,094,777
Net loss ........................... -- -- -- (183,432) (183,432)
Net additional investment
by Laidlaw Inc. ................ -- 7,562 -- -- 7,562
Issuance of subordinated convertible
debenture to Laidlaw Inc. ...... -- (350,000) -- -- (350,000)
Cash paid to Laidlaw Inc. .......... -- (349,116) -- -- (349,116)
Issuance of additional shares
on acquisition ................. 60,376 105,658 -- -- 166,034
Exercise of stock options .......... 59 96 -- -- 155
Transfer of subsidiary
(See Note 12) to Laidlaw Inc. .. -- (57,309) -- -- (57,309)
Cumulative foreign currency
translation adjustment ......... -- -- (706) -- (706)
- -----------------------------------------------------------------------------------------------------------------
Balance at August 31, 1997 ......... 180,435 385,200 (706) (236,964) 327,965
Net income ......................... -- -- -- 205 205
Issuance of additional shares
on acquisition ................. 166,460 520,189 -- -- 686,649
Exercise of stock options .......... 169 340 -- -- 509
Issuance of shares in payment for
interest on subordinated
convertible debenture .......... 3,921 13,579 -- -- 17,500
Cumulative foreign currency
translation adjustment ......... -- -- (18,122) $ -- (18,122)
- -----------------------------------------------------------------------------------------------------------------
Balance at August 31, 1998 ......... $ 350,985 $ 919,308 $ (18,828) $ (236,759) $ 1,014,706
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
25
safety-kleen corp.
Notes to Consolidated Financial Statements
1. NAME CHANGE
Effective July 1, 1998, Laidlaw Environmental Services, Inc. (the "Company")
began doing business as Safety-Kleen Corp. and its stock began trading on the
New York Stock Exchange under the name Safety-Kleen Corp. and the ticker symbol
NYSE:SK. The formal name change requires shareholder approval which the Company
will seek at its annual meeting in November 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies followed in
the preparation of these consolidated financial statements is as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all of its subsidiary companies. All significant intercompany
balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit and term deposits in
investments with maturities of three months or less.
INVENTORIES
Inventories consist primarily of solvent, oil and supplies
and are valued at the lower of cost or market, determined on a
first-in, first-out basis.
LONG-TERM INVESTMENTS
Long-term investments, which have been classified as held to maturity, are
carried at cost, which approximates fair market value, and consist primarily of
long-term trust fund deposits with government authorities to support closure and
post-closure activities at several of the Company's facilities.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Expenditures
for major renewals and improvements are capitalized. Items of an ordinary repair
or maintenance nature are charged directly to operating expense.
Machinery and equipment includes the cost of equipment at customer
locations having a net book value of $103.3 million at August 31, 1998.
Depreciation commences when the units are placed in service at the customer.
Landfill sites, preparation costs and improvements are recorded at cost,
which includes capitalized interest on landfill capacity under development, and
amortized on the basis of landfill capacity utilized during the year. Landfill
capacity represents total permitted airspace which is measured in the form of
cubic yards.
During the construction and development period of an asset, the costs
incurred, including applicable interest costs, are classified as construction in
process. Once an asset has been completed and put into use, it is transferred to
the appropriate category and depreciation commences.
During fiscal years 1998, 1997, and 1996, the Company capitalized
interest of $4.1 million, $6.7 million, and $12.8 million, respectively.
The cost of permits directly related to property, plant and equipment is
capitalized with the related asset and depreciated over the expected permit
life. Leasehold improvements are capitalized and amortized over the shorter of
the improvement life or the remaining term of the lease. Depreciation and
amortization of other property, plant and equipment is provided substantially on
a straight-line basis over their estimated useful lives which are as follows:
Buildings-20 to 40 years
Machinery and equipment-5 to 30 years.
Depreciation expense was $78.1 million, $50.9 million, and $45.9 million
in fiscal 1998, 1997 and 1996, respectively.
GOODWILL
Goodwill consists primarily of the cost of acquired businesses in excess of
market value of net assets acquired. Goodwill is amortized on a straight-line
basis over forty years.
IMPAIRMENT
The Company periodically reviews the carrying values of its property,
plant and equipment and goodwill to determine whether such values
are recoverable. Accordingly, when indicators of impairment are present,
the Company evaluates the carrying value of property, plant and
equipment and goodwill in relation to the operating
performance and the estimated future undiscounted cash flows of the
underlying business. The Company adjusts the book value of the
underlying asset if the sum of expected future cash flows is less than book
value. Any resulting write downs are charged to depreciation and amortization
expense.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the life of the related debt
instrument and included in long-term debt.
<PAGE>
26
safety-kleen corp.
Notes to Consolidated Financial Statements
ENVIRONMENTAL LIABILITIES
Environmental liabilities include accruals for the estimated costs associated
with closure and post-closure monitoring and maintenance of the
Company's landfills, remediation at certain of the Company's
facilities and corrective actions at Superfund sites. The Company accrues for
estimated closure and post-closure costs over the life of the landfill
site as capacity is consumed. The Company accrues for costs
associated with environmental remediation obligations when such costs are
probable and reasonably estimable. Accruals for estimated costs of environmental
remediation obligations generally are recognized no later than completion of the
remedial feasibility study. Such accruals are adjusted as further information
develops or circumstances change. Changes in estimated closure and post-closure
costs are recognized over the asset life. Costs of future expenditures for
environmental remediation obligations are discounted if the amount and timing of
the cash payments are fixed or reliably determinable.
FINANCIAL INSTRUMENTS
The Company's cash and cash equivalents, accounts receivable, certain long-term
investments, accounts payable, long-term debt, and the subordinated convertible
debenture constitute financial instruments. Concentration of credit risks in
accounts receivable are limited due to the large number of customers comprising
the Company's customer base throughout North America and Europe. 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 trends and other relevant information.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swap agreements to minimize the impact
of interest rate fluctuations on floating interest rate long-term borrowings.
The differential paid or received on interest rate swap agreements is
recognized as an adjustment to interest expense. See Note 5 for
fair value information pertaining to long-term debt and derivative financial
instruments.
REVENUE RECOGNITION
Revenues, along with the related costs of treatment, disposal
and transportation, are recorded at the time of performance
of services, shipment of products, or acceptance of waste at the Company's
service centers. Revenues from the Company's treatment and disposal operations,
primarily landfill and incineration facilities, are recognized when the waste
material is disposed of, whether burned, landfilled, or treated. Pursuant to
contracts with its customers, the Company accepts title to waste material at
such time and provides contractual indemnification to its customers against
future liability with respect to the waste materials.
INCOME TAXES
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts. Future tax benefits, such as net operating
loss carryforwards, are recognized to the extent that realization of such
benefits are more likely than not. Prior to May 15, 1997, the
Company filed consolidated tax returns with Laidlaw Inc., the
former parent company. Income taxes for periods prior to May 15, 1997 have been
calculated using applicable income tax rates on income for tax purposes on a
separate return basis.
FOREIGN CURRENCY TRANSLATION
The Company's foreign operations are all of a self-sustaining nature.
The functional currency of the Company's foreign subsidiaries is its
respective local currency. Assets and liabilities are translated to
U.S. Dollars at the exchange rate in effect at the balance sheet date and
revenue and expenses at weighted monthly average exchange rates for the year.
Gains and losses from the translation of the financial statements of the
foreign subsidiaries are included in stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to be consistent with current
year presentation.
<PAGE>
27
safety-kleen corp.
Notes to Consolidated Financial Statements
3. BUSINESS COMBINATIONS
ROLLINS ENVIRONMENTAL
On May 15, 1997, pursuant to a February 6, 1997 stock purchase agreement
(the "Stock Purchase Agreement") between Rollins Environmental Services, Inc.
("Rollins") and Laidlaw Inc. and its subsidiaries ("Laidlaw"), Rollins
acquired the hazardous and industrial waste operations of
Laidlaw ("Old LESI" or the "Accounting Acquirer"). The business combination was
accounted for as a reverse acquisition using the purchase method of accounting.
Rollins issued 120 million common shares and a $350 million 5% subordinated
convertible debenture, and paid $349.1 million in cash ($400 million, less debt
of $50.9 million assumed), to Laidlaw. Coincident with the closing of the
acquisition, the continuing legal entity changed its name from Rollins
Environmental Services, Inc. to Laidlaw Environmental Services, Inc.
(the "Company"). This acquisition decreased Laidlaw's ownership to 67% of the
issued common shares of the Company. Accordingly, the Company adopted the
Accounting Acquirer's fiscal year-end of August 31.
As a result of the acquisition, the historical financial information
included in these consolidated financial statements is that of the Accounting
Acquirer. The results of operations of Rollins have been included from the date
of acquisition.
SAFETY-KLEEN CORP.
The Company announced on April 1, 1998 that 93% of Safety-Kleen Corp.
("Safety-Kleen") shareholders had accepted its exchange offer, as amended on
March 16, 1998, relating to the acquisition of Safety-Kleen by the Company.
Under the terms of the offer, the Company exchanged $18.30 and 2.8
common shares of Company stock for each Safety-Kleen share tendered. In
May 1998, the Company completed the acquisition of Safety-Kleen
through a back-end merger, approved by the Safety-Kleen shareholders on May 18,
1998. The total consideration of approximately $2.2 billion, including debt
assumed and estimated transaction costs, was comprised of approximately $1.5
billion cash and 166.5 million shares of Common stock. The fair value per share
of the common stock of $4.125 is the average of the closing New York Stock
Exchange market price for the three trading days prior to and the three trading
days immediately following and including March 16, 1998, the date of the merger
agreement. The cash consideration and the refinancing of certain existing
indebtedness was financed from the proceeds of a $2.2 billion Senior Credit
Facility (See Note 5).
The acquisition of Safety-Kleen has been accounted for under the
purchase method and accordingly, the financial statements include the results of
operations of the acquired business from the date of acquisition. The purchase
price has been allocated to the assets acquired and liabilities assumed based
upon management's best estimate of their fair values. Given the size and
complexity of the acquired operations, as well as the short time period that has
elapsed since acquisition, the cost, and the allocation thereof, of the
acquisition is subject to change based upon the final resolution of those
estimates. However, management believes that the final resolution of the
estimates will not have a material impact on the financial position or results
of operations of the Company. The areas of particular complexity include
valuation of long-lived assets, environmental liabilities, pre-acquisition
contingencies and the related deferred tax consequences. The excess of the
estimated purchase price over the assets acquired of approximately $948.9
million is being amortized over forty years.
As a direct result of the personnel reductions and facility closures related to
the Rollins and Safety-Kleen acquisitions, the Company plans to incur salary and
benefit related costs and closure costs in fiscal 1999 of approximately $60.0
million.
The unaudited pro forma consolidated data set forth below presents the
results of operations of the Company as if both acquisitions had occurred as of
September 1, 1996. This data does not purport to be indicative of the results of
operations that might have occurred nor which might occur in the future. In
addition, the information does not reflect synergies yet to be realized from the
integration of the Company and the acquired businesses:
FISCAL YEAR 1998 1997
Revenue .................................. $ 1,754,981 $ 1,802,627
Loss from continuing operations .......... (15,753) (256,410)
Per share data:
Loss from continuing operations .......... $ (0.05) $ (0.74)
Weighted average common stock
outstanding (000's) .................... 349,025 346,836
<PAGE>
28
safety-kleen corp.
Notes to Consolidated Financial Statements
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following ($ in thousands):
AUGUST 31 1998 1997
- ------------------------------------------------------------------
Current portion of environmental liabilities $ 45,434 $ 27,376
Interest payable ........................... 28,914 12,643
Accrued salaries and benefits .............. 70,577 25,018
Accrued disposal costs ..................... 6,605 10,039
Other ...................................... 67,822 40,135
- ------------------------------------------------------------------
Total .................................. $219,352 $115,211
- ------------------------------------------------------------------
5. LONG-TERM DEBT
SENIOR CREDIT FACILITY
In April 1998, the Company repaid its existing Bank Credit Facility and
established a $2.2 billion Senior Credit Facility (the "Senior Credit Facility")
pursuant to a credit agreement between the Company and a syndicate
of banks and other financial institutions. The Senior Credit
Facility, the availability of which was permanently reduced by $325 million to
$1.875 billion by the subsequent issuance of the Senior Subordinated Notes
described below, consists of five parts: (i) a $550 million six-year Senior
Secured Revolving Credit Facility (interest rates at August 31, 1998 of 8.06% to
8.13%) with a $200 million letter of credit sublimit and $400 million sublimit
for loans (the "Revolver"), (ii) a $455 million six-year Senior Secured
Amortizing Term Loan (interest rates at August 31, 1998 of 8.06% to 8.13%),
(iii) a $70 million six-year Senior Secured Amortizing Term Loan (interest rates
at August 31, 1998 of 7.31% to 7.65%), (iv) a $400 million minimally amortizing
seven-year Senior Secured Term Loan (interest rates at August 31, 1998 of 8.44%
to 8.50%) and (v) a $400 million minimally amortizing eight-year Senior Secured
Term Loan (interest rates at August 31, 1998 of 8.69% to 8.75%). The term loans
referred to in clauses (ii), (iii), (iv) and (v) are collectively referred to
herein as the "Term Loans".
In connection with the repayment of its existing Bank Credit Facility,
the Company recognized an extraordinary charge of approximately $18.8 million
($11.3 million after tax, or $0.05 per share) related to the write-off of
previous deferred debt issuance costs and repayment penalties.
As of August 31, 1998, the Term Loans have been drawn in full and
borrowings outstanding under the Revolver total $208 million. The Company has
$192 million of additional borrowing availability under the Revolver. In
addition, there were $76 million of letters of credit issued under the terms of
the Revolver, with additional availability of $124 million.
The Senior Credit Facility contains negative, affirmative and financial
covenants customarily found in credit agreements for similar financings,
including covenants restricting debt, guarantees, liens, mergers and
consolidations, sales of assets and payment of dividends and establishing a
total leverage ratio test, a fixed charge coverage test, and interest coverage
ratio test and a maximum contingent obligation to operating cash flow ratio
test. The Company was in compliance with the covenants at August 31, 1998.
The Senior Credit Facility is collateralized by all of the tangible
assets of the Company. All of the capital stock of the Company and its
subsidiaries, including the acquired Safety-Kleen subsidiaries, are pledged
to the lenders, and such subsidiaries guaranty the obligations of the
Company to the lenders.
Interest costs on the Senior Credit Facility are reset periodically,
at least annually, and vary depending on the particular facility and whether
the Company chooses to borrow under Eurodollar or non-Eurodollar loans.
Interest costs on the promissory note are based on U.S. Dollar London
Interbank Offered Rate ("LIBOR "), determined on a semi-annual basis.
SENIOR SUBORDINATED NOTES
On May 29, 1998, Safety-Kleen Services, Inc. (formerly known as LES, Inc.),
a wholly-owned subsidiary of the Company, issued $325 million 9.25% Senior
Subordinated Notes due 2008 (the "Notes") in a Rule 144A offering.
Net proceeds from the sale of the Notes, after the underwriting discount and
other expenses, were approximately $316 million. The proceeds were used to
repay a portion of the borrowings outstanding under the Senior Credit Facility.
<PAGE>
29
safety-kleen corp.
Notes to Consolidated Financial Statements
The Notes mature on June 1, 2008. Interest on the Notes will be payable
semiannually, commencing December 1, 1998. The Notes will be redeemable, in
whole or in part, at the option of the Company, at any time prior to June 1,
2003 at a redemption price equal to the greater of (i) 100% of the principal
amount of such Notes or (ii) the sum of the present values of 104.625% of the
principal amount of such Notes and the scheduled payments of interest thereon
through and including June 1, 2003, discounted to such redemption date on a
semi-annual basis at the Adjusted Treasury Rate, as defined, plus 50 basis
points, together with accrued and unpaid interest, if any. The Notes will be
redeemable, in whole or in part, at the option of the Company at any time on or
after June 1, 2003 at 104.625% of the principal amount declining ratably in
annual increments to par on or after June 1, 2006. In addition, prior to June 1,
2001, the Company may redeem up to 35% of the original aggregate principal
amount of the Notes with the net proceeds of one or more public equity offerings
at a redemption price equal to 109.25% of the principal amount thereof, plus
accrued and unpaid interest. Upon a change in control of the Company, each
holder of the Notes may require the Company to repurchase all or a portion of
such holder's Notes at 101% of the principal amount thereof, plus accrued
interest.
The Notes are general unsecured obligations of the Company, subordinated
in right of payment to all existing and future senior indebtedness, as defined,
of the Company. The Notes will rank senior in right of payment to all existing
and future subordinated indebtedness of the Company, if any. The payment of the
Notes are guaranteed on a senior subordinated basis by Laidlaw Environmental
Services, Inc. and are jointly and severally guaranteed on a senior subordinated
basis by the Company's wholly-owned domestic subsidiaries. No foreign direct or
indirect subsidiary or non-wholly-owned domestic subsidiary is an obligor or
guarantor on the financing.
The Notes contain certain affirmative and negative covenants which, in
certain instances and subject to certain limitations and qualifications,
restrict, among other things, the incurrence of additional debt, restricted
payments, assets sales, transactions with affiliates, dividend and other
payments, the issuance of stock of subsidiaries to third parties, certain liens,
and certain consolidations, mergers of sales of assets. The Company was in
compliance with the covenants at August 31, 1998.
In accordance with an Exchange and Registration Rights Agreement entered
at the time of the issuance of the Notes, the Company filed a registration
statement with the Securities and Exchange Commission on June 24, 1998, pursuant
to which the Company proposes to exchange the Notes for notes of the Company
with terms identical to the Notes.
SAFETY-KLEEN NOTES
In connection with the acquisition of Safety-Kleen and in
accordance with the terms of the notes due to the change of control of
the issuer, the Company repurchased substantially all
of the outstanding 9.25% $100 million Notes due September 15, 1999 pursuant to
a tender offer to the note holders at a price of approximately 105%.
Long-term debt consists of the following ($ in thousands):
AUGUST 31 1998 1997
- --------------------------------------------------------------------------------
Senior Credit Facility:
Terms loans, U.S. ............................ $ 1,238,250 $315,000
Term loans, Canadian ......................... 60,500 60,000
Revolver ..................................... 208,000 --
Senior Subordinated Notes, due June 1, 2008,
with an interest rate of 9.25% ................. 325,000 --
Promissory note, due May 2003, with an interest
rate of 5.91% .................................. 60,000 60,000
Industrial Revenue Bonds, due 2003-2027,
with fixed interest rates from 6.0% to 9.0%..... 80,891 123,314
Other .......................................... 1,410 948
- --------------------------------------------------------------------------------
1,974,051 559,262
Less: current portion .......................... 77,004 12,086
Less: unamortized deferred financing costs ..... 43,883 19,166
- --------------------------------------------------------------------------------
Total ........................................ $1,853,164 $528,010
- --------------------------------------------------------------------------------
<PAGE>
30
safety-kleen corp.
Notes to Consolidated Financial Statements
The aggregate amount of minimum payments required on long-term debt
in each of the years indicated is as follows ($ in thousands):
YEAR ENDING AUGUST 31
- ---------------------------------------------
1999 ............................. $ 77,004
2000 ............................. 86,385
2001 ............................. 113,476
2002 ............................. 113,400
2003 ............................. 150,441
Thereafter ....................... 1,433,345
- ---------------------------------------------
Total minimum payments due ..... $1,974,051
In management's view, due to the long-term debt being primarily based on
floating rates, the carrying amounts approximate fair value.
The promissory note and $15.7 million of the Industrial Revenue Bonds
are guaranteed by Laidlaw.
The Company has entered into interest rate swap agreements to alter
interest rate exposures. These agreements, with a principal notional amount of
$710 million, expire in periods ranging from 0.5 to 30 years, with a weighted
average of approximately 7 years. The Company pays fixed rates ranging from
5.16% to 6.17%, and receives floating rates based on U.S. Dollar LIBOR,
determined on a quarterly basis of 5.6875% as of August 31, 1998.
Credit risk arises from the possible inability of counterparties to meet
the terms of their contracts on a net basis. All of the Company's interest rate
swap agreements have been entered into with major financial institutions which
are expected to fully perform under the terms of the agreements. The Company's
credit exposure on swaps is related not to the notional balances of the interest
rate swaps, but to the current and potential replacement costs of all profitable
contracts at year end. At August 31, 1998 this credit exposure is immaterial.
Credit exposure will increase along with the market value of the swaps, if
interest rates increase, and decrease if interest rates decline.
Derivative financial instrument fair values represent an approximation
of amounts the Company would have paid to or received from counterparties to
terminate its positions prior to maturity, and are based on capital market rates
prevailing at August 31, 1998. The Company's fair value cost for all interest
rate derivative contracts as of August 31, 1998, was approximately $11.1
million. At August 31, 1998, the Company had no plans to terminate these
positions prior to maturity.
6. SUBORDINATED CONVERTIBLE DEBENTURE
Pursuant to the Rollins acquisition described in Note 3, the Company issued
a $350 million 5% subordinated convertible, pay-in-kind debenture ("PIK")
due May 15, 2009 to Laidlaw.
Interest on the PIK is payable semiannually, on November 15 and May 15
until maturity. Beginning on May 15, 2002, and continuing until maturity, the
PIK is convertible, at the option of the holder into common shares of the
Company based on a conversion price per share of $3.75 (the "Conversion Price").
Beginning on May 15, 2002, and continuing until maturity, the Company has the
option to redeem the PIK in cash if the common shares are trading at a market
price greater than or equal to 120% of the Conversion Price. The PIK ranks
junior in right of payment (principal and interest) to all other long-term debt.
The estimated fair value of the PIK is based on quoted market prices,
where available, along with present value calculations which are calculated
using current rates for similar debt with the same remaining maturity. The
Company estimates that the fair value of the PIK at August 31, 1998 was $350.5
million ($493.6 million-1997).
Interest payments due during the first two years after the acquisition
of Safety-Kleen are required to be satisfied by the issuance of the Company's
common shares, based on the market price of the common shares at the time the
interest payments are due. At the Company's option, any other interest or
principal payments, other than optional early redemption, may be satisfied by
issuing common shares, based on the market price at the time such payments are
due. During the year ended August 31, 1998, the Company issued 3,920,410 shares
to Laidlaw in satisfaction of interest payments due.
<PAGE>
31
safety-kleen corp.
Notes to Consolidated Financial Statements
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS: Rental expense incurred under operating leases was $50.5
million, $36.1 million, and $35.9 million in 1998, 1997, and 1996, respectively.
Minimum future rental amounts required under operating leases for premises and
equipment having non-cancelable terms in excess of one year as of August 31,
1998, are as follows ($ in thousands):
YEAR ENDING AUGUST 31
- --------------------------------------
1999 ........................ $ 28,845
2000 ........................ 21,583
2001 ........................ 11,708
2002 ........................ 8,637
2003 ........................ 6,498
Thereafter .................. 19,444
- --------------------------------------
Total ................... $ 96,715
- --------------------------------------
CLOSURE, POST-CLOSURE AND ENVIRONMENTAL LIABILITIES: The Company has recorded
liabilities for closure and post-closure monitoring and environmental
remediation costs as follows ($ in thousands):
AUGUST 31 1998 1997
- -------------------------------------------------------------------------------
Current portion, included in accrued liabilities ........ $ 45,434 $27,376
Non-current portion, included in environmental
and other long-term liabilities......................... 220,669 155,685
- -------------------------------------------------------------------------------
Total ..................................................$266,103 $183,061
- -------------------------------------------------------------------------------
The business of the Company's hazardous and industrial waste services is
continuously regulated by federal, state, provincial and local provisions that
have been enacted or adopted, regulating the discharge of materials into the
environment or primarily for the purpose of protecting the environment. The
nature of the Company's businesses results in its frequently becoming a party to
judicial or administrative proceedings involving all levels of governmental
authorities and other interested parties. The issues that are involved generally
relate to applications for permits and licenses by the Company and their
conformity with legal requirements and alleged technical violations of existing
permits and licenses. The Company does not believe that these matters will be
material to its operations or financial condition.
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 its financial condition or results of
operations, since its business is based upon compliance with environmental laws
and regulations.
Closure and post-closure monitoring and maintenance costs for U.S.
landfills are estimated based on the technical requirements of Subtitle C and D
Regulations of the U.S. Environmental Protection Agency or the applicable state
requirements, whichever is stricter, and the air emissions standards under the
Clean Air Act. The costs include such items as final capping of the site,
methane gas and leachate management, groundwater monitoring and operation and
maintenance costs to be incurred during the period after the facility closes and
ceases to accept waste. Closure and post-closure costs for the Company's
landfills in Canada are based upon the local landfill regulations governing the
facility.
The Company has also established procedures to routinely evaluate
potential remedial liabilities at sites which it owns or operates, or to which
it transports waste, including 44 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 facilities in question, often prior to
the acquisition of such subsidiaries by the Company. The Company routinely
reviews and evaluates sites requiring remediation, including NPL sites, giving
consideration to the nature (i.e., owner, operator, transporter or generator),
and the extent (i.e., amount and nature of waste hauled to the location, number
of years of site operations or other relevant factors), of the Company's alleged
connection with the site, the accuracy and strength of evidence connecting the
Company to the location, the number, connection and financial ability of other
named and unnamed potentially responsible parties and the nature and estimated
cost of the likely remedy. Where the Company concludes that it is probable that
a liability has been incurred, provision is made in the financial statements,
based upon management's judgment and prior experience, for the Company's best
estimate of the liability. If no amount within the range appears to be a better
estimate than any other amount, then the Company provides for the minimum amount
within the range in accordance with SFAS
<PAGE>
32
safety-kleen corp.
Notes to Consolidated Financial Statements
No. 5, "Accounting for Contingencies". Such estimates are subsequently revised
as deemed necessary as additional information becomes available. The Company
believes that it is more than remotely possible but less than likely, that its
potential liability could be at the high end of such ranges, which would be
approximately $35.0 million higher in the aggregate than the estimate that has
been recorded in the financial statements as of August 31, 1998.
Estimates of the extent of the Company's degree of responsibility for
remediation of a particular site and the method and ultimate cost of remediation
require a number of assumptions and are inherently difficult to evaluate, such
that the ultimate outcome may differ from current estimates. However, the
Company believes that its extensive experience in the environmental services
business, as well as its involvement with a large number of sites, provides a
reasonable basis for estimating its aggregate liability. As additional
information becomes available, estimates are adjusted as necessary. While the
Company does not anticipate that any such adjustment would be material to its
financial statements, it is reasonably possible that technological, regulatory
or enforcement developments, the results of environmental studies or other
factors could necessitate the recording of additional liabilities which could be
material. The impact of such future events cannot be estimated at the current
time.
Where the Company believes that both the amount of a particular
environmental liability and the timing of the payments are fixed or reliably
determinable, the cost in current dollars is discounted to present value
assuming inflation of 3.6% and a risk free discount rate of 8.5%. Had the
Company not discounted any portion of its liability, the amount recorded would
have been increased by approximately $7.0 million at August 31, 1998 (1997 - $9
million).
The majority of the Company's active landfill sites have estimated
remaining lives ranging from two, to more than 100 years, based upon current
site plans and anticipated annual volumes of waste. As of August 31, 1998, the
Company estimates that during this remaining site life, it will provide for an
additional $59.0 million (1997 - $97 million) of closure and post-closure costs,
including accretion for the discount recognized to date.
Anticipated payments of undiscounted environmental liabilities for each
of the next five years and thereafter are as follows ($ in thousands):
YEAR ENDING AUGUST 31
- --------------------------------------
1999 ....................... $ 45,434
2000 ....................... 40,269
2001 ....................... 29,382
2002 ....................... 16,668
2003 ....................... 12,811
Thereafter ................. 180,539
- --------------------------------------
Total .................. $325,103
- --------------------------------------
In conjunction with the acquisitions of certain facilities, the Company
has obtained varying amounts and types of indemnification from potential
environmental liabilities existing at the time of acquisition. Such indemnities
typically cover all or a portion of the costs associated with the remediation of
such pre-existing environmental liabilities, and may be available for a limited
period of time. The Company periodically evaluates the ability of the sellers to
perform under the indemnification agreements and will record a receivable if
collection is probable.
FINANCIAL ASSURANCE OBLIGATIONS: As of August 31, 1998, the Company
provided financial assurances, primarily by insurance policies,
performance bonds and letters of credit, to the applicable regulatory
authorities, totaling approximately $560 million, in connection with the closure
and post-closure requirements of certain facility operating permits.
LEGAL PROCEEDINGS: Laidlaw's United States subsidiaries petitioned the United
States Tax Court (captioned as Laidlaw Transportation, Inc. and
Subsidiaries et al v. Commissioner of Internal Revenue, Docket
Nos. 9361-94 and 9362-94) with respect to their consolidated federal income tax
returns (which until May 15, 1997 included certain of the Company's United
States subsidiaries) for the fiscal years ended August 31, 1986, 1987, and 1988.
The principal issue involved related to the timing and deductibility for tax
purposes of interest attributable to loans owing to related foreign persons.
The court issued an opinion on June 30, 1998 concluding that advances from
the Laidlaw's related foreign entity were equity rather than debt and
that interest deductions claimed were disallowed. Based on this opinion,
taxes of $46.2 million (plus interest of approximately $88.8 million as of
August 31, 1998) would be payable. This opinion has been deferred to allow for
negotiations to resolve all issues. Should negotiations prove unsuccessful,
the Company expects Laidlaw to appeal this opinion.
<PAGE>
33
safety-kleen corp.
Notes to Consolidated Financial Statements
Similar claims have been asserted with respect to the consolidated federal
income tax returns for the fiscal years ended August 31, 1989, 1990, and 1991. A
petition has been filed with the United States Tax Court with respect to these
years (captioned as Laidlaw Transportation, Inc. and Subsidiaries v.
Commissioner of Internal Revenue, Docket No. 329-98). The income taxes at issue
for these years is approximately $143.5 million (plus interest of approximately
$156.7 million as of August 31, 1998). In August 1998, Laidlaw received a notice
of proposed adjustment proposing that the subsidiaries pay additional taxes of
approximately $96.0 million (plus interest of approximately $51.2 million as of
August 31, 1998) relating to disallowed deductions in federal income tax returns
for the fiscal years ended August 31, 1992, 1993, and 1994, based on the same
issues. Should Laidlaw's United States subsidiaries ultimately be required to
pay all claims on these issues, both presently asserted and expected to be
asserted, for the fiscal years 1986 through 1994, the cost (including interest
as of August 31, 1998) would be approximately $500.0 million. Laidlaw is
reviewing all of the above issues with counsel and the Company expects that
Laidlaw will vigorously contest the claimed deficiencies.
Pursuant to the Stock Purchase Agreement referred to in Note 3, Laidlaw
and Laidlaw Transportation, Inc. agreed to be responsible for any tax
liabilities, including the costs to defend the subsidiaries, resulting from
these matters. The Company believes that the ultimate disposition of these
issues will not have a materially adverse effect upon the Company's consolidated
financial position or results of operations.
8. STOCKHOLDERS' EQUITY
AUTHORIZED AND ISSUED CAPITAL STOCK: The Company is authorized to issue 750
million shares of its $1 par value common stock and one million shares of its $1
par value preferred stock. The terms and conditions of each issue of preferred
stock are determined by the Board of Directors. No preferred stock has been
issued.
Each share of common stock outstanding includes one common stock
purchase right (a "Right") which is non-detachable and non-exercisable until
certain defined events occur, including certain tender offers or the acquisition
by a person or group of affiliated or associated persons of 15% of the Company's
common stock. Upon the occurrence of certain defined events, the Right entitles
the holder to purchase additional stock of the Company or stock of an acquiring
company at a 50% discount. The Right expires on June 30, 1999, unless earlier
redeemed by the Company at a price of $.01 per Right.
9. STOCK OPTION PLANS
The Company has the following stock option plans:
1. The 1982 Stock Option Plan of the former Rollins Environmental
Services, Inc.
2. The 1993 Stock Option Plan of the former Rollins Environmental
Services, Inc.
3. The 1997 Directors Stock Option Plan
4. The 1997 Stock Option Plan
All outstanding employee stock options granted by the former Rollins
were fully vested on May 15, 1997, in accordance with the terms of the Stock
Purchase Agreement referred to in Note 3.
Option activity is as follows:
<TABLE>
<CAPTION>
1998 1997
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year 2,040,045 $ 3.994 -- --
Vested upon change in control -- -- 1,106,555 $ 5.047
Granted 1,586,250 $ 3.838 1,187,500 $ 3.188
Exercised (168,900) $ 3.014 (59,500) $ 2.612
Expired or canceled (336,996) $ 6.187 (194,510) $ 5.488
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,120,399 $ 3.731 2,040,045 $ 3.994
- ---------------------------------------------------------------------------------------------------------------------
Options available for grant 3,766,250 5,352,500
Options exercisable 584,149 852,545
</TABLE>
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Weighted Average
Remaining Average Remaining Weighted
Range of Options Contractual Exercise Options Conractual Average
Exercise Price Outstanding Life Price Outstanding Life Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 2.625-$ 2.875 82,000 2.85 years $ 2.790 239,500 2.62 years $ 2.846
$ 3.188-$ 3.938 2,773,750 9.43 years $ 3.560 1,212,700 9.69 years $ 3.202
$ 4.125-$ 5.750 180,600 3.00 years $ 4.761 353,400 2.41 years $ 4.814
$ 7.500-$ 8.875 79,549 0.37 years $ 7.846 225,445 0.94 years $ 7.878
$11.125-$12.250 4,500 1.47 years $12.250 9,000 1.59 years $11.688
- ---------------------------------------------------------------------------------------------------------------
$ 2.625-$12.250 3,120,399 8.64 years $ 3.731 2,040,045 6.60 years $ 3.994
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
34
safety-kleen corp.
Notes to Consolidated Financial Statements
Effective July 9, 1997, the directors of the Company set aside six
million shares of its $1 par value common stock for issuance under a 1997 stock
option plan. All options under this plan are for a term of ten years from the
date of grant and become exercisable with respect to 20% of the total number of
shares subject to the option, one year after the date of grant, and with respect
to an additional 20% at the end of each 12 month period thereafter on a
cumulative basis during the succeeding four years. The plan provides for the
granting of stock options to certain senior employees and officers of the
Company at the discretion of the Board of Directors. All options are subject to
certain conditions of service. Options for 1,097,500 shares were granted during
fiscal 1997 at an exercise price of $3.188. Options for 1,406,250 shares were
granted during fiscal 1998 at exercise prices ranging from $3.8125 to $3.9375.
Effective July 9, 1997, the directors of the Company set aside 540,000
shares of its $1 par value common stock for issuance under a 1997 directors
stock option plan. All options under this plan are for a term of ten years from
the date of grant and become exercisable with respect to 20% of the total number
of shares subject to the option, one year after the date of grant, and with
respect to an additional 20% at the end of each 12 month period thereafter on a
cumulative basis during the succeeding four years. All options are subject to
certain conditions of service. Options for 90,000 shares were granted during
fiscal 1997 at an exercise price of $3.188. Options for 180,000 shares were
granted during fiscal 1998 at an exercise price $3.8125.
The Company applies Accounting Principles Board ("APB") 25 in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized because the option exercise price is equal to the market price of the
underlying stock on the date of the grant. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," defines a
fair value method of accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting, or exercise period. Had compensation cost for
these plans been determined based on the Black Scholes value at the grant dates
for awards as prescribed by SFAS No. 123, pro forma net income and earnings per
share would have been as follows ($ in thousands, except per share data):
AUGUST 31 1998 1997
- -------------------------------------------------------------
Pro forma net income $(260) $(183,727)
Pro forma earnings per share $ -- $ (1.33)
There were no stock option plans prior to fiscal year 1997, therefore no
pro forma disclosure is required for fiscal year ended August 31, 1996.
The weighted average Black Scholes value of options granted under the
stock option plans during 1998 and 1997 was $1.07 and $2.48, respectively. The
value was estimated using an expected life of 8.7 years, no dividends, a
volatility factor of 28.6% and 19.4% and risk free interest rates of 4.5% in
1998 and 1997, respectively.
10. RESTRUCTURING AND OTHER CHARGES
The integration related to the acquisitions described in Note 3 have,
or will result in, the closing and remediation of certain of the existing
operating facilities that have become redundant and the incurrence of other
exit activities related to the acquisitions. Such actions are expected to
produce substantial cost savings.
With respect to the Old LESI operations, the Company recorded a one-time
charge of $331.7 million ($200 million after tax, or $1.52 per share) against
income in the quarter ended May 31, 1997, to reflect the closing of certain of
the operating facilities that had become redundant, and an impairment in the
carrying value of certain operating facilities due to lower expected future cash
flows as a result of the Rollins acquisition. The expected cash costs were $25.0
million, of which $14.4 million has been incurred to date, resulting in a
remaining balance of $10.6 million.
During the third quarter of fiscal 1998, with respect to the existing
operations, the Company recorded a one-time charge of $65.8 million ($39.5
million after tax or $0.16 per share) against earnings to reflect the costs
associated with the closing and remediation of certain facilities and other exit
activities as a result of the acquisition of Safety-Kleen. $31.8 million of the
charges relates to the non-cash write-off of existing facility carrying values
and $34.0 million represents cash costs to be incurred during subsequent
periods.
<PAGE>
35
safety-kleen corp.
Notes to Consolidated Financial Statements
11. INCOME TAXES
Prior to May 15, 1997, the Company filed consolidated tax returns with Laidlaw
Inc. (See Note 2). The income tax expense (benefit) for periods ending after May
15, 1997 are comprised as follows ($ in thousands):
YEAR ENDED AUGUST 31 1998 1997
- ----------------------------------------------------------------------
Current:
Federal $ -- $ (30,236)
State 810 1,000
Foreign 5,480 (2,064)
Deferred:
Federal 1,827 (87,086)
State (7,477) (12,440)
Foreign 999 8,037
- ----------------------------------------------------------------------
Income tax expense (benefit) $ 1,639 $(122,789)
- ----------------------------------------------------------------------
Income tax expense (benefit) is included in the financial statements
as follows ($ in thousands):
YEAR ENDED AUGUST 31 1998 1997
- -----------------------------------------------------------------------
Continuing operations $ 9,133 $ (122,789)
Extraordinary loss (7,494) --
- -----------------------------------------------------------------------
Income tax expense (benefit) $ 1,639 $ (122,789)
- -----------------------------------------------------------------------
A reconciliation of the income tax calculated by applying the domestic
statutory federal income tax rate to the income (loss) before income taxes is as
follows ($ in thousands):
YEAR ENDED AUGUST 31 1998 1997
- ------------------------------------------------------------------------
Federal income tax expense (benefit) at
statutory rate 35.0 % (35.0)%
State income tax benefit (14.6)% (5.2)%
Foreign country rate differential 2.2 % -- %
Goodwill 18.6 % -- %
Other 3.7 % 0.1 %
- ------------------------------------------------------------------------
Income tax expense (benefit) 44.9 % (40.1)%
- ------------------------------------------------------------------------
Deferred tax assets and liabilities consisted of the following
($ in thousands):
AUGUST 31 1998 1997
- ----------------------------------------------------------------------
Deferred tax assets:
Accrued liabilities $ 128,175 $ 122,051
Tax attribute carryovers 117,478 62,865
Interest 14,155 15,358
Other 11,882 7,016
- ----------------------------------------------------------------------
Total gross deferred tax assets 271,690 207,290
Less: valuation allowance 30,994 14,066
- ----------------------------------------------------------------------
Net deferred tax assets 240,696 193,224
- ----------------------------------------------------------------------
Deferred tax liabilities:
Excess of tax over book depreciation 710,286 223,732
Other 27,634 6,255
- ----------------------------------------------------------------------
Total gross deferred tax liabilities 737,920 229,987
- ----------------------------------------------------------------------
Net deferred tax liabilities $ 497,224 $ 36,763
- ----------------------------------------------------------------------
The Company has net operating loss carryforwards for federal income
taxes expiring in the years 2009 to 2113 of $197.0 million. A valuation
allowance of $14.1 million has been recorded against $46.9 million of the loss
carryforwards which are subject to limitations of both Treasury Regulation
1.1502-21 and Internal Revenue Code ("IRC") Section 382. Foreign net operating
losses expiring in the years 1999 to 2004 are $35.9 mill ion against which a
valuation allowance of $16.9 million has been recorded. Interest carryovers of
$27.1 million limited by IRC Section 163(j) are available against federal tax
without expiration.
<PAGE>
36
safety-kleen corp.
Notes to Consolidated Financial Statements
12. DISCONTINUED OPERATIONS
On May 1, 1997, in contemplation of the Rollins acquisition described in Note 3,
the Company transferred, in a non-cash transaction, JTM Industries, Inc., its
coal combustion by-products management operations to Laidlaw. Accordingly, no
gain or loss was recognized on this transfer. These operations were retained by
Laidlaw and are not part of the Company's ongoing operations. Accordingly, the
Company has classified these operations as discontinued. Historically, these
operations have been included in Laidlaw's Hazardous Waste Services segment for
financial reporting purposes. Revenue for the discontinued operations for 1997
and 1996 was $41.5 million, and $62.9 million, respectively.
13. EARNINGS PER SHARE
During the year ended August 31, 1998, the Company adopted Statement of
Financial Accounting Standard No. 128 (SFAS 128) "Earnings Per Share". This
statement requires the presentation of basic and diluted earnings per share.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS gives effect to all dilutive potential common shares
that were outstanding during the period. The adoption of this standard did not
have an impact on the prior period earnings per share data.
The following table represents a reconciliation of the shares used to
calculate basic and diluted earnings per share for each of the three years ended
August 31, 1998:
YEAR ENDED AUGUST 31 1998 1997 1996
- -------------------------------------------------------------------------------
Numerator ($ in thousands):
Net income (loss)-basic $ 205 $(183,432) $ 8,210
Add interest, net of tax, on
subordinated convertible debenture 10,500 3,063 --
- -------------------------------------------------------------------------------
Total-diluted $ 10,705 $(180,369) $ 8,210
- -------------------------------------------------------------------------------
Denominator (000's):
Weighted average shares
outstanding-basic 249,287 138,033 120,000
Effect of dilutive securities:
Employee stock options 349 15 --
Subordinated convertible debenture 93,333 27,391 --
- -------------------------------------------------------------------------------
Weighted average shares
outstanding-diluted 342,969 165,439 120,000
- -------------------------------------------------------------------------------
Basic earnings per share $ -- $ (1.33) $ 0.07
Diluted earnings per share $ -- $ (1.33) $ 0.07
14. RELATED PARTY TRANSACTIONS
Included in selling, general and administrative expenses are management fees
paid to Laidlaw in the amounts of $2.6 million and $4.6 million during 1997 and
1996, respectively.
Management fees have been allocated to the Company, prior to May 15,
1997, based upon the Company's share of Laidlaw's consolidated revenue.
Management fees are charged by Laidlaw to each of its operating groups in order
to recover its general and administrative costs. The services provided by
Laidlaw include treasury, taxation and insurance.
Related party insurance transactions totaled $11.3 million, $7.2
million, and $7.2 million in 1998, 1997, and 1996, respectively. Rates paid
under insurance contracts are determined on a similar basis as those charged
under similar contracts with third party insurers.
Certain directors and officers of the Company are also directors and
officers of Laidlaw.
15. SEGMENT AND GEOGRAPHIC INFORMATION
The Company's revenues and income are derived from one industry segment which
includes the collection, transportation, processing, recovery and disposal of
hazardous and industrial wastes. The segment renders services to a variety of
commercial, industrial, governmental and residential customers.
16. RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income," ("SFAS 130"),
effective for periods beginning after December 15, 1997. SFAS 130, which
will be adopted in the first quarter of the year ending August 31, 1999,
establishes standards
<PAGE>
37
safety-kleen corp.
Notes to Consolidated Financial Statements
for reporting and displaying comprehensive income and its components.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources and
includes all changes in equity during a period except those resulting from
investments by and distributions to owners. Adoption of this standard will only
require additional financial statement disclosures.
In June 1997, FASB issued Statement No. 131, "Disclosures About Segments
of an Enterprise and Related Information," ("SFAS 131"), effective for periods
beginning after December 15, 1997. SFAS 131, which will be adopted in the first
quarter of the year ending August 31, 1999, establishes standards for the
reporting by public business enterprises of information about operating segments
in interim and annual financial statements. The Company is currently evaluating
the impact, if any, the implementation of this standard will have on the
disclosures in the consolidated financial statements.
In June, 1998, FASB issued Statement No. 133, "Accounting of Derivative
Instruments and Hedging Activities," ("SFAS 133"), effective for periods
beginning after June 15, 1999. SFAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of the derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction, and if it is, the type of hedge transaction. The Company
anticipates that the adoption of this standard will not have a significant
effect on the Company's results of operations or its financial position.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), effective for periods
beginning after December 15, 1998. SOP 98-1 provides guidance on defining
internal use software and the accounting for the costs thereof. The Company
anticipates that the adoption of this statement will not have a significant
effect on the Company's results of operations or its financial position.
17. QUARTERLY FINANCIAL DATA-UNAUDITED
<TABLE>
<CAPTION>
AUGUST 31 FIRST SECOND THIRD* FOURTH TOTAL*
- ---------------------------------------------------------------------------------------------------------
($ in thousands)
1998
<S> <C> <C> <C> <C> <C>
Revenues $ 211,552 $ 173,215 $ 365,705 $ 435,001 $ 1,185,473
Income (loss) from operations 31,931 19,676 (10,304) 79,089 120,392
Extraordinary loss, net of
applicable tax -- -- (11,283) -- (11,283)
Net income (loss) 10,144 3,556 (35,319) 21,824 205
Earnings per share:
Income (loss) from operations $ 0.06 $ 0.02 $ (0.09) $ 0.06 $ 0.05
Extraordinary loss, net of
applicable tax -- -- (0.04) -- (0.05)
Net income (loss) per share $ 0.06 $ 0.02 $ (0.13) $0.06 $ --
1997
Revenues $ 172,565 $ 140,627 $ 155,330 $ 210,097 $ 678,619
Income (loss) from operations 14,899 9,169 (316,760) 27,978 (264,714)
Income (loss) from
continuing operations 3,588 1,750 (197,155) 8,365 (183,452)
Income (loss) from
discontinued operations 703 (917) 234 -- 20
Net income (loss) 4,291 833 (196,921) 8,365 (183,432)
Earnings per share:
Income (loss) from operations $ 0.03 $ 0.02 $ (1.50) $ 0.05 $ (1.33)
Discontinued operations 0.01 (0.01) -- -- --
Net income (loss) per share $ 0.04 $ 0.01 $ (1.50) $ 0.05 $ (1.33)
</TABLE>
*1998 includes restructuring charge of $65.8 million ($39.5 million net of
tax); 1997 includes restructuring charge of $331.7 million ($200 million net of
tax).
Results for the quarters include the results of operations of acquired
companies for the periods in which they were owned by the Company.
<PAGE>
38
safety-kleen corp.
Notes to Consolidated Financial Statements
18. SUMMARIZED FINANCIAL INFORMATION
In connection with the Safety-Kleen acquisition, Safety-Kleen Services, Inc.
(formerly known as LES, Inc.), a wholly-owned subsidiary of the Company, issued
9.25% Senior Subordinated Notes (See Note 5). The Notes are jointly and
severally guaranteed by the Company and all wholly-owned domestic subsidiaries
of the Company, including the wholly-owned domestic subsidiaries of Safety-Kleen
Corp., on a full and unconditional basis. No foreign direct or indirect
subsidiary or non wholly-owned domestic subsidiary is an obligor or guarantor on
the financing. Separate financial statements and other disclosures concerning
each of Safety-Kleen Services, Inc. and the subsidiary guarantors are not
presented because management believes they are not material to investors.
Summarized financial information for the Company and its subsidiaries on a
combined basis is set forth below.
<TABLE>
<CAPTION>
CONSOLIDATING CONDENSED BALANCE SHEET
LAIDLAW SAFETY-KLEEN SUBSIDIARY SUBSIDIARY CONSOLIDATING CONSOLIDATED
ENVIRONMENTAL SERVICES, INC. GUARANTORS NON-GUARANTORS ELIMINATING TOTAL
AUGUST 31, 1998 SERVICES, INC. ENTRIES
- -----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets ........... $ -- $ -- $ 431,274 $ 111,060 $ -- $ 542,334
Property, plant and
equipment, net ......... -- -- 2,454,211 396,331 (40) 2,850,502
Investment in Subsidiaries 1,496,759 2,776,635 1,322,059 166 (5,595,619) --
Goodwill ................. -- -- 951,655 71,499 -- 1,023,154
Other non-current assets . -- -- 52,134 771 -- 52,905
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets ............. $ 1,496,759 $ 2,776,635 $ 5,211,333 $ 579,827 $(5,595,659) $ 4,468,895
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities ...... $ 6,853 $ 88,089 $ 246,359 $ 83,617 $ (2) $ 424,916
Non-current liabilities .. -- -- 714,145 111,964 -- 826,109
Long-term debt ........... 125,200 1,661,989 16,334 49,641 -- 1,853,164
Subordinated convertible
debenture .............. 350,000 -- -- -- 350,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities ........ 482,053 1,750,078 976,838 245,222 (2) 3,454,189
STOCKHOLDERS' EQUITY
Stockholders' equity ..... 1,014,706 1,026,557 4,234,495 334,605 (5,595,657) 1,014,706
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity . $ 1,496,759 $ 2,776,635 $ 5,211,333 $ 579,827 $(5,595,659) $ 4,468,895
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING CONDENSED STATEMENT OF INCOME
LAIDLAW SAFETY-KLEEN SUBSIDIARY SUBSIDIARY CONSOLIDATING CONSOLIDATED
ENVIRONMENTAL SERVICES, INC. GUARANTORS NON-GUARANTORS ELIMINATING TOTAL
YEAR ENDED AUGUST 31, 1998 SERVICES, INC. ENTRIES
- -----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total revenues .............. $ -- $ -- $ 947,774 $ 250,814 $ (13,115) $ 1,185,473
Operating expenses .......... -- -- 796,955 215,370 (13,075) 999,250
Restructuring charge ........ -- -- 60,081 5,750 -- 65,831
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income ............ -- -- 90,738 29,694 (40) 120,392
Interest income
(expense), net ............ (25,747) (79,464) 12,790 (7,619) -- (100,040)
Undistributed earnings
of subsidiaries ........... 14,366 68,147 -- -- (82,513) --
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations
before income tax ......... (11,381) (11,317) 103,528 22,075 (82,553) 20,352
Income tax expense (benefit). (11,586) (35,759) 46,164 10,314 -- 9,133
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before
minority interest ......... 205 24,442 57,364 11,761 (82,553) 11,219
Minority interest ........... -- -- 589 (320) -- 269
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations ..... 205 24,442 57,953 11,441 (82,553) 11,488
Extraordinary loss,
net of tax ................ -- (10,076) -- (1,207) -- (11,283)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income .................. $ 205 $ 14,366 $ 57,953 $ 10,234 $ (82,553) $ 205
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
39
safety-kleen corp.
Notes to Consolidated Financial Statements
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
LAIDLAW SAFETY-KLEEN SUBSIDIARY SUBSIDIARY CONSOLIDATING CONSOLIDATED
ENVIRONMENTAL SERVICES, INC. GUARANTORS NON-GUARANTORS ELIMINATING TOTAL
AUGUST 31, 1998 SERVICES, INC. ENTRIES
- -----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Net cash provided by (used in)
<S> <C> <C> <C> <C> <C> <C>
operating activities .............. $ 3,612 $ (12,888) $ 76,353 $ 20,550 $-- $ 87,627
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash acquired on acquisition
of business ..................... -- -- (1,272,639) (8,856) -- (1,281,495)
Purchase of plant, property
and equipment ................... -- -- (39,327) (11,427) -- (50,754)
Proceeds from sale of property,
plant and equipment ............. -- -- 13,256 177 -- 13,433
Proceeds from sale of business .... -- -- 33,675 -- -- 33,675
Other, net ........................ -- -- 13,046 (21,240) -- (8,194)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities -- -- (1,251,989) (41,346) -- (1,293,335)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Exercise of stock options ......... 509 -- -- -- -- 509
Bank financing fees and expenses .. -- (48,513) -- (2,025) -- (50,538)
Bank overdraft .................... -- -- 10,975 2,017 -- 12,992
Borrowings of long-term debt ...... -- 1,788,000 -- 68,814 -- 1,856,814
Repayment of long-term debt ....... -- (331,750) (212,953) (59,981) -- (604,684)
Intercompany payable (receivable) . (4,121) (1,394,849) 1,357,187 41,783 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities .............. (3,612) 12,888 1,155,209 50,608 -- 1,215,093
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate
changes on cash ................... -- -- -- (4,212) -- (4,212)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents ............ -- -- (20,427) 25,600 -- 5,173
Cash and cash equivalents at:
Beginning of period ............... -- -- 24,770 (13,610) -- 11,160
- ------------------------------------------------------------------------------------------------------------------------------------
End of period ..................... $ -- $ -- $ 4,343 $ 11,990 $-- $ 16,333
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
40
safety-kleen corp.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATING CONDENSED BALANCE SHEET
LAIDLAW SAFETY-KLEEN SUBSIDIARY SUBSIDIARY CONSOLIDATING CONSOLIDATED
ENVIRONMENTAL SERVICES, INC. GUARANTORS NON-GUARANTORS ELIMINATING TOTAL
AUGUST 31, 1997 SERVICES, INC. ENTRIES
- -----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets ................... $ -- $ -- $ 213,139 $ 38,401 $ -- $ 251,540
Property, plant and equipment, net -- -- 1,043,874 192,695 -- 1,236,569
Investment in Subsidiaries ....... 809,745 633,669 88,000 -- (1,531,414) --
Other non-current assets ......... -- -- 93,346 48,847 (19,424) 122,769
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets ..................... $ 809,745 $ 633,669 $ 1,438,359 $ 279,943 $(1,550,838) $ 1,610,878
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Current Liabilities .............. $ 6,580 $ 1,952 $ 116,679 $ 50,454 $ (220) $ 175,445
Non-current liabilities .......... -- -- 241,335 7,547 (19,424) 229,458
Long-term debt ................... 125,200 299,717 7,863 95,230 -- 528,010
Subordinated convertible
debenture ...................... 350,000 -- -- -- -- 350,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities ................ 481,780 301,669 365,877 153,231 (19,644) 1,282,913
STOCKHOLDERS' EQUITY
Stockholders' equity ............. 327,965 332,000 1,072,482 126,712 (1,531,194) 327,965
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ........... $ 809,745 $ 633,669 $ 1,438,359 $ 279,943 $(1,550,838) $ 1,610,878
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING CONDENSED STATEMENT OF INCOME
LAIDLAW SAFETY-KLEEN SUBSIDIARY SUBSIDIARY CONSOLIDATING CONSOLIDATED
ENVIRONMENTAL SERVICES, INC. GUARANTORS NON-GUARANTORS ELIMINATING TOTAL
YEAR ENDED AUGUST 31, 1997 SERVICES, INC. ENTRIES
- -----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Total revenues ............... $ -- $ -- $ 510,563 $ 168,056 $ -- $ 678,619
Operating expenses ........... -- -- 472,254 139,382 -- 611,636
Restructuring charge ......... -- -- 325,070 6,627 -- 331,697
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) ...... -- -- (286,761) 22,047 -- (264,714)
Interest expense, net ........ 6,580 8,010 22,530 4,288 -- 41,408
Undistributed losses of
subsidiaries ............... (179,397) (174,485) -- -- 353,882 --
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income tax (185,977) (182,495) (309,291) 17,759 353,882 (306,122)
Income tax expense (benefit) . (2,545) (3,098) (118,579) 1,433 -- (122,789)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before
minority interest .......... (183,432) (179,397) (190,712) 16,326 353,882 (183,333)
Minority interest ............ -- -- (72) (47) -- (119)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations ...... (183,432) (179,397) (190,784) 16,279 353,882 (183,452)
Income from discontinued
operations ................. -- -- 20 -- -- 20
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ............ $(183,432) $(179,397) $(190,764) $ 16,279 $ 353,882 $(183,432)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
41
safety-kleen corp.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
LAIDLAW SAFETY-KLEEN SUBSIDIARY SUBSIDIARY CONSOLIDATING CONSOLIDATED
ENVIRONMENTAL SERVICES, INC. GUARANTORS NON-GUARANTORS ELIMINATING TOTAL
YEAR ENDED AUGUST 31, 1997 SERVICES, INC. ENTRIES
- -----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Net cash provided by (used in)
<S> <C> <C> <C> <C> <C> <C>
continuing operations .............. $ 2,545 $ 3,098 $ 38,964 $ (7,428) $(220) $ 36,959
Net cash provided by
discontinued operations .............. -- -- 425 -- -- 425
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities ................. 2,545 3,098 39,389 (7,428) (220) 37,384
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of plant, property
and equipment ...................... -- -- (16,154) (19,943) -- (36,097)
Other investing activities, net ...... -- -- 15,648 (1,438) -- 14,210
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing operations . -- -- (506) (21,381) -- (21,887)
Net cash used in discontinued operations -- -- (1,887) -- -- (1,887)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities .. -- -- (2,393) (21,381) -- (23,774)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of
long-term debt ..................... 65,200 315,000 -- 71,422 -- 451,622
Debt financing fees and expenses ..... -- (16,448) -- (2,340) -- (18,788)
Bank overdraft ....................... -- -- (28,829) (3,359) -- (32,188)
Repayment of long-term debt .......... -- -- (55,700) (5,842) -- (61,542)
Intercompany payable (receivable) .... (67,745) (301,650) 369,175 -- 220 --
Net payments to Laidlaw, Inc. ........ -- -- (296,872) (44,682) -- (341,554)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities ................. (2,545) (3,098) (12,226) 15,199 220 (2,450)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents ..................... -- -- 24,770 (13,610) -- 11,160
Cash and cash equivalents at:
Beginning of period .................. -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
End of period ........................ $ -- $ -- $ 24,770 $ (13,610) $ -- $ 11,160
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
42
safety-kleen corp.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATING CONDENSED STATEMENT OF INCOME
LAIDLAW SAFETY-KLEEN SUBSIDIARY SUBSIDIARY CONSOLIDATING CONSOLIDATED
ENVIRONMENTAL SERVICES, INC. GUARANTORS NON-GUARANTORS ELIMINATING TOTAL
YEAR ENDED AUGUST 31, 1996 SERVICES, INC. ENTRIES
- -----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Total revenues ....................... $ -- $ -- $ 474,410 $ 178,563 $ -- $ 652,973
Operating expenses ................... -- -- 443,093 152,561 -- 595,654
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income ..................... -- -- 31,317 26,002 -- 57,319
Interest expense, net ................ -- -- 33,067 12,392 -- 45,459
Undistributed earnings of subsidiaries -- 8,210 -- -- (8,210) --
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income tax ....... -- 8,210 (1,750) 13,610 (8,210) 11,860
Income tax expense (benefit) ......... -- -- (369) 2,869 -- 2,500
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before minority interest -- 8,210 (1,381) 10,741 (8,210) 9,360
Minority interest .................... -- -- -- (2,646) -- (2,646)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations .............. -- 8,210 (1,381) 8,095 (8,210) 6,714
Income from discontinued operations .. -- -- 1,496 -- -- 1,496
- ------------------------------------------------------------------------------------------------------------------------------------
Net income ........................... $ -- $ 8,210 $ 115 $ 8,095 $ (8,210) $ 8,210
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
LAIDLAW SAFETY-KLEEN SUBSIDIARY SUBSIDIARY CONSOLIDATING CONSOLIDATED
ENVIRONMENTAL SERVICES, INC. GUARANTORS NON-GUARANTORS ELIMINATING TOTAL
YEAR ENDED AUGUST 31, 1996 SERVICES, INC. ENTRIES
- -----------------------------------------------------------------------------------------------------------------------------------
($ in thousands)
Net cash provided by
<S> <C> <C> <C> <C> <C> <C>
continuing operations ................. $ -- $-- $ 18,061 $ 3,888 $-- $ 21,949
Net cash provided by
discontinued operations ............... -- -- 3,199 -- -- 3,199
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities .................. -- -- 21,260 3,888 -- 25,148
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of plant, property
and equipment ....................... -- -- (91,313) (12,971) -- (104,284)
Other investing activities, net ....... -- -- (9,754) (911) -- (10,665)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing
operations ............................ -- -- (101,067) (13,882) -- (114,949)
Net cash used in
discontinued operations ............... -- -- (5,026) -- -- (5,026)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in
investing activities .................. -- -- (106,093) (13,882) -- (119,975)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Bank overdraft ........................ -- -- 19,503 2,377 -- 21,880
Changes in long-term debt ............. -- -- (3,967) (3,581) -- (7,548)
Advance from (payments to)
Laidlaw Inc. ........................ -- -- 71,715 11,198 -- 82,913
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by
continuing operations ................. -- -- 87,251 9,994 -- 97,245
Net used in discontinued operations ..... -- -- (2,418) -- -- (2,418)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by
financing activities .................. -- -- 84,833 9,994 -- 94,827
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents
Cash and cash equivalents at:
Beginning of period ................. -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
End of period ....................... $ -- $-- $ -- $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 21
<TABLE>
<CAPTION>
CORPORATE ORGANIZATIONAL STRUCTURE
LAIDLAW ENVIRONMENTAL SERVICES, INC.
D/B/A SAFETY-KLEEN CORP.
NYSE: (SK)
THE FOLLOWING LIST SETS FORTH THE SUBSIDIARIES OF LAIDLAW ENVIRONMENTAL
SERVICES, INC. AS OF SEPTEMBER 10, 1998. PARENT SUBSIDIARY RELATIONS ARE
INDICATED BY INDENTATIONS. UNLESS OTHERWISE INDICATED, 100% OF THE VOTING
SECURITIES OF EACH SUBSIDIARY IS OWNED BY THE INDICATED PARENT OF SUCH
SUBSIDIARY.
NAME OF CORPORATION STATE OF INCORPORATION
- ---------------------------------------------------------------------------
<S> <C>
LAIDLAW ENVIRONMENTAL SERVICES, INC. D/B/A SAFETY-KLEEN CORP. Delaware
SAFETY-KLEEN SERVICES, INC. Delaware
SAFETY-KLEEN (LONE AND GRASSY MOUNTAIN), INC. Oklahoma
SAFETY-KLEEN (TULSA), INC. Oklahoma
SAFETY-KLEEN (SAN ANTONIO), INC. Texas
SAFETY-KLEEN (WICHITA), INC. Kansas
USPCI OF MISSISSIPPI, INC. (50%) Mississippi
SAFETY-KLEEN (DELAWARE), INC. Delaware
SK SERVICES (EAST), L.C. (80%) Utah
SK SERVICES, L.C. (80%) Utah
SAFETY-KLEEN (ROSEMOUNT), INC. Minnesota
SAFETY-KLEEN (SAWYER), INC. Oklahoma
SAFETY-KLEEN (PPM), INC. Georgia
NINTH STREET PROPERTIES, INC. Missouri
SAFETY-KLEEN (SAN JOSE), INC. California
CHEMCLEAR, INC. OF LOS ANGELES Delaware
USPCI, INC. OF GEORGIA Delaware
SAFETY-KLEEN HOLDINGS, INC. Delaware
SAFETY-KLEEN (WESTMORLAND), INC. (50%) California
SAFETY-KLEEN (BUTTONWILLOW), INC. (23%) California
SAFETY-KLEEN (NE), INC. New Hampshire
SAFETY-KLEEN (CROWLEY), INC. Louisiana
SAFETY-KLEEN (LAPORTE), INC. Texas
SAFETY-KLEEN (TG), INC. Delaware
SAFETY-KLEEN (ROEBUCK), INC. S. Carolina
SAFETY-KLEEN (TS), INC. Delaware
SAFETY-KLEEN (COLFAX), INC. Delaware
GSX CHEMICAL SERVICES OF OHIO, INC. Ohio
LEMC, INC. Delaware
SAFETY-KLEEN CHEMICAL SERVICES, INC. Mass.
SAFETY-KLEEN (ALTAIR), INC. Texas
SAFETY-KLEEN (FS), INC. (13%) Delaware
SAFETY-KLEEN (BDT), INC. New York
SAFETY-KLEEN (FS), INC. (86%) Delaware
SAFETY-KLEEN (GS), INC. Tennessee
SAFETY-KLEEN (CLIVE), INC. Oklahoma
SAFETY-KLEEN (WT), INC. Ohio
SAFETY-KLEEN OSCO HOLDINGS, INC. Delaware
SAFETY-KLEEN (NASHVILLE), INC. Tennessee
OSCO TREATMENT SYSTEMS OF MISSISSIPPI, INC. (50%) Tennessee
VIROGROUP, INC. (50%) Florida
SAFETY-KLEEN (BARTOW), INC. Florida
SAFETY-KLEEN (CALIFORNIA), INC. California
SAFETY-KLEEN (BUTTONWILLOW), INC. (77%) California
SAFETY-KLEEN (WESTMORLAND), INC. (50%) California
SAFETY-KLEEN (CHATTANOOGA), INC. Tennessee
SAFETY-KLEEN (PECATONICA), INC. Illinois
SAFETY-KLEEN (PINEWOOD), INC. S. Carolina
SAFETY-KLEEN (WHITE CASTLE), INC. Colorado
LES MERGER, INC. Delaware
SAFETY-KLEEN (PUERTO RICO), INC. Puerto Rico
SAFETY-KLEEN (BRIDGEPORT), INC. Delaware
SAFETY-KLEEN (DEER PARK), INC. Delaware
SAFETY-KLEEN (BATON ROUGE), INC. Delaware
SAFETY-KLEEN (PLAQUEMINE), INC. Delaware
SAFETY-KLEEN (CUSTOM TRANSPORT), INC. Delaware
SAFETY-KLEEN (LOS ANGELES), INC. California
SAFETY-KLEEN (TIPTON), INC. Delaware
SAFETY-KLEEN (GLOUCESTER), INC. Delaware
SAFETY-KLEEN (DEER TRAIL), INC. Colorado
SAFETY-KLEEN (MT. PLEASANT), INC. Tennessee
SAFETY-KLEEN (MINNEAPOLIS), INC. Minnesota
SAFETY-KLEEN (ARAGONITE), INC. Delaware
SAFETY-KLEEN (SUSSEX), INC. Delaware
SAFETY-KLEEN (ENCOTEC), INC. Delaware
SAFETY-KLEEN SYSTEMS, INC. Wisconsin
CURBSIDE, INC. (49%) California
DIRT MAGNET, INC. Colorado
THE MIDWAY GAS AND OIL CO. Colorado
SAFETY-KLEEN CANADA INC. (1) Ontario
ENVIRONNEMENT SERVICES ET MACHINERIE E.S.M. Quebec
INC.
ELGINT CORP. Nevada
ILIUM (NETHERLANDS) B.V. Netherlands
SAFETY-KLEEN ESPANA, S.A. Spain
SAFETY-KLEEN ENVIROSYSTEMS COMPANY California
SAFETY-KLEEN ENVIROSYSTEMS COMPANY OF Indiana
PUERTO RICO, INC.
PETROCON, INC. Delaware
PHILLIPS ACQUSITION CORP. Delaware
SAFETY-KLEEN AVIATION, INC. Delaware
SK INSURANCE COMPANY Vermont
SK REAL ESTATE INC. Illinois
SAFETY-KLEEN BELGIUM S.A. Belgium
SAFETY-KLEEN GRUNDBESITZ GMBH (98%) Germany
SAFETY-KLEEN BETEILIGUNGS - GMBH Germany
ORM-BERGOLD CHEMIE GMBH & CO. KG (95%) German Partnership
ORM-CHEMIE GMBH Germany
ORM-BERGOLD CHEMIE GMBH & CO. KG (5%) German Partnership
SAFETY-KLEEN GRUNDBESITZ GMBH (2%) Germany
SAFETY-KLEEN DEUTSCHLAND GMBH Germany
SAFETY-KLEEN (FRANCE) S.A. France
SAFETY-KLEEN INTERNATIONAL, INC. Delaware
SAFETY-KLEEN (EUROPE), INC. Delaware
SAFETY-KLEEN U.K. LIMITED UK
SAFETY-KLEEN IRELAND LIMITED Ireland
SAFETY-KLEEN ITALIA S.P.A. Italy
SAFETY-KLEEN OIL RECOVERY CO. Delaware
SAFETY-KLEEN OIL SERVICES, INC. Delaware
THE SOLVENTS RECOVERY SERVICE OF NEW JERSEY, INC. New Jersey
3E COMPANY ENVIRONMENTAL, ECOLOGICAL AND California
ENGINEERING (80%)
SAFETY-KLEEN SERVICES (CANADA) LTD. Canada
SAFETY-KLEEN LTD. Ontario
SAFETY-KLEEN (BC) LTD. Canada
1197296 ONTARIO INC. Ontario
SAFETY-KLEEN SERVICES (QUEBEC) LTD. Quebec
SAFETY-KLEEN SERVICES (MERCIER) LTD. Quebec
SK D'INCINERATION INC. Quebec
SAFETY-KLEEN (RYLEY) LTD. Alberta
SAFETY-KLEEN (ATLANTIC) LIMITED Nova Scotia
SAFETY-KLEEN (ON-SITE), INC. Ontario
</TABLE>
- --------
1 Quebec, Inc. holds 1,353,550 Class Z shares (however, they are physically
held by Safety-Kleen Canada Inc. and Safety-Kleen Systems, Inc.
as collateral for payment of outstanding loans).
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement on
Form S-8 of our report dated October 6, 1998, on our audits of the consolidated
financial statements and financial statement schedule of Laidlaw Environmental
Services, Inc. (d/b/a Safety-Kleen Corp.) as of August 31, 1998 and 1997 and
for each of the three years in the period ended August 31, 1998, which
report is incorporated by reference in the Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
October 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 16,333
<SECURITIES> 0
<RECEIVABLES> 330,864
<ALLOWANCES> 10,816
<INVENTORY> 53,759
<CURRENT-ASSETS> 542,334
<PP&E> 3,162,868
<DEPRECIATION> 312,366
<TOTAL-ASSETS> 4,468,895
<CURRENT-LIABILITIES> 424,916
<BONDS> 2,203,164
0
0
<COMMON> 350,985
<OTHER-SE> 663,721
<TOTAL-LIABILITY-AND-EQUITY> 4,468,895
<SALES> 0
<TOTAL-REVENUES> 1,185,473
<CGS> 0
<TOTAL-COSTS> 999,250
<OTHER-EXPENSES> 65,831
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,697
<INCOME-PRETAX> 20,352
<INCOME-TAX> 9,133
<INCOME-CONTINUING> 11,219
<DISCONTINUED> 0
<EXTRAORDINARY> (11,283)
<CHANGES> 0
<NET-INCOME> 205
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
